(Title Image: The Ecologist)
Economic growth is an expansion of the economy and an increase in productivity and/or the value of goods and services produced (and, subsequently, gross value added).
Economic growth is almost always presented as “good news”, but a growing economy doesn’t necessarily mean ordinary people get richer or that companies generate more sales etc. It just makes it more likely that unemployment will be kept at a relatively low level and that, in theory anyway, wages will grow and prices of some high-end goods will fall as supply increases.
Can economic growth continue forever?
Traditionally, economists believe this is indeed the case.
At one level this is magical thinking because we live on a planet with finite resources and economics is, at its most basic level, the science of scarcity and resource management.
Yet, all economic policies are geared towards growth. Few of us believe we will ever “run out of stuff”. If we do run out of things, a more efficient alternative will be invented to take its place (such as the shift from fossil fuels to renewable energy). The march has to be upwards. Negative growth and recessions are bad.
Living standards for pretty much everyone – even in the developing world – have improved dramatically over the last 100 years and that’s primarily down to industrialisation and economic growth. The reason the economy continues to grow was illustrated indirectly in Part IV – when you’re no longer reliant on basic resources and primary industry to sustain you, theoretically the economy can keep growing indefinitely through innovation and services or at least maintain a certain level.
Running a bank will generate more economic growth than a farm or factory and it doesn’t require any resources to do so. Increasing levels of recycling reduce the resources needed to produce hard goods and both clever investment and innovation to create new consumer products (i.e. zero carbon cars) can even be good for the environment on some level.
We are, nonetheless, reaching a tipping point where economic growth has to be matched with conservation of whatever resources we have left. While, theoretically, economic growth can continue, it may no longer be desirable or perhaps even necessary.
“Offa’s Gap”, The Flotilla Effect & Economic Growth
Whenever Welsh independence is discussed, we’re always told that the economy needs to grow to a certain level to make it “affordable”. Is this true? What does it mean in practice?
Let’s start with “Offa’s Gap”.
You might’ve seen me mention it in other articles down the years, but the phrase was coined in a Plaid Cymru paper jointly authored by Adam Price and Dr Eurfyl ap Gwilym in 2012 – I covered it in more detail at the time (Offa’s Gap – What? When? Where & Why?).
Essentially, Offa’s Gap is the gap in productivity between Wales and the rest of the UK. Something happened in the early 1990s that saw Welsh GVA-per-head fall from around 85-90% of the UK average to less than 80% and subsequently lower.
My nutshell hypothesis – and I’m no economist – is that it was the combination of the emergence of eastern European market economies at the end of the Cold War (which saw foreign investment redirected from Wales through increased competition and the failure of the WDA to adapt) and the liberalisation of the Irish economy (which I come back to later). Also, the sudden devaluation of the pound following Black Wednesday was taken advantage of by London and Scotland’s financial sector in subsequent years at the expense of Welsh manufacturing and (remaining) heavy industry.
Since devolution, Wales has slightly exceeded the average rate of economic growth across the UK. In 2016, GVA-per-head in Wales was about £114 higher than it would’ve been had we matched pace with UK economic growth since 1998. This was thanks mainly to Welsh growth being slightly faster on average than the UK since 2010.
On the face of it, Wales is doing about as well economically as would be expected within the UK, if not slightly better.
The key finding of The Flotilla Effect – another paper jointly authored by Adam Price and Ben Levinger – is that by using a population-based model, had Wales become independent around the time of the end of the Cold War in 1990, Wales would’ve been 39% more productive in 2009 than we actually were.
If this is true, then at 2016 prices, Wales would’ve been around £6,075 more productive per person, lifting the Welsh GVA-per-capita average from 71% of the UK average to 97% – similar to Scotland (as below).
The question remaining is how fast does the Welsh economy have to grow to close Offa’s Gap and match the UK.
A big word of caution – while I’m sure the basic maths adds up, I repeat that I’m not an economist and I’m making several big assumptions here. The figures are also in cash terms, not real terms (adjusted for inflation).
Some of those assumptions are that growth in the UK economy remains roughly the same year-on-year as it averaged between 2010-2016 (about 3.2% per year in nominal terms) and that the Welsh economy would grow at roughly the same rate on average as well (about 3.5% a year).
Economic projections beyond a year or so are notoriously unreliable and there are a number of variables that haven’t been included such as the impact of Brexit, the prospect of another economic downturn, changes in global trade due to increased protectionism and the impact of different rates of inflation.
Let’s assume my assumptions based on the average trends are true. If the Welsh and UK economies continued growing between 2016 and 2030 at roughly the same rate as they are now, then Welsh GVA-per-capita would only rise to about 75% of the UK average.
If the Welsh economy grew by an additional 1% each year on top of the average growth (4.5% a year in cash terms), the gap in 2030 closes to 86%. An additional 1.5% (5% growth) closes the gap to 92% and an additional 2% growth (5.5% a year) effectively closes Offa’s Gap.
So if Wales wants to close the economic productivity gap with the rest of the UK, what Adam Price said during the 2018 Plaid leadership contest about needing to grow the economy by between 2.5% and 3% a year for a decade (once inflation is taken into account) does seem to be correct.
The tipping point will be when the tax base reaches a level where public spending is roughly balanced with tax take and a small amount of public borrowing (deficit). We won’t know for certain what point that would be until our precise taxation and spending needs post-independence are worked out – entire topics in their own right (see also: How rich is Wales?, How is Wales funded?)
Economic growth of 4-5% in cash terms every year for a decade is certainly achievable; the Republic of Ireland reached annual growth rates of up to 10% during the late 1990s and even after 2000 was achieving close to 6% a year until the Great Recession. It was led mainly by foreign direct investment (something Wales used to be good at) – particularly from tech firms – a property & construction boom and incredibly ambitious infrastructure investment programme that Wales could only dream of at the moment.
I’m in no doubt that if Ireland was still in the UK, none of that would’ve happened. They paid a price for their growth and market fundamentalism after 2008 and paid a price before the “Celtic Tiger” as well, but imagine where Ireland would be now if every single big economic and fiscal policy call was being made in London and not Dublin? They would be Wales.
Steady State Economics & Degrowth
Economic growth isn’t all good news – that’s the point I’m trying to make in this piece. What if Wales adopted the complete opposite approach and focused less on economic growth and more on economic stability, quality of life and quality of work?
Some concepts related to this are already a common part of Welsh political discourse; recycling and the “circular economy” are both related to steady state economics and in the case of the former, Wales is a genuine world leader.
There’s an assumption that people are “rational”. Economists assume that people and businesses act rationally when making decisions (in line with “thinking at the margins” – Part I), when people at an individual level are far more complicated than that and may prefer, or even actively take, decisions that are irrational when understood by classical economics, but actually turn out better for themselves or society as a whole; not everyone is driven by optimising wealth and productivity (though most people and businesses are).
One advocate for steady state economics in Wales is Cardiff University economist, Prof. Calvin Jones.
In 2013, he wrote a piece for the IWA arguing that instead of seeing innovation and technology as the solution to resource depletion and scarcity – as well as other problems such as demographic change (an increase in elderly people with fewer workers) – we should instead make do with what we got.
On the surface of it, that sounds like defeatist doom-mongering but he has a point. The Welsh economy has grown pretty much consistently for 20+ years with a few bumps – and the facts I’ve provided over the course of this series proves that. Wales is technically more wealthy than its ever been (yes, seriously!). Yet, we’re no better off. We’ve got crappy work-life balance, an explosion in tech-libertarian gig-economy serfdom, zero-hour contracts, a reaction to it in the form of populist right-wing demagogues and the coming threat of automation just to finish us off (Part XIV).
Doing an about face on all that actually sounds sensible. The trouble is any politician going into an election advocating this sort of thing is going to get creamed because of our lust for “stuff”.
What would a post-growth/steady state economy look like?
We don’t know the answer to this question and that’s why the idea of degrowth and steady-state economics isn’t being taken as seriously as it perhaps should be. Here are some pointers:
- Simple living and “useful work” – Minimising your impact on the environment by living simply and only keeping the things you absolutely need. This doesn’t mean living off-grid in a hippy eco-village; it could mean designing homes to maximise energy efficiency, limiting storage space so you don’t accumulate things, rentals and sharing instead of owning and prioritising social spaces and social infrastructure in planning.
- “We, not me” – Prioritising public transport over private transport (with the exception of active travel), co-housing, limiting foreign travel but increasing general leisure time (i.e. 4-day working week), higher taxes on consumption (i.e. higher VAT, sales tax, carbon tax) and lower taxes on income; the introduction of wealth and/or luxury taxes, stable rates of pay and/or a basic income.
- A replacement rate child policy – Maintaining demographic balance by keeping the ratio of workers to dependents at a manageable level and creating incentives for people to have more or fewer children as demographic and resource demand allows. This would, however, require much stricter immigration controls and social engineering on a scale that could conflict with some of our values on personal freedom.
The Welsh economy can do better and arguably has room for growth – no doubt. It is growing, though I don’t believe there’s any arbitrary point where independence becomes more or less attainable or feasible.
Independence itself may provide the “creative destruction” needed to kick-start the economy. Tearing up everything we know and rebuilding it from scratch – such as shifting the centre of political, economic and financial power away from London to Cardiff and then, hopefully, creating stronger regional centres within Wales – will generate substantial levels of growth if we get it right (and maybe even if we get it wrong too).
If steady state/post-growth economics doesn’t sound particularly attractive to you, then at the very least you might be able to accept the need a broader measure of economic well-being; one that goes beyond productivity (GVA), employment and earnings. A measure that includes the impact economic activity has on mental & physical health, the environment, resource depletion and material inequality.
Independence doesn’t just have to make people wealthier or more productive; some of the unhappiest societies on Earth chase growth at all costs. There has to be a better balance between economic development, resource consumption and social well-being that’s perhaps absent in the UK, always has been and always will be.