The economy could have diverged from the UK’s in 1980, but now that will take time and there are other priorities, says Peter Jones
Ireland used to be a nationalist party icon before it started making headlines for non-Celtic Tigerish reasons – banking collapses and international bail-outs.
Actually, it still should be, not for recent history lessons which I don’t propose to rehearse here, but other lessons – what not to do when planning the economic direction of a newly independent nation.
The lesson is that it is probably a big mistake to design economic policy to fit your own political mythology of recent history. This can lead in entirely the wrong direction, a point which is underlined by last week’s disclosure of civil service advice to the Scottish Government on the huge difficulties of establishing an oil fund.
I learned this from listening to Frank Barry, professor of business and economic development, Trinity College, Dublin, and one of Ireland’s foremost economists, at a recent seminar on the meaning of independence for a small open economy. Prof Barry started, not with recent history, but by delving back into the late 1700s when Ireland had a parliament with a degree of devolved independence, including control of taxation, but which was abolished in the Act of Union with Great Britain.
During that period, Ireland enjoyed an economic resurgence, principally around its textile industries. These were protected by tariffs on imported textiles, including from Britain, and sustained by grants and tax breaks.
This protectionism, however, ended with the Act of Union, exposing Irish textile makers to competition with the burgeoning textile manufacturers of northern England and Scotland. The industry went into decline. This experience formed a central part of Irish nationalist thinking.The ending of protectionism, it was argued, killed a large part of the Irish economy for the benefit of Britain and wider imperial ambitions, for example, keeping Irish unemployment high to provide a good recruiting ground for the British army. Of course, the famine, mass emigration, and the brutalities of the British army in Ireland all played a much more emotive role, and is commonly seen to be more prominent in driving Irish nationalism. But Irish economic failure under union with Britain was the bedrock problem which intensified these horrors.
Thus, said Prof Barry, with independence in 1922, protectionism returned, initially selectively and then completely when Fianna Fail, the dominant left-of-centre nationalist party of 20th century Ireland, came to power in 1932 in a world recession. The aim was to protect Ireland’s existing industry behind tariffs, boost it through subsidies, and grow the economy. To some extent it worked – there was some increase in manufacturing employment.
The world’s most renowned economist, John Maynard Keynes, backed it. In a famous lecture in Dublin in 1933, he said: “Were I an Irishman, I should find much to attract me in the economic outlook of your present government towards greater self-sufficiency.” He issued a few warnings as well, but it was this compliment that stuck. But by then, Ireland was getting caught up in a tariff war with Britain, caused by a loose end in the deal over dividing national debt.
Britain was due repayment of loans to Irish tenant farmers that bought their land. The tenants repaid the loans via the Irish government, who stopped passing them on. Britain retaliated with substantial tariffs on Irish farm exports, aimed at recouping the lost annuity income. (Another lesson for nation-builders here: don’t leave any loose ends in treaties defining a newly independent state). The tariff war was ended, and the annuities question settled (on terms very favourable to Ireland), in 1938 as Britain cleared away distractions to concentrate on looming war. Current economic analysis, according to Prof Barry, argues protectionism was a mistake. It was caused by the failure to understand the real cause of 19th century economic failure was the huge reductions in cost by British textile makers through intense mechanisation, specialisation in the industrial process, economies of scale, and reductions in transport costs. It was, in effect, an early example of globalisation.
But the important point made by this history is the economic policy of protectionism fitted with the prevailing political consensus of Ireland’s subjugation and exploitation by the British, and how to reverse decline by implementing a previously forbidden policy.
The risk for an independent Scotland is that it could repeat the same mistake (not by introducing tariffs and subsidies, which are in any case forbidden under EU rules) but by trying to match economic policy to political ideology when that could be entirely inappropriate.
The dominant theme of SNP political rhetoric is economic – that the UK union has deprived Scotland of the income of North Sea oil which could have been deployed to build up industry and services as well as to establish a sovereign wealth fund. Offshore tax revenues could have been used to reduce onshore corporation taxes in a bid to boost the onshore economy.
The problem with this analysis is the evidence for it is thin, as has been painfully [for the SNP] exposed by the civil service briefing which, in effect says any transfers of oil income out of Scotland have been nearly balanced out by transfers in via the Barnett formula. If Scotland had been independent, the bureaucrats say, an oil fund was only viable if Scots had been prepared to deprive themselves of public services (through spending cuts) or personal income (through higher taxation). This thesis is questionable. It assumes that if Scotland had been independent in 1980, the course of its economy, public spending, and taxation would have followed an identical path as it did under the union. It wouldn’t have, because independence is about divergence.
It would take time for the fruits of a divergent policy, assuming a successful strategy was identified and implemented, to emerge. Remembering also there may be economic downsides, such as border effects reducing trade to the rest of the UK, setting up an oil fund immediately might be exactly the wrong thing to do as it would divert resources when they may be most needed for reforming the economy.
The priority, if independence occurs, is much more likely to be dealing with existing economic frailties and present insecurities rather than squirreling away money for future and very distant matters.