Evidence on Defence Industrial Strategy and Related Matters

I was asked to give written evidence to the Select Committee on Business and Trade, focussing on defence industrial strategy and related matters. I did so as I was dismayed by the low level level of analysis (‘defence industrial superpower’) and the prevalence of very naive assumptions about industrial strategy and British innovation. Yet again arguments were made taking the UK case in isolation, misunderstanding its place in the world, and not recognising that things had changed, and in case, relying on dubious history.

Introduction

In this evidence I have presented some thoughts about defence industrial strategy, industrial policy, and innovation. Some of the discussion is historical. I make no apology for this. Much discussion of policy in this area is profoundly shaped by historical arguments. In my experience, many are wrong and need challenging if only to free up the policy imagination to analysis of the problems of the present, which are very different. I have appended the text of two talks on related topics which I hope the Committee will find of interest. The first was given to the Worshipful Company of Engineers, the second to a conference at the Ministère de l'Économie, des Finances et de la Souveraineté industrielle et numérique in Paris.

Problems in thinking about policy in the present and recent past

One of the most striking features of the debate on industrial and innovation in the British case is a failure to understand the UK’s place in the world, fatally combined with delusions about British strength. That said, in the real world of policy, as opposed to politics, a certain realism must appear, for example the recognition that manufacturing is a small sector of the economy, and services account for 50 percent of British exports, or that it is an open question whether a ‘sovereign’ virgin steel capacity is necessary. Nevertheless, policy discourse itself is deeply affected the idea of the UK being or becoming a science, innovation, or defence industrial superpower, and is contaminated by claims that UK prowess is world-leading or world-beating. This is not pardonable exaggeration, or simply a sad reflection of the level of political culture, or a left over from the past. These delusions are new and damaging to British progress. It would be a great help to policy making for the policy discourse to appreciate that the UK is a big Canada (about 50 percent bigger) with a lower per capita GDP. It is not a small United States, but a small Germany. It is not the world in microcosm, but a small interdependent part of it. It does not in a serious sense punch above its weight, and even if it did, bantam weights rarely come off well in bouts with heavyweights. Pretending to play premier league football while in the first division is a recipe for failure, not success. There is also a particular historical-political economic issue which affects understanding of industrial policy. There is a standard way of thinking about industrial policy, and that is that it is a good thing, but has been largely missing from the history of the UK. The history of industrial policy in recent years is thus taken to be the history of a few reversed initiatives. There are three fundamental dangers in this kind of thinking.

The first is that all governments have policies for industry, which typically differ by sector, whether they call them industrial policies or not. Nor should we forget the many selective tax reliefs and subsidies which are often more expensive than industrial policy as usually defined. There are also important general industrial policies. For the last forty years perhaps the most important have been 1) opening up the economy, to the EU and the world, 2) encouragement of foreign investment (foreign capital accounts for around 50 percent of manufacturing) 3) an innovation policy focussed on start-ups and entrepreneurs. In the recent past by far the most important industrial policy has been Brexit.

The second is believing that industrial policy is a good thing, better than having no industrial policy. However, some industrial policies are bad. Sectoral or other forms of narrow, discriminatory industrial policy are a recipe for capture, often leading to outcomes which are worse than no intervention. The National Wealth Fund’s singly largest investment programme in Carbon Capture and Storage may well be a particular case in point. Another crucial point is that one cannot think of industrial policy as a policy choice over not having one. Industrial policies are often imposed by circumstances, and can be a second best.

The third is believing that all countries should have the same policy. Thus, in the UK industrial policy is sometimes argued for on the grounds that the Biden administration did it, or China does it. But the USA and China (and the EU) have scope for developing industrial policies the UK simply does not have. It is worth recalling that even the massive United States is no longer self-sufficient in critical manufacturers, and that reshoring production, with no guarantee such policies would work, involves placing massive tariffs on overseas production. The UK is an a radically different position. The point is therefore not whether to have an industrial policy, but what kind of policy, recognising that bad policy is a very real possibility, and that the UK is in a particular position in the world economy. That said, there are important opportunities to improve the quality of work and life by integrating production and consumption at national level in fresh ways, avoiding the race to the bottom as wages are driven down and service quality declines. Most will be in the 80 percent of the economy we call services, but such considerations apply to industry also. But it needs to be recognised that such a programme requires understanding the profound changes in the British economy in the last forty years, the material aspects of particular industries, and having a complementary policy for trade.

Getting these things right is difficult, as the British Steel case illustrates. It should surprise no one that for decades the UK has imported steel. Policy has recently recognised the need to move to limited, all-electric steel making based on scrap. Policy has been to subsidise foreign companies to install electric furnaces instead of blast furnaces, and to look to DRI. Yet now two very old blast furnaces, with little life left, are to be saved, though presumably for a short period, at great expense, where the more modern ones at Port Talbot were closed down. There is no evidence that Scunthorpe blast furnace steel is needed for defence at present, and there will obviously not be around for long. Where there might be a case for intervention is in the rolling mills at British Steel, but these were not threatened with closure. In short, the British Steel case shows how industrial intervention should not be done. Continued here