BRITAIN is on the brink of becoming a third world country.

In the 100 years since the outbreak of the First World War, the nation will have declined from pre-eminent global superpower to developing economy. For almost a century, the United Kingdom has deluded herself into believing that the days of global dominance will return, that the symptoms of decline can be relatively easily tackled and, more recently, that the economy is on its way back from the trough reached in the third quarter of the 20th century. By 2014, those illusions will be all used up. Respected commentators, including the investment bank Lazard, have identified a huge wall of banking and commercial debt due for refinancing at about that time. There are serious doubts whether it will be possible. Taken together with squeezed supplies of energy, metals and food, this will confront the West with a great reckoning – with the UK hit harder than most. For a quarter-century, it has been selling its economic assets into foreign hands to finance a standard of living it has not been earning. This has left it with a hopelessly unbalanced, unhealthy economic structure, an economy that does not work, and as a candidate for third world membership.

By coincidence, Britain's post-1914 odyssey is expected to reach its destination in the year Scotland will vote on whether to be independent. In our new book, Going South, we argue that the UK urgently requires a development plan to map a return to first world status. Assuming Scotland wishes also to make that journey, would it be best advised to travel solo?

Recent history is full of regions within developing nations who have decided that "he travels fastest who travels alone". In this category, Singapore remains the outstanding success story since it seceded from Malaysia in 1965. Other stories have ended less happily: Bangladesh, for example, remains a poor country with an erratic economy more than 40 years after it ceased to be East Pakistan.

Ultimately, the question of independence can never be a purely economic one. Indeed, some immediate drop in living standards post-secession may not matter very much. On a personal level, most of us experienced quite a sharp reduction in our standard of life when we left the comforts of home for the dubious delights of university residences, house sharing or bedsit-land. The thrilling (and terrifying) experience of taking control of your own affairs cannot be purely a matter of pounds and pence, a point we would make equally in relation to Britain's future engagement or otherwise with the European Union. So it is puzzling for us to hear campaigners in Scotland and elsewhere insist that independence is largely a matter of more effectively "delivering the goods" for their electorates.

When it comes to assessing the ability to reverse the trend from third to first world economy, however, would Scotland find the route back to developed-country status easier or harder on its own?

First, let's assess the evidence for Britain's demotion on the world's economic league table. Developing – or, in Britain's case, un-developing – economies run persistent and intractable balance of payments deficits, borrowing money from abroad to finance consumption (and selling hard assets to foreigners also to finance this rake's progress). When did Britain last have a balance of payments surplus? Here are clues: Michael Foot led Labour into a general election, Michael Jackson was recording Thriller and the hot movie was about a hairdresser enrolling with the Open University, Educating Rita.

That's right – 1983. And no, our much-vaunted skills in exporting services or in foreign investment have come nowhere near squaring the books.

Developing countries have seriously dysfunc-tional labour markets. Skilled people are brought in from abroad to do jobs for which the natives are believed to lack the know-how or inclination. Millions of these domestic workers are given beer money and told to stay at home. Remind you of anywhere?

In such a country, each sector of the economy displays its own hideous distortions. Thus many of Britain's public servants refuse to perform their duties without additional up-front payments in cash or kind: police overtime, teachers' workload reduction, the notorious GP contracts. Yet they are hugely sensitive to any criticism and consider themselves to be martyrs to their vocations.

Then there is a vast pseudo-private sector covering energy, water, the railways and other services, engaged in an apparent endless campaign to rook the public, against whom it is forever arming itself with "tough new powers" (penalty rail fares, hose-pipe bans and so forth). Swathes of the real private sector are equally unappetising: companies specialising in advising people how to wriggle out of their credit card debt on a technicality; firms specialising in adjusting insurance claims to the disadvantage of one party of another. As for our much-vaunted financial services industry, when it is not "churning" the accounts of major investors to generate commission income it is inserting so many "charging points" into ordinary savers' accounts as to reduce greatly their nest eggs.

Such an economy displays a demand for charismatic political leadership and a consequent disappointment when said leaders fail to effect a magical transformation of the nation. But then, quite what is expected of these leader-figures is never clear.

They come to office insisting in some ill-defined way that things cannot go on as before and espousing a vague, ideology-light philosophy ("the third way", "the big society"). Grandiose schemes are embarked upon, whether multi-billion-pound computer systems that go well over-budget and then cancelled or foreign wars for which there are insufficient troops or equipment. The state's security apparatus is beefed up to deal with blood-curdling threats. Figures "prove" that crime is falling and school exam results are soaring.

Sooner or later, the leader-figure is removed from office, his abandoned initiatives littering the landscape like the half-built skyscrapers of many post-colonial states. Time for another Big Man figure, another flurry of activity and, inevitably, another disappointment.

Finally, a third world country is prone to great uncertainty as to the locus of power in society, the legitimacy of its institutions and even the proper location of its national frontiers. In Britain, the constitutional flashpoints are many: Westminster versus Brussels and Strasbourg, the House of Commons versus the proposed elected senate and Westminster versus the devolved administrations in Belfast, Cardiff and, of course, Edinburgh.

Accepting our un-developing status is an essential pre-condition for taking the next step, which is to agree on the need for a development regime. We identify two options.

The first, which we call the Scandinavian model, is characterised by substantial state involvement in the economy, for example through public ownership of businesses or targeted public investment in industry. It also boasts a system of universal welfare benefits, freely-available medical and welfare services and extensive redistribution of wealth. Finally, it involves state provision, or subsidy, of things such as housing, childcare, public transport or home insulation: goods and services that can also be supplied through private means.

Britain's second option is what we call the "freeport" model, diametrically opposed to most aspects of the Scandinavian model.

Here, ease of running a business is coupled with minimal supervision, little regulation and very low tax rates. Hire and fire rules would be liberalised and welfare would be reduced to an insurance-based emergency service with no wider social purpose. Health and safety regulations, as well as planning controls, would be rigorously tested for cost-effectiveness. Privacy of business dealings would be guaran-teed. Anonymous bearer shares and bearer bonds would flourish, and money-laundering regulations would be minimal. There would be no deliberate redistribution of wealth, and the state's role would largely be concerned with keeping the markets open.

Both these models are starkly drawn, and in real life, there would inevitably be shades of grey. But if they are archetypes, we believe they are useful ones. Which would best suit the needs of Scotland's economy? The conventional thinking in 2012 would probably lean towards the social democratic model. But remember, we are talking about a model for development, not a destination. The question is not whether Scottish (or English) people would wish to enjoy Swedish or Norwegian living standards right now, but whether they are prepared to embrace the rigours of the journey to that destination.

In the case of the social-democratic model, this would involve a cultural revolution, with across the board co-operation among government, business and the unions. It would require restraint and restrictions in pay, prices and strike action. Big business would need to build export markets, unions would need to co-operate on training, the education system would have to admit failings and join the national effort. Is Scotland (or the UK) prepared to be this conformist?

But neither does the freeport model promise an easy ride. Forget romantic images of dockside cafes and a vibrant night life. Would a population used to the temperate zone of post-war Britain really tolerate the chill winds of unfettered competition? Just how "enterprising" are the Scots, or, indeed, their English neighbours?

As the Bank of England has noted, self-employment seems to rise and fall in an inverse relationship to unemployment, as those pushed out of jobs work for themselves for a while, but only until the economy picks up and the comforts of the salaried life become available again. Not much entrepreneurship there.

Up to a point, it may be possible to mix and match elements of the two models, as Denmark has done with a blend of labour-market flexibility and generous support for those who lose their jobs. But there are strict limits to this a la carte approach, not least because a low-tax model would lack the revenue to finance extensive social insurance.

How realistic is the prospect of redeveloping the British economy? It could be argued that some turn-around is inevitable, if only because the need to pay our way in an ever-harsher world, one where our credit is exhausted, will force it upon us.

But a sudden surge of dynamism is unlikely. In the coming years, as we find it increasingly difficult to live beyond our means, Britain's third world status will manifest itself through eroding living standards and social provision – unless we stop deluding ourselves, and act decisively to develop the economy.

Are Scotland and the rest of the UK more likely to make such a decision separately or together? That is hard to tell. The most likely prompt for such a reality check would be some sort of shock, and Scottish independence, by redrawing national frontiers, would certainly provide that, for both of what would now be new nations.

On the other hand, were such a constitutional earthquake to coincide with an external economic shock – the collapse of the euro, perhaps, or an energy crisis – then it could lead to the development of an introverted and lethargic outlook on both sides of the Border, and the decline would continue unchecked.

The final question, then, is this: when it comes to navigating the way back towards first-world status, regardless of the route chosen, would Scotland have a better chance of making the journey successfully on its own? That would depend on the interplay between two factors.

First, to what extent have the corrosive elements prompting the UK's relegation to un-developing status eaten themselves into Scotland's economy (as they clearly have), and into the institutions that would govern an independent nation? Second, to what extent do Scots accept that relegation looms and it is time to start from scratch?

We end not with Maynard Keynes or even Adam Smith, but with Arthur Hailey, writer of popular blockbusters. In one of his novels, a man asks a friend, after a lengthy discussion on the subject, whether he should seek a divorce. The friend refuses to advise, saying: "The last few paces each of us walks alone."

Over to you.

Larry Elliott is The Guardian's economics editor, and Dan Atkinson is economics editor of the Mail On Sunday. They have also co-authored The Gods That Failed, and Fantasy Island. Going South: Why Britain Will Have A Third World Economy By 2014, is published by Palgrave Macmillan, £14.99.