The Economist and Scotland's Seven Strengths

The Scottish Government's response to the infamous Economist article last week was to assert seven key strengths of the Scottish economy. They were clearly right to do this because there is no doubt that the Scottish economy is one of the strongest parts of the UK economy both in terms of GDP per head and employment. In any event the Economist article was more balanced than implied by the silly map mock-up on the cover of the magazine. See here

The cover was clearly more about marketing the article than an objective comment on the Scottish economy either now, or post independence. But it did downplay some of the strengths of the Scottish economy. Hence, the justification for the Scottish Government's response.

The key strengths as seen by the Scottish Government are:

1. Overall Wealth: An independent Scotland would be ranked 6th in the OECD in terms of GDP per head, compared to the UK's sixteenth place (in 2010).

2. Oil: There is up to 24 billion barrels remaining in the North Sea. Such a figure equates to a wholesale value of some £1.5 trillion in today's prices.

3. Renewables: Scotland has around 25 percent of Europe's potential offshore wind and tidal energy, and a tenth of Europe's wave power potential.

4. Food & Drink: The latest food and drink export figures show exports are at an all time high of £5.4 billion, and growing.

5. Public Finances: In terms of our public finances, Scotland is better off than the UK as a whole to the tune of £510 for every man, women and child in Scotland in the most recent year (2010/11).

6. Education: Scotland has five of the top 200 universities in the world.

7. Inward Investment: Scottish Development International are an award winning agency, with major companies continuing to locate in Scotland.

 

The problem is that the list looks as if it has been cobbled together in a hurry and some of the so-called "key strengths" appear more another marketing exercise to sell independence to the Scottish people than real economic strengths. And where there are doubts, qualifications and questions to be raised about such 'strengths' they are, not surprisingly, ignored.

Strength 1 is disingenuous to say the least. The difference between the 6th position of Scotland and the 16th position of the UK is due to the addition and subtraction of oil GDP to current Scottish GDP and UK GDP. But most of this additional income is not income for Scottish residents it is paid in profits to the oil majors and other multinationals headquartered outside Scotland. For countries, with a high multinational component in their GDP the better estimate is GNP - or GNI - which is GDP plus/minus net income from/to abroad. If the Scottish GDP/GNP ratio with oil GDP added was similar to the Irish ratio of around 0.84 - see Justin Doran here - (There is no published estimate of Scotland's GNP) - then Scotland's ranking would fall from 6th to 18th between Iceland and France. Incidentally, Ireland would also fall from 8th to 19th. For most of the other states in the top 20 of the Scottish Government's table the use of GNP shouldn't change the rankings over much since net income from/to abroad is relatively small in relation to GDP. And for some small countries such as Switzerland GNP is greater than GDP.

Strength 2, oil, is certainly correct but no mention is made that oil production from the North Sea is in decline that there are no more big fields like Brent and Forties still to be discovered even west of Scotland.

Strength 3, renewables, is also correct. But Scotland has a lot to do to capitalise on its potential in renewables and there is a great risk that renewables may not be the driver of the re-industrialisation of Scotland as the Government hopes. And, as Peter Jones has explained this is an industry that enjoys many benefits from the Union, particularly subsidies financed by UK consumers, which are likely to be lost if Scotland becomes independent.

Strength 4, food and drink, and particularly the whisky industry, appears to be a major asset to the Scottish economy. But the performance of whisky is dangerously over-hyped and much of the sector is now owned by foreign companies where there is significant profit outflow - the GNP issue again. As Colin Donald in the Herald has argued, the success of the industry and its contribution to the Scottish economy is not beyond question. And he cites the eminent economist John Kay, and ex member of the Scottish Government's Council of Economic Advisers, who contends that

Value added from Scotch whisky is reported as around £3 billion – about 2.5% of Scottish GDP – but this figure reflects essentially arbitrary transfer prices and export valuations. Wages and salaries and purchases of goods and services used in whisky production amount to only about £400 million. To this should be added the returns to beneficial Scottish ownership of whisky-related assets. With retail sales of whisky around the world totally perhaps £25bn, the Scottish economy appears to derive modest benefit from its most famous product. (Chapter 2 in Scotland's Economic Future 2012 (ed. Sir Donald Mackay)

Strength 5, public finances being in a better state than the UK as a whole so that Scottish families are better off, is a major distortion of reality. As I demonstrated in this post this is not money in the Scottish peoples' pockets, or the annual fiscal dividend from independence. Rather it is that an independent Scotland's fiscal deficit would have been slightly less worse than the UK if in 2010-11 it had received its geographical share of oil revenues. But a large deficit is still a deficit.

Strength 6, education and the excellence of Scottish universities, is a clear strength of the Scottish economy. But to support this statement by the claim that the Scottish universities are benefitting from unprecedented funding is only a half truth. It omits the fact that the charging of fees in England, for better or worse, is raising the funding of universities south of the border to a level which will make it increasingly hard for Scottish universities to compete in both research and teaching excellence. Moreover, there are real concerns about the extent of knowledge transfer from the Scottish universities to Scottish firms and whether economic development policy is properly capitalising on the strengths of the universities.

Finally, strength 7, inward investment and the success of Scottish Development International in attracting companies to Scotland is not to be disputed as I noted here. But there are real issues about the nature and significance of inward investment policy in Scotland as the recent debate about the role of Amazon has demonstrated.

There are other strengths that the Scottish Government appears to have ignored. Stephen Boyd tweets that it is surprising that no mention is made of financial services. I agree with him. The Government may be ashamed of the banks but financial services accounts for a rising share of 10% of GVA with more than half in non-banking such as asset management, pensions, and life assurance. Then there are the other industries that Scottish Enterprise sees Scotland as having major strengths: creative media, enabling technologies, business services, life sciences, and tourism. None of these is mentioned.

Added to this is the evidence that Scotland has high levels of social capital: trust, mature institutions, which make Scotland a 'good place to do business' and which are increasingly seen as a critical ingredient in economic growth. Finally, there is the evidence of Scotland's high amenity where, for example, Edinburgh ranks high as 'place to live'.

All of these are key strengths of the Scottish economy and will influence its future growth.

So, why were they ignored?

A cynic might say that they have little to do with the case for independence. Maybe that is going too far. But the Scottish government can do a better and more accurate job of documenting Scotland's economic strengths than the heavy dose of spin that it offered in response to the Economist.

Comments

[Angus McLellan]

Could I make a request for the benefit of us non-economists? Could you maybe do an idiot's guide to GDP/GNP/GVA and other widely quoted indicators? Wikipedia's coverage leaves me less than certain of the differences.

I have a second question. When I was a lad the trade deficit was reported in hushed tones every month, followed by a talking head explaining why it had gone up or done and why this mattered or didn't matter. If I try to place its disappearance, it seemed to come long after the end of exchange controls. So, why isn't the UK's trade balance as newsworthy as it once was and would that still be true of an independent Scotland?

[Saor Alba]

O/T but you describe yourself in your bio as a "regional economist" yet then go on to talk a lot about Scottish this and Scottish that! I would have expected a man in your position and with your background to have been aware of the basic fact,that even my 5 year old grandson knows,that SCOTLAND IS A NATION NOT A REGION,no matter how much you unionist establishment lackeys would like it to be otherwise! In response to this article I can only assume you're gagging for some kind of dubious honour from your masters in Westminster!

[Saor Alba]

Another point that I found rather amusing was that an obvious unionist mouthpiece like yourself has the audacity to accuse the Scottish Government of spin! Pots and kettles spring to mind!

[George Bunbury]

Dear Saor Alba

Is it possible that a Cybernat like yourself could just for once not make a fool of yourself on a blog like this?

Brian's position seems to me that he is prepared to look for evidence before taking a position on whether or not he comes out in support of independence. This seems perfectly fair and sensible. If you resort to screaming abuse at economists like Brian Ashcroft, who are respected by all sides, then you do your own cause more harm than good.

[Angus McLellan]

If I can add to my questions, according to Wikipedia's collection of GDP and GNI figures, Ireland and Iceland seemed to be visibly outliers in terms of the ratio of GNI to GDP (using the World Bank's numbers) being in the c. 85% range. I picked another four countries - Netherlands and UK which I expected to show higher GNI than GDP and Australia and NZ which I thought might show the opposite. But I was suprised. The ratios there were quite tightly clustered, from 98% for NZ to 106% for UK.

So my question is this. Why should we expect the Scottish ratio to resemble Ireland or Iceland more than, say, Australia or New Zealand? Do we have evidence to support that or is it just a(n educated) guess?

[Brian Ashcroft]

GNP < GDP in Scotland because of the large number of multinationals operating in Scotland and the high level of external ownership and control of the oil industry. We are much more similar to Ireland than Australia or New Zealand I believe.

[Angus McLellan]

Many thanks for taking the time to reply. I'll take shameless advantage of your good nature and try for one more question.

If I had deep pockets and a team of highly skilled economists, statisticians and researchers on hand to answer to my every whim, are the data sources needed for them to calculate a GNP or GNI for Scotland available in the public domain?

I assume the answer is no, not because we lack statistically plausible data for foreign ownership but because we can make no estimates of Scottish ownership of foreign assets. (For example, I own a share in extractive industries around the world via my investments, but what my pension fund owns on my behalf is a bit of a mystery.) But perhaps I am wrong?

[Brian Ashcroft]

Yes, it is not easy but in principle it is doable but costly. One problem, is charting flows of income between Scotland and rest of UK, the other is disentangling flows to and from Scottish residents via the data held by the UK tax authorities, which may not make location sufficiently clear. These problems would be less the more Scotland had independent tax and revenue collection institutions and national accounts. I am not arguing for independence here! The Scottish Executive statisticians looked at the possibility of calculating a GNP statistics and concluded that the benefit - and dubious accuracy - wasn't worth the cost. I didn't agree with them.

[Angus McLellan]

Thanks for that clear and concise answer. It makes the next step clear too: write to my MSP! Thanks again.

[Frank MacDonald]

Brian,

There was a great deal of anemic critique and very little acknowledgement of what the Scottish Government has already done and is continuing to do with regard to securing inward investment. Although you utilise a pragmatic tone, I fear there's a hint of bias in either the analysis or the presentation. To be honest, I'm disappointed that a man of your experience would neglect the importance of a balanced article.

[Iain Gunn]

Let's look at it this way, for comparative study: should New Zealand and Australia join as a union? Would New Zealand be better off? What factors would be involved that would make this a bumpy ride?