Studying the Growth Commission

I am critical of the Scottish Growth Commission Report, particularly on currency. It also appears over-influenced by the fading credibility of Neoliberal economic theory, and insufficiently reflects Modern Monetary Theory (MMT); but I would not argue that it is redundant; in a large number of areas it has done carefully work, and in all areas much more thoroughly than other sources we currently have, or that the public – including myself – have the time or resources to undertake; it is therefore a very good source of informed, if over-orthodox opinion. It is perhaps stronger on ‘managerialism’ of the status quo, than of originality and imaginative, creative new thinking.

Others are critical of other features of the Report.

Nevertheless there is invaluable analysis within it, and I think the debate is in danger of being soured for the public by the points of disagreement. The Growth Commission Report is a valuable, if flawed contribution to the way forward. To be fair, it could scarcely be otherwise. They will always be differences, for this is a process. There is no end-point, because the exploration of Scotland’s future is an evolutionary process. Elements will change, and change again. There is a never ending process of developing understanding. There are no ‘one-stop shops’ with all the answers. Consider the Growth Commission Report a flawed but useful contribution to a continuing debate, that is actually slowly revealing the contours of the path we require to take. I disagree strongly with the report on currency; especially for a certain lack of precision and clarity about the way forward, and a sense it is ‘kicking the can down the road’; but I do not doubt that currency is the key issue, and it is a very practical and very difficult one.

I have used a historic maxim to establish my fundamental point on currency before, and I do not apologise for using the hoary old maxim of Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild; often misquoted but I hope a good paraphrase at least, here: “Let me issue and control a nation’s money and I care not who writes the laws”. I quote it because it rather trenchantly makes the point. I also have serious reservations about the use of a currency ‘peg’. Nevertheless the Growth Commission should be studied with care. It is worthwhile.

The report is available free as a download if you wish to read more HERE.

To enhance the debate here is an extract of a key section from the Summary.

Economic Context

3.19 Scotland is without question a rich and successful nation, in the top 25 of global economies in terms of income per head and ranks near the top in the UK on most long-term indicators.
3.20 Scotland has very significant comparative economic assets and advantages, in terms of natural resources, the education and skills of the people who live in Scotland and sectors with existing and potential global competitiveness.
3.21 It is energy-rich with oil and gas resources, up to 25 per cent of Europe’s tidal power potential and 25 per cent of Europe’s offshore wind potential.
3.22 We have world-class universities, a world-wide reputation for premium food and drink products and our country has been named the world’s most beautiful, boosting our outstanding tourism industry. We are at the cutting edge of games technology, photonics, life sciences, advanced manufacturing and other industries of the future.
3.23 Despite these abundant resources, other independent countries with the ability to tailor economic policy to their own needs have performed better than Scotland. The median income of the group of 12 small advanced economies3 is 14% higher in GDP per head; a gap of £4,100 per person. This shows what is possible for an independent Scotland.

The UK Economy Before Brexit

3.24 The economic debate was at the heart of the 2014 referendum4. That debate was
predicated on the assumption that the UK would continue to be a member state of the EU.
3.25 A key argument from the pro-independence side was that the UK economy was unusually unbalanced – both in terms of geographical performance and inequality in income and wealth among UK citizens.
3.26 This report shows very significant regional disparity of performance in the UK. The gap in performance by local areas is by a distance the most unequal in Europe, with far too much economic activity and opportunity concentrated in London and the South-East of England.
3.27 The gap between rich and poor in the UK continues to be one of the largest among developed countries, with growing evidence that such inequality acts as a drag on economic performance.
3.28 A dependence on consumer debt fuelled spending for growth has been a consistent feature of the UK economy, is not sustainable and carries very significant risks.
3.29 The UK’s export performance has been poor and with a falling share of the global market. The UK has – by far – the highest trade deficit in the EU.
3.30 Scotland performs close to the UK average in terms of economic performance per person but has not enjoyed similar levels of population and labour force growth.
3.31 If Scotland had matched UK population growth since 1980, the population of Scotland would now be 5.8 million, if it had matched the population growth of the other small European countries (such as Austria, Denmark, Finland, Ireland, Norway and Switzerland) there would be 6.1 million living in Scotland.

Brexit – Two Futures

3.32 If the gap between Scotland’s real per capita income and the median of the small advanced economy group was closed, income per head would be 14 per cent higher. Closing the gap between Scotland and the best performers would increase incomes by half. Closing this gap would mean, in today’s values, an additional £22 billion in additional GDP and a potential additional £9 billion in tax revenues.
3.33 The decision of the UK to leave the European Union will fundamentally change Scotland’s economic future. Brexit will almost certainly widen, not narrow, the gap between Scotland and comparator countries.
3.34 The UK Treasury says Brexit will make the UK “permanently poorer”. This is not a controversial claim. There is a widespread consensus among economists, with few exceptions, that leaving the EU will damage UK economic growth, productivity and job creation.
3.35 The Fraser of Allander Institute estimate a potential Brexit impact of the loss of between 30,000 and 80,000 jobs, the loss of between £3 billion and £8 billion in GDP and a real wages cut of £2,000, depending on the model that succeeds Brexit negotiations.
3.36 Scottish Government modelling shows an adverse impact on trade, productivity, population and foreign direct investment. And LSE’s Programme of Brexit research suggests Scotland (as well as Wales and Northern Ireland) are already being disproportionately hit by the impact of the Brexit vote.
3.37 The already huge difference in economic performance between London and the South- East of England and other parts of the UK is therefore likely to increase.
3.38 This means it is essential to stimulate an inclusive, national debate on Scotland’s economic future to find out whether a different, better path is possible.
3.39 Scotland’s resources and talent, combined with good decision-making and the ability to tailor policy to our needs, can lead to improved economic performance and avoidance of the low growth future in a UK outside the EU. The growth aspirations here are structured over three time-horizons: (i) First 10 years: catching up with the small advanced economies average growth rate (currently 2.5%) (ii) Years 10 to 25: closing the GDP per capita gap with the small advanced economies (with period of 3.5% growth) (iii) maintaining a GDP per capita position in line with the top half of the small advanced economies group.
3.40 The long-term nature of the strategy should not diminish its urgency. It must begin now.

Insights on the Performance of Small Advanced Economies

3.41 Common themes in benchmark small advanced economies policy include a commitment to strong policy foundations (solid macro policy settings, innovation and human capital, and internationalisation), as well as a high degree of strategic coherence across these different policy settings, positioning the country to compete effectively in the global economy.
3.42 Small economies perform better than larger ones consistently by around 0.7 percentage points per year over the last 25 years on average.
3.43 This growth performance has meant the benchmark group of 12 small advanced economies has held its share of the global economy over past decades remaining competitive even with the integration of the large emerging markets. The share of many large economies, including the UK, has retreated substantially.
3.44 Small advanced economies have done well in terms of labour market performance, with relatively low unemployment, on average, a couple of percentage points under those of larger advanced economies.
3.45 On average, there is no clear margin between small and large advanced economies in terms of levels of labour productivity which is constrained in small economies by the small size of the domestic market; however the strong performance in the trading sectors offsets this. In this respect leaving the EU and Single Market would obviously act as a growth restraint for Scotland.
3.46 Small advanced economies also tend to do well on measures of the extent to which the gains from growth are broadly shared. Many small advanced economies, notably those in Northern Europe, have low levels of income inequality. Income distribution outcomes are
a matter of long term policy choice and effective implementation, rather than anything intrinsic to small advanced economies.
3.47 The overall performance of our benchmark group is significantly ahead of the UK and the large economies. Policy making is more agile and of higher quality because it requires to be.
3.48 Through history, there has been a strong relationship between periods of trade openness and an increase in the number of countries. Over the past 100 years, the number of independent countries rose from under 70 to just under 200 today.
3.49 Overall, small countries have effective, responsive governments, with a well-developed sense of strategic capacity, high levels of trust and social cohesion, and the ability to adapt in response to changing international circumstances.
3.50 Small competitively-strong economies are continuing to invest in key sectors and clusters, to help them develop positions of advantage in a more competitive and challenging global economy.
3.51 The levels of international engagement by small advanced economies are substantially higher than for larger economies and the growth in international economic activity has also been stronger. This is the case for both exporting as well as cross-border direct investment.
3.52 Large multinational firms play an important role in small advanced economies in driving international expansion.
3.53 However, increasingly, small advanced economies are investing in firm-level enterprise policy to support international expansion by indigenous firms. Export promotion agencies are increasingly working intensively with high-growth potential firms to accelerate their international engagement.
3.54 Small advanced economies take micro and macro policy foundations very seriously. Small advanced economies rank highly on the various indexes of the quality of policy and flexibility of business environment.
3.55 The strong performance of small countries is largely a matter of deliberate choice and management. It is the small advanced economies that have positioned themselves most appropriately for the challenges and opportunities of globalisation that have performed best. In contrast, those countries that did not engage with, and respond to, these global forces did not fare well.
3.56 Two fundamental lessons are clear: Scotland must become more engaged, not less, in the global and European economy in order to boost growth. And the opportunity to contribute to, and benefit from, that growth must be more widely shared.
3.57 In considering the future, the UK economic model is wrong for Scotland. Leaving the EU and the Single Market, hostility to immigration, concentrating economic activity in London and the South-East of England, low wages and tolerating a large gap between rich and poor can only depress growth and opportunity.
3.58 Our recommended starting point for a Next Generation Economic Model for Scotland is based on learning the lessons from small advanced economies and applying them intelligently to Scotland’s circumstances, needs and opportunities. Drawing on all 12 small advanced economy case studies we are especially drawn to a hybrid of Denmark, Finland and New Zealand.

Features of that model include; quality of governance; long term cross partisan strategy, a focus on innovation, being a competitive location for international investment, exploiting Scotland’s resource endowment, an export-orientation, migration- friendly, where flexible labour markets combine with fair and progressive work and active employment policies, maintaining a highly skilled workforce with transferable skills, using taxation as a tool for economic development but not competing as a low tax location, placing inclusive growth at the heart of the strategy and viewing quality of life as both an asset and objective. The best of the lessons of Denmark, Finland and New Zealand are at the heart of this but many other countries can, of course, offer continued inspiration.

The imperative of population growth

3.59 Scotland has recently been transformed from a nation suffering from population decline to a country benefitting from net immigration for the first time in our recent history. Positioning ourselves with an outward focus will both increase opportunities for the next generation of Scots born here and ensure we continue to attract talent.
3.60 Given the demographic structure of Scotland, migration is critically important to population growth and also productivity performance. IMF evidence suggests a 1 per cent increase in the share of migrants in the adult population can increase productivity by 3 per cent long term.
3.61 Scotland must continue to attract people in order to increase our working population and our overall population. Migration is projected to account for all of Scotland’s population growth over the period 2016-2041. Maintaining immigration is essential otherwise the number and proportion of people working and paying taxes will fall. The economic activity and employment rates of those born outside of the UK are higher than those in the rest of the Scottish population.
3.62 There are around 429,000 people resident in Scotland who were born outside of the UK, 8.1% of Scotland’s total population. Of the UK regions and nations London has the highest share of its population born outside of the UK (38.3%).
3.63 The contribution of non-UK born citizens in Scotland to the Scottish economy is estimated at approximately £12 billion per year.
3.64 The 429,000 Scottish residents who were born overseas are associated with £4.3 billion of government revenue, including income tax and national insurance contributions. Government spending associated with Scottish residents who were born overseas stood at £3.0 billion. This suggests a net contribution to Scotland’s public purse of £1.3 billion per year. The Polish born community alone is a net contributor of circa. £250 million.
3.65 We estimate that approximately £1.1 billion in exports in 2015-16 was attributable to overseas students studying in Scotland. Each student from out with the EU generated £26,811 in exports for the Scottish economy in 2015-16 and each student from within the EU generated £14,812. However, given that much of the spending of students is consumer spending in Scotland, like tourism exports these figures are not reflected in reported export statistics.
3.66 Overseas students in Scotland also make a net positive contribution to the UK Exchequer of around £2,500 per person per annum.
3.67 Policy should prioritise Scotland’s rankings in the main world competitiveness league tables and related trade-offs considered and agreed for long term policy.
3.68 The attraction of economic migrants (from identified target groups) should be one of the top priorities of Scottish Government economic policy. Policies are recommended to remove barriers provided in UK policy and to incentivise talent to come to Scotland.
3.69 Tone and message matter every bit as much as policy specifics in driving sentiment and human behaviour in this area, the whole country must market itself as a welcoming home for new talent and overseas citizens already based here. We should seek to be the most talent friendly country in the world.

Participation & Inclusive Growth

3.70 There is an economic as well as moral imperative to improve participation and equality. A
long-term cross partisan strategy is required.
3.71 International Monetary Fund and World Economic Forum studies identify a direct relationship between improved inequality and growth.
3.72 In income and gender pay inequality Scotland underperforms many of the benchmark small advanced economies to its economic, social and fiscal disadvantage.
3.73 The direct cost of inequality on the Scotland’s net fiscal position is estimated at more than £6.4 billion per year.
3.74 The Joseph Rowntree Foundation targets a position where less than 10% of the population are in poverty at any one time. This would be a reduction of 50%, if achieved this could mean a saving of £1.6 billion to the Scottish public finances.
3.75 OECD data show that many small advanced economies have gender pay gaps that are less than half that of Scotland. Median full-time female workers in New Zealand are paid 94.4% what the median full-time male worker is paid, compared to 83.4% in Scotland.
3.76 If gender inequality in Scotland was reduced to the level of New Zealand, Scottish GDP would grow by £6.1 billion and the net impact on public finances would be a possible positive net exchequer impact of up to £2.5 billion.
3.77 Regional inequality within Scotland is less stark than within the UK but requires addressing.
3.78 More localised inequality also needs to be addressed, targeted at the groups in society who have faced significant barriers to full participation in the economy, even in times of economic growth. This will require concerted long-term action to ensure that no one is excluded from opportunities that the majority of us take for granted.
Productivity & Competitiveness
3.79 Increasing productivity growth in the Scottish economy will be crucial and will generate
significant economic and social returns.
3.80 There is a widespread view that current economic development arrangements are not adaptable enough to respond quickly to new opportunities for the Scottish economy. Brexit is forecast to worsen productivity.
3.81 All of the approaches to increasing productivity growth require an increase in levels of investment in the Scottish economy, on improved technology, increasing capital intensity, better working practices and policies that encourage the growth of high productivity sectors.
3.82 International competitiveness rankings matter and should be elevated in policymaking, target setting and debate. Agreement should be sought on how Scotland can best achieve the required improvements in relative production costs and prices. One way is through trade and international ownership because that makes domestic output subject to competition on the world markets (instead of just the domestic markets).
3.83 An increase in trade share of GDP equivalent to 1% of GDP can increase productivity in the economyby0.4%. More specifically, the benefits to labour productivity and how that feeds through to wages are estimated to be 2-3 times as much.
3.84 Access to international markets is essential. The ability to integrate with international supply chains is critical for competitiveness and to attract foreign investment. The discipline of international competition can also help to drive innovation and new ways of working
3.85 While there are many successful Scottish exporters, Scottish exports are more dependent on a small number of sectors that employ relatively few people.
3.86 Scotland and the rest of the UK have a mutual interest in maintaining a close trade and investment relationship that benefits both. But if the Scottish economy is to realise its full potential, then we must build stronger direct trade and investment links with other European countries and the rest of the world.
3.87 The potential Brexit damage to trade relations with Europe – and the risks to trade relations with other countries – means that Scottish dependence on the UK market is likely to grow after Brexit if Scotland remains part of the UK. This narrowing of Scotland’s potential markets will be to Scotland’s material economic disadvantage. That this is seen by some as a case for maintaining the current model strikes us as demonstrating a remarkable lack of concern and ambition.
3.88 Maximising frictionless trade and market access with the rest of the UK and with Europe is of critical importance to the performance of the Scottish economy in the short and long term.
3.89 Increasing overseas exports from 20% of GDP to 40% of GDP would be a reasonable target to set in order to close the export gap with small advanced economy benchmark countries, implying an increase from under £30 billion to more than £60 billion. This could deliver a productivity boost of 8% of GDP and would be expected to generate additional taxation revenues of some £5 billion each year.
3.90 In Scotland, as in most other small advanced economies, improvements in productivity will come in myriad small advances, but a few major reforms would make that process a great deal easier – for example finding ways to encourage capital (total factor) productivity and repair the long-standing investment rate deficit.
3.91 Establishing a Productivity Commission in Scotland, to identify opportunities for productivity improvement would be useful, in particular ways in which policies can be used to bring these opportunities to reality in practice. Adopting a fixed-term model, as in Denmark or Norway, would be an easy way to start – with an option to establish a New Zealand style Productivity Commission model if appropriate.
3.92 The Anholt-GfK Roper Nation Brands Index examines the image of 50 nations. Scotland’s score (61.8) and rank (17th) on the index show that Scotland already has a strong national brand. Across all dimensions, with the exception of exports, Scotland is ranked within the Top 20 countries indicating that there is room for improvement in the exports dimension.
3.93 Digitalisation will continue to have an immense impact on the world economy in the coming decades, offering potential in every sector. The digital sector has grown markedly over the past five years and must be continue to be a priority growth sector for Scotland, given its potential long-term significance to the wider economy and also to the ability it provides to widen participation and globalisation in a country of Scotland’s geographic position and structure.
3.94 Higher Education Research & Development (R&D) significantly outpaces the UK and EU averages and lags only Denmark, Switzerland and Sweden. Scotland’s university sector is a key comparative advantage for any growth strategy. Internationally Scotland’s scientific outputs Scotland ranks top, and second to the Netherlands in terms of their influence. However, business R&D investment lags significantly behind EU, OECD and UK averages for both the government investment and business sectors. Improving this measure in key to overall productivity growth, higher investment, and strengthening the competitiveness in the Scottish economy.
3.95 Even within countries and industries there can be large gaps between the most productive and others. The diffusion of knowledge is as important as pushing the boundaries of knowledge. Changes in technology resulting from science and innovation accounted for one-third of productivity growth that took place in the UK between 2000 and 2008.
3.96 There is a positive and leading role for the state in the promotion of R&D and innovation. Building on the Scottish Government’s Can Do Innovation Forum, additional initiatives are required to improve commercialisation performance and enhance the role of workplace skills in innovation and the creation of a learning economy.
3.97 Infrastructure is critically important and can deliver significant economic returns on investment. The World Economic Forum’s Global Competitiveness Index ranked the UK only 28th in the world on quality of infrastructure. An Infrastructure Commission is urgently required along with a longer-term commitment to increased investment.