Two leading think tanks have warned the Welsh assembly lacks the powers to respond to possible economic problems.

A study published by the Institute for Welsh Affairs and the Constitution Unit at University College London has suggested that the Cardiff-based body could struggle to produce innovative policies to deal with the manufacturing downturn.

In the run-up to the May 2003 elections, first minister Rhodri Morgan said he had put "clear red water" between his administration and Westminster's New Labour approach to government.

The study says that the challenge for Morgan's second term is to put this distinctive profile into effective practice.

"So far it has been largely expressed as declaratory policy statements," said the IWA.

It also highlights a further challenge on the need to improve the structures and extend the powers of the assembly in order to give Cardiff ministers the discretion needed to put its policies into effect.

"Weak devolution, of the kind that may also be expected for the English regions, is a poor option for dynamic, experimental policy making," said Professor Phil Cooke, director of the Centre for Advanced Studies at Cardiff University.

"This is exacerbated where a weak lower tier, as in Wales, is faced with strong constraints from both the nation state and supranational levels."

The powers of the assembly are currently under review by the Richard Commission, which is due to report early next year.

Its recommendations are due to be considered by ministers in Cardiff and London, who will decide whether further powers should be devolved from Westminster.