THE RELATIVE PROSPERITY OF WALES 2010

Last Wednesday, the latest GVA (Gross Value Added) data was released by the Office for National Statistics.

It showed that this measure of prosperity had, following the recession of 2009, increased in all UK regions.

The good news for Wales is that, along with the East Midlands, it had the fastest growth in GVA/head of population in 2010 at 3.3 per cent. Before anyone gets excited about this news, it can probably be explained by the fact that both regions are the most manufacturing intensive in Britain and that the brief export led recovery experienced in 2010 was beneficial, at least in the short term. In fact, the bad news was that Wales is still the poorest part of the UK with a GVA/head of £15,145. In contrast, the richest part of the UK – London – had a GVA per head of £35,026.

And if we look at the growth of London since 1999, the year of the establishment of the National Assembly for Wales, the economic prosperity of Britain’s capital city has grown by 73 per cent. In contrast, the Welsh economy had only increased its wealth by 48 per cent.

So what has been happening by industry, where data lags regional GVA by one year? It shows that, despite the fact that Wales is still one of the main regions for manufacturing, its importance has decreased from being 22 per cent of the Welsh economy in 1999 to 15 per cent in 2009. In contrast, the public sector has grown from 23 per cent to 27 per cent over the same period. And ironically, given the way that the First Minister suggested this week that financial and insurance services was only important to the City of London, it is this sector that has experienced the largest growth in Wales since 1999, expanding by 125 per cent during this period.

What about the different parts of Wales? Has growth been even over this period? As many of you are no doubt aware, two thirds of Wales of Wales has qualified for around £4 billion of European Structural Funding since 2000 as one of the poorest regions in Europe. The aim of this funding was to close the prosperity gap.

The question is whether this has happened?

Unfortunately not, at least compared to the UK economy, with West Wales and the Valleys declining from 65 per cent of the UK average prosperity to 63 per cent since 1999. That is not to say that the difference between the richest and poorest parts of Wales has not been reduced. It has, but that is only because the growth in East Wales, which includes Cardiff, Newport, Wrexham and Flintshire, has been slower.

On a more local level, the good news is that Anglesey is no longer the poorest part of the UK. Unfortunately, it has been replaced by the Gwent Valleys, which now has a GVA/head of £10,654 in 2009 as compared to a UK average of £20,000.

So what does all this tells us.

Obviously, it shows that Wales remains the poorest part of the UK despite billions of pounds in additional European funding and a so-called devolution dividend. Not surprisingly, there remains the argument that the Welsh economy has suffered from long-term structural issues for decades, especially in relation to manufacturing.

Yet, the evidence suggests that the decline in this important industry, so critical for high value activities such as exporting, has actually declined at a faster rate in Wales since 1999 after actually growing during the early 1990s. There is also the issue of whether the Welsh Government could have done more or whether all the economic levers lie with the UK Government?

Certainly, some will look enviously at the growth rate of the Scottish economy, which has expanded by 60 per cent whilst Wales has demonstrated the lowest growth of any of the four nations. Critics may also argue that most of the effort of politicians and civil servants has been equivalent to shuffling deckchairs on the Titanic, bringing in a new economic document every few years rather than taking a long term view of how to truly transform the economy. From “A Winning Wales” in 2002, to “Wales: a Vibrant Economy” in 2005 to the “Economic Renewal Programme” in 2010, what we have seen is policymakers tinkering at the edges of economic development rather than coming up with a real vision for the future of the nation’s prosperity, one that truly changes the way that this country’s economy is managed.

Certainly, the lack of real and consistent strategy has had a major impact on the nation’s economic potential and, consequently, much of the billions of European Structural Funding, as well as the money available from the Welsh Government’s own funds, has been largely squandered, despite having the highest proportional spend of any region on economic development.

Back in 2001, the then Assembly Government under the leadership of Rhodri Morgan set targets to increase Wales's GVA to 90 per cent of the average for the UK by 2010. Unfortunately, we have gone nowhere near that target with Wales’ prosperity being 74 per cent of the UK average in 2010.

 Rather than writing yet another grand document, what is now needed is real action to drive forward entrepreneurship, innovation, productivity, exporting and skills to ensure that, in the next decade, the Welsh economy can make some major strides towards closing the prosperity gap and finally get off the bottom of the UK economic league table.

COMPARING SCOTLAND AND WALES ON ECONOMIC ADVICE

Yesterday the Welsh Government's Council for Economic Renewal met to discuss the way forward for the Welsh economy.

Formerly known as the Business Partnership Council, it provides advice to help inform economic and business policies in Wales.

Under the Government of Wales Act 1998, the Government has a statutory duty  to consult with businesses where the exercise of its functions impact on them.

This duty to consult was strengthened by the Government of Wales Act 2006, which required Welsh Ministers to make a Business Scheme setting out how they proposed to consult with business.

The Council for Economic Renewal is made up of a range of business, social enterprise and trade union representatives and is chaired by the First Minister.

According to today's Western Mail, leading members include :

• PAUL BYARD: Head of external affairs for manufacturing employers’ organisation EEF in Wales. Said earlier this year that the group’s membership had shown optimism that there would be future growth.
• JULIE COOK: Wales TUC national officer. Has been critical of public sector job cuts, particularly for its perceived disproportionate effect on women.
• HEATHER EASON: Policy adviser at Wales Social Partners Unit. Also a freelance translator who speaks fluent Esperanto.
• IAN GALLAGHER: Policy manager for south-west England and Wales at the Freight Transport Association. Has called for a cut in tolls on the Severn crossing.
• ALAN GARLEY: GMB regional secretary for Wales. Was prominent in the campaign to keep the Burberry factory in the Rhondda Valley open.
• RICHARD HOUDMONT: Director for Wales and Ireland for the Chartered Institute of Marketing. A well-known business commentator and advocate of greater innovation.
• RICHARD JENKINS: Director of FMB Wales. Has called on the Welsh Government to make stronger representations to Westminster for a reduction in the rate of VAT levied on repair and maintenance work.
• MARTIN MANSFIELD: General Secretary of the Wales TUC. Recently reiterated his belief in the value of collaboration to help businesses through economic difficulties without job losses.
• PHIL ORFORD: Chief executive of the Forum of Private Business. Said this year that small firms would continue to experience tough times due to reduced public spending, increased costs and late payments.
• RICHARD PRICE: Planning and policy adviser for Wales for the Home Builders Federation. Said last week that many housebuilders were concerned about a eurozone fall-out.
• NON RHYS: Policy manager for the Federation of Small Businesses in Wales. Said earlier this year: “Our members have told us that they want to employ, but do not have the resources”.
• ANDY RICHARDS: President of the Wales TUC. Has described public sector cuts as an “assault on our class designed to shift the blame for the economic crisis to the public sector”.
• DAVID ROSSER: The director of CBI Wales, who has joined the Welsh Government on a six-month secondment. He is taking up the position of director of innovation and anchor companies within the Department for Business, Enterprise, Technology and Science from January.
• DEREK WALKER: Chief executive of the Wales Co-operative Centre. Has argued that employee-owned businesses can enjoy a “real competitive advantage in tough economic conditions”.
• GARETH WILLIAMS: Chairman of the Institute of Directors in Wales. Called on the Welsh Government earlier this year to promote Wales internationally

A fuller list of normal attendees is available on the Welsh Government website. However, it is worth comparing this group to the Council of Economic Advisers which the Scottish Government has put together:

• SIR GEORGE MATHEWSON (Chair) One of the most eminent Scottish businessman of his generation. His period as Chief Executive and then Chairman of the Royal Bank of Scotland inspired the transformation of the bank into a global success story. Sir George previously also spent 6 years as the chief executive of the Scottish Development Agency.
• CRAWFORD BEVERIDGE, Executive-Vice President and Chairman of Sun Microsystems in Europe, the Middle East and Africa. From 1991 to 2000, Crawford Beveridge served as Chief Executive of Scottish Enterprise. He brings a wealth of international business experience.
• FRANCES CAIRNCROSS - Rector of Exeter College at Oxford University. Previously she worked for 20 years on 'The Economist' magazine. She chaired the Economic and Social Research Council for six years until 2007 and is a well respected author whose works include 'Costing the Earth' and 'Green, inc'.
• PROFESSOR ANDREW HUGHES - Hallett Professor of Economics and Public Policy at George Mason University in the US and visiting Professor of Economics at the University of St Andrews. He specialises in international economic policy and has acted as a consultant for the World Bank, the IMF, the Federal Reserve Board, the UN, the OECD, the European Commission and central banks around the world.
• PROFESSOR JOHN KAY - A leading economist and author. The author of several influential books, Professor Kay is a regular contributor to the Financial Times. He is a fellow of St John's College, Oxford and served as Director of the Institute for Fiscal Studies. He has served as a Professor at the London Business School and the University of Oxford. He is currently a visiting professor at the LSE.
• PROFESSOR ALEX KEMP - Schlumberger Professor of Petroleum Economics at the University of Aberdeen. He is a leading energy and taxation expert who has advised the World Bank, the United Nations, and individual governments around the world. In recent times, Professor Kemp has expanded his research to include the economics of renewable energy and how best to foster carbon capture.
• PROFESSOR FINN KYDLAND - Henley Professor of Economics at the University of California, Santa Barbara. He was awarded the Nobel Prize for his work in dynamic macroeconomics in 2004.
• JIM MCCOLL - Chairman and Chief Executive of Clyde Blowers - a company transformed under his leadership into a portfolio of global engineering companies. He also serves as Chairman of the Welfare to Work Forum which has seen 15,000 Scots enter employment.
• PROFESSOR SIR JAMES MIRRLEES - Professor Emeritus at Cambridge University and distinguished professor-at-large at the Chinese University of Hong Kong. Sir James was awarded the Nobel Prize for his work on economic models and equations about situations where information is asymmetrical or incomplete.
• PROFESSOR FRANCES RUANE - Director of Ireland's Economic and Social Research Institute previously an Associate Professor of Economics at Trinity College, Dublin. She is widely published in the area of international economic and industrial development.
• THE LORD SMITH OF KELVIN - Chairman of the Weir Group and Scottish and Southern Energy. He also serves as a non-executive director of 3i Group, Standard Bank Group and Aegon UK. Lord Smith chairs the Glasgow 2014 Commonwealth Games Organising Committee, and also chairs the Smith Group, a group of dedicated educators and business and civic leaders who are determined to offer more opportunities to young Scots

With respect to all the individuals on the Council for Economic Renewal involved who are merely doing their job and have been invited by the Welsh Government to represent their organisations, this is like comparing Porthmadog Town FC with Man Utd or an X-Factor finalist with Bruce Springsteen.

In fact, I am at a loss to understand why the Welsh Government would set up a system to take  economic advice from a group made up largely of business representatives/lobbyists and trade unionists rather than a forum of leading businesspeople and international thinkers. Indeed, with the honourable exceptions of Gareth Williams of the IOD and Phil Orford of the FSB, there is not one individual on the Council for Economic Renewal who has operated at the coalface of business outside of Wales.

Does this merely reflect the lack of ambition in Wales compared to our Celtic Cousins? Why do we continue to be inward looking in everything that we do and revert back to the old committee style approach to everything? 

Surely we are better than that?

Wales could and should have developed a completely new way of thinking in providing economic advice to the government. In fact, if we need innovative new ideas and entrepreneurial plans to grow the economy during the next few years, then we should bring together entrepreneurs, business leaders and innovators to achieve this. Indeed, on this blog, back in December 2006, I did suggest that: 

“the First Minister should urgently convene a summit of our leading businesspeople and entrepreneurs - such as Sir Terry Matthews, Sir Christopher Evans and Henry Engelhardt - to get their views on what is needed to kick start the Welsh economy.”

And for the first time this week, Ieuan Wyn Jones can't blame the current Labour Government for this state of affairs as he himself, as the Minister for Economic Development, put together this new Council for Economic Renewal by essentially using the same people who had sat on the Business Partnership Council for years rather than doing something creative and innovative.

I understand that there is statutory requirement to consult with business groups but can't that be done in a separate form? If not, then the Council for Economic Renewal should have all the chairs of the nine industry panels - all leading business people in Wales - represented and reduce the trade union and lobbying groups representation to two seats each. 

Perhaps then we can finally come up with a more positive approach to sorting out the problems of the Welsh economy rather than the defeatist approach put forward by the First Minister yesterday.

THE REGIONAL GROWTH FUND

This week, the government announced that it would be looking to give out £950 million to boost the economy further through the second round of its Regional Growth Fund.

Based in England only, this is a £1.4 billion fund that operates over three years (2011 to 2014) with the aim of stimulating private sector investment by providing support for projects that offer significant potential for long term economic growth and the creation of additional sustainable private sector jobs. 

In particular, the fund aims particularly to help support those areas and communities that are currently dependent on the public sector to make the transition to private sector led growth and prosperity.

To qualify for support from the Regional Growth Fund, projects should demonstrate that they:

• create additional sustainable private sector growth;
• rebalance the economy in those areas currently dependent on the public sector;
• would not otherwise go ahead without support from the Regional Growth Fund;
• offer value for money
• be state aid compliant.

Similar to the Enterprise Zones in England, the Regional Growth Fund is competitive and only those bids that best lever private sector investment, meet the fund objectives and criteria and offer the best value for money will be supported.

On Monday, the UK Government announced the 119 successful bids in the second round of the Regional Growth Fund. But it is also worth noting the expected impact of the first round of funding, as shown in the diagram below.

According to the UK Government, 

• there were 464 bids for a total of £2.78 billion of funding with two thirds of the funding requests was for finance of between £1m and £5m. 
• Half of the bids came from three regions, namely the West Midlands, the North West and the North East and only 4 per cent from London
• There were 50 successful projects in Round 1 for £450m which were expected to create 27,549 direct jobs and a further 96,654 indirect jobs in the English economy. 

According to Regeneris Consulting, the real winners were the West Midlands - capturing 25 per cent of R1 funding including a £70m grant to Jaguar Land Rover and the North East of England, which had 14 successful bids across the region, capturing around 13 per cent of the funding.  

In contrast, the perceived losers were London and South East England – which submitted 52 applications and got 1 approved. The North West of England also lost out, only capturing around 6 per cent of round 1 funding with no projects in either Cumbria or Lancashire.

The jobs to be created are merely projections by the companies, as we used to have with the old Regional Selective Assistance grants in Wales. The cost per direct job is slightly higher for Round 1 (at £16,334 per job) but this would be expected given that a significant number of the projects are supporting R&D and innovation. However, it is far lower than the estimated cost per job for the European Convergence Programme for West Wales and the Valleys of around £44,000 per job.

The UK Government also seems to be focusing on using large companies to leverage further investment into these regional economies. Indeed, as Regeneris Consulting point out, SMEs did poorly out of the first round of funding, with the majority going to investments in larger firms to expand facilities, increase R&D and increase employment. Only time will tell whether this will work, given that studies have consistently shown that SMEs are more effective at using such grants.

One final issue, which is more to do with the transparency of policymaking. In Wales, the Economic Renewal Programme is the closest equivalent of the Regional Growth Fund and yet it would seem that it is not performing as well, with the Welsh Conservatives claiming that only 16 firms have been helped in the first six months of 2011. In contrast to the detailed data presented by the UK Government, the biggest problem in assessing the effectiveness of Welsh Government policy is the reluctance to publish regular data on its economic programmes, something it used to do regularly to the old Economic Development Committee in the first and second Assemblies. 

Perhaps this is something that Nick Ramsay, the new chair of the Enterprise and Business Committee within the National Assembly for Wales, should restore so that at least the Welsh Government is held accountable for its policies in business and economic development.

MYOPIA AND ENTROPY

Over the next month, this blog will look very carefully at some of the new policies developed as part of the Economic Renewal Programme (ERP) launched by the Welsh Assembly Government (WAG) last week.

Hopefully, it will help to start a debate on whether this is the right approach to turn around the Welsh economy and to drag us from the bottom of the UK’s prosperity league table.

I will start by examining the decision to abolish International Business Wales (IBW), the Assembly’s overseas investment arm that was responsible for attracting business into Wales as well as promoting Welsh business abroad.

Some will say that this decision to close down the last remnant of the old Welsh Development Agency was justified by the outcomes of last October’s review of IBW by Glenn Massey, the former inward investment specialist. However, if you bother reading the Massey report in detail, it actually has little evidence to suggest that the division was doing badly.

If we examine IBW’s record on new jobs being brought into Wales in 2009 as compared to 2005, then the numbers are approximately the same, and equates to 6.2 per cent of the UK figure, which is higher than the proportion Wales would be expected to bring in as a region. More importantly, it did this job with roughly a third less of the resources than it had five years ago

Does this look like failure?

Actually, IBW has done exactly what would be expected of it under such conditions, namely deliver the same results with a vastly reduced budget. Whilst it was suggested that “IBW has left Wales at the bottom of the 12 UK regions when it comes to safeguarding jobs”, the report stated that made the point that “IBW has no direct responsibility for reinvestment by foreign owned companies in Wales.

Indeed, if you read Massey’s comments very carefully, it shows that the primary reason for issues such as the lack of branding, a silo approach across the Department of Economy and Transport (DE&T) and the focus on RSA as a tool for inward investment, were not due to operational issues within IBW itself but were failures in strategy that are decided at the highest levels of government.

To put it simply, it would seem that a lack of strategic direction at the top, rather than IBW, was essentially the reason as to why there was little care and attention given to the reinvestment needs of over 500 foreign owned companies in Wales, a situation that may have cost tens of thousands of jobs in Wales during the recession.

In fact, the potent mix of myopia and entropy that exists at the highest levels of the civil service is perfectly exemplified by this decision to scrap IBW and its functions.

Let’s take for example, its role in inward investment. Whether you agree with grants to large foreign companies (and I don’t), the real question is whether there is a role for an agency such as IBW to act as marketers for the Welsh economy, and to sell everything that is good about this nation to potential investors?

Consider this one recent change in the business environment that seems to have passed WAG officials by.

The new Westminster Government is gearing up the UK to be the most attractive place for inward investors with a reduction in corporation tax to 24 per cent over the next four years, the lowest level in Europe with the exception of Ireland.

Not only that, they have done the Welsh economy a massive favour as compared to the English regions by essentially wiping out ‘the opposition’ through their decision to abolish the regional development agencies that have been battling it out with IBW to attract the best companies.

Imagine if you were a business given such a golden opportunity?

With your main competitors closed down and the field wide open, would you have followed their lead and shut down the part of your firm that is marketing your goods to the rest of the World? Of course not - you would have taken full advantage of the situation presented to your business.

Maybe WAG doesn’t think that Wales can sell itself at a global level. If that is the case, what about IBW’s other role, namely the provision of support the internationalisation activities of Welsh businesses?

Does anyone seriously think that Welsh firms do not help with accessing overseas markets when the total value of exports for Welsh business for the last 12 months fell by 16.8 per cent to £8.8 billion. In contrast, Scottish exports rose by 3.5 per cent to £14.8 billion. Given this dismal performance, it is not surprising to find that Wales, with only 1264 exporting firms in 2010, accounts for only 2.7 per cent of the total number of exporters in the UK.

Would you, if you were in charge of the Welsh economy, therefore close down the body responsible for helping Welsh firms to increase their export activity or would you empower them, through your new economic renewal programme, to double that figure over the next decade, and ensure that Wales, at the very least, punches at its weight in terms of international performance?

The more one reads the Economic Renewal programme (and believe me, I have read it several times), the more one begins to wonder how WAG will deal with the 131,000 people currently out of work in Wales, with an employment rate that is lower than any other part of the UK apart from Northern Ireland.

If we don’t encourage entrepreneurship, help small businesses to grow, assist firms to internationalise and attract the best global businesses, then how are we going create jobs and wealth across all parts of our nation?

The business community can only hope someone within WAG has the answer to that conundrum.

PANIC IN CARDIFF BAY?

As I predicted yesterday, it seems that WAG's press office is working overtime to try and minimise any criticisms of the Economic Renewal Programme.

They have even gone so far as to write a last minute piece for today's Western Mail to try and explain how this new approach will benefit SMEs (whilst conveniently omitting the fact that they have cut support to the vast majority of small businesses in Wales).

Sorry, guys, your arguments just don't stack up and if that is the best you can do, then you need to get a new job.

For example, perhaps the Minister can explain why, in an interview in 2007, he said he was keen to increase business support to start-up companies and said " It is not just about the grant aid which is available, but giving the right advice at the beginning, in areas like the business plan, financial management and securing premises.”

Does he believe that, because of the recession, and new economic circumstances, that start-ups no longer need this business support, especially during the critical fiorst two years of their existence?

What has changed so much that he has now essentially abandoned FS4B, the main scheme for business support, cut business funding by a half to £50 million and is focusing his efforts on six sectors only? Where is the evidence for such an approach?

More relevantly, why is WAG so nervous about a debate on the economic direction for this nation?

Do they seriously think that everyone in the business community will agree with them just because they have done essentially what the CBI has suggested them to do?

It doesn't take a genius to work out that they have let down the small firm sector in Wales and if organisations like the FSB and the Chambers feel constrained in saying so, I can assure you there will be at least one person shouting from the rooftops to make sure everyone knows about this betrayal.

However, I do have one thing to thank the senior civil servants in WAG for.

People always come to me and ask how do you find something different to say every week in the Western Mail?

I must admit that it is sometimes difficult to also motivate oneself to put together 800 words together every week (without the advantage that politicians have of press office doing it for them!).

Anyway, I can now thank WAG for the next few weeks at least, as the ERP has given me the ideal material for my columns in the Western Mail and the Daily Post for the rest of the summer.

I look forward to continuing the debate and deconstructing, line by line, this excuse for an economic strategy for Wales, starting this Saturday.

Thanks a million!