Economists all point to a lack of productivity growth and underinvestment as the key issues underlining weak economic performance and low wage growth, so how do we solve it?
Manufacturing productivity has actually doubled in the last 20 years, compared to relatively low productivity growth in the service sector. The problem is that our manufacturing sector has declined, so those productivity gains are masked by an overall decline in activity. The lack of an industrial strategy to support manufacturing growth is the first place to start.
Industrial investment decisions are driven by the relationships between:
- Cost and availability of energy
- Cost and availability of labour and skills
- Cost and availability of Transport
- Cost and availability of capital
Looking at this list, we can immediately see the issues holding manufacturing investment in Wales back. On almost every measure above, Wales struggles to rank favourably.
Energy costs are the biggest driver of the relative decline in manufacturing. Wales can’t compete on labour costs with places like Asia and Eastern Europe for labour-intensive manufacturing, but we have also lost the energy-intensive industries because of our high energy costs. This is primarily a function of the way the energy market is regulated, and prices are set. If we look back historically, energy abundance is one of the biggest drivers of prosperity. It is energy that drives marked improvements in productivity, as energy has an exponential impact on human productivity.
Harnessing the renewable energy potential of Wales in a way that benefits the Welsh economy, by driving investment and productivity, should be the top priority of the Welsh Government. The development of local power networks and pricing reform that enables high energy users in Wales to obtain 100% renewable energy on long-term fixed-price contracts would be a very attractive proposition for industrial investment. The current focus is on trying to attract investment to the supply chain for renewable energy infrastructure. While this may be important, the genuine long-term benefits of renewable energy growth will come from how we can price and use that energy and whether the Welsh economy can benefit from being the source of increased renewable energy generation. This requires a shift in policy thinking.
The cost and availability of labour and skills are the next problems. This century has seen a shift to a one-size-fits-all education system, pushing people towards A levels and degrees. It is clear that the skills mix coming out of our education system has not supported economic and productivity growth. We need to see a shift in our education system towards different pathways and greater emphasis on technical skills and job-related training – this needs concrete action as its something that has been widely discussed for some time. Fundamental reform of our higher education sector may well now be forced, given the challenges the sector is facing – we should ensure this reform is deliberate and planned.
Wales also needs to attract young workers and talent, and that means growing our cities. Urbanisation is a major driver of economic activity and productivity. Outside of Cardiff, we have seen relatively little increase in urbanisation and very little housebuilding. Wales remains a relatively rural part of the UK, and unless we recognise the ongoing trend towards urbanisation and attract growth to our urban population centres, we will continue to see young talent moving to other parts of the UK. We can look at the success of other UK cities in attracting people to live and work in their city centres for inspiration.
In relation to the costs and availability of Transport, we see this as a major complaint of businesses the further we head away from the bridge. While bringing up the M4 relief road causes sighs and exasperation, it does remain the one big issue on which most businesses are united. A strategy to reduce freight transport costs in Wales is sorely needed, along with a strategy to take economic advantage of the Heads of the Valleys road, a longer term public transport plan.
Lastly, we come to capital availability. The dependence of private capital investment on public sector support means that capital investment decisions are lengthy and uncertain. The lack of private capital generation and reinvestment is the biggest driver of Wales’s relative economic weakness. Reform of investment incentives is needed to give greater certainty, along with a shift in spending from individual subsidies to infrastructure investment to support a broader investment strategy. Ultimately, there is a political decision to be made here as to whether we want a Welsh Government to use its executive powers to drive quicker decision-making over the heads of local councils. Wales needs a simpler political landscape for private capital to be able to navigate. The overlaps between the UK, Welsh, and local governments in economic policy responsibilities have left investment decision-making in Wales too complicated and have driven private capital over the bridge.
All this hints at the importance that regulation and policy have played in weak growth and low productivity. Simply continuing the model of opportunistic investments that need to be heavily subsidised is not going to make a significant difference in improving long-term investment, productivity and prosperity.
