The rate of growth of the Scottish economy has for long been below that of England, and even further below its counterparts among the smaller countries of North Western Europe. How can this situation be changed? Primarily by creating a business environment that’s attractive to entrepreneurs, not just native ones but foreign ones as well. When the pool of native business talent is quite shallow, as it is in Scotland at the present time, then the need to attract incomers is more urgent. Experience suggests that if you create a sympathetic environment, entrepreneurs will come. One third of the successful business start-ups in California between 1980 and 2000 had Indian-born or Chinese-born founders.
The modern recipe for economic growth is well-known, even if it is frequently ignored for political reasons. It can be illustrated by the experience of Singapore. When that country gained its independence in 1965 by leaving its political union with Malaysia, it was so poor that anyone who suggested at the time that Scotland would have anything to learn from a backward Asian country would have been laughed at. Today those same people would no doubt argue that Singapore was too rich a country for us to compare ourselves with. Singapore became rich by following a fairly simple set of principles that would have been appreciated by Adam Smith and his successors in the Scottish tradition of Political Economy.
The first principle is self-reliance. Right from the beginning, Singapore refused to accept foreign aid of any kind. By doing so it avoided a culture of dependence and established instead a culture of confidence. This is the exact opposite of the economic policies of the unionist parties in Scotland. The Labour Party openly advocates dependence on continuing fiscal transfers from the south east of England. This is the philosophy of the begging-bowl, or perhaps the cargo cult. It is a policy that is tacitly shared by the other unionist parties.
The second policy principle for modern economic growth is freedom of trade, with low rates of business taxation and light, but smart, regulation. Singapore is at the top of the World Bank’s annual Doing Business rankings, which measures the ease with which entrepreneurs can conduct business in a country. The metric uses 10 factors and covers 183 countries. Countries with better Doing Business rankings tend to have higher life expectancy rates.
A third principle is the rule of law. The Singapore strategy emphasises personal security, public order and the protection of private property.
Finally, there is stable money. A currency board provides stable prices and free convertibility at a fixed exchange rate which attracts foreign investment. It also delivers discipline to the spheres of money, banking and fiscal affairs.
What about Government? Singapore has a small, transparent system of governance that minimises red tape. It appoints only first class civil servants and pays them first class wages. In return for high salaries, the civil servants are expected to tolerate neither waste nor corruption. The Singaporean Government plays a central role in the country’s healthcare market. Its health care system is characterised by innovation (e.g. personal health savings accounts), simplicity and transparency, resembling neither the public monopolies of Europe nor the complex regulatory nightmare of the US.
This is light years away from the public sector scene in Scotland today. How can that change? Change will not be brought about by argument but by the facts on the ground. Governments everywhere, not just in the UK but throughout most of the Western world, are heavily in debt and have great difficulty in meeting their current expenditure commitments, especially the financial demands of their healthcare services and the needs for new infrastructure. Things cannot go on as they are. The alternatives are either higher taxes and lower public expenditure prolonged indefinitely, (“austerity”) or doing things differently. What we need is not just smaller government, but smarter government.
That improvement in public sector performance is possible in Scotland is demonstrated by the recent experience of Scottish Water, a public sector monopoly. When it was formed in 2002, the water industry in Scotland had operating costs and levels of service that were about thirteen years behind those of the same industry in England and Wales. Average household water bills in Scotland in 2002 were £19 higher than the average in England and Wales. Since then, operating costs have fallen by around 40%, so that household bills are now £50 lower than the average bill south of the border. This has been achieved by smart regulation providing strong incentives that reward both management and workers for meeting stiff targets.
Resources in the public sector in Scotland and elsewhere will be stretched for many years to come. A business-friendly environment, the only kind that will produce faster growth, means lower tax rates at both the corporate level and at the higher end of the income tax scale. Well judged reductions in tax rates should produce increases in tax revenues in the medium term, but in the short term increased taxes on consumption may have to take some of the strain. Consequently a fiscal regime in which income taxes alone are devolved will never be able to deliver economic growth, which is perhaps why this has been offered.
A further important role for Government is in the provision of finance for infrastructure. As Donald Mackay argues, only government investment in the necessary infrastructure will make the exploitation of many of Scotland’s natural advantages, especially renewable sources of energy, commercially attractive.
The recipe for promoting economic growth that Scotland can learn from the success of other states is that sovereignty brings two essential ingredients: the ability to design policies to suit the country’s own circumstances and a culture of confidence. As Keynes pointed out, the principal determinant of the level of private investment in a market economy is not the rate of interest nor even the level of aggregate demand but the state of business confidence. The prosperity that many other small states enjoy today is an indication of what is possible for Scotland.
Professor David Simpson founded the Fraser of Allander Institute in 1975, and was Professor of Economics at the University of Strathclyde from 1975 to 1988. From 1988 to 2001 he was Economic Adviser to Standard Life. From 2005 to 2012 he was Vice-Chairman of the Water Industry Commission for Scotland.