The Welsh Economy IX: Wales in the UK Economy

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With a detailed breakdown of how the Welsh economy works at the moment out of the way, attention now turns to how Wales fits within the UK economy.

Wales’ place in the global economy will be looked at in Part X, while unemployment & economic inactivity will be looked at in more detail in Part XIII. This part focuses on productivity, business demographics, business ownership and any conclusions drawn from it.

Wales within the UK Economy

First off, let’s look at how the economies of the different UK nations are structured (for this exercise I’ve separated the public sector from all other services), with the sectors starting at 12 o’clock and listed counter clockwise (for the colourblind).

There’s one very obvious difference from the outset – services (Part VI) make up a far greater proportion of the English economy than either Wales, Scotland or Northern Ireland. The big differences lie in financial services and what is statistically described as professional & scientific services, where the proportion of GVA from the two is roughly double that of any of the other Home Nations.

There’s an obvious answer to that: London. As a global city with high levels of agglomeration, London is headquarters for nearly all of the major UK banks and service companies so by virtue it’s going to generate a much higher proportion of the entire UK’s service output.

Another thing to note is that Wales is more reliant on manufacturing (Part V) than any of the other UK nations and slightly more reliant on public services (Part VIII) than Scotland and Northern Ireland. When the focus of Welsh economic development for the last 40 years has been to replace heavy industry with light industry – while Scotland saw their service sectors develop propped up by oil and gas and Northern Ireland underwent a post-Troubles reconstruction – then this isn’t surprising.

The question worth asking here is whether UK policies – in all those areas the Welsh Government has no say over (Part III) – helps or hinders the Welsh economy seeing as Wales’ economic make-up is so different to England’s?

One of the most commonly trotted out political tropes in Wales is that the economy hasn’t grown or has gone backwards since devolution. It isn’t true and here’s proof.

Economic productivity per head (GVA-per-capita) has consistently grown since 1999, increasing from £11,354-per-head in 1999 to a provisional figure of £19,140-per-head in 2016. That’s a 3.12% compound annual growth rate since devolution – very healthy and only slightly less than the whole-UK figure of 3.18% growth per year (neither figure adjusted for inflation).

“But”, I hear you cry, “Wales is always at the bottom of economic league tables!”

As you can see, it’s true. Wales is at the bottom of the nations and regions of the UK, with GVA-per-capita hovering at between 74% and 70% of the UK average since the late 1990s. Rhodri Morgan once famously wanted Wales to reach 90% of UK average GVA by 2010 (in the end it was 71.1%)…. but you should be able to notice something else.

London is so far ahead of the rest of the UK in terms of productivity, it’s artificially dragging the UK average upwards. The fact that TEN nations and regions are below the “UK average” renders it a poor measure of the true state of the economy.

Think of it like this. If the UK economy were a 100m race, 10 nations and regions would be very good semi-professionals, one (SE England) would be a decent professional and London is Usain Bolt! The UK is ridiculously over-centralised.

As the figures show, the only time in the last 20 years when every region outside London had a hope of catching them up economically was around 2000 – and it only happened when the London economy contracted (probably due to the dot-com bubble).

How do different regions of Wales compare to each other?

Apart from a dip during the Great Recession and its aftermath (Part III), every region has experienced near enough consistent growth. However, though because some regions – particularly Cardiff/Vale of Glamorgan and Flintshire/Wrexham – had a higher starting point it looks like they’ve grown at a faster rate.

Although its figures might be impacted by being tied to the Vale of Glamorgan, Cardiff isn’t the success story; it’s actually the Central Valleys (RCT & Merthyr Tydfil) which grew at the fastest rate since devolution.

The areas in Wales which have struggled and not grown as fast as the average are those which have very low population densities (Powys) or face continued structural problems (Gwent Valleys – perhaps linked to the Ebbw Vale Steelworks closure).

Being close to the English border doesn’t seem to matter either, with the authorities furthest away seemingly growing at a faster rate year-on-year than those closer to England despite generally having lower GVA-per-capita.

Business Birth Rates, Death Rates & Survival Rates

Another good way to measure the health of an economy is the state and general structure of businesses.

The key measures I’m going to look at are the business birth rate, business death rate, 1-year survival rate (dated 2011) and 5-year survival rate (again dated 2011).

First off, how is Wales doing compared to the rest of the UK?

Of the UK’s nations and regions, Wales has the third lowest business birth rate but also has a below average death rate and an above average 1-year survival rate. This means that while fewer businesses might be established in Wales, they’re marginally less likely to close after a short period of time than the UK average.

In terms of the 5-year survival rate, Wales comes off pretty well, being only 1 percentage point below the UK average, but ahead of a number of English regions, including London. This suggests a business is near enough just as likely to last the course in Wales as anywhere else in the UK – though perhaps we’re not doing as well as we should be.

Next, the picture within Wales – and it throws up a few surprises – starting with the business birth rate.

Where’s the entrepreneurial capital of Wales? Apparently, it’s Rhondda Cynon Taf.

With a birth rate of 19.5% in 2016, RCT outstrips both the Welsh and UK averages. Merthyr Tydfil isn’t far behind on 17.9%, with Newport (15.7%), Cardiff (14%) and Blaenau Gwent (13.4%) following next.

With the exception of Carmarthenshire, the business birth rate was generally much lower in rural areas and there’s probably a correlation between population density and business start-ups; maybe because there’s a bigger local market to tap into, or the sort of support networks needed to sustain a business in the early days are present in south Wales and the northeast to a greater extent than Mid Wales.

Next, the business death rate.

Again, the pattern is similar to the birth rate – more people, more businesses that cease trading. This is perhaps because charges relating to business operations are higher (like rents and business rates), or there’s more competition.

Lower business death rates in rural areas could be explained by the large numbers of businesses in the primary sector (Part IV), which have access to things like farming subsidies to help keep them going, as well as a lack of competition for any local businesses in rural areas; some businesspeople in rural Wales might be running the only business of its kind for miles around.

People in urban areas might also be more willing to take risks to get ahead or care out a niche for themselves which doesn’t end up working out (which would explain London’s relatively high business death rate). So a high death rate could be a sign of high levels of innovation and dynamism and might not necessarily be a bad thing.

Finally, the 5-year survival rate.

The five-year survival rate is important because it gives you an idea of whether an area has the right set of circumstances to make sure a new business lasts a long time.

If you live in rural Wales it’s good news – 5-year survival rates are much higher than the rest of Wales. Ceredigion has the highest 5-year survival rate (48.8%), while Powys (47.4%), Gwynedd (45.5), Anglesey (45.2%) and Pembrokeshire (48.2%) are all up there. As mentioned earlier, this could be down to a large number of family-owned farms, the lack of competition due to the low population densities and farming subsidies.

The big surprise was the local authority which came third – the UK media’s favourite whipping boy when it comes to poverty porn – Merthyr Tydfil (48.1%).

In fact, Merthyr scored well across the board. On the surface of it you could argue it’s undergoing something of an economic revival led, not necessarily by heavy industries and factories, but local foundation businesses. Also, a regeneration programme focused on social development, key infrastructure and making the most of its geographical position (new college, health centre, A465 dualling etc.).

While there are still serious problems relating to economic inactivity (Part XIII) and relative poverty (Part XI) in the area, it’s one in the eye both for those who think the Valleys are a write off and the local professional moaners who can’t see the good that’s happening right under their noses.

Business Demographics

In 2017 (pdf), 66.1% of the Welsh workforce were employed by small and medium-sized enterprises (SMEs).Of these, 16.3% were self-employed (defined as 0 employees).

34.4% of people in total worked for so-called micro-sized businesses (the self-employed and those employing up to 9 people) – this is marginally higher than the UK average of 33.3%.

The vast majority of active companies in Wales during 2017 – 92.7% – were in the micro category. Only 2.6% of companies (6,035) employed 250+ people, yet they employ 29.9% of Welsh workers.

Larger companies were also responsible for £69.6billion (59.4%) of all of the turnover generated by all businesses in Wales, compared to 51.2% across the UK as a whole.

Like other charts, there’s a general correlation between employment by large companies and population/population density, with two main clusters along the M4 corridor and Deeside. This isn’t a surprise as it generally tallies up with the proportion of jobs in production and construction – which tend to be more labour intensive – as access to major transport routes.

You can, therefore, conclude that while Wales has a marginally higher proportion of small businesses as the total number of active businesses, economically-speaking, Wales is still more reliant than the rest of the UK on big box “anchor companies” which are probably a legacy of WDA policy to encourage foreign direct investment (Part II, Part III, Part X).

Discussion Points

Wales will find it difficult to close “Offa’s Gap” – The gap in productivity between Wales and the UK average was dubbed “Offa’s Gap” a few years ago. London’s economy has run away so far from the rest of the UK it would take growth figures similar to those experience in China during the 2000s to catch up to the UK within a reasonable amount of time. The Welsh economy would probably have to grow consistently at 1 or 2% in real terms above the UK average for maybe 20-30 years – which is incredibly difficult, if not impossible. In my opinion, the best we can hope for is to match pace and focus not on “growth” but the quality of jobs and other measures (Part XII).

….but perhaps it doesn’t matter – The last time Wales was within reasonable touching distance of UK average GVA was in the late 1980s where Wales was at around 83-84%, probably due to inward investment. We have to remember though that GVA measures productivity, not wealth – on many measures other than GVA, Wales does relatively well (How rich is Wales?) and in global terms, Wales has a highly developed and open economy (Part X). In terms of independence and “affordability”, the tax base is far more important than economic growth.

Is London keeping Wales (and the rest of the UK) afloat? Or is it a leech? – The UK economy is highly centralised and also highly unbalanced to the point that Wales isn’t the only region disadvantaged by it, but perhaps comes off worse because our economic structure is very different to England’s and more reliant on manufacturing and foundational economy jobs than high-end services.

Unionists will point to redistribution of tax revenues from London and SE England offsetting any economic problems that result from having such a highly-centralised economy (How is Wales funded?), but the problem there is that it’s choking the Welsh economy. London sucks in talent, capital and infrastructure investment and farts out UK Government-controlled “subvention”.

Spending on things like welfare, defence and state pensions (which Wales doesn’t even control and is spent by the UK Government on our behalf) won’t do anything to ensure Wales gets off the bottom of the UK’s economic league tables. Being “subsidised” is no good if you have no control over how the “subsidy” is spent.

And I find it very hard to believe that 5% of the UK’s population is directly responsible for 28% (£13.2billion) of the UK’s £46.9billion budget deficit….but that’s a topic for another day.

If the Republic of Ireland were still part of the UK – with many of the same problems Wales current faces – they would by all likelihood be in a similar position to what Wales is in now. It took them decades to turn things around, but as it stands the Irish are about 37% more productive than the average UK worker and twice as productive as Wales. Why?

Almost all serious levers and influence over the Welsh economy remain in London and controlled by the UK Government. UK governments have had 500+ years to get the Welsh economy in a position to contribute to the UK on an equitable base and they’ve failed spectacularly to the point where it’s a miracle that Wales is doing as well as we are.