The Welsh Economy I: What’s the economy supposed to do?

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At the start of 2018, I ran a Twitter poll to let you choose which subject I should dedicate a State of Wales update too. “The Economy” won (above) and here it is – probably the most ambitious and wide-ranging work to date, more so than the original Wales: An Economic Profile.

There are 16 (SIXTEEN) parts to this series. Chuck me a couple of quid a month to make sure this isn’t the last one.

Wales: An Economic Profile (2012) wasn’t written with independence in mind but to give a general picture of the Welsh economy at the time.

While I’m going to do that again this time around, there’ll be a greater focus on fundamental and structural issues with the economy. That’s in order to point out weaknesses and strengths, start a conversation on what the economy could and should look like in an independent Wales and determine how achievable those policies and goals might be.

What this series ISN’T going to look at

Just so you don’t go into this expecting everything to be covered, here’s what won’t be discussed – though some of it may have already touched upon in other posts or will be discussed lightly in this series:

  • Currency – I’ve already looked at that (link).
  • Whether Wales would definitely be “better off” or “worse off” with independence – This series can give pointers and discuss what sorts of policies might lead to people feeling better off, being more productive, more confident in the economy etc. but to say for definite that Wales would be better or worse off requires sophisticated economic modeling I’m unable to provide. Of interest: The Flotilla Effect Revisited.
  • Industrial relations, employment law & trade unions – These are all subjects worthy of looking at in their own right to do them justice, though they’ll get a mention in passing.
  • Transport & Infrastructure – Again, subjects like transport, energy policy and utilities are worth looking at in their own right, though in this series I’ll look at how they currently contribute to the Welsh economy rather than how policy might changes towards them.
  • Public finances and tax – Neither of these are directly linked to the economy. Some preliminary work has been done on this in How Rich is Wales? As well as How is Wales funded?
  • Microeconomics – Microeconomics is focused on the consumer-side of things, like how price changes affect retail and wholesale sales on individuals and individual businesses. This series is focused on macroeconomics – how the national economy and individual sectors work.

If it’s not mentioned above then there’s a good chance I’ll be looking at it in the coming posts.

What’s Coming Up?

As mentioned, the series has 16 parts, divided into 5 broad themes.

Theme One – Economic History & Policy

Theme Two – Wales: An Economic Profile

Theme Three – Trade & Comparative Economics

Theme Four – Discussion Points

Theme Five – Conclusions

What do we mean by “The Economy”?

Economics is, at heart, the science of scarcity. (Pic:

The dictionary definition of “economy” is the management of resources as well as the production and consumption of goods and services. If you grow it, make it, do it, sell it or pay for it, it’s part of the economy.

It’s based on a core “law”/principle of scarcity – the problem of having unlimited wants, but limited resources to meet them.

There are ten famous core principles of economics famously defined by Gregory Mankiw:

  • Tradeoffs – To get one thing (i.e.a new car), you need sacrifice something else (i.e. time working); “There’s no such thing as a free lunch”.
  • Opportunity Cost – The cost of something is whatever you give up to obtain it.
  • Rational people think about the margins – People make decisions based on the cost and benefit of marginal changes (i.e. spending money now to make more money later or meet a specific goal).
  • People respond to incentives – The punishments and rewards for taking certain actions guide decisions (i.e. cutting back on smoking when prices of cigarettes rise).
  • Trade can make everyone better off – Proper distribution of goods or specialisation in producing a certain number of goods/services can increase sale prices and can also enable you to get what you want at a cheaper price/tradeoff.
  • Markets are a good way to organise economic activity (Part XI) – Nations which had centrally-planned economies have largely abandoned them (even North Korea to an extent) and markets reflect both the value of goods to consumers as well as the cost of producing them (aka. “The Invisible Hand” c/o Adam Smith).
  • A government can improve economic conditions – Government intervention is useful when there’s a market failure, to promote efficiency, to break up monopolies, enforce property rights (to maintain an incentive) or to redistribute wealth to ensure more people benefit from the “economic pie”.
  • Living standards are dependent on production (Part XII) – A nation’s living standard is largely dependent on the value of the goods and services they produce per worker in a given time (productivity).
  • Prices rise when governments/banks print too much money – This is known as inflation (see more at Currency I: What does Wales need from a currency?).
  • Societies face a tradeoff between inflation and employment (Part XIII) – Government policies usually push inflation and unemployment in opposite directions; policies which encourage more employment cause inflation and prices to rise, policies to cut inflation cause unemployment to rise and prices to fall.

Economics isn’t an exact science (some might not recognise it as a science full stop). There are a number of schools of thought and one of the most popular sayings about economists is: “If you ask five (economists) a question you’ll get five different answers”.

Some of the critiques of the current economic model will be discussed in later parts, particularly Part XI.

Why is productivity so important in economics?

Productivity is a sign of how efficient an economy is. High levels of productivity mean more goods and services are produced with less effort and/or at higher values. This boosts the supply of goods and services in a society, decreases the cost of producing that good or service (meaning lower prices) and increases the value of labour (meaning higher wages for less work).

All of that is fundamental to making an economy “tick”. As mentioned earlier, in mainstream economic thought it’s believed that higher levels of productivity raise living standards.

Think of it this way: Someone pays you £100 to clear their garden.

If you don’t have any tools to do the work (i.e. your bare hands, small trowel) it’ll take you ten hours, so your labour output is worth just £10 an hour.

If you had advanced power tools, a mini digger and maybe more than one person to help you, you might be able to do it in 2 hours, raising your labour output to £50 an hour. You might even be able to do two or three gardens a day. You would be significantly more productive than in the first scenario because you’ve got better tools, can make better use of your time and produce a higher-value end product for the consumer.

How productivity is measured and why this presents problems for Wales

You would think activites like these make a vital contribution to Welsh productivity figures, but technically it’s worthless. (Pic: Wales Online)

The main measures of productivity in a nation are Gross Domestic Product (GDP) and Gross Value Added (GVA). The figures can either be used to determine a whole nation’s productivity or the average productivity per person (GDP/GVA-per-capita).

GVA is now the more commonly-used measure and is calculated by:

the value of all final goods and services produced in a nation
plus subsidies
minus direct and sales taxes on products (i.e. VAT)

The latest figures, from 2016, show that Welsh GVA was £59.6billion or £19,140 per person (see more: How rich is Wales?). The per-head figure was only 72.7% of the UK-wide figure.

Remember, this isn’t a measure of wealth, it’s a measure of productivity. The total turnover of Welsh companies in 2017 (pdf – p2) was £117.1billon – almost twice our GVA.

There’s also one crucial word in the GVA calculation that was picked up by Swansea University economist Prof. John Ball earlier this year:

Final goods and services”.

Everything produced “in between” – processed raw materials, parts and components (known as intermediate goods) – don’t count towards GDP or GVA figures. Guess what the Welsh economy specialises in? It doesn’t mean it’s discounted in economic figures, but it does suggest that produce from Wales might not be as high value as it perhaps could be.

Also, many high-value services used by Welsh people are provided by companies headquartered in London, Edinburgh or elsewhere – banking in particular, but also private pensions, personal investments, stock trading and insurance. This means when these companies handle Welsh money or commodities, it won’t count as Welsh economic output but English and Scottish economic output because they’re dealing with the final good or service.

If you want a more recent example. Arla’s decision earlier this year to close a creamery in Denbighshire means that while Welsh milk will be sent to England and Scotland to produce “Welsh cheese”, none of that will count towards Welsh economic output – yet we lose jobs, GVA, tax revenues etc.

Wales produces and sells very few finished goods at high market prices and that’s perhaps why our GVA is lower than it otherwise should be. It’s also a problem that goes back to antiquity, which I turn to next….