George Kerevan: Going it alone is the way forward

Following on from our series about how the Scottish economy can be grown, George Kerevan outlines a number of working models but believes independence is key to them functioning effectively

SCOTLAND desperately needs to grow its economy. Not just out of greed or political ambition. The impact of the 2009 recession means that most Western economies are back where they were at the start of the Millennium, a contraction not seen since the Great Depression of the Thirties.

This (avoidable) catastrophe has wiped out so much wealth and economic capacity in the UK that we are unlikely to recover fully until the 2020s. So the next generation could be faced with caring for a soaring population of aging, post-war baby boomers, funded by an economy on life-support. Unless we take corrective action now.

This week The Scotsman has been running a series of interviews on how Scotland can re-boot its economy. A lot of good ideas have emerged, but to my mind too many have been in the category of what I call “helpful hints”.

In other words, random suggestions – often interesting – but which lack an overall strategic framework. Also, some growth ideas are perennial, such as reducing planning red tape. But they lack grounding in the new global economic reality of Western contraction and successful emerging economies such as China.

From recent experience, there are three different growth strategies Scotland can follow. I call them the Global City Model, the State-sponsored Growth, and the Premium Brand Model.

The Global City Model relies on inward investment and mass immigration to provide the stimulus for high growth, and sells directly to the world market place. To achieve this you need to de-regulate and let the free market rip. King of the Global City Model is London, now semi-detached from the UK economy.

America is big enough to operate this model inside its own borders, with cities in the sunny South-west now draining workers and investment from the declining industrial north. China’s new coastal cities also play in this league.

I’m a fan of free markets but doubt that Scotland can use the freebooting Global City Model as its blueprint. Politically and culturally we are too communitarian and social democratic to accept extreme deregulation, unrestrained building (as in China), or the social inequalities inherent in this approach (witness the London riots). But there are bits of this approach we need to pinch. A small country like Scotland needs to attract inward investment and educated migrants.

So it would definitely help if Scotland controlled its own business taxes and emigration rules, even inside the UK. If London can compete with Shanghai, it shouldn’t be afraid to compete with Scotland. Under current migration rules, the Scottish Government could put up the cash to attract at least two-dozen Nobel Prize winners to Scottish universities.

Above all, this model understands that economies are focused on cities, not on abstract political borders. Scotland is fortunate in having four major urban centres to spark growth – most small countries have only one or two. Four allows us to experiment and take risks – which is why we need elected city mayors to promote Scottish cities globally.

Yet globally successful cities require population scale. For 25 years I’ve been attending worthy conferences extolling the virtues of a Glasgow-Edinburgh “city region” big enough to take on the world. But Glasburgh (or Edinglow) remains a fantasy because successive political administrations have failed to build the modern transport infrastructure to turn the Central Belt into a single economy.

As for planning red tape, business needs to stop exaggerating its importance. Certainly, we need to replace the present regime of planning by lengthy negotiation to one of planning by fixed rules (“meet them and you can build straight away”). However, planning bureaucracy impacts mainly on house construction, especially by raising the value of land to excessive levels. Personally, I favour low-density house building in the Green Belt, which would reduce land values and kick-start construction. And pigs might fly.

Next, the State-sponsored Growth Model: this is where the government itself ensures capital is available for manufacturing and infrastructure investment. China’s state banks have fuelled that country’s miraculous growth, not foreign inward investment. Ditto Brazil. Germany’s economic prowess is founded on family-owned engineering firms, which traditionally were funded by industrial banks owned by regional governments.

You don’t need to tell me the state can’t pick industrial winners. But Scotland now faces a relative capital famine. Our banks went bust because they played casino capitalism with financial derivatives, which yielded bigger paper profits than manufacturing. Private equity investors are currently risk-averse and are likely to stay that way.

If you want growth quickly, Scotland requires its own industrial bank(s). Creating that would be easier for an independent Scottish government, but it could still be done under devolution with a bit of enterprise. What about using public land holdings as collateral for a new bank, which then raised cash on the bond markets? Local authority fixed assets are worth around £36 billion. Using that as leverage, you could pump £100bn into manufacturing, energy and infrastructure over the next decade. Back in the 1990s, we had some big, locally-owned multinationals who generated their own investment cash. Then came the Gordon Brown years when industry was derided. Scottish Power and S&N are now foreign owned and do what head office tells them. Fortunately, we do have one large player left in local hands – Scottish Water, which is publicly owned. If we want to be ambitious, then transform Scottish Water into Scottish Global Utilities, a multinational renewables and water company with the clout to raise capital and bring forth a new generation of local subcontractors.

There are serious limits to the State-sponsored model. It works best when you are throwing up new manufacturing cities, as in China. Scotland’s economic problem is more subtle. With our banks humbled and our American computer assembly plants closed, Scotland needs to redefine what it is going to sell to the world, to earn a living.

Most successful small Western economies exploit the Premium Brand Model of economic growth. This relies on exporting high quality engineering or services at a premium, to cover relatively high wage and welfare costs. A country’s name is the badge of quality. Scotland is already doing this with food, whisky, university education, aerospace maintenance and oil industry support. We need to generalise the model, making Scottish globally synonymous with luxury and perfection.

Our weakness lies in developing the value chain thoroughly and ruthlessly. For instance, we make some of the world’s best luxury textiles – then sell them wholesale to foreign fashion houses who brand them and earn a fortune. Why don’t Scottish fashion houses dominate the catwalks? Your natural reaction is to scoff, but Milan was an industrial town with smelly canals until Giorgio Armani arrived in the 1970s. Again, there are fake Irish pubs everywhere. Where are the high-class Scottish restaurants in LA, Shanghai or Berlin?

One problem in promoting a quality brand agenda is that Scotland’s current self-image is a mixture of industrial grime, tartan cringe and lack of confidence (promoted by a traditional Labour political elite wedded to welfare dependency and London subsidy).

Which explains my long-time belief in Scottish independence as a prerequisite for responsibility and entrepreneurship. When Scotland has to stand on its own two feet, when Scotland starts to believe in itself, growth will follow.