Business Secretary Lord Mandelson Speech: 'An Enterprise-Led Recovery'

The Department for Business, Innovation and Skills has released the full text of Business Secretary Lord Mandelson Speech: ‘An Enterprise-Led Recovery' at the Said Business School, Friday 16 October 2009

Well, the answer came to me last week. While watching television actually, which I don’t get that much time to do. I was watching someone who clearly has aspirations to govern this country, setting out an argument about government.

I don’t think I oversimplify when I say that the core of his argument ran like this: the problem, essentially, is government. Too much of it. The government is a check on enterprise, a check on growth. It is standing in the way.  So let’s get rid of it, or at least cut it down to size.

Of course, it’s not a particularly new argument. In fact it’s a reheated version of an argument about what makes an economy and a society dynamic that goes back a long way. It was the heart of the ideological thrust behind the Thatcher and Reagan administrations, which was all about rolling back the state.

But it has older antecedents too. It was the assumption behind the Hoover administration’s bungled handling of the aftermath of the 1929 Great Crash, which was based on Andrew Mellon’s advice that the US economy needed a purge at the end of which – and I quote – “enterprising people will pick up the wrecks”.

Mellon’s explanation of quite why it was necessary to wreck the US economy to give enterprising people something to work on is not something that history has recorded. But anyone who remembers the lost generation and the lost productive strengths left in the wake of the British recessions of the 1980s and early 1990s will understand instinctively why he was wrong – as well as pretty heartless. 

What I want to do today is to take this argument about government and the economy as my text. I want to see how it holds up to some basic realities, above all to the rapid acceleration of globalization over the last decade and what it means for our competitiveness. What it might mean for an enterprise-led recovery.

In my view, to argue that government is chiefly a problem for enterprise in this country is not only wrong, but it is to misunderstand fundamentally what enterprise needs in order to work. In a globalised economy based on high levels of knowledge, skill and innovation, enterprise needs an active government in many respects.

Not a big state that gets in the way of business.

Nor the small state that offers nothing but the kind of retrenchment that, at its worst, would plunge Britain into a double dip recession.

But a smart state working in partnership with business that fosters growth as the answer to unemployment and debt.  Not big, but activist. Today I want to set out what I think that means.

I’m going to have to skip over a few important points to get to the meat of my argument. Like, for example, the bizarre reasoning that blames government for the credit crunch and the recession when it is only government intervention in the banking sector and a coordinated fiscal stimulus that have stopped the private financial economy from tipping us into a prolonged global slump. Frankly this looks like a pathological aversion to reality.

Odd too is the implied argument that public spending in an economy stands in an inverse relationship to economic dynamism or growth. When in fact some of the highest public spenders in the OECD – the Nordics for example – also have some of the most open and successful and competitive economies. What matters of course, is where that public investment goes. 

Even if we assume that the argument about the size of government is just a coded way of talking about tax and the ease of doing business, it still doesn’t stack up. We now rank fifth in the world for ease of doing business – first in Europe.  Our corporate tax rates are the lowest in the G7 – the lowest ever, in fact. Capital gains lower than both the US and Germany. Income tax rates among the lowest in the G7. 

Now, I want to say at once and very clearly that none of this is to defend government for its own sake. I do believe in the value of what we do collectively as well as individually in our society – I don’t apologise for that. But statism, a belief in standardized, mass-produced public services and the centralizing instinct that says that the man in Whitehall knows best – these things are obstacles to thinking about the necessary role of government in a modern economy. Public spending is a means, not an end in itself, as are the taxes that support it.

This is a room full of entrepreneurs and would-be entrepreneurs and I’m sure that your first piece of advice for government would always be “get out of my way” and I’m with you on that one hundred percent.

The wrong decisions on tax or planning law or regulation can of course get in the way of business and job creation and that is something we constantly aim to avoid and will never ever be complacent about. Our ease of doing business ranking testifies to that.

But when I was EU Trade Commissioner I was constantly struck by the fact that the problem for most countries lower down the development ladder is not entrepreneurialism or enterprise. They have it in spades. You see it on every corner, in market stalls and micro-businesses.

What they don’t have is roads. And electricity or digital infrastructure. And complex skills. And credit, which is the basis of a modern economy. (Incidentally, that’s why giving the Nobel economic prize to Muhammad Yunus for his work on micro-credit was such a brilliant and deserved decision).

What enterprise needs in these cases is not governments that get out of the way but governments with the resources and policies that help create and nurture an enterprise economy. This whole idea that comparative advantages don’t just emerge out of the air, set in stone forever, but that competitive capacity can be built up, is at the heart of development economics. 

So why are we so reluctant to use this language or bring these ideas into our own politics? It’s sobering how much of the reluctance is simply ideological. Fear of sounding anti-market or retrograde - fear of the editorialists at the Wall Street Journal! 

But capacity building simply means recognizing that while the market is irreplaceable as the ultimate arbiter of what is long-term viable here or anywhere else, industrial strength can be lost – or never built – for reasons that are totally avoidable and that have nothing to do with long term viability and competitiveness.

Think about it for a moment. The high tech entrepreneur who commercialises an innovative low carbon technology has not usually thought up the whole thing from scratch and built it in her garden shed. She is building on technological education, or perhaps the skills she learnt in further education.

She’s drawing on the UK’s science base. She’ll need access to finance to support trials of pre-commercial technology, and that means investors patient enough to sit it out while she gets it right. Assuming she can get funding to trial her product, she’ll often need access to the facilities to do so.

When she gets her company off the ground, if she wants to stay in the UK, she’s going to be totally reliant on highly educated staff with the right niche skills. Every time she sends an email or uses her website to attract customers, she’s relying on a digital infrastructure for broadband that is now as integral to modern business life as roads are.

These things are the basic capacities for an economy like Britain that wants to compete on knowledge and skills at the top of global value chains. But none of these things are produced solely by markets – at least not to the extent that we need. For a range of reasons, but basically because the profit incentives for individual firms are wrong. In whole or in part they are built on public investment and the right kind of activism from government.

So if your problem is growth – and in every sense Britain’s biggest problem after the recession is returning to sustained, balanced, low carbon, deficit-reducing, job creating growth - then the right kind of government is undoubtedly part of the solution.

Again, the risk of caricature means that it’s important to be clear. Our recovery will be enterprise-led. The jobs and growth will be created by private enterprise and private investment. But if and how government supports that enterprise will be critical. If I stay with my high tech low carbon entrepreneur for a few more minutes, I can make the point.

First on skills. Both her own skills and the skills of the people she employs come from our higher and further education systems. Those systems, more even than they are now, need to be tailored to the demands of a knowledge economy. Producing people capable of managing complex systems and technologies and confident enough to innovate and lead.

When we produce our new frameworks for both adult skills and higher education over the next few weeks, they will include new tools for tracking advanced skills needs and demand in the economy and new measures for incentivising universities and colleges to work with business and industry in filling these skills gaps. We’re also going to put a greater emphasis on routes to higher skills that can be built around work: flexible study, foundation degrees and apprenticeships.

Second, research. Our low carbon entrepreneur will probably draw in some way on the UK’s huge public science base. Her company may well be one of the almost 1000 spin-outs from university research that have happened in Britain over the last five years – many of them from here in Oxford.

Actively tapping the huge resource of our research base to drive innovation and development is now one of the key challenges for Britain. Which is why in our new higher education framework, we will have a range of new incentives for businesses and universities to build long-term collaborations on research and development.

We’ve also been putting new resources behind the work of the Technology Strategy Board, which is a business-led but government-funded body that brings together government, industry and researchers to trial and develop pre-commercial technologies. Through the TSB we have funded a range of technology incubator programmes, including the biggest demonstrator programme for ultra-low carbon vehicles in the world. We have also funded a demonstrator facility for renewable chemicals in the North East of England which will allow small biotech firms to trial their concepts in a way that they would otherwise not be able to do.

We’ve committed almost three quarters of a billion pounds this year through our Strategic Investment Fund to projects like this that are all about making sure that viable technologies get a shot where they might otherwise stay on the drawing board. Many of these technologies are linked to the low carbon agenda, which makes investing in getting them across the line to commercial viability doubly important. My analysis is that these investments will pay back many times over in terms of new jobs and new capacity.

Third, finance. Our entrepreneur probably learnt the hard way that investment capital for innovation in Britain is still far too much of a gamble. Perhaps she is lucky enough to have angel or venture capital support, maybe she managed to crowbar a loan out of a bank. But maybe not.

I am convinced that this is not a cyclical problem: it is a structural problem in Britain. But it is a structural problem that is going to be made a lot worse by cyclical risk aversion as we come out of the recession.

Through the Innovation Investment Fund and a new type of national investment organisation we will have the capacity to create new sources of public seed capital to draw in private investment for startups and growing companies.

We’re also going to use the government’s role as a lead user more as an indirect way of financing innovation. In pilot programmes in the NHS we’ve shown that when we open up procurement tenders in a way that encourages smaller firms to bid we get more innovative solutions, usually at a net saving. This is a model that I want to see rolled out much more widely across government.  

In all of these cases we’ve been disciplined and realistic. We haven’t junked our commitment to long term viability in an open market. But we have recognised that the market can fail essentially viable projects or technologies, especially at the earliest stages.

We’ve also resisted the temptation to micromanage. We see a critical role for public investment, but have gone out of our way to avoid turning politicians or civil servants into investment managers or technology pickers. The deployment of resources is effectively managed by independent technology experts like the TSB and venture capital and industry experts for funds like the IIF.

These three examples I have used all reinforce a simple point. To argue that Government, in underwriting the enterprise-led recovery, cannot be either dogmatic, or complacent, or both."

We should of course be hard-headed and critical about the role that government can play in building growth – not least because governments have done it badly, or shortsightedly in the past. But to be ideological about it is a mistake.

Smart capital is always going to look for the best return at the lowest cost. But companies at the top of global value chains – which is where we need to be - measure best returns in far more than just cheap labour.

They need infrastructure, skills, a whole ecosystem of research, development and finance. Smart capital is increasingly going to seek out countries that know how to invest in that capacity. It will seek out countries that understand the balance between public investment and private enterprise in driving growth. Getting that balance right will also equip our own people to prosper in a global economy. Arguing that government has no role here doesn’t sound like a statement of fact to me, it sounds like an abdication of responsibility.

We all recognise that the next few years will be defined by the need to return the public finances to a sustainable balance. This should lead us to two conclusions.

The first is that it will be necessary to constrain and cut lower priority public spending while protecting the frontline services on which people depend. We need to renew the public sector reform agenda as a way of pushing up public sector productivity and return on investment. But the second is to recognise that at the same time we need to invest in growth and the enterprise-led recovery.

If you start with the ideological assumption that government is the problem, you will inevitably think the issue is big versus small government. And you will inevitably base your prospectus for government on how to cut it, regardless of the consequences.

But to argue for cuts and have nothing to say about growth reveals a dogmatic mind rather than a pragmatic one. It is to ignore the simple fact that the fastest way to get the country out of debt - is to get the country out of recession. If you start with the assumption that government is the problem you can only arrive at the wrong conclusion about what it will take to do that.

Everything I see about British industry and enterprise tells me that the potential in this country is huge, and that there is even greater potential waiting to be unlocked. That’s our collective challenge.

The Department for Business, Innovation and Skills (BIS) is building a dynamic and competitive UK economy by: creating the conditions for business success; promoting innovation, enterprise and science; and giving everyone the skills and opportunities to succeed. To achieve this it will foster world-class universities and promote an open global economy. BIS - Investing in our future.

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