Picture credit: Danny Lawson - WPA Pool/Getty Images
The Critic Essay

Britain has an industrial strategy, but it’s bad

British politicians have made a fatal commitment to human quantitative easing

An ill wind is whistling through Western economies. It may be the winds of change or a shortness of breath, but either way it whispers that change is drawing near.

Economic models, as much as economies themselves, are driven by competition. China poses the greatest challenge to the West since the end of the USSR and, proving imitation really is the sincerest form of flattery, many Western leaders are increasingly adopting policies that may be described as capitalist with Chinese characteristics.

Principle amongst these is industrial strategy. As is so often the case America leads the way; Biden’s White House has put together the most ambitious industrial strategy since the competition with the USSR, seeking “to revive strategic industries that have withered at home because of foreign competition … to stay ahead of China by pumping up the United States’ industrial and technological might through a focus on clean energy and semiconductor manufacturing”.

In response not only to Chinese interventionism but US protectionism, calls are growing for a similar policy across the EU — and those calls are increasingly made in Britain. Pointing out that the British economy is “behind on business investment and productivity”, whilst forecast “to have the worst economic growth of any G7 economy in 2023”, Labour are promising an industrial strategy based on the four central missions of delivering clean power by 2030, caring for the future, harnessing data for the public good and building a resilient economy. Calls are growing in right wing circles too. The think tank Onward has consistently called for an industrial strategy, whilst the industry itself is decisively in favour; a report last year revealed a full 99 per cent of manufacturers agreed Britain needed an industrial strategy.

But Britain does have an industrial strategy. It’s called human quantitative easing.

Britain’s immigration policy functions much like an industrial strategy. The Skilled Worker Visa allows businesses to pay immigrants “between 70 per cent and 90 per cent of the standard going rate” to occupy roles the government deems there is a shortage in; this looks very much like an incentive directed to specific industries. Given that post-Brexit increase in non-EEA immigration — and the fact that almost all studies have shown non-EEA immigration to be a net drain on the Exchequer — one can argue this is a form of public subsidy, too.

Government procurement is certainly a feature; health and care visas alone accounted for over 145,000 visas issued last year (rising to nearly 350,000 including dependents). Given that the NHS is now hiring more foreign doctors than the number of UK medical trainees – but that the number of British medical training places is artificially limited to less than demand (from the NHS) and supply (85 per cent of applications to study medicine and dentistry by British students are rejected) — it looks remarkably like the government is engaging in reverse-import-substitution-industrialization too.

Human Quantitative Easing is the method by which government allows geographically rooted industries, which cannot offshore their workforce to lower wage economies, to satisfy their need for cheap labour by importing the same workforce to the UK — with government providing a subsidy, if required, in the form of services and welfare payments.

The belief underpinning HQE is described ably by Rob Ford:

The rising view is that immigration is a resource that can deliver gains for all. A majority now see immigration as economically and culturally beneficial, as a driver of economic recovery and a vital source of support for public services.

Ignoring the at best questionable assertion on the “rising view” of immigration, Ford’s language uncovers a truth; in terms of economic policy, immigration is a resource and resources are there to be exploited. Just as with other resources — kiwis, beef, energy — we must allow ourselves access to as much of the resource as is possible at the lowest possible price. Despite the fact the resource, in this case, is people, the principle remains the same.

Describing the mindset of those who wish to instrumentalise immigration as another column in Britain’s import-export spreadsheet, Larry Elliot writes; “For them, free movement of labour is of a piece with free movement of capital and free movement of goods: an essential component of a globalised economy in which the barriers to growth are removed.”

One cannot argue that Britain has achieved the free movement of labour. But despite the clear democratic mandate that every government of the last 20 years has been given to reduce immigration (to say nothing of the Brexit referendum itself) the equalisation of immigration rules between nations and a lowering of barriers has seen a significant shift towards it.

This is how HQE works “as a driver of economic recovery” — by providing global patterns of labour competition to industries that cannot be offshored. If immigration is a resource, then it makes sense to extract it at the lowest cost possible; thus Britain’s industrial strategy requires a pattern of immigration that seeks access to lower and lower wage workforces, as Christophe Guilly explains in Twilight of the Elites:

A system of this sort for exploiting cheap labour therefore depends on a continuing influx of immigrants… It is primarily for the purpose of instituting a regime of permanent competition, not between natives and immigrants but among immigrants themselves, precisely in order to prevent any rise in the total wage bill.

This is backed up by the UK’s Migration Observatory, who found that “the wage effects of immigration are likely to be greatest for resident workers who are migrants themselves.” Since HQE’s adoption in the 1990s, the UK has undergone a significant shift in migration patterns. With workers arriving first from EU 14 nations, then EU 8 and, following Brexit, increasingly from lower-wage non-EEA nations like India, Nigeria and Pakistan. As a result, the Centre for Migration Control has found that the average salary of a migrant entering Britain has fallen by £10,000 since 2021.

But it is not the private sector alone utilising HQE as a quick fix. Ford is again right; the government is just as keen to utilise it “as a vital source of support for public services”. 

For decades, the government has employed HQE by hiring workers from countries with lower wages to depress public sector wages

What does this “support for public services” look like? For decades, the government has employed HQE by hiring workers from countries with lower wages to depress public sector wages. This approach exacerbates a recruitment and retention challenge within the sector, which is then addressed by further recruitment from countries with even lower wage levels. I have previously written about this emergent pattern in teaching, which “mirrors a wider trend in public sector recruitment that is particularly prevalent in the NHS; a race to the bottom on wages (via competition between low-wage economies) is preferred to addressing the problem of domestic recruitment (which is mostly, but not entirely, pay).”

HQE has been employed as a deliberate policy of public sector wage suppression, allowing successive governments to employ as cheap human capital as it can to deliver welfare services, helping them avoid the serious — and politically costly — decisions needed to deliver the growth necessary to sustain services.

This has been the industrial strategy for nearly a quarter of a century. It has been pursued for long enough to allow us to examine the effects of avoiding those serious — and politically costly — decisions needed to deliver the growth necessary to sustain services are plain to see. 

Hooked on cheap human capital, the productivity of Britain’s private sector has stalled. This is down to “a persistent failure to create the environment for long-run investments in capital, infrastructure, skills and innovation,” according to research from LSE

This entire article was prompted by the stunning statistic that in 2022 China installed over 250,000 industrial robots, whereas the UK installed just 2,534. But that is only a symptom of the problem. The UK has weak productivity because it has chosen to make fewer investments, primarily in capital but also in skills. UK R&D spending has “systematically failed” to hit its target of 2.4 per cent of GDP, lags significantly behind the OECD average, and well below nations like Germany, Japan or Israel. Meanwhile, a recent report “found no evidence to show government skills reforms have had a direct or positive impact on UK productivity” in an analysis of two decades of the skills system. Elsewhere, in the public sector, things are even worse; on average, productivity has grown by 0.2 per cent a year between 1997 and 2019. 

The cycle is brutal, but simple; low-wage en-masse immigration acts as a break on productivity because, whilst migrants themselves may be as productive as native workers, the constant influx of cheap human capital disincentives investment. This weak productivity results in flatlining wages, which cannot sustain the increasing demands on the welfare state. 

The government, faced with the choice between difficult & costly long-term fixes to improve productivity or a short-term fix to suppress increases in public spending & boost GDP figures, chooses the latter. GDP is artificially boosted by an increase in population, whilst costs of delivering public services are suppressed by the insourcing of workforces from increasingly low-wage economies.

Brexit was an opportunity to change the course of our industrial strategy, to end HQE and focus on tackling the fundamental blocks that have held back British productivity for years. But this ideal has not been tried and found wanting. It has been found difficult; and left untried, as described in The Economist

… politicians were not serious about going cold turkey. Free movement ended on the last day of 2020 and, by the following summer, labour shortages began to bite. Fruit rotted in the fields. Supermarkets cried out for lorry drivers. Pigs were shot for want of abattoir workers. Initially, Mr Johnson sounded bullish, but the Home Office soon opened doors and tweaked rules to help fill vacancies. Net migration reached 606,000 in 2022, higher than any previous year.

But there are less frequented paths; China leads the world in robot installations because its governmenthas aggressively promoted the production and use of industrial robots in recent years”, recognising investment in robotics and automation as a much more effective solution to combat demographic challenges; whilst maintaining a productive economy than employing HQE. Despite claims, familiar to western ears, that “China needs migrants” China’s net migration rate has remained below replacement since 1950, and UN projections expect that trend to continue. Chinese growth, it should be noted, is driven by increasing productivity rather than increasing the size of the population.

So long as politicians prefer the short to the long term, HQE will remain Britain’s industrial strategy, and a move towards a more productive, prosperous economy capable of delivering the growth we need to sustain public services will remain no more than a dream. But who is to say you cannot enjoy thinking about what might be, if only for a moment?

Enjoying The Critic online? It's even better in print

Try five issues of Britain’s newest magazine for £10

Critic magazine cover