Hamish McRae: This student visa policy is seriously stupid

It is a bit like BBC's What not to wear. Fashion writers used to tell people about the new trends so that they could become fashionistas and look suitably absurd as a result. It took the genius of Trinny and Susannah to turn this sort of guff on its head and give people genuine help by telling them what suited them and, more particularly, what did not.

Industrial policy is halfway through a similar transformation: not what to do, but what not to do. It used to be that the government tried to help business by spending taxpayers' money on companies such as British Leyland. Now, that policy is discredited. Some support is given to foreign companies seeking to invest in areas that need regeneration, but even that is questioned. Companies that are attracted by a cheap factory are liable to shut it when technology moves on, or when some other place - perhaps Eastern Europe - could come in with lower costs.

So what is the new policy? It is not trying to help business, but trying not to damage it: what policies not to wear.

There is a prime example of government inadvertently - or at least I hope inadvertently - damaging business at the moment. It is the tightening of the visa regulations for foreign students. The 120 vice-chancellors of British universities have just banded together to protest about the changes. Charges are going up and the right of appeal is being taken away.

Now there may be perfectly good reasons for these changes viewed through the prism of the Home Office, but in terms of industrial policy it is seriously stupid. We export some £4bn of educational services a year: higher education is an export industry, with already some 7 per cent of revenues coming from abroad and the potential of increasing this much further.

Higher education is a global growth industry and the UK is second only to the US in the quality of its universities. Tony Blair knows this. In that speech to the European Parliament a couple of weeks back, he noted only two of the top 20 universities in the world were European, suggesting this should concern the MEPs. Actually, he was pulling his punch. He was referring to the ranking done by Shanghai university, and those two are Cambridge and Oxford - ie British, not continental European.

But if he is aware of this and cites it as a problem, what are we doing damaging an export industry? The best students will choose the best universities worldwide. But those universities only remain the best if they can attract the best students.

There is a further twist. The Government has drawn attention, quite rightly, to the need to develop university know-how into business opportunities. That was the thrust of the Lambert report. But there is a further point here: bright university graduates and particularly post-graduates have a huge capacity to found and develop businesses. So what you need to do is to find ways of keeping students in the country after they graduate, rather than saying that now you have your qualification you should go home and take your intellect away.

Intellectual capital is almost the only form of capital that matters now. Money will flow anywhere where it can get the highest return. Companies will build plants wherever they can achieve the lowest costs. The prime advantage any developed country can have is the brains and energy of its people - not just the people it already has but the ones it can attract from the rest of the world.

The argument of the Home Office is that students are not deterred by the higher visa fees or the lack of an appeals procedure. The visa fees are small in relation to the cost of fees, and only 1 per cent of visas go to a successful appeal. Both those points are factually true - and utterly misunderstand the realities of the business world or, indeed, the way human beings make decisions.

The visa fees have to be paid upfront, whether or not the application is successful. It is rather like a shop charging people to enter the store, arguing that the entry cost is small when compared with the size of their purchase. If people really, really wanted to buy, so the Home Office would argue, they would not be deterred.

But imagine shops actually doing this. You would not bother going in if that was the way you were greeted - you would go to the store next door.

Now take the lack of appeals procedure. That is a bit like saying that planning controls do not deter inward investment because the authorities hear of very few cases where an investment application is withdrawn and the company goes elsewhere. It completely ignores the possibility that a reputation for planning delays means that potential investors simply don't bother to apply - they go somewhere else. In other words, the authorities do not know what business they are missing because it never comes up on their radar.

What is most worrying about this is the chasm between what senior ministers say and what the Government actually does. Put politely, it shows a lack of joined-up government. Put bluntly, is shows gross stupidity. But these are not stupid people. So what is up?

I think part of the problem is that government is trying to do too much. We have senior ministers rushing around without having any time to think. But more, I think it is that politicians are frequently bad administrators. Neither the Prime Minister nor the Chancellor had any experience of administration before they took office. Anyone who has, knows the extraordinary complexity of management: getting the right people in place; creating structures and lines of reporting; correcting and adapting when things go wrong; applying common sense. A host of "initiatives" have foundered because of this lack of administrative nous: the tax credits of Brown being a good example.

Now apply this to what we used to call industrial policy. The student visa debacle is just one of a series of similar acts where government does damage to an industry without realising what it is doing. Financial services remain the jewel in the country's economic crown, and the fact that these are a real industry employing real (and very expensive) people is intellectually accepted.

But the more thoughtful people in the City are deeply concerned about creeping regulation driving business offshore. Dublin and Zurich have bitten off little bits already. There are many more. What businesses need is not "incentives" dreamed up by some political adviser. What they need is a government that follows the rule: first, do no harm.

When clever and fundamentally well-meaning people do stupid things, you worry. Kicking our universities in the teeth is stupid. Undermining their export business is seriously stupid. Time to worry.