Growth: Easy to commit to, hard to do

It now looks like Chancellor George Osborne's growth strategy will have to be executed in a global environment of falling growth, more financial crisis and the breakup of old trans-national institutions.

That is not necessarily a disaster, as I explore below. But it changes the game.

Britain's politicians are trapped in a "Plan A versus Plan B" debate all the more intense for becoming less and less relevant to the issue of how we escape the crisis.

The short-term measures are obvious: George Osborne was given a pre-stamped exeat pass from his fiscal commitments by the International Monetary Fund in June. If it looks like you're going to miss your budget targets, said the IMF, go ahead and miss them; the detailed timetable of fiscal discipline was never as important as the general direction of travel for the markets, and by making a massive austerity gesture when everybody else was complacent, Britain successfully moved the markets' hostile attention onto the European mainland.

In addition, said the fund, cut taxes rather than spend more. We'll see what's signalled in the Autumn Statement but I would be surprised if, sometime in the next six months, we do not get a tax-based stimulus to the tune of £8bn or £12bn.

This, on top of the £20bn credit easing signalled on Sunday, might - I stress might - be enough to put a floor under collapsing lending to small businesses, falling consumption and falling confidence.

But Britain's real problems are long term. We have a structural deficit because we have a structural growth problem. For 30 years, successive governments stood by and allowed manufacturing to shrink rapidly, while boosting the financial services sector; they also progressively privatised the service economy, creating the illusion of "private sector job creation".

A recent study by economists at Manchester University's CRESC centre showed that "para-state" employment - that is private job creation with public money - accounted for about half the jobs created under Blair/Brown. (Ewald Engelen et al "After the Great Complacence" Oxford 2011)

In addition, the switch to a consumption-led economy was driven by two big spurts of equity withdrawal from mortgages, based on the two great house-price booms. The CRESC study shows that, under both Blair and Thatcher, the total amount created by equity withdrawal exceeded the value of GDP growth.

Now, the banking system is deflated, house-price inflation is only a problem where fleeing Greek and Russian millionaires wish to live, and state spending is destined to shrink by £113bn.

The old model is not going to drive growth so a new model must be found. But - and this is a problem for an essentially technocratic, managerial political class - there is no easy technical solution.

"Once the answer is not 'the market will solve things'," says CRESC Professor Karel Williams, "the answers are not easy". It is not easy just to decide to have an industrial policy, he says, and it is very easy to decide to have the wrong one.

In the OBR's first attempt to map out a rapid switch over of UK growth from "state plus consumption" to an "investment plus export" model, the OBR produced a set of figures which - in pie chart form - I've kept on my desktop ever since.

They show the intent - in fact the need - to switch growth rapidly from the way it was in the past 10 years, dominated by consumption, to a pattern dominated by investment - with exports replacing the shrinking state completely as a source of GDP growth. It's a useful comparator because in each case growth is supposed to be at the same rate: 2.6% average over the 10 years to 2008, and a projected 2.6% in 2014.

To make this happen, says Prof Williams, you would have to revive the manufacturing and trade-able goods sectors rapidly.

I have spent the week in the north of England trying to understand what it would take to make this happen. The North West is still Britain's most valuable manufacturing area, with pharmaceuticals, aerospace and materials long-standing specialisms. What you would need to do macro-economically is capture as much as possible of the global market for these and other sectors Britain is specialist in. That means focusing either on volume - still possible - or on the high-value end of these businesses.

This, it turns out, we are already doing - but there are micro-economic obstacles.

If we look at a company like Morson Projects, in Trafford Park, the issue that comes up immediately is skills: "We're about 200 people short across the whole group," says the Syd Carson, who runs the company's aerospace and defence division.

They need everything from technicians to engineering PhDs but, though they train between five and 10 each year, the overhead cost to the operations of doing anything more are prohibitive: "Our clients need us to be delivering perfect work from day one," he tells me.

Carson would like the UK government to, as in Germany, France and even ailing Spain, fund the training of engineering graduates to a standard where they are employable. "It saddens me to see people with engineering degrees driving cabs or stacking shelves," he says.

Like many of the other manufacturing sector bosses I have met, he's also passionate about where the opportunities are. Whole fleets of aircraft are to be replaced in the next 10 years, whole swathes of new nuclear technology are about to be built.

What Morson does is "manufacturing design" - that is they "build" each product - an airliner wing, a business jet body, a brand new factory - virtually on a computer screen, down to the chiselled cross in each Phillips screw. Then they simulate the manufacturing process - like building a model aircraft on a computer. And then they stress test the finished product on the computer. And then the maintenance team comes in and maintains the product, working out if you can get a spanner into a certain space - again still on the computer. These are well paid jobs and a high-value industry.

With politicians like Chuka Umunna now talking about "backing sectors", you would have to work out what it means to "back" a sector.

For many business people it comes down to offsetting the already hyper-competitive nature of policy in the successful exporting countries. China, Japan, Switzerland and - through the euro you could argue - Germany, "protect" their industries through manipulating their currencies; in much of continental Europe, they "protect" sectors by pooling the social costs of training. In countries like Ireland and Switzerland the attraction is also the tax regime.

Prof Williams believes that to turn things round we would have to go beyond the simple replication of the mercantilist policies of the exporting countries: you have to identify and build clusters, he says. "You need a new type of civil servant - one that does not worship 'enterprise' in general but understands state intervention to sustain high-value, exporting businesses." He believes very little of such expertise exists in Britain.

Actually the challenges go beyond even that. We are the oldest industrial economy in the world and have suffered the longest decline. Though we know a lot about how to industrialise countries, "re-industrialisation" has hardly been attempted in the past 200 years.

Probably the only country that has successfully done it is China, building low-tech industry from scratch in southern China, but less obviously rebuilding high-tech sectors on the ruins of the old, Mao-era factories in Manchuria. In other words, only states that can fire an entire work force, raze a whole area, jail people at will and override all kinds of local and national laws has ever tried it before.

But the prize is there: there is no shortage of examples of ailing economies bouncing back rapidly on the adoption of radical recovery policies in the 1930s. Again, before you rush out and celebrate, I will list them: Soviet Russia, Nazi Germany and Japan.

The fact is, in all the countries that are prospering during the global crisis, there are elites that have decided to ruthlessly pursue their national interest - often with the support of a middle-class electorate jealously defensive of its global privileges: the Japanese of their semi-closed market, the Chinese communists of their massive wealth, the Germans of their prudent and socially inclusive civil society.

Turning a country that's lived through a free market binge for 30 years into Stuttgart will not be easy. There is no chance of turning it into Shanghai. There is probably a right wing and a left wing version of state-driven, export-oriented rebalancing and this would be a more fruitful one to have than the one where right and left wing bloggers trade insults over "deficit denial".

But even once you've decided the strategy, and found some people to execute it, it will be hard. Everybody I've spoken to this week - from the bosses at Eden Biodesign, a huge biotech success story in Speke, to the scientists trying to commercialise Graphene at Manchester University - has one ever-present worry: that the rest of the world is capable of out competing us; that the global owners or the global clients can always go somewhere else; that maintaining global excellence is the first worry, long before you think about doubling or trebling your market share or your capacity.

The world business leaders live in is defensive; the obvious space for government is in commercial and industrial "offence" - the doing of stuff that ordinary firms cannot afford to do, nor can conceive of at an industry or sectoral level.

It's quite prosaic: it's about all the buzzwords politicians like to use - skill, tax-breaks, clusters, apprenticeships, seed-funding. But suddenly these tasks become things the state, or quasi-state, has to do, rather than attributes of an essentially market-driven, laissez faire, philosophy.

If you really want to achieve the change implied by the OBR's two pie charts (see below), the state would have to take ownership of creating the competitive conditions for an export-driven, high-skill service and manufacturing-led recovery.

The one reason for positivity amid the gloom spread by the euro crisis and the US' debt paralysis, is that - now that nearly all the big powers are engaged in a covert but perfectly obvious scramble to lump the costs of crisis onto other countries - it's become life or death for the politicians to work out how to do it.

But as the economists at CRESC remind us: when everybody else is doing it, and when it has been cross-party doctrine not to do it for 30 years, it might be quite hard to do it.

Sources of Growth 1999-2008

1= Consumption 2= Business investment 3= Housing 4= State spending (trade, not shown, is negative)

Image copyright Other

Sources of growth 2014 (OBR projection)

1= Consumption 2= Business investment 3= Housing 4= Exports (state spending, not shown, negative)

Image copyright Other