Full transcript | Chuka Umunna | Speech on active government | Liverpool | 12 March 2012

"Markets can't set strategic direction. Governments, working with business, can."

It's great to be back in Liverpool - in fact, it's my first time back since our Conference here last autumn.

It's good to get out of Westminster when we can - I think it's so important for us to getout and about - to see and listen to you.

On my trips to different regions of the country, increasing numbers tell me they feel like we are living through some weird, distorted repeat of the 1980s - unemployment high, cuts, the NHS under threat, more recently the Falklands back in the news.....Liverpool winning trophies (okay, that last one is clearly a good thing!).

And again, many argue - depending on your political point of view - that this is all happening under an ideological Conservative-led Government wedded to certain orthodoxies: the idea that the economy will fix itself; the best government can do is to stand back; that markets never fail.

So I'm going to say a little about the politics and then I'll talk at greater length about the economics which is of primary interest to you. Turning to the politics, today I want to pay tribute to a politician who I know commands the affection of this city. It is not Luciana, our fantastic Shadow Minster for Energy and Climate Change, who organised today's event, much as we all have great affection for Luciana and she does a superb job as one of your MPs.

Nor is it my other Parliamentary colleagues here today - who also work tirelessly for the people of this area too. Nor is it even the great Joe Anderson, Leader of the Liverpool City Council.

Lord Heseltine

No. The politician I want to pay tribute to today is not a Labour politician, but a Conservative. During the long Tory years there was one among them who stood against those in his party who in the name of ideology argued against government activism being used to boost business and private sector investment.

It was Lord Heseltine.

In the early 1980s, following the Toxteth riots, he stood with you the people of Liverpool where others wavered. He became known as Minister for Merseyside, assembled a 30 strong taskforce and put in motion the Liverpool Garden Festival and the redevelopment of Albert Docks. That is why, no doubt, you are giving him the Freedom of this city tomorrow - I commend you for doing so.

In his 1987 book, "Where there's a will", Heseltine urged "wholehearted recognition of the need for and the adoption of a British industrial strategy". In the early 1990s, with Thatcher toppled and at the peak of his influence, he sought to put his ideas into action after John Major appointed him to the precursor to the current Business Department, the DTI.

But the ideologues in the Conservative Party didn't much like him - that is still the case today. When his name came up in the House of Commons at the end of last year it was met with jeering from the Tory benches. That tells you a lot.

We know they don't like his views on Europe. They prefer the simplicities of a macho, phantom veto, not the painstaking complexities of proper engagement with our European partners to safeguard the 3.5 million jobs that depend on EU trade.

And they don't much like his views on the role of government in the economy either. As many in this room may recall, he told the Conservative Party Conference in 1992 that, if needed, he would, "intervene before breakfast, before lunch, before tea and before dinner". I'm not sure I'd quite put it like that myself but there was and is a clear difference between his approach and that of the Conservative orthodoxy then and now.

As a press cutting from the 1990s put it, Heseltine represented, "a break in the chain of right-wing Trade and Industry Secretaries - Sir Keith Joseph, Norman Tebbit, Nicholas Ridley, Lord Young, Peter Lilley - whose aim was to cut their budgets before breakfast lunch and dinner". Of course, Heseltine and Young advise the government now but, whereas Heseltine has an office in BIS and is known to have concerns about this
government's lack of an industrial strategy, Young has an office in the heart of Downing St. - where power ultimately lies in this government - and his fingerprints are all over the Cameron government's economic policy.

Of course, Heseltine's nemesis in the 1990s was Michael Portillo, who - back then - was a darling of the Tory right, not the highly watchable TV presenter he is now. In a leaked letter from 1994, Chief Secretary to the Treasury Portillo castigated Heseltine for his failure to deliver up sufficient cuts to the DTI budget: "Nowhere in your department's report," complained Portillo to Heseltine, "is the assumption that it is government's
proper task to intervene in the functioning of free markets actually questioned".

The betrayal of Heseltine's legacy

For Portillo and Heseltine in 1994, read George Osborne and Vince Cable in 2012. Having questioned the very need for a Business department in opposition, Vince Cable has become a recent convert to the cause of active government and industrial policy - as his letter leaked last week demonstrates.

Vince has realised the failures of his Government's approach. In the letter he says it is clear to all that, beyond the deficit, this Government has no "compelling vision of where the country is heading". Its actions are "piecemeal". It has no "clear and confident message about how we will earn our living in future".

But in seeking to address these shortcomings through the adoption of an active government strategy, he is hamstrung by the old orthodoxies of his Conservative partners who argue the best government can do is to step aside. The biggest roadblocks to reform and the adoption of an active government strategy are the Prime Minister and the Chancellor because, for ideological reasons, they simply do not buy into the idea of government activism. This is, of course, a betrayal of Heseltine's legacy - it runs counter to his approach.

The problem Vince has is that he lacks the clout that his predecessor in the role, Peter Mandelson, had with No. 10 and across Whitehall so consequently he finds he is unable to deliver the active government strategies he and Heseltine advocate.

Reforming our economy for the challenges ahead

So much for the politics, what about the economics?

We are living through a period of seismic, rapid, global and technological change. With the government sucking demand out of the economy - by cutting too far and too fast - we worry about where demand in our economy will come from. That's what lies behind Labour's five point plan for jobs and growth. To get the economy moving again and - through growth as well as fiscal discipline - to bring the nation's finances back into
balance.

Taking a longer term, global perspective, the Government's exclusive focus on deficit reduction as an end in itself, looks increasingly short term and narrow. Within the next two decades, the size of the global middle class will almost triple in size to 5 billion people. That's a whole lot of new demand we should be preparing our economy now to meet.

Success in the global economy won't come from being quite good at lots of things. There is a premium on being the best. So we must develop our areas of existing strength - sectors, technologies, services - where we are already world class. Like advanced manufacturing, aerospace and automotive. Like business services, the creative industries, and higher education. And, yes, financial services.

We must build on these strengths. We must develop other areas where we could realistically aspire to global leadership, with growth more broadly based across the UK. Not just in high end, export industries, but seeking to increase productivity across the economy, focusing as much on the diffusion of new technologies as on their creation. As a nation, we have a job of work to do to modernise our economy: to position it to
succeed in this new global context; to develop our national capabilities to make the most of these emerging opportunities. And, because change is difficult and its impact uneven, we must manage the process of change so that the costs and the benefits are broadly and fairly shared.

This must be our national mission. As Ed Miliband, the Leader of the Labour Party, laid out last week in his "Made in Britain" speech - a more productive, more responsible capitalism, underpinning a more inclusive and cohesive society. As Ed said, we should celebrate, take pride in and back the best of British business, products and services. This is not about protectionism but using all the means at government's disposal to give competitive British firms every chance to succeed.

We are clear that the growth that we need is private sector growth: UK businesses producing more, and selling more in tough but expanding global markets. I am equally clear that government must play an active role in that objective. Trusting markets alone won't get us there. Neither can governments. Building this New Economy requires a new partnership between productive business and activegovernment.

Not government stepping back - as the Prime Minister and Chancellor would have it - but government stepping up: consistently, responsibly, and strategically; creating the conditions for success; supporting business in practical ways.

That is why I have taken as my starting point the approach of Lord Heseltine. Of course, he sought to adopt active government strategies at a different time in a different context. His prescriptions cannot simply be transposed into this new era. But his mindset was the right one.

So what I want to do in the rest of this speech is to set out the role for active government in 2012 and beyond as well as acknowledge its limits. I will talk about the obstacles to this kind of approach in the UK context, and will end by setting out a framework for action.

The argument for active government

What do I see as the role for active government?

My starting point remains, of course, sound macroeconomic management. There is little that BIS and other departments can do to foster growth if the underlying macroeconomic judgements of the Treasury have gone awry. When George Osborne implied that we were on the brink of bankruptcy, he was not only wrong, he was irresponsible. As my colleague Ed Balls has clearly shown, by cutting too far and too fast, this Government choked off growth before it was properly established. Business confidence nosedived following their 2010 Spending Review.

Since then, we have seen too little investment and virtually no growth. Right now, many large firms are sitting on big piles of cash. Tragically, in an uncertain macro environment, they see greater value in hoarding cash against future uncertainties than investing it in productive capacity or re-circulating it in the economy. We need to get them investing, and this starts with getting the macroeconomic judgements right.

But beyond the crucial importance of getting the macroeconomic judgements right, why should government do more? I would give five reasons.

Number one: like it or not, in a modern economy governments can't help but influence the shape and functioning of markets, for good or ill. It is not about denying these influences, or even trying to minimise them. It is not about market versus state. It is about fostering productive interactions between them.

Number two: there is a lot that active government can do to improve the health and functioning of markets. Markets work best where no one has a monopoly of power; where information is symmetric - in other words, when buyers and sellers both know what they are getting into. Markets work better where they reflect all the costs of production, including social and environmental costs; where barriers to entry are low; where coordination failures can be overcome.

Healthy, competitive markets reward the innovator, the insurgent, and the risk taker. They keep incumbents on their toes, benefitting consumers. They create the disciplines at home that drive success abroad. This does not happen by itself - markets are not always efficient. Even where policy frameworks can correct market failures, markets still require active stewardship, constant vigilance against unhealthy concentrations of power, and deliberate promotion of competition.

Number three: the market outcome is the market outcome but this might differ from the outcome we would choose as a society. We could have growth with continuing high unemployment or we could have growth with low unemployment; an economy competing on quality and creating good jobs or an economy stuck in a low-skilled equilibrium, competing mostly on price; green growth to polluting growth.

Determining these preferences in aggregate is, of course, the job of politics. Realising them is the task of governments. Here I am not saying that governments know better than markets. I am saying that governments make use of different sources of information, and are sometimes pursuing different goals.

Reason number four is perhaps the most contentious. I would argue that governments can - in some circumstances - improve on market outcomes even when pursuing the same goals. How? By doing things that, left to their own devices, markets cannot or will not do:

- Markets can't set strategic direction. Governments, working with business, can. There are risks in doing so, so caution is necessary. But knowing that government is behind an industry or a technology can reduce uncertainty and promote investment
- Early stage, fundamental research is often too risky for businesses to undertake. The role the US government played in financing or buying many of the innovations behind the ICT revolution is increasingly being recognised. Silicon Valley venture capitalists took the plaudits, but they were standing on the shoulders of federal government investment and support over many years.
- Through regulation, governments can create entirely new markets, as Labour did by requiring zero carbon homes within ten years.
- And governments can help to foster clusters and other institutions that enable premarket coordination and support. Liverpool Science Park is an example.

For some, this might be viewed largely as an extension of the 'market failures' argument. I'd take that. But it seems to me that there is a difference between government positively adding new dimensions to the market, and government simply oiling an existing machine. Ultimately, the categorisation is less important than the recognition that this is a role that government can and should play.

Interestingly, whatever the label or rationale, other countries are already pursuing active government approaches, and much more aggressively than we are. What we are advocating is in keeping with the international mainstream. I don't just mean the obvious places like South Korea, China and Singapore. In modern industrial policy - as in life - it is important to remember that the winners write history.

Look at what they do, not at what they say. Just because the Americans preach a gospel of free markets does not mean that their government has not made huge interventions in markets through vehicles like DARPA, the Small Business Innovation Research programme, and the National Institutes of Health.

So, by holding the country back through stubborn adherence to misguided ideology and the old orthodoxies the government risks allowing others to capture future markets.

It not just me saying that. It's Mike Turner, chairman of Babcock, the engineering and services group. It's industrialist Sir John Parker. It's Anthony Bamford, Chairman of JCB. It's Richard Lambert, former head of the CBI. According to Vince, it's Ratan Tata. It's Vincent de Rivaz of EDF. I could go on.

The challenges in practice

There will be those who may buy this case for active government in theory, but remain sceptical about it in practice. This is a fair objection. Rightly or wrongly, the shadow of the 1970s hangs over us all. How can we get this right in the future?

We can start by being more systematic in our approach. Too often in the past, governments have reached for the levers of industrial policy when everything else has failed, responding to demands for immediate action.

I'm a lawyer by profession and we have a saying: hard cases make bad law. To be successful, active government policy must be for life, not just for crisis or dependent on the personality and drive of whoever leads the Business Department. It must be about shaping the future, not just reacting to events. It must be less about sporadic and unpredictable intervention, and more about fostering stable institutions within a certainpolicy environment.

This is less about Great Leaps Forward, more about consistent steps on a much longer journey. And on this journey, an active government approach is as much about knowing when not to intervene, to let business and competition thrive in healthy markets, as it is about knowing when to intervene to address market failures and fill in the gaps.

We can try and provide a more certain policy outlook. Just as macro stability is conducive to business investment, so policy induced uncertainty undermines it. Here governments can be their own worst enemies. The last Budget's tax grab on North Sea profits may have raised a little revenue in the short term. But it also increased the long term risks of investment in the UK oil and gas industries, making it more expensive or
sending it elsewhere. Changing the rules on Feed in Tariffs has completely undermined investment in the fast growing solar p.v. industry.

Now it is fair to say there is a tension between the need for policy certainty and elections when the people demand change. But they have elections in Germany too and certainty about the policy framework there is a source of competitive advantage for their industries. It is one that, with cross party commitment and the right discipline in areas where we agree, we could perhaps attempt to match in the UK despite changes of
government.

One important precondition to mention - when Lord Mandelson pursued active government policies at BIS, the government machine struggled to keep pace. So getting all this right will require changes to the government machine: the way it gathers information, interacts with business, makes decisions, joins up.

A framework for action

So far I have argued the case for active government - or, as Lord Mandelson has put it, why "ministers and markets should mix". I then set out some of the key challenges in getting active policy approaches right. Now I turn to what active government should actually mean in practice. What kinds of actions should it take, and what should be the priorities?

Traditionally, active government approaches have tended to divide between 'horizontal' policies that seek to improve the functioning of the whole economy, and 'vertical' policies that focus on the development of particular sectors, technologies and even individual businesses.

The first big lesson is that the further policy moves from the whole economy towards particular sectors or firms, the riskier it gets. The surest foundation for active government must be effective horizontal policies. The most important horizontal policy for active government is - as I have already emphasised - fair competition in markets. Second, third, fourth and fifth must be other horizontal policies like skills, finance and infrastructure investment, effective corporate governance and incentives that reward long term value creation over short term value extraction.

Horizontal policies of this type are lower risk and, done right, should improve productivity. But the second big lesson is that just because the risk increases as the policy becomes more targeted, it doesn't mean that vertical, sectoral policies should be ruled out. Between risk and reward there is a balance to be struck. On this basis, sectoral policies can be extremely successful:

- Sometimes because they are very low cost. For example, government can use its convening power to solve coordination problems in a sector without spending much money at all. The Automotive Council is a very good example of this - a Labour innovation that the Government have continued. The Germans - who know a thing or two about making cars - also have an envious eye on it.
- Other times they are low risk because a small amount of initial public investment can leverage in a large amount of private investment.
- Or they may be low risk because they build on things that government would be doing any way, like using its procurement power to develop UK sectors strategically and using procurement to support innovation and jobs here in Britain.
- And sometimes sectoral policies are successful precisely because it is government taking the biggest risks and doing the groundwork: like investing in fundamental research that allows for the development of new classes of drugs, not incremental developments of existing drugs.

Ultimately, the key to good sectoral policies is the quality and independence of the decision making process concerning what to prioritise, and how.
The third big lesson concerns institutions. Look at Germany - where I recently visited - with their national investment bank, KfW; their centres of technical and vocational training and research, the Fraunhofer Institutes; their network of 426 local banks providing credit to businesses, the Sparkassen. Look at the US - I met with the Obama administration last year - with its Small Business Administration, and its Small Business
Investment Companies. Look at Singapore with SPRING.

Institutions like these can help both horizontal and vertical approaches. They can support business development and growth; provide stable finance; allow for information to be shared; foster innovation and encourage its dissemination; develop the skills base on which business can build. This is why we are looking at plans for a British Investment Bank and why we have said we need to open up schools to let industry in, not have it
shut out.

For us, institutions remain a bit of a gap, despite steps in that direction with the Technology Strategy Board or the Office of Life Sciences. Not that we should be importing ideas wholesale from abroad. We must foster institutions that are right for the UK today. And not just by looking to the new. We must build on our existing institutional strengths - like our universities as exemplified by the Warwick Manufacturing Group, our existing business organisations, and our trade unions who have been critical to securing investment at JLR, BMW, Nissan and elsewhere.

The fourth big lesson is that sometimes establishing the end matters more than dictating the means. Create the dream. Much of the innovation funded by the US government was a by-product of the space race and the Cold War. What are our visions of the future? Of a greener, safer world? And to get there: set standards at the product level and let business figure out how to get there - that's exactly what we did with zero carbon homes, unleashing a wave of innovation across a wide range of industries.

And finally, the last big lesson. It's not only about getting individual parts right. It is about the whole. So it is about competition policy being reinforced by procurement policy. It is about taxation and regulation reinforcing the strategic direction agreed with business. It is about ensuring that the finance, the skills, and the infrastructure are there for business and so on. Above all, it is about joining up this activity across government, and government engaging with business in new ways.

Conclusion

Lord Heseltine had the right attitude, against history and against his own party. Lord Mandelson took up the baton, but had little infrastructure to build on. Now Vince Cable is starting to see the light, but faces ideological resistance from the Prime Minister and the Chancellor.

We are clear where we stand. Our country is depending on you for growth. You deserve a government than shares your ambition for the success of your business, your community, your city. A government that will back your success, supporting you where it can, every step of the way. Systematically, consistently and predictably, using every tool it has. An active government strategy and industrial policy is at the heart of this.

The prize is great. Let's work together to achieve it.

Thank you for listening.