The competing narratives on Welsh economic performance

As Professor Kevin Morgan put it, there are two competing narratives of Welsh economic performance. The first holds that, given the hand that we have been dealt, the performance of the Welsh economy since 1999 has been reasonable. The second has it that performance has been risible.

The rival narratives were each voiced during the final session of the Learned Society of Wales’ symposium on ‘Economic Policies for Peripheral Countries’ earlier this month. Jonathan Price, the Welsh Government’s Chief Economist, concluded his presentation by arguing that the statistics tell a simple story: given the skills level and the economic geography of the UK, people have as good a standard of living in Wales as they might reasonably expect. Emyr Jones Parry countered by impugning policy makers in Wales of lacking ambition and aspiration.

So which of these stories is closest to the truth? Should we be content to be bumping along at 72% of UK GVA, consoled by the sense of inevitability? Or should we be seeking to emulate the Irish, Finnish or Basque economies – regions that are geographically, but not economically, peripheral?

The problem of peripherality

Economic theory has come a long way over the past quarter of a century in helping us to understand why some regions support high levels of economic activity whilst others remain comparative backwaters. Indeed, Paul Krugman gained his Nobel Prize in no small part for his work on a core-periphery model in which simple assumptions about the nature of the productive process combine with transport costs to spontaneously give rise to concentrations of development amongst expanses of stasis.

However, as was demonstrated by the disagreement between Prof Ron Martin (University of Cambridge) and Professor Steve Gibbons (London School of Economics) in the very first session of the symposium, there is no consensus on whether the agglomeration of economic activity represents a benign process by which we all get to enjoy the benefits of the associated economies of scale, or whether this benefit is outweighed by the malevolence of the market power inherently associated with those economies of scale.

So is there any disadvantage to being on the economic margins? The Gibbons/Price story holds that we in the periphery do pretty well out of the process of economic agglomeration. We benefit in terms of cheaper goods and services produced in the core as well as from substantial transfer payments. At the same time, we get to avoid the costs of congestion and pollution that those in the core must endure. The logic is clear. If it weren’t true, we would surely all be trooping off across the border for a better life. This is, of course, the same type of ‘no such thing as a free lunch’ condition that is so favoured by neoclassical economists in all types of different settings.

For those of us who don’t accept this story, there is clearly a challenge to explain why the freedom to move is not enough to offset the disadvantages of geographically uneven development. More work needs to be done to formalise the explanations of why uneven development is important. Diagnosing the problem more precisely will help to ensure that the appropriate cures are prescribed.

However, the lack of a clear consensus on the nature of the problem is no evidence for the lack of a problem. Two key concerns arose time and again during the symposium. The first was that the life chances of individuals born in the periphery are limited relative to their peers in the core. The second, unsurprisingly, related to the complementary nature of economic and political power – the inevitability that economic agglomeration goes hand-in-hand with the pooling of political power.

The policy mix

So, if we do care about uneven development and do want to see the economic pie shared more equally across space, what can we do about it? Here the symposium heard numerous accounts of the policies that might prove effective.

Professor Ricardo Hausmann (Harvard University) highlighted the importance of product mix; Professor AnnaLee Saxenian (University of California, Berkeley) highlighted the complexity of successful entrepreneurial ecosystems and the role of the diaspora in forging links in the global economy. Sessions were held on ‘smart specialisation’, human capital, the role of finance and of infrastructure. We heard of the policies underpinning the success of regions such as Silicon Valley, the Basque country and Finland.

The key message that I took away is that there are no straightforward policy prescriptions. Producing a carbon copy of what has been done elsewhere is likely to prove ineffective. Moreover, success requires a complex mix of factors – innovation, skills, access to finance, suppliers and product markets.

To come back to Jonathan Price’s observation, if we want to see a transformation in Wales’ economic fortunes then we need to see a significant improvement in the skills base and a radical change in economic geography.  Economic peripherality is not the same as being on the geographical margin – it is not set in stone. But to radically improve Wales’ economic fortunes will require transforming the country from a peripheral hinterland of the UK, to an economy with more coherent internal linkages and external linkages which are not all mediated through the south east of England.

In the main, this is a long-term project which requires a significant change in culture – the previously mentioned ambition and aspiration. However, it seems to me that there are a few low-hanging fruit that can be harvested. Firstly, there is a major opportunity in Wales for harnessing public procurement to boost local demand. Secondly, we require a development agency, at arms-length from government, with the expertise to identify the key challenges facing the Welsh economy. Its focus should be less on handing out grants and attracting FDI; and more on identifying where market failures need to be corrected, where opportunities exist to invest in infrastructure, and in co-ordinating the business community in Wales to leverage existing strengths and fill the gaps in the product mix.

The LSW symposium has been a great innovation in Wales’ academic culture – bringing together networks from across the globe in Wales to address our needs and theirs. What Wales needs now is similar innovations in its financial, business and political culture.