The competing narratives on Welsh economic performance

Rhys ap Gwilym reflects on a recent symposium on economic policies for peripheral countries

As Professor Kevin Morgan put it, there are two competing narratives of Welsh economic performance. The first holds that, given the hand that we have been dealt, the performance of the Welsh economy since 1999 has been reasonable. The second has it that performance has been risible.

The rival narratives were each voiced during the final session of the Learned Society of Wales’ symposium on ‘Economic Policies for Peripheral Countries’ earlier this month. Jonathan Price, the Welsh Government’s Chief Economist, concluded his presentation by arguing that the statistics tell a simple story: given the skills level and the economic geography of the UK, people have as good a standard of living in Wales as they might reasonably expect. Emyr Jones Parry countered by impugning policy makers in Wales of lacking ambition and aspiration.

So which of these stories is closest to the truth? Should we be content to be bumping along at 72% of UK GVA, consoled by the sense of inevitability? Or should we be seeking to emulate the Irish, Finnish or Basque economies – regions that are geographically, but not economically, peripheral?

The problem of peripherality

Economic theory has come a long way over the past quarter of a century in helping us to understand why some regions support high levels of economic activity whilst others remain comparative backwaters. Indeed, Paul Krugman gained his Nobel Prize in no small part for his work on a core-periphery model in which simple assumptions about the nature of the productive process combine with transport costs to spontaneously give rise to concentrations of development amongst expanses of stasis.

However, as was demonstrated by the disagreement between Prof Ron Martin (University of Cambridge) and Professor Steve Gibbons (London School of Economics) in the very first session of the symposium, there is no consensus on whether the agglomeration of economic activity represents a benign process by which we all get to enjoy the benefits of the associated economies of scale, or whether this benefit is outweighed by the malevolence of the market power inherently associated with those economies of scale.

So is there any disadvantage to being on the economic margins? The Gibbons/Price story holds that we in the periphery do pretty well out of the process of economic agglomeration. We benefit in terms of cheaper goods and services produced in the core as well as from substantial transfer payments. At the same time, we get to avoid the costs of congestion and pollution that those in the core must endure. The logic is clear. If it weren’t true, we would surely all be trooping off across the border for a better life. This is, of course, the same type of ‘no such thing as a free lunch’ condition that is so favoured by neoclassical economists in all types of different settings.

For those of us who don’t accept this story, there is clearly a challenge to explain why the freedom to move is not enough to offset the disadvantages of geographically uneven development. More work needs to be done to formalise the explanations of why uneven development is important. Diagnosing the problem more precisely will help to ensure that the appropriate cures are prescribed.

However, the lack of a clear consensus on the nature of the problem is no evidence for the lack of a problem. Two key concerns arose time and again during the symposium. The first was that the life chances of individuals born in the periphery are limited relative to their peers in the core. The second, unsurprisingly, related to the complementary nature of economic and political power – the inevitability that economic agglomeration goes hand-in-hand with the pooling of political power.

The policy mix

So, if we do care about uneven development and do want to see the economic pie shared more equally across space, what can we do about it? Here the symposium heard numerous accounts of the policies that might prove effective.

Professor Ricardo Hausmann (Harvard University) highlighted the importance of product mix; Professor AnnaLee Saxenian (University of California, Berkeley) highlighted the complexity of successful entrepreneurial ecosystems and the role of the diaspora in forging links in the global economy. Sessions were held on ‘smart specialisation’, human capital, the role of finance and of infrastructure. We heard of the policies underpinning the success of regions such as Silicon Valley, the Basque country and Finland.

The key message that I took away is that there are no straightforward policy prescriptions. Producing a carbon copy of what has been done elsewhere is likely to prove ineffective. Moreover, success requires a complex mix of factors – innovation, skills, access to finance, suppliers and product markets.

To come back to Jonathan Price’s observation, if we want to see a transformation in Wales’ economic fortunes then we need to see a significant improvement in the skills base and a radical change in economic geography.  Economic peripherality is not the same as being on the geographical margin – it is not set in stone. But to radically improve Wales’ economic fortunes will require transforming the country from a peripheral hinterland of the UK, to an economy with more coherent internal linkages and external linkages which are not all mediated through the south east of England.

In the main, this is a long-term project which requires a significant change in culture – the previously mentioned ambition and aspiration. However, it seems to me that there are a few low-hanging fruit that can be harvested. Firstly, there is a major opportunity in Wales for harnessing public procurement to boost local demand. Secondly, we require a development agency, at arms-length from government, with the expertise to identify the key challenges facing the Welsh economy. Its focus should be less on handing out grants and attracting FDI; and more on identifying where market failures need to be corrected, where opportunities exist to invest in infrastructure, and in co-ordinating the business community in Wales to leverage existing strengths and fill the gaps in the product mix.

The LSW symposium has been a great innovation in Wales’ academic culture – bringing together networks from across the globe in Wales to address our needs and theirs. What Wales needs now is similar innovations in its financial, business and political culture.

Rhys ap Gwilym is a Lecturer in Economics at Bangor Business School

7 thoughts on “The competing narratives on Welsh economic performance

  1. The ‘industry’ of education is one that should be less vulnerable to peripherality. Where academic salaries are not high a lower cost of living is attractive. Distance from the centre is less important. Lower living costs for students is a plus. WG could do far worse than step up investment and improve performance across the board building a good base of excellence at primary and secondary level through to making Welsh HE institutions world class. People will move along way to get their children into good state schooling and those that value education to this extent are likely to be dynamic and entrepreneurial which should invigorate the economy.

    Ideally HE funding would be heavily biased towards science/technical subjects producing graduates with prospects of employment beyond minimum wage levels. The country already has its full quota of graduates in tree climbing and animal noises from the University of We’ve just got a bunsen burner.

  2. In no particular order some comments as bullet points as time is limited and I wont bore you with my background credentials. I am a businessman and startup owner with an electronic R&D background but have worked in financial services as well for a large Japanese multinational as well as two Silicon valley backed semiconductor startups with UK R&D operations:

    1. Is 72% of UK GVA the best we can do? absolutely not – anybody that says so should just get out of the way of those who are striving to improve it. The entrepreneurs, business owners, applied academics and business servers.
    2. Is the Welsh economy a peripheral economy – no, it is measured separately from England and Scotland but is part of the Sterling economy that is far from peripheral. The Welsh Government has limited leavers to influence the economy here and needs more particularly in relation to transport and taxation. Please stop calling it a peripheral economy – it isn’t.
    3. We do not spend enough on R&D in Wales particularly in the private sector – it is the key in my view to improving our innovation and giving the companies here the edge they need.
    4. Transport Infrastructure between north and south Wales is truly terrible. In Japan they are developing 375mph train systems and we celebrate the opening of a further mile of tourist Steam train line. It’s pathetic. I’m all for the beauty of stream trains but I want to get from Cardiff to Wrecsam and beyond quickly. I can’t stress this more. How is it I can fly from Cardiff to Anglesey and not Hawarden near Wrecsam? Can someone in government please just think? That plane’s flight path as I understand it passes over Wrecsam so why doesn’t it stop there.
    5. Access to risk capital in Wales could be better but our biggest challenges I feel is we lose our middle sized enterprises time and time again to companies outside of Wales and because we do not necessarily have the sticky R&D that stays we lose production or the operation moves.
    6. Our media in Wales apart from the Western Mail has little interest in business and the economy – the BBC Wales gives the economy very little airtime at all and ITV and S4C are no better. It is a real failing. Their coverage of science is also very poor.
    7. Education in Wales has it’s challenges but I wonder why Science is part of the EST department remit – surely it should come under the Education department. If it did it would bring expertise to the education department and the importance of science to our economy. Let the EST become ET and let it concentrate heavily on transport.
    8. Rural Wales gets a kicking in this symposium – unfairly. The rural Wales is our engine and we don’t see it yet. It is the source of our food, our renewable energy and our clean water and a good deal of our tourism. Look again and measure its output again. What we do need is better roads so that the adde value produce it does generate can get to market quickly and those that want to visit it can get there quickly.

  3. Interesting review but there seems to be an assumption that Wales exists in isolation. What can we do to change Wales, when in fact, Wales is far more forcefully acted upon and determined. Or is that too big a political question for the Welsh policy community?

  4. Can’t really disagree with a lot that has been written here. But as with all things we are jolly good at talking but not so good at doing.

    We’ve been trying for the last 700 years to prove to the people of England that we here in Wales are somehow ‘different’, despite all genetic evidence to the contrary. Just imagine what a difference we could have made if we’d spent this time doing something a tad more useful.

  5. Good to see the economic debate being taking seriously at last, but as other have pointed out the ideas being discussed require a culture shift in political thinking.

    So perhaps the IWA put together an economic manifesto/5 point plan or something similar with the ideas from your recent report and symposium for next year’s Welsh Assembly elections and get the parties standing for election signed up to it as way forward, as it would be a shame for yet another Welsh economic initiative to end up on a shelf gathering dust.

  6. Very interesting.However, I believe two matters need to be added to the debate: the Welsh language and its place in Welsh politics, and the mindset of Old Labour that lives on in the WG. We need to create a better skill set, in science, engineering and management. These are skills where use of English are to the fore: nobody does serious science, engineering or management in the Welsh language. And yet ,it seems to be an aim of the Welsh language political elite to make a greater place for the language in hi tech or commerce? Old Labour fears success, the creation of an ambitious, entrepreneurial culture which may favour an educated, motivated minority or leave the less able behind.
    Wales surely must engage the Greater World, for capital, ideas and personnel from whom to learn skills. That world and ninety percent of the nation’s population speak English, a language in which the Anglophone majority have long demonstrated a special mastery,eg, as teachers, scientists and lawyers.

  7. The opportunities afforded by devolution are not being taken up. We have a governing party that is risk averse and content to do little other than mind the shop in a rather passive way. Small initiatives are trumpeted while large initiatives are talked about then quietly shelved. You would think that being electorally secure Labour in Wales would look to the long term and play for history. Not at all. They are content to preside quietly and try to manage the news. In the words of their hero, Nye Bevan they fail utterly to rise to “the imperious needs of the times”. I do not know why that is but it reflects poorly on the First Minister who is looking increasingly inadequate. The trouble is the public does not trust any of the opposition parties to take a turn in government.
    Academic discussions about the best policies only get you so far. Then you need good politicians to recognise and implement them. And to get them you need an informed and interested electorate. Now I’m depressed enough to head for the pub.

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