Wales needs an industrial strategy built on localism

Earlier this year the Wales TUC commissioned an independent report by the New Economics Foundation which challenged how we go about winning prosperity for Wales in the wake of economic crisis. Towards a Welsh Industrial Strategy tracks the story of Wales’s economic fortunes since World War II and outlines the case for a whole government approach as part of a modern industrial strategy.

In the midst of the slowest recovery since the Victorian era and an utter refusal to rebalance at a UK level, Wales has little choice but to break with its past to practice a more active regionalism. While the debate rages at Westminster over the right macroeconomic approach and the Chancellor’s economic policy becomes increasingly contradictory, Wales cannot risk working on the basis that pre-2008 conditions will return.

Policy options for encouraging prosperity then will not be based on the pre crash parameters. The TUC has long argued that those parameters – set by an economic model obsessed with the financial sector – were deeply unsustainable and bad for Wales in any case. One statistic more than any other displays the sheer scale of the problem: between 1997 and 2007, banks extended £1.3 trillion in loans to the UK economy. 85% of this increase in lending went on commercial property, residential property and other finance companies, leaving just 15% for rest of the economy (see the recent Fabian pamphlet, The Great Rebalancing: How to fix the broken economy here, page 36).

Over the same period Wales lost 52,000 manufacturing jobs. This is before the onslaught of recession which saw a further 33,000 jobs in the sector disappear between 2008 and 2010. This period is best summed up by Andy Haldane, executive director for financial stability at the Bank of England who stated: “There was a great sucking sound as both people and monies were drawn into banking. Industries outside of finance were starved of sunlight.”

Unsurprisingly, employment in financial and insurance services in Wales shifted upwards by a measly 4,000 from the 1997 figure of 28,000. In no way has the financial sector created a boom in employment for Wales. Nor did it for the UK as a whole for that matter.

Within a macroeconomic analysis of Wales’s place in the modern UK economy, the New Economics Foundation concludes that:  “Wales is stuck on the wrong side of a divide that has privileged the accumulation of financial assets ahead of the creation of sustainable work”.

By now it is not radical to say that growth on its own is not sufficient for a true recovery. But the New Economics Foundation’s analysis is even starker. Putting London to one side, a more realistic measure is offered on the growth required to close the gap with the North West of England. This found that Wales “would need to grow at 2.5 per cent per year for ten years (with the North-West holding back at 1 per cent all the while) in order for Wales to achieve its goal. This is less implausible, but still represents a better economic performance over a longer period of time than it has ever managed before.”

The broader economic mistakes made by the UK Government are beyond the scope of this post but recent boasts of an ‘economy on the mend’ look as credible as earlier claims that we were ‘out of the danger zone’ ahead of a double dip recession, the fabled credit rating downgrade and countless missed Office of Budget Responsibility targets. TUC analysis has revealed just how fragile the recovery is. Recent growth has been reliant on a rise in consumer spending which coincided with a 43 per cent drop in household savings while median incomes face the longest squeeze since the 1870s. Meanwhile, the latest state sponsored housing bubble is described by Danny Gabay of the economic consultancy firm Fathom, as the “Help to Buy an Election” scheme.

While advocating alternatives for Welsh economic and/or industrial policy, the New Economics Foundation flags up the concept of the Foundational Economy developed by Karel Williams at the Centre for Research on Socio-Cultural Change at Manchester Business School. This refers to the 10 per cent or more of a local economy that is directly dependent upon local spending and the provision of the services necessary to enable any locality to function. The definition includes activities in the private and public sector and specifically those privatised services that rely primarily on populations and geography rather than more competitive market factors.

This novel yet practical approach arguably provides a better starting point for addressing the fragmentation of our economy and the broken supply chains within it. Williams discusses the Foundational Economy and the opportunity it presents Wales at a public lecture at Cardiff University available here. Elements of this thinking have important implications for how we support manufacturing in Wales. The Welsh Government rightly responded to the recession by offering strong and creative support for the sector with Proact and more recently the Economic Growth Fund which has benefitted this sector more than any other.

However, Williams refers to a need to look afresh at our economic assets and abilities in Wales to ensure we benefit from far more of the value that is created here. Food processing is a recurrent example with large and complex supply chains within a sector that is now the largest consumer of machinery in the UK. Localising supply as far as possible and embracing cooperative models is a lesson drawn from the success in the Emilia Romanga region of Italy. James Meadway at the New Economics Foundation writes:

“Building on a solid base of small and artisanal manufacturing, the regional administration encouraged the establishment of cooperatives amongst small manufacturers, enabling them to access economies of scale and cheaper financing. It also encouraged the creation of support networks of secondary services, again aiming to reduce the cost to businesses. Six in ten residents of Bologna, Emilia-Romagna’s principal city, are now members of a cooperative, while one in ten residents work in one. Imola, a town of 100,000, has 115 co-operatives that account for 60 per cent of economic output. Just over half of its residents actively invest capital into these firms. The regional government was central in establishing a dialogue between businesses, residents, and trade unions in developing a co-operative vision for Emilia-Romagna.”

Towards a Welsh Industrial Strategy ultimately calls for a better networked Welsh economy with sections from mobilising credit more effectively and new forms of banking to food production and renewable energy. Any industrial strategy should work across government and the broad subjects covered within this report support the assertion that the whole should be greater than the sum of its parts.

Austerity, and the nature of this historically weak recovery, is compounding our longstanding structural problems while the UK Government turns its back on previous commitments to rebalance the economy.

It is the case now more than ever that the Welsh Government requires powers over tax and borrowing as part of a reserved model. This has already been supported by the Wales TUC in its submission to the Silk Commission.  But whatever the shift in powers and constitution, an industrial strategy should be given serious consideration as a means by which to create a more resilient and productive Welsh economy.