David Green is CEO of Civitas and author of a new report, A strategy For Economic Growth: A new industrial policy. Follow Civitas on Twitter.
Next week Lord Heseltine will publish the review of industrial policy commissioned by George Osborne at the time of his 2012 Budget. One of its aims is to learn from rival countries that have coped more effectively since the recession. America has achieved economic growth since 2008, while Britain’s output languishes below its peak in the first quarter of 2008. One of the main reasons for America’s success is that its hands are not tied by an international entity like the European Union. Above all, it has pursued selective industrial policies that the EU prohibits.
In his October Tory conference speech, George Osborne said: "That’s a modern industrial policy’ ‘I am its champion. Let’s get on with it". In his March Budget speech he even said that we should not be shy about identifying our successful industries and reinforcing them. Not long ago such policies were denounced as ‘picking winners’, but nevertheless he said that he plans to champion life sciences and aerospace, even promising to establish a UK centre for aerodynamics. He wants to make Britain Europe’s technology centre and subsidise video games and high-speed broadband.
All governments claim to want a growing economy, but we don’t say that they have an industrial policy unless they support specific companies or sectors. Mr Osborne’s strategy is unambiguously selective. Perhaps he has learnt from America. Some attribute its success to the unfettered free market, but a closer look tells a different story.
The dominant policy paradigm until recently has been neo-classical economics. Markets are seen as self-correcting systems unless distorted by political action. For many economists this means that the policy challenge is to eliminate interference. But American prosperity is not the result of the government getting out of the way. Governments of all persuasions have pursued an industrial policy for decades. What we can learn from America is how to combine commitment to a market economy with a little bit of patriotism. Genuine Conservatives should not find this conclusion too much of a stretch – commitment to the nation state as the vital guardian of liberty has always been central.
Since the 1950s the Small Business Administration (SBA) has supplied millions of small businesses with financial help by supporting them when commercial banks would not. A small business is defined as a company with under 500 employees, some 99% of American companies. The SBA does not make loans direct to customers, but guarantees up to 80% of each loan against default. Some economists dislike the SBA because it distorts the market, but between 2000 and 2011 the failure rate of SBA guarantees was 12%, suggesting that the unfettered market fails to back creditworthy businesses.
Government procurement is another area where US governments are not squeamish about supporting their own people. The US Government aims to give 23 per cent of federal contracts by value to SMEs. By 2011 over 32 per cent had been achieved. The UK Government target is 25 per cent, but by March 2012, the proportion of government contracts awarded to SMEs was nearly 14 per cent. There is even a ‘Buy American’ clause in one Act: ‘none of the funds appropriated or otherwise made available by the Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work done unless all the iron, steel and manufactured goods used are produced in the US’.
EU Procurement rules make it impossible for the British Government to create an explicit ‘Buy British’ clause.
America has about 7,000 banks, many purely local. This infrastructure has given the American government the ability to channel additional funds to businesses. Between January 2009 and May 2011, more than $53 billion of government-guaranteed loans were issued to more than 11,300 SMEs. The significance of local relationship banks is that they empower people in localities to solve their own problems, without having to go cap in hand to international banks. They take local deposits and lend them to local businesses. It’s one of the main reasons America is more successful than we are. They are strongholds of dynamism that put economic power in the hands of people with energy and inventiveness.
The British Government has crossed the Rubicon by accepting that it needs an industrial policy. The challenge now is to strengthen it by learning the obvious lessons from America.