Wales needs new approach to economic policy – Part I

First published on WalesBusiness.org

Today I start a three-part article which argues why Wales needs a new approach to policy in order to respond to globalisation.

As is well known, the economic outcomes that Wales is generating are not great. There has been a long-running debate as to the various possible reasons for this performance. But the key reason is that Wales has not responded to the structural changes in the global environment over the past two decades.

Wales has an out-dated view of the global economy – that of a commodity exporter – and has not fully recognised that responding to the emerging global realities requires a more deliberate, strategic, comprehensive approach to policy.

For the past several decades, small countries like Wales have benefited from a relatively open, rules-based global economy – and in the context of a relatively benign strategic environment. Post-1970s, we have been able to successfully diversify and grow our export markets. And more recently we have benefited from the strong growth in emerging Asian markets, notably China.

But the latest phase of globalisation, that is perhaps two decades old, is qualitatively different. It is not just about exports, but about cross-border flows of capital, ideas, people, and much else. Key features include: the integration of large emerging markets; new business models, often enabled by technology; increased factor mobility across borders – and the increased agglomeration that goes with it; and a much more networked, connected world.

The increasing intensity of this process has placed growing pressure on many advanced economies: declining competitiveness in several sectors; substantial pressure on income inequality; increased exposure to external shocks (because of interconnectedness); and so on. Many advanced economies are struggling to respond to these changed realities, and are trying to figure out how to strengthen their competitiveness, renew the social compact, and position themselves in a much messier global economic and political environment.

And the intensity of this process is likely to continue to increase: greater competitive pressure; ongoing erosion in many multilateral institutions and processes; and increased volatility, are all more likely than not. The global political environment is also changing, with Asia (and particularly China) assuming a much more prominent role; economic weight is translating into political influence, which raises a series of strategic questions for Western countries like Wales.

Small economies are particularly exposed to these changes, given their higher levels of international engagement. Many small developed countries have done a good job at responding to the challenges and opportunities presented by globalisation, through deliberate economic policy, ongoing efforts at external integration, policies to moderate pressures on social outcomes, and so on. Small country growth rates have remained steady, the small country share of global GDP has remained constant, and the level of international economic engagement has grown strongly.

If anything, small country performance has strengthened, relative to larger countries, over the past 15 years. But small countries that have not adapted to these new global realities have fared poorly, as recent experiences in Europe (e.g. Greece) remind us; there is a bifurcated distribution of small country performance.

As with other small countries, Wales is highly exposed to this changing world. These external forces are much more material than the domestic policy environment. The international economic and political environment clearly has a first-order impact on Wales’ economic trajectory.

And the global environment has a material impact on our behaviour and performance on multiple other dimensions as well. Consider the impact of the globalisation of the labour market over the past few decades on labour market outcomes and income distribution, or our ability to access foreign capital.

As noted above, the intensity and significance of these global forces has increased substantially over the past decade – and accordingly, Wales’ exposure has also increased. But these global changes are not a core part of our national debate or of the way that policy discussions are framed. And this is something I will expand more upon in the coming weeks…