Democratic Federalism, the Welsh Economy & Economic Justice

Nathan James, is a member of the YCL in Swansea

Nathan James makes the case for radical economic planning and redistribution in Wales to reverse a decade of austerity and invigorate democratic rights.

Democratic federalism emphasises the symbiotic relationship between public sector intervention and economic democracy at a local, federal and national level. It requires a significant level of income redistribution at federal level combined with the development of economic democracy at the local and national level. This vision stands in contrast to the type of economic devolution mandated for English regions by the Cities and Local Government Devolution Act (2016). 

This Act minimised the potential for local or regional democracy, institutionalises corporate power through mayoral executives, hinders the goal of income redistribution and, in terms of tax revenue, puts different regions in competition with each other on terms instigated by the market. Predominantly, this Act provided institutional structures designed to maximise corporate power and demobilise movements for democratic or economic change. Democratic federalism aims to reverse this power dynamic in order to create a legal framework that supports economic policy which assists the mobilisation of democratic forces. While legal frameworks can assist socialist outcomes, ultimately these will depend on the political strength of the labour movement and its allies at a local, national and federal level.

The capitalist economy creates the situation in Wales, and every other country where it is dominant, in which significant numbers people within our society are condemned to live in poverty and deprivation.  For centuries now, capitalism has deliberately maintained a pool of impoverished unemployed people to act as a threat to working people, driving down wages through a false competition for jobs.

Austerity in Wales

The 2008 global financial crisis intensified the underlying weaknesses of the Welsh economy. It exposed that economic growth was limited to a small number of sectors and that these are either externally owned or externally dependent. The origins of this structural economic crisis began with the decline of staple industries under the Thatcher administration.

In the proceeding decades, it was claimed that the Welsh economy had been successfully transformed. In theory the replacement of the coal and steel industries with lighter manufacturing industries helped by the influence and relatively large amounts of foreign direct investment (FDI) vastly improved the economy. This view did not go unchallenged, and it was often noted that Wales was near or even at the bottom of the regional economic league tables measuring economic prosperity. For example, in 1970 gross domestic product (GDP) in Wales was 92% of the UK average, and by 1983 it had fallen to 88%. It was down to 76% in 1997, reaching a low of 71% in 2010 before increasing slightly to 73% by 2016.

GDP as a measure of economic welfare has been subject to controversy, but despite its many weaknesses remains a starting point in assessing the level of economic activity in a country. Within Wales a substantial gap in levels of GDP per head exists between East and West.  Proximity to Offa’s Dyke and its major lines of communication to neighbouring English centres of population are major characteristics of the more successful areas. In 2016 GDP per head of population was £19,140 in Wales whilst it was only £17,137 and £17,381 in Mid Wales and South West Wales respectively. 

The financial crisis of 2007/08 lead to an increase in the government deficit and the ConDem regime through its austerity programme, put in place policies to reduce the size of the deficit through tax rises, but mainly spending cuts to reduce the size of the deficit and eliminate it by 2015.  This had several implications for Wales.

First welfare reform had significant implications for poverty reduction policies. Wales has a higher dependence on welfare benefits than the UK generally. For example, in 2011 Wales had the highest proportion of its population receiving Employment Support Allowance (ESA) or Incapacity Benefit (IB), a significantly higher percentage of individuals claiming benefits for five years or more, and the highest level of disabled benefit claimants.  Policies of reducing in work and out of work benefits have implications for poverty levels in Wales, which are higher than in Scotland, the Occupied North of Ireland and England.

Additionally, the government introduced a public sector pay freeze for workers earning over £21,000 per year. It was estimated that by 2014/15 the pay freeze would save £3.3 billion a year, instead the austerity programme would also lead to the loss of approximately three quarters of a million public sector jobs by 2016/17. In the Autumn Statement of 2011, the Chancellor of the Exchequer announced that the pay freeze would end in 2012/13 and would be followed by pay awards of 1% for the following 2 years. The government justified this policy by citing research by the Institute of Fiscal Studies which showed a public/private sector pay premium of 8.3%. This IFS research also outlined substantial regional variations in this pay premium being found to be largest in Wales (18.0%), followed by Yorkshire and Humberside (13.4%) and Scotland (13.4%). The South East (0.5%) and London (4.6%) were found to have the smallest differentials.

The alternative

There is a credible alternative which is far more radical than the timid stance of Welsh Labour or Plaid Cymru. It is an alternative which understands the need to go beyond information sharing between Government and industry into positive industrial and economic planning at national, sectoral, company and collective level. It is an alternative which recognises that with ownership comes power and that forms of popular ownership have a part to play across the economy but in certain strategically important sectors in particular: like steel and transport, energy and communications. This alternative recognises that the economy should be one where decision making is accountable, working people through their trade unions have a much greater share of the power at each level, and so marginalised interests in the economy including women and ethnic minorities, are given a real opportunity to exert influence in economic decision making.

Our generation must be prepared to fight for an economy planned according to need rather than the anarchy of market forces. If previous generations had not been prepared to take on the capitalist class and the economic structure itself; the NHS would have remained a dream and public ownership would not have been reality. A socialist Welsh government could be the catalyst for sustainable investment and production, with full employment once again becoming a goal of public policy. Economic planning could be back on the agenda, so that we have a cohesive approach which joins together public procurement with our manufacturing base.

The 1975 Industry Act is over forty years old but remains on the statute book. Part II of the Act provides the powers for UK Governments to take public control of strategically important manufacturing undertakings when they are faced with overseas takeover. It is a power which remains unused but should be considered by not only UK but devolved governments. The statutory right for workers and communities to buy up the enterprise for which they work, a Welsh “Marcora Law” could be adapted in a wider class empowerment movement which embraces land ownership reform. This would start to convert the economy along a path of socialised ownership from the root up. Municipal ownership has a key role to play in converting ownership from private to public in everything from transport services to power supplies, as well as more traditional public services like housing and the wider social economy. A Welsh Co-operative Development Agency with real powers and real financial backing could make a big difference in promoting co-operative alternatives not to public and municipal ownership as is sometimes posited, but to private and joint stock ownership.

A long-term development bank to promote industrialisation is common in other, more successful economies. Such an institution should be set up in Wales, preferably as part of a constellation of publicly owned and democratic regional investment banks across the UK. It needs visibility, accountability and should not simply be a public lender of preferential loans and grants in place of overdrafts to small and medium size companies, but also a public interest body prepared to take equity stakes in regionally, strategically important sectors.

Many key sectors of the economy are reliant on public investment and procurement most notably in defence, aerospace, energy production, civil engineering and construction, and in life sciences with its links to the research work of our higher education establishments and the NHS. So why pretend that planning in these and other sectors: including food and drink should not be carried out alongside businesses, their workers and unions to build full and fulfilling employment in socially useful work to meet community need?

Planning with the bigger enterprises, building up cooperative and municipal ownership, looking at alternatives to the market, and challenging transnational corporations in Wales must be key on our agenda. It could lead to the formation of a more diverse industrial base as measured by what is produced, how it is produced and who produces it; with the potential to strength local and national democratic rights and national sovereignty in the face of international capital and global markets.

Nathan James

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