Why Are Some Areas More Affected by Economic Shock Than Others?

Dr Adrian Healy, Cardiff University

by Rupert Hall, Wales Online: http://www.walesonline.co.uk/business/business-news/areas-more-affected-economic-shock-6560603

In the first of our series of round table seminars organised by the Federation of Small Businesses (FSB) in association with the Western Mail, Dr Adrian Healy of Cardiff University discusses the theories of economic recovery and why some areas are more affected by economic crisis than others.

After several false starts it appears that the economic recovery has, in the words of Mark Carney the Governor of the Bank of England, “finally taken hold”.

Yet this recovery, like the crisis itself is not evenly distributed across the UK, some places are doing rather better than others and, as we have seen in recent news in Wales, the effects of fiscal tightening on the public sector are still working their way through the system.

Why is it though, that some places are more affected by an economic shock than others?  Why do some places take longer to recover and others respond more quickly?

The scale of the economic crisis across the EU has thrown this question into stark relief and it is particularly pertinent in Wales, where levels of economic prosperity are already someway below the EU’s average.

In the aftermath of the economic crisis there is a lot of talk of the need to build more resilient economies. That is economies which are less susceptible to economic shocks, or which are able to recover more quickly.

But what does resilience mean? Is it levels of economic output, as measured by traditional indicators, such as GDP, or things which are closer to individual experience such as levels of employment or household incomes?

The recent economic crisis was characterised by the fact that employment levels remained relatively strong, although overall real wage levels fell, as employers and workers tried to maintain employment through the downturn.

For many people, a resilient economy is one that is able to maintain jobs, or to recover to the previous peak in employment relatively quickly. Whilst wage levels, and household incomes, may fall temporarily these should also recover over time in a resilient economy.

Interview with Dr Adrian Healy

But what influences the economic resilience of a place?

One aspect is clearly the nature of local businesses. Economic structure can be a significant feature, as some sectors are more affected by economic shocks than others.

Areas with a more diverse business base also tend to have a greater level of resilience, as some sectors decline others are likely to expand.

The extent to which an economy innovates and exports its products can also positively affect levels of resilience to economic shocks.

The local population also has an influence, often through the way that local labour markets operate, whilst community features, such as the strength of local networks and willingness to help one another, can also have a positive effect.

What is clear is that it is not always the richest or most technologically adept that are most resilient to economic shocks. Some, more traditional, economies also exhibit stronger levels of resilience, suggesting that there may be more than one path available.

One of the features of economic resilience that remains less well understood, though, is how individual choices might affect this.

These might be choices made by ourselves, as households: should I take a pay-cut to retain my job or should I move to another place for example? Often, though, it is about the choices made by businesses.

In the last crisis, for example, many firms recognised the need to retain experienced workers and chose to reduce costs through reducing wages and hours worked rather than through large-scale layoffs.

Others reduced investment, ran down their financial reserves and stopped out-sourcing work, all of which can have longer-term implications for the wider economy.

Businesses also helped each other, with some larger firms providing payment holidays to help maintain their supply chains for example.

Helping firms make positive choices, such as through seeking new markets or to retain labour, was a feature of much public policy at this time, although such assistance needs to be rapidly available in order to be successful.

Long delays in policy responses can create additional burdens for firms and hinder their ability to respond.

The economic crisis has also demonstrated the importance of small and family firms as anchors of many local economies. Often these are strongly embedded in their local economy and highly dependent on their local market.

They are less able to turn to new markets during an economic downturn, but tend to absorb the shock through generally tightening their belts. Ownership of their own property and employment of family members helps in doing so.

A focus on the resilience of economies raises some new questions on the role of businesses, communities, households and, significantly, government in the development of places.

Whilst economic growth is important we must also consider how our economies will react, and respond, to a future downturn in economic activity.

This is not to say that protectionist policies are the way forward, but rather policies that promote the ability of businesses, individuals and communities to adapt to changing circumstances. The policies that we put in place today will lay the ground for how we respond in the future.

Dr Adrian Healy of the School of Planning and Geography at Cardiff University

The next seminar in the series will be held on Wednesday, February 12 when Professor Karel Williams of Manchester Business School will examine the issue of “What Small Business Can Do?”

For full details log on to www.fsb.org.uk/wales/seminars-2014