Andrew Goudie: Seeking out the answers

WHILE the debate on constitutional change has entailed considerable discussion of the specific economic powers that might be transferred to Scotland, there has generally been far less emphasis placed on accurately identifying the potential value of those powers, particularly in the sense of the achievability of the critical outcomes that motivate government.

What can we really say about the potential opportunities and risks that a new constitutional arrangement might bring in the context of the vision of any particular government ? Would the transfer of greater economic powers provide significant new economic opportunities that would substantively facilitate the achievement of any targeted outcomes? Or would extended powers carry greater risks and uncertainties that would overwhelm the opportunities ?

Where these questions have been addressed, the responses have typically suffered from a paucity of evidence to support specific propositions and, instead, have sadly often lapsed into cavalier assertions with little or no foundation. This conclusion is not to belittle the exceptional problems that we face in seeking to understand exactly what are the likely implications – for good or for ill – of major constitutional change. In principle, constitutional transformations as many propose may not simply imply minor changes to the parameters within the existing economic system. Transformation is presumably about seeking to change expectations, behaviours and incentives. The change that is sought is explicitly intended to create a clear discontinuity in economic impact. It is therefore about transforming the economic system itself.

A reliance on past evidence or traditional techniques to “test” whether new economic powers are a good or a bad thing is therefore potentially highly misleading: unless, that is, the change is anticipated to be relatively minor in its impact on the primary economic behaviours. The debate that is generated around the value of the Scottish Government publication, Government Expenditure and Revenue, Scotland (GERS) sharply illustrates the point. GERS captures the actual flows that result from the economic activity of both the private and public sector in a specific year.

It reflects the behaviours and choices with the constitutional arrangement and the economic policy that prevail at that time.

It, therefore, reveals little, if anything, about the state of the public accounts were a radically different constitutional arrangement to be put in place, assuming that such a change did, indeed, create a substantively different economic model of behaviour and incentives. It would offer considerable insight into the Scottish Government accounts on Day One with a new constitution but, thereafter, would provide little value. Given the importance of a long-term perspective to constitutional change, this transitional information falls well short of its intended objective of shedding light on this longer-term horizon. It is, therefore, a very good example of the serious limitations of forecasting for anything except the very short term.

We need a more structured approach to the assessment of all the various constitutional proposals, whether focused on the extension of powers within the UK or around a model of independence. To do so, six tests (see above), are set out that crystallise the key challenges and major concerns into a handful of precise questions. Importantly, this approach looks not only to the short term but to the long-term value of constitutional change, beyond the very specific current challenges that we face and the current political preoccupations.

The first test focuses on new opportunities. If there is one overarching belief in all the propositions advanced for further constitutional development, it is that new opportunities can be created through the adoption of economic powers that the current constitutional arrangement in some way inhibits. For this reason, this test is at the core of this debate. It is, moreover, the creation of real opportunities that is key: opportunities that are politically, financially and economically feasible. The likely limitations and constraints on policy, both internally and externally imposed, form a key consideration here.

The second test concerns cyclical compatibility and stability. This test explicitly relates to the constitutional options that entail independence and monetary union and has a particular relevance and importance in the light of the recent eurozone crisis. There are two different sets of challenges at the national level here: first, how to bring about greater convergence in the shorter term, prior to membership of a monetary union, if this is ultimately the preferred choice; and, secondly, how to manage questions of national cyclical variation and stabilisation within a monetary union, as well as the dissimilarities in performance and divergence in policy interest that will inevitably arise among individual members. The evidence suggests Scotland would currently be substantially more convergent with a redefined UK than are many countries within the EU. The key point is whether or not – and how – such a high degree of integration would be maintained post-independence.

The third test is on long-term competitiveness. Over the long term, challenges to the national economy’s existing comparative advantage are predictable, albeit the exact form of that competition will not be known with certainty. The rapid economic development of the newly emerging economies has already led to a significant erosion of developed economies’ economic advantage and the expectation must be that this competition will only intensify.

Of more immediate importance to the debate is the competition that will only intensify with those choices that entail membership of a monetary union. In all these varied economic environments, the capacity to counter these competitive pressures and maintain areas of economic advantage is critical. As the on-going euro crisis has demonstrated, the underlying problems of competitiveness that both existed in 1999 and were then allowed to escalate further, have played a critical role.

The fourth test highlights resilience and managing global shocks. The financial crisis that erupted in 2008 provides an excellent example of the massive dislocation that global shocks can inflict on the economic and social systems. The set of available economic powers that can be brought to bear on both the more immediate macroeconomic challenges that inevitably will arise and the longer-term challenges that result from an underlying vulnerability to potential external shock is therefore a crucial issue.

The fifth test focuses on risk management and uncertainty. It is impossible to escape from a world of considerable uncertainty. Highlighting the importance of these risks and the imperative to have thought through the management of these risks, insofar as they can be anticipated, is critical: hence the value of identifying a distinct test from this perspective.

And finally, there is the summary test: this final test has the great attribute that it refocuses the thinking back to the two elements that ultimately may be seen as most critical: first, the stability of the economic and financial basis of any proposed constitutional model; and, second, the capacity of that new model to enhance progress towards the outcome objectives of Scottish society.

In essence, the six tests encourage us all to ask – and most importantly answer – the key question: what specific outcomes should be the focus of our debate on constitutional change? And will any given constitutional proposition achieve these objectives?

• Professor Andrew Goudie is visiting professor and special adviser to the Principal at the University of Strathclyde and a former chief economic adviser to the Scottish Government. This is an extract from Scotland’s Future: the economics of constitutional change, a new economic commentary on constitutional options facing Scotland, launched today, edited by Prof Goudie. Scotsman Readers can buy the book for a discount price of £13 at www.dundee.ac.uk/dup. The code is SCOT1.