Not all 'the bad old days': Revisiting Labour's 1970s industrial strategy

When Labour came back into power under Harold Wilson in 1974 it faced an all-too-familiar problem of industrial under-performance. Its broad approach was hardly controversial and was based on several agreed assumptions.

It was a central tenet that government had an important role to play in promoting economic development, and could not simply leave the market to decide. There was the tradition of successful government guidance to industry during the war, which was built on by the Attlee administration. Conservative governments, faced with post-war industrial decline, had made repeated attempts to help: Macmillan had set up the National Economic Development Council (NEDC) in 1962, and Heath, after an initial period of laissez-faire theory, had passed the Industry Act (permitting subsidies to boost investment) and intervened to save Upper Clyde Shipbuilders (UCS) and Rolls-Royce.

'Indicative planning', which had been in vogue in the 1960s, was no longer seen to be a sufficient answer. It depended on the theory that a government commitment to a longer-term macroeconomic framework would give the private sector the confidence to invest and expand - French and Japanese industrial plans were thought to be successful examples of this. But the Wilson government's 'National Plan' had collapsed after the 1967 devaluation, and the problems of cyclical short-termism remained. Medium-term macroeconomic planning might have a part to play in building confidence, but industrial policy needed to get down to more detail at sectoral and firm level.

Thus far, political pressures to rescue firms close to collapse, in order to save jobs, had led to piecemeal industrial subsidies which were often wasteful and doomed to fail. This was not always the case (Rolls-Royce was a success; UCS and British Leyland were ultimately failures), but regardless of outcome short-term crisis management was not a satisfactory basis for industrial policy.

All this pointed in the direction of a more systematic industrial strategy. The development of such a policy fell into two phases, which were distinct - indeed, diametrically opposed - in ways which are not often recognised in the prevailing caricature of the period.

Phase 1: planning agreements

The 1974 Labour manifesto, backed by the National Executive Committee (NEC), maintained socialist rhetoric about taking charge of 'the commanding heights of the economy'. The concept of planning agreements, on the other hand, took account of the need for cooperative longer-term planning at sectoral and firm level, and was based on a French model, whereby individual firms were persuaded to commit to investment and job creation in exchange for public grants or purchasing. Not surprisingly, these two approaches clashed.

Stuart Holland, an economic adviser to the NEC, tells the full story in his chapter on 'The Industrial Strategy' in New Labour, Old Labour: The Wilson and Callaghan Governments, 1974-9. Tony Benn argued publicly for 'compulsory planning agreements with the top 100 companies', on a short timescale, even though Holland advised that at most only six or seven could be negotiated, on the French model, within a year or so. When the draft 1974 Industry Bill went to Cabinet, Harold Wilson and colleagues decided against even French-style bargaining in return for public support, so that agreements would be purely voluntary. To the general public, the concept of planning agreements still carried a flavour of command-and-control, and as a result very few agreements were reached. As Holland commented, 'instead of reinforcing and promoting industrial success ... the companies most likely to agree ... would be those which were in difficulty'.

In retrospect it is not obvious that French-style negotiated agreements would have been as damaging as some had feared, though scarce expertise in Whitehall would certainly have limited their extent: Labour ministers were taken aback when the Duke of Northumberland, reporting to the NEDC as chairman of the Agriculture EDC, told them that his industry had had a planning agreement for 25 years. In any case, Benn argued that an industrial strategy on the lines he envisaged would be incompatible with continuing EC membership, and when the 1975 referendum result was decisively in favour of staying in, Wilson moved him from industry to energy, marking the end of phase 1.

Phase 2: industrial strategy

Thus, in 1975, the government found itself lacking any coherent industrial policy. At the same time, it needed to persuade the trade unions that the 'solemn and binding' agreement on pay restraint was still effective.

Denis Healey (as chancellor of the exchequer) developed with Douglas Wass (Treasury permanent secretary) the idea of a tripartite sectoral approach under which each of the three parties - government and 'both sides of industry' - could contribute to improving performance in individual sectors and firms. It would clearly need to be government-led, with a considerable input from the Department of Industry, the Treasury and some other departments; and I recall pointing out, at a seminal meeting between Wass and Alan Lord (then a deputy secretary in the Department of Industry), that the NEDC and its supporting office were inescapably well placed (despite their rather tired image as a talking-shop) to provide the coordinating machinery.

As the ensuing white paper (An Approach to Industrial Strategy, published in November 1975) said, this was in itself not so much a strategy as a methodology. It had several key elements.

Priority for manufacturing industry

The government wanted to show that it was not hostile to private industry; on the contrary, in the words of the white paper, it 'intends to give greater weight, and more consistently than hitherto, to the need for increasing the national rate of growth through regenerating our industrial structure and improving efficiency. For the immediate future this will mean giving priority to industrial development over consumption or even our social objectives.' The fact that the services sector was a large and growing part of the economy was briefly recognised, but the remainder of the white paper, and the sectoral analysis, concentrated on manufacturing industry; the needs of services were to be handled separately (if at all). Similarly, the specific concerns of small businesses (notably finance and regulation) were under-represented in the sectoral approach.

Sector working parties

To make a reality of these general intentions required a detailed understanding of the needs of particular sectors and firms. Only with that understanding could departments make effective use of the various instruments which could meet those needs: direct subsidy, guaranteed finance, public purchasing, regulations, trade negotiations, taxation, competition policy, research, skills training, immigration, and so on. In practical terms, this led to the setting-up of 40 tripartite 'sectoral working parties' (SWPs), initially covering over two-thirds of manufacturing industry; these were staffed by NEDO, with representatives of the sponsoring departments, management and trade unions. It gave officials in those departments an important responsibility: to argue in Whitehall, with ministerial support, for changes which would encourage investment and expansion in their sectors.

'Picking winners'

The crucial question remained to be decided in each case: whether the benefits, of some specific change sought by industry, would exceed the costs. Those benefits would be given 'greater weight', but 'in deciding whether individual companies merit support the government will have regard to its normal criteria, including the need to ensure that the company concerned is likely to be viable in the longer term'.

Such judgments are inevitably difficult. To inform individual decisions, the government proposed 'to provide a framework in which to consider the likely prospects of the most important sectors of industry over a period of five or more years ahead', by initiating 'an analysis of past performance of individual sectors of manufacturing industry based on a number of statistical indicators such as size, growth rate, trading performance, import content, growth of world demand and importance to other sectors'. This exercise was given some publicity, as an important new initiative - hence the phrase 'picking winners' arose as journalistic shorthand.

The white paper recognised from the outset the limitations of this approach: 'the selection of sectors will not imply any commitment that the government will necessarily intervene ... It is of course clear that any industry can contain sub-sectors and individual firms whose prospects may be better or worse than the sector as a whole. Indeed some of the biggest disparities in performance at present are found within particular sectors rather than between them.' As the work proceeded it yielded no very clear conclusions (I recall that the best-performing sector under 'General Engineering' was 'mechanical machinery not elsewhere specified', the statisticians' residual ragbag). And as a matter of principle it was never clear whether the government proposed to give priority to those sectors which appeared already to have the best prospects, or to apply its limited resources to other sectors where there might be more room for improvement as a result.

Lessons

It is hard to assess how much difference the industrial strategy made in the four years between 1975 and the 1979 election of Margaret Thatcher's Conservative government, which rejected the whole idea of 'corporatist' involvement and left the market free wherever possible (NEDC was abolished in 1992). But the 1979 report by NEDOon SWPs' activities claimed some achievements.

The report deliberately focused on actions within industry, as the primary target area for improvements in productivity and competitiveness, rather than on lobbying addressed to government. Much of the work, in setting objectives and seeing what would be needed to meet them, was longer-term.

But there were some specific examples. The Mechanical Handling SWP was setting up collaborative export-selling arrangements. To improve communications between domestic suppliers and their customers, the Food and Drink Machinery SWP had carried out a survey to establish 'which main types of machinery were being imported and why', and arranged a conference and confidential report summarising 'what the customers had to say about future development requirements and specific opportunities for the machinery manufacturers'. As a channel of communication between government and companies, the Paper and Board SWP reported that 'the very good response to the £8 million government aid scheme intended to stimulate investment in plant which uses indigenous materials was largely due to the publicity given to it by the SWP, especially among smaller firms, and that the UK is now a world leader in the de-inking technology needed to allow waste newsprint to replace imported pulp'.

Much government support, through Industry Act schemes and the National Enterprise Board, dealt directly with individual firms, but the officials concerned were more knowledgeable about the sectoral background as a result of their parallel involvement with SWPs: thus NEDO claimed some credit for 'major investment in product development and fixed capital (aided by government schemes)' in domestic electrical appliances, machine tools, printing machinery, textile machinery, wool textiles and electronics.

One government scheme, the Market Entry Guarantee Scheme, arose directly from a discussion in NEDC - though SWPs typically wanted it to be operated more flexibly. Some of the comments now have an ironical tinge: 'the Office Machinery SWP's tripartite mission to the USA studied developments in the production of "word processing" equipment and its use in offices in the public and private sectors', and 'identified a serious product gap in the UK's capability'. The Power Plant SWP complained that 'present energy policy underestimates the need for power plant orders on the short term and does not identify adequately a long-term commitment to a nuclear power station building programme'.

All this gives a patchy and partial impression, and it is hard to demonstrate that the large volume of consultation, absorbing much management time and effort, produced worthwhile results. Much of the discussion took place behind the scenes, in detailed consultations in Whitehall and with agencies such as the Health and Safety Executive, research requirement boards and training boards. As a minimum, in political terms, British industry could no longer argue that its relatively poor performance was the result of government neglect, and that other countries' governments played a more constructive part in their industrial development. As Denis Healey concluded in his autobiography: 'All this helped, and would have helped much more, given more time.'

Now that free-market laissez-faire is seen to have its own problems, the challenge is in many respects similar to that faced in phase 2 in 1975. Peter Mandelson, towards the end of the last Labour government, aimed at a more activist industrial policy, and Ed Milliband, in his Juncture essay, says that 'making the change [towards a more responsible capitalism] will require us all to work actively together in a way that we currently see all too rarely in British public life'.

Of course there are important differences from the 1970s:

• EU restrictions on 'state aids' limit the scope for direct government support to sectors or firms.
• The extent of globalisation, and ownership by multinational corporations, makes it harder to address the needs of industrial sectors in this country.
• Key industries, notably energy and transport, have been privatised and are now monitored by independent regulators.
• Perhaps most important, civil service expertise, which was never strong by comparison with French and Japanese models, has been run down and will need to be rebuilt.

Nevertheless I think there are some conclusions from my four years' experience of activist sectoral policy which may still be relevant.

Knowledge is key

Government industrial policy will not be effective until officials develop contacts and trusting relationships with trade associations and individual managers in the private sector. Some departments, at some stages in their history, have managed relations with their industries - pharmaceuticals, defence, agriculture - in ways which successfully developed this close relationship, combining financial involvement (public purchasing, subsidy) with sponsorship. There is an obvious risk of agency capture, and indeed actual corruption, but civil service discipline and ethos have generally been proof against these risks (at some cost in amateurishness and too-quick movement of staff). Sector working parties were designed to achieve this level of understanding more widely.

There is a strong case for operating at regional level where possible (following the subsidiarity principle), thereby tapping into dispersed local knowledge. But one of the problems with regional devolution, on the lines proposed recently by Michael Heseltine, is that few industrial sectors, or large corporations, are confined to a single region, so that regional officials would find it harder to achieve a sufficient understanding of the issues. Similarly they would be more remote from those responsible for other government policies with an impact on the sector.

Competition

There is a familiar concern (as in the well-known quotation from Adam Smith) that industrialists meeting to discuss their sector's prospects will end up fixing prices and market shares, to the detriment of outside competitors and consumers. Even sharing statistical data can lead in this direction, though ways can generally be found, for example via trade associations, of anonymising data and achieving a fair statistical picture. However, there will be some areas, such as planned investment to expand capacity, which can only be discussed bilaterally between officials and individual firms to maintain commercial confidentiality.

A more fundamental problem is that government assistance to one firm's project may be seen as unfairly damaging the interests of its competitors. Britain's strongly developed sense of fairness (often backed by judicial review) can inhibit the creation of 'national champions', as in France. In some sectors, where the main competition is international and the threat of takeover exists, it may be in the national interest to support selected firms and encourage restructuring to prevent transfer of ownership - though French efforts in this direction have had only mixed success. Japanese industrial policy, in its prime, had an enviable record of achieving a balance: MITI could support one firm's new venture, and the other large conglomerates (zaibatsu) would then compete fiercely for a share of the new market.

...and statistics

Statistical analysis of sectoral prospects is only of limited value. It may provide broad guidance, and act as a framework for detailed discussions with the industry. But it does not produce answers to the practical questions: what difference will a change in a specific government policy make to a given sector? And what are the prospects for a particular firm or project, with or without government support?

People

From a Whitehall perspective the key issue is staffing: finding enough good people to achieve a close relationship with their industry and to exercise an influence on policies elsewhere in Whitehall. The role cannot easily be contracted out to consultants: it is essentially a public-sector task, under ministerial guidance, to weigh industrial concerns and risks against other government policies, to achieve a politically defensible outcome in the national interest.