Roots and Remedies of the Welsh Growth Collapse

Offa’s Gap
Roots and Remedies of the
Welsh Growth Collapse
A Discussion Paper
Plaid Cymru’s Economic Commission
Offa’s Gap Page
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You can contact the Commission:
By email: [email protected]
By post: The Economic Commission, Plaid Cymru. Anson Court, Atlantic Wharf, Cardiff. CF10 4AL
By phone: 029 2047 2272
www.plaidcymru.org/economy
Offa’s Gap Page
Offa’s Gap
Roots and Remedies of the
Welsh Growth Collapse
A Discussion Paper
Plaid Cymru’s Economic Commission
3
Offa’s Gap Page
4
Introduction
The Welsh economy is in crisis.
The collapse in its economic output since 2007 ran in parallel with the Great Recession. But its
problems run much deeper. The Welsh economy has been growing slower relative to its historic trend
growth and that of the UK economy for the last two decades. While the inherited problems of the
Welsh economy, those associated with its industrial legacy, are well understood, this paper seeks to ask
the simple question: what made a bad situation worse?
The combination of our economic history and our recent experience means Wales faces a dual
developmental problem. As an economy and a society that was at the vanguard of the Industrial
Revolution Wales displays many of the social and environmental scars that are the by-products of rapid
economic growth based largely on natural resource-based industries. Wales, in common with most of
the northern hemisphere, is in many ways having to confront the problems and challenges of
uneconomic growth or over-development. Overcoming the problems associated with this will be very
much the focus of our sister Commission on Sustainable Communities.
Wales’ other developmental problem flows from the uneven nature of development itself, both
historically and geographically. Wales, once a powerhouse of economic progress, now finds itself at the
bottom of the UK’s and, increasingly, the EU’s prosperity league tables. We are well on the way to
becoming the most under-developed land in the advanced post-industrial world.
The first step in solving any problem is establishing its nature and its scale. This means having some
measure that allows us to compare performance over time and contrast with the experience of other
countries. In this report we use regional output as measured by Gross Domestic Product (GDP)
historically and more recently by Gross Value Added or GVA (which was previously known as GDP at
basic prices). This is not a perfect metric for measuring social and economic welfare for reasons that
are now well understood. GVA does not acknowledge the effects on the prosperity of citizens of a
given country of having an unequal distribution of income or allowing the transfer of resources to
foreign individuals through exports or the profits of multinational firms. GVA measures some bad
things, e.g. clean up costs from a pollution incident, as positives, and fails to measure other bad things,
e.g. the original pollution incident, as costs. The relationship between happiness and GVA per capita,
though by some measures positive, is a good deal more complex than the general obsession with
economic growth would suggest.
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Despite its imperfections, however, GVA remains the single most useful indicator in seeking to
evaluate economic performance – though other broader indices, like the Index of Sustainable
Economic Welfare, are undoubtedly better tools for measuring genuine social and economic wellbeing.
In the specific context of Wales, where we are seeking to understand the dynamics of underdevelopment, GVA remains a key benchmark in the same way that poverty for an individual is
measured primarily in terms of income. Particularly because of its transparency and uniformity as a
measure of economic activity, GVA is also the best available method we have for comparing economic
performance over time and across geographies.
Our starting point in this Commission is the belief that raising Welsh GVA per capita has to be a key
strategic goal of Welsh economic policy – and that the abandonment of an explicit target by the Welsh
Government, or the shift to a measure that includes central government transfers, is an acceptance of
failure Wales can ill afford.
Our focus in this report is on diagnostics: What is wrong with the Welsh economy, what are the
symptoms, what is the syndrome, what is the underlying cause? The important thing, of course, is to
cure the problem. Growth therapeutics will become the focus of the Commission over the course of
the next four years. With the launch of this report we are inviting everyone in Wales to participate in
this essential process of discovering together the ideas and strategies that will offer our country a better
economic future. There can be no monopoly on good ideas in this regard. Indeed only by pooling our
intelligence can we hope to begin the task of charting a different course.
Dr Eurfyl ap Gwilym
Adam Price
Co-Chairs - Plaid Cymru’s Economic Commission
Cardiff, July 2012
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Offa’s Gap: the Welsh growth crisis
Offa’s Dyke, that mound of earth still visible and built by an eighth century Saxon King, remains as a
metaphorical border between England and Wales. But in the late 20th century a new dividing line came
to be associated with the two countries: a gap in relative prosperity. Welsh GVA per capita1 is currently
just above 73% of the UK average, and Wales lies at the bottom of the UK prosperity league table (12th
out of 12 UK Standard Regions). This new chasm in economic realities we call “Offa’s Gap”.
In some sense this new divide represents a long historic unwinding from a high-point when Welsh coal
powered and Welsh slate roofed the world. The economic historian Nick Crafts has estimated that
Welsh income per head in 1891 was 96.2% of the UK average.2 Since then Wales has experienced a
century of relative decline, in particular in the inter-war period as coal was supplanted by oil as the
major fuel of the modern economy
100
95
GDP at Factor Cost
GDP at Basic Prices
90
85
80
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1955
1931
1911
70
1891
75
1871
as a % of UK average (excluding Continental
Shelf)
Welsh GDP per capita, 1871-2010
Source: 1871-1911 (Crafts, 2005); 1954-2009, CSO/ONS
Figure 1: Post-war Recovery and Recent Decline
Yet, as we see from Figure 1, by 1971 the Welsh economy, which had benefitted from some form of
regional policy designed to diversify its economic base from the 1930s on, had recovered much of its
relative position. Excluding the exceptional years 1974, 1980/81 and 1985, which were all to some
extent marred by the impact of major industrial disputes in the staple coal and steel industries, the
Residence-based GVA at current basic prices
Nicholas Crafts, 2005. "Regional GDP in Britain, 1871-1911: Some Estimates," Scottish Journal of Political Economy,
Scottish Economic Society, vol. 52(1), pages 54-64, 02.
1
2
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Welsh economy for almost twenty years, between 1971 and 1988, remained in the 85%-90% range
relative to UK GDP per capita. Indeed in the latter half of the 1980s Welsh GDP growth was the
highest of all UK regions (see Figure 2).
12
Regional Growth, real GDP per head
10
8
4
2
-4
1990
1989
1988
1987
Lowest Regional
Growth
Highest Regional
Growth
Wales
-6
-8
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
-2
1973
0
1972
% change
6
Source: ONS
Figure 2: the 1980s Resurgence
During the 1980s the Welsh Development Agency, formed in 1977, achieved considerable success in
attracting Foreign Direct Investment, with Wales consistently out-performing other parts of the UK.
In July 1992 the Welsh unemployment rate fell below the UK average for the first time in living
memory, a symbolically important result that was surpassed a year later when Welsh unemployment fell
below that of the South East of England. By the mid-1990s most economic forecasters predicted a
decade of superior economic growth with Wales continuing to narrow the gap with the rest of the UK.3
Wales’ actual economic performance since then has been dismal. Welsh GVA per capita growth was
significantly below that of the UK as a whole in all but two of the years between 1990 and 20094.
As
can be seen from Figure 3 the general trend of Welsh growth tended to follow that of the UK economy
until a marked growth deceleration experienced between 1996 and 1999 that was responsible for a
particularly pronounced deterioration in relative Welsh prosperity. It’s since this mid-90s turning point
– a modern ‘growth climacteric’ - that Offa’s Gap has opened up.
3 Alden, J. (1996), “The transfer from a problem to a powerful region”, in: J. Alden and P. Boland, Regional Development
Strategies: A European Perspective, Kingsley/Regional Studies Association.
4 using the 1989-2009 continuous record
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Real GVA Growth, 1990-2009
5
4
% annual change
3
2
1
UK
0
Wales
-1
-2
-3
-4
Source: ONS, author's calculations
Figure 3: The 90s’ Growth Collapse
Figure 4 shows the discrepancy in growth rates between Wales and the UK from 1972 to 2009. While
the 1970s and 1980s were characterized by volatility in relative performance, the downswings were
generally matched by periods of resurgence. Since 1996, however, the Welsh economy has been in a
period of almost continuous relative decline.
Welsh/UK Growth Rate Differential, 1972-2010
6
4
-4
-6
-8
Figure 4: A decade and a half of decline
Source: ONS, author's calculations
2010
2008
2006
2004
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
-2
1976
0
1974
2
2002
GDP at factor cost
GDP at basic prices
1972
Welsh Nominal Growth Rate - UK Nominal
Growth Rate
8
Offa’s Gap Page
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The compounded average growth rate (CAGR) for Welsh GDP per capita between 1971 and 1990,
1.96%, was almost identical to the UK rate of 1.99%. Over the succeeding two decades, however, a
gap has opened up with Welsh income per capita growing at a rate of just 1.25% compared with 1.87%
for the UK as a whole. In cumulative terms this 0.6% gap meant that while the Welsh economy pretty
much matched the UK economy pound for pound with a real terms increase income of 46% versus the
UK’s 47% between 1971 and 1990, over the succeeding period, 1991-2010, Welsh income growth was
just 27% compared with the 42% registered by the UK as a whole. The cost of this modern Offa’s
Gap to every person in Wales– the amount of additional income per capita lost by the failure to keep
up with the UK economy – amounts to £1850 a year.
A key fact to grasp from this analysis is that Welsh economic growth over the last two decades is lower
not just in geographic terms, relative to the rest of the UK, but also historically, when compared to our
own past economic performance. Where previously the performance of the Welsh economy had
generally followed the growth trajectory of the UK economy, these paths diverged markedly from the
late 90s onwards. This is best captured by Figure 5 that shows the rolling average of economic growth
for the two economies over the preceding five years. Up until 1992 the smoothed growth patterns of
the Welsh economy and the UK economy are almost perfectly correlated (with a coefficient of 96%),
but this falls by a quarter in the following years. From 1996 the Welsh economy has been on a very
different track.
6
Real GVA Growth, Five-year Rolling Average
5
Wales 5yr
average
4
%
3
2
1
0
1975
1980
1985
1990
1995
2000
‐1
‐2
Figure 5: The Great Divergence
Source: ONS, author's calculations
2005
2010
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One of the most common explanations for this deterioration in Wales’ relative economic fortunes is
the boom in financial services and other high value-added activity concentrated primarily in London.
Welsh GVA per capita did fall in relation to London GVA per capita from 53.73% in 1989 to 43.4%
two decades later. But it also fell compared to the Rest of the UK (excluding London and Wales) from
88.46% to 79.91% in 2009. In actual fact the London effect is only responsible for a little over a third
of the 10-point decline in Welsh GVA per capita relative to the UK. Most of the decline in Welsh
economic growth is explained by its failure to keep pace with the UK as a whole not London in
particular. If Wales had achieved the same growth rate as the mostly post-industrial extra-London UK
economy then GVA per capita in 2009 would be 80.7%, not, as it turned out, 74.3% of the UK
average. Blaming the rise of the City of London directly for all the woes of the Welsh economy would
appear to be misplaced – though its indirect influence on wider UK policy may have played a bigger
role.
Placing the collapse in the Welsh growth rate in some sort of historical perspective is hampered by the
lack of GDP data before the mid-50s. With this in mind economic historians Frank Geary and Tom
Stark have developed historical GDP estimates stretching back to 1901.5 By their estimate, Welsh
GDP as a share of the overall UK figure has fallen as much over the period 1991-2007 as it had done in
the previous 60 years. In relative terms, as measured by economic output at least, the last twenty years
is the worst period in Welsh economic history for which data exists. The inter-war period and its
aftermath, which through collective memory of mass unemployment and emigration looms large in the
Welsh imagination, saw a much smaller decline in Wales’ relative position.
5
Frank Geary and Tom Stark (2011), Estimates of Regional GDP in the United Kingdom, unpublished Offa’s Gap Page
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Wales' Share of UK GDP, 1901-2007
4.8
% share of UK GDP
4.6
4.4
4.2
4
3.8
3.6
3.4
1901
1911
1921
1931
1941 1951 1961 1971
Source: Geary and Stark (2011)
1981
1991
2001
Figure 6: The Arc of Decline
The decline in relative Welsh prosperity is not a purely domestic phenomenon limited to our decline in
relation to the Rest of the UK. Wales has also undergone a rapid phase of deterioration in its economic
ranking internationally. Figure 7 shows Welsh per capita GDP relative to the EU average over the
fifteen year period to 2009. The 13-point slide in the Welsh position relative to the EU is considerably
worse than its 5-point slide relative to the UK in the same time period. Within the entire European
Union, only the Walloon region of Belgium equalled Wales’ rate of relative decline. The UK as a whole
by contrast dropped just two points relative to the EU-27 over the same period – down from 114% to
112%.
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Welsh GDP per capita as % of EU-27 average
PPS per inhabitant as % of the EU average
95
93
91
89
87
85
83
81
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
79
Source: Eurostat
Figure 7: The Sick Man of Europe
Across the European Union a strong tendency towards economic convergence can be observed with
the poorest regions in general growing much faster and the richer regions growing more slowly. Figure
8 illustrates this trend by mapping NUTS 1 regions’ starting income per capita in 1995 (measured on a
logarithmic scale) against their compounded nominal growth over the fourteen years to 2009. The
downward slope of the trend-line shows quite a strong negative relationship between starting income
and growth rates i.e. it confirms the convergence effect. The Scottish economy’s growth rate of 3.1%
over this period is almost exactly as predicted by its level of income given the simple convergence
equation. Some regions buck the trend, however. London is among those already rich regions that are
getting even richer in relative terms. Wales is in the least favourable quadrant of poorer than average
regions that are getting even poorer in relative terms. Indeed, Wales’ position over this time period as
having the worst economic growth of any poorer than average region means it can be legitimately
described as the worst performing economic region in the whole of the EU.
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Compound Annual GVA growth rate, 1995-2009 (current prcies,
PPP per inahbitant)
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
R² = 0.49745
1.0%
0.0%
8.0
8.5
9.0
9.5
10.0
10.5
11.0
Ln (GVA, PPP per inhabitant), 1995
Figure 8: Wrong Side of the Tracks
Source: Eurostat, author’s calculations
It hasn’t always been this way. For most of the 20th century Welsh economic growth has generally
followed that of the advanced industrialised world. It is only in the last fifteen years or so that Offa’s
Gap has opened up, not just with the rest of the Island of Britain but more worryingly still, increasingly
with the rest of the world. Wales’ current trend rate of growth in real GDP per capita of between 1.2
and 1.5% is well below the roughly 2.0% long-run growth rate of the UK and most high-income
countries. Figure 9 extrapolates the effect of this divergence on income per capita from now until midcentury using long-term projections published by PriceWaterhouseCoopers.6 Projections are merely
that: predictions based on current and recent performance. They are by no means inevitable. But what
we can say is that the Welsh economy, which now occupies a position towards the lower end among
the advanced economies, will likely be overtaken by Russia, Mexico, Turkey and Argentina before midcentury on current trends and cease to be classed as a high-income country, when considered
independently, within about twenty years.
6
John Hawksworth and Gordon Cookson, The World in 2050, PwC, 2011
Offa’s Gap Page
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Figure 9: The Welsh economy in 2050
In trying to understand the underlying reasons for the Welsh Growth Collapse we are severely
hampered by the lack of reliable and comprehensive data. Analysing GDP with reference to its
component parts is simply not possible in many cases as time series data in a sufficiently disaggregated
form is simply not available. The expenditure-based formula for GDP:
Y= C (private consumption expenditure) + I (private investment expenditure) +
G (Government consumption and investment expenditure) + X-M (Exports –
Imports)
Offa’s Gap Page
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is difficult to reproduce for Welsh GDP as we lack any official figures for international trade in
services, for investment (despite the publication of regional gross fixed capital formation statistics being
a legal requirement) and intra-regional trade in goods and services within the UK. We do, however,
have figures for gross fixed capital formation for the critical period 1996-2000 and they give us some
insight to the fall in the economic growth rate during that five year period.
Chart 1: Welsh GDP (expenditure method)
Identifiable
Government
expenditure
Non-identifiable
Government
expenditure (within
Wales)
Consumer expenditure
Private gross fixed
capital formation
Net foreign goods
exports
Net foreign services
exports
GDP
Residual - Net exports
of goods and services
to rest of the UK
£million, current prices
1996
1997
1998
1999
2000
8196
8293
8613
8938
9521
880
18562
850
18883
920
19320
855
19937
995
20,137
4671 (e)
5305 (e)
6062
5674
5001
2513
2155
1485
805
1335
-1001 (e)
-956 (e)
-1082 (e)
-1286 (e)
-1365 (e)
27518
28672
29787
30736
31898
-6303
-5858
-5531
-4187
-3726
Source: UK Treasury PESA annual report, various years; Regional Trends, various years; ONS statistics on sub­national GFCF, 2003; HMRC Regional Trade Statistics; author’s calculations What is clear from the figures is that the relative decline in Welsh growth during this period was driven
by problems in the business sector. Government expenditure (identifiable and non-identifiable
expenditure within Wales on government services) increased by about £1.5 billion in nominal terms
over the period, though at a slightly slower rate than the UK as a whole probably due to the effects of
Barnett Convergence. Welsh household consumption also declined relative to the UK as a whole
during this period. There may have been some effect from the fact that house prices in Wales, and the
potential for equity release which drove some of the consumption boom during this period, grew at a
slower rate relative to the south east of England. However, the impact of this slower growth is dwarfed
by the fall of £1.7 billion in net exports (extra UK) between 1996 and 1999. This fall in goods exports
amounts to 6% of Welsh GDP, which is the same amount by which Welsh GDP fell relative to the rest
of the UK during the latter half of the 90s.
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This snapshot – and it must be stressed that the figures contained here can only be indicative – does
tend to confirm the importance of the export base as a key driver of economic development. The
central role of those industries producing goods and services for markets outside the region to
understanding the growth process was first proposed by the American economists Charles Tiebout and
Douglass North in the 1950s. The Hungarian-born Cambridge economist, Nicholas Kaldor, who was
to become the architect of British regional policy under the Wilson Labour governments, merged this
idea with Gunnar Myrdal’s concept of “cumulative causation”. This model of regional growth stressed
not just the short-run demand stimulus of an increase in exports but also the more long-term virtuous
circle of increasing returns to scale, and the productivity gains resulting from greater output (the socalled Verdoorn effect). The British economist A.P. Thirlwall also proposed a regional version of his
balance of payments constraint, which essentially meant that a region’s long run rate of growth
depended on the ratio between its growth in exports and the income elasticity of its imports. A region
with sluggish exports and a tendency to import high income elasticity manufactured goods or services
would experience lower economic growth.
There is evidence for a collapse in productivity in the late 90s that would be consistent with the
Verdoorn effect. Labour productivity in Wales was relatively high and grew relatively fast during the
1980s and early 1990s. When measured by gross output per employee Wales had the highest
productivity in the UK between 1984 and 1996.7 When measured by gross value added per employee,
Welsh labour productivity was lower (because of the effects of a higher than average level of
intermediate outputs) but still remained above the UK average between 1987 and 1996. Figure 10
shows figures for productivity growth over the period 1979-1998 which on both measures of labour
productivity show a stronger than average performance between 1979 and 1994.
However, figures from this Welsh Government study by the respected Scottish economist Richard
Harris using detailed and previously unavailable statistics from the most comprehensive dataset
available to researchers, the Annual Respondents Database, show a precipitous decline in the 1994-98
period. Harris’ figures suggest an average annual reduction in gross value added in manufacturing of
some 18.5%, and a dramatic reversal of Wales’ relative position, from approximately 40% above the
UK average to 20% below in just five years.
R. Harris, (2006), Labour Productivity Growth in Wales 1990-1998: Evidence Based on the Annual Respondents Database:
Department of Economics and Finance, University of Durham (mimeo).
7
Percentage change per annum
Offa’s Gap Page
17
10
5
GVA per worker, Wales
0
‐5
1974‐79 1979‐84 1984‐89 1989‐94 1994‐98
GVA per worker, UK
‐10
Gross output per worker, Wales
‐15
Gross output per worker, UK
‐20
Source: Harris (2006)
Figure 10: Real productivity growth in manufacturing
Published datasets provide a less dramatic picture of a standstill in real Welsh GVA per job in
manufacturing rather than the massive fall suggested in Harris’ work, together with a steady decline
relative to the rest of the UK. But there are other indications of a significant shock to the business
sector during this period. The late 90s Welsh growth climacteric coincided with a precipitous decline in
Welsh business profitability. Gross Operating Surplus – which includes income not derived from
wages – had a higher share in Welsh GVA than the UK as a whole at the beginning of the 1990s but
collapsed in the middle of the decade and is now 5% lower than for the UK.
Gross Operating Surplus
44.00%
42.00%
% GVA
40.00%
38.00%
Wales
UK
36.00%
34.00%
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
32.00%
Figure 11: The Welsh Profits Crisis
Source: ONS
Offa’s Gap Page
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Wales – for these purposes, an “economic region” not a nation-state – is more vulnerable to the effects
of exports on its economic growth than the UK as a whole. This follows from the fact that the Welsh
economy is more “open” i.e. the share of exports and imports (including those to the rest of the United
Kingdom) are much larger than that of the UK, whose domestic economy is relatively more important.
Allied to this is the fact that the Welsh Government has none of the policy levers available to a national
government – currency depreciation, fiscal or monetary stimulus – in responding to an exogenous
shock. Without accompanying transfer payments the only short-term response possible is a reduction
in income levels.
There is strong evidence suggesting the Welsh economy suffered a major economic shock in the latter
half of the 90s, the effects of which were to be long-lasting. The roots of this shock lie to some extent
in the policy of non-intervention in the currency market that led to what some commentators regarded
as an over-valuation in the pound. Figure 12 shows the exchange rate of the Pound against the Euro,
and prior to its introduction the basket of European currencies that made up the European Currency
Unit. The pound appreciated by around 25% for a period of 11 years between 1996 and the onset of
the financial crisis.8 This period of over-valuation – fuelled by the strong performance of the City of
London in the export of financial services and in the attraction of inflows of capital and invisible
earnings – led to a deteriorating trade balance in goods, and a haemorrhaging of jobs in the
manufacturing sector. It was Wales’ particular misfortune that this period of over-valuation proved
even more painful than a similar period of over-valuation in the early 1980s as it coincided with the
entry into first the European Economic Area and then the EU of low-wage but relatively high-skilled
former Communist countries in Central and Eastern Europe.
8 It should be noted that this pattern of appreciation was specific to the Euro-zone are. The pound began to appreciate
much later against the dollar in the period 2002-2007. Offa’s Gap Page
1.000000
Period of Appreciation 0.900000
0.800000
Pounds per Euro/ECU
19
0.700000
0.600000
0.500000
0.400000
0.300000
0.200000
0.100000
1990M01
1990M10
1991M07
1992M04
1993M01
1993M10
1994M07
1995M04
1996M01
1996M10
1997M07
1998M04
1999M01
1999M10
2000M07
2001M04
2002M01
2002M10
2003M07
2004M04
2005M01
2005M10
2006M07
2007M04
2008M01
2008M10
2009M07
2010M04
2011M01
0.000000
Figure 12: Sterling’s Costly Decade
Source: Eurostat
Against this backdrop the recovery in Welsh manufactured exports post 1999 is impressive. Figure 13
shows a 102.6% increase in total exports, at current prices, over the period 1996-2010.
2011Q2
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
14000000
13000000
12000000
11000000
10000000
9000000
8000000
7000000
6000000
5000000
4000000
1996
'000s (pounds sterling, current prices)
Total Welsh Exports in Goods
Source: HMRC
Figure 13: Welsh Exports Rebound
Wales’ share of total UK exports (excluding the 15% of total UK exports for which no geographic
designation is possible) has risen from 4.09% in 1996 to 5.52% by the second quarter of 2011. This
compares with Wales’ resident population share of 4.83 %.
Offa’s Gap Page
20
6.00%
5.50%
5.00%
4.50%
2011Q2
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
4.00%
1996
% of UK Total (excluding non­identifiable) Welsh Exports as a share of Total UK Exports (Goods)
Source: HMRC
Figure 14: Wales, Export Leader
The success of the Welsh export sector is demonstrated in Figure 15 that shows the index of goods
exported over the last fifteen years. Wales over this period has powered ahead, outstripping export
growth in the rest of the UK and particularly in comparable economic regions like Scotland whose
export volumes have been stagnant.
Index of Goods Exported
230
Index, 1996=100
210
190
170
Wales
150
UK
130
Scotland
110
90
70
Source: HMRC
Figure 15: Wales, Export Champion
A slightly less positive picture emerges when we examine the composition of Welsh exports. Since
1996 Welsh exports have become considerably less diversified. In 1996 seven sectors registered a share
of 5% of total exports or above. By 2010 this had fallen to just three, with two sectors, petroleum
0%
00 Live Animals Other Than Animals Of Division 03
01 Meat & Meat Preparations
02 Dairy Products & Birds Eggs
03 Fish,Crustaceans,Molluscs & Aq.Inverts & Preps Thereof
04 Cereals & Cereal Preparations
05 Vegetables & Fruit
06 Sugar, Sugar Preparations & Honey
07 Coffee, Tea, Cocoa, Spices & Manufactures Thereof
08 Feeding Stuff For Animals (Not Inc.Unmilled Cereals)
09 Miscellaneous Edible Products & Preparations
11 Beverages
12 Tobacco & Tobacco Manufactures
21 Hides, Skins & Furskins, Raw
22 Oil Seeds & Oleaginous Fruits
23 Crude Rubber (Including Synthetic & Reclaimed)
24 Cork & Wood
25 Pulp & Waste Paper
26 Textile Fibres Not Manufactured & Their Waste Etc
27 Crude Fertilizers & Crude Minerals (Exc Fuels Etc)
28 Metalliferous Ores & Metal Scrap
29 Crude Animal & Vegetable Materials N.E.S.
32 Coal, Coke & Briquettes
33 Petroleum, Petroleum Products & Related Materials
34 Gas, Natural & Manufactured
35 Electric Current
41 Animal Oils & Fats
42 Fixed Vegetable Fats & Oils, Crude,Refined,Fractionated
43 Animal Or Vegetable Fats & Oils, Processed, & Waxes
51 Organic Chemicals
52 Inorganic Chemicals
53 Dyeing, Tanning & Colouring Materials
54 Medicinal & Pharmaceutical Products
55 Essential Oils & Perfume Materials; Toilet Preps Etc
56 Fertilizers (Other Than Those Of Group 272)
57 Plastics In Primary Forms
58 Plastics In Non-Primary Forms
59 Chemical Materials & Products N.E.S.
61 Leather, Leather Manufactures N.E.S & Dressed Furskins
62 Rubber Manufactures N.E.S.
63 Cork & Wood Manufactures (Excluding Furniture)
64 Paper, Paperboard & Manufactures Thereof
65 Textile Yarn, Fabrics, Made Up Articles Etc
66 Non-Metallic Mineral Manufactures N.E.S.
67 Iron & Steel
68 Non-Ferrous Metals
69 Manufactures Of Metal N.E.S.
71 Power Generating Machinery & Equipment
72 Machinery Specialized For Particular Industries
73 Metalworking Machinery
74 General Industrial Machinery & Eqp. & Machine Pt.N.E.S.
75 Office Machines & Adp Machines
76 Telecomms & Sound Recording & Reproducing App. & Eqp.
77 Ele Machinery, App & Appliances & Ele Pt Thereof N.E.S.
78 Road Vehicles (Including Air Cushion Vehicles)
79 Other Transport Equipment
81 P/Fab Buildings;Sanit.,Plumbing,Heating &Lighting Fixt.
82 Furniture & Parts Thereof; Bedding, Mattresses Etc
83 Travel Goods, Handbags & Similar Containers
84 Articles Of Apparel & Clothing Accessories
85 Footwear
87 Professional, Scientific & Controlling Ins & App N.E.S.
88 Photographic & Optical Goods, N.E.S.; Watches & Clocks
89 Miscellaneous Manufactured Articles N.E.S.
9 Commodities not classified elsewhere;
Offa’s Gap Page
Source: HMRC
Figure 16: Welsh Good Exports by Sector, 1996
21
products, and power generating machinery and equipment, responsible for almost half (47%) of total
Welsh exports (see figures 16, 17 and 18).
30%
25%
20%
15%
10%
5%
0%
00 Live Animals Other Than Animals Of Division 03
01 Meat & Meat Preparations
02 Dairy Products & Birds Eggs
03 Fish,Crustaceans,Molluscs & Aq.Inverts & Preps Thereof
04 Cereals & Cereal Preparations
05 Vegetables & Fruit
06 Sugar, Sugar Preparations & Honey
07 Coffee, Tea, Cocoa, Spices & Manufactures Thereof
08 Feeding Stuff For Animals (Not Inc.Unmilled Cereals)
09 Miscellaneous Edible Products & Preparations
11 Beverages
12 Tobacco & Tobacco Manufactures
21 Hides, Skins & Furskins, Raw
22 Oil Seeds & Oleaginous Fruits
23 Crude Rubber (Including Synthetic & Reclaimed)
24 Cork & Wood
25 Pulp & Waste Paper
26 Textile Fibres Not Manufactured & Their Waste Etc
27 Crude Fertilizers & Crude Minerals (Exc Fuels Etc)
28 Metalliferous Ores & Metal Scrap
29 Crude Animal & Vegetable Materials N.E.S.
32 Coal, Coke & Briquettes
33 Petroleum, Petroleum Products & Related Materials
34 Gas, Natural & Manufactured
35 Electric Current
41 Animal Oils & Fats
42 Fixed Vegetable Fats & Oils, Crude,Refined,Fractionated
43 Animal Or Vegetable Fats & Oils, Processed, & Waxes
51 Organic Chemicals
52 Inorganic Chemicals
53 Dyeing, Tanning & Colouring Materials
54 Medicinal & Pharmaceutical Products
55 Essential Oils & Perfume Materials; Toilet Preps Etc
56 Fertilizers (Other Than Those Of Group 272)
57 Plastics In Primary Forms
58 Plastics In Non-Primary Forms
59 Chemical Materials & Products N.E.S.
61 Leather, Leather Manufactures N.E.S & Dressed Furskins
62 Rubber Manufactures N.E.S.
63 Cork & Wood Manufactures (Excluding Furniture)
64 Paper, Paperboard & Manufactures Thereof
65 Textile Yarn, Fabrics, Made Up Articles Etc
66 Non-Metallic Mineral Manufactures N.E.S.
67 Iron & Steel
68 Non-Ferrous Metals
69 Manufactures Of Metal N.E.S.
71 Power Generating Machinery & Equipment
72 Machinery Specialized For Particular Industries
73 Metalworking Machinery
74 General Industrial Machinery & Eqp. & Machine…
75 Office Machines & Adp Machines
76 Telecomms & Sound Recording & Reproducing App.…
77 Ele Machinery, App & Appliances & Ele Pt Thereof…
78 Road Vehicles (Including Air Cushion Vehicles)
79 Other Transport Equipment
81 P/Fab Buildings;Sanit.,Plumbing,Heating &Lighting Fixt.
82 Furniture & Parts Thereof; Bedding, Mattresses Etc
83 Travel Goods, Handbags & Similar Containers
84 Articles Of Apparel & Clothing Accessories
85 Footwear
87 Professional, Scientific & Controlling Ins & App N.E.S.
88 Photographic & Optical Goods, N.E.S.; Watches &…
89 Miscellaneous Manufactured Articles N.E.S.
9 Commodities not classified elsewhere;
Offa’s Gap Page
Figure 18: the key Welsh export sectors
22
30%
25%
20%
15%
10%
5%
Source: HMRC
Figure 17: Welsh Goods Exports by Sector, 2010
Offa’s Gap Page
23
The Welsh Growth Enigma
Two puzzles emerge from the preceding account of the Welsh economy over the last fifteen years:
•
Firstly, why hasn’t the crisis revealed in the fundamentals of the Welsh economy – productivity,
investment, profitability – been reflected in a serious collapse in incomes?
•
Secondly, why hasn’t the robust recovery of Welsh traded goods – at least as suggested by the
HMRC data – been reflected in an improvement in economic growth given the supposed
importance of the export base?
Answering the first question is relatively straightforward. The effects of the decline in Welsh economic
output have been cushioned by transfer payments from outside Wales. This has allowed disposable
income to remain much higher than the figures for GDP which is presumably why the current Welsh
Government prefers disposable income per head as an economic indicator for relative prosperity. Figure 19: The Disposable Argument
Disposable income has declined over this period, from a high point of 93.1% in 1977 (this is equivalent
to 95% in terms of household disposable income which includes the non-profit sector) to a lowpoint of
85.8% in 1999 before recovering slightly to its current level of 87.9%. This is a much more moderate
decline than that in relative GDP per head. The difference between disposable income and GDP per
head is explained by the redistributive effects of transfer payments (both public and private) and a
somewhat progressive tax system. Figure 20 shows pensions and social security benefits as a
percentage of total household income over the period 1984-2009. From the figure we can see that
Offa’s Gap Page
24
transfer payments have risen by over 8% as a share of total income over a period of twenty years. This
shift from primary to secondary income has effectively ameliorated the effect of the deterioration in
output growth, but with both the pension system and the Welfare state facing a leaner financial
environment the continued efficacy of this damping mechanism is in doubt.
32.0%
30.0%
28.0%
26.0%
24.0%
22.0%
20.0%
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
% of total household income
Pensions and social security benefits, Wales
Source: ONS
Figure 20: The Dependent State
The second question is more difficult to answer definitively because we only have data on the overseas
exports of manufactured goods. Gains in that sector may be cancelled out by what is likely to be a
deficit in trade in services. More significant still though is the role played by the inter-regional balance
of trade with the other countries and regions of the UK. Because of the “home market” effect, trade
with the rest of the UK is certain to have a much bigger share in Welsh GVA than overseas trade. The
few studies that have been conducted of the UK regional balance of trade have concluded that Wales
has a trade deficit with the UK with estimates ranging, in constant prices, from £2.7 billion in 1964 to
£5.5 billion in 1980 falling to some £3.7 billion in 1987.9 Based on the residuals in the analysis in Chart
1 it is reasonable to infer that the deficit in trade with the rest of the UK ballooned as a proportion of
GDP by the middle of the 90s when compared with a decade earlier, up from 10% of GDP to well
over 20%, before being choked off again by lower rates of economic growth.10 The total current
account deficit in Wales during the period 1996-1999 would seem to have reached £5 billion, before
recovering somewhat to just under £4 billion by the end of the decade.
Report of the Study Group on the role of Public Finances in European integration, vol. II: Chapter 1: United Kingdom, by
A.J. Brown, Brussels, 1972; PA Cambridge Economics study quoted in H. Armstrong, J. Taylor Regional Economics and Policy,
Harvester Wheatsheaf, 1993
10 It is reasonable to assume that the improvement in net trade to the rest of the UK during the latter half of the 90s was
caused by a diminution in imports rather than an export boom as the latter would have resulted in a significant increase in
earnings and profits, and therefore in consumption and investment, that are not indicated by the figures.
9
Offa’s Gap Page
25
In some ways these twin deficits – the deficit of Government spending in Wales over taxation, and the
deficit of exports generated in Wales to imported goods and services – are in some sense two sides of
the same coin. They are also both long-standing features of the Welsh economic predicament, and are
strongly interrelated: the bigger the current account deficit in Wales, the bigger the central government
money needed to fund the incomes necessary for the private consumption of imported goods and
services.
So why the worsening of Wales’ position in the mid to late 1990s? The traditional factors which tend
to be the subject of policy discussion – Wales’ high economic inactivity rate, its age structure and its
unemployment rate – while still important in understanding part of the shortfall in absolute GVA
compared with other parts of the UK, have not changed sharply over the last twenty years and thus
have not contributed materially to the relative decline in GVA. So what other reasons might there be?
Insufficient evidence means we can only make educated guesses but it seems reasonable to suggest that
the Welsh economy suffered a dual external shock in the 1990s. The first arose from the loss of its
overseas markets due to a change in the terms of trade. The secondary shock arose from the loss of its
domestic customers – manufacturing customers in the rest of the UK – themselves reeling from the
same process of deindustrialization.
The Welsh economy overall, it would seem, has proved
significantly less agile in responding to the challenges of structural change than other parts of the UK.
What Is To Be Done?
This in Wales’ case is the £64 billion question – which is roughly what our output would be if we
matched the UK’s prosperity levels.
Detailed proposals on a policy programme will be the proper subject of later reports and analyses
during the course of this Commission. In this short report we have presented a particular narrative of
the Welsh economy that prioritises the role of the export-generating sector of the economy. There are
alternative narratives that would emphasise different aspects: skills and productivity, innovation and
R&D, jobs, the labour market and demographics, all of which would involve different policy priorities.
In this initial report we have concentrated on understanding the problem. Some people might respond
by saying this is a waste of time. “We know what the problem is. We need answers.” But how we
analyse the problem will be crucial to the development of the right solutions. The narrative presented
here, for example, invites certain policy conclusions (see Box A).
Offa’s Gap Page
26
A Potential Policy Approach
Firstly, a Welsh growth strategy by definition must be a Welsh export strategy. Jobs and incomes in the
non-tradable sectors of the economy ultimately depend upon the income generated in the tradable
sector. Expanding and diversifying the Welsh export base is critical to increasing the Welsh economic
growth rate, and reducing the dependence on budgetary transfers from central government. Wales
needs a dedicated arms-length business-friendly agency working to attract export-oriented investment
and support and encourage indigenous based exporters. An important part of the strategy will be
identifying key niche areas in which Wales can enjoy competitive advantage as part of a strategy of
smart specialisation.
Secondly, a key part of any export-oriented economic strategy will be to devise an appropriate plan to
maximize the economic opportunity offered by our nearest and biggest neighbour, England - a highvalue market, 45 million people of which are within two hours travelling time of Wales. The Welsh
public and private sectors need to pool their intelligence and resources in seeking to sell Welsh goods
and services to England. The appallingly low participation of Welsh firms in the Olympic Games is
symptomatic of a systematic failure by the Welsh economy to adapt to the changing nature of
opportunities within the wider UK economy. Particular thought should be given to the opportunities
offered in the public sector, including potential new opportunities which may arise out of the
privatisation policies in health and education being pursued by the Westminster Government. While
these policies themselves find little support in Wales, is it not legitimate to consider whether Welsh
firms or not-for-profit enterprises could build on Wales’ extensive knowledge in health and education
provision – due to our extensive specialisation in this area – by marketing their services in the English
arena? A further possibility might be the creation of publicly-owned Welsh enterprises bidding for
some of these contracts. This would not be wholly unprecedented given the Norwegian-owned
Statkraft or Swedish state-owned Vattenfall investing in Welsh renewables.
The third and final area of policy prioritisation should be the services and infrastructure that the Welsh
tradable goods and services sector needs to be successful. The most obvious of these is transport. The
new economic geography, most closely associated with the work of Paul Krugman, has emphasized the
key role played by transport costs in explaining the relative success of regional economies. The
economic historian Nick Crafts has drawn attention in his work to the role played by the shift away
from water as the main artery for goods transport – in which Wales, with its good access to ports, had
an advantage over the landlocked English midlands – towards rail and particularly roads in the relative
decline of the Welsh economy in the 20th century. The low level of investment in Welsh transport
Offa’s Gap Page
27
infrastructure – consistently just 2% of transport investment overall – is reflected in a completely unelectrified railway system, an ailing national airport, a Severn rail tunnel that is prone to flooding and a
main southern motorway that is vulnerable to a two-lane pinch-point – the Brynglas tunnel - that is the
subject of increasingly vociferous business complaints. The composition of Welsh goods exports –
petroleum, iron and steel and large-sale turbine equipment – all of which are more likely to be exported
by large companies in bulk through ports suggests that the transport infrastructure for land-based
transportation of smaller volumes of output by SMEs is a problem area which needs to be addressed.
Studies commissioned by the Welsh Government have confirmed travelling distance from the main
urban conurbations in the UK as a significant factor in explaining the Welsh economic performance
deficit vis-à-vis the UK.11 A comprehensive connectivity strategy to invest in the public infrastructure
necessary for a successful export sector – including the quality of broadband connection needed by
high value service businesses – should logically be a key supporting element in Welsh economic
strategy.
Box A
Some of the prescriptions in Box A will be controversial for a variety of reasons. What about the
emphasis on export promotion versus import substitution through local procurement? Is it morally
acceptable to benefit economically from misguided policies of English privatisation? Does viewing
transport primarily as a conduit for the export of goods mean reverting to the West-East extractive bias
that has so long skewed the development of our national infrastructure?
A national economic strategy worthy of the name must be the subject of vigorous debate; at times,
impassioned disagreement; but most importantly of all, dialogue. The strategy will not write itself. We
need all of Wales to be engaged, if all of Wales is to be transformed.
It’s time to get involved.
You can contact the Commission:
By email: [email protected]
By post: The Economic Commission, Plaid Cymru. Anson Court, Atlantic Wharf, Cardiff. CF10 4AL
By phone: 029 2047 2272
Understanding productivity variations between Wales and the rest of the UK
Report to the Economic Research Advisory Panel, Welsh Assembly Government, Martin Boddy, University of the West of
England, Bristol , 2006.
11