Lord Mandelson sets out his path to UK recovery; is it the right one?

This blog enters 2010 with a look into the UK's industrial future. Today the Business Secretary Lord Mandelson showcased his new policy agenda 'Going for Growth: Building Britain's future economy' in a lengthy speech at the Work Foundation. This blogger was pleased to be given an invitation, and duly took it up. This speech has got a little lost among the news noise of a possible Labour leadership challenge and bad weather in the UK, but it remains important, and also suggests that the government are at least aware that economic growth is the way to get the UK out of debt.

In terms of business policy Lord Mandelson is broadly suggesting that the UK should look away from solely relying upon the financial sector for economic growth and tax revenue. Government will aim to set up new partnerships with the private sector to drive capital investment, while the government will attempt to pressurize firms to improve the links between pay and performance. The sectors to be concentrated on will generally be knowledge intensive, such as electronics, the nuclear industry, plastics, biotechnology and low carbon industries. A regional approach will be pursued, with Regional Development Agencies working closely with Universities in their areas to establish new R&D centres of excellence. These will include a plastic and electronics centre of excellence in County Durham and a nuclear centre of excellence in Yorkshire. Herman Hauser, mentioned on this blog previously in his role as co-founder of Acorn Computers, will report on the possibility of the UK emulating the German Fraunhofer Society to establish a new research concentration. Universities will also be expected to commercialise their work further.

A new Technology Strategy Board will direct all these new research activities, as well as the new Innovation Investment Fund, which will make grants to SMEs of between £2-10m. Some funding will also be given to infrastructure development, although this will require private sector co-operation, but will involve the further expansion of broadband internet access and railway electrification among other projects. Lord Mandelson also has lofty aims for corporate culture; with former Courtaulds Chairman, and present Chair of the Financial Reporting Council Christopher Hogg having undertaken a review of corporate governance. Among the most striking of proposals was that any company making a major acquisition would have to set out a full manifesto for the future of the assets, including what would happen to the head office and R&D functions as well as the productive assets of the company. We were also told that the fiscal plans now set out by the Conservatives suggest that they have no real plan for the future beyond cutting public spending, prolonging recession. An interesting policy agenda for sure, and one which Mandelson claims will see a 'new politics of production and growth.'

But how realistic is this policy agenda? Very little was said in the speech about the future of the service sector, surely now the most important element of the UK economy (and infact the most important element of the economy since at least the mid-nineteenth century). It is true that British manufacturing, while continuing to shrink in employment terms has become more productive, and also true that the UK continues to have a good record in scientific research. The UK also already has a good record in knowledge industries, particularly the niche low-economy-of-scale parts of them. It may also be the case that under such a research intensive policy a lot of highly skilled and high earning jobs will be created, but its less clear that the UK will be able to capture the longer term rents of these inventions. The UK already has a fantastic historic record in invention, with inventions as diverse as the steam engine and polyester fabric historically emerging from its economy. However in both fields it has been clear that just because a country invents something, it does not confer permanent competitive advantage upon that country in manufacture, with today very little polyester fabric manufacture remaining in the UK. The UK is also likely to be unable to competitive advantage in the manufacture of these new products for long, at least for the mass market; as the adoption curve for a new technology rises, the returns per unit from its production fall, and maufacturing is likely to move to developing countries.

While it is worth investing in R&D to the extent that it will generate TFP growth in the UK, it seems that Lord Mandelson may risk placing Britian's eggs dangerously in this basket too, perhaps creating the risk of a UK based 'green technology' bubble reminiscent of the Californian dot-com bubble of 1999-2000. To reduce this over-dependence, surely Lord Mandelson should be looking to further development of the UK's service sector away from manufacturing. Most of the value of products is actually created through their distribution and retailing, not their manufacture. Additionally, in an online world services are becoming increasingly exportable, while knowledge can remain an important input. The UK should also target research resources towards service industries to help them to remain a competitive source of employment in the UK, not just attempting to create a new manufacturing sector which is unlikely to have a great life expectancy. The UK can have a vibrant economic future which need not only mean relative economic decline, but this will only be possible if growth comes from all the sectors in which the UK is strong, not just some of them.

The car industry - still worthwhile in mature economies?

Today Jaguar Land Rover, the British sports and offroad car manufacturer (which is actually owned by the Indian company Tata) announced that it plans to close one of its three UK factories in the next ten years, to consolidate production onto one site. Meanwhile the UK's Business Secretary Lord Mandelson has claimed that the Canadian car parts firm Magna's plans for the Vauxhall and Opel divisions of General Motors, which it is purchasing, are not commercially viable. Mandelson's reasoning for this is unclear, except that it is claimed that 1,100 jobs will be lost in the long term.

Historically the car industry, as a second industrial revolution industry, has been at home in mature economies where it produced linkages with other parts of the second industrial revolution economy, backwards into the steel, tyre and electronics industries, and forwards into the distribution and retail sectors. Indeed David Landes suggested that these linkages made the car industry "the industry of industries", perhaps the most vital to a modern industrialised economy.

However, the position of the car industry in many western countries has been one of decline for many years; the decline of the US big 3, General Motors, Ford and Chrysler in recent years being one sign of this. In the UK the position has been similar, with the UK's motor industry gradually consolidating through the 1950s and 1960s, then being forced into the super-consortium British Leyland (BL) by the government in 1968. Government believed that the failing British Motor Holdings could be saved by merging it with the successful truck and bus manufacturer Leyland, thus preserving employment. BL was unable to carry out the necessary rationalisaton of ranges, and its competitive position faltered to the extent that the government nationalised it in 1975 to preserve employment in the industry, and that of related industries. The Thatcher government was able to slim down and privatise BL as Rover in 1986, but even this has passed through a number of (government supported) owners and gradually withered away.

Given this history of unsuccessful government intervention in the industry, and history of gradual decline, its all the more amazing that Mandelson still believes that the motor industry in the UK has a viable future. While its clear that there is still potential for the industry in the UK as cars are expensive to transport, they are becoming increasingly cheap to make as Asian manufacturers find new scale economies in car production, seeking to boost the mass market in their home countries. Jaguar Land Rover's owners Tata, for instance are already making a basic car with a price to the consumer of less than US$2,000. It seems unlikely that British manufacturers could match these sort of economies in the long term, which must eventually make importing worthwhile, for the volume market at least. Surely governments in developed countries would be better to allow car manufacturers to make the savings required to remain competitive rather than forcing them to produce cars that they won't be able to sell to consumers. Such a strategy will mean that the present state interventions won't be the last.