Why has Wales suffered so much in the credit crunch – and why it should not have

There are many pieces of news hitting the headlines over various layoffs and redundancies at present. It is unfortunately inevitable that companies will cut expenditure in light of falling revenues – because if they didn’t survive, where would the jobs come from in a revival?

However, from various pieces of government funded analysis, the Welsh economy is presently suffering more in the down turn than most economies, with redundancies around one quarter higher than the average in the UK. The excellent Jamie Owen asked a commentator last night on Wales Today why, and the answer was at best fudged: so here is a personal view.

The Welsh boom time lasted 100 years, from about the 1820’s when the first pits were sunk, to the post war 1920’s when the great depression hit. Since then it has been a slow bleed from employment to unemployment, investment to decay; with around two thirds of the pit jobs lost by the start of World War Two, and Maggie Thatcher just finishing the inevitable in the 1980’s.

At that point, Wales had a clean slate and was offered investment – according to a talk I heard from Ieuan Wyn Jones, from 1973 to 2003 it had some £930million pounds of grant investment made into it, and it’s in how that money was spent as to why Wales is now suffering.

Firstly, 60% of it was invested within 12mile radius of Cardiff Bay. Now partly that should not come as a surprise – that’s about equivalent to the amount of Welsh GDP generation – but that doesn’t reflect the distribution of the Welsh population. Merthyr Tydfil sits at a radius of 18miles from the bay, and has the highest unemployment rate of most towns and cities in the UK.

Secondly, the way the money was invested. Most of the money was given to large incoming investment projects by non-EU head quartered companies. Sony is probably the best example at Bridgend, which was held up as a world class centre by even Sony themselves; the same can be said of the GE engine facility at Caerphilly, or the BAe facility at Wharton. But some of those projects didn’t come off – the LG Philips plant at Newport being the highest profile example, and the film studio at Valleywood presently looks like a missed opportunity. Most of the money was placed in singular large profile projects, around a strategy of “hub and spoke” with the WDA investing in hubs and the companies themselves creating spokes in the local economy. They even created a series of large industrial estates for the developments of these spokes, many of which are still empty rows of large steel sheds. However, unlike the Scot’s the Welsh picked no core hubs, and so there were no world class spokes – which would have led to more hubs.

Thirdly, the local grants were handed out at a local business initiative level in an adhoc and splash the cash manner. A conversation I had 18months ago with a council based business development unit went:
• Me: how many of the following skilled people do you have? (I knew they had the answer, as they would come up with such stat’s when we were looking to place call centres in the UK)
• Council: well, we offer a grant to find out such answers in developing your business. We pay £X for such investigations and reports, and it will cost you £Y (about twice X) to buy the report from one of our approved consultants
• Me: how often do you get asked this question?
• Council: about twice a week at minimum
• Me: so to answer a common question, I have to get a grant to pay someone to answer it for me?
• Council: yes!

The problem this generated was a grant-dependent culture, in local small businesses, and also a series of weak SME businesses. Grants should be from a business level seen as a bonus guarantee, not an essential of business as they have become here. Every time I hear a new business proposal in Wales from a local person, the second issue on the table after the concept is the detailed list of grants available!

The result of the grant expenditure from 1972 to 2003 is that 97% of the jobs created have gone. They came to Wales, were created, and have now left. There were insufficient local roots placed down by the hub investors, so they could leave easily when technology changed – or a downturn came. And the spokes were not strong enough to survive alone.

Have there been successes in the Welsh economy? Yes – and the thing they have in common is that they were in general created by people who are or have strong ties to Wales. Such enterprises include insurance group Admiral, the only Welsh headquartered business listed in the FTSE100 – they are about to take on 500 people into a new centre in Newport; or the Lanelli based TV production company Tinopolis, without which Dr Who could never have been attempted in Cardiff.

Wales will now suffer as a result of poor central strategy – and one which missed its greatest strength: the Welsh people. On any measure, compared to an average UK worker they are three times as loyal, and as a whole are as well educated as any part of the UK thanks to large investment in the educational sector. They are also quite creative and adaptable, in part because of this love and existence of an old Celtic language. What I am trying to say here is that the Welsh people could be horribly entrepreneurial if given the right infrastructure around them, but what appears to have happened is the creation of a grant-dependent business focus. Thankfully most of the new businesses coming through from the sub-25 year old bracket can stand on their own two feet.

I think Wales will go through some tough times, probably even longer than the rest of the UK: we might just as well be in Bejing in 2012, such is the amount of Olympic money that will at presently planned flow down here. But I am convinced by the Welsh people, and that the central government – thankfully because it won’t have the cash – will change it strategy to local entrepreneurial investment focus, over one of buying in multi-national hubs. Modern businesses need to be adaptable, and such choices even by the companies themselves will need to come with far quicker payback timescales.

When faced with that unknown choice, versus a bet on your own people, I hope it is even obvious to central government where the financial investment bet needs to be placed – your own people offer a far, far better set of long term employment odd’s.

Good Luck!