LONG READ: From a Welsh Economy to an Economy for Wales: Thinking about an independent Wales

The Covid-19 crisis has turned a searing searchlight on the relationship between the Westminster Government and the Devolved Administrations and the Westminster Government has demonstrated a disrespectful lack of engagement with Wales’ elected leadership in Cardiff.

This has been compounded by the provisions of the UK Internal Market legislation, which by introducing a centralised regulatory framework, over-rides devolved powers established by the devolution settlements. 

Exposed to this light it is clear that the devolution settlements are not a robust defence against the centralising tendencies of a government which seeks to assert its political and economic supremacy, and this will have a significant effect on the direction of a future Welsh economy.  This deliberately removes significant areas of economic control from Cardiff.  Notwithstanding the imaginative and constructive vision outlined by Minister for the Economy, Vaughan Gething MS (BBC Wales 17/10/21),“Levelling up” in Wales will be controlled from Westminster.

‘A different question might be, “How much longer can Wales afford not to be independent?’, if it is to have any real say in its economic destiny.

Whether people are already committed to independence or cautiously “indy-curious”, any conversation on the subject soon turns to a question posed in many different ways, but ultimately summed up as: ‘Can Wales really afford to be independent?’

On key indicators, such as productivity, educational attainment, income, material deprivation, health, housing, Wales performs badly.  The eligibility of Wales for EU Objective 1 funding resulted from 1.87 of its 3.14 million inhabitants (60%) being in an area with a GDP per capita of less than 75% of the EU average. Despite receiving EU funding since 2000, in 2019, the per capita GDP for all of Wales was 92% of the EU average, lagging behind the UK at 115%.  Beyond the economic damage Covid-19 and Brexit are bringing, the loss of EU funding is being compounded by the Internal Market legislation, through which the UK Government will control distribution of the UK Shared Prosperity Fund across the whole of the UK.  This means that Wales will be bidding against the rest of the UK for funding, whereas EU funding was regional funding specifically for Wales limiting the control of Westminster.

A different question might be, “How much longer can Wales afford not to be independent?’, if it is to have any real say in its economic destiny.

Too Small and too Poor      

In conversation, there appears to be a received wisdom that Wales is ‘too small’ and ‘too poor’ to ‘go it alone’, as an independent country, but it is far from being the smallest or the poorest in Europe.  The Baltic states of Lithuania (2.8m), Latvia (1.9m), and Estonia (1.3m) and also Slovenia (2.1m) are all smaller, while Croatia (4.1m) and Ireland (5.0m) are bigger than Wales (3.1m).  They make interesting comparators as they have all rebuilt their economies since joining the EU, and all are independent states which were formerly subordinate parts of a much larger political entity. Outside of Europe, another state which was formerly a British Colony before becoming part of the Malaysian Federation, only gaining independence in 1965, is Singapore with a population of 5.7m.  It is interesting because its GDP of £0.53bn in 1960 had become £283.65bn by 2019, which with a population of only 5.7m, is too remarkable to ignore. Although by no means direct comparators, these are all modern states with thriving economies and a review of their economic structure provides a point of departure for a consideration of what an independent Wales should be striving for.

When compared with other European countries (that is, European Union Member States, Candidate and potential Candidate Countries, the United Kingdom and Norway), Wales is ranked 27th largest country (out of 38) in terms of population.  Even when compared with its nearest neighbours, Wales is not small.  The European continent is full of smaller countries – San Marino (33,800), Liechtenstein (38,300), Malta (502,000), and Andorra (77,100) are just a few examples – reflecting the rapid increasing number of independent states seen since the end of the Second World War.

Table 1 – Comparison of European populations (in millions)

In post-Cold War Europe, there has been a tendency towards political separatism with economic integration, and border changes are often accompanied by a democratisation process.  An independent Wales would only be reflecting this movement towards political autonomy and would be far from being “too small” to do so.

But what about being ‘too poor’?  Does the size of a country influence its economic growth?  The existence of a so-called scale effect on economic growth is a recurring question in economics.  The fast development of small East Asian economies in the 1970s and 1980s, captured by Schumacher’s phrase “small is beautiful” (1973), fuelled a new branch of literature documenting these economic miracles. 

Different aspects of country size may affect growth positively or negatively: a large land area is prone to provide more natural resources but may prove difficult and costly to manage for public services and transportation means.  A large population provides a labour force and a wide domestic market with scale economies but may also incur larger administrative costs.  A high GDP may be associated with slower growth rates as income and development levels are already high, but also with better infrastructure, greater human capital and so a higher growth potential.  Again, there is clear evidence that Wales is not ‘too poor’ to be independent.  Given the size of its population, it ranks 27th (out of 38) on employment rate, and the Welsh economy, as measured by GDP, in a comparison of GDP with other European countries excluding potential Candidate Countries and Norway, is ranked 23rd (out of 34).

Table 2 – Employment comparison

Table 3 – GDP comparison against other European economies

An independent Wales would not be an outlier in terms of size or wealth. As Scotland pushes for independence and a united Ireland presents a pragmatic and sustainable solution to EU border issues, pressure is building for an independence referendum in Wales. However, a referendum without a credible economic plan for an independent Wales presents two risks: (1) those who oppose independence will seize on the lack of a coherent economic alternative to the status quo, or, and equally troubling, (2) an early referendum could produce a yes result without clear direction of travel for rebuilding the economy.

While the country is neither ‘too small’ or ‘too poor’, it needs to ensure its economy is suitably structured for independence; that is, there needs to be a shift from a Welsh economy to an economy for Wales.  In other words, we need a shift from describing the status quo to envisioning a future economy which serves a potentially independent Wales. The recent statement by Vaughan Gething (17/10/21) whilst welcome, could have been more ambition in this regard.  A more radical conceptualisation is needed.  Once independence is factored in a more expansive and integrated way of thinking about the economy begins to emerge.

A baseline analysis of the structure of an economy can be measured using location quotients, which are measures estimating the importance of industry sectors to the economy relative to their importance in a larger reference economy.  Industry employment is typically used as a measure of scale for such an approach.  Analysis was conducted of the ten main industrial categories for all European Union Member States, Candidate and potential Candidate Countries, the four countries of the United Kingdom and Norway, with the European Union (28 countries, 2013-2020) being the larger reference economy.  Therefore, a location quotient value of 1.0 signifies the industry has the same importance within a country as it does in the reference economy; a value above 1.0 indicates greater importance while a value less than 1.0 indicates diminished relative importance of the industry.

Table 4 – 2019 country location quotients

Note, European Union – 28 countries (2013-2020) = 1.00.

Industry: A – Agriculture, forestry and fishing, B-E – Industry (except construction), F – Construction, G – Wholesale and retail trade, transport, accommodation and food service activities, J – Information and communication, K – Financial and insurance activities, L – Real estate activities, M – Professional, scientific and technical activities, administrative and support service activities, O – Public administration, defence, education, human health and social work activities, R – Arts, entertainment and recreation, other service activities.

Table 5 – 2019 country specialisation (UK nations only)

Note, European Union – 28 countries (2013-2020) = 1.00.

Table 6 – GVA in £’ millions

Table 6. identifies a significant gap in GVA between Wales and Ireland and it is instructive to question why this should be so.  To understand the reasons, looking back to the “Celtic Tiger” period between 1993 and 2001 is revealing.  Garret FitzGerald, writing in the Irish Times July  21, 2007, wrote that:

“…a major factor in this [economic growth] was the arrival in Ireland during that eight-year period of almost 300 new mainly high-tech industrial projects.

These increased almost fivefold the value of our manufacturing output, trebled the volume of exports, and, most important of all, virtually quadrupled the reported money value of the average industrial worker’s output.”

This “jump start” to the Irish economy did not come about by accident and resulted from Ireland initiating and pursuing an integrated series of policies built around the assets of a young well-educated workforce, the potential to expand the labour force by increasing the proportion of those economically active, and a pro-business political environment in an English speaking  member of the EU. Since then Ireland has joined the Eurozone and a visit to the IDA website (www.idaireland.com) reveals a confident country, proud of its achievements and presenting an inviting, competitive offer to the wider world.

That Wales aspires to a closer relationship with Ireland is reflected in the Ireland-Wales Shared Statement and Action Plan 2021-2025.  This plan was initiated through the meeting of the Welsh First Minister , Mark Drakeford MS and the Irish Minister for Foreign Affairs, Simon Coveney TD at the inaugural Wales-Ireland forum which took place on 22 October 2021. Although Wales lacks the sovereign powers of Ireland there are areas where devolved powers allow scope for independent action. Of crucial importance to economic success are education and research, which are identified in the Shared Statement as areas for significant collaboration.  This is a vital area for collaboration, as Ireland has shown, a well-educated workforce together with research capability are important attractors for inward investment. 

Education is viewed as an important component in allowing an economy to prosper.  There is a wealth of literature on this topic, showing the long-held expectation that human capital formation – that is, a population’s education and health status – plays a significant role in a country’s economic development.  Better education leads not only to higher individual income but is also a necessary precondition for long-term economic growth.  There are three channels through which education affects a country’s productivity. First, it increases the collective ability of the workforce to carry out existing tasks more quickly.  Second, secondary and tertiary education especially facilitate the transfer of research, knowledge about new information, products, and technologies created by others.  Finally, by increasing creativity it boosts a country’s own capacity to research, create more new knowledge, products, and technologies.

The OECD provides PISA scores which measure educational attainment in Reading, Mathematics and Science at age 15, allowing international comparisons to be made.

Table 7 – 2019 OECD PISA scores

Although close to the OECD PISA averages, the data shows Wales lags behind Ireland and the UK significantly in these key areas.

Table 8 – 2019 Education (% of the population by education attainment)

Wales compares well on levels 3 and 4, but falls behind Ireland on levels 5-8.  This highlights a weakness and a challenge in structuring the economy for an independent Wales.  Over 47% of Ireland’s population has attained tertiary education compared with only 41% of Wales population.  Historically, Wales has consistently exported its educated talent, and it continues to do so is discussed in the recent IWA article ‘No country for young folks: Looking for the full picture of the Welsh brain drain’.  If Wales is to develop a balanced modern economy, it needs to retain its talent and develop a twenty-first century workforce suitable for an independent country.

A New Economic Narrative 

By allowing ‘too small and too poor’ to become the received wisdom, Wales has lost its way and needs an ambitious economic strategy, if it is to take independence seriously.  The country is facing an abundance of different challenges – from those related to health and Brexit, to those related to the climate crisis and, with the Internal Market Act, an insultingly dismissive attitude from Westminster. 

‘Wales needs to adopt an unambiguously international perspective, embrace the opportunities to work with our European partners and to look to a wider world. 

Wales does not lack imaginative ambition. It has already made internationally acclaimed strides in socio-economic policy, with the Well-being of Future Generations (Wales) Act.  But to ensure independence is a success, Wales needs a very different approach to educating its workforce and a major rethink on what the economy is for and the types of capability and capacity it needs.  It needs to transform the economy from within, strengthening its core provisions – in health, education, infrastructure, transport and the environment – while giving the economy a new direction and purpose.  We cannot move on from the key problems facing our economy until we abandon this narrow view of Wales being “too small” and “too poor”. 

Monetarism has not served Wales well. The scale of the reinvention calls for a new narrative and new vocabulary for the Welsh economy, drawing on the concept of Public Purpose, (Gregory 2013), to guide policy and business activity.  This requires the ambition, emanating from the Welsh Government, to make sure that all public contracts, relationships and messaging result in a more sustainable and just society. And it requires an inclusive process, involving the many private, public and 3rd sector value creators. Public Purpose must lie at the centre of how wealth is created collectively to bring stronger alignment between value creation and value distribution. An independent Wales would be free to adopt a neo- Keynesian economic model, with its own Central Bank serving the interests of Wales and not controlled by the aptly named Bank of England, serving the interests of the City of London.

Wales needs to adopt an unambiguously international perspective, embrace the opportunities to work with our European partners and to look to a wider world.  Florence in the 1320s, Amsterdam in the 1620s, Shanghai in 1920s – all these great entrepreneurial hotspots – had one thing in common: they were open, they were liberal, they were tolerant, and they saw the world as their oyster.  They created the background noise for people to have a go, to respect the idea of having a go, but all of them faced out to the world.  Other similar and smaller countries have done this successfully and Wales should do the same. 

We are not “too small or too poor” to follow their lead.      

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