The foundational economy - rethinking industrial policy By Andrew Bowman, Julie Froud, Sukhdev Johal and Karel Williams

Against a back ground of nance led crisis, the rhetoric about rebalancing the economy has usefully opened up a new discussion about what kind of private sector we want and about the role of industrial policy which was previously dismissed as picking winners. With Vince Cable in the lead and the TUC and CBI in the chorus, our policy wonks and politicians are all industrial activists now. The problem is that this activism is focused on an aspirational economy of sectors of the future and overestimates the practical efcacy of policy instruments like a national investment bank. Aspiration is a ne thing for Britains large heterogeneous economy which (with or without government support) will generate some exceptional technology led successes. But, in a sector with structural problems after 30 years of relative decline, this kind of industrial policy will not deliver the competitive success that has eluded British manufacturing since the war. Against this background, it is time to change the focus and pay more attention to the foundational economy of utilities, supermarket retail, health, education and welfare. This is a large part of whats left; and it is also what we have serially mismanaged because of our very British enthusiasm for generic policy xes and neglect of specic national conditions and sector specics. The result is a thirty year policy cycle driven by the antidote fallacy that if strategy (a) is a dismal failure then the opposite strategy (b) will deliver policy objectives.

The current enthusiasm for industrial policy is thus both a progressive move and a repetition of a hopeless cycle The antidote fallacy gave us ill-considered nationalisation after 1945 as the antidote to the coal owners and then as balm for distressed sectors. After 1979, it gave us labour market deregulation and all the rest as antidote to British corporatism. Since 2009, it has given us the Vince Cable version of industrial policy as redressing the balance. So heres a short piece on why aspirational success will be elusive and how we need to pay more attention to the foundational economy which deserves better than serial mismanagement. The aspirational economy and foie gras industrial policy The current UK discussion of industrial policy is about how the nation can come back in tradeable goods through high tech and competitive exports (with a little balance of payments help from fracking in the right wing vision). The aspirational focus is given away by those speeches by politicians which list sectors of the future in which the Brits can and will succeed. In David Camerons version, the list includes green technologies, creative industries, nancial services, pharmaceuticals and advanced engineering. The Tory right (and HM Treasury) still want to encourage enterprise through more deregulation but the centre and left are increasingly convinced that the sectors of the future (and our existing base of SMEs) can be encouraged by more active state policies plus something like Robert Skidelskys proposed National Investment Bank. This is foie gras industrial policy whose assumption is that if we choose and force feed the goose it will deliver what we want. Industrial policy enthusiasts cite national examples of success (currently Germany, Korea and China; previously Japan) where the positive outcome is attributed to the power of policy under the aegis of focused government ministries and supportive banks. Their emphasis is on the power of generic policies which should be adopted in the UK; rather than on favourable specic conditions which are absent in the UK. Unlike Germany we are not on a trajectory of sustained development, with intact manufacturing supply chains which build technical and nancial resources, capably backed by government with sectoral expertise.
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With recent initiatives like the Green Investment Bank, the coalition is only half heartedly doing what the industrial policy enthusiasts want. But there are also more fundamental questions about whether a more active state plus investment bank nance can do the trick. Because, the precondition for successful foie gras industrial policy is a healthy goose but the British manufacturing sector looks more like Monty Pythons dead parrot. There has been no sustained increase in British manufacturing output since the 1970s and rms are now braced for another punishing downturn with manufacturing output down 2% year on year, and a record trade gap last quarter. Government ministries, like BIS and DfT, do not understand the underlying structural problems about broken supply chains and the wrong ecology of ownership, because our ministries now lack the sectoral knowledge which was the basis for our last successful intervention in the 1980s on British content in North Sea oil engineering. Politicians are deceived by manufacturing success stories which do not bear close examination and are refuted by research from the Centre for Research on Socio Cultural Change (cresc.ac.uk). In automobiles, we are building more cars, but 35% of the value of UK auto output is imported. This is locked in by broken supply chains and a lack of capacity and capability which have been sustained elsewhere on the European mainland. Despite JCBs preference for national suppliers, the British content by value of the JCB digger declined from 96-36% between 1979 and 2009. Generally, the ecology of ownership is a serious structural constraint on export growth because it limits the capability of British rms and the ambition of foreign rms. British owned manufacturing rms on average employ 14 and will never export directly because they are trapped in a workshop sector; foreign owned rms employ 200 because the factory sector has been sold to foreign owners. But the foreign owners in automotive and other sectors generally have limited ambition because they run British branch factories as part of a global division of labour The foundational economy (and why it matters)

Rather than hoping forlornly to recover whats lost in British manufacturing, it would be better to start by thinking about whats left in the foundational economy of mundane activities which sustains the infrastructure of everyday life. This idea of the foundational introduces a new way of thinking and classifying economic activity, so we can begin by answering three questions: what is included in the foundational? Why does it matter? And how is it ubiquitous, persistent and policy relevant. The foundational economy provides the infrastructure of everyday life. The largest component of the foundational economy in the UK and elsewhere is health education and welfare because high incomes everywhere increase the demand for eds and meds. This demand is supplied in the UK by the state sector and a growing para state of publicly funded private employers in care homes, nursery education and such like. The other key component of the foundational is mundane activities like utilities, retail and food processing which produce necessary everyday goods and services which are used by everybody regardless of income or social status. In Britain, the utilities like water and electricity were privatised under Thatcher and joined supermarket retail and food processing in an augmented private sector. The foundational matters because it is the single most important determinant of our collective welfare and because it has a huge employment base of ten million or more. On a broad denition, some 30 % of the national workforce are employed in health, education and welfare with another 10% or more in the utilities, retail and food manufacture. At national level, the leverage of foundational policies on outcomes is much stronger here than in manufacturing where employment is declining towards two million; and, signicantly, the largest sector in manufacturing by employment is the foundational sector of food processing which employs nearly 400,000 and is crucial to managing import penetration. Regionally, the foundational share is close to half of all employment in the depressed ex industrial districts of Wales so any foundational policies have an explicit spatial dimension and are crucial to managing the growing gap between the regions. Regional issues are completely absent from the current, Cable vision

of industrial policy which has no sense of geography ( perhaps because it will most likely benet the M11 corridor and the Thames Valley). The foundational economy is what s left in Wales or the North East where tradeable manufacturing has collapsed; but it is also important in London and the South East because the foundational is distributed according to population. It is always one way or another the subject of public policy because of the connection with citizen entitlement and everyday life. The foundational is usually politically franchised; with the connection explicit in an utility activity like train operating and inexplicit in the case of supermarkets where the availability of sites depends on the planning permission regime. It is the policy relevant solid basis for all our futures Mismanaging the foundational: generic xes If the focus of active industrial policy needs to be shifted, we need also to do more than simply propose new policy xes. It is important to analyse our history of recurrent policy failures and recognise that foundational activities have been ill managed ever since 1945 because of the antidote fallacy and a preoccupation with generic xes which is our inheritance from Atlee and Thatcher. Since 1945, the antidote syllogism which justies every major British policy regime change is that, if strategy (a) is a dismal failure then the opposite strategy (b) will deliver policy objectives. Strategy (b) involves a generic policy x justied by counterposing a failed past and a blurred, rhetorical, imaginary future. Policy never engages with specic national conditions or variable sectoral circumstances. The result is a thirty year policy cycle where initial failures are attributed to the incomplete revolution before the undeniable gap between promise and outcome drives policy makers to embrace the antidote. Thus, between the 1930s and the 1970s, the foundational economy ( as it then was) was increasingly nationalised, municipalised and socialised. Reformers criticised private railways or coalmining as pathologically inefcient, investment averse and prone to value extraction as in the case of the coal owners; in health and education, a disorganised, unplanned mix of private, voluntary and state provision could not deliver universal standards at sensible cost. After Atlees
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generic x, the relation between social objectives, cost recovery and state funding became sector by sector work in progress as operating losses publicly discredited the nationalised industries. The foundational was privatised, PPPd, outsourced and broken up after 1979 under Thatcher and Blair. Reformers stereotyped large nationalised organisations as sclerotic; and then presented private ownership and management along with competition for markets as generic xes which could transform any and every sector. The outcome was a much worse mess in two key respects. (1) In the privatised utilities, value extracting private rms now toll the public and rip off the contracting state. The forthcoming CRESC report on railways, explains how franchising gives train operating companies a no investment, option on distributing prot with the right to walk away if losses threaten; train operating prots are politically constructed by Network Rails low track access charges which have reduced its revenues and increased its publicly guaranteed borrowings to 30 billion. (2) Right across the private sector, point value or cashing out has become the new principle of success which fed shareholder value, boosted private equity and draws in ordinary Brits through housing equity withdrawal. The result was an unsustainable feeding on asset prices, dramatized by the way in which housing equity withdrawal was larger than nominal GDP growth under both Blair and Thatcher. More enduring and pervasive was collateral damage down all along the supply chains as, for example, the supermarkets competed to deliver SV and low prices by capturing the margins of processors and producers and delivered slow motion disasters in UK dairy + meat processing. New paradigm? The thinkable and the doable So the UK does not so much need industrial policy as a new and different kind of policy for the foundational economy which breaks with the antidote fallacy and generic xes by stopping certain kinds of corporate behaviours and engaging with sector specics. If we can already change whats thinkable, the question is whether the political classes can then change whats doable

On the behavioural front, the immediate priorities are fairly clear. Firstly, it is important to stop the ongoing disorganisation of health, education and welfare provision in the name of competition for markets and consumer choice. Because this will surely extend the sphere of, and scope for, corporate looting of the contracting state. Second, it is important to curb point value calculations like those of the supermarkets so that British food processors and producers retain enough margin to stay in business. But principles are not enough because policy engagement with sector specics requires new kinds of analysis and empirics. We can give some examples here from forthcoming and recent CRESC reports inti sector specic business model issues In rail, the business model is that recovering costs from passenger fares never covers investment costs. Analysis here needs to focus on land taxes and such like which can tap the diffuse social benets of transport improvement. Relevant empirics are equally important. In retail, the accounts of Morrisons processing subsidiaries show that their vertically integrated model in meat is a protable alternative to the buyer led business model of the other three big supermarket chains which is a matter of organisational capability and cultural choice not economic necessity Out of this kind of sector specic analysis would come a learning which ensured we could do more than reverse Thatchers mistakes. But there must now be questions about whether the central state in 2012 has the capacity to break with the old paradigm. Do the political classes have the political will to challenge entrenched private interests and do their civil servants have the technical imagination to think regional, deal with chain issues and envision an economy of low nancial returns?. In Whitehall, the ministries lack expertise on sectors like rail engineering or autos and the Treasury is being run by a 28 year old PPE graduate who is just about to leave for a better paid job in the private sector. In Westminster we have factions of professionalised politicians pitching to swing voters. Labour is marooned in a bubble by its stand off relation with the trade unions and the decline of its
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provincially based mass party. The Labour Party has no more than 150,000 members who have been recast in the role of a supporters club. We must ask whether and how the expertise and political will of the central state can be strengthened so that it is less of a problem and part of the solution for the foundational economy. And also ask whether there is enough of a Labour party in the regions to drive change at local and regional level as Eneld is already doing with its New Directions programme. We should not assume the central or local states are progressive; the challenge is to make them so. Andrew Bowman, Julie Froud, Sukhdev Johal and Karel Williams are members of the Centre for Research in Socio-Cultural Change at Manchester University www.cresc.ac.uk -----------Political notes are published by One Nation Register. They are a monthly contribution to the debates shaping Labours political renewal. The articles published do not represent Labours policy positions. To contact political notes, email onenationregister@gmail.com