Vince Cable’s five-year plan

Inspired by the success of London's Olympics, the Business Secretary thinks it's time Britain had an industrial policy. But can it work? Matthew Partridge and Tim Bennett investigate.

What is Vince Cable proposing?

Business Secretary Vince Cable has decided that Britain needs an industrial policy. He appears to have drawn inspiration from the success of the London Olympics. Sixteen years ago in Atlanta, Britain won just one gold medal. But after heavy National Lottery investment and a comprehensive programme designed to find and train our best athletes, the country came away from 2012 with its best medal haul for over a century. Cable thinks a similar targeted government investment strategy could turn around our economy.

So what's the plan?

Cable says "pure laissez-faire is not the right way of doing things" and reckons "very few countries would dream of approaching their industry in that way". Instead, the coalition believes in "getting behind its success stories". Although the precise details of his plan are still unclear his recent House of Commons speech was "full of holes", according to The Guardian's Aditya Chakrabortty he outlined two key components.

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Firstly, he wants to see certain British business sectors, such as aerospace and IT, developed and supported by the government. Secondly, he wants to launch a government-backed business bank that will channel money to small and medium-sized businesses.

Have we ever had an industrial policy?

We invented it. Prime Minister Robert Walpole and his successors in the 18th century used a mixture of trade protectionism, subsidies, government procurement and skills policy (mostly consisting of poaching skilled workers from abroad) to develop British industries, especially wool making.

As Cambridge University economics professor Ha-Joon Chang notes, without these ideas Britain would have remained an exporter of raw wool, rather than woollen goods, exports of which paid for raw materials and food needed to fuel the Industrial Revolution.

These policies have since provided the template for industrial policies for the US and other success stories, from Germany and Sweden in the late 19th century, to France, Japan, Finland and South Korea in the late 20th century, to today's China and Brazil.

Are we out of step with other countries?

As The Guardian notes, "Britain is the only G8 country without a national investment strategy, and pretty much the only advanced country without a serious regional development policy". The result, says Chakrabortty, is that "Britain occupies a disastrous niche".

At the other end of the spectrum sits China, where Beijing injects huge sums of money into the economy via state-owned banks. Meanwhile Europe's main powerhouse, Germany, boasts a range of state-owned banks Sparkassen and Landesbanken that act as lenders to local firms.

So industrial policies work?

Not necessarily. Although Britain may have once benefited from an industrial strategy, the last time we had one in the 1970s we ended up saddled with inefficient state-run behemoths such as car maker British Leyland. As The Economist notes, although an industrial policy has sometimes worked in the past, "missteps and failures are more usual... governments usually fail in attempts to boost entrepreneurship". The last initiative for a Regional Growth Fund is a case in point (see below).

As for Germany's state-owned banks, the Landesbanken became increasingly involved in riskier activities, such as wholesale funding and investment banking during the credit bubble. As a result, they were hard hit when the US subprime crisis blew up, and are now under pressure from European regulators to repair their balance sheets.

Could Cable's solution help the economy? It's hard to see how. As Allister Heath points out in City AM, picking winning businesses isn't easy: "the experts' advising politicians don't have a clue about which industries will do well". Besides, "many of the UK's most successful industries such as supermarkets, accountancy firms, hedge funds, currency trading companies or private schools (which are rated more highly than those of any other economy apart from New Zealand on the OECD's league table) are politically incorrect or located in the wrong' part of the country. They will never be backed under an industrial policy."

Worse, as the Daily Mail's Andrew Alexander notes, "the industries [Cable] remains determined to back are aerospace, advanced engineering technology, the motor industry, digital development and medical science". These already "make pots of money". As for his plan for a new state bank, "it would take ages to set up. Starting a bank from scratch is at least a five-year operation and still not guaranteed to work."

A scandalous failure of policy

"The timing could hardly have been less auspicious," says The Daily Telegraph. The "fundamental flaws" in Cable's industrial policy idea have already been "mercilessly exposed" by the Commons public accounts committee. The Regional Growth Fund (RGF), a Nick Clegg brainwave set up within weeks of the coalition coming to power to channel taxpayers' money into businesses, represented a "scandalous" failure of policy in the view of the committee.

"Just £60m of the £1.4bn allocated to the fund had reached its intended targets; only 5,200 jobs out of a promised 36,800 had been created; and some of those jobs had cost as much as £200,000 each to create. If hard evidence were needed of the futility of Whitehall attempting to stimulate the economy through direct intervention, we need look no further."