«Original citation: Owen, Geoffrey (2012) Industrial policy in Europe since the Second World War: what has been learnt? ECIPE Occasional paper, 1. ...»
Of the three largest European countries, the UK and France were the most active practitioners of industrial policy in the first thirty years after the war. In the UK, much of the intervention took place under Labour administrations, although the Conservatives were by no means as non-interventionist as their rhetoric suggested. In France there was no alternative in the conditions which prevailed at the end of the war but for the government to supervise and finance the reconstruction of the economy, as it had done after the First World War.7 There was a long tradition in France of state support for industry, going back to Jean-Baptiste Colbert in the seventeenth century and a “Colbertist” approach was followed by post-war French governments, especially in the 1960s and 1970s. Another factor in the UK and France was that both countries were in the throes of losing overseas empires; part of the motivation for active industrial policy was the desire to preserve their status as world powers.8 West Germany was in a different situation after the war, and adopted different policies. In a fundamental break with the autarkic, state-controlled policies of the Nazi era, the Christian Democrat party that won power in the first federal elections in 1949 was committed to the principles of Ordo-liberalism – a belief in free markets, a vigorous competition policy and a limited role for government.
Moreover, because of the restrictions imposed by the Allies after the war, West Germany was
barred from involvement in defence-related industries such as aerospace and computers until the mid-1950s. Even after that date these industries never had as high a political profile in Germany as they did in the UK and France.
2.1. THE UK The first Labour government which held office from 1945 to 1951 set in train a massive expansion of state control of the economy through nationalisation. New state corporations were created in electricity, gas, coal, railways and (near the end of the government’s term) steel.9 Telecommunications, which was part of the Post Office, was already in the public sector, as was the principal airline, British Overseas Airways Corporation.10 Outside these “commanding heights” of the economy, Labour had no long-term plan for industry as a whole (the main focus was on increasing production in the short term, especially in exporting industries11), but it took a close interest in two high-technology sectors – aircraft and computers – which were to become major recipients of state support under subsequent governments.
The aircraft industry had been greatly expanded during the war, and the government had to find a way of scaling it back while at the same time preserving what was seen as one of Britain’s great industrial assets. Several factories were closed, but a substantial military programme was maintained, and the government provided funds for the development of a wide range of civil aircraft.12 These included the De Havilland Comet, which when it entered service in 1951 was the world’s first jet airliner. However, any hope that the Comet would be a commercial success was dashed when a design flaw caused two fatal crashes. The aircraft had been rushed into production too quickly, and De Havilland soon lost ground to the big American companies, led by Boeing and Douglas. While avoidable mistakes were made on the British side, the American industry had two advantages which were lacking in the UK; a large domestic market and the presence of several competing private-sector airlines which put pressure on the manufacturers to design efficient and economical aircraft.
British companies, whether making civil or military aircraft, had shorter production runs than their American counterparts, and hence higher costs. This problem was partially addressed through an enforced rationalisation of the industry which took place at the insistence of the Conservative government in 1959, creating two large airframe groups, British Aircraft Corporation ( jointly owned by Vickers and English Electric) and Hawker Siddeley (which included De Havilland). At the same time, in order to support the industry’s efforts on the civil side, the government introduced a system of launch aid; companies that undertook new civil aircraft and aero-engine projects were eligible for grants, with repayment linked to sales.
During the second half of the 1950s, scientists in the industry and in government research laboratories began to examine the feasibility of a supersonic jet airliner. If such an aircraft could be built, the British manufacturers might be able to regain the lead that they had lost to their US rivals in subsonic jets. By 1959 detailed design studies were under way and the supersonic project had gained some political momentum, but the cost was too high for the UK to undertake alone. The French aircraft industry, which was also struggling to keep up with the Americans, was a logical partner, and in 1962 the two governments agreed to share the development costs of what became the Concorde airliner. It was a decision that was to prove enormously costly for the British taxpayer, as well as diverting resources from other parts of the market where British manufacturers had better prospects of earning a commercial return.13 6 No. 1/2012
ECIPE OCCASIONAL PAPER
Large sums of public money were spent in these three sectors, but neither the first Labour government nor its Conservative successor, which held office from 1951 to 1964, can be said to have had a policy for high-technology industries. Their main preoccupation was with trying to reconcile their macro-economic objectives – full employment, low inflation and balance of payments equilibrium. It was only in the closing years of Conservative rule that attention switched to the supply side of the economy. The UK was growing more slowly than West Germany and France, and British industry was losing ground in export markets.
Because the government had stood aside from the first moves towards European economic integration, British industry had not benefited from the expansion of intra-European trade that had begun in the 1950s and accelerated in the 1960s. (The first application to join the Common Market, made by Harold Macmillan in 1961, was vetoed by General Charles de Gaulle.) But the bigger problem was seen to lie in poor management, antiquated production methods and dysfunctional industrial relations.
Out of this reappraisal came the creation of the National Economic Development Office in 1962, followed by industry-level Economic Development Committees. These new agencies were modelled on the French planning system, which included sector-based Modernisation Commissions, bringing together businessmen, trade unionists, outside experts and civil servants to discuss the future of key industries.18 The practical achievements of “Neddy” and the “little Neddies” were meagre, but they represented a step towards supply-side reform which was taken much further by the Labour governments that held office between 1964 and 1970.
These years saw “a dramatic increase in the pace of microeconomic intervention, and also in the trend towards selectivity in industrial policy”.19 7 No. 1/2012
ECIPE OCCASIONAL PAPERTwo new Whitehall departments were created, the Department of Economic Affairs (DEA) and the Ministry of Technology (Mintech). Much of the DEA’s energies were devoted to the National Plan, which the government hoped would provide the basis for faster growth.
However, the Plan was unrealistic in its projections and was thrown off course by Britain’s continuing balance of payments problems. Potentially more promising were Mintech’s efforts to accelerate the process of technical change in industry. The aim was to redirect the government’s spending on research and development from defence to civilian uses, to cut back on prestige projects which had no prospect of generating a commercial return, and to identify key sectors where faster technological progress was needed.20 Computers was one of the targeted industries, and soon after the election the government had to deal with a financial crisis in ICT, the UK’s leading computer company. This was due, not so much to competition from IBM (although the American company had increased its share of the British market to about 40 per cent), as to the mismanaged launch of a new family of computers and the unexpectedly rapid decline in sales of its older punched-card equipment.21 Mintech officials believed that ICT was too small and pressed for a merger with the second largest supplier, the computer division of English Electric.22 This was finally achieved in 1968 with the creation of International Computers Limited (ICL), in which the government took a 10.5 per cent stake. It also provided a £13.5m grant for the development of a new range of computers, and instructed government departments to buy their computers from ICL unless there were strong technical reasons for not doing so.23 Labour ministers were less inclined to support the aircraft industry which they believed had absorbed too much of the country’s engineering and scientific resources. Several military projects were cancelled, including an advanced fighter, the TSR2, which was scrapped in favour of an American aircraft. The government also considered pulling out of Concorde, but France was determined to continue with the project, and the terms of the 1962 agreement made the costs of unilateral withdrawal appear unacceptably high.24 In 1967 the government agreed to cooperate with France in developing a new subsonic airliner, the Airbus, but withdrew two years later on the grounds that the new aircraft was unlikely to be economic and its specification made it unsuitable for British European Airways. One of the few bright spots in the aircraft industry was Rolls-Royce, the aero-engine manufacturer. This company had been an early leader in jet engines for military aircraft, and it built on this experience, with support from the government, to launch a successful attack on civil markets. 25 In nuclear power the first-generation Magnox stations were nearing the end of their life, and for the next generation a choice had to be made between the Advanced Gas-Cooled Reactor (AGR), which had been developed by the Atomic Energy Authority and, like Magnox, was based on gas-graphite technology, and the American light water reactor which had gained wide acceptance around the world. The AGR was chosen, apparently on the grounds that the technology was safer and had greater long-term potential. 26 This decision, announced in 1965, was regarded on all sides as a triumph for British technology, but it turned out to be a serious mistake. The Atomic Energy Authority had under-estimated the problems involved in scaling up the pilot reactor, and the AGR programme was plagued by technical problems and cost over-runs.
Alongside its support for (preferably home-grown) advanced technology Labour’s industrial policy was influenced by its belief in scale. Ministers and their advisers considered that many British industries were too fragmented and that the necessary rationalisation was unlikely to take place without government intervention. The Industrial Reorganisation Corporation 8 No. 1/2012