Britain must look at the bigger picture

In Case you haven't noticed, it is Oscar time. Tomorrow we will learn whether the Fiennes/Scott Thomas team has triumphed with The English Patient, or whether concern in Hollywood about cultural invasion will have swung the votes to Jerry Maguire, the only one of the five "best picture" nominees to have been made by a studio, rather than by an independent.

This is commercially important, of course, for movies that win Oscars see a spurt in their takings compared with ones that get nominations, but it is also enormously important in economic terms. Expertise in manufacturing crosses boundaries with astonishing speed, making it hard for any country to achieve a lasting comparative advantage, and leaving developed countries open to competition from newly industrialised ones with much lower wage rates. By contrast, trade in intellectual property - culture, entertainment, royalties, licence fees - is not only growing rapidly, but gives an opportunity for mature economies to justify their high wages. After all, a country like Malaysia has built up a competitive motor industry; but we are unlikely to see serious competition from Malaysia in, say, pop music.

Two facts show the rising importance of the entertainment industry. One is that it accounts for around 6 per cent of US exports, roughly the same size as exports of civil aircraft. The other is that employment in the UK in "cultural industries" grew by 34 per cent between 1981 and 1991 - when employment growth was flat.

So cultural industries are enormously important. They are also an area where the UK has a comparative advantage, as the second largest net exporter of intellectual property after the US. As always there is a dearth of statistics, but Enigma Productions, Sir David Puttnam's film company, has produced an interesting research proposal which, if accepted by the Department of National Heritage, should lead to us knowing a lot more - and being better able to find ways of encouraging yet further growth.

However, amid this success story there is a disaster. It is a disaster not just for the UK but also for the whole of Europe. While we are successful as a cultural exporter, movies have been little short of a catastrophe. The sad story of the decline of the European movie industry is shown in the charts, taken from an excellent new book, The Movie Game, by Martin Dale.

At a time when Hollywood has been growing at 25 per cent a year, the European film industry has collapsed. On the left is domestic box office receipts, which have fallen in real terms to one sixth of their peak in the mid-1950s. Proportionately, the fall in exports has been even worse. Exports held up well through to 1980 and then plunged so that now exports from continental Europe hardly exist. UK exports are not shown as they are distorted by the fact that we pick up and distribute US films, so that US-made movies appear as British exports.

Now you could argue that the box-office is declining in commercial significance anyway, but the big screen remains the shop window for the whole industry. Hollywood has won that battle. So what happens next?

Fortunately, "entirely new areas of opportunity and struggle are opening up. As the distinctions between film, video, telecommunications and computer software evaporate in the face of the digital revolution, whole new industries are being created". That quote comes from a book by David Puttnam to be published in May, The Undeclared War - the Struggle for Control of the World's Film Industry. Sir David's argument is that if one looks forward, the balance between Europe and the US is not nearly so adverse as it might seem from Hollywood's current dominance of the film industry. He thinks that the balance of the intellectual property business will shift towards teaching and away from entertainment. The highest- earning stars in another 10 or 15 years might not be actors and actresses but teachers and educational presenters.

If this is correct, things ought to come our way because we start from the English language base, but also have considerable talent in television and film production, in educational publishing, in animation and in developing the software for electronic games. Sir David is concerned that this opportunity might be thrown away.

There would seem to me to be one certain way not to go forward, which is to follow the European model of handing out large subsidies to film- makers. It is not a popular view in UK film circles but there is surely little evidence that subsidising films is any more likely to create a viable industry in the future than subsidising cars or coal was in the past. The catastrophe of French and German film-making suggests that subsidies are corrosive as they train film-makers to craft their products to please the committees which hand out the money, rather than the punters.

As Martin Dale says in The Movie Game: "In Europe, commissioning editors are far less concerned with appealing to the public ... the resulting economic deficit is met by the taxpayer, because politicians assert that although nobody wants to see the films, they represent high cultural value." I'm not so sure about the high cultural value bit, given the fact that the top film this week in Germany is called Kleines Arschloch; I shall leave you to translate that for yourselves.

On the other hand, a completely hands-off approach carries dangers too, particularly if the balance of trade in intellectual property shifts away from the entertainment end towards the educational one. The option of becoming principally a sub- contractor to Hollywood may well be the best one in the entertainment side of the business - the "Hollywood East" model. Here, we would use the fact that we are in a different time zone to dovetail our industry into theirs: shoot in the US, and remodel the images overnight here; or vice versa. It may not be a glorious vision, but it is a practical and effective one. Besides, to make serious money in this business you have to make it big in the US, and that requires integration into the US distribution system.

But insofar as the focus shifts away from a relatively small number of blockbuster movies towards a wide spectrum of screen-delivered audio-visual services, there may well be scope for a thoughtful role by the authorities.

For example, we have a couple of global brand names in the BBC and the Open University, both of which are in the public sector. Leave aside whether and when the BBC will be privatised, or how even greater market disciplines might be introduced into the Open University. If you accept the fact that the public sector will be involved in developing human capital, nudging the educational system towards the artistic end of the skills spectrum must be helpful.

Sometimes this will mean subsidies. Sir Cameron Mackintosh has noted that the pounds 600m made by Les Miserables was possible thanks to the existence of a subsidised theatre sector. But I suspect that this is mostly not a money issue; much more one of thinking of the economic implications of our trade in intellectual property when other policy issues are decided.

Until we have more information, though, it is hard to distinguish the special pleading from the real need.

Insofar as there is a model for policy, maybe the City one is best. That is to create a market place which draws in talent - not to plan, except to remove roadblocks, but to react swiftly to market signals. Members of the cultural establishment might find it odd to suggest that they should look to financial services as a model, but it does show that it is perfectly possible to establish a world business without a strong domestic market to support it.

It demonstrates something else: the extent to which some businesses have become truly global, 24-hour enterprises. Financial markets are that already. Now the entertainment/ information/education businesses are developing into true global, 24-hour enterprises too.