Thursday, 13 September 2012

Wales : An Economic Profile V - Wales in the global economy

What does the economy look like within Wales? What
is Wales' role in the UK, European and global economies?
(Pic : Wikipedia)

The economic geography of Wales

It's worth taking a look at the overall spread of the economy within Wales, and how it's changed over the years.

Firstly, in terms of average gross (before deductions like taxes) weekly earnings. Only eight local authorities - clustered in three areas - had an average weekly wage above the Welsh average in 2011 (£519.40) and that shows on the map below.

The three clusters are : the M4 corridor, north east Wales and Pembrokeshire. Pembrokeshire is the 2nd highest on the list, and there are obvious reasons why, one being well paid contractor work at the various petrochemical terminals.

Gross weekly earnings by Welsh local authority
(Click to enlarge)

The M4 corridor is another obvious one, though it's surprising that Monmouthshire doesn't seem to get much out of it. Being "close to England" doesn't appear to be that much of a factor – look at Powys, Monmouthshire and Wrexham.

This might suggest that the south Wales economy is more self-contained that commonly believed. Other local authorities have taken advantage of vacant, flat land next to motorway junctions down the years for industry – especially in authorities like Bridgend and Neath Port Talbot. Cardiff's place is obvious, and the Vale of Glamorgan likely acts as an upmarket/attractive overspill for people commuting to Cardiff.

Flintshire is home to many large employers, so its high wages are not a surprise. People from Denbighshire are probably likely to commute there to work, and it's also where Ysbyty Glan Clwyd is. What stands out is that Wrexham doesn't appear to have had any knock-on from this - despite having one of the largest industrial estates in Wales. Average weekly earnings in Wrexham are, in fact, lower than Merthyr Tydfil and Rhondda Cynon Taf (which are both below average themselves, but not spectacularly so).

Pembrokeshire aside, almost all of the rural parts of Wales have average wages below the Welsh, and even south Wales valley, averages. Carmarthenshire was the highest-placed "rural" authority at £495.10, but the likes of Anglesey, Powys and Ceredigion were all below £470. One suggestion might be that higher population densities, equals more demand for services and more attractive locations for businesses – an agglomeration effect.

Where are those businesses? I decided to map the density of the Top 100 largest companies in Wales (from the 2011 Top 300) and the 2011 Fast Growth 50. This is imperfect, as some companies are listed in both and have been counted twice.

Density of largest and fastest
growing companies in Wales
(Click to enlarge)

In this case, the Cardiff-Newport area and Deeside-Wrexham appear to be the main business hubs. But perhaps surprisingly, the south Wales valleys – in particular Rhondda Cynon Taf, Caerphilly and Bridgend – do rather well. Authorities like Swansea did much better on the Fast Growth list than the Top 100 list.

One other thing stood out. More than half of the top 100 and fastest growing companies (92) were based in just six local authorities : Cardiff (32), Flintshire (15), Newport (12), Caerphilly (11), Bridgend (10) and Swansea (10).

You would think this suggests that urban areas outperform rural areas, but that isn't necessarily the case. Gwynedd (7), Powys (6) and Vale of Glamorgan (5) do quite well. The only two local authorities without listings were Ceredigion and Conwy, while urban authorities like Blaenau Gwent and Merthyr Tydfil (both 1) did poorly too.

Wages do seem to be higher in areas where there's a greater density of large businesses. This radiates out into neighbouring authorities – for example, the Vale of Glamorgan has some of the highest wages, but not a spectacular business density, perhaps reliant on Cardiff commuters living there.

Going back to Part IV for a moment, there doesn't seem to be any link/pattern between levels of public sector employment, average wages or "lack of businesses" – it appears to be quite random.

Pembrokeshire only had 2 companies on the business list, pays some of Wales's highest wages, but had one of the lowest public sector employment rates. Cardiff, Bridgend, Swansea and Rhondda Cynon Taf had some of the highest public sector employment rates and businesses densities, but varied in average wages.

Any suggestion that the public sector might affect the private sector's competitiveness in Wales doesn't appear to have any legs.

Then you look at how Welsh production has changed over the last decade or so.

GVA compared to the UK by NUTS3 region 1997-2009
(Click to enlarge)
Only three NUTS3 areas in Wales experienced an increase in GVA relative to the UK between 1997 and 2009 : Cardiff & Vale of Glamorgan (+2.9%), Anglesey (+7.6%) and Gwynedd (a rather modest +0.2%). Only Cardiff & Vale of Glamorgan had a GVA above the UK average average in 2009.

Some NUTS3 areas experienced wild changes over the period. Bridgend & Neath Port Talbot was 82.6% (UK=100) in 1997, this fell to 67.6% (-15%) in 2003, then recovered to 71.3% in 2009 (-11.3% on 1997). Swansea was the opposite - falling, then rising, then falling.

The most dramatic relative decline though, has been in Flintshire and Wrexham, where GVA relative to the UK has fallen from 99% in 1997 to 80.3% in 2009 (-18.7%). Maybe this explains the Wrexham anomaly in wages from earlier.

Wales within the UK

As highlighted above, there is a widening gap in productivity between Wales and the rest of the UK – this was the crux of Plaid Cymru's Offa's Gap report earlier this year.

Relative GVA of the UK's constituent nations 1997-2010
(Click to enlarge)

Welsh GVA per capita has fallen from 78% of the UK average in 1997 to hovering around 74% in 2010. However, this is a much slower slide than in the early 1990s. Northern Ireland also experienced a slightly sharper drop (from 81% to 76%) over this period. England remained relatively stable at around 102%, while Scotland's GVA per capita rose from 96% in 1997 to 99% in 2010 – perhaps boosted by North Sea oil. Most of the UK's GVA growth has been driven by England - in particular Greater London and SE England.

The depressing fact is that GVA per capita in Wales actually grew over this period, from £9,774 in 1997 to £15,145 in 2010. Despite this, Wales is rooted at the bottom of the 12 nations and regions of the UK.

Some people will say all Wales has to do to close the gap is match pace with whatever the rest of the UK is doing. If Wales did so, you would expect us to be much better off, wouldn't you?

Welsh GVA is economic growth matched pace with the UK 1996-2010
(Click to enlarge)

Well, if Wales had matched the UK's average growth rate year-on-year (including the recent downturn) since 1996, Welsh GVA per capita would only be £1,253 higher (+8.3%) than it is currently. Better, but not dramatically so.

Presuming all the other nations and regions remained unchanged, Wales would only move up two places in the "league table" to 10th – above NE England and Northern Ireland and just behind Yorkshire & Humber. Welsh GVA per capita would've stayed static at around 80-81% of the UK average throughout the period.

So even in more favourable economic circumstances within the UK, Wales might never be able to realistically breach that 80-81% "ceiling".

It was once Rhodri Morgan's stated aim to get Welsh GVA to 90% of the UK average. A similar pledge was in the Welsh Conservative manifesto in 2011. So, Rhodri would've missed the target even if Wales matched pace with the rest of the UK. It's lucky we in Wales don't punish politicians for making promises they couldn't possibly keep, isn't it?

Wales is, first of all, starting off from a much lower base - the "precipitous decline" in the 1980s-1990s saw to that. For Wales to close the gap with the rest of the UK, the Welsh economy would not only have to match pace with UK growth, but significantly exceed it. Wales would have to try and close the gap without possessing a large financial service sector, having a sparse population and with a one-size-fits all monetary, tax and fiscal policy.

As I hope these pieces have demonstrated, there's not much fundamentally wrong with the Welsh private sector, but there are gaps that need to be filled. All those things Wales needs are currently based in and around London : great international links, a large financial service sector, excellent and extensive public transport and agglomeration.

To close Offa's Gap, Wales would need to become the fastest growing nation/region in the UK - sustained for at least 30 years. Your guess as to how Wales, in its current state, would be able to do that is as good as mine. Maybe the Welsh economy needs a big game-changing shock to the system. Something really dramatic to kick start it.

Wales in three scenarios : current, matching pace
with the UK and the "Flotilla Effect"
(Click to enlarge)

The Flotilla Effect report suggested, on a population-based model, that if Wales became independent around the same time as the fall of the Berlin Wall, and followed the "right" economic policies:
  • Welsh economic growth would have been between 2.2% and 2.5% per year (compared to the actual 0.9%)
  • Wales would be 39% "wealthier" now than it is currently.

If this were true, and presuming all the other nations and regions stayed the same, then Welsh GVA would be (approximately) £21,052 in 2010 – the 3rd highest nation/region compared to the UK, and above the UK average, only behind London and SE England. If Scotland were independent, then maybe they would be above Wales, perhaps the overall English figures will have been dragged upwards too. More on that further down.

Before you read on, I think the Flotilla Effect figures are an over-estimate. I'm convinced GVA would probably be higher because Wales would have needed to prioritise economic growth. My guess is it would probably be halfway between where we are now and +39%, but I'm not an economist. It's unclear what impact independence would have had on things like the public service sector, the public sector/public spending, exports, employment law etc.

For now though, the Flotilla Effect is the best thing we have to base an estimate on. I fear it's going to become a Welsh equivalent of the McCrone Report, except written with the benefit of hindsight.

Wales within Europe

Rough estimate of Wales' place within the European Union in 2011
Based on the "three scenarios"
(Click to enlarge)

Based on 2011 figures (so not 100% accurate, as my GVA figures are from 2010), Wales would be, alone, the 19th wealthiest EU nation, with a GVA per capita at $24,534 (based on mid-2011 dollar conversion rates). Wales would also be the second poorest nation in what we would call "Western Europe" or "Old Europe", snuggled between Malta and Portugal. It's around 78% of EU-27 average GVA per capita ($31,607).

This isn't an awful place to be in compared to some of the EU nations ranked below us. Using football terminology, you could say Wales is in the "lower half of midtable."

"Poor" within the EU is a relative term. The only parts of Europe - including non-EU nations - you could genuinely describe as poor are places like Albania and Moldova.Wales also significantly outperforms the vast bulk of Eastern Europe, including EU members, on a nation-to-nation basis.

Notice that bit of orange where West Wales is (and Cornwall)?
But there's also a bit of green too - which is good.
(Pic : Eurostat)

However, on a regional basis, West Wales and the Valleys does compare unfavourably to some parts of the former Warsaw Pact (as you can see above), while East Wales compares relatively favourably to the European mainstream.

Based on Wales matching pace with UK, Wales would only move up two places to 17th - above Greece and just below the Czech Republic. Wales' GVA per capita of $26,565 would also be boosted to 84% of the EU average. Wales is still in that "midtable" position, but closing the gap with "twin countries" (nations that are similar to Wales in many respects) like Slovenia.

Now the Flotilla Effect figures. Wales would be 11th place, with a GVA per capita of $34,101 (108% of the EU-27 average). Wales would be pushing very close to the productive mainstream of the EU : Finland, Germany, Denmark, as well as above Spain and Italy. All of this is conjecture, as I noted above.

It's unclear what effect independence, or matching pace with the rest of the UK, would have on the intra-Wales regional differences. Would West Wales & Valleys be wealthier? Would all the economic growth have come from East Wales? You can't really tell.

It's worth noting that presumably, were Wales independent, the UK would cease to exist. Thus, England, Scotland, Northern Ireland (and at a stretch Cornwall and the Crown Dependencies) would be in the list in their own right. You also have to take into account other stateless nations like Catalonia, the Basque Country, Wallonia, Faroe Islands and Flanders.

Rough estimate of Wales' place amongst the "stateless nations" of
Western Europe
(Click to enlarge)

Where would Wales place amongst these? The above is an estimate based on various sources and timescales, so it's only a rough guess. I'm also including the Brussels city region as they are neither Flanders or Wallonia and have been mooted as some sort of EU "federal district" should Belgium split.

Catalonia and the Basque Country perform particularly well alongside England and Scotland. Wales, Brittany, Cornwall and Northern Ireland less so. Greenland isn't in the EU of course, but remains part of the Kingdom of Denmark (along with the Faroe Islands). Despite only having a population of around 60,000, the Greenlandic economy has been boosted by the discovery of large mineral deposits, and possibly in future extractable supplies of natural gas and oil. There are obvious concerns about that.

The likelihood is that these nations would be ranked above Wales, pushing Wales down the rankings a few places and changing the EU averages. I've treated this, in part, as though the UK disappeared into a puff of smoke - frankly because I couldn't be bothered to work the figures out and I'm not paid to do this. You get what you (don't) pay for. I think you can forgive me for that - and I am noting it.

Wales and the World

The global economy is becoming ever more interdependent, and Wales is as much a part of it as any other nation. It's worth looking at where Wales stands amongst the 183 nation-states listed in the International Monetary Fund list of nations by per capita GDP for 2010-11.

Rough estimate of Wales' rankings globally
(Click to emlarge)

Currently, Wales would be ranked 39th , based on the same figures given for Europe above, nestled between the Seychelles and Saudi Arabia. The UK is currently 22nd. This means Wales is pushing into the top 20% of all nations.

Based on the matching UK pace figures, Wales would be bumped up to 35th place, between the Czech Republic and Oman. This, again, is around the top 20% mark for all the nations.

When it comes to the Flotilla Effect figures, Wales would be 25th place, between Japan and South Korea, and ahead of nations like Israel and The Bahamas. Wales would have been within the top 15% of nations.

Whichever way you look at it, Wales is undoubtedly a "first world economy" - even in its current state. When people talk about poverty in Wales, it's always in a relative sense. For example, someone used to shopping at Waitrose having to shop at Asda would probably consider themselves "impoverished" somewhat.

However, the vast bulk of the world don't even have the luxury of a Lidl's. When we talk about "poverty" in Wales, or Wales being "poor", we need to remember that – for their sake.

When it comes to population, how does Wales stand compared to nations the same size as us (~3million)?

Wales' global rankings to similar sized nations in terms of population
(Click to enlarge)

Oil-rich Oman is the only circa-3million nation that's wealthier than Wales. If Wales had matched pace with the rest of the UK even modestly, Wales would be #1, with an even wider gap in respect of the Flotilla Effect. So you could say that Wales is one of the richest nations in the world with a population of around 3million.

Where do Welsh exports go?

There have been concerns raised that many small and medium sized Welsh businesses aren't taking full advantage of overseas opportunities. It's quite plausible that this has been caused by the demise of the WDA and International Business Wales.

The make up of Welsh goods exports in 2011
(Click to enlarge)

Wales' exported goods worth around £13.4billion in 2011. At the same time, the UK's total goods exports were worth £293.6billion. So Welsh goods exports make up approximately 4.6% of all UK goods exports – roughly where you would expect Wales to be, based on population share.

Where did Welsh goods go in that year though? It's difficult to pinpoint specific nations, the only statistics I could find are on a global regional/continental basis, but there are some interesting findings.

Welsh goods exports by destination (and value)
(Click to enlarge)

Although the European Union is the single largest trading partner for both the UK and Wales, Wales is less reliant on exports to the EU than the UK as a whole (42.4% of exports vs 53.8% for the UK).
Wales' other major export destinations are Oceania & Asia (12.1% of exports), North America (29.4%) and Middle East and Africa (8.8%).

In addition to the EU, the UK as a whole exports more, proportionally, than Wales to : Oceania & Asia (14% of UK exports), non-EU Western Europe, for example Norway, (4.5% compared to Wales' 2.5%) and non-EU Eastern Europe (2.5% to Wales' 0.9%).

Whole UK goods exports by destination. Notice the
differences compared to Wales?
(Click to enlarge)

How do Welsh figures look on a UK scale?

Welsh good exports to North America for instance, amount to 8.8% of total UK exports there – well above our population share. This is similar for the Middle East and North Africa, probably comings and goings via Milford Haven (7.7%).

However, Welsh exports to the EU (3.6%), non-EU Western Europe (2.6%), non-EU Eastern Europe (1.6%) and Sub-Saharan Africa (3.6%) were well below our population share.

Exports to Asia & Oceania and Latin America & the Caribbean are roughly where you would expect them to be (4% and 5% respectively).

Trade in goods - differences between Wales and the UK
(Click to enlarge)

As I've mentioned several times, Wales has a trade surplus in goods, and has done for several years. In fact, the Welsh trade surplus in goods has risen from £2.23billion in 2005, to £5.41billion in 2011.

The UK, on the other hand, has a deficit in trade in goods, rising from a £60.5billion deficit in 2005, to  £143.5billion in 2011. (You can find all the figures on the HM Revenue and Customs website, here's just a selection)

It's very hard to pin down trade in services figures, but it's believed that if these were included, Wales would be in deficit, while the UK would be closer to equilibrium (thanks primarily to the City of London's financial service sector, I'd imagine). It's also hard to tell how much is exported/imported to and from the respective Home Nations, and what effect it would have on Welsh export figures.

It doesn't matter in the grand scheme of things whether a nation is a net-exporter or a net-importer due to global interdependence. Trade deficits are neither a good, nor bad thing really.

These things matter because economic policy should be shaped to inherent strengths. I'm not convinced the UK's import-based economy based on services (though the UK Coalition government have, nominally at least, focused on exporters/manufacturing) is to the benefit of Wales' export-based economy based around manufacturing and energy.

Exports can help determine currency strength, credit ratings as well as who your trading partners are and why you do business with them. It can even boost things like international profiles and university co-operation, while successful exporters could well beget other successful exporters. These are very important issues that should, ideally, be shaped to a nation's individual profile.

For now, we're going to have to work within the current framework, which boils down to : monetary policy designed to maximise tax incomes from the City of London financial service sector (without spooking them), making sure the London remains Europe's predominant financial servicecentre, bribing businesses to set up in undesirable locations and keeping our fingers crossed that we (Wales) might produce another Admiral one day (Part III).

The sixth and final part in this series, will offer my own conclusions on what the strengths, weaknesses, opportunities and threats are with regard the Welsh economy.


  1. This is absolutely invaluable Owen! To think that the universities in Wales wan't produce a simple coherent, academic document to match this proves how short-changed we are as tax payers by these universities.

    It's time you put these in print. It's time Plaid used them to good effect.


  2. Brilliant stuff.

  3. Thanks, everyone!

    I'm not sure how much of what I've written would stand up to serious statistical rigour, so it should all be treated with that in mind. To be honest, I don't know why I keep doing it. The problem is "reports" like this end up gathering dust on shelves (or in my case whatever the cyber equivalent of a shelf is) - even if they are produced with the best of intentions - when what we need is action.

    All I want to show is the Welsh economy isn't a complete disaster zone, has its problems, but can do significantly better - and quite possibly through independence. If people take that away from this, or go out and look at the figures and draw their own conclusions, then I'm happy.

  4. Don't talk youself down, Owen. You're doing excellent work - it's a pity our paid researchers don't have the vision to think differently. They seem content with the trickle-down effect of hoping a new run way in London or 20 minutes off a train journey would make a difference to the Welsh economy.


  5. This is an excellent blog I read it every day im the guy who commented on the metro post the other day btw. I bet you know more than some our elected politicians down the bay.

  6. Interesting stuff. The issue I have with the airport caption is Wales needs it. You mean South Wales needs it. We have a perfectly good airport in Manchester 40-60 mins away from as you figures show a thriving economic hotspot.

    The road and rail structure is still so bad that as things stand there won't ever be a One Wales because the North can't get South and instead look North West. My reaction to the electrification of the South Wales line?....whoopydoo...what about the A55? If you look North West there are theatres, Arena venues, shopping outlets, shopping malls, motorways, airports all within a 40 minutes drive. Look South and it's a difficult and frustrating 4 hour drive.

    So the question is can Wales ever be independent when Cardiff is just too much effort?

  7. There are other countries that have "difficult" communications with other parts of the same country, even in Europe (Switzerland and the Balkans states). There are even places in Europe where large cities are right next to the border on one side - Lille and parts of Belgium for example. It doesn't really affect independence. If anything I think it's a case for a "federal" system within Wales. As more powers go to Cardiff from Westminster, some powers should perhaps be sent out to larger self-contained regions like north Wales. It's still all Wales at the end of the day.

    There's a case for building up regional centres to try and claw back some trade and influence. I'd never expect Cardiff to be that big a pull for people from the north except in a cultural/national sense - for example government, football and rugby games, museums etc. But why couldn't Wrexham, for arguments sake, become a "Cardiff of the north"?

    There's no reason why a Cardiff-Wrexham/Flintshire train journey couldn't be 90minutes or less with the right investment - that could even make places like Hereford and Shrewsbury look to Cardiff in a way they (and central Wales) might look to Birmingham currently.

    1. I like the idea of federalism, it may be one Wales but we have different Wales' around the country. There is only the Govt that pull people to the South - at the moment. Is there a pull to the North? If not why not?. Did you know there is about to be a major development at Chester Zoo with an Eden Project of the North and a new themed hotel being built there? It's right on the doorstep for North Wales, what's our plan to cash in on all those vistors?

      Castles and Conservation - kerching

  8. This is an outstanding piece of work Owen. I like the pessimism of the intellect, optimism of the will. It's pretty bad, but we're not a complete disaster yet. Very interesting stuff about GVA. Realistically, the problem isn't the public sector but that private sector wages in Wales are simply too low. What can be done to increase them? I'm not an economist but my main feeling is our people need better skills.

  9. Anon 15:05 - I think there is a pull to the north, especially for tourism and in some cases family ties (for example "exiles" living in Cardiff) and business. I imagine those links will be stronger east-west as well, but there's nothing essentially wrong with that.

    There are so many proposed "Eden Projects of the North" out there - I think the Welsh Mountain Zoo in Colwyn Bay have mooted one - it's becoming a cliche now. North Wales is going to have to offer more than tourism though, and we must also remember that most of the major (industrial) employers in NE Wales & Cheshire are on this side of the Dee.

    Anon 15:58 - Private sector wages appear to be lower than the public sector across the UK, especially for graduates (presumably GP's, consultants, dentists and doctors making up a big chunk of that).

    Better skills is just one piece of the puzzle, but only if those skills are relevant to the economy of the future - so for example like environmental/energy engineers, biotechnology, IT/computing and finance (especially insurance).

    We also need better jobs, the sort that currently base themselves in London, Manchester and Edinburgh. We can either build these sorts of companies from the ground up in Wales - which is long-term and not guaranteed to succeed. Or, we can try and attract existing companies to Wales - that might work now, but they could just as easily move elsewhere.

  10. Hey I am a student from Germany and have to write an essay about "Wales in the global economy". So are these serious and real facts and charts? Can I use it for my essay?

    1. The graphs and charts are based on official data (Welsh Government, UK Government, EU, IMF etc.). Links to the official data have been provided within the article.

      I'm happy for you to use them for your essay, but be careful, as I can't guarantee they are 100% correct!