Economic Crisis 2: Exports key to bridging Offa’s gap

The Welsh economy is in crisis. The collapse in its economic output since 2007 ran in parallel with the Great Recession. But its problems run much deeper. The Welsh economy has been growing slower relative to its historic trend growth and that of the UK economy for the last two decades. While the inherited problems of the Welsh economy, those associated with its industrial legacy, are well understood, we need to ask the simple question, what made a bad situation worse?

The combination of our economic history and our recent experience means Wales faces a dual developmental problem. As an economy and a society that was at the vanguard of the Industrial Revolution Wales displays many of the social and environmental scars that are the by-products of rapid economic growth based largely on natural resource based industries.  Wales, in common with most of the northern hemisphere, is in many ways having to confront the problems and challenges of uneconomic growth or over-development.

Wales’ other developmental problem flows from the uneven nature of development itself, both historically and geographically. Wales, once a powerhouse of economic progress now finds itself at the bottom of the UK and, increasingly, the EU’s prosperity league tables. We are well on the way to becoming the most under-developed land in the advanced post-industrial world.

The starting point of the Economic Commission launched by Plaid Cymru yesterday is the belief that raising Welsh GVA per capita has to be a key strategic goal of Welsh economic policy – and that the abandonment of an explicit target by the Welsh Government, or the shift to a measure that includes central government transfers, is an acceptance of failure Wales can ill afford.

The focus of Offa’s Gap: Roots and Remedies of the Welsh Growth Collapse, the Commission’s first report published yesterday is on diagnostics. What is wrong with the Welsh economy, what are the symptoms, what is the syndrome, what is the underlying cause? The important thing, of course, is to cure the problem. Growth therapeutics will become the focus of the Commission over the course of the next four years. With the launch of this first report we are inviting everyone in Wales to participate in this essential process of discovering together the ideas and strategies that will offer our country a better economic future.  There can be no monopoly on good ideas in this regard.  Indeed only by pooling our intelligence can we hope to begin the task of charting a different course.

Detailed proposals on a policy programme will be the subject of later reports and analyses by the Commission. In this short initial report we have presented a particular narrative of the Welsh economy which prioritises the role of the export generating sector of the economy. There are alternative narratives that would emphasise different aspects: skills and productivity, innovation and R&D, jobs, the labour market and demographics, all of which would involve different policy priorities. The narrative presented here, for example, invites a number of policy conclusions.

Firstly, a Welsh growth strategy by definition must be a Welsh export strategy. Jobs and incomes in the non-tradable sectors of the economy ultimately depend upon the income generated in the tradable sector. Expanding and diversifying the Welsh export base is critical to increasing the Welsh economic growth rate, and reducing the dependence on budgetary transfers from central government.

Wales needs a dedicated arms-length business-friendly agency working to attract export-oriented investment and support and encourage indigenous based exporters. An important part of the strategy will be identifying key niche areas in which Wales can enjoy competitive advantage as part of a strategy of smart specialisation.

Secondly, a key part of the new export-oriented economic strategy will be to devise an appropriate plan to maximize the economic opportunity offered by our nearest and biggest neighbour, England – a high-value market, 45 million people of which are within two hours travelling time of Wales. The Welsh public and private sectors need to pool their intelligence and resources in seeking to sell Welsh goods and services to England. The appallingly low participation of Welsh firms in the Olympic Games are symptomatic of a systematic failure by the Welsh economy to adapt to the changing nature of opportunities within the wider UK economy.

Particular thought should be given to the opportunities offered in the public sector.  These include opportunities in the defence industry where Wales is currently under-represented in procurement terms. They also include new opportunities arising out of the privatisation policies in health and education being followed by the Westminster Government. While these policies themselves find little support in Wales, it is legitimate to consider whether Welsh firms or not-for-profit enterprises could build on Wales’ extensive knowledge in health and education provision – due to our extensive specialisation in this area – by marketing their services in the English arena.

A further possibility might be the creation of publicly-owned Welsh enterprises bidding for some of these contracts. This would not be wholly unprecedented given the Norwegian-owned Statkraft or Swedish state-owned Vattenfall investing in Welsh renewables, or the French state-owned Areva company seeking to win the contract to build Wylfa B on Anglesey.

The third and final area of policy prioritisation should be the services and infrastructure which the Welsh tradable goods and services need to be successful. The most obvious of these is transport. The new economic geography, most closely associated with the work of Paul Krugman, has emphasised the key role played by transport costs in explaining the relative success of regional economies.  The economic historian Nick Crafts has drawn attention in his work to the role played by the shift away from water as the main artery for goods transport – in which Wales, with its good access to ports, had an advantage over the landlocked English midlands – towards rail and particularly roads in the relative decline of the Welsh economy in the 20^th Century.

The low level of investment in Welsh transport infrastructure – consistently just two per cent of transport investment overall – is reflected in a completely un-electrified railway system, an ailing national airport, a Severn rail tunnel that is prone to flooding and a main southern motorway that is vulnerable to a two-lane pinch-point – the Brynglas tunnel – that is the subject of increasingly vociferous business complaints.

The composition of Welsh goods exports – petroleum, iron and steel and large-sale turbine equipment – all of which are more likely to be exported by large companies in bulk through ports suggest that the transport infrastructure for land-based transportation of smaller volumes of output by SMEs is a problem area which needs to be addressed.  Studies commissioned by the Welsh Government have confirmed travelling distance from the main urban conurbations in the UK as a significant factor in explaining the Welsh economic performance deficit vis-à-vis the UK. (See, for example, Understanding productivity variations between Wales and the rest of the UK Report to the Economic Research Advisory Panel, Welsh Assembly Government, by Martin Boddy of the University of the West of England, in 2006.)

A comprehensive Connectivity strategy to invest in the public infrastructure necessary for a successful export sector – including the quality of broadband connection needed by the high value service businesses – should logically be a key supporting element in Welsh economic strategy.

Some of these prescriptions will be controversial for a variety of reasons.  What role is there for the defence industry at a time of falling defence spending? What about the emphasis on exports versus import substitution through local procurement? Is it morally acceptable to benefit economically from misguided policies of English privatisation? And does seeing transport primarily as conduit for the export of goods mean reverting to the extractive bias that has so long skewed the development of our national infrastructure?

A national economic strategy worthy of the name must be the subject of vigorous debate; at times, impassioned disagreement; but most importantly of all, dialogue.  The strategy will not write itself.  We need all of Wales to be engaged, if all of Wales is to be transformed.