IWA Analysis: Where Next for the Foundational Economy?

Over the last two years the IWA has been exploring the foundational economy through a project to develop new ideas for policy makers in Wales. Through a series of reports — on business support, regulation and decarbonisation — that have focused on the range of powers that can be exercised by the Welsh Government and by local authorities, we have addressed how to create new opportunities and support for Welsh businesses, while strengthening the provision of everyday essentials.

Having discussed this topic with a broad spectrum of interested people across Wales, we have found a mixture of support for its general aims and confusion about what it means for policy. As our collaborative project on the foundational economy with CREW comes to an end, this short article will share some of our reflections and illustrate some next steps for anyone who is interested in building on this policy agenda.

There is broad agreement with the analysis of the weaknesses in the Welsh economy

The ever-growing foundational economy literature is a tremendously important contribution to understanding contemporary Wales. It sets out how Wales’ peripherality to bigger markets creates weaknesses when supply chains are long and competitive, and when high value activities are concentrated in knowledge clusters and cities. It highlights how public and private investment often serves to weaken the resilience of many of our most essential services, such as social care, by embedding short-termism and financialisation. 

Throughout our work, we have found a great deal of confusion about what policies are needed to strengthen the foundational economy, even among enthusiastic supporters.

This analysis has a clear appeal to Welsh Labour both as a searching critique of contemporary capitalism and as a reflection on the Wales that they govern. Nonetheless, in our work we have found that it also appeals to the political right’s new-found concerns for community, cohesion and local pride.

COVID-19 has resulted in much wider acceptance of the fact that health and social care, as well as logistics, need sufficient investment and capacity to cope with shocks, while a brewing energy crisis highlights the fragility of market-oriented approach to any failure to secure energy supplies. 

The substantive change this has brought about means that there is now a widespread openness to challenging the orthodox approach to how markets operate in these sectors. This is an opportunity for anyone who can set out an alternative vision for policy makers.

Nonetheless, confusion remains about what can be done

Common recognition of a set of problems has not led to consensus on potential solutions. Throughout our work, we have found a great deal of confusion about what policies are needed to strengthen the foundational economy, even among enthusiastic supporters.

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One area of confusion concerns definitions. The foundational economy is on one hand a description of a series of economic activities that represent the basic requirements of everyday life, such as energy, housing or care, for which demand is non-negotiable and supply is rooted in the places where people live. On the other hand, the foundational economy is an approach to analysis that represents a radical critique of the mechanisms of ownership that drive our contemporary economy, both in terms of foundational sectors but also in relation to other, often high-value, tradeable activities in things like advanced manufacturing. 

These distinctions have generally not been reflected in policy, as the Welsh Government has sought to incorporate the foundational economy into a wider economic development programme that is focussed on growth in a variety of sectors. This has created a tension that will need to be overcome.

Foundational sectors struggle to compete with high-growth sectors for attention and investment

By absorbing the foundational economy into existing sector-based economic development programmes, as evidenced through the 2016 programme for government, the Welsh Government has sought to increase the amount of investment in these sectors, and introduce new types of support that target business acumen, capital and entrepreneurship. 

The foundational economy analysis has important lessons for thinking about the whole economy, as it highlights the insecurity of the kind of jobs that are typically supported through economic development policies, including their low place in global value chains.

However, economic development investments are typically allocated to firms who can demonstrate how they will generate returns on that investment. Sectors like social care are now competing with auto manufacturing for the same pots of money, and while the latter can promise thousands of jobs (whether or not these materialise), businesses in foundational sectors can often offer only a fraction of this in terms of new jobs being created.

The solution to this, as we argued in our work on business support programmes, is to reduce the importance of job creation as a measure of the success of economic development policy. This is where the foundational economy analysis has important lessons for thinking about the whole economy, as it highlights the insecurity of the kind of jobs that are typically supported through economic development policies, including their low place in global value chains. There are good reasons to think about other metrics, and not just to create parity between sectors: doing so would enable greater attention to other factors of productivity, such as innovation, and would create more opportunities for indigenous firms rather than foreign investors. This will be increasingly important as Wales accelerates its transition towards a Net Zero economy.

Nonetheless, real strengthening of the resilience of the foundational economy will require, in the longer term, a much broader base of policy support and investment than economic development can provide. 

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In the longer term, cross-departmental approaches to policy and delivery are needed

Implicit in the foundational economy literature is the argument that policy makers in Wales are often powerless to shape the overall direction of the Welsh economy. This is partly about resources and the devolution settlement, but also reflects Wales’ exposure to global forces, including for basics like food and, as we will all soon be aware, gas. 

Economic development forms a smaller proportion of the Welsh Government’s budget than is the case in many local or city governments in other European countries, highlighting the extent to which economic policy in the UK remains highly centralised. The work funded through this limited budget has to complement a wider government agenda here in Wales as well as aligning with programmes, priorities and funding at a UK level. We are all placing immense pressure on a relatively small directorate in the Welsh Government to deliver prosperity which it is really not resourced to deliver.

Given this, and given the strong link between many foundational sectors and public services, it makes sense for the foundational economy to sit across departmental boundaries. In our work on business support, we called for greater coordination from the centre to ensure that investments in hospitals and colleges are designed in a way that supports the private sector, and particularly the grounded firms that are so important to everyday life. 

But coordination from the centre also needs to be matched with clear expectations. If jobs are not the right measure, then there is a pressing need to develop the metrics that can guide public services towards maximising their wider economic impact. Procurement is part of this, but as we have highlighted in our work on decarbonising the foundational economy, it goes much wider into thinking about how small and medium enterprises can influence design and delivery in areas like skills, innovation and infrastructure. 

We all need to recognise the role of local government

The Welsh Government is the first national government to take up the foundational economy approach, but there are many examples of this kind of thinking that have influenced radical changes in local government. 

For me, the most important lesson of these experiments with capturing more local value has been to reconsider the role, capacity and capabilities of local government.

Alongside the celebrated Preston Model and the Cleveland Model one can also look at  experiments in Oldham and Scotland. All of these examples show local authorities using their extensive relationships with businesses, principally through public procurement, to shape local markets and encourage local firms to invest and improve, while capturing more spend locally. 

For me, the most important lesson of these experiments with capturing more local value has been to reconsider the role, capacity and capabilities of local government. As someone whose whole working life has been under devolution, it is tempting (and easy) to think that the Welsh Government is the level at which we can influence meaningful change. But there is a reason that Preston has grabbed attention where Wales has not, and it is because their experiments are being led from the bottom up rather than the top down. 

This matters because the Welsh Government does not have the same kinds of relationships with businesses as local authorities do. If you own a business, the local authorities approve the planning for your premises, administer your rates and any rate relief, inspect you for health and safety and food hygiene, fix the roads and pavements and fund the buses that bring you your customers. The Welsh Government by contrast engages a (nonetheless impressive) fraction of Welsh firms through business support, and maintains close relationships with key firms through direct investments and in policy discussions through advisory panels. If you are a small business in Wales, it is your council you are going to think of when you have a problem, and your council that you expect to fix it. 

Both the Welsh and UK Governments need to address the unsustainable state of local government finance, as we have called for in our work on regulation and our assessment of the UK government’s ‘Levelling Up’ agenda. But Wales’ policy and public affairs organisations also have a role to play in ensuring that our own work and ideas are helpful for local government leaders and for the officials that are charged with delivery.

You can now read the last in our series of reports on the foundational economy, Turning Rhetoric into Reality: Decarbonising the Foundational Economy.

Dr Jack Watkins is the IWA’s Foundational Economy Project Lead.

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