Scotland: The unanswered questions: The Economics

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The Independent Online
Devolution has to work in economic terms too. The main thrust of the debate over Scotland's future has been in political terms; where economics has entered it, it has been over the single issue of tax-varying powers - relevant to the economy of course but hardly crucial to its future.

This is odd. If devolution is to be a success it must be an economic success. If in 20 years' time Scots are materially poorer than English people, devolution will catch much of the blame; if they are significantly richer it will get much of the credit. Devolution is not independence; but its perceived success or failure will influence that debate too.

What do we know about devolution and economics? Not a lot. Predicting the consequences of any political change on an economy is fraught with peril. Why did the separation of Singapore from the Malaysian Federation power an economic triumph? Will political change in Hong Kong herald an economic downturn? But if one talks about countries rather than regions one thing does seem pretty clear. It is no longer necessary to be big.

One obvious reason is that you no longer have to be a big country to have access to a big market. Singapore is tiny but can sell to the world - a population of 2.9m has nearly two and a half per cent of world exports. A series of related developments have changed the economics of size.

Most obvious of these is the emergence of regional blocs like the EU and now Nafta. More important, I think, have been the changes in the nature of trade: the surge in the trade in intellectual property, rising foreign direct investments where countries ship the money and the know- how to build the goods rather than the goods themselves; the fall in telecommunications costs which means that there is no longer any economic fringe. The best example of this last phenomenon is the growth of call centres - people answering telephones. This has been the biggest single source of new jobs in the United States over the last five years and is in the process of taking off in Europe too. With cheap telecommunications a call centre can be anywhere in the world.

So how does Scotland - certainly as a more independent region, maybe eventually as a more independent country - fare in this changing world? And how does devolution help or hinder its competitiveness?

I think over the next generation the balance of economic advantage will tend to shift Scotland's way. It has certainly shifted Ireland's way partly as a result of EU subsidies but more because of the successful attraction of international investment to take advantage of its young, well-educated population. One fascinating question is to what extent is the Irish experience of economic independence relevant to the coming Scottish experience of economic devolution. (I should say that I am an Anglo-Scot, brought up mostly in Ireland!)

There are I think at least four economic lessons and maybe a political one. Lesson one is that neither country is any longer on the economic fringe. Cheap air travel and very cheap telecommunications make it possible to export output anywhere in the world. This does not necessarily confer a new advantage on Scotland, but it does mean that a long-standing disadvantage has now gone.

Lesson two is that cultural capital is enormously important. Both countries have it in spades, not just producing products which embody that culture, like whisky and Guinness, but rather being able to export culture in subtle ways. For example, only this week a new survey showed that Irish and Scottish voices were the most helpful for people seeking a job. Sounding trustworthy is an extraordinary asset in a world where telecommunications becomes more important.

Lesson three is that education is enormously important. Education is a much more complex and subtle thing than most people appreciate: that mix of intelligence, order, innovation, flexibility, even charm. The Irish education system seems to have lifted its game dramatically in the last 30 years and has interacted with political self-confidence to produce employees who are extremely attractive to international investors. Does devolution enable Scotland to improve its education system still further? And if not, why not?

Lesson four is you have to flexible on tax. This is simply to point out that the Irish economic renaissance has relied heavily on tax breaks to attract foreign investors. There is a danger here of caning domestic taxpayers in order to bribe distant companies. But cleverly used, Scottish flexibility on taxation could mimic the Irish experience. Scotland will need to be thoughtful about the way it uses its tax leeway - assuming it gets it.

This points to the political lesson. For the first years of Irish independence the government was preoccupied with asserting the country's identity. Economics took a back seat and the economic take-off only really began 40 years after independence in the 1960s, even before Ireland joined the European Union. I suggest that the delegates in the Scottish Assembly need to think about economics because political activity on its own will not make the Scottish economy more successful. You can see how political autonomy might reinforce the plus points noted here. But you could also see how inept politicians could stifle them. In particular local politicians need to think hard about how they work to raise the human capital of the land - something that is much more important than the physical and financial capital. How do you create the buzz that builds human capital? I don't know. But I know that Scottish politicians need to think about this and I worry that they don't.

It is surely worrying too that tax-varying powers should be discussed as tax-raising powers, rather than selective, well-targeted, tax-cutting powers. It's worrying that there should be such a pre-occupation with tax when so many government functions now turn on employing existing resources more effectively rather than simply spending more resources. Besides, governments have ways of nudging society that go far beyond taxing and spending as indeed the UK government is now demonstrating; encouraging , persuading cajoling, charming. So too should assemblies.