Wales now the Mezzogiorno of northwest Europe

Rhys David reports on a recent seminar that examined how we are faring within the European Union

“London should leave the EU – and quit Britain, too”. So said Simon Jenkins ex-Times and Economist editor, National Trust chairman, Guardian and Evening Standard columnist, Aberdyfi resident and former IWA lunchtime speaker. He was – one assumes – seeking to be controversial and was not expecting even London mayor, Boris Johnson to come out in support. Instead, he was making the point that London and the rest of the UK now inhabit different worlds.

London looks to a global future built around its two great industries, finance and leisure, and its attractions as a desirable place for the world’s wealthy to live. Jenkins argues that it is no longer just a European city but a world city, its real partner, its civic alter ego, being New York. Both share large-scale immigration, a wide spread of rich and poor, a similar business culture and leisure pursuits including theatre, opera, film and book scenes.  They are the sort of places where the successful from all over the world want to come to live, be entertained, watch sport, and do business. As such, the EU with its propensity to regulate, cartelise and restrict, is by implication no longer relevant.

By contrast, much of the rest of Britain is still living with the legacy of now-departed industries and does not have the same worries as London over the threat to financial services posed by measures such as the proposed Tobin tax on transactions. Regions heavily dependent on EU funding for infrastructure and other business stimulation investment, would benefit from the trade boost that the devalued pound they would necessarily be left with after the London city state – probably the area encompassed within the M25 – withdrew and went its own international way.

Just a few weeks ago a group of Welsh, Westminster and Brussels politicians and officials, academics, think-tank experts and businesspeople gathered in Cardiff with a different agenda – how to maximise the benefits Wales might get from yet another round of European funding. The picture they painted was definitely not one in which the merits or otherwise of leaving the EU could be placidly debated.

As Adrian Healy, an economist at Cardiff University, pointed out, over the last ten years Wales has become the Mezzogiorno of northwest Europe, the equivalent of the chronically depressed south of Italy. In terms of eligibility for funding we are now on a par with Portugal, southern Italy, Greece, and the newer, formerly Communist, Eastern European entrants.

It gets worse. Between 200 and 2009 our rate of growth in purchasing power per person lagged our new rivals. They have surplus labour, and can close the productivity gap with the richer EU economies much more quickly than Wales. As such, several can be expected to overtake us over the next decade, leaving us very much the poor man of Europe.

Despite billions of Euros of Objective One and convergence funding, GDP in west Wales and the Valleys is still between 50-75 per cent of the European average. By contrast the Irish Republic was higher than the European average in 2009. Although the Irish economy took a serious knock from the financial crisis, it is making a strong recovery. There’s not even much to cheer about in supposedly wealthy Cardiff either. Whereas at the turn of the Millennium east Wales stood at 108 per cent of the EU average, by 2008 it was down to 100 per cent, Jill Evans, MEP, and president of Plaid Cymru, told the event.

She thought we could spend convergence funds much more effectively in the next round, between 2014 and 2020. Labour MEP, Derek Vaughan said we should learn lessons from other countries that had benefitted from structural funding, and devise better ways of measuring of the impact of investment. Adrian Healy said we should adopt a more co-ordinated approach towards the Horizon 2020, Interreg V, and Erasmus programmes rather than commit to them on an ad hoc individual initiative basis.

Guto Bebb, the Eurosceptic Aberconwy Conservative MP, chose to disagree. He argued that European regional policy had failed. Far from it making a difference he said we were going backward in west Wales and the Valleys. The priorities that had been followed in Wales, such as big infrastructural schemes, were those chosen by the EU and not necessarily those that were most appropriate to the Welsh economy. There had been too great a focus on inputs and compliance, while performance had not been properly measured. White elephants were being supported by match funding, taking spending away from other priorities. In his view regional policy should be repatriated to the UK (and the other member states) and paid for from savings made as a result of lower EU contributions.

It is, of course, an argument being played out on a wider stage than Wales, as Britain confronts its EU future in the proposed referendum. Yet have any of our politicians got the right answer for Wales and is it possible something infinitely more radical is required, whether we stay in the EU and fight our corner or go it alone? For all the money spent so far, Wales now has a place in the next round of funding alongside the ‘less developed economies’ – an irony for a country that has claims to being the cradle of the industrial revolution, one of the first with a largely literate population, and a history of compulsory popular education dating back to the last half of the 19th Century.

Should we now be starting to think of Wales not as a developed economy, less developed economy or a post-industrial economy, but rather an undeveloping economy? Should policy recognise that this requires an altogether different approach than that applicable to countries that do not have Wales’s industrial and economic history?

We have seen three major phases of economic policy in Wales since the war. All have been targeted at dealing with the ‘decline of heavy industry’. From 1945 until roughly 1970 we effectively had direction of industry with major corporations of the time obliged in the immediate post war years to invest in the poorer regions. This was an era when British Nylon Spinners and many other big companies came to Wales, bringing industrial sectors not previously represented here. Direction ended with the change of government in 1951 but big British groups were heavily incentivised through development grants to come here throughout the 1950s and 1960s. The Location of Offices Bureau completed the pincer movement for service industries, actively dragooning office employers in London to move out – policies that would seem incomprehensible nowadays.

The next phase between 1970 and 1990, when British-owned industry was in decline, saw development funds being used to attract foreign direct investment, utilising low cost Welsh labour to manufacture products that could now be sold across the European Common Market. This worked until the collapse of Communism and the opening up of China released millions of more lowly paid workers who could do the same jobs for the multinationals but more cheaply.

Since then policy has been a combination of spurring on local entrepreneurs, targeting growth sectors such as biotechnology and IT services, and holding on like grim death (with the help of investment support incentives) to the significant big businesses that are still based here, such as Airbus, Ford, Dow Chemical and Tata.

All of these approaches have ultimately disappointed. Is it time, therefore, to think of Wales as a place where the economy – in particular the small and medium sized sector – needs to be rebuilt and needs a degree of sheltering from the full rigours of the globalised, free market?

Though the scale is completely different, can we learn some lessons from South Korea? At the end of the Second World War this was a largely agricultural nation. Today, however, it is one of the world’s leading industrial nations, with powerhouse electronic and motor industries. In his recent book How Asia Works: Success and Failure in the World’s Most Dynamic Region Joe Studwell points out that the neo-liberal free market policies that have been followed in the West for the last 30 years would have prevented South Korea – and Taiwan before it – from taking off. Companies like Samsung, LG, and Hyundai could never have faced down competition from Sony, Sharp, Panasonic, Toyota, Honda and General Motors without some help to develop export strategies in a protected market with a helpful domestic financial system. He quotes Park Chung-hee, the South Korean strongman who was behind the South Korean miracle: “Make public pronouncements about the importance of free markets and then go quietly about your business.”

Naomi Klein says something similar in her 2007 book The Shock Doctrine, The Rise of Disaster Capitalism. In it she charts the defeat of ‘developmentalist’ policies which she argues had been helping the economies of Argentina, Chile, Paraguay and Uruguay. Though it is not necessary to accept in full the conspiracy theories behind her writing, she does make a powerful case that these economies were beginning to prosper in the post war period as they sought to develop a degree of local self-sufficiency. However, free market advocates from the Chicago School of Economics proved so successful in penetrating the higher echelons of politics and banking in those countries, that policy reverted to a globalised free market model favouring big international, and mainly American, corporations.

Of course, all this takes us some way away from Wales and its hopes of what might be achieved from the next round of EU funding. All the same they are relevant issues. It seems unlikely, to say the least, that the Welsh Government’s growth sector strategy is going to make the dent in Wales’s unemployment and skills deficit and GDP gap that is needed, however big a subvention we get in the next EU budget. Yet there are sectors where a strong indigenous firms need to be developed. Nor are they usually operating in advanced technology fields though they might have these requirements, if they ever developed a sufficient scale.

With one notable exception in Welsh Water – which even now looks likely to be challenged – Wales lacks any control over its utilities. We have only one significant hospitality company, despite our dependence on tourism, and only two significant Welsh-based financial institutions. Where they are not part of British multinationals such as Unilever, ultimate ownership of most of our public transport assets, and despite the importance of our food sector, our biggest meat and food processing operations, is by the French, Germans, Irish and Dutch. As a result, even the big public procurement spend in Wales is destined only ever to leave scraps for Welsh-based businesses and little money to circulate within the Welsh economy.

Wales does need multinationals companies and their contribution in sustaining Welsh wealth has been overwhelming in post-war years. However, we are not building the small and medium-sized companies we need in sectors where we could hope to have Welsh-owned and controlled assets and which of themselves would encourage the growth of Welsh-based support services.

As yet again we need another round of funding from Brussels, why not make the focus this time on building stronger Welsh businesses in these areas? Let us see if we cannot persuade Brussels that Welsh businesses need to be prioritised in Wales, through favourable treatment under the procurement rules, and through some form of protection if wider Welsh interests are threatened. Public stakes might also need to be used to support businesses going through difficult times. After all, we have started down this path with the Welsh Government’s purchase of Cardiff Airport. Simply watering the ground with further millions of Euro funding in the hope something will grow can only work if there are healthy plants waiting to come through, but in Wales this is often not the case.

Rhys David is a former Financial Times journalist and a Trustee with the IWA.

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