Thursday, 2 August 2012

Offa's Gap - What? When? Where? & Why?

Offa's Dyke might be nothing more than a ditch, but Offa's Gap is looking distinctively
deeper and wider - and Wales is quickly sinking into the sea on one side of it.
(Pic : Britannica)
Plaid Cymru recently launched a comprehensive discussion paper, co-authored by Dr Eurfyl ap Gwilym and Adam Price, on the "relative health" of the Welsh economy. More on that at Syniadau (where you can find the report itself in English and Welsh), A Change of Personnel and Borthlas.

Despite devolution, European structural funds and the economic boom in the early noughties, Offa's Gap – the gap in productivity between Wales and the rest of the UK – has widened over the years, and now Welsh GVA per capita stands at just 74% of the UK average. The report is a forensic analysis of this relative decline of the Welsh economy, and it makes for rather depressing reading - regardless of your political persuasion.

What are the paper's key findings?

The Welsh Growth Crisis

  • For a period of around 20 years (1971-1988), the Welsh economy remained at around 85-90% of the UK average, but in the early 1990s (1992-93), fell dramatically compared to the rest of he UK.
  • GVA per capita growth has been "significantly below the UK average apart from two years between 1990 and 2009", with a pronounced deterioration between 1996 and 1999.
  • While the UK as a whole experienced resurgences following declines in economic output, Wales has been on a "continuous relative decline" since 1996.
  • The average annual growth rate between 1971 and 1990 was almost exactly the same as the UK (1.96%), but since then, a gap of 0.6% opened between Wales and the rest of the UK opened.
  • Welsh income growth was just 27% between 1991-2010 compared to 42% for the UK as a whole.
  • Although Welsh GVA per capita fell compared to London between 1989 and 2009, possibly as a result of the financial services boom, it also fell relative to the rest of the UK. Most of the decline "is explained by Wales failing to keep pace with the UK as a whole."
  • Welsh GDP relative to the EU27 has fallen from 92% in 1994, to 80% in 2009. The EU trend has been for poorer-than-average regions to outperform richer regions. However, this hasn't been the case in Wales. There's a strong argument for Wales "being the worst performing economic region in the entire EU."

The Welsh Growth Collapse (1995-2010)

  • It's "only in the last 15 years that Offa's Gap has opened up." Wales hasn't always been as poorly performing as it is now. For most of the 20th century, Wales kept pace with most of the industrialised world.
  • Extrapolated figures for Welsh growth, in terms of purchasing power per capita, show that by 2050, Wales might fall behind Russia, Mexico, Turkey, Argentina and possibly South Africa and China.
  • The relative decline in this period is explained by problems in the Welsh business sector. Welsh household consumption declined relative to the rest of the UK, and there was less potential for equity release (which drove the consumption boom) due to lower Welsh house prices.
  • When measured by gross output per employee, Welsh productivity was higher than the UK average between 1987 and 1996. When measured by GVA per employee, productivity was lower, but still remained above the UK average.
  • There was a "precipitous decline" between 1994 and 1998, according to study by Richard Harris on behalf of the Welsh Government. There was an 18.5% decline in manufacturing GVA, and productivity went from 40% above the UK average to 20% below.
  • Gross Operating Surplus (a measure of profitability in business) fell away sharply from the UK average between 1994 and 2001.
  • Wales is more vulnerable to export effects on economic growth than the UK as a whole. The Welsh economy is more "open" (share of imports and exports are larger than the UK), and the domestic economy is less important.
  • Welsh Government had "access to none of the policy levers available to national governments – currency depreciation, fiscal/monetary stimulus – to respond to an external shock."
  • The pound was over-valued in this period, due to exports of financial services from London, leading to a deterioration in the balance of payments at a UK level, and a "hemorrhaging of jobs in the manufacturing sector" – which was still a major part of the Welsh economy (and still is compared to the rest of the UK).

The "Good" News

  • Wales' total share of UK exports in goods rose from 4.09% in 1996 to 5.52% in 2011 - bigger than Wales' population share. Wales has significantly outperformed the UK and Scotland in this regard compared to 1996.
  • The composition of Welsh exports is less positive. In 1996 17 sectors had an export share of 5% or more, by 2010 that was reduced to just three : petroleum products, power generating equipment and electrical machinery.

The Welsh Growth Enigma

There are two "puzzles" emerging:

  1.   Why hasn't the economic decline resulted in a collapse in incomes?
  2.   Why hasn't the robust trading in Welsh goods resulted in improved economic growth?

The answer to the first question, is that income falls have been "cushioned by transfer payments" – pensions, social security benefits & tax credits – which acts as a "dampening mechanism", but cannot last as the welfare state comes under more sustained fiscal pressure. (I touched on this a few weeks ago : Cameron on Welfare - Right analysis, Wrong sentiments).

The second question is more complicated to answer. Trade surplus' in exports of goods are likely to be offset by a deficit in trade in services (a shorthand example, would be Welsh people using financial services based in London). Wales' trade deficit with the rest of the UK was estimated to be around £4billion.

The national deficit in taxes, and deficit in imports of goods and services, are said to be "interrelated".

It means the bigger the current account deficit in Wales, the bigger the need for more central government intervention (to offset the economic decline). Levels of economic inactivity and ageing demographics "haven't changed sharply over the last 20 years." Only educated guesses can be made as to "why" this decline has happened, in spite of strong export performance.

Why did Offa's Gap widen?

There was a major "economic shock in the late 1990's" that left long-lasting
damage to the Welsh economy. Was it a hangover from Black Wednesday?
Was Wales' manufacturing base sacrificed to create a City of London cash cow?
(Pic : BBC)
The report highlights a "major economic shock in the late 1990s" that caused Offa's Gap to widen dramatically and "left long-lasting effects". It doesn't, however, give many specifics as to what these were, mainly due to lack of formal evidence and statistics (a Welsh GERS for example). I think this is an important discussion point. Here are a few of my own guesses:

Black Wednesday "freeing" Sterling from EMU – The report says that "blaming the City of London for Wales' woes is misplaced." However, the report does say that over-valuation of the pound, fuelled by the export of financial services by London, caused the gap between the UK and Wales to widen.

This could've been fuelled by Black Wednesday in 1992, which resulted in the value of the pound plunging suddenly. Over subsequent years, Sterling's value was able to rise dramatically, improving the economic performance of The City, which became the UK's "Golden Goose", right through to Labour winning the 1997 General Election and beyond. This dragged the UK average GVA upwards too fast for Wales to keep up. Wales didn't have the financial service industry to match Northern Ireland, Scotland and some other parts of England, which could've been able to take full advantage of this.

Lack of agglomeration & "too many eggs" – The consolidation of exports down the years into fewer sectors exemplifies this. Wales still hasn't seemed to have learned the lesson that being over-reliant on too few sectors can lead to disaster. The lack of major centres also means that there is very little to fall back on. Manchester, Birmingham, Leeds et al. had far more "back up" industries (mainly high-end services) to respond to post-industrialisation that Wales ever did, and probably ever will.

Decline of Steel - The late 1990s/early 00s was to the steel industry in Wales, what the 1980s were to the coal industry - and I think people forget that. The numbers employed in steel fell from around 63,000 in 1996 to around 8,000 in 2010. Steel is still one on Wales' big export categories, and the closure of the likes of the Ebbw Vale plant, and mothballing furnaces, not only impacts jobs, but seriously impacts Welsh GVA and exports. The decline of steel-making jobs in fact, roughly falls in line with the "precipitous decline" in manufacturing outputs in the late 1990s and early 00s. Look up the Mittel Affair too while you're at it - another Adam Price production.

LG Newport shaking faith in "big bang" inward investment – This was an infamous "white elephant", and the swan-song of the big "metal bashing", "branch factory", foreign direct investment (FDI) schemes in Wales. In 1996, it was announced up to 6,000 jobs would be created, off the back of around £150million of public subsidy via the WDA and government, and hardly any of that materialised.

This probably played a big role in the eventual winding up of the WDA, even if I think there was a rose-tinted view of their role and performance. Are we paying the price now for that decision? Should the WDA have been reformed, or given a new function, instead of scrapped?

LG Newport was an example of what was wrong with the WDA:
Excessive optimism,  pork barrel politics, promising too much, and not
taking into account changing trends in the global economy.
(Pic : Llewellyn Lewis Sennick)
Liberalised Eastern European economies – Market reforms in eastern European nations following the fall of Communism, flooded the FDI "market" with nations that had:

  • Better skilled, cheaper workforces (a remnant of a command economy)
  • Full economic tools being used to promote the free market
  • Commercial opportunities provided by "reconstruction efforts" (i.e. East Germany)
  • A desire within these nations to become part of the European mainstream.
  • A desire on the part of NATO powers to integrate "New Europe" into "The Western Sphere"

Wales suddenly had many more competitors than we were used to. Foreign investors could pick and choose where to plonk their factories. Wales couldn't offer anything compelling anymore.

Instead of competing with NE England, Northern Ireland and the West Midlands, Wales was now up against Poland, Slovenia, Slovakia, Czech Republic - and even the likes of China and India. How could a "region" (with - at the time - no devolution) compete with fully sovereign nations?

Misapplication of European structural funds – It would be unfair to say that no infrastructure/economic development funding has been used in West Wales & The Valleys. However, the vast bulk seems to be directed towards "social schemes" which provide something in the way of personal development, but little in the way of economic development.

EU-funds appear to be used for things like public realm improvements, or incredibly niche schemes, spreading funds far too thinly. In the period 2007-2013, £1.5billion has been spent on the public sector (mainly universities), £99million on the third sector (including ~£6.1million to the likes of AWEMA), and just £23million in the private sector.

Devolution didn't cause the decline, but may have contributed to prolonging it – The start of the decline was before devolution was even re-considered as UK policy – around the 1992 mark – and the severe dip happened around 1995 or 1996, before devolution even came into being. However, related to the EU funds issue, subsequent policies taken by Welsh Governments may well have prolonged the decline, rather than actively turning it around.

For example : scrapping (instead of reforming) the WDA as mentioned further up, spreading public infrastructure investment too thinly, responding too late to shocks (exceptions like ProAct and ReAct), the culture in the civil service (managerialism, fatalism, process over purpose, being "used to being poor") and the old chestnut of relying too much on the public sector to provide economic stimulus in our poorer performing areas.

What can be done?

Wales is a net-exporter of goods. Should any economic growth
strategy be focused on this underlying Welsh economic strength?
(Pic : Commodity Online)
The paper gives three potential policy approaches that could lead to a turnaround.

A growth strategy focused on exports. "Expanding and diversifying the Welsh export base is critical to increasing Welsh economic growth and reducing dependence on budgetary transfers." It goes on to suggest the creation of a business-friendly arms-length agency that would aim to "attract export-oriented investment and support and encourage indigenous-based exporters."

That would be different to the old WDA, which focused on inward investment from foreign companies, rather than this proposal for effectively "outward investment from Welsh companies."

Maximising economic opportunities in England.
England is called a "high-value market" with "45million people within 2 hours travelling time of Wales." Welsh businesses are described as failing to take advantage of the changing opportunities within the UK economy – for example, Welsh firms providing English health and education services as the UK Government increasingly privatises them, and publicly-owned Welsh companies bidding for these sorts of contracts. Statkraft (Norway) and Vattenfall (Sweden) are given as examples.

Significant investment in Welsh infrastructure.
Transport costs affect regional economic performance, and the low level of investment in transport is "reflected in an completely unelectrified rail system, an ailing national airport, a Severn tunnel that is prone to flooding and a vulnerable two-lane pinch point at Brynglas tunnels." Most of Wales' large bulk exports (chemicals etc.) are transported by sea, but land-based transport could "seriously be affecting the performance of Welsh SME's." This shouldn't be seen as a be-all and end-all. More on that at Borthlas.

School of Hard Knocks, School of Athens and Lazy Big Brothers

So, do you point "sky-wards" to more powers and independence? Or
"earth-wards" to boosting the economy as a pre-requisite, within the current model?
(Pic: Wikipedia)
The paper doesn't provide a cure, just a comprehensive diagnosis of the underlying problems. It made for depressing, sobering, reading. I'd go so far as to say this is the most important paper on the Welsh economy produced since the Holtham Commission, and an absolute must read, despite the obvious agenda/motivation of the authors.

It hits home the near-quixotic task it is to get Wales into a position to move towards independence. That isn't "good news" for unionists though. In fact, it reflects incredibly badly on the UK.

Westminster is the burly big brother that saw their slightly dim, slightly smelly, unpopular little brother kicked in over and over again in the playground, and didn't do anything about it - perhaps even joined in a little bit. Behind all the smiles, denials and promises of action on Wales - past, present and future – we've been betrayed. That goes for you whether you're a nat, Labour, Welsh Tory or even the most ardent of ardent unionists.

This "growth collapse" happened on their watch, and almost entirely their brief. One thing we can say, is Wales can't rely on Westminster at all to dig us out of this. The solution will have to come from within Wales, and unpalatable decisions will need to be taken.

Welsh Labour's (or even the Assembly in general) approach to the economy is the equivalent of the big sister offering a shoulder to cry on. It'll make you feel better, it might even offer a distraction, but it's not going to stop the subsequent beatings the following day, and the day after that, and the day after that, and the day after that....

If this had been produced by an independent think-tank, or another political party, it would've been painful - shutting down this blog levels of painful - but the fact it's Plaid leading this has dulled pain a little bit. It (along with Gerry Holtham's recent musings, albeit with question marks on the numbers) brought us back down to Earth, and I think we (Nationalists) needed that. We've gotten a little carried away with events in Scotland.

I've always realised that Welsh independence isn't on the horizon the same way it is for Scotland. It looks likely I'm going to be another nat who goes to the grave or the crematorium oven never seeing independence - and I'm not even thirty yet. However, "fought the good fight, finished the course" and all that.... This report isn't telling us stuff we didn't already know - but it's not all doom and gloom. Even the most desperate cases can be turned around.

The problem now is the politics and philosophy on the way forward.

We have the slightly more pessimistic, hard-headed, empiricist, "worldly" views of the likes of Gerry Holtham. A conclusion that Wales can only be what it is at present, and the cold hard light of day says a failing nation (economically). This far, no further. But does that, ultimately, also mean "more of the same, please"? And an acceptance of the current failed models?

Meanwhile, nationalists are excessively idealistic, faith-based, "sky-ward" people. A belief that Wales should aspire to be something greater than the sum of its parts, and that it can only be done with full freedom of thought and action. It's more imaginative, significantly more creative, gives you more options, but is in no way grounded in conventional rationality, or more importantly - conventional economics.

The frustrating thing is we all want the same thing – a successful Welsh economy, and a prosperous Wales. We just can't agree on a single way forward without dragging in the "chicken or the egg" re. independence/more powers. We need something to break us out of that thinking.

The question for all of us lay people, the politicians (of all colours), the business supremos, the trade unionists, is what do we do next?

I'm currently working on a "six part special" related to this - on the current status of the Welsh economy - which will be published either later this month, or next month. I'll have some possible answers to that question then, and maybe a slightly more positive outlook.


  1. "The frustrating thing is we all want the same thing – a successful Welsh economy.."

    I'm not at all sure that you are correct on that one. I'm cynical.

    It suits Labour politcally to have a poor dependant population in Wales, which will never vote Tory. Labour did little or nothing to stimulate the Welsh economy when in power, and they reaped the rewards for that at the last election.

    As for the Tories, do they care whether or not Wales succeeds economically or not? They also like low wages, high unemployment and exploitation.

    Excellent comment, by the way.

  2. Excellent musings on what is, or could be, a seminal publication on the Welsh economy from Adam et al. - I have to say that I like the scenario of Leanne as our leader, and Adam and Eurfyl as the intellectual engine room of the party. Labour don't have anyone even approaching their insightful power, and the Tories only have Melding, who the seem to have ostracised.

    I agree that the way the WDA was handled was inept - it needed reforming, but had a global 'Brand' (dread word. The same is true of the Welsh Tourist Board. Too much unaccountable spending, but known worldwide. Now nobody knows about Wales.

    One thing that we can say for certain that even if we succeed in improving the Welsh economy, it will look nothing like the economy of 20 years ago. I would like to see the universities (and grants) used to bring commercial R&D departments into Wales - the High Tech industries will follow. There used to be a of of R&D here, and they moved - during the 90s. Once the R&D went, it was not long before the factories closed.

    We need new thinking. We need control over our own resources - Electricity, water, and commodities crossing our territory (Oil and Gas), and soon we need control over Shale gas (it's coming like it or not.

    We need to look a transport infrastructure with a C21 eye, not a C19th one. The same goes for Energy - we should look to be early adopters of Thorium reactors, and static state wind generators. We have usually been ahead of the pack in the industrial race, why not become so again? Bio technology is thriving in Wales, though being exploited elsewhere. WHY?

    Our creative arts (TV in particular) is thriving, but I'm not sure how much benefit Wales actually derives from that.

    We should be looking at energy storage - with all our hilly ground , hydro-electric pump storage would be a cheaper, and more profitable, less intrusive alternative to turbines everywhere.

    New thinking is what we need, and this report is a great start.

  3. Thanks for the comments, as always.

    Maen Tramgwydd - Plaid might have a vested interest in seeing a successful Welsh economy, but I think it's wrong to suggest that Labour doesn't either, though they are not under as much pressure from within to deliver such. I think Labour and the Tories would be quite happy with an economy that "does enough to get by", improves Wales' position within the UK "league tables" but still enjoys the "benefits" of fiscal transfers. On paper that's perfectly sensible, but I hasn't worked so far, has it?

    Siônnyn - There's nothing wrong with having a good "Brand Wales". Ultimately brands are there to promote awareness and loyalty, and nothing has touched the WDA since. You can't show loyalty or awareness to a couple of suits in Cathays Park, can you?

    I agree entirely re. universities. I think they'll play an important role in the future Welsh economy, whether we remain part of the union or not. I'll have more on that another time.

    I don't think we should throw all our eggs in the energy basket though. Energy production isn't labour intensive (apart from constructing them), and at the end of the day, it's just another export. It's having secure supplies of resources within Wales that's important, and would make Wales a more attractive place to do business.

    I'd warn on creative industries too. It might be the "buzz"sector of the economy at the moment, and although Wales has an OK track record there, it's far from a saviour just yet. It'll need to become bigger and bolder. We'd need to be competing with Los Angeles for it to make any sort of meaningful impact on the economy. Not going to happen, really.

  4. We not only need independence we need our own currency and central bank. Union with England is the problem not the cure.

  5. Being non-tribal, the idea that Labour "deliberately keeps Wales poor" so that they keep voting Labour is not true. The Welsh Government of any party can't decide really whether or not Wales is poor. That is, they don't really have the powers or muscle to enact major economic policies. The UK Government however, does.

    Where this conspiracy theory has a grain of truth is that there's no incentive for Labour to improve the Welsh economy significantly. Remember people in Wales still grew wealthier throughout New Labour rule. The fact was it was false prosperity, but at the time Labour including "Welsh" Labour very much promoted the fact people were getting wealthier and that more (usually low-paid) jobs were coming to Wales. people still got richer and those on low pay got tax credits and benefits to compensate for the market not paying high enough wages. Welsh people didn't get poorer. The Welsh economy declined relatively. It didn't decline in absolute terms, so it was still growing. To have it grow on a sustained relative level Labour would have had to dampen down growth in the south-east of England, which they had no intention of doing obviously. But that didn't mean Welsh people had less in their pocket.

    I can though see why Maen Tramgwydd's line is incendiary and the fact there's a grain of truth in it makes it a potent weapon.

  6. Anon 21:33 - Having our own currency would certainly have its advantages (and disadvantages), depreciation for example to improve exports even further, or monetary stimulus (as mentioned in the report). I'll look at it in more detail another time.

    Anon 15:01 - Nail > Head. I think that pretty much sums up my own view on it.

    I honestly don't envy Labour's task here. I doubt things would be dramatically different had Plaid (or any of the other parties) had been in power for any length of time, especially if they wouldn't have any of the powers necessary to drive things forward.

    Labour have inherited (perhaps caused too it has to be said), and are juggling, so many underperforming portfolios in Wales now, that they can't keep it up forever. They'll need to let one of the big three (health, education, economy) fall away as ballast or they risk going into meltdown. They know they'll never be able to deliver significant economic growth in the current environment, they're not stupid.

    They have no concrete incentive to improve the economy as said - Westminster is judged on that, and holds all the powers. In addition, Labour don't "need" a self-sustaining Welsh economy to be electorally successful. That'll be the one they'll leave behind, concentrating their energies on health and education/"public services" in general, where in all honesty, is where Labour (should) feel more comfortable.

    As a result, Wales is left with a glorified County Council, stuck in County Council thinking for another generation until we become the UK's psudo-Socialist Florida.

  7. The report makes for sad reading. I have often wondered about the justice/injustice of the situation during my frequent visits to North Wales.
    I think the major parties are happy to make Wales dependent! I never understood why the Welsh did not vote for a separate parliament as Scotland did. Were they cowed into voting for an assembly rather than a Parliament?

  8. As a unionist party "WelshLabour" has Wales held captive because we believe their lies.

    If WelshLabour really wanted to see Wales prosper they would break away from EnglishLabour and lead Wales to prosperity. So the reality is that WelshLabour does indeed keep Wales deliberately poor in order to win a few votes to help it's EnglishLabour masters win votes off the Tories in England.

    If WelshLabour stood up for Wales it would mean standing up against EnglishLabour.

  9. Efpastor - A "Parliament" was never offered to Wales. Devolution means that constitutional developments can move at different speeds between the UK/"British" nations depending on what the central government decides is best - quickly for the likes of the Isle of Man and Channel Islands, slightly less quickly for Scotland & Northern Ireland, slowly for Wales and not at all for England and Cornwall. It's a bit of a mess, but that's how the UK works.

    WNB - Some people did moot a Welsh Labour breakaway recently, I think. I don't think it'll happen, though. There's too much at stake (party funding, "clout" in Westminster and backroom administration etc.) for them to realistically consider it.

  10. WelshLabour is currently run for the sole purpose of keeping Wales in check and subservient to England.

    If they (amnd therefore we) continue on their present course then either Wales will gradually become part of England or WelshLabour will become as unelectable as they are becoming in Scotland.

    If only we had a party in Wales that is prepared to put Wales first in every single aspect of day to day life.