How wealthy is Scotland? Understanding the real answer is vital to avoid chasing economic rainbows – John McLaren

Scots are entitled to ask why, in only a decade, their country has moved from being the “sixth richest in the world” (John Swinney, 2011) to one which lags so badly behind comparable countries that it needs the equivalent of Google’s global output to bring it back into contention (Oxford Economics report for the Tom Hunter Foundation, April 2021).

Singapore is far from being an ideal example of how a small, northern European, democracy should conduct its economy, says John McLaren (Picture: Danny Lawson/PA)

The answer to this conundrum is, as usual, all to do with the inappropriate use of statistics.

All the claims are, or were, true, in terms of the GDP per capita statistics available at the time. The problem is that for many countries, GDP is not a very good measure of a nations underlying economic performance or wealth.

In Scotland s case, its position as sixth wealthiest amongst OECD developed economies in 2010 was down to a high price of oil which meant that North Sea-related GDP was also, temporarily, elevated.

However, the average Scot did not become wealthy overnight as most of the North Sea is overseas owned. So it looked good, and some politicians claimed that it was good, but the reality was much more ‘business as usual’ – ie, a moderately successful economy akin to the UK in wealth terms. That has turned out to be the case as North Sea output and oil prices have since declined.

In the case of claims that “Scotland’s GDP per head is a mere 44 per cent of Singapore’s level, 48 per cent of Ireland’s, 68 per cent of Norway’s and 75 per cent of Denmark’s” then, again, such claims need to be examined closely.

Profits recorded for tax reasons

In the case of Norway, unlike the UK, oil and gas is still a big contributor to the economy. This means that, yes the Norwegians are wealthy but much of this is based on the exploitation of a natural product and no amount of productivity gains will magic up such a natural advantage for Scotland.

In the case of Ireland, even the Irish government warns against the use of GDP to gauge the health of its economy, especially as it appeared to increase in size rise by around 25 per cent in one year alone (2015).

The reason Irish GDP is so inflated comes down to multinational companies using it as a base to record activity and profits for tax reasons but where very little of this wealth makes it through to the Irish people. The reality is that the Irish standard of living is probably very similar to that seen in Scotland and the UK.

In the case of Singapore, the arguments become more complex. Singapore is a very densely populated, quasi-authoritarian democracy, where 30 per cent of the population are non-residents (ie similar to some Arab states economies based on migrant non-resident workers with reduced rights).

Anyone who has been to Singapore will immediately recognise the vast chasm between the have and the have-nots. So Singapore may be wealthy, although its true wealth is hard to gauge, but it is far from being an ideal example of how a small, northern European, democracy should conduct its economy.

Measuring true prosperity

In the case of Denmark, their economy, like other Scandinavian economies, seems to be doing well. However, what are the lessons to be learnt?

The Oxford Economics report suggests that one of the biggest policy successes has been the use of private public partnerships (PPPs) for large infrastructure projects.

Of course Scotland and the UK have gone down this route before and now largely abandoned it. The other obvious economic aspect of Scandinavian countries is that they have higher taxes and more generous social support systems, which could in turn affect education, health standards and poverty levels. Is that something that Scotland should be looking to more?

These distortions of the underlying economic reality were highlighted in an analysis of Ireland’s true prosperity published in February by Patrick Honohan, ex-governor of the Central Bank of Ireland.

In general, he found that Ireland’s international economic standing was highly overstated due to “the inappropriate use of misleading, albeit conventional statistics” and that “there is less consumption per capita than in the United Kingdom”.

Indeed, based on the World Bank’s measure of actual individual consumption per head – an alternative indicator of household welfare – Honohan shows that, in 2017, the UK (and implicitly Scotland) ranked above not only Ireland but also Denmark and Singapore.

Could do better, not in bad shape

So where does all this leave Scotland?

The reality is that Scotland, like the UK, is a country in the middle of the pack, amongst developed economies, in terms of average wealth per citizen. It could do better but it is not in bad shape. Any attempts to reach those notionally at the top, like Luxembourg, Norway, Singapore, and Qatar are doomed to failure as there are unique, and non-replicable, reasons for them being so far ahead.

More interesting is to see how more similar countries like Austria, the Netherlands and Denmark, have managed to get near the top of the rankings without such unique circumstances applying.

There are undoubtedly on-going problems with the Scottish economy, including the transitional difficulties that will apply to the down-scaling of North Sea activities, and some of the ideas mentioned in the Oxford Economics report will be pertinent to improving matters.

However, setting out Scotland’s economic challenge as one that requires a revolution is inaccurate. It would also inevitably end in failure, as the only cases of sustained, well-above average, economic growth – outwith highly unusual circumstances – have been found in countries in catch-up mode, for example Ireland in the 1990s and Eastern Europe more recently.

Scotland already has a highly developed economy and needs to find nuanced ways of improving its performance. The Scottish government needs to concentrate on getting the basics, like education, right as well as providing a robust and efficient infrastructure for the private sector to utilise, not on picking winners and chasing rainbows.

John McLaren is an independent economist at the Scottish Trends website

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