What's Wales Worth? Views on role of government

What's Wales Worth?

Does the public sector help or hinder growth? Two economists based in Wales share their views on how the Welsh government can best help the economy.

James Foreman-Peck

Welsh Institute for Research in Economics and Development, Cardiff University

David Adamson

Chief executive, Crew: Regeneration Wales

Our immediate worry is the rise in unemployment plus the collapse of private sector investment and growth. But in the longer term perhaps the most important investment for the future of Wales is in education and health. This spending constitutes the bulk of devolved Welsh government outlays yet the investment is not managed as well as in England. Performance has been poor from a desire not to follow English managerialism without finding an effective alternative, coupled with inadequate performance monitoring.

In both health and education, government in Wales reacted against policies pursued in England. Target setting with sanctions was preferred in England and anathema in Wales. Rigorous academic studies have demonstrated that target setting improved public service performance in England relative to Wales (and Scotland). After devolution, the government in Wales did not report failure to achieve targets in the NHS in a way likely to improve performance, unlike England. Instead they returned to the pre-1991 NHS organisation. To encourage improvement, poor functioning seemed to be rewarded with extra resources. When the NHS in Wales adopted a new target of 26 weeks maximum wait from patient referral to treatment patient waiting times did not fall to the extent they did in England. The additional means provided did not substantially reduce waiting times.

Hospital doctors and nurses were able to achieve more in the broadly comparable North East region of England than in Wales. With a higher level of per capita funding and hospital staffing, the NHS in Wales had a much poorer performance to that in England; lower hospital bed occupancy rates, longer patient hospital stays, longer ambulance response times and longer waiting times for operations. Despite the complexities of comparing health systems in different environments it is clear that the Welsh system has performed less well than the English because Welsh government policy on the NHS has been less effective than English policy.

In education, like health, after devolution, the Welsh government abandoned publication of school league tables. Measured by the percentage of pupils achieving 5 or more A*-C grade passes at GCSE, Wales's educational performance remained well below England's. Judged by international comparisons, such apparent improvements as have been achieved in Wales may have involved various forms of 'dumbing down'; a stronger focus on supposedly easier subjects or syllabuses for instance. The OECD PISA scores not only show Welsh 15 year olds achieve less than students in the rest of the UK, but also that their performance deteriorated between 2006 and 2009 relative to the rest of Britain and to the OECD. Of course this has been widely recognised in Wales now but the remedy has not. Although the education system supposedly has been overhauled, Wales may not have improved its international score in the next set of tests. An external review of the "quality and equity" of education in Wales is due to report in 2014, but the question remains as to why it has taken so long even to identify that there are substantial deficiencies in the Welsh education system.

One possibility is the relatively large size of the Welsh public sector. In Wales votes of public sector employees are more important than elsewhere in UK. Policies congenial to employees are not always appropriate for pupils and patients.

The dominance of the Welsh public sector perhaps explains another uncomfortable feature of the Welsh economy; the long term deterioration in how much is produced in terms of Gross Value Added (GVA) per head relative to the rest of the UK. The way the numbers are calculated necessarily treats the public sector differently from the market sector where the products are bought and sold. The simplest approach just uses the wage bill as the public sector contribution to the economy. No measurement of improved performance is possible and alternative measurement approaches tend also to show no trend increase in productivity. If the Welsh market sector increases productivity or GVA per head at the same rate as the UK average, the proportionately larger Welsh public sector with no productivity increase must necessarily prevent the indicator for the entire Welsh economy rising at the UK average. But the evidence for health and education suggests this divergence is not just a statistical construction.

What can be done? In general terms it would help to narrow the gap between high-level visions and planning the practical steps needed to deliver those ambitions. An incentive to do that might be devolving taxes to the Welsh government that at present receives its income as a block grant from Westminster. A responsibility for taxes raised in Wales to finance public services could concentrate minds.

Another contribution could be a stronger market sector to raise Wales' resource base as well as to balance public sector lobbies. Cardiff City Council's funding of what is now Wales' unique FTSE100 company, Admiral, was an admirable achievement. Careful study and emulation of this approach must be worthwhile.

The global economic crisis is stubbornly refusing to respond to current policies and in Europe even the powerhouse economies of France and Germany are failing to return to growth and prosperity. Little wonder that in Wales we face insurmountable problems that are now long-term and embedded in the deep structure of our economy. Despite considerable investment by Welsh and UK governments and the European Union, our economic performance measured by conventional indicators of Gross Domestic Product (GDP) and Gross Value Added (GVA) remains fixed below 70% of the UK average. This suggests that we have an important decision to make in Wales.

Our first choice involves adhering to conventional economic policy and hoping that the crisis will resolve, Europe will return to growth and Wales will continue to compete, rather poorly, in this wider economy. In short, a return to 'business as usual'. It is perhaps worth noting that even at the peak of economic performance in the mid 2000s, child poverty in Wales never fell below 23% and is now 32%. This suggests that this economic model serves a significant proportion of our people very badly.

Our second choice involves creating a radical vision for Wales that competes as best it can internationally but also develops an internal and localised economy, which revitalises community life and 're-industrialises' our society with a new technological and intellectual base in the low carbon economy of the future.

What might this look like? There are some clues in the innovation that is appearing throughout Europe in response to economic collapse. Manuel Castells has charted this in his book Aftermath (2012). He suggests that our economies have settled into four new divisions. The failing elements are a diminishing public sector ravaged by 'austerity' measures and a 'survival' sector of old manufacturing and service industries struggling in a shrinking market for products. It is these failing sectors that largely characterise the current Welsh economy.

In contrast are two expanding sectors emerging from the restructured form that capitalism is gradually developing. The first is a 'revamped informational' economy grounded in new technologies of energy supply, information management, bio-medical and nano-sciences and innovative product development. This is the sector into which Wales should be pouring as much resource as possible, even at the expense of current support for traditional manufacturing sectors. Our universities must develop a far more proactive role in this sector, leading innovation in partnership with the private sector and fostering product development with new and emerging Welsh companies.

The second sector with economic potential is the 'alternative economic' sector operating at a local economic level and emerging out of the very conditions of economic crisis. Arising from experimentation and social innovation, new patterns of production and trading are emerging. Characterised by social enterprise and small-scale for-profit organisations, this sector has a strong social ethic focused on "positive" growth for the benefit of people and the environment. In Wales emerging initiatives in community energy, local food production and heritage-led regeneration are already illustrating the potential value of this sector. Social enterprise initiatives as diverse as recycling and eco-tourism are employing people and creating local wealth.

Mainstream policies such as enterprise zones and city regions are a necessary approach to maintaining the existing economy in Wales. However, they will not in themselves solve our problems. They must be supplemented by major investment in the two sectors with the potential for recovery, identified by Castells and which are already evident in Wales. These require the full support of Welsh government to flourish and realise the potential that they contain. Our challenge is to end attempts to reinvent the past and instead reimagine the future.

For a fuller development of these views see www.regenwales.org

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