Economists want an industrial strategy from the government – but will it solve the productivity puzzle?

 
Jasper Jolly
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Economists have struggled to work out how to boost the UK's productivity, despite technological leaps forward (Source: Getty)

An updated industrial strategy for the UK is long overdue, a poll of prominent economists says, with the process of leaving the EU set to begin in earnest within a month.

Two-thirds of the economists’ surveyed, including some of the leading academic economists in Britain, agree that the UK needs a new industrial strategy, according to the survey by the Centre for Macroeconomics (CFM) and the Centre for Economic Policy Research (CEPR).

The UK lags behind comparable rival nations when it comes to productivity, with output per hour growing slowly since the financial crisis.

Read more: More, faster: Productivity rises but a wage boost is still far off

Meanwhile more than three-quarters of the economists think the UK needs a new regional strategy. Regional differences are even more stark, with cities in the north and midlands up to 15 per cent below the national average, while London added 32 per cent more value to 2015 output than the national average, according to the Office for National Statistics.

Angus Armstrong, director of macroeconomics at the National Institute of Economic and Social Research (Niesr), said: “Output per workforce shows enormous variation across the UK, and understanding the challenges in the low productivity areas would be an obvious way to raise national productivity. This should be complemented by tertiary education policy and the regions.”

Wendy Carlin, an economist at University College London, agreed, saying: “If a new industrial policy is interpreted as a policy oriented at productivity growth involving private and public sector collaboration, then this is needed.”

Sector deals or picking winners?

A “modern” industrial strategy was a key point of difference for Prime Minister Theresa May when she assumed the role in July from predecessor David Cameron.

May has since announced she will pursue “sector deals” in frontier industries in which the UK could become world leaders.

However, which sectors receive particular state aid is a contentious matter. Chancellor Philip Hammond announced a national productivity investment fund in the Autumn Statement, which would invest in infrastructure such as roads, which can boost productivity, but sectoral interventions are more controversial.

Read more: Industrial strategy needs a three-pillared approach to boost productivity

Akos Valentinyi, professor of macroeconomics at the University of Manchester, took issue with some of the choices the government has already made.

He said: “It is unclear how the proposed policies will improve labour productivity. In particular, [the industrial strategy] focuses on sectors which do not lag behind in terms of labour productivity.”

May stressed her desire to create “an economy that works for everyone”, and said Hammond would work with business secretary Greg Clark to support industries of strategic importance in doing so.

She also tried to head off criticisms from some elements of her own Conservative party by saying the strategy would not involve “picking winners”.

David Bell, a professor at the University of Stirling, said: “Any new policy should avoid focusing on individual companies. There may be value in investment in skills, infrastructure and information flows aimed at improving the competitiveness of domestic value chains.”

The visible hand

One of the main objections lies in the idea government will be able to judge the best policy without succumbing to undue influence from outside parties, rather than leaving it to the invisible hand of the market.

Morten Ravn, a professor of economics at University College London, was one of the dissenters from the majority supporting an industrial policy.

He said: “It is hard to believe that policymakers are in a strong position to apply an efficient industrial policy free of concerns about voters and current financial interests, and given how strongly parties with vested interests will try to impact on the policies.”

Read more: Hurrah: The UK boosted its productivity potential last year

In the end judgements on the efficacy of the government's plans may have to wait for more concrete announcements – which could be a feature of Hammond's first Budget on 8 March.

Patrick Minford, an economist at Cardiff Business School and a vocal proponent of Britain leaving the EU, said “it really depends what is meant by this.”

He said: “The part of the policy that invites ridicule is the 'backing of winning sectors and industries'; but I doubt whether this will gain any traction.

“However, the idea that the government should pursue policies that support the business climate and underpin private investment through things government can undeniably do is good.”

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