Select Committee on Welsh Affairs Minutes of Evidence


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/regionGDP 19961GDP 19952Multiple 1995-66
£billions£ billions
UK (excluding cont shelf)33.0594.118
England28.3504.918
Wales1.424.618
Scotland2.850.718

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

Cumulative
Percentage total regional manufacturing output by size of company (numbers employed)
Total value
Under 100Under 200Under 500500 and over£billion (1994)
UK34486931123
South West385476248.4
South East3751722814.4
West Midlands3651703014.1
Eastern3650683211.1
East Midlands3550742611.1
Scotland314464369.8
Wales253964366.6

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

WalesUKScotlandWales as per cent UK GDPScotland as per cent UK GDP
£ billions£billions£ billions
Overall GDP24.6594.150.74.18.5
Manufacturing6.9131.710.25.27.7
Transport/Communications1.650.84.03.17.9
Finance and Business services4.5158.210.72.86.7

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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