Michael Kelly: We can export our way out of the economic crisis

Increasing our sales to overseas markets is easier to achieve than boosting consumption at home

THE news of a further dip in Scotland’s economy, reported yesterday, demands a return to the discussions on these pages about boosting Scotland’s economic performance. The thoughtful but conflicting contributions of George Kerevan and Brian Ashcroft have focused almost exclusively on the wrong part of the growth equation. George talked about a “shortage of demand” and of an “instant fiscal boost to consumption”, while Brian centred his policy prescriptions on measures “likely to have the necessary effect of raising demand”.

As a third economist I, naturally, have a third opinion – and a fourth, but I’ll keep that to myself for now.

When I say the “wrong” part of the growth equation, I am not arguing that measures to boost consumer spending or to encourage businesses to invest would not help the economy recover from its current dire state. However, given the constraints that apply to both fiscal and monetary policy, it seems that governments will be unable in the short run to offer the required injections to boost either of these. In fact, anything other than tinkering at the edges would militate so severely against the main policy goal of lowering the deficit as to be unacceptable to international money markets.

It would be more useful to concentrate efforts on that other vital component of the growth equation – net exports – and to seek ways on the supply side to boost Scottish exports and increase the rate of import substitution. This is a more productive route to achieve the common goal of increasing private sector growth. Such a discussion would focus the public debate on what has so far been an understated matter: Scotland’s international business and place competitiveness – more important for the future shape and wellbeing of the economy than efforts to smooth out the trade cycle.

There are four main factors affecting this on which action could be taken and improvements made. The first is transport. Goods exporters have suffered a loss of cost competitiveness due to fuel increases. This week we have heard the outcry from domestic consumers and the blanking by the government of their demands for relief. Business is suffering equally badly and is receiving similar rebuffs. But the Scottish Government could help secure offsetting efficiency gains through improved transport links, transport infrastructure and better exploitation of advances in transport technologies.

Prioritising those projects which, for example, reduce the costs of freight transport through airports could help significantly. The completion of the M74 is an example of the improvements that can be made. And so too is the faster route from Stirling to Glasgow. But how many traffic-jammed years did we have to wait for that? Improving transport links is an interminable process in Scotland. The world won’t wait.

Despite the embarrassment the financial sector has caused Scotland recently, services are going to continue to be a growing and more important part of the economy than manufacturing. Scotland can still be a pre-eminent exporter of intangible services, from those that are tradeable in marketplaces to the untradeable but nonetheless valuable services such as supplying personnel or technical support for British multinationals.

Firms, of course, have the responsibility for installing their own advanced information and communications technology. But it is a strategic priority for the nation that the government takes responsibility for ensuring that the advanced platforms are in place to enable every city, town and village to take advantage – whether by fibre optic cable or satellite – of the new superhighways as they become available and so ensure that firms can have access to the fastest communications at the lowest cost. Those who already trade with Estonia, for example, talk in jealous wonder about the universally available, free speedy connection to the internet. As e-communications and e-business grow exponentially, any exporting nation that is serious about holding its own, never mind increasing its market share, must upgrade to the most advanced systems.

In a world where traditional markets in the United States and in Europe are likely to be depressed for years to come, it is essential that Scottish exporting companies quickly identify new markets which are growing. There are countries which can still afford to suck in imports.

I do not have sufficient confidence in Scottish business to expect it to achieve these breakthroughs on its own. This is where Scottish Enterprise and Scottish Development International could be required to up their game by helping to create more exporting companies with good growth prospects and helping more existing small and medium-sized enterprises better identify and exploit export market opportunities.

There are undoubted weaknesses in Scottish management. Again, Scottish Enterprise could be asked to identify these and to help recruit and train better managers. The goal would be to secure a step change in the business skills of owners and managers within three years. Sooner would be better.

There are fixes which might work on a shorter timescale. The cut in VAT that is the common cry would, of course, have a positive impact on consumption – though I doubt that the promise of corporation tax powers for Holyrood would have the confidence effect that George expects. The recent Scottish Budget lumped new taxes on business to pay for expenditure promises elsewhere. Why should Scottish business not now expect a Scottish government to raise, not lower, corporation tax?

But we are looking for long-term solutions, and government objectives and expenditure should be rejigged accordingly. It might be possible to secure new grants for innovating and exporting firms out of some European Union pot rather than out of Holyrood’s spent budget. But has Europe ears to listen to anything other than Greek tragedies?

The main problem is not finance. It is that all countries are looking to exports as the way out of their difficulties. So pursing the agenda above will be in the face of increasing competition. However, if we do not embark on it now, Scotland will find itself falling even further behind.

Furthermore and more importantly, if successful – even only slightly – it would shift Scottish business to where an economy with a small and relatively poor domestic market needs to be.