One of the legacies of the 1980s is the prevalent view that governments can do rather little to influence economic developments for the better. In many respects, this is a healthy corrective to the excessive interventionism of the 1960s and 1970s, when government became excessively intrusive. But it may have gone too far, in that many see governments in general, and UK governments in particular, as being pretty powerless.

The purpose of this note is to suggest that governments, and in particular a future Labour government, can make a difference to economic performance and social well -being. This can be so through a variety of non-economic polices; but in economic policy governments can influence the economy for better or worse.

Governments have a great capacity to mess things up through ill-advised macro-economic policies. We see this in the Tory record, with the recessions of the early 1980s and the early 1990s, resulting from the loss of control in the Lawson boom. Failures of macro-economic policy also weakened the two past Labour governments. This theme of Ònegative powersÓ p rovides a warning against short term macro-economic policies for the next Labour government that undermine longer term performance. The surest way of ensuring the defeat of a Labour government after its first term would be to embark on a programme of econ omic expansion through a fiscal expansion. This would help to cut unemployment for two or three years, but would certainly raise inflation. This in turn would force a rise in interest rates, and a recession. Tony Blair and Gordon Brown are therefore right to be very cautious on spending plans: a stable macro-economic framework offers the best context in which other, longer term supply side measures can operate.

Governments also have the capacity positively to help economic performance through a variet y of policies. Each measure may take time to have an influence, and the effect of each measure may be quite small, but the cumulative effect of consistently good policy measures can be large. (This is one of the lessons to be drawn from the South East Asi an phenomenon.) Such measures include a balanced macro-economic policy, avoiding the instability discussed above. It involves a tight fiscal stance and lower interest rates to favour investment and a competitive exchange rate without generating inflationa ry pressures. This reinforces the case for controlling public spending and/or increasing revenues. Unlike the Tory record, it does not include savaging public infrastructure investment in the name of fiscal prudence, which is short-sighted policy. It invo lves an emphasis on training and skills.

There is also the question of whether governments can engage in what used to be called Òfine-tuningÓ: stabilising the economy in the face of unexpected shocks, so as to iron out cycles that would otherwise occu r. I think that the evidence is that a certain amount can be done in this way. Allowing automatic fiscal stabilisers (the tendency for the government budget surplus to rise in booms and fall in slumps) is an important part of this, subject to the need for an overall tight fiscal stance over the cycle. (It is therefore right to be concerned about whether the Waigel Stability pact, as part of EMU, will allow for sufficient flexibility in this.) Discretionary monetary policy may also play some role (outside EMU) as the record of the last few years shows. But since monetary policy has its effect with quite a long lag, an over-zealous conduct of monetary policy can easily destabilise, rather than stabilise. This is even more the case for an active fiscal polic y. Without dismissing the role of stabilisation policy, I would therefore rather downplay it.

More important are policy measures aimed at long run supply side performance. Traditional macroeconomic policy can help in this by getting the monetary/fisc al policy mix right, as noted above, but beyond that the issues are as much to do with the structure of government and taxes; ie with microeconomic policy. Here there is quite a lot that can be done, provided that three points are borne in mind. First, su ch measures usually take a long time to yield a pay-off. The worst error that can be made is therefore to conduct overall macroeconomic policy on the assumption that such policies are paying off and that the underlying growth rate has risen: this can lead to the errors of the National plan era or the over-optimism of the Lawson boom. Second, it is important that such policies are, and are expected to be, in place for some considerable. Continual fiddling with such policies is unlikely to be effective. Thi rd, it is important to remember that it is not governments, but companies, who have prime responsibility for bringing about enhanced supply-side performance. For this reason, such measures need to be considered in partnership with business.

My busines s school background also leads me to note that management practice is a very important part of any policy aimed at improving productivity, efficiency, and innovation, and that benchmarking of corporate performance may be one way in which government can he lp to encourage good management. UK has some world class companies, but the source of its productivity shortfall is that it has a longer tail than most other countries of poorly performing companies. Moreover, the evidence seems to be that these companies are not aware how bad they are: efficiency and complacency are negatively correlated. Moreover, bench-marking is not just a matter of productivity: similar bench-marking of best practice in innovation and new product development could well be a key for f uture economic growth and prosperity. The DTI could be doing more, and more effectively, to promote this. And the exchequer costs of such measures need not be significant: the aim is to work with business, not to subsidise it.

With such measures in pl ace, growth can help the prospects of the poorer sections of society, particularly the unemployed. (This will be helped by careful reform of the welfare system to reduce the benefits trap at the bottom end.) The emphasis on investment in skills and traini ng will also help. The major element of the Asian miracle, as the World Bank has pointed out, has been the unusual combination of rapid growth without increasing inequality, and indeed with a fall in some cases. This was primarily due to the heavy emphasi s on basic mass education, which spread the benefits of growth widely; and more recently on giving very wide access to higher education (more than 60% of kids in South Korea go through tertiary education).

This note has not said much about internation al co-operation on international macroeconomic policy. But to lay down a marker, I am rather sceptical about the effectiveness of informal co-operation internationally on macroeconomic policy co-ordination, such as through the G7. It seems to me much more likely that effective co-ordination will come through the growth of international institutions, such as the EU (or EMU subset of EU). Whether this effective co-ordination will be for the good is a much bigger issue that I will not address here.