OPINION: Former chief economic adviser to the Scottish Government, Andrew Goudie, will edit a set of essays on the impact of constitutional change. Picture: Gordon Terris
A couple of weeks back saw the publication – on (strange coincidence!) the same day – of both a paper from the Scottish Government's "Fiscal Commission" on a range of important matters related to exchange rate, monetary and fiscal policies; and one from the UK Government on the implications of Scottish independence on EU and UN membership et al. Both are "pathfinders" with many more such documents to come from each Government. Also, they provide a positive indication that this year will see the debate move on to greater transparency and enhanced analysis of economic and legal issues.
This expectation is heightened by the fact that this very week sees the publication of a set of essays edited by Andrew Goudie, now of Strathclyde University but recently chief economic adviser to the Scottish Government. Further, I understand that another former chief economic adviser has a book ready to go. Then we at the David Hume Institute, with colleagues from the University of Edinburgh, are finalising over the next three months our third and fourth "conversations" on issues related to possible constitutional change. We have covered macro policies and welfare and are now engaged with energy and then competition policy/regulation. Masses of work and fascinating and important papers; but we have just scratched the surface so far. Governments and informed – preferably objective and sceptical – outsiders need to be active and engaged; and to help others to understand the key and complex issues.
Limited attention was paid to a paper produced by Dr David Skilling for the Scottish Government, which was unveiled and debated at a recent DHI seminar; (available on our web site www.davidhumeinstitute.com). This paper examines what lessons can be learned for the prospects for an independent Scotland from other small but successful and independent economies. It can be seen as the first contribution of substance to one key element of the debate, ie how and why Scotland's economic performance might be expected to improve – or at least have the potential for improvement – as a result of full independence.
Dr Skilling, a New Zealander now based in Singapore, has a reputation as an "expert" on successful small economies, which he suggests have out-performed their larger counterparts in recent years. About half of the top 34 advanced economies (as per the IMF) have a population of less than 10 million – and 23 of the 34 a population of less than 20 million.
During the recent financial and economic trauma, the view that small is beautiful for nation states may have changed towards "small is precarious". The financial markets have looked long and hard at smaller economies, and for some the lack of diversity has worked to their disadvantage. Given the financial market spotlight, these small nations now have less room for manoeuvre, becoming necessarily more conservative on fiscal policy and more risk- averse generally.
Looking to lessons for Scotland, Dr Skilling points to the importance of human resources, social cohesion and natural resources. He also stresses – and this is perhaps his crucial point – that in the successful small economies policies across a range of areas are aligned and "pulling together". He suggests that the situation under devolution, whereby some policy levers are controlled elsewhere and hence cannot necessarily be Scotland-specific, could be acting to Scotland's detriment. On the basis of his – fairly superficial – comparison between some small, successful economies and Scotland, this lack of control over a full set of policy levers emerges as one reason for our under-performance.
Dr Skilling fully accepts that his knowledge of Scotland is limited; and also that a full and detailed, bottom-up analysis would be required to identify properly Scotland's competitive potential. Nevertheless he is prepared to point in particular to three areas which he deems to be crucial – science and innovation policy; industry policy; and international connectivity. This will resonate with many here in Scotland.
But Dr Skilling's paper and presentation left me with a number of questions. First, I would have welcomed more hard evidence as to the factors that underlie the success of some small economies, and distinguish them from the laggards in their peer group. If we can thereby identify the policy levers that matter most to economic success, the next task should be to clarify which of these are available under the existing settlement, or could be available given further devolution; and which are only available given full independence. In addition we need to consider the costs associated with the development and operation of such policy levers. The human resource and other costs associated with institutional development can be substantial; and taking on more policies adds to the complexity and cost of overall policy-making. The "benefits" have to justify these costs – including the "opportunity" costs associated with what we could have been otherwise doing with such scarce resources. More policy does not always mean better policy!
Nevertheless there is clearly merit in further examination of these issues – why some small economies succeed; what Scotland can learn from their success; what policy levers really matter for a successful economic strategy; which are available now or could be under differing regimes. And there is another question that Dr Skilling did not tackle. Are there some gains to be anticipated not through policy change but through what John Maynard Keynes referred to as "animal spirits"? Would independence bring enhanced social cohesion and unleash extra and different efforts from those within Scotland to stimulate our economy? Would the Scottish diaspora return with funds, innovative ideas and developed business expertise to add extra value? Are Scottish animal spirits at present as much constrained as policy development? Are these spirits of importance in other small and successful economies? Too many questions, too few answers – scope for more careful, evidence-based and sceptical research.
l Jeremy Peat is director of The David Hume Institute
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