Business and government: Forget the CBI, watch the market signals

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Business everywhere is becoming more important, so how should we make sure that the voice of business is conveyed accurately to government?

Two equally unsatisfactory approaches to this problem are on display this week. One is the Formula One model. Here the politicians accept a lot of money from the business in question, trim their policies to suit its interests while insisting that there is utterly no connection between the dosh and the policy - and then give the money back in case anyone thinks there was.

The other is the CBI model. Here the key grandees of business get together and decide on a policy, in this case that European Monetary Union is basically a good idea. They then stand up at a grand annual conference and say so, only to find that other key grandees think it isn't a such good idea at all, and they also stand up and put the opposite line. The disagreement then stirs up a string of anti-CBI comment, with people pointing out that it happens to be German and Irish grandees that think it is great idea for Britain to join EMU, while the British ones are altogether more circumspect.

There is a deeper problem here, which is that the business world has become much more fragmented than it was even 10 years ago, so that creating a mechanism to represent its interests is virtually impossible. We have the CBI which is competently run and does as a good job as it can representing big business. But the big companies that dominate it are becoming less and less important as a source of employment in this country. Companies such as British Airways or Barclays Bank are busy cutting their labour- forces. That is not a criticism; merely an observation that big business everywhere is involved in a ferocious drive to cut costs and that means killing jobs.

By contrast net job creation in this country comes entirely from tiny companies, the sort of companies that make Formula One cars or supply services to the business. If you run a firm with half a dozen employees you are not going to want to spend time on a CBI committee, even if that was your idea of fun.

There are other organisations that represent small business. There is the Institute of Directors, for example, which usually takes the opposite line to the CBI. But it is more of a club, with posh premises on Pall Mall, and a service industry (conferences, a magazine, meeting rooms, etc), than a lobbying body. There are various other bodies that try to represent small business, and there are the Chambers of Commerce, but it is very difficult for them to convey a clear signal: there is too much background noise.

There are an amazing number of small businesses in this country. Back in 1980 there were 2.4 million small businesses in total in Britain. Now there are more than 3.7 million, though that is down a touch from the peak of the 1980s boom. Companies with fewer than 50 employees employ nearly 10 million people, of which 2.9 million are self-employed. Where these people have a collective interest in an industry their interests can be protected by an energetic champion, with access to the corridors of power. A meeting at Number 10 and, hey presto, policy changes.

There are still dangers lurking even when there are such champions. The fragmented fine arts business in London is in danger of losing business to New York if the government agrees to an EU rule that it has to apply VAT on the auction trade. But at least there are powerful people in the salerooms who can convey the warning to government, pointing out that the Treasury will actually lose revenue, not gain it, if it drives the trade offshore.

But those are exceptions. Most small businesses do not have powerful champions. Not only is there no Federation for Creators of Web Pages on the Internet, but there is no Mr Internet (as there is a Mr Formula One and a Mr Unilever and a Mr BMW) who can hob-nob at Number 10. We have structures that represent big business in a world where power is shifting to small business.

So what is to be done? Well, I know what is not to be done, which is to create some additional formal mechanism for trying to convey the views of business to the government. The sort of people who want to sit on committees are not the people who matter in small businesses: people who are any good are too busy doing their jobs.

No, I suggest that government should not listen to what business people say but watch what they do. The market will signal pretty fast if government adopts a business-unfriendly policy. Do not over-plan, but respond very quickly to market signals.

This is the strategy of the City of London. There has been no long-term plan that sought to make the City the largest producer of international financial services in the world. We have not bribed foreign banks to locate in London, as we have the Koreans to set up plants in South Wales; yet there are more banks here than any other place on earth and we seem, if anything, to be gaining market share in financial services, rather than losing it. Whenever there is a threat, then there has to be an immediate response: a good example was the "ring of steel" round the City in response to IRA bomb attacks.

This must be the right response to the needs of business. Do not waste energy having long meetings with people who claim to represent business, for they will represent the interests of - if not large business, certainly existing business. Instead, watch with lidless eyes what is happening to small business creation and employment. Do not worry if business people moan, for everyone whinges these days. But if they start to shut down or lay off staff, or simply don't start businesses in the first place, move like the wind to find out why and correct the policy that has caused the problem. Policies which cannot easily be reversed (such as EMU membership) need to be approached with particular caution.

This is a whole new world for politicians. Politicians are used to bureaucracies, to structures, to meetings. To deal with the growing, new businesses politicians have to behave not like bureaucrats but like entrepreneurs. They have to create policies, test them on the market and see if they walk off the shelves. They have to accept that they will make mistakes and if they have a duff idea, change it fast. Being business-friendly is not the same as being friendly with business people, for it is the business people of the future who hold the key to the success of economies, not those who have already made their pile.

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