Analysis - Wales - The dragon's gets louder

Will Wales fulfil its potential to become the next Celtic tiger?

The Welsh economy is positively booming, according to the headlines.

Talk that Wales is soon to be the next Celtic tiger has become so frenzied that people - especially the Welsh - are starting to believe it can happen overnight. The conviction is almost as if the more the mantra is spoken the less chance it'll have of failing to become reality. But such talk is premature. It isn't that real economic strength is an impossibility, but that it is some years off yet.

In recent years it has been more a case of Wales managing to tread water in extremely difficult world trading conditions. This is an achievement in itself. But it's not enough if the Celtic dragon wants to achieve an economic boom like that enjoyed by Ireland in the 1990s.

Yes, there have been many success stories throughout Wales at a time when the world economy has been a tough place to trade in and where competition for investment and job creation is increasingly difficult, particularly in an enlarged Europe.

Winners and losers

Stephen Harrison, chairman of Pricewaterhouse-Coopers Wales and the West, says: 'On the one hand you can celebrate the successes, but on the other we're losing traditional areas. The ones we're losing are still greater than the ones we're winning. The Welsh Development Agency (WDA) and Assembly have been addressing those problems and looking at what will make us competitive; how innovative, value-added business can be generated.'

Andrew Davies, Labour's economic and development minister in the Assembly, is more upbeat.

Davies says: 'Despite world trading conditions and a bear market we've performed well. Exports growth has been significant. Year on year we've seen increases. In the third quarter of 2003 there was an 8.6% increase. For the UK it was 3.9%. That growth is due primarily to the American market.'

But where investment is concerned Wales can no longer trade on being the UK's cheapest labour and property market. As in the North of England, Wales is experiencing an unprecedented property boom and wages are rising with it.

With this at the forefront of their minds, the Welsh Assembly, business, its representatives and higher education institutions have had to work together to ensure the economy doesn't falter.

As James Price, senior economist at the WDA, puts it: 'Now we are not saying, "Come to Wales because it's cheap and green". Now we're saying, "Come to Wales because we have the key skills". We're identifying packages that we can offer. Cost alone won't win it anymore.'

Media friendly

Some of the key areas pinpointed include aerospace, automotive, niche truck building, film and TV. Outside of London, Cardiff has one of the highest, long-standing concentrations of media organisations.

In March, figures released by Accelerate Wales, an industry-led initiative geared at raising the performance of the Welsh automotive sector, showed it had helped create 650 new jobs and safeguard a further 1,963 since its launch three years ago.

Accelerate Wales is supported by the Welsh Automotive Forum and managed and funded by the WDA.

The hi-tech industry is also taking up firm roots in Wales. LogicaCMG confirmed in March plans to bring more than 750 jobs to South Wales within the next three years. The move is one of the biggest inward investments in Wales for many years.

The deal was clinched with the aid of the Assembly and the WDA.

Rule changes introduced by Ofcom, the UK's new communications regulator, also mean there are many opportunities for Wales. As part of the new regulations, 25% of UK network content for BBC1 and BBC2 has to come from outside the M25 area. For other channels it varies between 10% and 33%.

'Wales has historically got a lot of content companies so there are opportunities for those companies. I'm leading a fact-finding mission on behalf of an Assembly-wide group looking at how we can take advantage of that,' says Price.

Despite the WDA's record of attracting inward investment and job creation, critics urge caution in praising the body.

The Welsh Conservatives dispute its success in job creation warning that a large proportion of new jobs in Wales are down to public sector growth.

Doubts have also been cast over the WDA's figures. The news in March that the National Audit Office for Wales has decided not to investigate the way in which the WDA collates its figures, will not help the body fight its corner.

Coming of age

Nevertheless, it could be said that Wales is finally growing out of its petulant teenage years into a mature adult.

It should be remembered that its industrial history and 17 years of Conservative rule did not do it any favours, let alone stand it in good stead for the modern economy.

But because of this, it has gained large amounts of European Union funding to provide the necessary infrastructure, training and education it needs to transform itself.

But the South Wales collieries are now closed, the population's health is slowly improving and the valleys have regained their green sheen, making it one of the UK's most sought after tourist destinations for British nationals and foreigners alike.

The issue, however, is now one of culture. And that cannot be transformed by government policies.

Manufacturing remains the mainstay of economic activity but Wales is no longer entirely reliant on it. The market is slowly shifting to one of a service economy.

Davies says: 'Much of traditional industry has disappeared. Now it's a more diverse economy, but manufacturing is still important.

'Unemployment is below the UK average. We have employment levels not seen since the 1970s. We've been showing the rest of the UK new heels.' However, Wales has been one of the areas to suffer from government job cuts. In March, Welsh secretary Peter Hain confirmed that 550 jobs would be lost at the Defence Aviation Repair Agency (DARA) facility at St Athan in the Vale of Glamorgan.

Joined-up thinking connecting higher education, government and business is now the thrust behind Wales's aim to become an economic success story.

PwC's Harrison says: 'It's how you link the academic excellence and build this into a viable economic base. We have the availability of space, properties and grants that will help us in Wales to package this.

'The danger is that this agenda is the government's and while Wales started on this road earlier than other parts of the UK, the question now is what speed will other areas catch up?

'Other regional development agencies have since been created. A lot of them will focus on this strategy, so it's whether we can maintain the lead and start delivering the opportunities.' But some think it is an initiative that has come too late.

Alun Bowen, senior partner at KPMG Cardiff, believes Wales certainly has the potential but is realistic on the timescale.

He says: 'The business, government and universities' link up - it's not been a very successful combination if compared to US and Asian economies. We are way behind the game.'

There is the added problem of scepticism between these three sectors.

'We're trapped in a slow circle. It's fostered currently on an untrusting tri-partied relationship,' Bowen adds.

And for many, Labour in Wales retains the stigma of being anti-business.

This Davies refutes vehemently.

'I don't think anyone in business would say that I or the government wasn't pro-business. Since I became minister I have regular meetings with the Federation of Small Business, the Confederation of British Industry, various chambers of commerce and trade unions.'

But it is the mindset that has to change. And psychological change does not come quickly.

'We're not waiting with bated breath for a huge upturn. We're in there and have been for a long time. It's going to be a long haul. Government is kidding itself if it thinks it can kick-start this change,' says Bowen.

Taken for granted?

Despite recent successes, the positive mood and confidence that most sectors have, there is still a dependency on grants that many see as only a short-term fix.

A lack of inherited wealth has also held back Welsh entrepreneurialism, say experts, compared with the south-east of England, for example.

Colin Mitten, CEO of Finance Wales, Wales's first venture capital group, says: 'The only issue we have is one of grant dependency. Business will always take grants, but they aren't good for the long term. It encourages business to focus time and effort on achieving grants. If you make an equity investment on a good day you'll get the funds back with interest. If you offer a grant, it's a one-way trip.'

Finance Wales, backed by the Assembly, offers funding, mentoring and business support to businesses unable to achieve backing from traditional sources, such as banks.

The brain drain is yet another issue to contend with.

Wales's record of retaining skilled labour has not been a phenomenal success. But Davies assures the Assembly is working hard to counter it.

'There are opportunities in financial professional institutions now. The growth of Cardiff has been phenomenal. There's a new mood. People are coming back here at a younger age. The work/life balance is increasingly important for people.

'Wales has great countryside and fantastic employment opportunities. We have a world-class arts centre and stadium, and we will be hosting the Ryder Cup in 2010.

'People are seeing what's on offer and liking it. If you've got a family it's increasingly important. And education in Wales is second to none.'

The other crucial factor is retention of intellectual property. Besides the country's inability to stop losing skilled labour, it has also been letting the rights to intellectual property slip through its fingers.

That is now changing. The WDA together with a number of other organisations are now actively working to keep IP rights in Wales.

It is a key initiative if Wales wants to be a competitive force in an enlarged EU, where labour and property come much cheaper in the Czech Republic or Poland.

Signs of confidence in Wales's ability to do this are, however, clear.

PwC has been restructuring its practice in light of such initiatives.

'We've invested heavily on the advisory side in the last two years,' says Harrison. 'We now have two directors who focus on performance improvement work. We've brought back into the region a corporate finance partner and another director.'

There is however an underlying murkier picture. One business representative who preferred to remain anonymous said Assembly members merely paid lip service to business and that companies succeeded despite it.

Another said few Assembly members actually understood business. And there's a story of a businessman who criticised the Assembly and later received a letter informing him he could expect no further government business.

Whether this anecdotal evidence is merely an indication of personal dissatisfaction or reflects a wider discontent, is a question that Labour will have to think carefully about.

But if Wales can maintain the momentum it currently enjoys, 'team Wales' will continue to deliver coups such as the Ryder Cup win while maintaining sustainable growth.

If it takes its eye off the ball because things don't happen as quickly as planned, then the dragon's roar will become more of a whimper.


•   Property boom and rising wages.

•   Need for joined-up thinking connecting higher education, government and business.

•   Perception that Welsh Assembly pays lip service to business interests.

•   Lack of inherited wealth and its effect on entrepreneurialism.

•   Brain drain.

•   Retention of intellectual property.


Total civilian workforce: 1.3m

Unemployed claimants: 43,625

GDP (also referred to as GVA gross value added): 33.1m

GDP per capita: 11,379

Source: Office for National Statistics, 2001

Over the year to January 2004:

•   House prices. The House Price Index rose by 19.3%, higher than the annual increase to December 2003 (17.8%).

•   Across the UK as a whole, the HPI increased by 9.7% over the year to January 2004, also up on the annual increase to December 2003 (8.3%).

•   The average house price in Wales in January 2004 was 114,949.

•   Employment. For the three months to January 2004, the Labour Force Survey (LFS) estimates that employment of people of working age in Wales stood at 72.1%, up from 71.6% in the same period a year earlier. The UK average stood at 74.8%.

•   Economic activity. The rate of economic activity among people of working age rose over the year from 75.3% to 75.9%. The UK average stood at 78.7%.

•   Exports of goods for the quarter ending December 2003. This totalled 1,758m, a fall of 47m (2.6%) over the same period a year ago.

Source: StatsWales, National Assembly for Wales

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