APPENDIX 4
Memorandum from the Institute of Welsh
Affairs
1. THE LONG-STANDING,
CONTINUING GAP
BETWEEN GDP/HEAD
OF WALES
AND UK
Table 1 shows that Wales has kept pace with
economic growth of the UK in GDP terms and other regions, including
Scotland, over the past 30 years.
TABLE 1
| Country/region | GDP 19961 | GDP 19952 | Multiple 1995-66 |
| £billions | £ billions | |
| UK (excluding cont shelf) | 33.0 | 594.1 | 18 |
| England | 28.3 | 504.9 | 18 |
| Wales | 1.4 | 24.6 | 18
| | Scotland | 2.8 | 50.7 | 18 |
Sources:
1 Regional Trends,
1975.
2 Regional Trends,
1997.
Over this 30 year period, Wales' GDP grew slightly
more than the:
— West Midlands and the North West
regions but less than the
— East Midlands, East Anglia and the
South West regions.
The increased economic activity in manufacturing,
particularly through inward investment brought into Wales over
the past twenty years, has compensated for the loss of contribution
to GDP arising from the decline in the traditional industries
of coal and steel. But no more.
As Wales' proportion of total UK GDP has remained
around 4.2 per cent, so too has GDP/Head (of resident population)
hovered around 85 per cent UK.
2. THE BALANCE
OF INTEREST
BETWEEN ATTRACTING
INWARD INVESTMENT
AND ENCOURAGING
INDIGENOUS COMPANIES
Inward investment
Wales has attracted, for most of the last 12
years or so, 20 per cent of the overseas inward investment in
manufacturing industry into the UK. It has attracted, however,
a lower proportion of service industry investment into the UK.
Manufacturing industry in Wales employs around
240,000 people or about 21 per cent of the total civilian work
force, employees and self-employed—a number which has been
steady for 10 years. However, manufacturing industry is subject
to continual productivity improvements of around 5-10 per cent
a year simply to stay competitive in the international market
place. So that employment in manufacturing cannot be expected
to increase unless sales growth is over 10 percent per annum.
We believe that inward investment in manufacturing
is likely to be of lesser significance in the future than it has
been over the past decade. It was the arrival of the Single European
Market in 1992 and the prospect of tariff barriers, which was
the motivation for overseas companies to invest in Europe—and
in Wales to supply Europe. Japanese companies arrived first as,
later, have South Korean, Thai and Taiwanese companies. The market
they intended to supply primarily was continental Europe. Wales,
and the Welsh Development Agency in particular, was right to capitalise
on this window of opportunity and it did so with conspicuous success.
But now the overseas companies in Wales today
are unlikely to expand their operations in Wales to continue to
export to continental Europe. They will establish new manufacturing
plants in Hungary, Czechoslovakia, Poland and the countries making
up the former USSR to service their share of the markets.
There will always continue to be foreign firms
which will want to invest in Europe and Wales will continue to
be an attractive country but for manufacturing industry, we would
be very unwise to believe that our economic prosperity can be
substantially improved by inward investment in manufacturing.
Indigenous companies
There is a more significant underlying problem—or
opportunity—for Wales. Wales' manufacturing industry is
dominated by the large companies, employing over 500 people. Wales'
smaller manufacturing companies (fewer than 200 employees) produce
a significantly lower proportion of total manufacturing output
than other UK regions.
TABLE 2
Manufacturing output (1994) by size of company
in the UK and selected regions
A smaller proportion of Wales' manufacturing wealth
is created by companies employing fewer than 100 or 200 employees
compared with other regions
| Percentage total regional manufacturing output by size of company (numbers employed) |
Cumulative
| Total value |
| Under 100 | Under 200 | Under 500 | 500 and over | £billion (1994) |
| UK | 34 | 48 | 69 | 31 | 123 |
| South West | 38 | 54 | 76 | 24 | 8.4 |
| South East | 37 | 51 | 72 | 28 | 14.4 |
| West Midlands | 36 | 51 | 70 | 30 | 14.1 |
| Eastern | 36 | 50 | 68 | 32 | 11.1 |
| East Midlands | 35 | 50 | 74 | 26 | 11.1 |
| Scotland | 31 | 44 | 64 | 36 | 9.8 |
| Wales | 25 | 39 | 64 | 36 | 6.6 |
Source: Regional Trends,
1997 Table 13.5.
This may not, at first glance, appear a significant
difference between Wales and, say, the UK average. However, for
Wales to have produced in 1994 the same proportion of manufacturing
output from companies employing under 100 people, it would have
had a further 300 companies, each with a turnover of £3
million and employing 50 people.
These smaller companies could have been in the
areas which need employment opportunities most—in West Wales,
the North West and the former mining communities in the valleys
of South Wales which certainly do not have the large areas of
land available as required by inward investing companies as the
South Korean LG.
Looking to the future, and with reservations
expressed above on the outlook for a steady flow of inwardly investing
companies, Wales has no alternative but to put increasing emphasis
on developing our own indigenous businesses in manufacturing industry.
Encouraging the existing small businesses to
expand profitably and encouraging new business formation has to
be a key priority for the new Economic Power House.
3. THE IMPORTANCE
OF REDRESSING
THE BALANCE
BETWEEN MANUFACTURING
AND SERVICE
INDUSTRIES IN
WALES
Service industries
Private sector service industries are an increasingly
important sector of a country's economy. These include:
— Transport and communication industries,
including telecommunications
— Financial and Business services—including
the fast-growing areas as soft-ware systems design and related
services
Unfortunately, they do not figure as largely
in the economy of Wales as they do in the UK economy as a whole
or, indeed, in the economy of many other UK regions.
TABLE 2
Wales' manufacturing and service industry sectors
as per cent UK GDP in 1995
Private sector service industries play a smaller
than average part in the make up of GDP in Wales compared with the UK as
a whole
| Wales | UK | Scotland | Wales as per cent UK GDP | Scotland as per cent UK GDP |
| £ billions | £billions | £ billions | | |
| Overall GDP | 24.6 | 594.1 | 50.7 | 4.1 | 8.5 |
| Manufacturing | 6.9 | 131.7 | 10.2 | 5.2 | 7.7 |
| Transport/Communications | 1.6 | 50.8 | 4.0 | 3.1 | 7.9 |
Finance and Business services | 4.5 | 158.2 | 10.7 | 2.8 | 6.7 |
Source: Regional Trends,
1997
Overall, the Welsh economy accounts for 4.2
per cent of the UK total: Wales' manufacturing output accounts
for 5.2 per cent of the total manufacturing output of the UK.
However, in the two key service sectors quoted, Wales is poorly
represented.
And a higher proportion of GDP in Wales arises
from public sector expenditure, which is potentially concerning.
CHART I
WHILE WALES
ENJOYS A
HIGHER CONTRIBUTION
TO ITS
GDP FROM MANUFACTURING,
THE CONTRIBUTION
FROM TRANSPORT
AND COMMUNICATIONS
AND FINANCIAL
AND BUSINESS
SERVICE IS
SIGNIFICANTLY LESS
Source: Regional Trends, 1996.
Ag—Agriculture, forestry, fishing; M/Q—Mining,
quarrying, oil and gas; Mfg—Manufacturing; E/W—Electricity
and water supply; Cons—Construction; Dist—Distribution,
wholesale, retail: hotels etc; T/C—Transport, storage,
post, telecommunications: FBS—Financial and business
services; P Ad—Public administration; Ed.H—Education
and health; Othr—other services
The service industries in the private sector
are some of the fastest growing parts of the economy. Business
Strategies, forecasting that Wales' GDP will grow marginally less
than the UK over the next few years, commented (July 1996) "One
of the main reasons for the under-performance of the Welsh economy
over the next two years will be moderating growth in the non-manufacturing
sectors."
The Welsh economy is not sufficiently strong
in the service sector industries.
Services and employment
The Institute's Wales 2010—three years
on Report, December 1996, concluded that If Wales had the
same proportion of jobs in the service sectors as the UK as a
whole, there would be substantially more jobs in the services
sectors and, in particular:
— 12,000 more jobs in Transport, storage
and communications (particularly tele-communications) compared
with 46,000 in 1996;
— 18,000 more jobs in Financial services—banks,
insurance etc. compared with 25,000 and, even more strikingly;
— 49,000 more jobs in Business services
compared with 72,000 in 1996.
ACTION STEPS
Inward Investment of service industry companies
can assist Wales in gaining more of the fastest growing sectors.
Inward investment by, for example: design services of all kinds,
software and IT businesses, (as has successfully occurred in Ireland);
research and development centres for international companies;
international and national telephone call centres (Wales has some
but not many compared with England, Ireland and Scotland).
However, inward investment alone is not going
to accelerate the rate of change that needs to occur if Wales
is to have its fair share of the economic growth sectors of the
next century.
As with manufacturing industry, the priority
now is to develop more indigenous service sector business in the
important growth sectors of the next 10 years and beyond.
4. THE SCALE
OF THE
EFFORT REQUIRED
TO INCREASE
WALES' PROSPERITY
100,000+ NEW HIGH
VALUE-ADDED
JOBS
While the GDP/Head (of total resident population)
is around 85 per cent UK, the GDP/Head (of the civilian work force)
is around 95 per cent UK, i.e., Wales needs more jobs.
Or looking at it another way, Wales with 5 per
cent of the population of the UK has only 4.2 per cent of its
GDP. Therefore, the fundamental problem is that there are substantially
too few jobs in Wales for the resident population. This is, of
course, reflected in the lower "activity rates" for
Wales compared with other regions. Given the lower activity rates
in Wales and that many people would prefer full-time work to part-time
work, Wales has the necessary people. It's just a question of
the jobs.
It is the scale of the discrepancy that is the
challenge. If Wales had had a further 150,000 people working in
1995 (total civilian work force was around 1.1 million) then,
if the occupational and full-time/part-time mix were the same,
the GDP would have been around £28 billion— 4.7 per
cent of the UK instead of 4.1 per cent. Still too low.
It is, therefore, not simply a matter of more
jobs—but of jobs which are more highly paid and which generate
more wealth for the Welsh economy. Substantially more high value-added
jobs are what is needed.
Where could the new jobs come from?
From manufacturing industry
With productivity increases continuing at around
5-10 per cent a year in manufacturing it requires a 5-10 per cent
increase in sales simply to safeguard existing jobs. Increased
automation will, inevitably, result in job losses in assembly
operations over the next several years. It will be essential to
seek new manufacturing operations in Wales from all sources to
stabilise existing employment numbers.
If Wales could create the 300 new businesses
in manufacturing, each employing 50 people this would result in
15,000 more jobs. If those small businesses, SMEs, already in
existence could expand then several tens of thousands of jobs
would be created.
But that would not be enough. Wales has to look
to the service industry sectors for the new jobs.
From the service industry sectors
If the jobs are to come, therefore, they must
be in the services sector. And the sectors of service industries
which are important are the high value-added sectors and, particularly,
those which `export' their services—rather than services
essentially meeting local needs. Wales needs to become a much
stronger base for such services.
Clearly, inward investment of service sector
companies must be a key priority but the economy will only be
on a sound financial basis if we can encourage more companies
in the service sectors. And that is a message that needs clearly
to be understood by all.
The Wales 2010—three years on Report
lists a large number of recommendations to help achieve these
ends.
John Osmond
Director
19 January 1998
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