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Wales needs new approach to economic policy – Part Two

Here is the second of a three-part article which argues why Wales needs a new approach to policy in order to respond to globalisation. Last week I touched up the fact that global changes are not a core part of our national debate or of the way that policy discussions are framed.

This is because Wales’ economic policy debate is remarkably introspective. Many, if not most, policy issues are framed in the context of domestic dynamics – and global considerations are seen as of less relevance. Maybe all politics is local, but we have taken this further than most.

But I also think that it reflects an out-dated view of the global economy: the world has changed, and Wales has not fully internalised these changes. We have the perspective of a trader, even though exports make up a much smaller share of Wales’ GDP than most other small developed countries.

When we do talk about the global economy, it tends to be primarily in the context of the world as a source of export demand. Policy-makers are interested in global economic developments to the extent that variation in GDP growth in key trading partners is likely to impact on demand for Welsh exports. And improving international connectedness is defined as helping our firms expand into international markets, rather than as understanding the global debate and broader global forces.

This is what I call the ‘black box’ view of globalisation: the global economy is an exogenous thing from which either positive or negative outcomes are produced, and which means that Wales can either sell more or sell less. The primary transmission mechanism is through trade, and there is no real need to engage with or to deeply understand the broader global dynamics. The world is ‘over there’, except for tourists and the acquisition of Welsh companies and land.

The latest economic policy thinking from Wales seems to be based on a view that the priority is to improve domestic productivity, which will boost Wales’ competitive position, which in turn will generate better outcomes. The focus is on the domestic situation, over which we can exert some more direct control, with the international context a second-order consideration. This is not the same as an active process of grappling with what it means to be a small economy in a globalising world. The focus on domestic productivity means that we are not having the conversations we need to have about our position in the global economy.

In this sense, Wales has not moved on from the approach of 1960s policy: a largely domestically-focused approach, with global engagement defined in terms of negotiating agreements for foreign market access. Wales may have a much more flexible, efficient economy – but it is still domestically oriented. Perhaps it was our misfortune that globalisation began to change gear at the same time as we came to the end of the reform period in the early 1990s; we were distracted and thought there were no more big ideas left.

The fundamental cause of Wales’ economic under-performance is that we have not responded to the latest phase of globalisation over the past two decades. Specifically, we have not figured out how to position a small economy to compete in a global economy with factor mobility, intense competition, and where global politics and economics are intersecting to a much greater degree. After the reform process wound down in the mid 1990′s, the policy machinery seems to have run out of steam in terms of new ideas and debate (at exactly the time we needed to begin to respond).

This lack of responsiveness to the changing global economy is perhaps the most striking difference between Wales and other small developed countries. Small developed countries tend to be highly externally oriented, adapting themselves to changing global conditions, and to have a very deliberate sense of positioning themselves in the global economy.

My sense is that this goes a long way to explaining why Wales’ relative performance has been worsening, even with a reformed economy. We have not engaged with serious global changes. The economic consequence of Wales being small is much greater now than 25 years ago; agglomeration, cross-border capital flows, and new business models make life much more difficult. Globalisation is now about much more than trade, in which we had a decent position. And yet we have not responded deliberately. Talk of deliberateness in economic policy is still viewed with suspicion, even though this is what successful small countries tend to do.

The various structural changes in the global economic and political environment are enormously consequential for Wales. They matter more than most of the domestically-oriented policies that we tend to focus on. We cannot treat these as ‘over the horizon’ issues – we need to engage with them. As we all know, if you have your back to the wave you are likely to be knocked over – we need to be facing the wave by deliberately engaging with the global forces that are hitting us. And this is something I will address in the final part of this three-part article next week…

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