Wolfgang Michalski: Hamburg is a model worth emulating

WITH an equivalent population and many shared attributes, Scotland would do well to heed the lessons of Hamburg’s long-standing prosperity, writes Wolfgang Michalski

Economics has got a bad name in recent times. The standard economic model appears to have precipitated both the global and the European economic and financial crises and now can’t determine whether austerity and deficit reduction or growth and Keynesian stimulus are the best route to salvation. With Nobel Prize winners lining up on both sides of the argument, people are rightly confused.

In Scotland the debate is a little more parochial, but no less confusing, with economists arguing nuances of fractions of a percentage point to claim an advantage over England and engaging in fractious debates about economic prospects in the event of independence.

Even so, I believe there are enduring truths about successful economic and social policy making in a globalising world which Scotland would do well to remember – especially in today’s times of rapid change, radical interconnectedness and shifting economic power.

Those truths lay at the heart of the Scottish Parliament’s Enterprise and Culture Committee’s 2006 report on “Business Growth – the next 10 years”. I acted as special adviser at that time to the committee which looked at the research, held evidence sessions, and talked to all sectors of the economy. But as an outsider, with more than 20 years’ experience as a senior director in the Organisation for Economic Co-operation and Development, I was struck by the tendency always to compare Scotland’s performance with either the rest of the UK or the US. This seemed very strange to me. Scotland looks like a model European economic region. I believe it has much more to learn from metropolitan regions like Helsinki, Stockholm, Barcelona or Milan (all around 4 to 5 million people) than from these much larger and more diverse national economies.

Most of all I was struck by the comparison with my own home city of Hamburg – again a metropolitan region of some 5 million people and a very successful one. GDP per person in gainful employment in the Metropolitan Region of Hamburg is around £60,000, in Scotland no more than £25,000.

I took the committee to Hamburg on a learning journey, and I believe that this journey not only opened their eyes to new possibilities, but was in fact instrumental in providing the confidence for a set of bold recommendations which, remarkably, gained support across all parties, including the Greens.

Since then I have looked more closely at the causes of Hamburg’s success – and have written a book on promising economic and social policies in the globalising world in which I use my home town as an illustration. It turns out that Hamburg is, alongside London, the only city in the world that has benefited from successive waves of globalisation. While other cities and regions rise and fall, Hamburg today is still internationally important.

There have been at least six different phases of globalisation. First an early period from the golden age of Athens to the end of the Roman Empire. Then the heyday of Venice in the Mediterranean region and the Hanseatic League in Northern Europe in the late Middle Ages. The early colonial age started with the voyages of discovery of the Portuguese and Spanish and led to the maritime dominance of the Dutch. What followed was globalisation on a world-wide scale, intense intra-European rivalries and the steady geopolitical, economic and military rise of England. The first half of the 20th century saw the globalisation of war, two World Wars, an illusory boom in the 1920s and the Great Depression of the early 1930s.

Finally, we entered the phase of US hegemony with an American-led offensive for economic growth and prosperity – the end of which we may possibly find ourselves in now.

There have always been winners and losers in this process. Dynamic and innovative cities, particularly trading ports and financial centres, have always benefited more than rural areas. But it is always the same patterns which distinguish the winners. They share: stable governmental and administrative structures; a reliable legal and regulatory framework; high economic and social dynamics; a well-educated and disciplined work force; a more or less stable currency; and – in the case of a hegemonic country – political and military power.

In addition there is always a set of specific economic and social policies which enhance economic growth and wealth creation. This includes liberal settlement and immigration policies, support for universities and research institutes, and a creative intellectual and rich cultural environment.

As regards the losers, apart from war and tribal disputes, the most common reasons for decline or lagging behind include: a corrupt government; a society that perceives change as a threat rather than an opportunity; economic and societal rigidities which hamper adapting to political, economic or technological change; domestic policies which do not take sufficient account of international economic interdependencies; a pursuit of policies which have been successful in the past, but are no longer adequate; inadequate physical and social infrastructure as well as low educational and health standards; and last but not least, a major financial crisis or serious social unrest.

I leave others to weigh up Scotland’s performance against both these lists. The story of Hamburg plays across this history with remarkable resilience and adaptability, and what is even more important in the long-run, a considerable capacity for transformative innovation.

Today, Hamburg is in terms of both population and GDP the most important non-capital city in the European Union. And although shipbuilding and the oil industry, two of the growth sectors of the city’s economy during the 20th century are no longer there, it is still the number one industrial city and trading centre in Northern Europe. It is now the world’s third most important location for the civil aircraft industry, operates one of the two leading European container ports, is home to Europe’s biggest copper smelter and a leader in new energy technologies. And despite all this industrial activity, the city remains a pleasant place to live, winning high scores in lifestyle rankings.

Hamburg offers five lessons for Scotland. First, it shows that even a secondary place with no geopolitical and military power can be a major and long-term beneficiary of the globalisation process. Second, it demonstrates that remaining on the winning side of globalisation implies continuous change in economic and social structures.

Third, it illustrates that lasting success in the globalised world requires a set of policies which – apart from providing a general economic and social climate that is conducive to creative investment and risk-taking – embrace international openness, competition and collaboration. Fourth, it exemplifies that government has an important role to play not only in setting the rules for the game, but also in providing appropriate infrastructure and other common goods.

And finally, there is the clear message that policy makers should seek to make market processes compatible with overriding political goals such as income distribution or the environment without durably impeding the functioning of markets and entrepreneurial activity.

I believe these lessons informed the Parliament’s 2006 conclusions and recommendations. Of course, after the global financial crash in 2008 and the European economic and financial crisis thereafter, the analysis needs updating today. That is a task on which I am already engaged in my capacity as a member of International Futures Forum.

But the real challenge is once again to reveal what I believe remains a cross-party consensus on the fundamentals of Scotland’s economic and social policy – and to maintain this collective, future-facing sense of purpose over time. I do not believe that propping up the past at the expense of the future or exaggerating small differences for political purposes will be judged kindly by history.

• Wolfgang Michalski has been a Professor of Economics at the University of Hamburg and a long-time Director at the OECD in Paris. He will launch his book “Capitalising on Change in a Globalising World: A View from Hamburg” at Dovecot Studios, Edinburgh tomorrow evening (2 May).