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Demanding Growth in Scotland: Why Scotland Needs a Recovery Plan Based on Growth and Innovation

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Demanding Growth in Scotland: Why Scotland Needs a Recovery Plan Based on Growth and Innovation Policy Report 02: March 2009 Demanding Growth in Scotland: Why Scotland needs a recovery plan based on growth and innovation James Meadway with Juan Mateos-Garcia Demanding Growth in Scotland: Why Scotland needs a recovery plan based on growth and innovation 3 Contents Demanding Growth in Scotland: Why Scotland needs a recovery plan based on growth and innovation Executive summary 4 The economy faces a series of extraordinary challenges in the coming years 5 A strategy for recovery is a practical economic solution 6 The right kind of government intervention has worked in the past 6 How to put growth and innovation at the heart of our strategy 8 A growth-based recovery plan is more affordable than alternatives 12 Conclusion 12 Appendix: What would a sector-specific support policy look like? 13 Endnotes 15 4 Demanding Growth in Scotland: Why Scotland needs a recovery plan based on growth and innovation Executive summary Recovery from the recession will require an of emerging demand, where important long-term imaginative approach from government. Traditional trends are giving rise to new markets. Three areas intervention policies have sought to prop up old for potential growth are especially promising: the industries. But such short-term fixes will not produce green economy; creative industries; and healthcare, long-term growth. Instead, government policy including services for an ageing society and should focus on innovation and growth, supporting biotechnology. NESTA believes that these are all areas innovative sectors that have the potential for strong of high future demand, significant existing strengths, growth once the recovery begins. It is a move and strong technological changes. The green economy away from corrective intervention towards creative and healthcare could have a combined market size of intervention. £93 billion by 2013, with the creative industries alone contributing £85 billion to GDP. Acting decisively and intelligently is necessary to transform an economy that had become unduly reliant Success in these areas requires the government on financial services. This is not about a return to to support and empower businesses through a post-war industrial policy, where the government tried combination of infrastructure development, regulation to ‘pick winners’. Rather it is about being willing to that actively encourages growth, and the use of create the conditions in which innovation can flourish. government procurement to stimulate demand. These conditions will include the development of Procurement, in particular, is successfully used to networks and may mean a degree of cooperation support innovative small businesses in countries like rather than competition initially. South Korea and the United States. There are good examples of where such a policy has Such a recovery plan can deliver good results at worked. The Finnish telecommunications industry, relatively low cost, provided it is well-targeted. including Nokia, grew from a national economic Upgrading our broadband network would cost a strategy developed in the recession which followed third of the price of a third runway at Heathrow. the collapse of the Soviet Union. In Britain, defence Carefully targeting existing funding would transform equipment is developed through a planned market the environment for industries in the three targeted approach which helps to develop the latest military areas. In the Appendix, we show how a very specific hardware. Even the growth of Silicon Valley as the targeting at one creative industry, videogames, could hub of international IT was partly a spin-off from the help create new jobs with extra investment, tax credits subsidised American defence industries. and education, at an extra cost of just over £15 million. We estimate that this sort of support, across Our response to the recession should not seek to build the creative industries, could help create over 100,000 national champions. But it should support new areas new jobs across the UK by 2013. Demanding Growth in Scotland: Why Scotland needs a recovery plan based on growth and innovation 5 Demanding Growth in Scotland: Why Scotland needs a recovery plan based on growth and innovation The economy faces a series of extraordinary manufacturers to shoe-makers seeking government challenges in the coming years help. Economic recovery requires a change of economic The Scottish Government has identified long-term direction challenges to Scotland’s economy and society. These After a decade of continuous growth, the UK include boosting Scotland’s growth, productivity, economy is facing a recession of exceptional severity. population and participation, and in delivering on the The International Monetary Fund (IMF) forecasts desired characteristics of growth – solidarity, cohesion a 2.8 per cent contraction in UK Gross Domestic and sustainability.4 Product over 2009, and fears that the world economy could shrink for the first time since the 1930s.1 In Sitting idly by in the face of the worst recession Scotland, the economy is projected to experience of modern times is not an option. But bailing out its worst recession since 1980, shrinking by 0.4 per industries piecemeal is no better. A coordinated cent in 2009, before growing again by 1.5 per cent in approach is clearly preferable. The trouble, however, is 2010.2 At the heart of this recession is the collapse of that ‘industrial policy’ carries with it a heavy history. It the financial services industry, with bank failures and is redolent of failed attempts to boost post-war British nationalisations on a scale not seen for decades. New, manufacturing, a process of ‘picking winners’ that tighter regulations on financial institutions are being rarely came good. imposed worldwide in response. NESTA argues that there is a better option. The But these finance and business service industries current recession offers a precious opportunity for were central to the UK’s relative prosperity, fuelling both businesses and government to prepare for the economic growth and providing hundreds of future. In particular, this crisis can act as a spur for thousands of jobs. From 2000 to 2007, financial innovation, focusing attention on pressing needs services added 15 per cent to annual GDP growth.3 and demanding an immediate response. ‘Attacking But finance will not save us in the future. The the recession’ means providing the support for challenge facing the UK economy is now to find new, dynamic growth sectors to address long-term the new sources of growth that will drive prosperity needs so that the economy can emerge in a better over the coming years. The knock-on effects of the shape from the current crisis. The Government is global financial crisis are hitting Britain’s non-financial increasingly recognising it has an important role to businesses hard. Reduced business lending and play here:5 not only through subsidy and bail-out, but lower spending is hitting British industry, sparking by coordinating its efforts and removing the barriers a chain reaction of distress, with industries from car to growth in key sectors where current and future market demand is strong. This should be the basis for 6 Demanding Growth in Scotland: Why Scotland needs a recovery plan based on growth and innovation how government addresses the downturn, as it offers profit to participants when all participate fully, but a basis for emerging from the recession with a more returns a loss if only some do.10 This sort of failure innovative, resilient economy than we had before. is particularly likely to occur when innovation and The time is ripe for a move away from intervention to growth are at stake. Large-scale innovative projects ‘correct’, and towards intervention to ‘create’. depend on different firms cooperating with each other, have large sunk costs (such as installing specialised machinery), and their outcomes are very uncertain.11 A strategy for recovery is a practical economic solution Establishing and sustaining high-growth sectors of the economy can be thought of as an innovative But industrial policy has a poor reputation and project on a very large scale. But as well as supply- record in the UK side coordination failures, new sectors will not take Before the recession, things seemed clear. off if there is insufficient early demand for their Government intervention should restrict itself to products and services. A species of coordination providing the institutional and regulatory context in failure can occur because there is no market now which competition could flourish.6 UK governments for new goods and services produced in the future: have been understandably keen to distance producers can fail to spot the potential demand for themselves from the perceived failures of direct innovative products, weakening their incentives to industrial intervention in the 1960s and 1970s, when innovate. ‘national champions’ like British Leyland floundered, and schemes such as the National Economic Board Lead users – important customers with complex failed to live up to expectations.7 demands for new products and services – can therefore play a critical role in driving innovation. A Three reasons help account for this failure. First, lead user seeks goods or services ahead of the general old-school industrial policy did not in fact ‘pick market, showing a path for others to follow.12 There winners’, despite its declared intentions. The bulk of are important areas in which government itself can act policy was directed at sustaining existing industries, as this lead user, using its own procurement spending not encouraging new ones.8 Second, in the alleged to create new markets.13 interests of economies of scale, policy became heavily focused on the promotion of single champions in each The recession has strengthened the argument for sector, failing to diversify risks.9 Third, governments intervention focused on inputs – pet industries and technologies Recessionary pressures on companies are already – rather than starting from an understanding of starting to encourage retrenchment. Innovation consumer and social demand, and working backwards.
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