Yes, we can

IWA Director Lee Waters outlines the think-tank’s latest report on closing the wealth gap between Wales and England

“An outsider observing our economic policies and the national debate, such as it is, would conclude the Welsh were either content with their relative position or did not believe there was anything to be done about it” – Gerald Holtham, Chair IWA Economy group.

We mustn’t accept that Wales will always be the poor relation of the UK. That’s the core message of the IWA’s latest report, An Economic Strategy for Wales?

Our expert group of economists, business leaders and academics have spent the last five months analysing data and debating its recommendations for reversing Wales’ economic decline. Its conclusion is that Wales has been a ‘middling performer’ since devolution but the wealth gap with England can be closed if there is determined political leadership behind an ambitious and detailed delivery plan for growth.  We recommend a bold £25 Billion programme for investment over the next 15 years, funded by public sector borrowing and private sector investment.

Whilst Welsh wealth (GVA) per head remains at 72% of the UK average – the same level it was at in 1999 when the Assembly was established – the North East of England has climbed to 75% GVA per head. By growing 2% every year the English region has outpaced Wales over the same period even though it lacks the tools devolution has given the Welsh Government.

2% annual economic growth is achievable, and if we could sustain it for 10 years we could reach 75% of the UK average; over 20 years we’d stand at 79% of the UK’s GVA per head by 2035. That is surely do-able, but it would still leave us a fifth poorer than the UK average in a generation’s time.

True catch-up growth with England would require growth of 4% a year for 20 years – unprecedented in the UK, and in-line with the leaps made by the former Soviet republics after the Iron Curtain fell.

The additional economic activity we’d need to generate would be the equivalent of the annual turnover of Admiral Insurance every year, for two decades.

These are sobering figures. We’ve laid them out because it’s important we confront the severity of the position we are in, and our failure to make any progress out of it since devolution.

As Gerald Holtham writes in his chapter of the report, “there is an undercurrent of grumbling in Welsh public life about the relatively poor economy, as if there is an expectation that the government should do something about it. Rather than vague grumbling or vaguer aspirations, surely it is time for the country to take a clear-eyed look at how ambitious it wants to be for its economic future and what sort of changes would be required to achieve its ambitions”.

The IWA’s Economy Group, chaired by Gerry Holtham, is firmly of the view that closing the gap with England is achievable, but the political debate in Wales is nowhere near acknowledging the scale of the actions that are necessary.  Our report says “The growth policies of Welsh governments up to now have sometimes fallen down in implementation owing to a lack of commercial nous but they have also generally been on a scale implying acceptance of only modest narrowing of the gap with the rest of the UK”.

Our report highlights examples of good policies or projects taken forward by the Welsh Government – the Arbed housing energy saving scheme or the WG’s policy on procurement for example, but even these are too modest in scale – in the case of Arbed – or are not being implemented effectively, in the case of procurement.

In a telling passage Gerry Holtham – who recently left his role inside the Welsh Government advising on accessing finance for investment in infrastructure writes:

“The Welsh Government broke new ground with a National Infrastructure Investment Plan, but with no underlying economic strategy it is a list of projects that will happen as Departmental budgets permit. In the absence of a strategy and priorities resources will not be moved between capital budgets to reflect those priorities”.

The risk aversion of Ministers and their senior officials needs to be overcome if we are to obtain true catch-up growth. That, the report says, “requires taking risks because investments may not pay off to the extent hoped or expected. It also requires sacrifices. Money spent on investment cannot be spent on goods and services – including public services – in the here and now. Even if financed by borrowing, the investment would require debts to be serviced in the near future at the expense of other sorts of spending”.

The capacity and competence to deliver well was a recurring theme in the IWA’s Constitutional Convention project, and is also woven through our economy report.  The civil service is not a delivery body and it is time for the First Minister to reconsider his aversion to arms length delivery bodies. An early test of this will be the delivery of the Metro project, which currently seems to be stuck in the system.

These are the principles we espouse in our report – ambitious targets, a detailed plan to deliver a clear strategy, willingness to take calculated risks and a robust approach to implementation. We set out the type of projects we believe would contribute towards narrowing the wealth gap. These are not definitive, nor exhaustive. There needs to be a wide debate on the best approach but we put these forward as examples of interventions, if taken together, could propel the Welsh economy:

—   Implementation of City Region projects with full roll-out of south Wales ‘Metro’ project.

—   Challenging investment targets for Research and Development need to be set and much more needs to be done to encourage companies to invest in R&D in Wales.

—   New build housing: an investment of approximately £500 – £750 million over and above existing programmes could enable an additional 10,000 affordable homes to be built.

—   Housing retrofit: doubling existing investment in improving energy efficiency of homes to £250 million over the next Assembly term would support nearly 9,000 jobs.

—   Large scale programme of multiple low carbon and energy savings projects to make Wales ‘renewable energy’ self-sufficient.

—   Firms should be encouraged to develop more linkages to the local economy through their supplier choices and bringing more of their own activities to Wales.

—   A “succession fund” to keep businesses in Wales by enabling owner managers to get retirement money out without selling the business or by facilitating management buyouts.

Devising and implementing a new energy model for Wales involving a more energy-efficient housing and vehicle stock, distributed micro-generation and smart networks would require massive investment but could spawn a new industry of locally-grounded firms. Concentrating and accelerating infrastructure investment in growth-pole areas with schemes like the Cardiff metro could also give the economy a boost, especially if a firm eye was kept on local content and local apprenticeships. A renewed commitment to financing higher education at an appropriate level and pursuing initiatives like the software university, and the generation of medical spin-outs is also a promising area. All of these things will require heavy investment, necessitating a programme of borrowing.

They also require new public institutions working at arm’s length from government and employing people with the requisite skills, experience and drive. Each of them involves considerable risk and perhaps some stringency in current spending on other public services.

Ultimately it is a political question for the people of Wales. Do we want to purse modest sensible policies that will change our situation only very gradually? Or are we ready to venture something bolder with no certainty of success but some hope of making a faster change in Wales’ circumstances?

The IWA believes Wales can do better, and its time for all parties to get behind an ambitious long-term to grow the economy sustainably and spread prosperity


Lee Waters is Director of the IWA

23 thoughts on “Yes, we can

  1. Like a lot of people my hear sinks when I hear the term ‘City-Region’. Also, the obsession with England is getting beyond a joke. Has anybody associated with the IWA any understanding of nations outside the UK? That apart, there appears to be a lot of tinkering, and re-packaging here. Can we try to have some vision rather then churning outdated concepts.?

  2. The Gerald Holtham epigraph is correct: Wales has a problem and either does not think she has a problem or believes the problem cannot be solved – the truth is partly both.

    The basic thesis of the article is also correct: there is no reason in principle why we would not solve the problem, given the will. The title ‘Yes, we can’ has unhappy connotations but ‘Yes, we could’ would be accurate.

    It is therefore regrettable that the article loses its way after that when it gets into specific policies. The usual suspects, most notably massive investment in infrastructure financed by public borrowing, are dragged out. This is part of the problem, not the solution. Just look around Europe – the roads that go nowhere, the empty housing estates, the factories which have never opened, the underused airports, etc – and you will see that investment in infrastructure has been at the heart of every failed regional development strategy. A little further thought should make it obvious why this should be the case. For a start, the money is usually distributed on the basis of political priorities rather than economic demand – which has certainly been the case historically in Wales. Moreover, the money goes to contractors, who are usually not locally based, and not into building the long-term capacity of local businesses.

    As has been explained elsewhere, the key to building Welsh GDP is to build Welsh-based businesses that produce goods and services that others buy. Focus on those businesses, not on infrastructure. Otherwise you will be burdening your children with even more long-term public debt – something of which this generation is already extremely culpable – in return for leaving them decaying unused or underused facilities to maintain which brought little or no lasting economic benefit after their initial construction.

  3. The key to economic prosperity in Wales is actually rapid population growth. Too many areas of Wales have small enterprises that have only marginal profitability because of a dispersed local population and a customer base that does not provide enough people to generate profit to grow the business.
    To improve the outlook of West of Wales we need to attract more people into those areas and do so rapidly.

  4. Yet more rubbish spouted by think-tanks and blog contributors.

    Look to Singapore for an easy answers.

    i) Education; education; education
    ii) Language; language; language
    iii) multi-culturalism; multiculturalism; multiculturalism
    iii) safe, attractive place to live, work & bring up a family; safe, attractive place to live, work & bring up a family; safe, attractive place to live, work & bring up a family

    Inward investment will seek out our well educated workforce; local entrepreneurs will emerge; more and more firms will flock to Wales because it is where everyone wants to live, work and have families.

    No need to go looking for more powers from Westminster. We have control over almost everything we need already (and have had so for fifteen years).

    Why try to pretend it is any more complicated?

  5. Am I alone in lamenting the dismantling of the Welsh Development Agency and the effective neutering of the highly capable team currently battling to bring investment into Wales? The WDA was ‘arm’s length’ and highly effective for it.

  6. It is symptomatic of the fundamental problems facing the Welsh economy that an independent think tank and not the Welsh Government, has taken the initiative in addressing the need for a clear plan of action. There’s the first lesson.
    The IWA is therefore to be congratulated on taking the initiative, but I’m afraid that’s where the compliments end.
    The report does contain – as Jack Rawls points out – far too much tinkering and re-packaging, and the obsession with England surely must end.
    IF we have to look elsewhere for ideas, why not look at the successful economies of Europe; Finland, Norway, the Baltic States for example. As sovereign states they do of course have greater powers, but that does not stop us learning lessons.
    It is perhaps the contribution of JWR that is highly relevant.
    Blanket expenditure in infrastructure will simply not work for a number of reasons. First, any schemes have to be advertised within the EU and will certainly attract organisations from outside Wales (and the UK) with a consequently limited multiplier effect.
    Also, (and of particular current concern) it takes many years of planning and development before any form of work can begin and of course measuring the effect over time. Furthermore, the type of investment is fundamental; community buildings need future revenue support, once housing improvements are complete there is no ongoing multiplier, improved road construction often has an opposite effect in making it attractive and easier for external businesses to transport goods into the area. Technology also makes a great difference, infrastructure driven development on the thirties required huge numbers of workers; today machines do the work.
    In a recent report the IMF suggested that on average an investment equivalent to 1% of GDP boosted GDP by just 0.4% initially (in the same year) and by some 1.5% four years later before – in many cases- fizzling out. There are however caveats. The first is the type of investment, secondly the multiplier effect appears to be stronger in a poor economy and finally whether the investment is funded by direct taxation or borrowing.
    This last point needs clarification. Investment funded through taxation (not borrowing) has a limited multiplier effect and tends not to lift demand, mainly because such schemes are relatively small. However, if they pull in private investment then the multiplier effect kicks in, but as a consequence of the (large relative to the public investment) private investment. The overall effect however is limited.
    And of course being Wales and reflecting recent initiatives, any scheme is likely to be based on a current fixation (see the M4 extension and Wales “success” in life sciences) and vanity projects – repeat parenthesis.
    The report is however disappointing in its failure to address the further fundamental point made by JWR. – where is the recognition of the need to develop home grown businesses? One of the drivers of success in the small nations of Europe has been the commitment to build and develop home grown businesses.
    In an earlier Click on Wales I discussed the importance of enterprise and local business. The statistic missing from the IWA report and which should be repeated over and over again. Evidence suggests that successful enterprise can raise GDP by as much as 5% per year. Anybody listening?

  7. Without the infrastructure, there won’t be businesses. That was the message of the economic conference today.

  8. Groundhog Day! Lots of words and numbers just covering the same old ground without accepting that Wales can never progress while it has 2 millstones round its neck. Those millstones are an unnecessary layer of 3rd rate governance and the braindead multi-million pound social engineering project to create a bilingual Wales which puts a globally useless almost dead language above the business and scientific language of the world – driving investment out and away.

    The North East NUTS1 Region carries neither millstone and it is doing better than Wales. Should anybody be surprised? But Northern Ireland has the unnecessary layer of governance and it is moving towards its own braindead social engineering programme incorporating Gaelige into more and more aspects of public life. Ultimately no good will come from this although it does look like pre-planning to hand Northern Ireland over to Ireland sometime in the future. I’m beginning to think they would now be better off as a united Ireland. The English taxpayers certainly would be better off!

    My expectation is that the North East Region will continue to out-perform Wales and Northern Ireland for precisely these reasons, along with the rest of the north of England covering the North West and the Yorkshire & the Humber NUTS1 Regions.

    According to George Osborne, EUrostat figures suggest that Yorkshire has actually outperformed the whole of France over the last few years when it comes to job creation.

    I spend a fair bit of time in Yorkshire and it certainly looks like a busy place these days while North West Wales continues to look like a graveyard apart from the bloated white eliffants created by the public sector using unsustainable subsidised funding streams. Meanwhile, hardly a week goes by without news of another talented person leaving!

  9. I agree with Karen – education is a key. This is why China has focused on it. My experience of working there and other parts of the world is that education is the foundation of a successful society. In addition, the mindset and thinking of people. After many years of of funding from WDA and Europe etc people will not invest and pay for progress in Wales. They expect everything to be funded and there is wake up call coming. There is far too much inward focus and small thinking. However, with leadership from many places that has courage and integrity that includes a voice from young people, the country can turn round. Yes we can is a good theme but it has to begin with how people think – there has to be a cognitive change first.

  10. Unfortunately duties elsewhere prevented me from attending – and hopefully contributing to – yesterday’s conference. However, my thoughts on the initial recommendations are presented above, summarised perhaps in that I don’t think there’s anything really new, exciting or innovative in the plan.
    There are however two issues raised by other contributors to this blg in which perversely, they in turn reflect lack of anything new with the promotion of out dated and discredited ideas. Firstly, J. Jones, Karen and John Rees assume that the only way forward is through inward investment, that – in Karen’s words – will “flock” to Wales. Really? From where, in what quantity and bringing what?
    John Rees bemoans the demise of the WDA; he is clearly unaware (or unwilling to accept the evidence) that its policy of growth based on inward investment is the root cause of the present problems. It is a fundamental truism – no successful economy was ever built on external ownership.
    Secondly, I did not attend the conference and cannot in all honesty comment on whether it was – as Rhobat Bryn Jones suggests – all about infrastructure. I refer again to my earlier contribution and the evidence that throwing massive amounts of money at grand schemes simply doesn’t work.
    In an American study published last year, researchers looked at the hoped for positive economic effects of infrastructure development; in this case road building. Their findings were sobering. Connecting poor areas to the main highway resulted in GDP growth being reduced by a staggering 18%, relevant to similar poor areas that were not connected. Why? Because it became far easier and speedier for products from outside, richer areas to flood in, thus crowding out businesses (existing and potential) in the area now connected to the highway. Newport M4 bypass please note.

  11. I was surprised to find no mention of: Digital, Cyber, Silicon, Graphene, all of which we are well placed to grow from strong existing positions. This suggest to me that the report is looking more at the traditional ways of growing the economy rather than recognising that there are game changes out there that can be exploited.
    And that’s before we get a Space Catapult in west Wales, attract Trident to Milford Haven and house military units returning from Germany to bases in Wales. All would have a significant impact on our economy, but of course might challenge some in terms of acceptability.

  12. John Walker, the Basque Country has gone from being a rust-bucket area to being one of the richest in Spain. It did this while putting a lot of effort into reviving the ancient Basque language, which after Franco’s oppression was in an even worse state than Welsh. At Hay on Wye the former Basque President set out their success and said that pride in culture and identity was the source of the energy that revived their country. What is the point of economic development, he asked, except to support your culture and improve the quality of life. The trouble with Wales is that that energy is sapped by nay-sayers like yourself, who instead of taking pride in our country and trying to make it better belittle it and its culture at every turn and say we are so hopeless we would be better off being run by someone else. Pity poor Wales while it has citizens like that.

  13. A lot of the report focused on the need for more medium-sized local firms rooted in Wales. It proposed a number of measures to foster these, involving financial support for start-up and succession and a more focused procurement policy by the public sector,particularly in the areas of energy efficiency and generation. I am puzzled therefore by Dr John Ball’s remark that we did not consider the need for home-grown businesses.
    Karen and Hilarie Owen emphasise education as if somehow we had forgotten it. The report emphasizes the central importance of education and training and discusses recent experience, attempted reform and the best way forward.
    Both Dr Ball and Mr Richards are critical of the emphasis on infrastructure. However the report said that infrastructure development was pointless in the absence of an economic strategy that established what was required and where it was needed.
    As to an obsession with England,I do not think any of the policy suggestions were drawn from England. The policy to foster companies and the drive for distributed energy generation were both inspired by Germany. The education systems cited were Finland and Korea.

    I really welcome critical comments but I do have a suggestion: why not read the report before making them?

  14. Mr Hotham, as usual on this website, comments refer to the article, and what the article chooses to emphasise, not to the full report. Having read the online version of the report, a detailed critique would require a lengthy essay, not just a few paragraphs of comments.

    Suffice to say, there is a lot of good stuff in the report. Your comments on the development of local firms – especially giving them greater access to public procurement – are particularly welcome to those of us already on record on the subject.

    The basic problem is that a list of things that would be nice if they happened gets us no further forward. What we need to do is set priorities that may actually lead to something. The promotion of enterprise culture is suggested as such a priority because (1) it will lead on to other benefits and (2) it takes leadership rather than large public expenditure – which we all know is simply not going to be available in the foreseeable future, irrespective of what happens in May, and subsequently in both Westminster and then Cardiff Bay.

  15. I haven’t read the report (yet) but I am encouraged by the interest taken in it. One thing that isn’t mentioned much in the above article is the financial sector, and the financial industries. It occurs to me that if we are to ensure that money is retained in wales and that finance is available for investment in wales in both the public and private sectors then this in an area that needs focussing on. Both a national savings and investment fund, and a national pensions scheme, would be realistic, achievable, and very positive developments that the Welsh government could establish and lead on. If they are correctly established (my vision would be something like a Wales focused version of the ethical investment strategy of the triodos bank) then these new financial institutions could play a significant role in providing the funding and investment for the much needed new small and medium sized enterprises that will help to drive economic growth.

  16. Dr Ball is critical of my observation that population growth is key to future prosperity in Wales yet I was linking this improvement in customer volume directly to the small and micro business ventures that are a major part of the home grown economy.
    Dr Ball asks what these people would bring with them? I’m surprised that I have to explain but……they bring disposable income and the need for goods and services at a fundamental level. Eventually population growth does provide a pool of labour which, if it is large enough, will include people with desirable skills that can be used in larger businesses.
    If I were to set up a manufacturing business in Anglesey and advertise for 40 skilled Lathe operators I would get few job applicants. If I did the same on Dee side I would have hundreds of applicants.
    Wales cannot sit back and establish itself as a country that looks only to its existing population and their progeny to develop enterprise, we must be open and welcoming to inward migration as Scotland has been. Inward investment has, in the past, concentrated on the huge international businesses that require new infrastructure and, inevitably, millions in cash incentives. These firms come….and they go. Individual families come and they stay. Unnoticed they grow local economies, keep schools open, keep pubs and small shops open, give employment to building trades and grow the wealth of communities.

    Wales needs to think small not big.

  17. @J.Jones
    “The key to economic prosperity in Wales is actually rapid population growth.”
    I think that other than by facilitating globally competitive cheap labour conditions or exploiting an extensive, in demand and labour intensive natural resource that suggestion isn’t going to produce a result. I think most likely overall in would result in more people in Wales in poverty/poor.

    “we must be open and welcoming to inward migration as Scotland has been.”
    However less open and welcoming to inward migration you might think Wales has been compared to Scotland, Wales has the fact had significant more recent inward migration than Scotland.

    On the face of it your prescription doesn’t look to me like a cure though some might be happy with the side effects.

  18. That really is a cheap shot, Mr Holtham. As JWR so correctly points out, the contributions to this website provide the salient points; indeed the article that started this thread is very much the executive summary of the full report. And yes, I have read the full report and remain singularly unimpressed, except for the valid points made by Karyl Williams (repeating incidentally some ideas contained in the earlier IWA publication “An Economic Strategy for Wales” 2008) who’s views on developing local business are innovative, practical and sound – which is why his ideas will be ignored by the Welsh Government.
    J.Jones’ response misses the point I made. I am well aware both of the importance of disposable income and the development of local businesses. What I questioned was this continued fixation that any economic development must come from outside, whether its lathe operators in Anglesey or LG in Newport (RIP).

  19. Ah but Dr Ball I wasn’t suggesting that the actual businesses came from outside Wales (although in most communities incomers are more dynamic than the established population in starting new enterprises) what I suggested was that if we entice individuals through supply of housing (for instance) or advertising attractive surroundings in Wales or good schools, then we would build a CUSTOMER base that would support already existing business.

  20. I wonder if we all mean the same thing by ‘infrastructure’? Two elements emphasised in the report are related more to energy than transportation, namely making our building stock energy efficient and moving electricity generation on to a low-carbon basis. The latter can be done either with large scale projects like the Severn barrage, tidal lagoons or nuclear power or by micro-generation and smart grid technology or some combination of the two. The more can be done with distributed micro-generation the better the chance of building up an industry of local firms with the requisite know-how that could later be profitably exported – although, once again, the Germans are off the mark faster than us. In any case, this infrastructure is going to require heavy investment. Any growth strategy is – you can’t get anything for nothing. A question for political debate is how much investment are we prepared to undertake as a country given that it will inevitably come at the expense of current spending in the short to medium run? That assumes of course that credible investment projects can be proposed.

  21. Germany’s undoubted success with its Energiewende is hitting a roadblock because the electricity grid cannot accept evermore renewables. Denmark is the same and our grid already has the same issues, despite us lagging behind with renewables. The grid can be upgraded but at a massive cost and which still doesn’t overcome the intermittency of wind. Energy storage is the key which is why Germany is developing Power to Gas (producing storable & transportable hydrogen and Synthetic Natural Gas, SNG, from renewables) to help drive forward the Energiewende. The hydrogen and SNG can supply fuel cells for ultra-clean & predictable power, heat and transport applications. Huge markets are emerging and Wales can learn from Germany etc to gain early-mover advantages for our economy.

  22. Guto makes a good point but in fact Wales is well placed to expand energy storage in the way that the Dinorwic plant in Llanberis already does. Using water storage at height and release during times of peak load on the grid, combined with the intermittent power generation that comes from renewables being used to operate pumping, is an ideal way to make sense of the resources of Wales.

    What we cannot afford however is to have vital projects vetoed or delayed endlessly by consultation and protest. If increased wealth is what we want we have to push through the infrastructure that enables it to take place. Failing that we could always harness the indignation and hot air generated by protest and politicking.

  23. Delighted to see the importance of increased new housing, retrofit of better energy etc, mentioned here for the variety of reasons given.
    Largely risk averse and cash strapped local authorities are mentioned in the housing context, but there is no mention of housing associations, many of which focus on appropriate risk appetite rather than aversion. They also offer a wide variety of housing types and tenures.
    On a different point, I welcome the fact that it is not part of any Government which has produced this report. The mature, self confident Wales needs to be to “close the gap” needs a stronger civil society that looks beyond just government funded thinking and policy proposals.

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