Wales needs new approach to economic policy – Part Three
The challenge is to respond to all of the forces of globalisation, not simply those that are transmitted through the export channel. We need to move away from the black box view of globalisation. The key problem with the black box view is that is leads to policy disengagement and inaction, because we oscillate between complacency when things are positive (there is no need to do anything, we can just ride the commodity boom) or fatalism when things are negative (there is nothing we can do about our place in the world except hunker down).
This broader view of the effects of globalisation may dampen some of the optimism about Wales’ economic trajectory. Yes, the Asia story is real. But as a small economy, we remain hugely exposed to a range of other risks (economic turbulence, competitive intensity, agglomeration, global labour markets, and so on). We should not overweight the export story as the driver of our future economic trajectory. There are clearly structural features that play to our advantage, but my view is that Wales will face a much more challenging world with many more risks and uncertainties.
To respond we need to write some additional chapters to the existing playbook, which focuses on domestic productivity as the way to strengthen the economy. The current approach is not wrong, but it is an incomplete response to globalisation. Rather, Wales should learn from other small developed economies in how to position a country in the global context.
To navigate this world, and to develop a view on how a small country like Wales can prosper in this challenging world, will require an investment in strategic capacity. We need to understand these global forces deeply. What sort of policy strategy is appropriate and sustainable for a small economy in the emerging global economy? We can only define a coherent strategy in the context of a grounded understanding of the external environment.
To respond effectively to globalisation will require all policies to be informed by a clear sense of the global context. Indeed, my contention is that, for small countries like ours, there is no such thing as domestic policy any more. Most major areas of policy, from education to social policy as well as economic policy, need to be designed to work well in the global environment in which we will be operating.
To make this a little more concrete, consider the following examples of policies that could form part of a coherent response to globalisation: developing an economic strategy that has a clear view of the basis on which Wales will be competing; developing a sense of how national risk exposures are to be managed and how risk is to be allocated in an economy (fiscal policy, labour market policy, the provision of education and training); and forming a clear view as to how we position ourselves internationally (trade agreements, but also how we balance increasingly overlapping international political and economic relationships, and the extent to which we need to ‘bulk up’ to manage our risk exposures).
Moving in this direction is demanding of strengthened strategic capacity in government. If it is the case that there is no such thing as domestic policy, Wales needs to invest in developing a much stronger international orientation and the capacity to generate creative policy responses.
In particular, Wales needs: an awareness of the key global forces and our exposure to these; an awareness of what other governments – particularly small countries – are doing in key policy areas to respond; and being across the key debates (intellectual awareness). As a small economy, we will need to over-invest in order to overcome the disadvantages and get into the flow.
The performance of other small developed countries provides some confidence that it is possible to respond effectively to the challenges and opportunities of globalisations. Indeed, small developed countries will likely continue to be over-represented at the top of the various economic and social measures. But I expect that the distribution of small country outcomes will widen, perhaps substantially, as a consequence of intensifying global forces. To date, Wales has significantly under-performed its small country peer group. Improving its performance will require a different, much more deliberate approach, to engaging with the global economy.