An alternative to picking economic winners

Economy Sheets of paper with data on them
ViewsMarch 17th, 2021

Victoria Winckler, Director of the Bevan Foundation, says it’s time to shift Wales’ economic policies away from picking winners

Economic development policy in Wales has shape-shifted over many years.

For decades, the emphasis was on inward investment.  The Welsh Development Agency had many faults but it did at least deliver thousands of jobs, although the lasting contribution of some of those investments is a moot point.  As footloose projects began to dry up – or at least became more difficult to secure – the focus shifted to ‘growing our own’.  Remember the Entrepreneurship Action Plan? A few years later, growth sectors were all the rage, with all efforts focused on a small number of high performance (and mostly high-tech) business activities with the addition of tourism.  Then that star faded to be replaced with its near opposite – the foundational economy, comprising the unglamorous everyday economy of social care, food production and retail, energy and waste.

None of these new ideas has generated a transformation in the Welsh economy’s fortunes. For all the new ideas, plans, programmes and initiatives it continues languish at or near the bottom of the UK league table.

So what’s the answer?

At least part of the reason that the various economic development plans have not achieved the transformation they claimed is that they have sought an economic silver bullet. If only we had more inward investment / high tech companies / entrepreneurs / foundational businesses, then our problems would be solved.

The truth is that there is no silver bullet.

Focusing on one part of the economy, no matter how glamorous the sector or persuasive the arguments, will simply never work. The contemporary Welsh economy is a mix of agriculture, manufacturing, consumer services, business services and public sector activities.  Picking out one sector – or even group of sectors – as holding the key to success overlooks the importance of this mix.

This is most clearly seen in some high tech sectors.  Compound semi-conductors are said to become ‘cornerstones of the region’s future economy’ and have received tens of millions of public funding.  Yet the new cluster will create just 300 direct jobs, with a further 5,000 jobs created indirectly – a tiny proportion of Wales’ total employment.  It is hard to see how the development will make much difference to whole economy, no matter how significant it may be in other ways.

Sectors are also closely interconnected, with one type of economic activity relying on others.  This is clear in the foundational economy.  No matter how important the foundational economy may be, almost all of it relies on supplies from other sectors such as manufacturing or business services.  Think of that archetypal foundational activity – social care.  To deliver care, it uses masks, mattresses and medicines – all designed and produced in manufacturing. It also uses computers and software, developed by business services.  Similar interdependencies can be seen in other foundational sectors.

There is also a real risk those picking a particular type of economic activity, whether a sector, type of firm or technology, get it wrong. Even experienced and successful entrepreneurs sometimes make the wrong call, let alone civil servants and politicians. Trying to spot economic trends and ride economic waves is a mug’s game, best left to businesses.

So what’s left?

There is now considerable evidence that the way to develop a lagging economy isn’t to intervene in the economy itself. Instead, the way forward is to help to create the conditions in which businesses can flourish. Importantly, this doesn’t involve a bonfire of regulations or a race to the bottom, but public investment in the basics of skills and infrastructure.

First, investment in adult skills and especially lower-level adult skills rather than in higher education. For all the claims about Wales’ adult training offer, the opportunities on the ground are woeful.

Second, investment in connectivity – not just trains but also buses, cycling and walking, and digital connectivity.

And third, investment in ‘knowledge diffusion’ between businesses, enabling peer-to-peer sharing of experience and expertise, both locally and internationally.

What does this mean for future economic policy in Wales?

Taken to its logical conclusion, it should mean winding down regional development grants and incentives to firms simply to locate or invest in Wales. It also suggests that generalist business advice and support should also draw to a close (although they may well be a role for specialist support). The sums freed up would not be large – economic development spending has been quietly squeezed for several years.  But diverting them to adult learning and sharing ideas amongst businesses could deliver the step-change that has eluded public policy for decades.

Victoria Winckler is the Director of the Bevan Foundation

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