Rural wages are surging in Asia as fewer people enter the rural workforce and manufacturing growth draws people into cities, according to an important study by the Overseas Development Institute’s Steve Wiggins and Sharada Keats.
It’s a huge story. Wiggins says it’s “almost certainly the end of mass poverty in Asia” although he points out that pockets of chronic poverty will persist.
One of the most interesting impacts is on manufacturing wages: “manufacturers can’t get dirt-cheap labour off the land anymore, and they have to start putting up their salaries.” Industry will have to locate to inland China and low-income Asian countries like Cambodia, Bangladesh and Burma.
Fascinatingly, Wiggins also reckons factories will be forced to move to Africa, the last big pool of cheap labour. Until recently Chinese direct investment in Africa has mostly been resource-seeking, a hunt for oil and minerals. But cost-saving investment is also underway. Millions of jobs may move across the Indian ocean as factory owners try to cut the wage bill:
The World Bank reports Ethiopian factory wages for unskilled labour as being one-quarter those of Chinese wages. Logistics costs are higher, but overall costs are lower. Outside Addis Ababa, the first pioneer wave of relocated Chinese plants can be seen. Now these have broken the ice, how many more will follow? [Former World Bank chief economist Justin] Lin… speculated that 85 million factory jobs could leave China in the coming years. If half of those came to Africa, it would transform a continent where there is a surge in youth entering the labour market.
Duncan Green features the report on his blog under the title: “A wage revolution could end extreme poverty in Asia, with massive knock-on effects in Africa.”
Some of the commenters beneath Green’s blog express scepticism , saying that increased mechanisation will limit the benefits for Africa. Chinese iPhone contractor Foxconn is already replacing workers with robots, points out one commenter. Another cites an Oxford Martin School study showing that nearly half of US jobs could be at risk of computerisation.
Ryan Avent argues in the Economist that:
More manufacturing work can be automated, and skilled design work accounts for a larger share of the value of trade, leading to what economists call “premature deindustrialisation” in developing countries. No longer can governments count on a growing industrial sector to absorb unskilled labour from rural areas. …new work for those with modest skill levels is scarce compared with the bonanza created by earlier technological revolutions.
The rise of the machines, in other words, will rob workers of potential factory jobs.
I don’t buy this story, at least in poor countries. For a start it overestimates the kind of pay and work we’re talking about. Sierra Leone’s minimum wage, the lowest in the world, is 3 cents an hour. No machine can compete with that. The electricity costs of running a robot are higher, not to mention set-up and maintenance costs. According to Wikipedia the minimum wage in Uganda is US$ 29 a year. Tanzanians are lucky in comparison, earning a minimum of US$ 303 a year. (Whether or not many people actually earn the minimum wage and how much it will buy at local prices are different questions.)
The Oxford study might well be true but it’s less relevant in impoverished nations. Plenty of bottom-end jobs will continue to be performed by low-paid workers in the developing world. It just doesn’t make sense to fully automate garment manufacture when people will make t-shirts for a few cents an hour. Unfortunately not much computerisation goes on in clothing factories: it’s just rows of (usually) women sitting at sewing machines.
Premature deindustrialisation is mostly due not to automation but to neoliberal economic policies: sudden trade liberalisation killed off a lot of manufacturers. Inflation-paranoia and overvalued exchange rates added to the pain.
Some commenters worry about Africa’s low productivity and infrastructure. But these fears, too, are misplaced. Fifteen years ago people doubted whether China itself possessed the infrastructure for rapid development. Now much of the country is criss-crossed with highways and high-speed trains. Given the right incentives, foreign (and local) investors will build the infrastructure. Chinese roads and buildings are already springing up across the continent. The promise of profits can achieve miraculous things.
The productivity argument is similarly misplaced: productivity is, by definition, the ratio of output per worker, which is mostly influenced by the capital-intensiveness of production. A shoemaker can produce far more if she works on a production line than if she has to do the job on her own, from scratch. Africans are only less productive because they generally don’t currently work in factories featuring cutting-edge machines and production processes.
Economic development is by nature a process of increased investment. Almost without fail the fastest-growing countries are the ones with higher rates of capital formation. Ha-Joon points out that in China the ratio of investment to GDP was as high as 45% in the last few years. For the world as a whole it’s 20-22%, and in some African countries it’s only 10%. “No economy has achieved ‘miracle’ rates of growth (that is, over 6 per cent per year in per capita terms) over a period of time without investing at least 25 per cent of GDP,” says Chang. Worries about the existing state of productivity in African are really just worries about the lack of investment rather than legitimate fears about future prospects. Productivity is weak because investment is low; low productivity isn’t a deterrent to investment or an obstacle to growth.
The whole debate reminds me of 19th Luddite worries about machines replacing human labour. Whilst the industrial revolution cause a lot of pain, and governments must act to mitigate the impact on the worst-off, eventually new sorts of work emerged in response to the new economy. Workers in rich countries might legitimately fear that robots and computers will take their jobs, and the Economist report cited above points out that it’s mostly middle-level jobs which are at risk. But in much of the poor world the situation is completely different. Poor quality, low-paid work is here for a long while yet (i’m still not convinced that Africa will undergo Asian-style industrialisation, and in many countries the services sector might play a bigger role, but that’s another story).
People have also historically misunderstood the reasons and prospects for the outward expansion of capitalism. Capitalists didn’t just look overseas to get resources or establish new foreign markets; they went abroad to access cheaper (and sometimes slave) labour. Companies will keep hunting for cheap workers.
Little about this story is particularly pleasant — who really wants to flog away on an assembly line for a few dollars a day? — but for unemployed Africans or those living a subsistence lifestyle and facing the horrors of extreme poverty, it’s a bleak source of optimism. Some work is better than no work, and eventually it should enable many countries on the continent to start moving toward higher value-addition and better pay and conditions, not to mention the myriad other benefits of development. Unfortunately there’s only one thing worse than exploitation: not being exploited.
Image courtesy of jiggoja at FreeDigitalPhotos.net
A common worry during the Scottish independence campaign was that a separate Scotland would end up like Ireland: a rump state ravished by the international markets and forced to depend too much on foreign investment. So implied the BBC, Guardian and Independent.
But Alba isn’t Eire.
Scottish-Irish comparisons depend on a misunderstanding of the euro crisis. Lots of mainstream commentators like to blame the euro-victims for their own problems. They say that Greece, Italy, Portugal, Ireland and Spain all borrowed too much, fudged the numbers and failed to collect enough tax , overspending their way into a calamity of their own making.
But in reality the main problems were mainly structural rather than originating with governments. The euro project was badly designed and executed. Investors were never likely to shift funds quickly to economic dead-zones. Workers wouldn’t move to places with loads of jobs available because the chances are they probably couldn’t speak the language and they wouldn’t fit in with the culture. In the jargon, capital and labour mobility were limited and the euro-area wasn’t an optimal currency area, unlike the United States which has much more factor mobility.
To compensate for the resulting economic black spots, the eurozone should have a central tax authority that can redistribute funds and it should act to stimulate economic activity in areas suffering from low demand. As it was the limits placed on government spending were so tight that not much could be done to boost demand or help the unemployed — but in any case the lack of law-enforcement meant that most governments periodically broke the rules. As I said in this post, France breached official spending limits in seven of the 12 years after the euro began and Germany five.
A low interest rate that helped the sluggish north was never going to suit the more volatile economies of Greece, Portugal, Ireland or Spain. Cheap money helped inflate housing bubbles and allowed governments to escape the need for proper tax systems.
The eurocrats blame the Irish, but it was always likely that such a poorly-designed currency and lax enforcement in a global environment of historically low borrowing costs would prompt number-fudging, spending and undercollection of tax. This is not to absolve the Irish bankers and government, but Berlin and Paris like to forget their own misdemeanours. The austerity that accompanies their multi-billion euro bailouts is designed to perpetuate a system that supports themselves and their financiers, not primarily to help the periphery.
Scotland, clearly, doesn’t use the euro and might never do so. To imagine that it will somehow end up like Ireland is to miss this point and is to blame Dublin for structural failings that were not of its own doing.
One failure that can be attributed to Dublin is the 12.5% headline income tax rate, which left the government over-exposed to levels of consumer taxation which were among the highest in Europe. As spending dried up amidst the crisis VAT revenues dwindled, further draining state coffers. An undue reliance on indirect taxation was not only inegalitarian but was always likely to worsen slumps and inflate bubbles.
Scotland, of course, has no such plans to slash income tax or to raise VAT. The Scottish National Party said that if it got into power after independence it would cut the headline income tax rate only to 18%. It’s far from certain that the nationalists would rule in an independent Scotland and it’s not clear that the party would be able to follow through on its promise.
Oil is another issue on which this identikit celtic world comes to grief. Even on the most pessimistic projections the North Sea still holds up to 15 billion barrel equivalents. The SNP quotes a figure of 25 billion, which is up to a tenth of Saudi reserves. The existence of the slippery stuff, however unsavoury it may be in a hopefully decarbonising world, would help prevent a race to the bottom like Ireland engaged in — and Ireland was unfortunately successful in its race.
Partly because it had no natural resources, the Irish government embarked on an effort to solicit more overseas investment than a Dublin streetwalker at a stag party. Annual foreign direct investment inflows have been worth up to a fifth of GDP, with companies encouraged by tax breaks and, allegedly, the turning of blind eyes. Google, Apple and others effectively use Ireland as a refuge from British and continental tax collectors.
An over-reliance on FDI, runs the progressive argument, tends to force governments to liberalise markets and makes it difficult to do things like legislate in favour of workers and the environment or to introduce capital controls. The presence of large foreign players can hinder the development of domestic industry.
Scotland wouldn’t suffer so much from these problems because its economy is more diversified and it relies much less on FDI. No exact statistics exist but my own calculations suggest that annual FDI inflows are only about 1% of GDP (an average of £2.46 billion per year in an economy currently worth £248 billion). This would fit more or less with the UK, which according to the World Bank has yearly net FDI inflows of 1.9% of GDP. UK Trade and Investment data suggest that FDI created or safeguarded 55,034 Scottish jobs in the decade after 2003. Overall, Scotland’s economy generated 76,000 jobs in 2014, of which FDI generated less than a tenth. FDI created 13,000 Irish jobs during 2013 alone, a much higher proportion of the workforce than in Scotland. Irish exports, too, are more reliant on foreign investors than in Scotland.
Scottish FDI is increasingly resource-seeking, argues this recent paper. Normally this might be considered a bad thing. So-called efficiency-seeking investors are considered better for productivity growth; they employ workers for their brains, not heft. But Scotland’s inward investment is increasingly in renewable energy and natural resources, the kind of high-capital investment that stays put for years rather than fleeing at the first sight of a wobbly graph. Most other investors target Scotland because it is a source of innovation or knowhow — think Grand Theft Auto and renewable energy. Both the efficiency-seekers and the resource-seekers are in Scotland for its inherent advantages not its tax breaks.
Lessons can be learnt from the Irish experience: don’t join the euro, don’t lower direct taxes too much, use the oil revenues wisely and court the right kind of foreign investment. But this isn’t to suggest the two economies have much in common.
The kind of celtic conflation seen in the run up to the Scottish independence referendum is exactly the kind of thing I criticise in my book. It amounts to one-size-fits all theorising designed to ignore local circumstances and promote the same solutions everywhere; a kind of blindness to nuance that speaks always of models and types, not people and context. “To be sure, the only thing those tight-fisted wee sleekit celtic-types want is a good craic, so they do,” you can almost hear the financial commentators mutter. Progressives and nationalists can also be guilty of such obfuscatory generalisation — Scotland-Norway comparisons are overdone — but universalism usually benefits the status quo. We need to find out what’s going on from the bottom up and to see things as they really are, not as we’d like them to be.
Another reminder as to why Chris Dillow’s Stumbling and Mumbling is one of best blogs around. Some simple facts about the British economy:
Let’s just remind ourselves of the facts. Back in June 2010 the OBR forecast (pdf) that real GDP would grow by a cumulative 8.2% in between 2010 and 2013. In fact, it grew by only 3.1%. Partly because of this, the deficit is much larger now than expected. In 2010, the OBR forecast that PSNB in 2014-15 would be £37bn, or 2.1% of GDP. It now expects it to be £83.9bn, or 5.5% of GDP.
The economy has grown much more slowly than expected and the deficit is therefore much worse.
But then Dillow questions the very idea of ‘the economy’ as an actually-existing thing. A newer post on Baudrillard’s idea of hyperreality asks whether what we think of as ‘the economy’ might not really be what we think it is. Politicians and the media are “creating a symbol or set of signifiers which actually represent something that does not actually exist”.
All that matters is that policymakers keep the creators and sustainers of that hyperreality happy by seeming to alter those symbols and signifiers in a useful way. Where ‘the economy’ ends and the media begins might be a blur. Looking good in the media isn’t just a means to an end; it might be the end itself.
I’ve long doubted that ‘the economy’ is an object just like a table or an elephant. The concept is probably conditioned by the way in which it is discussed. Even the study of economics has all sorts of definitions, each of which affects the notion of what the economy is. Economists aren’t natural scientists studying fixed objects in an effort to find out the truth. They’re engaged in a process of narrative. And economics is personal, whether we like it or not. The idea of hyperreality might be a good way of thinking about these problems.
As Dillow suggests, it may be irrelevant whether or not the ‘objective’ realities of unemployment and poverty due to economic underperformance cause people physical unhappiness. These people aren’t the creators and purveyors of hyperreality.
The last-minute promise of devo-max is probably the main reason for the Scottish No vote. But lots of voters appear to have had doubts about the economy. According to Ashcroft’s post-independence polls, 47% of No voters cited “the risks of independence when it came to things like the currency, EU membership, the economy, jobs, and prices” as the most important reason for rejecting independence, compared with two other choices.
Keeping the pound was much more important for unionists than for Yes voters; jobs and prices marginally more so. The Aschroft poll shows that 19% of No voters made their minds up in the last month or later, even if the majority of the anti-independence crowd always knew which way they’d vote. Better Together only needed to implant fear about the economy in some wavering minds at a late stage in order to tip the balance toward the union.
I suspect that a more credible economic plan could have swung these no-voters — people who want more fairness and a voice but who were swayed by promises of more powers and were too worried about the economy to vote for full separation.
All potential breakaway nations face economic uncertainty. As it happens Scotland’s worries were nothing compared with most of the countries to have previously split from England. As William K. Black argues on the site New Economic Perspectives: “The risks that the Scots take in voting for independence does not even begin to compare with the risks taken by their Americans and Irish counterparts.”
Consider … the economic results of the major “Western” nations that have chosen independence from England: the U.S., Canada, Australia, New Zealand, and Ireland. Each of those nations must be considered among the world’s greatest success stories on economic, political, and social grounds.
So risk in itself isn’t at issue. Of course an independent Scotland would face an uncertain future, just as it does now. It was the lack of a credible alternative that really put off potential Yes supporters.
One of the victories of the No campaign was its ability to conflate independence with rule by Salmond. The personal
unpopularity divisiveness of the First Minister and his dominance of the campaign (maybe the Darling debates weren’t such a good idea) made it easy to gloss over the realities that Scotland would have an election in 2016 to vote in the first Scottish parliament and that the opinion polls at the time predicted a small Labour majority.
But given that Salmond was a figurehead, he should have admitted that Scotland probably wouldn’t be the land of whisky and cranachan in the years after independence. Voters were too smart for that. He should have instead acknowledged the short-term difficulties Scotland would undoubtedly face after the election, such as a budget deficit of 5.9% of GDP (even though the budget was in surplus on average from 1980 to 2012) and the restrictions on fiscal policy faced under a currency union or sterlingisation. Salmond and the Yes campaign should have focused more on the long-term possibilities for economic expansion that couldn’t be accommodated within the union.
I don’t really know why Salmond refused to be realistic. Perhaps he’s too much the politician, always fearful that the media would seize on any negativity: promise the world and voters will buy half of it. Maybe he was just so blinkered by the proximity of his lifetime goal that he couldn’t even admit to himself that there’d be problems in the early days. Perhaps he was too worried about business, although he shouldn’t have been. Lots of corporate bosses openly supported independence and many understood that an expansionary policy would be good for them because it would boost demand.
So it wasn’t risk per se that swung it for the No camp. It was a lack of a believable alternative and the refusal of Salmond to outline a plausible plan for the currency. Scotland could have launched its own currency several years down the line after establishing its creditworthiness. A credible long-term economic alternative has already been outlined by several prominent economists, in the form of expansionary policies aimed at reflating the shrunken economy after seven years of decline and stagnation.
Given Salmond’s professed Keynesian leanings, you’d think he would have trumpeted his sensible approach here. In a 2012 lecture he talked about safeguarding capital spending, encouraging investment and creating jobs — all of which would help reduce the deficit as unnecessary benefits payments fell and revenues rose. He rightly cited nationalised Scottish Water as an example of success but criticised the Treasury rules which effectively penalise the Scottish Government if Scottish Water decides to borrow. Salmond talked in expansionary, Keynesian terms of the need to alter taxes so as to boost specific parts of the economy, something which Westminster is not in a position to be able to do.
What many people don’t seem to realise, and what the Yes campaign should have hammered home, is that austerity has failed; that the national debt has continued to rise partly because the government withdrew so much money from the economy, shrinking demand. And we’ve mostly bought the lie that the national debt is at historically high levels. Actually it’s about 80% of GDP, much lower than throughout most of history and not particularly large by current global standards. Debt was much higher in the 1930s when Keynes urged governments to spend their way out of recession. Scotland has an opportunity to do things differently to Westminster.
What Salmond was perhaps less likely to do from his conventional perspective was to focus on an alternative vision for the future. With a reflated and more stable economy Holyrood could then afford to focus on redistribution and wellbeing rather than simple individual enrichment. Many Scots seem to acknowledge the need for greater equality and environmental sustainability, not to mention an economy that makes them happier.
Because that’s what I think the economic debate boiled down to: a short-term beancounter’s approach versus the economics of long-term possibility.
A new publication from the Overseas Development Institute lists 10 policy priorities for the new EU trade boss. The last trade commissioner, Karel de Gucht, was said to be a bit, ahem, brusque with poorer countries. In an attempt to get in early while his replacement Sweden’s Cecilia Malmstrom is still arranging the pencils on her desk, the ODI lists ways in which the EU can help developing countries trade their way out of poverty. Dishing out billions of euros in aid makes less sense unless the EU helps poorer countries take part in the global economy.
The ODI calls broadly for measures aimed at helping developing and least developed countries to build the export engine. Until now global efforts have focused largely on market access rather than the supply-side, imagining that the smallest countries can magically develop the ability to sell to the EU market without support. Some countries can’t meet EU standards. The ODI asks the Trade Commissioner to bear in mind the consequences of EU bans on poorer countries. Europe should have helped Nepal to meet its rules on honey rather than the product being banned.
The ODI booklet also encourages the EU to reduce average tariffs on developing country imports and to abolish the tariff peaks which effectively restrict some of the main exports from developing countries. Apparently Pakistani whey exporters have to pay a levy of over 100%.
The thorny issue of agricultural exports also makes a justified appearance. Despite deciding to abolish support for farm export subsidies the EU still spends 50 billion euros on agricultural subsidies, nearly 40% of the total EU budget. “The EU currently spends 255 million euros subsidising its farmers to grow cotton rather than importing cotton from developing countries”, says the ODI. The EU should make its abolition of agricultural export subsidies legally binding and shift subsidies away from crops like cotton that developing countries produce more efficiently.
The ODI also says that developing-country voices must be heard whilst making trade rules, urging a commitment to the UN sustainable development goals which includes a commitment to a new global trade framework that goes beyond market access for the poorest nations.
Another particularly sensible aim is to increase services exports from Least Developed Countries, which until recently received less preferential access for services exports to the EU than for goods. A waiver agreed at the WTO would help the EU grant preferential access to these countries. The waiver hasn’t been applied yet.
Whether the controversial and headline-grabbing Transatlantic Trade and Investment Partnership between the EU and the US consumes Malmstrom’s time remains to be seen, but the 10 points listed by the ODI would be a useful place to start on development.
The 10 points are:
1. Strengthen the link between development and trade in EU policy-making
2. Ensure developing-country voices are heard in making trade rules
3. Diversify trade with developing countries
4. Abolish tariff peaks
5. Revise rules of origin for 21st century trade
6. Protect poor countries from trade defence measures
7. Provide a level playing field for agricultural trade
8. Promote environmentally-friendly trade with developing countries
9. Build the capacity of developing countries to meet EU trade standards
10. Increase business networks between EU and developing countries.
I’ve tended to steer away from the debate over Scotland’s finances because it’s not my professional area and because it all gets a bit “he-said”, “she-said”. Westminster concocts one set of figures and Holyrood another. I’ve no independent yardstick by which to measure which numbers are more accurate. Much of the answer comes down to logic and clear-thinking, free as far as possible of material interests or ideological predispositions. For those reasons i’d be more than happy to receive constructive comments on the following.
What seems clear is that Scotland’s fiscal situation would be viable in the early days, despite the scaremongering. And in the long term Scotland would have the opportunity to pursue an expansionary economic policy which would in turn create the finances to sustainably pursue its social goals. A new Scotland could surely pay for itself?
Looking at the short-term data you’d be forgiven for thinking that the inevitable currency union with England or the less-preferred option of using the pound independently would restrict Scotland’s fiscal options. Under a currency union the Bank of England would impose spending limits on Scotland. Without a currency union the cost of borrowing would increase as international borrowers demanded higher returns, leaving Holyrood with less cash.
There wouldn’t be oodles of money around. In addition fiscal space would be limited because higher taxes would, all other things being equal, tend to frighten away companies and may reduce investment (although the corporate fearmongering of the last week is vastly overblown and is really about shifting brass plates. These companies are just sending a signal to a future Scottish administration not to regulate them or make them pay more tax. Most of them already threatened to leave in 1979 and 1997.) Lower taxation might reduce revenues and encourage a mutually-destructive race to the bottom.
Some people argue that despite political separation that this economic straitjacket would limit true independence. Where would the money come from to pay for Scotland’s enlightened social policy?
It’s a question certainly worth asking. With a budget deficit of 5.9 per cent of GDP using a geographical share of oil, according to this perspective Scotland’s fiscal options appear further limited in the near term, just like the UK’s.
I’m not one of those starry-eyed nationalists who insists on the holiness of everything after independence, but a few reservations need to be voiced about this story.
First, it’s important to look at the long-term data rather than just the last year. As pointed out by the Scottish government’s Fiscal Commission Working Group (Profs. Andrew Hughes-Hallet, Jim Mirleess, Joseph Stiglitz, Frances Ruane and Crawford Beveridge) over the period 1980-81 to 2011-12 Scotland is estimated to have run an average net fiscal surplus equivalent to 0.2% of GDP. The UK, in contrast, ran a net fiscal deficit of 3.2% of GDP.
“Taking both spending and taxes into account Scotland’s national balance sheet has been healthier by £12.6 billion over the past five years for which data is available”. There’s no reason to believe that over the long-term a similar trend might not re-establish itself as global stability increased. Oil, sustainable energy, tourism, food and beverages, tourism. Scotland is a world-leader in them all.
Second, austerity has not only been unjust but economically counter-productive. It’s worse than useless. Paradoxically (and to heavily simplify Keynes) when interest rates are almost at zero during a recession the less the government spends the more the economy stagnates. Paul Krugman, despite his faults, has been one of the better critics of austerity. There’s no magic level of debt below which governments must unfailingly remain. Private debt is anyway a much worse problem, at around four times that of government debt.
So Scotland’s current budget deficit isn’t crippling and wouldn’t rule out spending to stimulate growth or to redistribute wealth. We’ve been sold the lie that governments are like households and that we’re all in some sort of collective belt-tightening exercise. This is nonsense. A sensible government could try to stimulate domestic savings and investment. Government infrastructure spending can reap higher returns than the likely borrowing costs (which in the UK are at historic lows), even after independence.
And if you believe in infrastructure crowding investment in, not out, and in a multiplier effect, then the long-term broader economic benefits can justify the rise in debt (which might be lower than England’s if they do a deal based on refusal of the use of Sterling). None of these ideas are original – they’re all well-known to economists of a broadly Keynesian persuasion, like Krugman.
Funnily enough Krugman came out in recent days in support of the union because he believed separation risked emulating the euro crisis. The problem with the Eurozone, lots of economists say, is that it comprises separate countries with no mechanism for fiscal transfers and has no free movement of capital or labour.
Now I’m no Nobel prizewinner but even I can see that Scotland’s and England’s economies would be similar enough to prevent a euro-style crisis. In the neoclassical jargon, they’re an optimal currency area. Workers and capital will still be able to move freely over the border after independence. Yes, a key problem with the eurozone was that it didn’t have fiscal powers – ie. it couldn’t spend more in the economic blackspots and rein in the overheating areas — but that’s only a problem because the euro economies were so different and because it’s not an optimal currency area. I can’t see any scenario under which an independent Scotland would end up like Greece or Portugal.
In the long run when credibility is established, and when the English and Scottish economies began to diverge Scotland should launch its own currency, giving it more freedom to pursue its social and political objectives. That’s what Ireland did after independence.
As it happens Scotland only controls 58% of its spending under a block grant. Self-evidently, full control of the budget would create far more fiscal freedom. Members of the Scottish Parliament would become more accountable if they were responsible for raising revenue as well as spending it.
Even with the fiscal constraints that would undoubtedly exist there’s a certain amount of wiggle room. Mainstream economists talk as if there is a direct one-to-one correlation between monetary and fiscal policy when in reality there are significant avenues for divergence. Real economies aren’t carbon copies of the university models. Panama ≠ the US ≠ Hong Kong. Brunei ≠ Singapore. And how can the Westminster parties talk of allowing Scotland to raise its own debt under devo more or max but predict economic collapse under full independence?
As the Fiscal Commission Working Group points out, even if the overall budget is fixed, an independent Scotland could decide how it shared out the pie. Fiscal flexibility is a necessary part of a successful currency union: “Limitations on borrowing and deficits are typically at the composite level, and still allow for flexibilities in the design of the underlying tax system and a range of specific policies suitable for each Member State. Indeed, such flexibility is vital to the success of a monetary union as it provides the autonomy and policy levers to target country specific differences (advantages and weaknesses) which cannot be tackled with a common monetary policy. This should help ensure alignment in terms of economic performance. It is also vital for democratic accountability and legitimacy.”
I see newly-independent countries as successful insofar as they seize and develop the levers of economic and political power and use them to shape policy to their particular circumstances, rather than imagining that they are victims of capital. Expansionist or statist policies actually work — they stimulate economic activity — rather than just being a bulwark against the erosion of social welfare.
The Working Group details the levers of economic control that would be available to a Scottish government given suitable currency arrangements but which aren’t available now.
On the fiscal side these include:
- Corporation Tax (base and rate)
- Oil and Gas Taxation
- Excise Duty
- Value Added Tax (VAT)
- Air Passenger Duty
- Capital Borrowing
- Welfare and Social Security
- Public Sector Pay/Pensions
- Environmental taxation
Non-fiscal levers of policy include:
- Financial Regulation
- Consumer Protection
- Industry Regulation
- Energy Markets and Regulation
- EU Legislation
- Competition Law
- International Trade
- UK-Level Public Goods
- Public procurement.
Ultimately Scotland’s economy wouldn’t be all that different, at least in the early days. But it would be viable, and fears about fiscal straitjackets are vastly overblown. Even the Financial Times says so. In many ways the naysayers fall victim to the austerian hype that’s pervaded Britain since the crisis. There’d be wiggle room. Scotland could distribute the pie how it wanted even if the overall sum stayed similar. And in the long run an expansionary policy would generate the tax revenues necessary for a more fair and just social system. In my eyes much of the debate boils down to an economics of short-term accountancy versus an economics of dynamism and possibility: beancounters versus visionaries.
None of this viable economic future is guaranteed under an independent Scotland, and of course I could be wrong about the prospects for an expansionary Scottish policy. But what’s all-but-certain under Westminster rule is more of the same old inegalitarian, uncaring, me-first policy which puts private interests before the public good and works to shrink the state. As the Yes campaign has said all along, a vote for independence is about hope, not fear.
As the establishment tightens the frighteners to Orwellian levels I thought I’d rejig my May post on Scottish independence.
The no campaign portrays Scottish independence as a leap into darkness. Within the union, the conventional reasoning goes, Scots know what they’re getting.
Project Fear thinks it only needs to periodically tweak the buttons on the scare-o-meter and Scots will scurry back to their tellys, allowing Westminster to carry on undisturbed.
Quite the contrary. For many Scots the union could prove more unpredictable than independence. Here’s why:
1. Europe is a source of immense uncertainty. I overestimated UKIP’s European election gains in my original post but they still did worryingly well. The danger isn’t UKIP itself: it’s a party of plonkers with quarter-baked policies. The real problem is that mainstream parties couldn’t wait to ape Farage. A month after the European elections senior Liberal Democrats tried to back the Tory proposal to hold an in/out referendum on Europe. This, from a party whose DNA is practically Belgian. The Lib Dems will hold a referendum if UK sovereignty is passed to the EU and won’t oppose the Tory motion on a referendum in the House of Commons.
Labour’s Ed Balls says “if there is any proposal in the next parliament for a transfer of powers to Brussels we will have an in/out referendum.” The website LabourForaReferendum.com features a couple of dozen of prominent party members. Last month UKIP predicted Labour will promise an in/out vote after the general election. And the Farage-o-philia is more than just a temporary trend. It’s the culmination of a long-term shift to the right in some areas and an expression of some peoples’ lack of voice.
All the parties continue to blurt out ill-considered statements on immigration and Europe. The prospect of UKIP getting even a seat or two in Westminster is horrifying, and holds open the prospect of Labour and the Tories continuing to out-Farage Farage. Who knows? Scottish politics is more predictable.
2. The promised referendum on EU membership means Scotland may be forced to choose between a union with England or with Europe: a source of scariness which Scots can’t do much about. Scots will go to the independence vote in the knowledge that England could quit the EU. Ditching Brussels might even create more instability than severing ties with Westminster. Contrary to what the No campaign says the EU is unlikely to freeze out Scotland. That’d be ridiculous given an independent Scotland’s democratic mandate and EU-compliant laws.
3. The London housing bubble will burst sooner or later. I was probably wrong in my original post to say definitively that the bursting of the bubble would cause another economic downturn – bubbles seem to linger for eons, and it’s possible the capital’s could be contained — but it’s certainly a source of potential instability. London house prices leapt by an average of 19.1% in the 12 months to July, with the average breaking half a million pounds for the first time. That means that in a year prices in the capital rose by enough to buy a decent semi in Dunfermline. The housing wealth of just 10 London boroughs could buy all the homes in Scotland, Wales and Northern Ireland combined.
Japan’s asset price explosion carries eerie parallels. In 1989 the land underneath Tokyo’s Imperial Palace was rumoured to have been worth as much as the entire state of California in the same year. We’re not quite there yet but the Japanese crash caused the economy to flounder for decades.
Scotland should distance itself from any similar calamity. Independence provides the opportunity to do so and to tackle the housing problem. A Scottish parliament could give councils the full powers to build new homes. It could change housing-specific taxation and in the very long-run a Scottish central bank could potentially follow Norway’s lead in deploying macroprudential tools like ceilings on loan-to-value ratios.
4. The London financial sector remains the biggest source of risk for the UK economy. Independence would reduce this source of instability for Scotland. City cheerleaders tout the square mile as a source of strength when in fact the banks avoid more tax than other industries, create fewer jobs, suck in talent which would be better employed in productive industries and over-concentrate economic activity. Finance caused the global crisis and has even been described as a curse. Most popular Scottish parties recognise the risks of over-reliance on finance.
5. Scotland plans to use North sea oil to foster stability. Scottish parties broadly support the oil fund and talk of the need to invest the proceeds from oil or use it to pay down the debt, unlike the Westminster parties which would continue to fritter it away. Nobel prize-winner Joseph Stiglitz was correct to say that Britain should have invested its oil revenues from the start instead of squandering them to prop up the shaky 1980s economy. Thatcher’s public spending cuts were only viable because of a readily-available stream of hard cash. If Scotland stays in the union there’s no reason to believe much would change.
6. Scotland’s electoral system improves policy certainty. The first-past-the-post system, as is well known, means Westminster parties can foist policies on to Scotland without having to bear the consequences. A certain well-known Chinese zoo animal is more common in Scotland than Tory MPs are, so the Conservatives can test out their inegalitarian schemes north of the border first without losing MPs. Think poll tax and privatisation. Who’s to say they’ll behave any differently if Scotland votes no on the 18th?
A winner-takes-all electoral system generates boom and bust. The Condem coalition is currently praying that it can sneak back in before the property bubble pops, a bubble it has purposefully pumped up in order to make its own electoral base feel richer. Holyrood is more consensual and gradualist – not because Scots are more touchy-feely, but because the system was designed that way. And the white paper is in effect the SNP manifesto (not that Scotland is voting for Salmond), bringing greater clarity to the debate than any Westminster party is able to.
7. Continued austerity makes everyone worry about the future, not just those whose benefits are being cut. All the Westminster parties have pledged to continue with the austerity agenda. The cuts have plunged tens of thousands of Scots into poverty, causing some with mental health issues to starve to death or kill themselves. One charity boss called this a “crime against humanity”. According to the BBC over a hundred thousand more Scots fell into poverty in 2012-13, bringing the total to 820,000. Nearly a fifth of children live in poverty. How is this possible in one of the world’s richest economies? How stable are the futures of those children?
At a less extreme level, unemployment benefits calm people’s fears about their prospects and allow the temporarily jobless to look for work: it’s called social security for a reason. Independence would create the opportunity to build a fairer society. More equal societies are usually more stable, with less poverty and crime, better education and more cohesion. Greater equality is in the interests of the rich as well as the poor.
8. Economic stagnation throws doubt over jobs and wages. Even if you’re lucky enough to have a job, you’re likely to be worse off now than six years ago given that on average real wages have fallen. News today showed that the number of people who aren’t in the UK labour market increased again even though unemployment has fallen to 6.2%, which is still an unacceptably high rate.
Economists talk of ‘secular stagnation’ – code for permanent slump. All the signs are that any independent government would reflate the economy and tackle unemployment. Government spending will more than pay for itself in the long run in the form of higher tax receipts and lower social security payments.
An independent Scotland won’t be paradise. Few sensible economists predict a starry future immediately after independence. But there’s little doubt that the economy will be viable and that Scots can be wealthy enough.
Osborne’s ultimate economic scare story – that he wouldn’t let Scotland keep the pound – is just bluster. It’s not likely to be his decision anyway, and why would England purposefully cripple one of its main trading partners? Trident and the share of the debt constitute powerful bargaining chips. Even if Scotland were excluded from a currency union it could use the pound if it wanted to in the first years after independence, just as Ireland did, and much like the 20 or more countries which use the dollar or peg their currencies to it without Washington’s say-so.
Don’t believe the scaremongers. In a sense the union has always been a source of uncertainty for most working Scots. They’d be safer distancing themselves from the southern stramash and crafting sane policies which Scotland actually voted for.