Would Scotland have done better on its own?

An entertaining debate is taking place between the economists George Kerevan and Brian Ashcroft – and they seem to be pointing to some surprising conclusions about the performance of the Scottish economy.

In an article on the excellent new Scotbuzz website GK (an SNP supporter) takes BA to task for criticizing his claim that Scotland would have performed better as an independent country in recent decades.

In brief, GK points to small independent European countries that all have a higher growth rate than Scotland between 1977 and 2007. He also makes the point that Scotland had a lower growth rate than the rest of the UK. So how can we be ‘better together’?

In response BA says that if you take a longer timeframe, from 1963, Scotland’s relative performance looks much better.

So the argument is really about which selective timeframe gives a better indication of the trend, with various factors – the decline of shipbuilding, the impact of North Sea Oil and so on – playing their part.

Now, as well as being extremely nice people (I’m lucky enough to have met them both) BA and GK know far more about Scottish economics than I do, so I hesitate to engage in the argument.

But I did notice something that seemed a bit funny.

GK points out that the relative performance of the Scottish economy declines over time. Indeed, it is at its worst in the 1998 – 2006 period.

The period of devolution.

And his explanation for the poor performance of the Scottish economy throughout the post war period is that “Scotland lacks the macroeconomic tools to promote growth” (unlike the other small countries).

Now it’s true of course that the classic macro-economic levers of monetary and fiscal policy have largely not been available to Scotland (though locally controlled taxes account for about 10% of government spending – greater than the normal variations in overall tax rates between different OECD countries and different parts of the cycle).

But it’s surely a bit of a tall supposition to claim that an independent post-war Scotland would a) have had more competent politicians than the UK, b) that the economy here is sufficiently different to merit much of a different approach, and c) that even if it was a perfectly tailored Scottish macroeconomic policy would have made much difference to the growth rate.

But more to the point, what do GK’s figures say about economic policy more generally in Scotland? He seems to be saying that the more power is devolved, the worse relative economic performance becomes.

For make no mistake, some of the most important economic policy levers have been controlled by the Scottish Parliament since 1999.

For example, the devolved Parliament directly controls most of the public sector, accounting for about 35% of GDP. Productivity in this part of the economy actually declined by about 5% between 1997 and 2007 while it increased in the private sector by about a third. The opportunity cost of this failure runs into tens of billions of pounds, dwarfing the notional effects of tweaking the tax system or fiddling with interest rates.

Similarly, during the same period house prices in Scotland more than doubled, while the supply of houses only increased by about 10%. Again, billions of pounds wasted because of a malfunctioning planning system that cannot respond to demand signals. Again, controlled by the Scottish Parliament.

Scotland’s (and Britain’s) most fundamental economic problem in the post war period is not, I would suggest, dodgy monetary or fiscal policy (thought these have at times been truly flaky), but a terribly weak public sector, and that’s what really sets us apart from the rest of Northern Europe.

At least at the UK level successive governments of all hues over the last thirty years have recognized this central problem and tried to do something about it, from the privatisations of the 1980s to the reforms of welfare, schools, universities, hospitals and the planning system under Major, Blair and Cameron/Clegg.

By contrast, all of these measures have been bitterly resisted in Scotland, and under devolution progress has ground to a complete halt. We’re left with what must be one of the least productive public sectors in the OECD.

Now, you can only judge a political class by its actions rather than its words. The performance of the Scottish Parliament with the powers that it does have is the best clue to what would happen if it were given (or had been given) more powers. The likelihood is, therefore, that Scotland’s post war economic performance would have been even worse if we had been fully independent.

So why did all those other small independent countries do so well by comparison? Well, there are probably all sorts of explanations beyond my ken to do with catch up economics in places like Ireland and Iceland. But the fundamental truth is that constitutional autonomy makes no difference to economic performance. If it did, then autonomous countries would perform better than non-autonomous regions, which is a nonsense because the former are made up of the latter.

What counts is the political culture, and the political culture in Scotland is self-evidently not conducive to competent economic management. So while there may be good reasons for independence (and it surely shouldn’t be all about money), the prospect of improved economic performance is not one of them.

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4 Responses to Would Scotland have done better on its own?

  1. Charles Wyllie says:

    I’ve never read so much crap in all my life. The ravings of a blithering idiot. The key sentence is the admission that he knows nothing about Scottish economics – very evident. Public sector spending is not an economic lever. If anything it’s the result of other macroeconomic levers. If there is low productivity in the public sector in Scotland, the fault can be laid squarely at the door of the public sector unions and their accomplices in incompetence and corruption, the Labour Party.
    Economic performance of any economy depends on the functioning of its markets and its resultant competitiveness. Successful management of the economy requires both micro and macroeconomic levers working in tandem to achieve high competitiveness. Scotland only now has some of the former and none of the latter. Control of both (recognising international interconnectedness) is what would have made Scotland’s economic growth rate higher.
    The point about autonomous countries and non-autonomous regions is just wrong. Highly performing non-automous regions within an autonomous country, usually do so due to having a high degree of control over their economy – California within the federal United States, for example. California run from Washinton DC would be much poorer. Constitutional autonomy makes all the difference to economic performance.

    • tdpcm says:

      I’m a little bemused by the vehemence of this comment since after gleefully insulting me you then go on to agree with the main point of my blog and article which is that Scotland’s poor performace can in large part be attributed to an unproductive public sector. As you say, ‘economic performance .. depeneds on the functioning of its markets and resultant competititveness’. You’re right. In our public sector, which accounts for 50% of GDP (2/3rds of it controlled by the devolved institutions) markets function very badly indeed and competititveness is very low, dragging down the whole economy.

      But perhaps you were distracted by my observation that autonomy does not, of itself, lead to good government. For every Switzerland there is a Greece, so the average performace of independent countries is, well, average. You assert that a form of autonomy within an independent country leads to better performance, citing California, but this implies that if Califormia then became fully independent its performance would worsen, which is odd. The truth is that political elites behave in a very similar way whether they’re governing 5m, 50m or 1bn people, so passing power from one to the other doesn’t, of itself, make any difference.

      • Charles Wyllie says:

        I apologise for the aggressive tenor of my contribution. The point is not that an independent California would see a decline in its economic performance but that its exceptional performance within the US is due to its autonomy. An independent California would in all likelihood be even richer.

  2. Merinus says:

    You have me wondering what you think of Robert Black’s (until recently our Auditor General) recent assessment of the state we’re in?: http://www.bbc.co.uk/news/uk-scotland-19839096

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