In times of economic uncertainty attention often turns to the resilience of economies to shocks and downturns. As we grapple with the likely economic consequences of coronavirus, not to mention the longer-term implications of leaving the European Union, it is no wonder that thoughts turn to how to ensure our economy is resilient to any potential economic crisis. In this context, a recent Wales Centre for Public Policy review of the evidence relating to economic resilience takes on an enhanced significance.
There have been a number of studies since the 2008-09 financial crisis which explore how economies weather shocks, and what governments can learn. Such studies stress that resilience is not just about withstanding economic shocks, but is also about adapting to new circumstances. A resilient economy has the ability to transform itself, and in doing so distribute the costs and benefits of such actions in a just and equitable manner. Economic resilience is as much a social construct as an economic one. It’s a matter of choices.
The literature makes clear that there is no single magic bullet that will lead to a resilient economy. Rather, there are a series of foundations that can be laid. These include a diverse but inter-connected industrial base, a skilled and experienced workforce, a positive export orientation, high levels of innovation, and a body of dynamic firms that compete on the basis of quality rather than lowest costs. Reliance on a small number of sectors, firms or limited supply chains all provide potential vulnerability to future shocks.
There is evidence that the social ties of companies and communities can also play an important role in the resilience of economies, with firms that are committed to their location, whilst still seeking to grow and develop, more likely to promote resilient economies. During a demand-led economic crisis, such as that being created by the coronavirus epidemic, the survival of locally-embedded firms will determine the shape of our communities after the first wave of the crisis has passed.
Evidence for the role of government policies in promoting the resilience of economies is mixed. Experience gained from the closure to the Longbridge car manufacturing plant in the West Midlands suggests that public policies can help in diversifying an economy, assist affected workers find new employment and support firms affected by the closure. In particular, short-term actions to help otherwise solvent firms remain trading, such as PAYE and VAT holidays, were particularly effective. However, Longbridge also demonstrates that displaced workers often had to take less secure and less well-paid employment, illustrating that resilient economies still incur individual costs.
What is clear from the evidence is that governments need to distinguish between actions that help economies weather the immediate effects of a shock, and longer-term actions that will help firms, employees and communities to adapt to new economic conditions in the future. The decisions that governments take about which firms to support and which not, about which affected workers are supported and to what extent, plays a significant role in shaping our economy into the future.
Short-term policy actions may be based on fiscal stimulus, subsidies, loans, tax-credits and other forms of intervention, as are currently being introduced in response to the coronavirus epidemic. Longer-term actions will be founded on the role government can play in promoting adaptation and transformation, such as through investing in new technologies, the upskilling of the workforce, promoting innovation or encouraging the development of new markets.
However, evidence suggests that resilience is rarely a strategic objective of government. There are few examples of systemic approaches to building economic resilience. Rather, policies are formulated to tackle problems at a particular point in time under the badge of economic resilience.
As coronavirus has brutally illustrated, not all shocks can be predicted or forecast, meaning that a resilient economy must have the capacity to adapt to circumstances that change unexpectedly. Government policies can play a role in this by strengthening the capacity for independent action and by addressing identified vulnerabilities in an economy. This requires a rather different perspective from more traditional policy approaches, one that acts in a pre-emptive manner towards collective objectives.
The recent experience of the coronavirus epidemic has also illustrated another feature of resilient economies that is often overlooked in the literature: the collective power of individual decision-making. The individual actions of households, companies and other organisations can be a powerful force in promoting the resilience, or otherwise, of an economy.
In current circumstances, individual decisions to cancel sporting events, curtail travel and initiate ‘social distancing’ in advance of government advice to do so risks pushing the economy into recession, particularly where actions become mutually reinforcing. Whilst this highlights the potential role of government in framing a ‘resilience’ narrative, it also demonstrates that to be effective this requires a shared understanding of the risks and probabilities being faced. How to harness this power of ‘agency’ remains an opportunity and challenge.
From our work we have learnt that strengthening the resilience of an economy relies upon sound policies that seek to promote the ability of an economy to adapt in the face of uncertainty, as well as to respond in the event of a shock and its aftermath. Government is only one actor among many, and the powers of a devolved Government are further constrained. This reinforces the message that policies aimed at strengthening the resilience of an economy require a collective ownership and a shared sense of direction. Moreover, if we truly wish to build a resilient economy then this requires a holistic vision that encompasses fields beyond those traditionally associated with economic development.
Welsh Government has the potential to be in the vanguard of such an innovative approach if it wishes to do so. It has the tools and, with the Well-being of Future Generations Act, the framework for action. In seeking to strengthen the resilience of the Welsh economy, Welsh Government and the UK Government both have choices to make as to where to focus their support. The decisions Welsh Government makes today will shape the Welsh economy for many years to come.