No easy answers on the Welsh economy

Dr Leon Gooberman asks if lessons can be learned from previous attempts to develop the Welsh economy.

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Governments of various shapes have been attempting to offset the impact of economic change in Wales for the last eighty years. Initial problems flowed from how the resource led economy that had created modern Wales contained the seeds of its own destruction, as there was little need to diversify into other activities. Disaster followed the First World War as demand for steel, coal and slate collapsed, with the subsequent slump remembered for many decades. During the Second World War, the government directed industrial production to Wales and eliminated unemployment, with the dominance of the market within the economy giving way to that of the state. After the war, governments began to run down the coal industry, while employment levels dropped in some other sectors such as agriculture. However, full employment was maintained by the state’s expansion of the steel industry and its use of regional policy instruments to force industrialists to locate new factories in Wales, as opposed to choosing more prosperous parts of the UK.  

All this changed after 1979, even if deindustrialisation was already apparent. Regional policy instruments were scrapped or downgraded amidst an avalanche of industrial closures while the nationalised industries of coal and steel shed tens of thousands of jobs. Having been established by the Welsh Office in the 1970s, quangos such as the Welsh Development Agency cleared land, built factories and attracted investment, but despite many successes the scale of change proved impossible to offset fully. As the economy increasingly focused on the service sector throughout the 1990s and manufacturing suffered from overseas competition, economic development activities struggled to achieve impact. The arrival of political devolution and large-scale European funding appeared to herald a new beginning, but initial optimism did not last. Attempts to govern European structural fund programmes through 51 committees were unsuccessful as ambitious economic targets were proclaimed and then abandoned. Frustration mounted and the Welsh Development Agency was merged with the Welsh Government in 2006 during the ‘bonfire of the quangos’.

Between 1934 and 2006, a huge range of activities aimed to stimulate greater economic growth. Factories and business infrastructure were developed, companies were compelled to locate in Wales, land made derelict by industry was cleared, urban areas were regenerated, grants and loans were provided to companies, inward investment projects were attracted while business advice and training was provided. Can lessons be learnt from all this activity across thousands of projects, schemes and beneficiaries? L.P. Hartley’s proverbial ‘the past is a foreign country; they do things differently there’ words apply as always, but some lessons can be identified across the activities most likely to be successful, and in how these could best be governed.

In terms of activities, first; achieving a stronger economy must be an over-riding priority throughout government. The methods by which this is to be done should be set out, although there is a need for realism when setting targets. Second, successful intervention focuses on areas of market demand and the public sector cannot deliver sustained growth by itself. A more successful private sector is a critical component of a stronger economy. Third, a tangible focus on activities most likely to facilitate job creation is vital within economic development. Fourth, the debate on inward versus indigenous investment achieves little. The importance of inward investment was sometimes overstated, but an economy needs both types to be successful. Finally, more commercial entrepreneurship and innovation is needed throughout Wales. While it is difficult for governments to facilitate such activity, higher levels would enhance the economy’s ability to renew itself without the need for seemingly endless, large-scale, assistance.

While interventions need to be focused, good governance is equally important. First, activities should be publicised and subject to rigorous and, where possible, comparable evaluations to quantify effectiveness and impact. There is no guarantee that greater expenditure will automatically create better economic outcomes. In some cases, better outcomes might be obtained through diverting funding to activities such as infrastructure or education, or towards reducing the tax burden. Second, arms-length agencies can play a positive role in delivering some activities. Their structure enables them to bridge organisational differences between the public and private sectors, while remaining accountable to government. However, they need a rigorous approach to internal governance and should be subjected to scrutiny that is well-informed, detailed and ongoing. Third, a proliferation of funding schemes causes confusion and inefficiency. Overly complex and opaque systems can cause organisations to focus on co-ordinating activities with each other and navigating funding programmes to ensure survival, instead of focusing on economic development.

The economy of Wales changed shape constantly during the twentieth century and beyond, but was often characterised by a dependence on successive waves of external investment. More recent decades have seen central governments’ visible role, through regional policy and nationalised industries, replaced by invisible fiscal transfers from Westminster. Reducing this dependence by enabling a stronger economy is a defining issue within contemporary Wales. However, as is well known, recent economic performance has been mixed with low unemployment co-existing with high levels of concentrated poverty. Overall, there are no easy answers to the issues facing the Welsh economy, especially given its structural inheritance and the centralised nature of the UK’s economy, but Wales could and should be a more prosperous place.

Dr Gooberman’s book ‘From Depression to Devolution: economy and government in Wales, 1934 to 2006’ will be published on 15 February by the University of Wales Press. He is a Research Fellow at Cardiff Business School.