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With the spending review over, the Government needs to focus on economic growth, but already it has taken a false step. The Government's proposed Green Investment Bank (GIB), which is intended to fund low carbon enterprises and pollution reducing investments, is too restricted and as a result will reduce economic growth, says independent think tank Civitas. Instead, a broader Industry Bank should be set up to meet the needs of all British manufacturers, not only the sectors currently in vogue with our political elites. In particular, with gross exports of £179 billion in 2009, the wider manufacturing sector is too valuable to ignore.
The 2010 Spending Review confirmed the Government's commitment to a Green Investment Bank and allocated £1bn to it. It forms part of the Coalition's plans to support 'high-tech' sectors like nanotechnology and low-carbon manufacturing. However, high-tech industries are only a small proportion of the economy. In 2007, British manufacturing made profits of £454bn, but high-tech industries contributed only £64bn of this total, according to OECD statistics. It would be short-sighted for the Government to focus on a small fraction of manufacturing industry at the expense of other producers that contribute far more.
The Government has an important role to play in creating favourable conditions for free enterprise but it should always leave room for discovery of the unexpected. Economic growth is the result of allowing countless individuals to try out their ideas. By establishing the Green Investment Bank the Government is imposing a straitjacket on enterprise when we urgently need to give innovators the freedom to experiment in all sectors.
The proposed GIB constitutes an attempt by the Government to 'pick winners'. Sometimes a wise policy will unavoidably 'pick winners', but a government should never use its monopoly powers to suppress creativity.
'Contrary to popular opinion, British manufacturing has not only survived, but some sectors are still going strong', commented David Merlin-Jones, research fellow at Civitas.
The Government's support for a GIB is based on its assumption that 'low carbon technology is in the early stages of an industrial revolution', and that other forms of manufacturing are on their way out. This is not true. Even at its maximum extent in 2008, the financial services sector only accounted for £53bn worth of exports - a figure dwarfed by the £194bn produced by British manufacturing.
However, UK manufacturing is at a turning point. If government support is not forthcoming, there will be a danger that the present trickle of industry migrating overseas could turn into a mass exodus. To ensure that the UK remains an attractive place for industry, the Government must support manufacturing more broadly and not eliminate sectors from consideration. All British manufacturers innovate to improve their production processes and products, but few of these improvements would fall into the narrow 'green' category.
It would be far better to nurture all industry through an Industry Bank and let advanced manufacturing grow in response to market demand.
The remit of the GIB is: 'identifying and addressing market failures limiting private investment in carbon reduction activities', but the problems facing UK industries are far greater than this. Small and medium sized firms suffer from a chronic lack of private investors. Merlin-Jones argues:
An Industry Bank doesn't need to have 'Green' in its name to support this specific sector and the Government shouldn't be afraid of setting their focus wider than is currently the case. An Industry Bank inclusive of all British manufacturing will maximise returns and these can be redeployed for green industries while benefiting everyone in the process.
Learning lessons from the past
Britain has a history of establishing successful industrial banks. For example, the Industrial and Commercial Finance Corporation (ICFC), was set up in 1945. A Civitas report by David Merlin-Jones, The Industrial and Commercial Finance Corporation: Lessons from the past for the future, shows that the ICFC provides a successful model for a new Industrial Bank. Several lessons follow.
First, the ICFC established local branches and recruited staff who acquired expertise in specific industrial sectors and made themselves knowledgeable about individual companies. This allowed them to make shrewd investments, unlike the leading banks of today.
Second, the ICFC invested for the long term. It understood that market conditions fluctuate and competitive pressures ebb and flow, sometimes leading to corporate collapse. ICFC backed companies with sound business fundamentals regardless of short-run fluctuations. It proved to be a successful business model that paid off for the ICFC as well as its clients.
Third, the ICFC was originally established by the Bank of England and relied heavily on the existing banks. The 'big five' UK banks used this dependency to undermine the competitive threat that it posed, and it was only when the ICFC was free to compete head on with the main banks that it was able to meet the demand from SMEs. An industry bank today should be established as a rival for the main banks, not as a dependent offshoot.
David Merlin-Jones: 079 498 11032 (mobile) or 020 7799 6677
David Green or Nick Cowen: 020 7799 6677
i. The Industrial and Commercial Finance Corporation: Lessons from the past for the future, by David Merlin-Jones, is available online here.
ii. Civitas is an independent social policy think tank. It has no links to any political party and its research programme receives no state funding.
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