• Matthew Smylie

What lessons can be learnt from the British experience of industrial policy between 1950 and 1997

Industrial Policy is crucial to the development and growth of the economy or specific areas within the economy. This post looks into the lessons that can be learnt from the British experience of industrial policy between 1950 and 1997.

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Many lessons can be learnt from the British experience of Industrial policy between 1950 & 1997. This post will argue that the most important lessons arise when we look at the roles of competition and the failures of selective industrial policies in the British case. Competition policy is of crucial importance to efficiency and productivity in numerous ways and should continue to play a major role moving forward (Broadberry & Leunig, 2013: 48). In contrast, ‘selective’ policies have often failed in their attempts to cultivate industry and improve growth figures. Governments should take a more active approach towards industrial policy, focusing less on protecting specific industries. Instead, they should manage change, promoting policies which foster the competitiveness and productivity of the whole economy.

In the first section, I outline why this period was important and will define what industrial policy is. I then analyse ownership, finding that competition was at the heart of raising the productivity of nationalised industries. I then consider selective policies, finding that many of these strategies failed; this has prompted the government to move towards more ‘horizontal’ based policies. The role of competition is then analysed more closely, proving to be the major lesson to be learnt from Britain’s experience during the period.


Economic performance and ‘Industrial policy’:


The period between 1950 and 1973, commonly known as the ‘Golden Age’, saw Britain’s economy perform very poorly relative to its European neighbours. During this time, Britain was overtaken by many of its competitors in terms of labour productivity and had growth rates at least 0.7 percentage points lower than any of the other major western economies (Crafts, 2011: 22). However, the 1970’s proved to be a turning point and Britain’s performance saw a reversal; TFP performance and labour productivity improved allowing Britain to outperform major European players such as Germany and France (Card & Freeman, 2004: 37).


Throughout this period, ‘industrial policies’ were used by the UK government to combat issues such as market failure, government failure and poor productivity. Such policies can be understood as ‘any public sector intervention aimed at changing the distribution of resources across economic sectors and activities’ (Crafts, 2010: 3). These include ‘selective’ policies, such as subsidies and public procurement, which aim to benefit and improve specific industries. Conversely, there are also horizontal policies, such as competition policy and tax credits which aim to improve the productive potential of the economy as a whole, not focused specifically on one industry.


Ownership:


A major policy that dominated between 1950 and the 1970’s was nationalisation, with Utilities, Railways, Steel and many other industries taken into public ownership. In doing so, the government hoped to avoid monopoly formation in key utilities and services, resolve labour problems, protect companies and take control of the commanding heights of the economy (Hannah, 2004: 87). However, the nationalised industries faced many issues such as lack of management quality and strategic knowledge (Hannah, 2004, 96) and by the 1970’s these industries were performing poorly in both finance and productivity, requiring large amounts of support to cover losses (Vickers and Yarrow, 1988: 143-150).


This trend was reversed when the Thatcher government came to power in 1979 and started a series of privatisations which intensified throughout the 1980’s. With the aim to expand ownership, improve efficiency and reduce government debt (Vickers and Yarrow, 1988: 157), the government, through privatisation, were able to raise £33 billion in public funds (Hannah, 2004: 98) and achieve aggregate productivity increases of 1.1% between 1979 and 1997 (Card and Freeman, 2004: 49). However, the lesson learnt here is more to do with competition than ownership. This is because the largest gains in productivity were experienced pre-privatisation when the government were preparing the nationalised industries to be sold by setting clear objectives and pressuring for efficiency (Hannah, 2004: 99). Therefore, the lesson to be learnt was that ‘restructuring and competition are more important in raising productivity than ownership’ (Green & Haskell, 2004: 65).


Selective Policies:


In terms of selective policy, subsidies were used throughout the period with expenditure rising during the 1950’s, peaking at approximately £9 billion in 1970 before falling substantially by the 1990’s (Wren, 1996: 204). These subsidies aimed to provide industries with funds that would promote investment thus spurring productivity improvements and growth. However, in many cases, these subsidies were poorly designed. Firstly, subsidies often ignored improving human capital which would have provided positive externalities in terms of labour productivity (Bean & Crafts, 1996: 146). Further still, subsidies were often directed towards failing industries in attempts to prevent unemployment, avoid industry loss or in response to lobbying from interest groups. This was evidenced in the case of the British shipbuilding industry which was provided with profitability support despite losing its comparative advantage to Asian competition (Crafts, 2010: 5).


The British experience in industrial subsidies was therefore fairly negative, offering very poor value for money. Through this, we learn that it is vital to focus on both human and physical capital when subsiding capital improvements. Further still, the experience shows that in granting subsidies, the government must take special care in distinguishing between those sectors in decline and those likely to grow in the future (Broadberry & Leunig, 2013: 4). In this sense, the government’s role is more to manage inevitable changes to the economy, directing support towards smaller enterprises with high growth potential as this is crucial for economic growth (Wren, 2010: 854).


Education and training also formed a key part of industrial policy throughout the period. Britain struggled in comparison to its competitors, often supporting ‘low-level training schemes which did little to enhance the employability of participants’ (Broadberry & Leunig, 2013: 34). Due to this poor selective approach towards human capital improvements, there was a shortfall of qualified workers; this was responsible for a German-UK productivity gap of up to 13.4 percentage points during the 1980’s (Bean & Crafts, 1996: 143). It was therefore clear that Britain required substantial change to improve the quality of its workforce.

Britain did, however, learn from its experiences of education and training programmes. This resulted in the use of far more horizontal policies, aimed at improving the quality of the labour force in general. Most notable here is the expansion of higher education, the national curriculum and school league tables (Crafts, 2012: 23). Such changes have allowed Britain to make significant gains in terms of labour productivity and growth, outperforming nations such as Germany and France where labour force quality grew slower, as seen in table 1. Britain also developed much stronger links between its universities and industries which has helped to promote both technology transfer and enterprise whilst also raising the competitiveness of key areas such as biotechnology (Wren, 2001: 852).


Table 1: Labour Quality and Labour Productivity Growth in the Market Sector, 1995- 2005 (% per year)

Source: Source: Timmer et al. (2010) pg. 41


Further, many lessons can be learnt from Britain’s approach towards innovation and technology. Firstly, the government employed a selective policy of public procurement which proved to be costly, with investment and R & D often poorly guided. This was seen in the case of British nuclear plants whereby Britain attempted to go it alone and develop its own nuclear reactors; this came at a huge cost to the economy and meant that energy was more expensive than in Germany and France (Hannah, 2004: 100-101). Such poor performance in R & D and technological development highlighted the need for Britain to set more open policies and regulations so that technologies and knowledge from other nations could more easily be diffused into the economy- as seen with Britain’s success relative to its competitors during the ICT revolution (Crafts, 2010: 6), vastly improving productivity. Similarly, it highlighted the need for Britain to take a ‘softer’ approach towards technological development which later resulted in the R & D tax credit; this policy is estimated to improve TFP by approximately 0.32 percentage points per annum (Griffith et al, 2001: 386).


It was also a commonly held view in the 1950’s that large firms, in cartelised industries, were beneficial for technological innovation, with price-fixing agreements promoting R & D (Broadberry & Crafts, 2001: 97). However, this Schumpeterian view was, in practice, a falsity with collusion and cartelisation posing ‘serious obstacles to productivity performance’ (Broadberry & Crafts, 1996: 80). This issue brings to attention the need for competition and lower levels of market concentration in order to improve innovation, technology and productivity through its effect on incentive structures. This seems a particularly important lesson with Nickell et al (1997) finding that if competition reduces monopoly rents from 15% to 5%, there would be a rise in total factor ‘productivity growth by 1 percent per annum in a firm with no dominant external shareholder’. This shows that improved competition policy could have led to large increases in Britain’s productivity and should be pursued in the future.


Competition:


The issue of competition, touched on in the previous sections, is a particularly important lesson to be taken from the period and has been an area where Britain has improved substantially. Firstly, protectionism had been a key policy since the 1930’s and continued to be used substantially until the 1960s; this included tariffs offering considerable protection to industries such as lace (Crafts, 2012: 11). However, it is unlikely that such protectionism was beneficial in terms of long-run productivity performance. This prompted the government to undergo a period of trade liberalisation, joining the EU in 1973 and eliminating 55% of 1950 protectionism between 1958 and 1975 (Crafts, 2016: 5).


The process of trade liberalization and accession to the EU resulted in significant benefits for the British economy. FDI flows significantly increased, leading to both increases in British manufacturing activity (Broadberry & Leunig, 2013: 4) and higher levels of productivity through spill over effects (Harris & Robinson, 2004: 65). Trade policy also put extra pressure on managers, boosting productivity and efficiency through entry threats- competition and trade policies proved to be a lot more helpful than the supply-side policies, such as subsidies, which had previously been employed (Bean & Crafts, 1996: 146).


Secondly, Britain’s strengthening of competition and opening up of market-forces between the 1970’s and 1990’s was influential in altering industrial relations. Whilst anti-union legislation proved to play a limited role in mitigating the negative effects of trade unions, such as restrictive work practices which hinder productivity, greater levels of competition in product markets were highly influential in improving the efficiency and productivity of unionised firms (Machin & Wadhwani, 1991: 843). Similarly, Britain’s move towards a more market-based wage setting system, as well as relaxed employment regulations proved to be valuable, creating a permanent positive shift in the productivity growth rate (Card & Freeman, 2004; 31-32). It is therefore clear that competition and deregulation had positive effects for the economy by eroding trade union membership and collective bargaining.


This theme towards substantial weight being put on competition policy continued through the 1990’s with the publication of Competitiveness White Papers. These papers reflected the lessons learnt in the post-war period and aimed to set out key factors needed to raise the competitiveness of the economy; this ignored distributional policies and focused on promoting infrastructure, education, innovation and finance for business (Wren, 2001: 849). Britain’s commitment to such policies meant that it soon closed the gap with the USA and outperformed its European competitors in terms of competition, as seen in table 2.


Table 2: Competition Policy Indicators

Source: Crafts (2012) pg. 21


This focus on competition policy, which had previously been very weak, undoubtedly helped Britain to close the gap with its European neighbours (Crafts, 2016: 15). The strengthening of competition resulted in a strong productivity response (Crafts, 2011: 27) as policies helped to improve management practices, promote innovation and reduce principle-agent problems. It is clear that Britain learnt a lot from its earlier experiences and its new approach is likely to support productivity growth in the future.


Conclusion:


The British experience of industrial policy between 1950 and 1997 highlights many lessons. It uncovers the importance of well thought out competition policy, whereby an emphasis on competition can lead to large productivity gains as evidenced in the cases of the nationalised industries, trade unions, foreign trade and incentive structures. It also shows how deregulation can improve productivity, with Britain having great success with its flexible employment arrangements and adoption of ICT. Further, the experience highlights the need for governments to manage change in their economies. Rather than using selective policies to protect failing industries, develop technologies and improve specific skills, governments should be taking a much more active approach. This suggests the need for a more ‘horizontal’ stance, whereby the government improves general education, facilitates innovation and generates regulations and taxes which allow the economy to move with the times. Where selective policies are used, it is important that they are well considered and promote those industries with a high growth potential for the future.


Bibliography


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