New South Wales/Old South Wales

As a resident of the former and a native of the latter, and passionate about both, I’m wondering how both are doing at the moment. One thing that coming from one and living in the other does for you is give you a sense of perspective. That leads to this immediate judgment: however anxious New South Welshman are currently about the future on average they are well on their way to being twice as wealthy as the average South Walian. Their GDP per head is already 1.60 times that of Old South Wales and on current trends they will be twice as wealthy by 2025. This wasn’t always the case. But then the two have been going in opposite directions since the 1920s.

The story of South Wales since the collapse in the 20s has been that population went down overall in the 30s and 40s – and in some places dropped like a stone – then recovered slowly but in many places has not reached the levels seen in 1921. Indeed, the Rhondda has lost more than 40% of its population at the economic peak and many former mining towns continue to lose population. New South Wales’s population has more than trebled in the same period. This is despite the fact that for more than 20 years now other Australian States have seen even faster growth with Sydney in the last decade for example ‘only’ growing at 1.2% per annum whilst Melbourne has seen 2% growth each year.

Some national figures for Welsh and Australian population growth since 1901 show what a terrible ‘long century’ it has been for Wales since 1901. In that year Wales’s population was about 60% of Australia’s. Today it’s about 13%.

Yes, New South Wales has got failed places where population went away when the economy did. But even places well away from the fast developing coast where most Australians seem to want to live, have seen and will see some population growth in the next few decades. So Dubbo or Tamworth will still grow 1% a year or more though nothing like the growth we shall see in Sydney or coastal towns like Port Macquarie, destined to grow by 30% in the next dozen years or so. The Valleys of South Wales will be very lucky to maintain their current depleted populations though continued decline is predicted. And why not? There is after all precious little to keep people in some South Wales places except free social housing and welfare benefits.

Many New South Walians don’t actually get how well off they are by such comparisons. Whilst there are patches of concentrated deprivation here and in remoter places there are what Tony Abbott has called ‘welfare villages’ largely inhabited by indigenous populations trapped far from either employment or anything that would look like a traditional lifestyle, New South Wales has no equivalent of Merthyr, Blaenau Gwent, the Heads of the Valleys are any South Wales social housing estate you can name where multi-generational worklessness is normal. Some NSW coastal towns have higher economic inactivity than is good for them but this is mostly a sign of relative affluence as they attract early retirees. Despite the anxieties ,New South Wales is still on the rise .Old South Wales remains in serious trouble and things worsen as , public spending begins to fall, the euro zone implodes and GFC 2 picks up pace.

There are some echoes between the NSW and OSW (Old South Wales) experiences, largely to do with managing and leveraging mining royalties. For various reasons, as much to do with non local ownership patterns in Welsh mining, whatever money was made when King Coal ruled the world from South Wales, was in the first period of small scale mines, re invested locally. As the scale of pits and capital required grew, royalties and mining incomes tended to be exported to London and thence internationally. Globalisation is not that new, after all. This mean that the coal boom brought very little local capital formation of any scale in South Wales and hence wasn’t recycled in local businesses or infrastructure. As Australia is investing $25bn a year less in infrastructure than it was in the 1970s, despite the mining boom of the last few decades, there must be a worry that some of the Welsh history is being replicated in Australia .

Of course NSW has never had the type of mining based economy OSW had and Queensland or Western Australia have today. The numbers are worth comparing. South Wales had a coal-mining workforce in 1921 of 150,000 in a population of 2.5 million whereas Australia’s resources sector only employs 170,000 in a population of 23 million. Indeed, there is now increasing worry that without a big mining sector NSW will in some senses get left behind by the other resource giants. Hence the references here to Australia having a two or three speed economy, with NSW not being in top gear.

It’s more complex than that because Sydney remains Australia’s only global city and has seen its financial services sector more or less sail through GFC1. It’s also the case that Sydney is well placed to capitalise on the continuing with the only economy which seems matter in the early to mid 21st century: China.

What is suffering in NSW and indeed Australia , is the non mining manufacturing economy whose exports are being killed by the high price of the dollar – which itself has risen high partly on the back of the mining boom. And herein lies a real danger and a real echo of the South Wales experience.

It’s sometimes forgotten outside the UK or just not known that the collapse of manufacturing in the west of the UK (Wales), the midlands, the north and Scotland , didn’t just affect a sector. It affected a geography. Whereas that geography had been the wealthy and ebullient part of the UK in the 19th century, in the 20th century it was the south-east which prevailed, largely on the back of financial and business services. There was a link between the collapse of one and the rise of the other and of the differential and opposite fates of the periphery versus the centre. Its name was sterling and principally the high exchange rate thereof.

Essentially, as UK economic policy began to favour the growth of financial services over anything else, the default position became to protect the value of sterling and the high interest rates which kept it there. Interest rates became set less by what the economy outside London needed and more by what the Masters of the Universe in the City of London, Wall Street and the Gnomes of Zurich wanted. As with the Aussie dollar today, high comparative interest rates were attractive to currency dealers and bankers whose money the City was delighted to save, manage and invest. Thus started a process which left manufacturing struggling with both high interest rates and a price for sterling which left them incapable of selling their goods. The century long decline of manufacturing Britain and the many communities in it has seen populations dwindle, multi-generational worklessness entrenched, and the balance of economic and political power in the country swing decisively south-east. Now out of the 11 regions or devolved countries in Great Britain, only two make a net contribution to the UK Treasury: London and the Southeast. In 1850, the opposite would have been the case, with London and the south-east piggy-backing industrial Britain.

Although many think this shift and decline were natural or automatic they have more to do with public policy than acts of God. Germany has retained its industrial base – even though its cost base increased – because its public and economic policy supported it and because its financial services were less important in the first place. Interestingly, as Germany in the last decade or so let its financial services off the leash so too has the ‘real German economy’ been adversely affected by the kind of stupid and greedy behaviour we saw in the City.

The UK suffered from having an economic policy which supported one sector at the expense of another. It also favoured one or two regions over the majority. Part of this is indeed the difficulty of having a single interest rate or currency for very different 2-3 speed economies – and the current euro zone crisis is as much about this inflexibility of policy as anything – but it is also about governments making choices. In the UK the choice was made to back the City at the expense of the UK’s manufacturing capacity and heartlands, with the latter being ‘compensated’ by increased welfare transfers, public spending and ‘regeneration’ investment. Not enough effort was put into developing new sectors and the infrastructure needed to re-launch their economies. Then we demonised them for being ‘dependent’ when the engine of their growth and jobs for those who now receive welfare benefits, had been blown up by their own governments.

I add: this is not a left-right battle. I worked for Labour governments that had little commitment to re-tooling the industrial economy outside London or little economic idea in their heads except de-regulating the City to make it safe for Lehman Brothers.

So South Wales lies more or less broken by the end of the industrial economy, with public spending now faltering as a way of filling the employment gap and parsimonious but still demoralising welfare benefits trapping people in failed places and catastrophic lifestyles.

Whatever the immediate prospects for the NSW economy, it can and will avoid the fate of Old South Wales being more diverse and less dependent on a single source of e employment anyway. Having said that, it will suffer from a one size fits all economic and fiscal approach which favours the nation-wide mining industry. Interest rates are being set by Chinese demand for resources rather than to reflect the needs of other Australian sectors or regions outside the mining boom. The logic of that is that to stay competitive in such sectors –rather than give up the ghost as the UK so disastrously did – NSW needs to disproportionately and proactively invest in infrastructure , soft(education) and hard(connectivity stuff), that supports productivity and competitiveness . Yes that’s harder to do without the mining royalties in the first place but there are other ways to skin the cat, including sweating existing assets more efficiently and borrowing-to-invest-and pay book through growth(structured finance approaches). My worry is that Treasury orthodoxy will prevent the NSW risking its AAA status in the bond markets precisely at a time when no-one should be listening to S+P or anyone of the ratings agencies who brought us GFC 1 – and precisely at a time when NSW needs to be improving its infrastructure both to maintain competitiveness and ensure the sustainable growth of Sydney. I am sure sense and ambition will prevail.

And Old South Wales? Deep in the mire of structural and policy driven poverty it also has a bureaucracy which is trapped in Treasury orthodoxy and frankly not up to the challenge of defending it against the coming storm let alone turning the economy around. Returning to my 1901 comparisons I believe that the Old South Walians and the New South Welshmen of that era would both have looked pretty equally confidently at the prospects of the coming century. It says everything about South Wales’s strength then and feebleness now that no-one would have found the comparisons between glowing futures of the two places far-fetched then. To make them today is a study in stark contrasts.