Skills the only answer for the Welsh economy

Rhys David discovers that where Wales stands in economic terms is much more complicated than would first appear

Rhys David is a trustee of the IWA and writes on economic and business affairs.

Consider these strange, but true facts about the Welsh economy:

  • Individuals with graduate level qualifications in the Heads of the Valleys are marginally more likely to be in employment than in other parts of Wales.
  • When subsidies from the EU and other sources are taken into account, agriculture makes a vanishingly small contribution, less than 0.5 per cent, to Welsh gross value added, a measure of wealth produced (though, of course, the other benefits it offers to life in Wales are still substantial).
  • More than six times as many people were losing their jobs every week in Wales before the recession as will be made redundant when the Passport Office in Newport is scaled back (but at that time more new jobs were also being created to replace them).

Perhaps these statements are not quite up there with some of the weirder facts and figures posted on Strange but True websites. However, they are examples of how perceptions of what is going on in the Welsh economy are sometimes out of kilter with reality. What we do know for certain is that Wales’s Gross Domestic Product relative to the rest of the UK is declining and, therefore, we must all be getting poorer. But are we? No. In fact people in Wales are 21 per cent wealthier, according to official Government statistics, than they were in 1998, about the same as the rise in Scotland and a slightly better performance than the UK as a whole. Disposable income – the money left to spend after tax and property costs have been accounted for – has remained constant relative to the UK figure since 1990.

But surely we must at any rate be falling behind the rest of Europe? No. It would seem again that, on the most impeccable of figures, the money Welsh people have available to spend per head places us roughly one third down a list of EU regions (admittedly, this was four years ago in the period 2004- 2006). Adjusted to take into account different prices in different countries, GDP per head has remained broadly constant at 82-83 per cent of the average for the EU15 (the earliest and wealthiest members). Disposable income stood in that period at £15,127 (it will be somewhat higher now) well down on Hamburg £21,973, or London (£21,397 but ahead of Ireland (£14,378) and Denmark (£12,180).

The explanation is the overall progress of the UK economy, helped by the growth of the City of London. This has brought about a rise in the value of the pound (though it has dipped again since the start of the recession in 2008), boosting the wealth of all parts of the UK relative to our Continental neighbours. There is the rub, however. While in general Welsh people have been getting wealthier, not all of them have. The lot of the rich has improved much faster than the poor over the last 20 years and the gap has been growing.

Because they are drawn from many different sources, are subject to exchange rate fluctuations (when international comparisons are made), or have to take into account different starting positions, economic statistics are often an impenetrable thicket, open to contradictory interpretations. Native Welsh pessimism may also lead us in Wales generally to look at the poorer indicators without noticing our relative position and whether that is weakening or strengthening.

The man with an axe trying to cut through the thicket at a recent IWA seminar was Jonathan Price, chief economist with the Welsh Government. While not disguising the fact that Wales does very badly on many of the indicators of economic progress, he suggested some of the beliefs many of us hold about the Welsh – and indeed the UK – economy are misplaced.

Take housing, for example. Few would disagree that we invest too much money in over-priced housing in Britain. But is that the whole story? Even more than Britain, Spain has seen the bursting of a serious house price bubble but the problems are completely different in the two countries. Spain has invested more than it can afford in building new housing. In contrast, Britain has one of the worst EU records for investing in new housing. People in Britain have put too much money into existing stock, paying excessive prices for properties already built. The Spanish problem may be more serious now but at least they have lots of new housing in waiting.

But let’s come back to the GDP/disposable income conundrum. Welsh GDP has been declining relative to the rest of the UK since 1981, falling over that period from 84 per cent to 74 per cent in 2008. However, at the same time disposable income has stayed  at close on 90 per cent of the UK figure. The two should work in tandem unless we have achieved an alchemist’s dream of taking the same amount in income from fewer or less valuable goods and services.

In fact, the seminar was told, the answer may lie in the composition of the goods and services – smaller output from big manufacturing plants producing the high return on capital needed to finance investment, but similar income for individuals from the newer jobs in less heavily capitalised small and medium sized enterprises which have in many cases replaced employment in larger enterprises. In other words much of the hit to GDP has been taken by profits – which in any case largely leave Wales – rather than by incomes. Incuding part-time working this would also help to explain why the significant jobs growth in Wales over recent years has not produced the hoped-for impact on Wales GDP per head. The answer lies in the composition of employment in modern Wales.

The size of the Welsh GDP relative to other regions is also influenced by the large number of retirees in the population. Retired people may – or may not – be income wealthy but whatever their condition they are mostly no longer making a significant contribution to GDP creation. If we continue to have an older profile than the rest of the UK we will probably never catch up.

Two long term processes are taking place that emerge very clearly from Welsh economic statistics. In all economies, as individuals become wealthier a bigger proportion of their income goes on services – meals in restaurants, entertainment, transport and travel, hairdressing and personal grooming, gardening, decorating and the like. Over time, too, the shape of the economy and the pattern of employment in Wales has converged with that of the rest of the UK and other wealthy parts of the EU.

Between 2001 and 2007 employment in finance and business services in Wales grew by 29 per cent,  whereas mining and quarrying was down 38 per cent and manufacturing by 16 per cent where there has been a further steep drop since the start of the present recession. Public administration, (another service sector) was up by 26 per cent.

Manufacturing’s share of GVA fell by 10 percentage points to 17.9 per cent in 2007 in Wales and by 8 percentage points in England to 12.7 per cent. However the fall has been steeper in the UK and Wales than just about anywhere else, apart from Ireland. But this still leaves Wales roughly mid-table among industrialised countries. Mirroring the shift away from manufacturing have been increases in the numbers employed in management and professional occupations and a decline in the numbers in lower skilled work such as process plant and machine operatives.

So, should we be sanguine and accept that more powerful forces than we can influence are at work? Should we just allow these changes – enhanced as they are by the impact of globalisation – to happen, fully expecting it all to turn out all right in the end as Wales just becomes more like everywhere else? The answer is Yes and No.

We do have leverage in one area – skills. Wales has large numbers of working age individuals with few or in some cases no qualifications and their employment prospects will remain bleak. Employers requiring large numbers of people with basic skills will never come back to Wales.

The graduate in the Heads of the Valleys will find work – 88 per cent of those of working age in the area are in work compared with an average for the population of all skills throughout Britain of 70 per cent. Of the unskilled and unqualified only 32 per cent in the Valleys and fewer than 50 per cent in Wales or the UK are in work.

This is the problem Wales must solve urgently. These are the people that the Government’s new welfare approach is trying to get back into work one way or another. It will not be easy but it must be done.

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