The UK has the most regionally unbalanced economy in Europe. Time for change

For a long time, industrial strategy was something that belonged in the 1970s, along with British Leyland and cars with square steering wheels. But after the decade of stagnation that followed the 2007 financial crisis, the idea that our economy might need some strategic direction no longer seems far-fetched.

Later this month, the government is expected to publish its industrial strategy white paper. Ahead of that, the Industrial Strategy Commission – an independent initiative by the Universities of Manchester and Sheffield, of which I’m a member – has today published its own recommendations.

We call for a long-term commitment to the strategic management of the economy. Science and innovation has to be a big part of that, but we need to think differently about how to turn research into innovation, and innovation into economic growth, and about the overall architecture of our system.

The first thing we need to do in defining a strategy is to face up to our economic problems. Since the financial crisis, productivity growth has been almost flat, with stagnant wage growth, endless fiscal deficits and austerity the inevitable consequences.

We have the most regionally unbalanced economy in Europe. All but two of the core cities outside London are below the national average in output per head. We have areas that have never recovered from deindustrialisation, are trapped with poor infrastructure, low investment and skills. And we have rural and coastal peripheries that are some of the poorest places in the country. The results are reflected in our sour politics.

Our international trading performance remains woeful, with a worsening current account deficit. We don’t make enough of the goods and services that the rest of the world wants to buy, even before the disruptions to our trading environment that Brexit will bring.

Economists agree that productivity growth arises from technological innovation, so the UK’s strong science base should give us something to build on. But there are weaknesses here too. The overall R&D intensity of our economy is too low, and both the Conservatives and Labour have committed to increasing it from its current level of 1.7% of GDP towards 2.4%, then 3%.

But this isn’t all in the direct control of the government. Low levels of business R&D are at least as much of a problem as relatively modest government investment. The regional dimension is important here, too: R&D investment is heavily concentrated in London, the south and east of England – areas that are already the most prosperous.

We need to increase the UK’s R&D intensity, but we need to do this in a way that thinks about the innovation system as a whole, linking academic research, translational institutes like the Catapult Centres, and business R&D. We need to link more explicitly translational research and skills at all levels (the University of Sheffield’s Advanced Manufacturing Research Centre provides a good model here). And we need to remove financing barriers, which restrict the private sector’s ability to access long term, patient capital.

There is one big shift in perspective that is needed. In the last couple of decades, the UK’s approach to innovation policy has focused on the supply side. It was thought that if the research base was strong and linked to a supply of skilled people, and we promoted knowledge exchange, research would automatically turn into innovation, and then into economic value. Experience now tells us that this is not enough – governments need to do more to create the demand for innovation.

Put this way, it starts to become obvious where that demand should come from. The government has some big strategic goals that it cannot deliver without innovation. The urgency of climate change means that we are rightly committed to decarbonisation of the energy system, but politics means that we need to do this at an affordable cost. Our rapidly ageing population threatens an already strained health and social care system.

New technologies could help with problems like these – fast developing renewable energies and the all-pervasive use of data and machine learning are two examples. New technologies like these need to be developed at the same time as the broader social systems they operate in, shaped by what society wants.

These developments will also need partnership between the public and private sectors. In particular, the government should use its enormous purchasing power and regulatory influence to drive innovation in a much more purposeful way than has been done up to now. Done right, an industrial strategy will generate solutions to the government’s strategic problems at the same time as creating opportunities for the private sector.

There is much more to industrial strategy than innovation policy. In the Industrial Strategy Commission report, we call for a universal basic infrastructure guarantee, and new institutions to oversee the management of the economy, including more rapid devolution, especially to England’s cities and regions. But questions of how we innovate, and how those innovations are spread throughout the economy, are central. The 2016 autumn statement introduced the £4.7 billion industrial strategy challenge fund, explicitly linking extra research funding to industrial strategy. This is a sign of things to come, with science and innovation policy increasingly influencing, and being driven by, our evolving industrial strategy.

Richard Jones (@RichardALJones) is professor of physics at the University of Sheffield, and a member of the Industrial Strategy Commission.