Carmichael NeilNeil Carmichael is the Member of Parliament for Stroud and a member of the Education Select Committee. Follow Neil on Twitter.

Thirty years ago,
Edward Heath asserted “Britain cannot rely on doing other peoples washing”. His
meaning was plain; we were in danger of becoming a service economy at the
expense of manufacturing and engineering. Today, the Coalition Government is
facing up to the consequences of successive governments (especially the last
one) having failed to understand the implications of ignoring many such

Rebalancing the economy
is proving difficult, not least because of the huge cultural change necessary
to support the reversal of several now ingrained assumptions and the impact of
complacency. To make matters worse, we are operating in a global economy where
new emerging economies – some are former colonies and several others we virtually
ignored – are powering ahead as their middle classes expand, continental links
are forged, and investors find easy opportunities.

Domestically, we are
badly hampered by the deficit and overall debt. We must secure a sound
financial footing because the risks of high interest rates and an endemic lack
of confidence in our economy could be fatal. To sum up the challenge we
confront, it is a mixture of structural failures in the real economy, robust competition
from unexpected quarters and a debt ridden financial system.

Game changing action is
called for and this should comprise of a boost to infrastructure investment,
radical rethink about strategies for exporting, creation of conditions for
small and medium sized firms to gain sufficient critical mass to become bigger
market players, developing ‘banks for business’, tackling regional
underperformance, and redoubling efforts to reform education and the labour

Before each of these
measures is discussed in more detail, it is worth considering Germany’s
capacity to create frameworks for growth and prosperity. The striking features
of German economic and industrial policy are rationalism and boldness as opposed
to incrementalism and interference. The absorption of the old German Democratic
Republic (GDR) is a case in point. At the time of unification, the GDR was an
economic wasteland, producing poor products for quickly vanishing markets yet,
today, many parts of East Germany are thriving with sophisticated supply
chains, modern infrastructure, productive factories, successful exporters and an
increasingly adaptable workforce. Britain can bring about the same economic
revolution in our underperforming regions.

Business needs an
effective infrastructure but it can also be effective in providing one. Business
requires several conditions for successful delivery of infrastructure including
timely and consistent decision making, ability to realistically apportion risk,
and access to funding. Private Finance 2 – the successor to the overly
complicated, cumbersome and hugely expensive Private Finance Initiative – is
set to be a useful mechanism for public sector capital investment, not least
because it is characterised by transparency and seeks to ‘align public and
private interests’. Government departments should be preparing their programmes
and planning the centralised procurement mechanisms.

Other larger
infrastructure projects require government to signal commitment and even a
sense of urgency. Here, the decision to postpone any decision about increasing
the UK’s airport capacity is an example of excessive caution risking unintended
but, potentially, detrimental consequences in terms of global competitiveness
and, more immediately, missing the advantages of a major construction project.
Put simply, stronger signals in support of infrastructure investment are
necessary to underpin the National Infrastructure Plan, loan guarantees and
additional capital commitments.

Britain’s export record
is a matter of widespread concern, especially against the background of
Sterling’s recent significant decline in value (devaluation is not, however, a
panacea). Latin America, India and China are all developing economies where our
near neighbours have achieved significant export successes as opposed to
Britain’s more measured performance. Two changes could make a difference.
Firstly, United Kingdom Trade and Investment (UKTI) should focus on providing
economic analysis on emerging markets and match this information up with
clearly identified and promoted specialist sectors back at home. Second, a more
sophisticated understanding of supply chains would enable smaller firms to
develop products and sales opportunities. In essence, potential exporters need
to know more about the possibilities abroad.

The size, definition
and behaviour of firms have often been hotly debated by industrial economists
but several characteristics of British firms are well known. There is little
dispute about the huge number of start-ups, micro-businesses, vehicles for
entrepreneurs and established small firms, many of which have thrived in their
own terms. Too many, however, are either created with an exit plan requiring maximum
value at the time of sale or simply fail to grow into larger businesses with
the critical mass to invest, evolve and flourish. The contrast between Britain
with very few substantial medium sized firms and, for instance, Germany with
ample numbers of often family, privately or employee owned businesses is
striking. This kind of business is the type where long term investment, product
development and market penetration are the hallmarks.

Britain needs more of
these bigger businesses. To create a culture where they could become the norm
would require new forms of ownership and modern, responsive leadership. Taxation
incentives should be geared to encourage capital investment including forms of
mergers and takeovers, new forms of ownership, and research and development.

Britain’s large
financial services sector contributes massively in terms of gross domestic
product and, of course, services much of the real economy. Ringfencing bank
activities as provided for in the Financial Services (Banking Reform) Bill is
one step in the right direction but creating a new banking culture where
professional advice, local decision making, more clarity in assessing risk and
increasingly innovative ways of funding business plans will all combine to
produce a vibrant SME sector.

underperformance amounts to a chronic waste of resources and has continued to
do so since disparities were first properly analysed in the 1950s. Lord Heseltine’s
report, “No stone left unturned: in pursuit of growth”, makes the case for
strong cities and regions. City leaderships – civil and business – should be
defining their specialisms through existing firms, universities and their
labour markets. The role of a city as a ‘growth pole’ for its region is central
to effective supply chains and international recognition.

Since 2010, 1.2 million
new jobs have been created in the private sector but, as the Bank of England’s
Inflation Report (February 2013) notes, the “strength of the private sector
employment since mid-2010 contrasts with the weakness of private sector output
growth”. Various explanations for this divergence have been advanced but one
recurring theme is poor productivity through a lack of skills and training. In
this policy area, the Coalition Government is moving radically and swiftly but
business, too, must engage with the education establishment in order to push
the skills agenda in the right direction.

Joining these six
themes together produces an economic vision of powerful interlinked cities with significant
industrial activity represented by large firms with sufficient ‘punch’ to
develop export markets and able to draw on a skilled and adaptable labour force.
Lord Heseltine’s report does so in more detail; the Coalition Government’s
positive response to it – accepting virtually all recommendations – signals the
right intentions and, if backed up by determined leadership, the prospects for
Britain’s economy will dramatically improve.