Industrial strategy and the challenge of inclusive growth

One of the many odd features of our post-Brexit political landscape is that amongst all the shouting, rancour, and court cases, there seems to be an almost unBrexit-like consensus on its cause. Social and economic exclusion, or the feeling of being “left behind” among large swathes of the population prompted many to vote against the status quo or a representation of global progress which had not taken them with it.

At Demos, we’ve been investigating this thesis at a pan-European level as part of our cross-national study into the politics of fear, but we’re also hoping to delve deeper into the specifics of the UK context. To help us do this we are hosting a series of three events at PwC, looking at the different aspects of this issue. The first, convened this week and sponsored by the Joseph Rowntree Foundation, brought together leaders from national and local government, and the private, public and voluntary sectors. While there’s, quite rightly, a major focus at the moment on deliberative research into the experiences of the “left behinds”, our PwC events are focused on thinking through how policy-makers, businesses, and social sector organisations should respond.

The issue of the “left behinds” was a key feature of the new Chancellor’s Conference speech – where he argued that:

‘One of the key messages of the referendum campaign was that large parts of our country feel left behind. They see the country getting richer, but don’t feel part of that success.’

For the Chancellor, the solution boils down to solving one particularly intractable problem of recent times – productivity. Particularly, the substantial disparity in productivity levels between London and the rest of our major cities and regions. In his conference speech the Chancellor said he wanted to put productivity ‘at the heart’ of the Government’s industrial strategy and he backed this up in the Autumn Statement with a raft of measures to boost productivity – both nationally (eg, £23 billion National Productivity Investment Fund) and to help regions close the gap to London (eg, £3.3 billion in Growth Deals for local infrastructure spending in the North).

The issue of productivity was also at the top of the agenda at our round table. While broadly supportive of his underlying motivations, some participants questioned whether the Chancellor’s productivity strategy – focused on what one attendee described as  investment in “shiny and new” infrastructure projects and high-productivity industries – really addressed the problem of the “left behinds”. Over the course of the discussion our roundtable attendees put forward a number of alternative approaches to support more broad-based productivity gains:

1. Invest in post-16 and adult skills development

While the Chancellor has referred to the centrality of skills development to addressing the productivity problem, the current and previous Government’s actions speak louder than the rhetoric. When it comes to addressing regional inequality, for instance, while the Government has pledged £13 billion to spend on transport in the North, it has earmarked just £70 million for the ‘Northern Powerhouse Schools Strategy’. More broadly, the further education sector – not ring fenced like primary and secondary education – has been significantly weakened by the last six years of austerity.

However, developing the skills demanded by the modern economy must be central to any productivity-focused policy. As one roundtable attendee argued: ‘the best industrial strategy is skills strategy’. Given the perennial complaints by employers on the work readiness of school leavers, there’s a major need to invest in post-16 provision. Moreover, rapid, technology-driven economic change means that adult re-skilling is also vitally important to develop a globally competitive workforce. By taking this supply-side approach Government would also have more scope to ensure that productivity gains reach lower-skilled individuals and communities.

2. Support productivity gains in low-wage sectors

Government R&D investment (as a percentage of GDP) lags behind many other developed and developing economies. Investing in, and growing, already high-productivity industries is therefore central to boosting average productivity levels. However, there’s often an assumption that this means productivity gains can’t also be made in low-wage sectors such as retail and care. In fact research has found that if we could raise productivity in low-wage sectors to match those in the rest of Western Europe, we would cut the average productivity gap by a third.

So how can productivity gains in these sectors be brought about? Well, the National Living Wage is a good start, giving employers an incentive to invest in productivity-enhancing measures. Skills and training also come back into the argument, with research showing that innovation and creative decision-making by middle and junior managers is key to driving productivity gains in these sectors. Finally, employers need to think more fundamentally about how jobs are designed to support progression and professional development, rather than simply relying on a large pool of low-paid workers.

3. Government intervention to match the rhetoric

There’s been a lot of media attention on the May Government’s more economically interventionist stance. The message from our roundtable was that at all levels of government (national and local) the state could still do much more to enable inclusive growth. Currently, there’s too great a focus on the risks of legislative and regulatory change, which limits the scope for innovation and leaves a fragmented policy landscape.

Some councils, despite their squeezed budgets, have acted unilaterally –introducing the (London) Living Wage, enabling greater cross-sector collaboration and changing procurement practices to prevent a race to the bottom on price. These local authorities have taken risks and reaped the benefits of more productive approaches to commissioning, and more sustainable and joined up local economic strategies

Taken together these three points underline the need for the Government to move industrial strategy beyond large infrastructure projects and tech industry investment.  If the Prime Minister and Chancellor really are serious about creating an economy that works for everyone they must put outcomes for low-paid, low-skill communities at the heart of efforts to boost productivity and regional growth. In the nicest possible sense, we need an economic policy that will make the “left behinds” a thing of the past.