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Industrial strategy beyond Brexit

David Bailey and Phil Tomlinson / Feb 2021

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Industrial Strategy: Back on the Agenda

There is a renewed desire of sorts within government to address the UK’s wide spatial imbalances – the UK has the widest regional income and productivity disparities in Europe. Addressing these disparities would be a challenge for any government, since they are deep-rooted and go back decades. The new political rhetoric centres on a desire to ‘level up’ and boost the prosperity of ‘left behind’ places. In part this is meant to be achieved through the government’s industrial strategy, in which the state plays an active role in the economy, especially with regards to promoting science and technology and shaping markets to improve outcomes.

This all appears a significant departure from the dominant economic paradigm of the last forty years. During the late 1970s, industrial policy fell out of favour in the UK, with successive governments accused of ‘picking winners’ and supporting ‘lame duck’ corporations – although some of these ‘ducks’ included British Aerospace and Rolls Royce, which subsequently became successful companies. The Thatcher government largely abandoned the idea of industrial policy, preferring instead to extol the virtues of laissez-faire – though, in truth, it never disappeared completely. Indeed, later Lord Heseltine – as Secretary for the Board of Trade - once famously declared that ‘he would intervene before breakfast, lunch, tea and dinner’. More recently, and following the Great Financial Crisis, Lord Mandelson began to resurrect the idea of industrial strategy, establishing the Automotive Council to support the car industry, and commissioning the Hauser Review to address the UK’s poor performance in commercialising science. The latter led to the establishment – under the Coalition government - of the Catapult programme, a network of elite technology and innovation centres based upon the highly successful German Fraunhofer model. There are currently 9 Catapult centres ranging from High Value Manufacturing to Medicines Discovery – these are currently engaged in over £1 billion of research funding, with over 12,000 industry and 2,260 academic collaborations.    

It was, however, Theresa May’s government which published the much touted ‘Industrial Strategy White Paper’ (2017), with ambitious plans to raise the UK’s level of Research and Development expenditure from 1.8% to 3% of GDP by 2025 and setting out four grand challenges: AI and the Data Economy, Clean Growth, Future of Mobility, Ageing Society to nurture a better society. In meeting these challenges, the White Paper identified five foundations of productivity, ideas (i.e. innovation), people (i.e. skills), advanced and connected infrastructure (both physical & digital), a supportive and supported business environment and, place. These foundations are to be supported through new government funding initiatives, such as tailored sectoral deals and the Strength in Places Fund.

At the regional level, Combined Authorities (CAs) and Local Economic Partnerships (LEPs) are being tasked with identifying - at a granular level - new opportunities for growth and pursuing them through ‘local industrial strategies’. Indeed, during 2019 and into 2020, several CAs published their local industrial strategies. However, these they remain unfunded and the White Paper has not quite followed through on the objective of joining up industrial policy and place as had initially been hoped.    

Where are we now?

The COVID-19 pandemic is a once-in-a-century event that would give any politician nightmares. Not only has it thrown the government’s post-Brexit policy plans up in the air, but it has also intensified the challenges facing so-called ‘left behind places’ which now facing rising unemployment amidst a severe economic downturn. Indeed, city mayors are warning that some of UK’s biggest cities risk going bankrupt due to losing commercial revenue from business rates, council tax and tourist income. This comes on top of a decade, in which local authorities have had to cope with real term reductions of almost 50% in Local Government funding.

While the government’s much criticised COVID-19 testing approach has been run centrally, much of the response to the pandemic has been managed at the regional level, especially in terms of healthcare and education provision. In addition, regions have begun to establish regional taskforces - comprising of local stakeholders from across business, universities/further education, healthcare and local authorities – to help steer the economic recovery. In this regard, there have been calls for regions to ‘build back better’ and promote more inclusive growth. This implies a greater emphasis upon promoting wellbeing and pursuing societal challenges such as sustainable energy, healthy ageing and education.

For UK manufacturing, the recent EU-UK Trade and Cooperation Agreement (TCA) offers some relief – up to a point. Tariffs and quotas will not be applied on goods exports and imports with the UK’s biggest market. However, the deal still raises significant ‘non-tariff barriers’ and additional costs for UK business, such as UK auto. These include customs delays that will disrupt just-in-time delivery systems, the cost of completing customs declarations and complying with rules of origin requirements and different EU regulations. These will make trade with the EU harder and diminish new investment opportunities. Business investment is already at a low ebb – it flatlined between 2016-2019, before crashing during the pandemic of 2020. Given these unprecedented economic conditions, the big test for government is whether it can meet the challenge to “build back better”.

Future challenges and opportunities

Many of the challenges - sustainable energy, healthy ageing and education – span the so-called ‘foundational economy’ – sectors that provide the essential goods and services that enable everyday life to function. In so-called ‘left behind’ regions, foundational sectors are the often the bedrock of local economies. There is potential for local industrial strategies, if properly funded, to follow the lead of the Welsh Government which has aligned its innovation policy with national wellbeing goals on economic, environmental, social and cultural issues to promote these local foundational sectors.

Where are these foundational economy opportunities? In June, a Local Government Association report flagged up the prospect of 1.2 million new jobs in the sector by 2050, if sufficient investment is made. More than half of these jobs are anticipated to arise in the North and other deprived regions of the UK. The north of England has strong expertise around generation, storage and low-carbon technologies and processes - especially in nuclear and offshore wind. Yet, in order to realise such ambitions, there needs to be significant investment in low carbon infrastructure - for instance, in electric vehicle infrastructure, high-speed broadband and hydrogen technology. Many of these projects can be devolved to local authorities, LEPs and CAs. Indeed, bringing forward ‘shovel ready’ green projects could boost local economic recoveries.

In addition, significant skills gaps need to be addressed across the low carbon sector. Local authorities, LEPs and CAs are often better placed to play a role with skills providers to diversify into low carbon sectors than centralised skills quangos. Public procurement and demonstrations of low carbon technologies could also boost consumer confidence and enhance ‘take up’.

The COVID pandemic initially exposed the UK’s over-reliance on global supply chains for sourcing healthcare products (such as Personal Protective Equipment/medicines). UK manufacturing quickly stepped up by producing PPE and coming together as part of the Ventilator Challenge to scale up ventilator production. There is a fear that sourcing will revert to least cost again with exposed value chains. With the right procurement strategies, there may be opportunities for ‘re-shoring’ some production, which would also reduce the UK’s carbon footprint and could in turn mitigate some of the supply chain risk around Brexit.

Similarly, healthcare innovation offers new opportunities, especially in the development of digital health apps, health monitoring and utilising artificial intelligence to help address the challenge of an ageing population. Again, this will require significant investment, especially given big issues in ‘digital divides’ in terms of digital accessibility and broadband speeds.

More widely, local industrial strategies could focus on building regionally focused Research and Development, rebuilding supply chains (e.g. through reshoring), cutting carbon emission and meeting new skill needs, especially in the context of ‘Industry 4.0’ creating and destroying many jobs. These will need to build on existing regional capabilities and specialisms while linking to new emerging technologies.

This means working with local businesses to identify the best opportunities and projects to support, and with employers to co-develop curricula and training tailored to local demands. It also involves carefully crafting a holistic set of policies (to boost skills, innovation, technology adoption, and providing finance) that are targeted at specific industrial sectors to build competitiveness in new areas. This may allow struggling sectors such as aerospace to orientate to the opportunities that lie ahead in developing low carbon technologies.

Last but not least, universities need to step up and play a bigger role as regional ‘anchors’. Many universities played a big local role in the COVID response, often producing and donating large amounts of PPE, undertaking tests and providing free accommodation for healthcare staff. Yet, for too long, UK universities have focused too much on their global reputations, with much less regard to their impact in their host regions. Universities need to become better neighbours in collaborating with other local anchors to deliver inclusive local growth.

 

The full report ‘Brexit and Beyond’ can be found here

 

David Bailey

David Bailey

February 2021

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Phil Tomlinson

Phil Tomlinson

February 2021

About this author ︎►

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