Deregulation is no short-cut to creating world-class industries

Global growth is at serious risk, as energy and food supply shocks from the war in Ukraine add to disruption from the Covid-19 pandemic. New digital and low-carbon technologies have started a global race to reach critical mass in production, given extra impetus by geopolitical rivalries. The need to innovate and create high-growth sectors is acute, and a new respectability for state intervention has created a particularly lively debate. Industrial policy or deregulation? State-directed investment or lower tax?

The questions have a fresh urgency, yet governments have been trying for decades to build up internationally dominant sectors. What lessons have been learnt?

Since the UK seems to be giving its body to economic science at the moment by contemplating all sorts of things that no one else (perhaps for good reason) would touch, assessing its prospects compared with near-neighbours might be instructive. Liz Truss’s government, in the rare moments its ministers can get away from the Conservative party’s civil war, has set in motion a whole conveyor belt of supply-side wheezes. Their ideas, laid out on Wednesday in her mercifully short party conference speech, are heavy on the deregulation side (relaxing planning laws, cutting taxes) and light on public investment.

One is a “salad offensive”, aiming to grow more cucumbers, lettuce and tomatoes in the UK. Ignoring the silly name, it’s a perfectly reasonable project. Technology can dramatically change productivity in agriculture. Britain’s output of soft fruit rapidly increased in recent years thanks to improvements in polytunnel efficiency extending the growing season into the winter. The UK has always been dependent on soft fruit imports, but over the past decade British growers became sufficiently productive to start exporting significant amounts to continental Europe.

Putting up plastic tents is relatively cheap and simple, and the only deregulation it needs is leniency from the local planning authorities. To see more impressive agricultural productivity at work, the British agriculture minister Ranil Jayawardena is planning a fact-finding trip to the Netherlands. He will visit a nation that, despite being small and densely populated with expensive land and labour and a cool damp climate, has become the world’s second-biggest exporter of tomatoes — in fact the second-biggest global agricultural exporter overall by value.

Dutch growers have a history of raising plants in greenhouses, thanks to the flower industry, and of agricultural innovation more generally. For decades they’ve been building a fertile ecosystem of research, development and production. Specialist companies have produced complementary products for high-tech indoor vegetable and fruit farming such as innovative lighting and climate and water management systems.

Could this be replicated? How did the government help?

Well, it wasn’t through shelling out market-distorting subsidies or relying on heavy trade protection. The Dutch government has supported farmers in various ways, not least by financing the public Wageningen University, one of the world’s best agribusiness research centres. But it comes under the beady eye of the European Commission’s competition directorate with its state-aid rule book. The EU does have import tariffs on fresh tomatoes, but those do much more to protect southern European countries such as Italy: the Netherlands is competitive on the global market.

Nor was it deregulation that did it. Unlike the UK, the Netherlands has remained very firmly in the EU with its complex web of rules on food hygiene and horticultural standards. It also has high labour costs and a commitment to reduce carbon emissions. Dutch growers pride themselves on their low environmental impact. EU regulations are among the world’s toughest, so being practised in complying with them helps their farmers to meet standards in markets elsewhere.

In other words, the UK government’s general attitude towards supply-side reform — leave the EU’s regulatory orbit and reduce labour and environmental costs — is in this case, and probably in many others, unhelpful.

There are, of course, arguments for getting rid of some domestic regulations such as excessive planning restrictions. But meeting product rules is crucial to accessing international markets, and leaving the EU has increased export barriers. Those British soft-fruit farmers who were breaking into the continental market now say the extra cost of food hygiene inspections and shortage of EU workers have undone all their work.

Building world-class sectors really isn’t a simple question of the state being absent or present in the market. It is about which interventions to make and for how long and why. These are often fine judgments. But to trade in a modern economy is to regulate, and voluntarily giving up export markets and introducing the deadweight of compliance under the guise of cutting red tape is clearly the wrong way to go about it.


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