Vicky Pryce: Picking winners is a losing bet

Vince Cable is right when he identifies the problem, but wrong to say we need an active industrial policy

The political fuss over Vince Cable's leaked letter to No 10 calling for a more coherent industrial policy as the basis for Britain's economic recovery masks a debate that has been going on for decades. Ever since the industrial upheavals of the Thatcher era, governments of all persuasions, and indeed even ministers within the same government, have agonised over how a strategy for industry should look. With less and less money available for direct support, the task has become increasingly difficult.

Mr Cable is right when he identifies the underlying problem with "piecemeal" decisions and the absence of a long-term vision. Where he is wrong is in suggesting that what we require now is an active industrial policy.

Government is already hugely involved, directly and indirectly, in the shaping of industry and commerce. Sectors of the economy where the government is a major purchaser have tended to thrive, such as defence and aerospace and pharmaceuticals. A large part of the economy is either subject to strict competition rules (retail, media), price controls (utilities, transport) or is directly regulated by government (the financial sector). Government's main role has been to make sure markets work in an open and competitive way.

But moving from here to "picking winners" and backing these potential success stories via a government-owned industrial development bank is not the answer. Sustained long-term growth is achieved through open markets, skills, science, innovation and a business-friendly environment.

While there is a good case for government to share risks with the private sector on technology and R&D in certain areas, the more fundamental basis for industry to thrive in is one that allows funds to flow into productive investment.

That can only be done in two ways. The first is providing the right incentives for banks and other institutions to lend. The second is by ensuring that those running companies are rewarded for investing in growth and profitable expansion.

Arguably, therefore, the current debate on executive pay should switch from the size of the overall pay packet itself to whether the types of remuneration that executives receive actually incentivise long-term investment and growth. Those that don't should be discouraged. This would mean linking pay to growth and profitable expansion rather than buyback deals that drive up share prices. It also would mean rethinking the wisdom of stock options as a means of remuneration. This would be a far more effective step than a loss-making industrial development bank owned by taxpayers that would risk picking more losers than winners.

Vicky Pryce is a City economist and former Joint Head of the Government Economic Service