Understanding the Crisis and its Implications for Wales

08
June 2013

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Professor Adamson argues that devolution has presented a minor cushion from the neo-liberal excesses of the Coalition, but it remains wedded to an economic paradigm that is rapidly losing coherence and validity.

Most conversations about public policy in Wales inevitably encounter the issue of the ongoing financial crisis and how we respond to it.The austerity programme initiated by the UK Coalition has a range of effects on the Welsh economy.  We can initially identify the immediate changes of funding to Welsh Government, for example in the reduction in capital grant and revenue sttlement; changes which impact immediately on the delivery of public services in Wales.  Secondly, we can identify a range of secondary effects that will extend over time as changes to the welfare system reduce income to our poorest communities.  The general climate of austerity and current UK government refusal to consider a Plan B therefore poses critical problems for government in Wales, the delivery of public services and the quality of life experienced by Welsh citizens.  Given much of the solution lies in UK taxation, economic and welfare policy, the scope of the Welsh Government to address these issues is limited if a conventional economic and policy analysis is followed.

 

Poverty rates in Wales now approach 32% of the child population and professionals working in the field report significant deterioration in the last two years. Despite a central commitment to the eradication of poverty since 1997, Welsh Government controls few of the levers that can reduce poverty when measured as an income differential.  Currently a family is considered to be in poverty if its income is less that 60% of the national mean income.  Despite some reduction through creation of the minimum wage and development of the tax credit system, the best we achieved at the height of Labour Government expenditure was a reduction to 23% of Welsh children living in poverty.  It is probably true to say that the current level of poverty in Wales has reached a tipping point which will require a Beveridge scale intervention to redress.  Paradoxically, this may not be reflected in poverty statistics as the use of mean income as the benchmark measure will mask the numbers in poverty as the mean itself reduces.  We are faced with the paradox of major increases of people experiencing poverty while the official statistics may show the opposite.

 

If this is the central challenge facing Welsh Government it is difficult to see what can be done.  The core solution lies in developing a vibrant Welsh economy which returns employment to our poorest communities and establishes a pattern of productivity and employment which encompasses the whole population, including the currently economic inactive and the new cohorts being added by each year of school leavers.  This essay asks what that economy might look like and where does the potential for its development lay.  It also asks how we might measure the success of such an economy and avoid a slavish attachment to a simple growth-based model of GDP and GVA measurement.

 

Understanding the crisis.

Given I am not an economist there are those far better placed to reflect on and identify the depth and scale of the pattern of issues currently challenging the global economy. As a lay-person it seems to me there are three key elements.

 

  • The financial crisis and associated problems of nil or poor economic growth in the majority of Western advanced capitalist societies

 

  • The related political crisis of a failed response and the polarisation of wealth, which operates at an international, national and local scale.

 

  • The failure to recognise socially, culturally and politically the implications of global warming, energy shortfalls and food insecurity

 

The current response by the UK government has focused on resolution of the financial crisis through recapitalising the banks and quantitative easing to kick-start the economy.  The failure of this approach manifests in continued reluctance of the banks to lend to businesses and consumers and the continued near flat-lining of the economy.  That this is a Europe-wide experience stems from the predominance of the ideology of 'austerity' as the only possible response to the crisis. Experience from the USA and Japan suggests an expenditure focused model would be more effective in the long-term by enabling economic growth to diminish the budget deficit over a longer term.

 

Related to these wider economic conditions are the political and ideological responses of government. The Merkel led European doctrine of austerity, most clearly focused on Southern Europe, is matched in the UK by the Coalition commitment to savage public expenditure cuts.  This is set within a long-term Conservative Party project to roll back the welfare state to pre-Beveridge levels and to dismantle the interventionist infrastructure of the modern state. Hence everything is under attack, illustrated by proposed changes to the welfare system, health and safety, legal aid, consumer protection, education and health provision. Despite the manifest failure of the market in the current financial crisis it is still to the market that the coalition looks to create employment and take-up the labour shed from the public sector.

 

The nod to growth by the coalition in the recent infrastructure investment plans also presents Wales with additional problems.  Professor Karel Williams identifies a UK economy largely operating for the benefit of metropolitan London with 85% of proposed infrastructural investment of benefit to the South East (Williams 2012).  The proposed electrification of rail links from London to Wales and onwards to the Valley lines may prove to be a better instrument of wealth extraction for Wales rather than wealth creation. Feasibly, shorter commute times may drain our best talent and inflate Newport and Cardiff housing costs in return for more low value, low wage employment along the M4 corridor in the service and financial sectors and characterised by call centres and back-office support.  It is unlikely to see UK corporations move R&D and front office functions to Wales.  Nor are we likely to see major relocations of industry as a result of this investment given current attachment to road transport rather than rail freight.

 

This albeit superficial analysis of current conditions for Wales deriving from global economic conditions suggests a multi-variate crisis with very little scope for remedial action by Welsh Government.  It also poses a secondary question with major implications for future action in Wales.

 

 

Crisis or reconfiguration?

Conventional wisdom claims that the current problems are the aftermath of a collapse of banks and the drain on the public purse of bank recapitalisation.  The solution is to ride the storm, assume growth will return and in the meantime reduce the budget deficit.  Reduction of sovereign and consumer debt becomes the priority to enable a return to 'business as usual' once the recession resolves itself.  This view pays little attention to the problems of climate change and peak oil and measures success as a return to 3-4% annual GDP growth.  This view represents the dominant paradigm and establishes an orthodoxy of response reflected in UK government policy of creating Enterprise Zones and Local Enterprise Partnerships to release the entrepreneurial energy of markets.  Mirrored in more poorly funded versions in Wales these approaches seek to do more of what we have conventionally done.

 

This view is increasingly challenged by an argument that the nature of capitalism itself has been reconfigured or indeed that capitalism has been fatally damaged by the outcomes of the crisis.  This view is predicated on an acceptance that the current crisis is not resolvable as sovereign debt remains insoluble, banks remain precariously capitalised and growth remains unattainable.  In this view we will never return to a personal and sovereign debt-fuelled capitalism.  More fundamentally issues of sustainability challenge the growth-based model of capitalism and require a settlement of key issues around energy supply and security.  This view argues for innovative economic revitalisation by tackling the very crisis of capitalism itself.  This model even challenges the concept of economic well-being only being measurable by continued economic growth and arguments for 'no- growth' or ‘post-growth’ economic models are emerging (Kingsley 2012). From this perspectivethe current crisis can be seen to offer a taste of the future and an opportunity to test and prepare solutions before they become a pre-requisite of survival.

 

This essay is an argument for adopting this latter perspective to inform economic policy in Wales.  Biding our time with minor programmes that seek to recreate the economic past need to be replaced with radical visions that re-imagine our economic future.

 

Responding to reconfiguration

How might we respond in the face of a reconfiguration of capitalism.  This in part depends on whether we are witnessing a fundamental and rapid rupture with the previous form of capitalism or a more gradual evolution of something different.  Conventional Marxist analysis of changes in the mode of production, of which capitalism is one model, suggests that change can either be revolutionary or evolutionary.   The transition from feudalism to capitalism was gradual as bonded and serf labour gradually gave way to wage labourers who were free to pursue their livelihoods where they chose.  Wage labour first appeared in sixteenth century Florence amongst artisanal guilds and established the primary pre-condition for the later emergence of capitalism.  Transition to communism in the Soviet Union and China was rapid and revolutionary and occurred through the crisis of legitimacy of the semi-feudal/proto-capitalist Russia and Chinese systems.

 

No-one would suggest that we are witnessing a revolutionary change in the pattern of capitalism or indeed some transcendence of capitalism by an alternative mode of production.  But it can be argued that we are witnessing changes on a par with the conditions in Florence where minor changes presage more fundamental shifts in the structure of the economy and its mode of organisation.   This has been most eloquently expressed by Manuel Castells (2012) who argues that economic experimentation is emerging as a key response to the aftermath of the crisis.Castells identifies a four-layered economy as the outcome of the crisis:

 

Firstly a revamped informational, capitalist economy will exploit new technologies and new products and be the domain of a new professional elite. Secondly, a crisis-ridden public and semi-public sector will bear the continued brunt of the fiscal crisis. Thirdly, there will be a survival orientated, traditional economic sector with continued low productivity and low skilled employment opportunities. Fourthly, there is an alternative economy emerging with different models and different values based on a rejection of previous practice. Castells sees this fourth 'sector' as a cultural vanguard fuelled by a quest for a different way of life.  He also sees it coming together with disorientated consumers' who no longer have the opportunity to consume anything but themselves' (Castell 2012, p10).  With the withdrawal of an endless supply of credit, consumers are themselves seeking alternative patterns of consumption in local food, leisure and cultural activities which do not require complete compliance with a mass culture.

 

This has perhaps been exemplified in Stokescroft, Bristol where the counter-cultural development of arts and creative industries, especially through the development of meanwhile uses of empty and derelict buildings is now being seen as a key approach to urban development by mainstream agencies.  Here the necessity of innovation meets the creativity of street level activists in a way anticipated by Castells analysis.

 

If we accept Castells’ argument, where Wales positions its economic policy can drastically affect the likelihood of success and our ability to address the problems outlined in the opening paragraphs. Currently, our policy base is clearly located in a diminishing public sector and a survival orientated manufacturing and service sector. Neither are likely to significantly develop the Welsh economy. 

 

Looking at them separately there is a consensus that public sector employment dominates the Welsh economy and represents an imbalance of economic activity.  Traditionally, in Wales we defend this on the basis of high levels of social need, particularly grounded in the poor health of the nation.  Rather than attempt to fundamentally challenge current attitudes to health we advocate for a continued costly public sector intervention that perpetuates the problem. Changing the whole orientation of the public sector in Wales to a preventative model can change the dynamic of public services and create economic gain alongside the social gain of successful delivery.  To do so requires a fundamental challenge to our defensive attitude to maintaining public services in the model we inherited from post WW2 municipalism.  This is not to accept the mantra of austerity and the unaffordability of public services but is rather to champion a radically different model of public services designed to solve rather than perpetuate the problems they exist to address.  Clearly, this approach requires major further development and will inform the delivery of CREW's Deep Place study of Tredegar and Llandovery.

 

If we next turn to the survival orientated sector in Castells’ typology we again see Wales currently investing heavily in approaches associated with this sector. In Wales this sector consists largely of manufacturing and services and includes outposts of the London financial services.  However, much of this sector in Wales is the legacy of Foreign Direct Investment (FDI) policies that characterised economic policy in Wales through the 1980s and 1990s.   Whilst temporarily successful in meeting some employment needs as coal and steel employment collapsed, it has not proved a long-term solution. Disinvestment of high profile 1990s arrivals alongside the continued failure to move beyond branch plant and assembly only functions has not added significantly to Welsh GDP, which is the classic measurement of success of this approach.  Indeed productivity remains significantly lower that the UK and EU average despite the significant resources targeted at this approach. This approach has not assisted the development of a skilled workforce and has failed to develop R&D and knowledge based industries in Wales.  Despite this failure we continue to pursue policies such as Enterprise Zones, which are routed in the paradigm of encouraging transfers to localities with designated incentives. Ignoring the conventional criticisms of mere displacement outcomes for this approach we also have to question the viability of an approach that maintains Wales as a secondary economy dependent on investment decisions made elsewhere.  This paper does not support an abandonment of such approaches but questions their predominance in the policy arsenal.  There is a role for this sector and its current approach but it should be secondary to the full-scale reorientation of the Welsh economy that will be argued for in the following paragraphs.

 

Maintaining our use of Castells' typology this paper argues that our economic policies should be grounded in the 'revamped informational' capitalist economy and the 'alternative economic sector'.   In the first of these Castells portrays an economic sector grounded in new technologies of energy supply and innovative product development, for example through nanotechnologies.  In Wales we can identify this with the current emphasis on the knowledge economy and creative industries.  Whilst generally behind the curve in these areas, Wales has notable successes in bio-medics, aerospace and creative media which should be fully developed for maximum impact, even at the expense of traditional sectors of the economy. To fully participate in this new international economy will require a major improvement in the performance of Welsh Universities.  Whilst there are exemplars of engagement of Welsh HE with the private sector it is not a rule and is not their prime role.  Education of a Welsh professional elite and retention of those graduates in Wales is a pre-condition of realising our potential in the emerging new variant of capitalism.  Collaboration between HE and private sector product development can ensure that Wales is at the forefront of low carbon technology development and contributing to the emergence of new patterns of production that can 're-industrialise' post-industrial Wales.  In 2001 CREW hosted nine State University of New York students who demonstrated how innovative technology in Combined Heat and Power (CHP) and Controlled Environmental Agriculture (CEA) could provide significant employment opportunities and contribute to food and energy security for Wales.  Exploring such radical models of technological innovation could place Wales at the leading edge of the industries that are likely to dominate in the low-carbon future we must develop. Wales could be exporting knowledge and technological innovation in much the same way it once exported coal.

 

However, this paper argues that the most significant sector for Wales identified by Castells is the 'alternative economy'.  Since 1913 and the peak of coal production, Wales' role as the first industrial nation has been in decline.  Our ability to compete in global capitalism has decreased alongside the shift away from extractive industries to manufacturing and later service provision.  As a consequence our international trading has been weak and we have consistently measured in conventional economic criteria as well below the UK and European averages. If one recognises this historical reality it is a short step away from rejecting our aspiration to correct one hundred years of decline by pursuing measures that have failed throughout that century of futile attempts to reverse decline.  From the Assisted Area Status of the 1930s to the current emphasis on Enterprise Zones and City Regions we pursue policies that stand Canute like against the tide of global capitalism and its march around the world in search of the lowest costs of production. In succession Wales has lost to Eastern Europe, China and now the likely development of Africa over the next 30 years. We will never again compete effectively on wage costs, which was the key feature that drove the FDI successes of the 1980s and 90s.  So is there an alternative?

 

This paper argues that there is and that it lies in the promotion of local economic development.   The economic experimentation identified by Castells is taking place largely in the local sphere and is led by community activists and social entrepreneurs developing innovative models of ownership and trading.  If we consider for a moment where the local economy currently sits:

 

Here we see an externally orientated section of the economy engaged with international trading.  This is a key element of the Welsh economy but does not perform well in comparison to similar nations in Europe.  Alongside and interacting with this is the local economy where local patterns of exchange support the SME sector, sole traders and the public sector.  The New Economics Foundation has published extensively on the value of this local economy (Ward and Lewis 2002) and its ability to maintain stability in times of recession by providing a partial firewall against international ebbs and flows of economic activity. But it is not the focus of Welsh economic policy. This paper argues for a refocusing of policy on the development of the local economy. It is here that we can realise the potential identified in Castells' recognition of the emerging alternative economic sector.

 

For him, this sector is characterised by experimentation and social innovation leading to previously unrecognised potential economic value.  Here in Wales we see this sector emerging in community energy production (e.g. The Green Valleys initiative), eco-tourism (e.g.TYF, St David's) and local heritage led regeneration (Talgarth Mill and Amlwch Copper Kingdom).  Development Trusts are providing innovative social and educational services and social enterprises are exploring new ways of providing quasi-public services (Adamson 2003).  Further potential exists in community food production, revitalised agricultural production and meeting the care needs of an aging population.  Fast broadband delivery throughout Wales can energise the creative and multi-media industries from localities anywhere in Wales.  Wales can lead in developing technological systems in CEA and CHP which support local economic development and which can be sold internationally.  It is here that we would locate a Green Economy as envisioned in the NEF publication, The Green New Deal (NEF 2008).  Our local experience delivering the ARBED programme points to the significant job creation and supply chain development released by tackling the low carbon performance of existing homes in Wales.  Through effective targeted recruitment and training and local sourcing of supplies and products, developing the green infrastructure in Wales is itself a direct route to economic recovery.  We already have people in Wales who are developing Castells' alternative economy to form the basis of a new economy for Wales providing employment and social benefit.

 

This new sector can provide a route to energy and food security as well as reindustrialisation of our economy as we meet the needs of a low-carbon future.  Whilst it clearly lends itself to new forms of mutualism and cooperative enterprise it does not rule out for profit businesses but it is likely that they will operate from a strong social ethic. The new economy also offers a route to the revitalisation of public services as social enterprises emerge to meet the needs of the Welsh population.  This process was evident during the previous withdrawal of public services in the 1980s, as community initiatives grew to fill the public sector vacuum.  Whether Dove Workshop providing training or Planed revitalising Narbeth, Wales was characterised by community organisations plugging the gaps left by public expenditure cuts. Communities First was an attempt to promote similar responses where they had not occurred spontaneously. 

 

As the final issue in the promotion of an alternative economy we might consider whether this economic vision forsakes the pursuit of economic growth as the core objective of economic policy.  Whilst a growth based approach offers some immediate attraction its longer-term validity is less evident. Conventionally, it has been heresy to question the continued pursuit of unrelenting economic growth. It has been the cornerstone of economic policy in the Western developed world for five decades: 

 

But question it we must. The myth of growth has failed us. It has failed the two billion people who still live on less than $2 a day. It has failed the fragile ecological systems on which we depend for survival. It has failed, spectacularly, in its own terms, to provide economic stability and secure people’s livelihoods. (Jackson 2009, foreword)

 

This is clearly true for Wales when even at our most prosperous we have endured high levels of child poverty and some of the highest levels of adult economic inactivity in the developed world. The neo-liberal paradigm has served Wales less well than most other regions of the UK and has largely benefited the metropolitan south east of England. Jackson calls for a redefined sense of wellbeing that is not contingent on ever-increasing consumerism but which recognises the psychological and social needs of human beings.  Identifying a 'social recession' working alongside economic recession he points to the declining well-being of individuals revealed in research throughout the Western world.  Rather than being raised by permanent economic growth, well-being has declined.  This creates room for arguments for 'social growth' to encompass human personal development and the eradication of gross inequalities. Space prevents a full development of this approach here but it suggests an alternative means of assessing the effectiveness of the economy.  There is little point in pursuing an economic model that on a world scale appears to have little benefit and is detrimental to the well-being of the undeveloped nations.  Closer to home there is little value in adherence to a paradigm which effectively excludes around 25% of the Welsh population from its questionable benefits.

 

 

Conclusion

Walesis at a critical point in developing a viable and sustainable future for itself. Devolution has presented a minor cushion from the neo-liberal excesses of the Coalition but it remains wedded to an economic paradigm that is rapidly losing coherence and validity.  We need to recognise our limitations when engaged with this conventional model of our economic future and develop a radical vision that fully embraces the innovative pursuit of a low carbon economy, not simply because we have to anyway but rather because we recognise that it is itself a route to a new form of economy which can reindustrialise Wales and challenge the poverty which has become our central characteristic.

 

 

Bibliography

 

Adamson, D. and Byrne. P. (2003) Developing the Social Economy in Wales. A scoping study. Social Economy Network and The Welsh Development Agency. Cardiff

 

Castells, M., Caraca, J,. Cardoso, G. (2012). Aftermath. The Cultures of the Economic Crisis. Oxford University Press, Oxford.

 

Jackson, T. (2009) Prosperity without Growth.  The transition to a sustainable economy. Sustainable Development Commission. London

 

Patrick Kingsley (2012) Towards a No Growth Future. Guardian Monday 15th October http://www.guardian.co.uk/society/2012/oct/15/economics-the-no-growth�

 

NEF (2008) A Green New Deal. Joined up policies to solve the triple crunch of the credit crisis, climate change and high oil prices. Green New Deal Group, NEF London.

 

NEF (2009) The Great Transition. A tale of how it turned out right. NEF. London.

 

Ward, B and Lewis, J. (2002) Plugging the Leak. Making the most of every pound that enters your local economy.  New Economics Foundation. London

 

Williams, K. (2012) Must Wales fail? Presentation to the Third sector Partnership Council. Cardiff.










 

This article has 4 comments

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Lesley Smith26 June 2013

1

Great article Dave, let's hope it stimulates a debate!

Dave28 June 2013

2

Thanks Lesley, would be good to have a major debate Mon these issues.
Dave

John Lewis08 August 2013

3

It isn't a debate that is needed it is action. The problem is well understood. The move to a knowledge economy needs a very proactive engagement from the universities together with focussed seed capital and incentives for companies and people to stay in Wales. One of the most innovative companies I know started in Abergele and had to move to Manchester. Knowledge businesses are much less dependent on location than traditional businesses; using the web a small business in a village can sell to the world. Knowledge businesses can only be part of the solution - not everyone has or can develop the skills - but knowledge workers and entrepreneurs have the capability to employ a lot of non-knowledge workers, they are "force multipliers". The most effective way to eliminate poverty is to create jobs. I will send you 10 ideas.

Mike Cuddy12 August 2013

4

Dave
A brave analysis considering the hand that feeds CREW, with which I largely agree. I note that the analysis of responses to the consultation on the WEFO EU 2014-2020 Structural Funds proposal, picks CREW out as less than optimistic, unlike most other respondents. Hywel Cri Jones in a recent IWA Agenda article looks for a major reorientation of the ESF –suggesting a major conference to explore new initiatives to secure a more inclusive society.
Besides the works you quote there are a few others which have caught my eye which respond to a growing awareness that more of the same is inadequate to deal with wider consequences of the failing logic of growth at all costs. The most provocative is Stephan King in “When the Money Runs Out” where he poses the question –what happens if the Keynesians and the Austerians are both wrong in viewing the present stagnation as normal cyclical behaviour to be corrected by their (differing) policy prescriptions. Both suffer from an optimism bias and the failure to face the truth about slow growth in Western Countries and the culture of entitlements.
“The west has created “entitlement” economies, which are predicated on continuing growth. ....This stagnation is not the same as a crash. It does not inspire terror but rather, as Adam Smith put it, melancholia.”
You tackle Melancholia with a new narrative or it destroys the possibility of united action to save ourselves. He gives a few pointers there should also be a “new social contract between the generations”. The baby boomers have lived well off the future earnings of the young; that cannot happen again.
The downstream consequences of slow growth ,especially the provision of basic services and security in old age are tackled by Andrew Simms(Fabian Review Summer 2013))who argues for a transition economy that helps weave local, social fabrics –based on social innovations such as reciprocity, besides a scaled up green deal .
Finally Geoff Mulgan CEO Nesta in the Locust and the Bee,–argues we should not waste the opportunity of a crisis to choose a radically different direction for capitalism-promoting better lives and relationships –in which social innovation should play a dominant part.
The promotion of Local economic development, which you and most of the above advocate apart from the easy wins of community energy, requires attention to relationships, the re-orientation of the focus of innovation,and an active civil economy: reflected in a reinvigorated notion of local governance including what is termed the First Tier(Community And Town Councils) to date largely ignored by the Welsh Government. A conference on "not more of the same" seems opportune.


 

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