Shanker A. Singham, Chairman, Legatum Institute Special Trade Commission and Alice J. Brooks, Counsel, Legatum Institute Special Trade Commission outline what they see as crucial to any UK Industrial Strategy. HMG has published theirs here we post our report for those wishing to make comparison or analysis.
We've advocated that HMG’s Industrial strategy should be built on three key pillars. The first and major pillar is that competition on the merits as an organizing economic principle ought to be a key element of HMG’s industrial strategy. Other pillars include talent management and acquisition, and skilling the UK work force for the needs of a 21st century economy. Competition plays a crucial role in increasing efficiency and lowering costs. It is therefore a key driver of productivity.
Competition on the Merits as an Industrial Strategy
Industrial strategy has historically meant supporting key industries, or certain companies in those industries through a network of tax credits and subsidies. However, this method of picking winners and losers is very distortive to the functioning of free and competitive markets. A better industrial strategy is to ensure that competition on the merits is the organizing economic principle and that government restraints on trade and commerce that are anti-competitive are eliminated. In order to achieve this goal, the government will have to be pro-active in eliminating these barriers.
The UK Market: Ensuring Pro-Competitive Regulatory Promulgation
While the UK is a relatively undistorted market, there are examples of distortions. The UK Competition and Markets Authority (CMA) has completed a number of recent investigations into existing UK markets and identified key sectors which currently suffer from anti-competitive distortions.
We recommend particular focus be given to supporting the growth and expansion of new entrants, smaller businesses and challengers to address the distortions caused by laws and policies that give protection to existing incumbents. Ensuring the regulatory system is not skewed in favour of incumbents will ensure a more open and competitive UK market.
As lifeblood industries of the UK, we have initially considered the retail banking and energy sectors and consider below the existing distortions in the UK market. Due to the nature of these industries, anti-competitive market distortions in these sectors can have very significant implications for all aspects of the economy.
We have also considered how HMG might focus on fostering the development of its existing skilled workers (through vocational training and apprenticeships) and attracting high quality skilled workers through a detailed skills-based immigration policy.
The precise manner of regulatory promulgation can determine to a significant extent the potential competitive impact of new regulation. In order to make regulatory promulgation more likely, the process must include at the outset considerations of the impact on competition and the market of proposed regulatory measures. Here we can build on what the UK already does better than most countries. Individual regulators do refer specific sectors for competition analysis to the CMA.
As part of the HMG industrial strategy, we recommend that the CMA be given an enhanced role in ensuring pro-competitive regulatory promulgation. It should be obliged to take a proactive and consistent approach to completing investigations (on its own initiative and on recommendation by regulators) to ensure that UK markets are regularly monitored and any anti-competitive distortions identified and addressed as early as possible. The CMA should not take a conservative approach in dealing with distortions caused by incumbents. Instead the nature of the CMA should be progressive and interventionist with the recommendations and actions that it takes to remedy UK markets.
The latest CMA report on banking shows that there are competition problems in a number of sectors, including lending and provision of Business Current Accounts (“BCAs”) to SMEs and the provision of personal current accounts (“PCAs”) to individual customers. In particular, there are specific problems in capital requirements, cost of funds for lending and information asymmetries between banks. On capital requirements, these can often work against new, insurgent banks (especially for residential mortgages). At the time of the CMA report, the CMA concluded that while there was evidence there was a barrier to entry in this area, they lacked the mandate to advise change in capital adequacy rules where were set in Basel and in Brussels. Given the fact that the UK will be leaving the EU, there is the possibility that the UK could advocate more strenuously in international committees such as Basel for less anti-competitive capital adequacy regulation. In addition, retail banking markets are concentrated. There are significant barriers to entry in PCA markets, and there are barriers in SME banking also.
The Too Big to Fail concept is also distortive and does not discourage incumbent banks from engaging in high-risk activities. Accordingly, HMG might consider whether the concept should be further reduced and removed entirely.
Energy cost is a major component of competitiveness and productivity. Since energy is a constituent part of every good and service, if its costs are artificially inflated by government regulation, law or private anti-competitive practices, then this can severely erode the ability of firms to be effective competitors globally.
HMG might consider putting particular focus on establishing the reasons for such cost-inflation in the energy sector, so that measures can be taken to lower the cost to a level that enables UK energy firms to be competitive.
We reviewed various countries’ immigration policies and consider that the UK will benefit from policies that continue to attract skilled workers into its key sectors and remain competitive in the global market. Consideration of an immigrant’s skills is clearly key, however there may be other valuable qualities that the immigration policy might seek to assess, including linguistic skills, age and existing connections to the UK.
But a sensible immigration policy is only one half of the answer. The UK will need to ensure that its own workers are properly skilled in a variety of high tech sectors through a holistic approach to education, vocational training, apprenticeships and the like.
Skills are a key driver of productivity and can promote competitive advantage. Alongside a skills-based immigration policy, ensuring that the existing UK workforce is properly skilled will be key in ensuring that HMG’s industrial strategy is successful.
Historically, HMG has focused on ensuring access for young people to higher educational routes and achieving parity across access to university. Whilst this is positive for the higher education sector, the result is that the type and number of jobs available for young people without a university degree are arguably limited. There are also existing discrepancies between training offered in different-sized companies in the UK and lower skilled workers have little to no access to training. Many roles are being filled by over-qualified individuals, leading to a lack of engagement and productivity. Accordingly, there are a number of initiatives HMG might consider in this area (from financial support for individuals completing vocational training and apprenticeships through to a renewed focus on ensuring that businesses are providing adequate training).