Economic policy 'that dare not speak its name' could be Scots saviour

While some may baulk at the idea of yet another ‘strategy’, it is clear that a new approach to economic policy is desperately needed. While Scotland’s economy retains some key strengths, a chronic problem of low investment has undermined living standards, constrained economic growth, and stifled innovation.

Meanwhile, a weak industrial base has held back Scotland’s ability to seize the huge economic opportunities associated with the net zero transition. Inequalities of income and wealth, as well as between different regions of Scotland, remain large – and in some cases are growing wider.

Net Zero provides opportunities for Scotland (Image: Getty Images/iStockphoto)

Overcoming these challenges will require embracing a new more joined up approach to policy making – one that emphasises a more proactive role for the state in shaping the economy. So what should an industrial strategy for Scotland look like?

Historically, countries have tailored industrial strategies towards specific sectors. While these approaches have delivered some successes, they are not well equipped to respond to 21st century challenges.

Tackling challenges such as climate change do not just require a small number sectors to transform – they require system-wide transformation. This transformation requires all sectors and all government departments to be part of the solution. Today governments are increasingly recognising the need for a different type of industrial strategy that focuses not on selected sectors, but on cross-sectoral ‘missions’.

A mission-oriented approach picks problems that all sectors can tackle – but only if they transform. Missions are not simply a new term for ‘business-as-usual’. Instead, they are about providing a clear direction for the economy, increasing business expectations about future growth areas, and harnessing all available policy levers to stimulate investment and innovation.

Whereas sectoral approaches to industrial strategy involve ‘picking winners’, a mission-oriented approach is about ‘picking the willing’ – those actors in the public and private sectors that are willing to invest in societally relevant missions.

However, simply talking about ‘missions’ without acting will do little to tackle Scotland’s intertwined challenges. Delivering industrial strategy in practice involves rethinking the role of the state.

The dominant economic paradigm of the past five decades has justified government intervention only to ‘fix’ perceived market failures. However, the recent history of capitalism depicts a different story — one in which different types of public actors have been responsible for actively shaping and creating markets, not just fixing them; and for creating new wealth, not just redistributing it. The story is not one of the state ‘getting out of the way’, but of an ‘entrepreneurial state’ that is a lead investor and risk-taker in the economy, co-creating and shaping new markets, not simply ‘fixing’ them.

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In recent years the Scottish Government has made a number of significant interventions in the economy, providing support to firms such as Ferguson Marine shipyard, Burntisland Fabrications (BiFab) and Lochaber Aluminium Smelter.

In each case, the Scottish Government has acted as the ‘lender of last resort’ – stepping in to support firms facing financial difficulties. In contrast, a mission-oriented approach would see the Scottish Government acting as an ‘investor of first resort’ – investing to nurture new technological and industrial landscapes to address 21st century challenges.

Of course, this is easier said than done. As a devolved nation, Scotland does not have full control over many key areas of economic policy, and faces a challenging fiscal outlook. However, this makes it ever more critical that the tools, funding and institutions the Scottish Government already has are harnessed more effectively. In practice this means coordinating tools such as procurement, grants, and innovation funding more strategically, and reforming institutions such as Scottish Enterprise and the Scottish National Investment Bank.

Such an approach also presents an opportunity to rethink the ‘deal’ that exists between public and private actors. Too often in the past, the Scottish Government has socialised the risks and privatised the rewards when partnering with the private sector. Going forward, policy should aim to create a more symbiotic partnership that better aligns risks and rewards. Where state funding or contracts benefit specific companies, this should come with a reciprocity arrangement, for example by taking public equity stakes or attaching new conditionalities, building on the Scottish Government's Fair Work framework.

Perhaps most importantly, industrial strategy must not be viewed as a bolt-on to Scotland’s core economic strategy. Instead, it requires an all-of-government approach to break down government silos and create a more joined-up approach to delivery. This must be underpinned by proactive measures to strengthen capabilities within the public sector.

In recent years, the Scottish Government has come to rely heavily on consulting firms to shape policy. However, outsourcing policy in this way weakens government, hollows out state capacity and often extracts value rather than creates it. If a new industrial strategy is to succeed, it is crucial that public institutions have the capacity to think and act big.

Structured and governed effectively, a mission-oriented approach can help to drive productivity growth, raise living standards, and position Scotland as a global leader in the net zero transition. This in turn can help deliver the First Minister’s three stated priorities of growing the economy, eradicating child poverty and tackling the climate emergency. Doing this will not be easy, and mistakes may be made along the way. But given the scale of the challenges Scotland faces, now is not the time to be shying away from bold action.

Laurie Macfarlane is co-director of Future Economy Scotland (FES) – a non-partisan think tank. Professor Mariana Mazzucato is the founding director of University College London’s Institute for Innovation and Public Purpose