And the winner is…. competition?
Civitas, 25 October 2010
In his speech to the Confederation of British Industry (CBI) today, David Cameron promised government support for ‘those industries where Britain enjoys competitive advantage’ . He also stated that ‘I believe in competition… I believe when new entrants challenge big business, everyone wins’ . This latter point about competition – having faith in the market – has traditionally distinguished centre-right parties from those on the left who have traditionally favoured a greater degree of state intervention. The former point, however, concerning government support for industry, is traditionally associated more with left-wing economic policy.
The interesting thing about British politics over the last decade or so is that some of the traditional hallmarks of the ‘right’ and the ‘left’ have been up-ended. New Labour was far more pro-market than its predecessor (the previous Labour Party) and under Tony Blair was committed to extending the use of Market Type Mechanisms (MTMs) in public services as well as ensuring that the free market for private businesses remained relatively free from government intervention. New Labour’s aversion to economic policy positions previously considered as left-wing was also evident in its relationship with industry with Peter Mandelson stating that it was not for the Government to ‘pick winners’. In contrast the Conservatives, under David Cameron, have been keen to overturn some right-wing stereotypes associated with the party. For instance, before the election the Prime Minister emphasised the party’s commitment to public spending, particularly on the NHS. Now it seems the Conservatives are advocating government support of specific British industries, again something perhaps traditionally associated more with the left-wing of British politics.
Although these developments are of interest to political historians and political scientists, labels such as ‘right’ and ‘left’, ‘interventionist’ and ‘free-market’ can often cloud the actual effect or implications of a policy or set of policies. In the case of David Cameron and the Conservative Party, the real question is what effect will this industrial policy have in practice?
Without pre-judging too much, there may be a tension between supporting specific industries and opening up markets to competitive pressures. Although the dichotomy between free-market policies and support for industry is simplistic, and in many cases unhelpful, there is an important difference between government support that helps complete a market and support that distorts it. Some of David Cameron’s comments suggest that his government will be firmly behind the, laudable, former objective (supporting the market); however, a few other comments and some of the new Government’s actions suggest that they may, unhelpfully, contribute to the latter (distorting the market). Cameron is right that the Government needs to encourage new entrants to challenge big business and should accordingly improve access to credit for start-ups and reduce the regulatory burden on new businesses. He has also made the right decision not to overly cut plans for UK infrastructure improvement, which is necessary for future growth. The decision not to reduce science research funding is also welcome. Furthermore, the Chancellor George Osbourne has correctly identified that cutting spending, rather than raising taxes, is a better way to encourage growth and so permanently, and effectively, reduce Britain’s budget deficit.
However, some of the new Government’s actions may unfortunately distort the market and, in the long run, impede growth. First, the plan for a ‘green investment bank’, at a time when general investment in industry is declining, is a myopic decision. As argued in a recent Civitas report, what is needed is a general industry bank that would help improve the funding market, rather than distort it. Secondly, to pin-point specific industries in specific areas, as Cameron did in his speech, risks favouring the incumbents in an industry rather than providing a level playing field for new entrants. Rather than promoting ‘green technologies in the North East’ as Cameron promises, the Government should ensure that all technology companies and start-ups (green or not) have access to funding that can help them grow. By promoting specific industries in specific areas, the Government risks propping up failing companies or promoting an industry in an area more suitable for a different industry. Although Cameron is right that the Government needs to support industries where Britain is a world-leader this can be done without the risk of supporting incumbent institutions which may, in actual fact, be limiting Britain’s international success rather than furthering it. Rather than spending relatively scarce funds on targeted industries, the Government should spend money to ensure that businesses in all industries in Britain have an equal chance to succeed (and to fail in the case of poorly performing firms). This can be done through increased investment in infrastructure and education, ensuring that Britain’s financial system serves the needs of the real economy, and reducing the regulatory burden on new and old companies (especially given the fact that all British firms are now under the jurisdiction of Brussels as well as that of Westminster). Britain’s leading industries will benefit from these measures without the associated risk that the government may promote inefficient industries or companies.
Cameron is right to support British industry and to promote competition; however, he should not waste money and political capital micro-managing the economy. It is the job of the Government, not to pick winners, but to ensure that no winners fail to win because of market failures. The Government should concentrate on the many areas where there is obvious market failure, rather than adding to such failure.