The Role of State-Led Industrial Policy in the Economic Rebalancing of the UK - Essay Example

led industrial policy in the economic rebalancing of the UK Introduction The United Kingdom economy is at a crossroads. The premise for this assertion is drawn from the fact that economic growth in the UK is stagnating and the public finances facing an unparalleled period of cutback. The importance of improving the UK industrial policy and export development has become of essence than it has ever been. The contemporary society discussions regarding industrial policy have been characterized with a resounding emphasis asserting that the UK should initiate an activist industrial strategy in order to ‘re-balance’ the economy. However, there is also much trepidation and angst surrounding this emphasis because it is broadly believed that industrial policy endeavours, which were initiated in the past, were generally unsuccessful (Westlake, 2013: 327). The very phrase ‘Industrial policy’ is usually linked to the waste and ineptitude of the post-war British settlement, a trend that saw its death knell during Margaret Thatcher’s regime (Mayhew, 2013: 249). After the financial turbulence of 2008, policy-makers in the UK have shown a revamped interest in the sectoral composition of the country’s economy, with the major concern being whether their manufacturing sector is becoming too small or whether the services sector especially the financial services sector becoming too huge (Warwick, 2013: 9). This is because, for example the financial services industry in the UK accounts for 10% of the country’s GDP. This is a much higher figure compared to the financial services industry in the US, Japan, France, and Germany. On the contrary, all the manufacturing industries combined accounts for only 12% of GDP in the UK. This paper investigates the concept of sectoral re-balancing in the UK, and evaluates why sectoral re-balancing might be a good thing for the UK’s economy. The paper also takes into account the recent policies that have been established to transform the sectoral structures of economies, and explicates on some principles for that should be considered by policy-makers in their endeavours pertaining economic re-balancing The service sector in the UK This dynamic growth in the UK’s service sector has led to an increase in staffing levels in the firms in that sector. The dynamic growth in the UK’s service sector has also led to increased business confidence in the sector. According to (Warwick, 2013: 37), when a sector thrives it attracts more investors entry by many firms because the expectation of returns in such a sector is much more appealing. Expected returns is one of the major factors that affect investment decisions. As a corollary, the UK’s service sector attracted many investors and this has led to an increase in the supply of the services in the sector.The other sectors especially the manufacturing sector, however, have been experiencing a downward trend over the decades and this has created a great sectoral imbalance in the UK’s economy as discussed below. Sectoral imbalances in the UK According to Westlake, (2013: 332) the manufacturing sector accounts for only 10% to 20% the GDP of develop countries. Westlake, (2013) stresses that the manufacturing sector is particularly low in the UK because the relative size of Germany’smanufacturing sector is about two times bigger than that of the UK or Australia combined (pg 332). On the other hand, Westlake, (2013: 332) the services sectorin developed countries usch as the UK account for for around 30% - 50% of their GDPs. Westlake stresses that with financial service industries (for example banks and asset management firms) alone account for 4% ro 8 % of the GDP in such countries. Westlake, (2013: 335) affirms that indeed that there is indeed a momentous imbalance between the serviceand manufacturing sectorsin developed countries such as the UK. Westlake reckons that the trend of sectoral imbalancesin such countries has changed over time in two manners which include: a 50-plus-year dwindleof the relative size of the manufacturing sector, and an augmentation of the service sector especially the financial service firms in Anglo-Saxon countries which has within a period of 30 years. The state-led industrial policy Industrial Policy is a term that refers to any kind of intervention by the government that is aimed at improving the business environment or modifying the configuration of a country’s economy in terms of sectors, technologies, or tasks (Warwick, 2013:16). Warwick, (2013) continues to assert that such interventions are supposed to offer better prospects for economic development or the well-being of the citizens. However the reputation industrial policies according to Aghion et al (2011), has become tainted on the premise that it operates on the philosophy of ‘picking winners’ and thus disrupting healthy competition between firms, while rendering the government vulnerable to the risks and outcomes of the vested interests. Economists who disparage the idea that a state-led industrial policy can influence a country’s economy claim that it breeds incompetence and condenses competition (The Economist 2011). Even amid these concerns, I support the institution of state-led industrial policies in the contemporary economy. My support for the reinstatement of state-led industrial policies is based on the argument that the contemporary economy has offered reasons for a rethink of. First, there is the issue of climate change which immensely depends on government intervention because companies would rather engage in activities that are not environmental friendly to gain a competitive advantage that in clean technologies to conserve reduce ramifications of climate change. Secondly, is the need to embrace a new post-crisis realism ideology in the economy because the laissez-faire complacency has brought about mis-investment in the non-tradable sector and this has led to the decimation of growth-rich sectors. Thirdly, is the fact China as well as countries have been able to deploy sectoral policies and this has made their growth-rich sectors thrive. So as to present a comprehensive argument for my support for the reinstatement of state-led industrial policies I am going to explore the arguments that have been present for and against industrial policy by academics and researchers. Review of the theories that surround the concept of state-led industrial policy and market failures The theories that surround the concept of state-led industrial policy are usually based on the impacts of state-led industrial policies on the economy. However, the evaluation of the direct impacts of these policies becomes particularly problematic when dealing with intricate policies that are established to transform the overall dynamic of a sector or generate long-standing incentives. For example, appraisals of big government procurement programmes intended to promote innovation are very problematic. On this subject, Warwick (2013) asserts that some appraisals have been favourable and while others have not. Hence, some of the theories that surround the concept of state-led industrial policy are deeply flawed. This following part of this papers investigates the theories provided for and against industrial policy and analyse which of the theories are flawed and which give a flawless depiction of the impacts of state-led industrial policies on the economy One of the sceptics of the sceptics of state-led policies is Lerner, (2010). According to Lerner, (2010) state-led policies are detrimental to the economy because they operate. On the philosophy of ‘picking winners,’ Lerner, (2010) emphasises that due to this philosophy, the government is not in a position to assess the likelihood of commercial success more competently than the market. Lerner’s argues that the philosophy of ‘picking winners’ in industrial policy involves the risks of misjudgement and the assumption that the government’s endeavours will prove more influential than the corresponding market forces. Lerner, (2010) asserts that when the government decides to endorse a particular sector, there is a lurking risk is that the government may endorse the wrong sector or firm due to flawed information and there is also the risk that the government may endorse the wrong sectional interests. The second disparagement of industrial policy offered by Lerner, (2010) is that it renders the government vulnerable to the risks and outcomes of capture, vested interests, and rent-seeking. Conversely, supporters of state-led policies such as Rodrik, (2010) assert that industrial policies can be very influential. They emphasize on the responsibility of the government in the establishment of exceedingly prolific and globally competitive sectors. They argue that such policies only go wrong if the government did not seek sectoral understanding. Rodrik, (2010) stresses that the essence of economic development is structural transformation and this can only be achieved through imposition of well-planned and informed industrial policies. Rodrik, (2010) gives several rationales of imposing industrial policies: for example unlike the laissez-faire approach industrial policies enable directed technical change which enables the government to control certain significant elements of the business environment such as climatic change. Going through arguments from both sides one thing becomes evident. The opposers of state-led industrial policies argue that concepts state-led industrial policies are indeed plausible and blame ‘market failures’ on the difficulties of putting the concepts into practice. Market failures arise when the market forces unable to distribute resources in an optimal and proficient manner. Some of these market failures include externalities otherwise known as knowledge spillovers, market imperfections, financial market imperfections, and inequity Externalities arise when the expenses or benefits associated with production or consumption of commodities and services spill over into third parties. The critics of industry policy propose that a negative externality is experienced when the expenses are imposed on society. In terms of externalities the government should intervene using financial intervention measures such as imposing taxes on individuals or a firm (the taxes should be equal to the monetary value of the marginal externality costs and internalization of externality costs). The government should also impose laws and administrative rules to proscribe or standardize behaviour that imposes an externality cost. Market imperfections and financial market imperfections occur when market forces do not bring about optimal efficiency in resource distribution. Critics of industry policy propose that it might lead to a monopolic output which is not efficient in resource distribution. In terms of imperfections, the government should intervene using impose regulations to control a monopolies so as to alleviate formation of monopolies, to proscribe monopolistic behaviour and to ensure helathy competition in the market. Inquity occurs when the distribution of income is relatively fair from a normative point of view. While, a certain level of income inequality is advantageous for example incentives, an exceedingly imbalanced distribution of income has detrimentyal ramifications particularly from a socioeconomic point of view. In terms of inquity the government should intervene using the tax system so as to decrease inequalities in revenue and wealth in the economy. On the issues pertaining to market failures, I acknowledge that the opposers’ arguments are quite true and justifiable because in the instances where industrial policies have failed, government intervention in the market are hindered by the market failures which end up augmenting market distortions and reducing economic efficiency rather than intended goal of improving the market. For this reason I argue that industrial policies should focus on alleviating the market failure rather than balming them for the failure of industrial policies in the past. From a different perspective, when other governments endevours such as education policy, health policy, or tax policy are investigated, it becomes evident that even on these areas governments are driven by economic and social goals which are also contingent to concepts/ideals which can also be imperfectly projected. Therefore, market failures should not impede efforts to implement industrial policy because promoting structural transformation and innovation is a fundamental public responsibility, which governments cannot avoid. This is the reason I assert that the only arguable issue about industrial policy is not “whether” but “how.” As a corollary the next part of this paper looks at how the UK government should implement industrial policies for economic rebalancing bearing in mind that the previous ones failed Rebalancing of the UK economy using industrial policy One of the UK’s government ministers Cable, (2012), asserted that for the country to achieve growth, a re-balancing the UK economic sectors is imperative. Cable, (2012) reckons that endeavours aimed at re-balancing the UK economic sectors should lean towards promoting highly developed manufacturing, supporting creative industries, and encouraging higher education ventures, which would in turn lead to less dependence on financial service industries for economic growth. Below is a recommendation on how the UK government should implement industrial policies to achieve this. First, I recommend that the UK government should come up with a criterion that makes sure that chosen sectoral intervention is the most appropriate. The criterion should consider degree of skill-intensity competition within the service and manufacturing sector. Secondly, I recommend that the government intervention in the manufacturing sector should redirect production and innovation towards clean technologies so as to avoid worse future climatic and economic ramifications. Thirdly, I recommend that the government should ensure proper governance of industrial policy so that it cannot get in the way of friendly competition between firms. To achieve this, I suggest that government-sanctioned aid in the manufacturing sector should not favour one particular firm within that sector. Instead, the government-sanctioned aid should be provided on equal terms to all the firms in the manufacturing sector in the UK. However, even as the government-sanctioned aid is provided on equal terms in the manufacturing sector, the industrial policies should be fashioned in a way that the firms that turn out to be non-performing will stop receiving the government-sanctioned aid. in conclusion, I suggest that the government should take a less legalistic and more pragmatic, evidence-based stance when analysing and presenting expenses and merits of government-sanctioned aid of the manufacturing sector, and when evaluating the consistency of sectoral and competition regulations to the European competition authorities. In general, deliberations about rebalancing of the UK economy using industrial policy should shift from debates on “whether it should be implemented” to “how it should be implemented.” The major issue in the deliberations should be on the manner in which the first order mistakes can be circumvented through appropriate policy structure and governance. Conclusion Having evaluated the factors surrounding the debate on the State-led industrial policy in the economic re-balancing of the UK, is not astounding that there has been so little accord on matters pertaining to re-balancing the economy. Contemporary developments in theory and practice of industrial policies purport the government’s role in economic re-balancing is indispensable. Nonetheless, there are significant practical intricacies (market failures) of state- led industrial policies that have also been identified. Any sensible course of action must take these intricacies (market failures) into account because unless they are addressed, failure of State-led industrial policy in the economic re-balancing of the UK is inevitable and the judging from the historical record of failure in the UK, failure is not something to look forward to. References Aghion, P., Boulanger, J. and Cohen, E. (2011) ‘Rethinking Industrial Policy’, Bruegel Policy Brief, 2011/4, June 2011. Cable, V. (2012), ‘industry policy’ available at www.bis.gov.uk accessed on 17 April 2014 Lerner, J. (2010) Industrial policy: Statements available at http://www.economist.com/debate/days/view/541/print accessed on 17 April 2014 Mayhew, K. (2013) Government and business: an introduction, Oxford Review of Economic Policy, 29(2), pp. 249–260 Rodrik, D. (2010) Industrial policy: Statements available at http://www.economist.com/debate/days/view/541/print accessed on 17 April 2014 The Economist (2011) Economists reconsider the merits of industrial policy, but some flaws are hard to fix. Oct 1st 2011 Warwick, K. (2013), ‘Beyond Industrial Policy: Emerging Issues and New Trends’, OECD Science, Technology and Industry Policy Papers, 2, Paris, OECD Publishing.http://dx.doi.org/10.1787/5k4869clw0xp-en Westlake, S. (2013), Rebalancing act: rationales and policies for sectoral economic rebalancing, Oxford Review of Economic Policy, 29 (2): pp. 326–343 Read More