Essay: Goodbye Noughties, hello Teenies: Six key issues Scotland Inc must address in a time of both supreme uncertainty and opportunity

THE Noughties may have been a great decade for celebs and Facebook, but it has been one of the worst for the world's developed economies. It has been particularly poor for the Anglo-Saxon/Celtic Tiger market model.

The US, UK and Irish economies end the decade with their public finances in meltdown and unknown horrors still lurking in the balance sheets of commercial banks. The Scottish economy is part of this model: changes in its political trappings have not changed its economic allegiances. Although 2008-9 have been awful, Scotland's economic scorecard is not entirely negative.

All of Scotland's devolved administrations have placed economic growth at centre stage in their economic ambitions. Scotland ends the Noughties with output 13 per cent higher than at the end of the Nineties: if the reckoning had been taken at the start of 2008, before the recession started, the tally would have been a more respectable 20 per cent.

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Scotland's present rate of growth can be compared to its historical record: it can also be analysed in relation to our neighbours and competitors. The historical record doesn't look good. The Noughties have produced less growth than the Seventies, Eighties or Nineties. Industrial discontent was rife in the Seventies; the economy went through painful economic change during the Eighties and the Nineties featured the dotcom bubble and Black Wednesday. But these decades produced more economic growth in Scotland than the Noughties.

These were decades in which the economic challenges were different. Scotland built and then largely lost an electronics industry. In the Seventies, its costs were low enough for US manufacturers to set up plants in Scotland.

In the Nineties and Noughties, as globalisation accelerated, it lost its competitive advantage in electronics manufacturing to eastern Europe and especially China and South-east Asia.

These changes have affected other developed countries. In comparison to Japan and Germany, Scotland's growth performance during the Noughties has been quite good. The Germans and Japanese have relied on export markets to drive growth. This has not been easy in the decade when China has emerged as a major competitor. The US has done better: at the end of the Noughties, even after the recession, its output was 17 per cent higher than at the start of the decade. Nevertheless, its unemployment rate is now above 10 per cent.

The "arc of prosperity" countries have had a mixed decade. Ireland was the star performer, but now faces an uncertain future. Finland has outperformed Scotland, but Denmark's economic growth has been anaemic.

Different times and different economic conditions in other countries complicate analyses of growth performance. But comparisons closer to home are more uncomfortable. Scotland's growth during the Noughties has been slower than the UK.

Overall, the UK grew by 17 per cent, compared with Scotland's 13 per cent. Like previous decades, the Noughties has been one of unbalanced growth, with London and the south-east outperforming the economy and being the key driver of overall UK growth. Scotland did not fare worst: Wales, the north-west and the West Midlands grew at around half the rate of the south-east. Regional policy was intended to achieve more balanced growth across the UK. It has come and gone, but has had no effect on the dominant role that the south-east plays. This dominance is also reflected in firm data. During the Noughties, up to 2008, the number of VAT-registered firms in Scotland gradually increased.

THERE were 336 VAT-registered firms for every 10,000 people by 2008, an increase of 11 per cent on the start of the decade. But London had 527 registrations for every 10,000 people, a rise of 17 per cent over 1999. Scotland's small-firm sector is less robust than almost all other parts of the UK: only the north-east of England has fewer VAT registrations per head than Scotland.

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The Noughties were not a good decade for Scotland's large financial corporates. In the ultimate humiliation, RBS and HBOS ended the decade officially part of the public sector. The leeching away of decision-making power in these businesses from Edinburgh seems irreversible. This development cannot be good for Scotland's business services sector.

Away from the financial sector, ScottishPower and Scottish and Newcastle have lost their independence to foreign buyers. But First Group, Stagecoach, Cairn Energy, and Scottish and Southern Electricity have prospered. And some companies that are parts of international conglomerates, such as LifeScan Scotland, have had a successful decade.

So, though the politicians argue that growth has been their first priority, Scotland's record in the last decade has been mixed. Part of the problem is that it is difficult to know which policies will be most effective in stimulating businesses to expand. No business is likely to reject lower taxes, better access to capital, improved infrastructure or highly qualified and motivated labour.

Looking ahead, with an economy where the general level of taxation is likely to be higher, it is vital the development agencies and government get other aspects of the business environment right.

So if the Noughties have been anything but nice, what are the prospects for the Teenies? Scots of my generation have become used to the continuing increases in disposable income that economic growth brings. For this to stop would be an unwelcome shock – it would mean shelving plans for increases in private and public consumption. This would mean getting used to continual pay freezes and to retrenchment in public services and benefits.

WHILE this may seem an apocalyptic view, the next decade has more question marks attached to continuing growth in private and public prosperity than any that I have commented on in the last 35 years.

The Teenies will bring at least six major challenges to the continuation of economic growth in Scotland. The first will be to adjust to a world where the costs of risk are significantly higher. Even when the financial sector returns to stability, it will be much less willing to lend either to businesses or consumers than in the last decade. Firms will have to find new ways of raising credit or reduce their demand for credit.

Second, the Scottish economy will have to find a new balance between the private and public sectors. It would be unwise to adjust too quickly but, after the recession has ended, the public sector is likely to be smaller so the UK can pay back the debt it is currently accumulating.

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Third, there is the changing world order – evident at the Copenhagen summit. The emergence of China and India as superpowers and the increasing voice of developing nations may influence trade patterns and the rules that govern these. Scotland Inc. must understand and adapt to these changes. Fourth, expansion of IT technologies will increase uncertainty and the transience of economic relationships. The internet has shown that it can create (SuBo) and destroy (Tiger Woods) celebrities almost overnight. In the future, it may do the same with businesses. For those Scottish businesses wishing to survive during the Teenies, corporate-responsibility policies will not be an optional extra.

Fifth, the reaction to the climate-change agenda will almost certainly have significant economic effects in the next decade. While governments seem to think this is a great economic opportunity, the private sector is seeking greater policy clarity before committing to large-scale investment. Copenhagen did not help.

Finally, population change and ageing provide threats and opportunities for Scotland. Scotland's population grew by 97,000 (1.9 per cent) between 1999 and 2008. Between 2000 and 2010, world population will grow by 825m (12 per cent) and will expand by a similar amount in the following decade.

The world labour supply will be increasing hugely, which is bad news for Scottish businesses hoping to use low labour costs as a main selling point for international expansion. Expansion of the economy in the Teenies will only happen if Scotland makes the most of its human resources.

• David Bell is Professor of economics at Stirling University.

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