George Kerevan: Strategic investment will maintain oil revenue
Picture: Jane Barlow
A properly structured sovereign wealth fund carefully managed can stabilise Scotland’s economy after independence, writes George Kerevan
IS SCOTLAND richer for being part of the United Kingdom, as David Cameron came north to tell us yesterday? Over the 30-year period from 1976 to 2006, in other words, until just before the downturn, the average rate of growth in the UK was 2.3 per cent but only 1.8 per cent in Scotland. Growth north of the Border was a fifth less than the UK for a whole generation – hardly an indicator of prosperity under the Union.
Part of the explanation lies in the destruction of indigenous Scottish entrepreneurship following the nationalisation of Scottish industry by Westminster governments after the war, and the transfer of their corporate HQs to London. For example, plans by Prestwick-based Scottish Airlines – then one of the biggest private airlines in the world – to create a global network were shattered when its scheduled routes were handed over to new, Heathrow-centric nationalised services. Calls by Scottish MPs and chambers of commerce to have local control of public industries devolved to Edinburgh were summarily rejected.
The 1950s and 1960s did see new industries such as car manufacturing parachuted into Scotland using subsidies. But turning Scotland into a branch plant economy was lethal to local enterprise and these firms disappeared when the subsidies ended.
In the 1970s came outright deindustrialisation as the arrival of North Sea oil sent the value of sterling soaring, killing traditional export industries. London politicians were desperate to pump oil as fast as possible to generate foreign currency to pay for imports (Harold Wilson); or cut income tax to get re-elected (Margaret Thatcher). With its industrial base and manufacturing class undermined, Scotland inside the Union was doomed thereafter to slow economic growth.
Pro-Union economists such as John McLaren and Brian Ashcroft will object that it is wrong to concentrate on overall national GDP growth. Instead, they argue one should look at growth per capita, which reflects standards of living. On this measure, the gap between Scotland and the UK is much narrower, with Scottish living standards staying close to the UK average over the past generation and occasionally even surpassing it. Does this let Cameron off the hook? Not at all.
The reason for the difference between average and per capita growth rates is population change. Scotland’s seeming ability to maintain its share (per head) of the UK cake is the result of the massive population loss that resulted from industrial decline, not the result of economic growth. Scotland’s population today, despite a rise under devolution, is barely 1 per cent higher than in the early 1950s. Contrast that with Ireland, which has seen an increase in population of more than 40 per cent by reversing out-migration (at least until the current downturn). You can’t drive hundreds of thousands of Scots abroad and then claim the Union delivered per capita growth at home.
Scotland’s slow-growing population affected the domestic service economy, which is the modern driver of growth. Though the data is complicated to interpret, it seems much of the recent lag in growth lies in the weakness of the retail sector and business services. That’s no surprise given the limited consumer base and the erosion of local entrepreneurship. Imagine instead a dynamic Scotland with a population of seven million today rather than five million, with a correspondingly bigger internal market.
Mr Cameron was very careful to say Scotland could go it alone. That did not stop Ruth Davidson, the Tory leader in Scotland, telling BBC Radio that the SNP’s economic case for independence rested on “fantasy figures”. She dismissed Alex Salmond’s proposal to create a Scottish sovereign wealth fund (SWF) of £30 billion, by salting away £1bn of oil revenues every year. She quoted Mr McLaren, of Glasgow University, that in 2009-10, sans oil revenues, Scotland had a budget deficit of £20bn. So you need all the oil cash to help cover the black hole.
The proposal for an SWF is a litmus test when it comes to evaluating membership of the Union. Oil is a diminishing natural asset. Economic sense tells you to convert oil and gas revenues into permanent assets (shares, bonds, property), so the windfall lasts forever. Instead the London Treasury has spent the past 37 years using the oil money to subsidise revenue expenditure, with nothing left to show for it. .
Of course there are difficulties regarding the creation of an SWF in the present climate (though the Scottish budget will be less constrained by 2017, when independence could take place). However, this problem is a red herring. The Tories and Labour are actually against an SWF in principle. Which explains why Ms Davidson and Mr McLaren fail to offer any ideas on how the present UK government might set up its own SWF rather than just burn oil. A Union that prefers to loot its own natural resources is a Union that does not care for the long-term wealth of its citizens. And why? Because Westminster governments are too beholden to City financial institutions to dare create a rival SWF.
Here is one way of initiating an SWF. Assume Scotland keeps sterling but issues local notes as legal tender (each backed by a Bank of England note to ensure parity). An independent Scotland would also accumulate large amounts of dollars and foreign currency from North Sea oil. The Scottish Government could acquire this foreign currency in exchange for local notes, though these notes would also require exact dollar reserves. As dollar reserves mount there would be less need to keep them entirely in liquid form. Instead, the bulk could be invested long-term (via the SWF) in dollar-denominated, income bearing assets abroad – exactly as China does with its currency earnings.
David Cameron’s defence of the Union seemed very emotional, which I respect. But it was nostalgia for an economic past that never existed.
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There are 29 comments to this article
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DANCES WITH HAGGIS
Thursday, March 29, 2012 at 10:56 AM# 26 SM 753......"17 "#14 sm753 ........ Wikipedia says" -----------------------------------------------I think you should have stopped there, shouldn't you?"........................................................................Wikipedia is an excellent first point of reference. It also at the bottom gives references and external links and in this case links to the Facts & Figures: The Royal Norwegian Navy (Norwegian Defence - Official Website) (English]... I think yer rush to condemn wiki was just to cover the fact that you posted a statement after doing ZERO research and you were called out for it. A lesson to be learned there..."WIKIPEDIEA IS ACCRURATE" [citation needed]
DANCES WITH HAGGIS
Thursday, March 29, 2012 at 10:22 AM# 27 unimpressedone...."So Scotland still wants to profit from oil but shuns fossil fuel energy? A bit like being anti drugs but a pusher by trade. Salmond- a man not to be trusted."........................ ... The first thing is to point out that Oil for fuel is only one of the uses of oil, Look around your house and car and try to find things that have not been made with the by-products of oil.......................... My point here being we can reduce our carbon foot print by depending less on oil as a Fuel source yet still benefit from oil by using it to manufacture the things in life we use in appliences, goods ect which would extend the life of the oil fields and the economic benefits....................... Your "Salmond- a man not to be trusted." statement beggers belief , The last SNP Govt delivered over 90% of its manifesto commitments. Now compare the F.M with the UK leadership in "call me dave and I'll let you write yer own legislation for a quarter of a Milllion "[cant trust dave to safe gaurd parliamentry democracy].....then there is Clegg and the Condemned Li-Dems, a beacon of trustworthiness who scrapped all his manifesto pleges faster than you could say "how about a post in the cabinet please Dave" ......Then there is Milliband who could be on a football pitch facing 20 open goals to choose from and not only does he miss all of them he decides he will act as the oppositions goalie so as not to damage the Tory govt..... I'l leave out the Scottish Labour,and Li-Dems leadership as they await orders from london, and Ruth Davidson who has been waiting for her orders from Dave who never bothers to phone or write to brief her before he announces new policy or tactics concerning Scotland thus making her statements sounding at odds with Tory HQ, the woman is out of her depth and should have stayed in the dojo to get some sense knocked into her......................................So given that lot then look at the F.M who is respected by friend and foe and journalists alike and who could have had a high flying political career in westmonster if he had choosen to join one of the Unionist parties years ago and he acts in the interests of Scotland I will put my trust not only in the hands of Alec Salmond F.M but more importantly in an Independent Scotland
unimpressedone
Sunday, February 19, 2012 at 09:47 AMSo Scotland still wants to profit from oil but shuns fossil fuel energy? A bit like being anti drugs but a pusher by trade. Salmond- a man not to be trusted.
sm753
Saturday, February 18, 2012 at 07:23 PM17 "#14 sm753 ........ Wikipedia says" -----------------------------------------------I think you should have stopped there, shouldn't you?
sm753
Saturday, February 18, 2012 at 07:22 PM16 A "ship" is not the same as a "vessel", you clown.
Danielrober2
Friday, February 17, 2012 at 07:37 PM# 22 Abridged too Far ........................ A similar situation happened in Manufacturing where, production people were able to take charge of their own companies by employing cellular organisations and reducing management. Teams managed themselves, improving productivity and creating a nicer work place. Today both France and the USA have higher production levels than the UK and Germany because they use well trained and respected cellular teams. These teams work fantastically and act semi independently from each other. Yet some outside agencies, [though only a few bad eggs], have this last decade it seems taken back control of many recruitment processes and closed many doors. ..................... I deeply respect the modern management profession, including HR and do not actually blame the older professionals as they tried to establish new ideas. Experiments rarely turn out well, but always provide data. I increasingly do not even think the UK is in recession, instead what we have is an employment and taxation problem. I for one have tried to recruit in job centres [for something I am working on] and had a shocking experience, but met some very helpful people. The thing is we must retry again and again, learning from past mistakes not emulating them.
Marga
Friday, February 17, 2012 at 07:30 PMMr Ashcroft "Mr wee-scamp, of course you can submit comments on my blog. It is moderated, so you won't be allowed to use foul or libellous language". A somewhat gratuitous warning, if I may say so, since wee scamp has not said anything remotely objectionable. I am quite sure that your academic opinions do not rely on that kind of facile pre-judgement.
Abridged too Far
Friday, February 17, 2012 at 04:43 PM#8 Daniel, I do disagree with many of your opinions. However I must agree with you on the destruction caused by the industry of 'Management'. Our industrial history testifies to their failures. I remember reading an interview with the industrialist Victor Kiam. the man who liked the razor so much, he bought the company. One of his stated purposes when taking control of a company was rid the organisation of the 'Human Resources Dept'. This, he had observed, was the cancer at the centre of any large business. A group of self-serving individuals who believed the rest of the organisation were there to serve them, not the company. After ridding them from the company and replacing them with departmental administrative assistants, he warned, the trick was to prevent them from ever meeting or communicating directly with each other, for they would quickly form an unofficial Human Resources Dept and the company would be doomed....... Unfortunately, this cancer has spread. Now, Human Resources (agencies) are companies in there own rights. The large and ever increasing number of agencies in the oil and gas sector has seen the rewards for spending weeks of your time offshore dwindle in real terms. Some of the rates being offered are derisory, the real option being take it or leave it, they can always find someone with no skills or experience who will take less - safety is a small consideration. In other industries, agencies insulate the employers from the need to provide basic employment rights, though rights on holiday pay are now being redressed. Agency work means that you do the labour and someone else takes the cream............. The damage they do makes a bit of government meddling pale in comparison.
Danielrober2
Friday, February 17, 2012 at 03:00 PM# 16 BobLeslie .............. What is incoherent about saying the nationalisation of many industries in the past was a huge mistake. Profitable businesses went from been SMALL taxpaying employers to divisions of ever large national businesses. Very quickly details became less important than strategies, though they are important too, slowly seeing businesses be managed instead of worked. Its hardly controversial and if you want evidence that most nationalisation did not work, well just take a look at any industrial community in Europe. ........................ Today we have professional managers, very different from the put upon Civil Servants but learning from their mistakes [and some successes actually], still not all companies can be managed, they need to be work. I think its the same with many government activities, hard work can solve many government problems, within or without of the UK, EU, NATO etc.
Brian Ashcroft
Friday, February 17, 2012 at 01:41 PMDear No. 18. Mr wee-scamp, of course you can submit comments on my blog. It is moderated, so you won't be allowed to use foul or libellous language. But if you make your argument in a reasoned way it will be published.
CWH
Friday, February 17, 2012 at 01:27 PMIn an interview with Gordon Brewer in 2010 the Nobel-prize winning economist Professor Stiglitz stated that it was not too late to set up a Sovereign Wealth fund from the oil revenues. Properly invested it would provide income long after the oil has disappeared. While oil is a diminishing resource it is, like many diminishing resources which are central to our way of life, one whose value will rise as supplies reduce. Therefore over the next 30-40 years an independent Scotland could build up a very large SWF.
wee-scamp
Friday, February 17, 2012 at 12:50 PM#15 Brian Ashcroft. I see that unlike George you're not allowing any comments on your blog. This is probably because as an academic economist you delight in statistics and avoid discussing reality. George is essentially correct because he's dealing with the reality of the situation as most intelligent people see it. Try making a simple comparison with Norway. Ask yourself if you seriously believe an independent Scotland couldn't have matched Norway's economic success. Unless you are being pretty perverse then I'm sure your answer will be "Yes".... So then ask yourself why it was we didn't match Norway economically and you'll find the only logical answer is that it's because we were part of the Union.
wee-scamp
Friday, February 17, 2012 at 12:38 PM#14 sm753 ........ Wikipedia says "The Royal Norwegian Navy (often abbreviated as RNoN) is the branch of the Norwegian Defence Force responsible for naval operations. As of 2008[update], the RNoN consists of approximately 3,700 personnel (9,450 if mobilized, and 32,000 if fully mobilized) and 70 vessels, including 5 heavy frigates, 6 submarines, 14 patrol boats, 4 minesweepers, 4 minehunters, 1 mine detection vessel, 4 support vessels and 2 training vessels. The navy also includes the Coast Guard."............. Now who exactly is the crackpot.
BobLeslie
Friday, February 17, 2012 at 12:34 PMAm I alone in finding Danielrober2 completely incoherent? And, as for 'all politicians are the s*me', the SNP's position makes perfect sense to me. If we are doing at all well, it is because of John Swinney's careful management of that little part of the economy we have control over. Those aspects of the economy that are not doing well can justifiably be laid at the door of the UK government that is on the verge of losing its AAA rating because of its crass incompetence. That's not "having your cake and eating it", that's just reality, pal! For those not clear on Roccabaraigh's point, the years referred to are the years the BritNats were in control of the Scottish Government. For four out of the last five years (when the SNP were in charge) Scotland has returned a fiscal surplus. Also please note the results of the Centre for Economics and Business Research recent study (reported 12th Feb. 2012, on the Sunday Times front page), based on official tax and spending figures which concludes that Scotland "receives no net subsidy". In addition, their figures do not take into account the 6,000 sq. miles of Scotland's waters denominated "Extra Regio Territories" which were stolen by Blair in 1999 and contain approx. 9% of the oilfields - not to mention the fisheries. These would be returned to an Independent Scotland as their purloining by the UK would be deemed illegal under international law. Therefore we are actually in surplus - and probably by a good dunt! As for Sm753's claim that George Kerevan is a "crackpot" to be ignored because he states the Norwegian Navy has 70 ships, it might have been wise to do a teeny bit of research first because the Norwegian Navy has "70 vessels, including 5 heavy frigates, 6 submarines, 14 patrol boats, 4 minesweepers, 4 minehunters, 1 mine detection vessel, 4 support vessels and 2 training vessels" according to both Wikipedia and their own Facebook site. What Sm753 has done is post a misleading lie that is easily checked. Why should heshe do this, I wonder? It strikes me Sm753 (what a lovely name, couldn't possibly be meant to conceal a troll could it?) shouldn't be calling other people crackpots. One of the weaknesses of comment sites like this is that moderators don't generally have the time to ascertain the truth of the posts. Anyone, please feel free to check my facts.
Brian Ashcroft
Friday, February 17, 2012 at 12:13 PMI respond to this article in my blog at http:www.scottisheconomywatch.combrian-ashcrofts-scottish201202scottish-growth-in-the-uk-union.html I argue that George Kerevan's article uses data selectively. Scotland has stronger trend growth than he allows, although still a little below the UK. Moreover, there is no hard evidence to support Kerevan's contention that Scotland's slightly lower growth rate is due to membership of the UK union. Growth in an independent Scotland over the period could well have been worse. In arguing that the union is the cause of Scotland's weaker growth Kerevan ignores the academic evidence that nowhere concludes that membership of the UK union has been a cause of any growth weakness Scotland might have displayed. Other factors appear to account for the weakness.
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