Scotland needs ‘strategic capacity’ in order to join the list of the world’s most prosperous countries, write Andrew Cumbers and Iain Docherty
Hidden away in the small print accompanying George Osborne’s “Beer and Bingo” Budget was the most remarkable admission: that productivity – the key measure of the real output of the economy and hence its capacity to generate wealth, higher wages and a better standard of living – has been more or less static since the 2008 financial crash.
The UK’s productivity performance has long been woeful, with the value created per hour worked lagging badly behind comparable large economies such as France and Germany (20 per cent higher) and especially smaller countries such as Belgium (27 per cent higher), Ireland (47 per cent higher) and Norway, where each hour worked produces a staggering 79 per cent more wealth than in the UK. For this already dire performance to be getting worse highlights just what a parlous state of the British economy is in.
The importance of the productivity gap is not just that it depresses wages and living standards but it also makes it hard to see how Britain can escape its debt-driven economic model, predicated upon unproductive property-based growth and financial speculation. The UK is the second- most indebted country in the world according to McKinsey, and without significant growth in productivity the UK will find it extremely difficult to earn enough to repay its debt whilst financing the levels of public services people expect.
To us at least, this state of affairs renders much of the existing debate about the economics of Scottish independence irrelevant. Technically clever arguments about whether an independent Scotland might pay half a percentage point more for its own debt fill airtime and column inches but are based on modelling exercises that, to use Alfred Marshall’s memorable phrase, are more often than not “precisely wrong”.
Then there is the obsession about currency. Believe the hype and you would think that the choice of currency alone would determine the economic prospects for an independent Scotland. But economic geography tells us that there is much more than the choice of currency when it comes to explaining why some places are wealthier than others: after all, Sweden (float), Denmark (tied to euro) and Finland (euro) each has a different currency posture but are able to manage their own choice to their advantage.
Perhaps it is not surprising that so much of the comment emanating from the “Dark Star” of London imagines an independent Scotland as a not-quite-as-rich mini version of the UK. But the assumption that an independent Scotland will be a more vulnerable and weakened economy, is precisely that… an assumption. Indeed, we would argue that by focusing the debate on the things that matter to the performance and potential of the real economy – how to improve productivity, grow the SME base, support local employment, maintain and develop high skill levels and so on – the evidence suggests precisely the opposite.
It is reasonably well understood that small developed states head the league tables of the most prosperous countries on earth: OECD figures list the top ten as Luxembourg (population 500,000), Norway (4 million), Switzerland (7.8m), the US (311m), The Netherlands (16.6m), Austria (8.4m), Sweden (9m), Denmark (5.5m), Ireland (4.4m), and Canada (34m). Seven out of these ten countries have populations less than ten million, and four have populations smaller than Scotland’s. We do not think this is by chance: what marks these countries out is that they have used small size as an advantage to assiduously manage their own highly productive sectors within wider international networks of knowledge and innovation. This means that they have much better productivity than the UK, can afford high wages and have been able to maintain relatively large welfare states. And contrary to whatever Weir’s chief executive might say, their people report a better quality of life than the British too.
Given its diversity of highly competitive industrial sectors (e.g. energy, life sciences, food and drink, engineering), excellent universities and well-established export-led international networks, Scotland already has the fundamentals in place to develop its own bespoke economic development strategy and compete effectively with the leading global economies. Doing so would enable it to transcend the UK’s toxic mix of too little productivity and too much reliance on the Treasury-City-financial services nexus to the benefit of both improved prosperity and equality.
What Scotland currently lacks are the robust governmental frameworks and institutional commitment and direction known as “strategic capacity” that underpins the ability of the other small countries higher up the rich list to develop winning economic strategies. The inability to control critical policy levers such as the taxation system, competition law, corporate governance and banking means that Scotland’s economic potential is not being realised. Too much R&D activity is still exported to other locations (mainly London and the south-east), there remains a lack of finance for Scottish companies, and as a result it is hard to retain growing firms in Scotland. To improve productivity to match the best countries in the world and therefore create the wealthy and inclusive society that the fundamentals suggest are entirely possible, Scotland needs greater strategic capacity. This is more commonly known as independence, which is the vital missing ingredient required for Scotland to prosper in future.
• Andrew Cumbers is professor of urban and regional political economy and Iain Docherty is professor of public policy and governance, both at the Adam Smith Business School, University of Glasgow.