George Kerevan: Consensus needed before Scotland can truly prosper

Published on Tuesday 12 May 2009 21:39

WHAT has been the impact of ten years of devolution on the Scottish economy and business?

The early years of devolution, until the credit crunch in 2007, saw a boom in Scotland, with growth above trend and unemployment at historically low levels. From that perspective, the performance debate became somewhat muted. Yet a look at the data shows Scotland's relative economic performance (as compared with the UK) was no better than before devolution.

Between 1998 and 2008, total Scottish output (measured by the GVA method) rose by 23.1 per cent, while total UK output rose by 28.6 per cent. That means the UK economy as a whole grew by 24 per cent more than Scotland. How do we explain this?

Scotland was not the only part of the UK to see a relative deterioration in its economic performance over the past decade. This was caused by the massive expansion of financial services, plus an allied construction boom, in London and the south-east, which unbalanced the UK economy as a whole.

London and the south-east account for a third of UK output. Add in those parts of the south-west and Essex that have been incorporated into the London commuter belt and this part of the UK is responsible for nearly a half of output. No other major industrial country exhibits this degree of imbalance. Greater London sucks in capital and skilled labour, to the detriment of the rest of the country. The recent financial bubble exaggerated this phenomenon.

This is clear if we look at productivity data, measured in output (GVA) per head. At the start of the millennium, only two UK regions had a GVA per capita greater than the UK average: London and the south-east. Scotland came third, sitting just below average. Scotland's relatively strong performance was the result of high investment in new plant in Silicon Glen.

Now for the devolution years. Between 1996 and 2006, GVA per head relative to the UK average increased in only two regions – again, London and the south-east. Most other regions, including Scotland, saw a deterioration in their relative productivity performance. The London effect still rules.

The usual conclusion is that Scotland, under the present devolution settlement, has insufficient macroeconomic powers to promote growth. In particular, lack of capital borrowing powers restricts its ability to follow the European devolved regions by investing in infrastructure.

But there is another aspect to the debate. While Holyrood might lack fiscal powers, it still possesses tools to influence the micro-economic sphere at company level. Scotland's poor productivity record suggests these were not well used. There were paper plans: remember "Smart, Successful Scotland"?

Yet for most of the decade, the emphasis was on redistribution rather than growth. Policy-making was about placating interest groups, not forcing them to come to a consensus about national economic priorities (the Scandinavian approach).

As a result, there were serious micro-economic failures.

First, exports. Scottish exports are two thirds of what they were in 1995 – and that is before the recession. This results from the loss of Silicon Glen after the dot-com bubble burst in 2000. Export promotion should have been given a more strategic focus. The emphasis on fostering trade links with Asia is understandable, but we underplayed other markets where Scotland has a strong brand; eg Canada, which is desperate to break its dependence on the United States.

Second, small businesses. Recent data shows that the survival rate among new-start companies improved appreciably during the devolution years. In part this reflects better support and better communications with policy makers. The downside was the long delay in cutting the business rate for SMEs. This should have been done in 1999.

Third, research. Significant public funds have been channelled into promoting R&D in Scotland. This could be classified as the main micro-economic policy. Yet as a percentage of GDP, Scottish research spending remains abysmally low.

This does not tell the whole story. R&D spending in manufacturing actually doubled over the decade. One reason why research seems low as a proportion of GDP is that Scottish service industries are reticent to get involved – a failure that public policy should have addressed more effectively.

Management of the public R&D intervention has been uncertain. The Intermediate Technology Institutes, introduced with a fanfare in 2003, were absorbed back into Scottish Enterprise at the end of last year with minimal explanation.

Devolution has not transformed the economy. But recession is going to force hard choices in terms of resource allocation. Holyrood has a chance to show its potential by leading a debate over economic priorities. Only if Holyrood can forge a national consensus between competing interest groups, can Scotland reach its growth potential.