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Scotland’s economy would be viable

September 17, 2014
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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
  • Housing
  • Environmental taxation

 

Non-fiscal levers of policy include:

  • Financial Regulation
  • Consumer Protection
  • Industry Regulation
  • Energy Markets and Regulation
  • EU Legislation
  • Competition Law
  • International Trade
  • Immigration
  • 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.

Eight reasons why staying in the union could destabilise Scotland

September 17, 2014

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:

worried-cameron1. 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.

Winners and losers in Scottish history

September 5, 2014

Sometimes the Scottish independence debate seems to take place in a kind of two-month old bubble, with the media’s idea of “political history” the outcome of a June opinion poll. But it’s important to look at Scotland’s more distant past. Unearthing the background, interests and motivations behind the main protagonists in the current campaign helps provide context to the vote and leads to the identification of future gainers and losers. To disaggregate should be the goal of most political economy. Scots aren’t all going to fare the same under independence. Many in the no camp are simply those with something to lose. Those who vote yes hope for a better future.

Here’s a couple of fascinating passages from historians Neal Ascherson and Tom Devine (who’s just come out as Yes man).

The first, from Ascherson clarifies Scots’ role in empire: “Scots… established distinct and almost exclusively Scottish fiefdoms: the fur trade, the tobacco trade, the jute industry, the opium business in China, the “hedge-banking” outfits in Australia, the executive levels of the East India Company. Later in the 19th century, in the second phase of industrialisation, the Clyde basin achieved something approaching world domination in shipbuilding, locomotive and bridge construction, and other branches of heavy engineering. Overseas enterprise was a pattern of near monopolies from Scotland’s regions. The Hudson’s Bay Company was staffed by Orcadians; its Canadian rival, the North West Company, was run by Highlanders; the sugar plantations of Jamaica were packed with younger sons of Argyllshire lairds; the great trading houses of South East Asia were mostly family businesses from Aberdeen and north east Scotland; the outflow of foreign investment was cornered by Edinburgh solicitors.”

Many modern-day exporters, industrialists, financiers and solicitors are largely against independence because they have, unsurprisingly, something to lose by leaving the British state — although some should perhaps be more aware of their inglorious heritage.

According to Devine: “the sugar, tobacco and cotton produced by these slave-based economies were absolutely central components in Scottish overseas commerce for most of the 18th century, and the dominant factors in the country’s international trade to a much greater extent than even the equivalent sectors south of the border.” Scottish regiments provided “the military cutting edge of the British Empire”. (Devine, T M, 2011, To the Ends of the EarthScotland’s Global Diaspora (Allen Lane): pp37, 26.)

Scotland’s unique role in slavery and colonialism is why i’m not a patriot or nationalist. We should be voting for a break with this past.

But what’s also interesting is how the same economic process that enriched some ultimately led to stagnation and impoverishment for others. Devine argues that even before the first world war a lack of domestic opportunity slowed industrial progress as capital flowed abroad:

“The strategic weaknesses of the extraordinarily successful Scottish heavy industry economy were now revealed in stark detail. The achievement had been built on low wages and the interlocking critical mass of shipbuilding, engineering, coal, iron and steel, which fixed the economy into the past rather than creating fresh opportunities for the future. Despite some attempts, the “new” consumer-based manufactures (household goods, electrical products, motor cars and cycles), which were expanding south of the border, did not take off in Scotland because of the levels of relative poverty among the mass of the population and the small size of the domestic market. The nation, therefore, missed out on the next big stage of economic development.” (Devine: p249).

Ordinary Scottish people have been living with the consequences of this missed opportunity ever since. The Westminster political parties want to maintain a hands-off approach to economic policy which would ensure that Scotland remains mired in its underperforming past. Most Scottish parties favour an activist industrial policy which would propel the country into a more equal, prosperous future. Unsurprisingly many of the modern beneficiaries of Scotland’s inglorious past want to preserve the union. The grandchildren of those on the losing side — ie. most of us — should be arguing for separation.

Generations of over-ambition?

August 24, 2014
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Owen Barder lists 21 people who have claimed over the last century that ours is the first generation that can eradicate poverty. In 1919 Woodrow Wilson declared that “For the first time in history the counsels of mankind are to be drawn together and concerted for the purpose of defending the rights and improving the conditions of working people”.

This month Eric Solheim, chair of the OECD Development Assistance Committee, became the latest: “We are the first generation in history with ability to eradicate extreme poverty from the planet. The great kings, caliphs and emperors of the past would not have known how to go about it or how to pay for it.”

Owen’s unspoken point seems to be [Some people] argue that they’re all wrong, that social planners with their grand designs have repeatedly failed to eradicate poverty so they should probably stop trying. People like Owen [Some people] argue that poverty reduction is probably better achieved from the bottom up, using markets instead of goal-setting.

[NB. Owen says in the comments that this isn't his view, that we need to "will the means and the ends". Very sensibly this implies that it's not enough just to promote targets; we should also make mechanisms and funding available to achieve those goals. People like William Easterly are probably more typical critics of social planning and grand designs. Here's some more anti-goalism.]

Hold on a minute. A century is a tiny droplet in the ocean of human history. Just because a few high-minded world leaders came up short of their ambitions in the last few decades doesn’t mean the world should abandon its worthy goal.

The range of figures Owen cites is striking: from British Prime Minister David Cameron, to Jim Kim, president of the World Bank, to Tony Blair, Nelson Mandela, the Heritage Foundation, Henry Kissinger and John F. Kennedy.

Surely the unanimity of their ambition means something? It’s encouraging that right-wing warmongers and deified leftists can agree not only on the desirability of reducing world poverty but also that they predict poverty’s demise. It must be about the only thing such a wide range of political figures agree on! Some of them must know — at least a little bit — what they’re talking about. And if it’s just rhetoric, the politicians are presumably responding to popular demand for social justice.

World poverty has tumbled dramatically in the last century. Without goals to aspire to, without leaders setting targets, surely poverty reduction would have been a lot less. In my mind it’s probably despite the increasing domination of markets that poverty’s fallen, not because of it. After all the Washington Consensus period of liberalisation has been widely condemned by poverty specialists, partly because it brought a fall in African per capita incomes during the 1980s.

Solheim’s half-right: the kings, caliphs and emperors not only wouldn’t have known how to eradicate or pay for the eradication of extreme poverty, they wouldn’t have wanted to. Slavery, destitution and unspeakable inequality were central to those pre-democratic societies. Ours is the first epoch in which ending poverty is seen as either desirable or possible.

In another context the historian Eric Hobsbawm in his autobiography cites a late 1980s play by an East German dramatist called The Knights of the Round Table:

“What is their future? wonders Lancelot. ‘The people outside don’t want to know any more about the grail and the round table… They no longer believe in our justice and our dream’… Does he himself still believe in the grail? ‘I don’t know,’ says Lancelot. ‘I can’t answer the question. I can’t say yes or no…’ No, they may never find the grail. But is not King Arthur right when he says that what is essential is not the grail but the quest for it? ‘If we give up on the grail, we give up on ourselves.’ “

“Only on ourselves?” asks Hobsbawm. “Can humanity live without the ideals of freedom and justice, or without those who devote their lives to them?”

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Hobsbwam, E. (2005) Interesting Times: A Twentieth-Century Life, The New Press, New York: p.151

Why I’m voting for Scottish independence

August 22, 2014

photo (5)

When God was making Scotland he created a country with fabulous scenery, full of lush greenery, deep lochs and high mountains. In it he placed a people of warmth and character and a language of great beauty and poetry. A Scotsman asks God, “Oh Lord, what have we done to deserve this?” God replies, “Better not thank me yet, just wait until you see the neighbours I’m giving you!”

As someone from an English background growing up in Scotland I used to shrivel at those sort of jokes. I remember modifying my rounded vowels so that people wouldn’t sneer. My parents, born well south of the Tweed, once went to a party held by a neighbour, who, forgetful after a few drinks, confided in them that he “hated the English”.

I sometimes felt I had a vague inkling of what it must be like to have a different skin colour among bigots. The slight stiffening of posture; the difference in tone.

Here’s another typical quip:

A visitor to Scotland was walking through a farmer’s field one day when he spotted a pool of water. He was thirsty and began to drink from it, scooping the water out with his hand. When the farmer saw what he was doing he cried, “Laddie, dinnae drink fae there, it’s fu’ ae coo keech!”*

The visitor didn’t understand and called back: “Speak English please, I’m English!”
The farmer replied: “Use two hands, you’ll get more that way!”
Source

That gag’s a bit funnier than the first but it’s still essentially xenophobic, the kind of joke that at first made me suspicious about independence. A country that blamed its neighbour for its own problems surely didn’t have enough self-respect to run its affairs. An already inward-looking nation – and, let’s face it, one which is ethnically homogenous – faced the risk of disappearing even further up its own posterior.

I’ve never been a brandisher of flags because flags represent invented tradition, the false sense of being part of a tribe. The Union Jack is canned monarchy. Those who wave it are effectively shouting: “Amritsar, Mau-Mau, aristocracy, inequality!” The Saltire’s little better given that Scots administered a large part of the British empire. Far from making me proud, it leaves me indifferent.

I find patriotism distasteful. I’ve never met most other Scots so I don’t consider myself part of a Scots community and like all of them it’s only chance that I was born in Scotland. Patriotism, in my cynical mind, is the thin end of the racist wedge.

Scotland’s no better than anywhere else, whatever the flag-wavers say. The people who happen to live in this particular territory are much the same as others – they’re just humans, with good points and bad points, who respond to similar impulses. They eat, talk politics, laugh, drink (OK, maybe they’re not quite the same as everyone else), so they shouldn’t behave like they’re special or seek unique treatment. As it happens I like most Scots I meet, but then I like lots of other peoples too.

There’s nothing inherent in Scottish character which in some unpleasant future would prevent the kind of nationalism seen in the Balkans. Give Glasgow football bigots their own flag and country, tell them they’re special, and the less-enlightened among them might do all manner of nasty things. Nationalism uncorked can be difficult to re-bottle.

National traditions, which underpin national symbolism, are like dead hands reaching from beyond the grave and forcing us to behave in a certain way. Why not decide what we do for ourselves?

A beauty-contest of nationalisms?

But if politics is about deciding things for ourselves, then maybe independence isn’t such a bad idea after all. Maybe the Scottish movement for self-rule is the more benign of the British nationalisms?

As Adam Ramsey of OurKingdom says here: “You’d never catch Salmond or Sturgeon or Swinney saying ‘Scottish jobs for Scottish workers’. There are no prominent Scottish isolationists, and most [independence] advocates argue against empire rather than apologising for it. Not only the SNP, but the broader movement is vocally welcoming of migrants, and encourage inclusion: ‘we’re a’ Jock Tamson’s bairns’ and all that.”

The emergence of UKIP, in contrast, is part of a gradual rightwards shift in English party politics. The “who, me?” brand of pseudo-innocence that pervades Nigel Farage’s pub politics can’t hide a foul streak, the kind of BNP-lite bile that prompted so many liberal commentators to give him sofa-to-wall coverage around the European elections.

It’s not so much UKIP’s popularity that’s so worrying; it’s the response of the main parties. I still think that the best UKIP can hope for is a seat for Farage in the Commons (dreadful though that would be), followed by a collapse in support as people figure out that his party is run by middle-England nutjobs with a toilet roll for policy.

What’s more serious is that the main parties all responded to the rise of UKIP by galloping even further to the right. It’s as if Miliband, Clegg and Cameron got together in some London gentlemen’s club and collectively decided that there’d been a popular rejection of Europe, when in reality most UKIP support only came from a forgotten stratum of English people voicing their protest at their perceived powerlessness.

Now that all the main Westminster parties have promised a referendum on EU membership, Scotland potentially faces the choice of two unions: with England or Europe. Most Scots would surely choose greater ties with the continent. Despite the scaremongering Brussels will let Scotland in.

Contrary to my past fears about the ugly side of nationalism, so far Scotland hasn’t experienced anything like the level of right-wing thuggery that seems occasionally to burst forth in England. (The so-called Scottish Defence League (defence against what?) is just a gaggle of bewildered knuckle-draggers. In August last year I saw a very Fringe event: the SDL, significantly outnumbered by the anti-fascist league, staged a sad protest outside the Scottish parliament. Bizarrely the SDL was supported by members of the English Defence League, of whom there are many more.)

The long-term rightward drift in English politics manifests itself in lots of other ways: the stealth privatisation of the National Health Service; benefit cuts; austerity; arms spending; militarism; inequality.

No large Scottish party agrees with any of this. Every major political grouping supports public ownership of the NHS, which has suffered less under devolution than it has south of the border. The Scottish political spectrum is unanimous in its support of a basic level of welfare, from the Green party’s advocacy of a basic citizen’s income for all, to Salmond saying that a Scottish constitution would establish a right to a house and a decent wage. All but the Scottish Tories recognise the need for greater equality. Few Scots support Trident, and indeed the prospect of its removal has been a major motivation behind independence.

And if you think the politicians are lying about all this, one way of locking them in to their commitments is to vote for a self-rule — ie. a new constitution. I for one don’t believe Westminster’s promises of new powers for Scotland after September.

In a way it’s the London establishment that’s moving away from Scotland and from ordinary people. If you’re a Scottish anti-nationalist, you probably ought to vote for self-rule.

A better economy is possible

Scotland is more sensible about economic policy, too. Rather than urging yet more liberalisation and the encroachment of the market into every part of our lives, the Scottish government argues for a strategic, developmental approach. Current UK economic policy sees tax and spending as necessary evils or about revenue collection. Leave the economy alone, the free-marketeers say, and it will look after itself.

But the events of the last decade or more have proved that the economy isn’t very good at self-care and that governments need to intervene to produce desirable outcomes and to mitigate the worst impacts of markets. The Scottish government reports that capital spending under independence would have been £7 billion higher over the five years following the global financial crisis, and that this would have helped mitigate the impact of recession by creating 19,000 jobs.

Presenting specific policy controls, as Holyrood does, takes chutzpah, as does the naming of specific economic sectors for development. They aren’t the high-employment, low-value-adding industries of the past; there’ll be no return to ship-building or mass manufacture. The future is in the life-sciences, whisky, tourism, the creative industries, digital and information communication technology and renewable energy.

The government has formed a fund for the support of the wave-power industry, something which it sees as important for meeting carbon-reduction targets and as a possible source of exports. Rather than the discredited import-substitution or ‘picking winners’ policy so derided by the right it’s smart, targeted investment in sectors with obvious potential (Scotland is very windy and wavy, for example, and has lots of good scientists and engineers), in conjunction with the private sector.

Of course there will be a few failures, but it also looks likely that the success stories will outweigh the cock-ups. Most other governments and many economists lack the imagination to go beyond the same old low-tax, hands-off, light-touch policy that has dogged economics for the past few decades. Alex Salmond’s government and its advisers should be congratulated on their courage and foresight (not that we’re voting for them on September 18th). Who knows whether in 20 years, when the oil is running out and countries are fighting over fossil fuels, we’ll look back at Scotland’s policy of energy self-sufficiency as a stroke of genius?

Leaving the cage

Somehow a lot of Scots, Welsh and English – middle-class and poor – have been lulled into believing that what we have now is the best that we can hope for; that a life of working hard, doing what the politicians tell us and worrying about the mortgage is as good as it gets. Equality, instability and uncertainty are here to stay.

But they aren’t. The cage door is open, and we can leave it. Which of the 30 countries to gain independence since 1960 wants to return to its previous union? Almost all small countries have managed to forge a more prosperous future than when they were part of the empire or a bigger nation. Most people in former colonies will tell you that they care less about cash than about having control over their lives.

Singapore is perhaps an extreme example of small-country economic success but it’s one I know well after having lived there for three years. The hundred or more states and territories with smaller populations than Scotland have proven that small nations are viable; in fact some economists, such as these World Bank authors, argue that smallness makes countries more nimble and adaptable, allowing them to develop via growth in human resources.

We shouldn’t accept that in no Westminster election since the second world war has the Scottish vote brought to power the party Scotland voted for. Talk about turkeys supporting Christmas. If we want representation we can’t afford not to vote for independence.

Just as the Irish assembly was part of the political settlement that then brought about parliaments in Cardiff and Edinburgh, Scottish independence can demonstrate to England that more democracy is possible; that we don’t need to submit to five-year dictatorships punctuated by meaningless polls at which we choose between shades of grey.

Squabbling over a few pennies here and there or however long the oil lasts is beside the point. Recent psychological research confirms the fairly obvious fact that the freedom to make choices makes us happier than money does. For the first time Scots can be in charge of their own destinies, and in more than a narrow, old-style nationalist sense; in a way that has the potential to revitalise democracy in the whole of the British isles.

The minority of predominantly English people who complain in some vague way that they “don’t want Scotland to leave us” are just dangling red herrings. Despite it being OK to ignore Scotland for the last half-century they seem suddenly to have noticed that Scots have their own views about how their lives should be run. Scotland’s not going anywhere. English people will still be able to travel north without passports, go camping in the Highlands or visit the Edinburgh festival.

Independence, in short, is the only hope of a fair and sensible society everywhere. That statement bears rephrasing in the negative: by sticking with the union Scottish people risk condemning everyone to perpetual misrule by the same grey old British political establishment. Independence isn’t really about old-style nationalism; it’s about bringing democracy closer to home. This is it. It’s our chance.

When I was growing up some people who heard my slightly southern inflections would ask where I was really from. Now, in a newer, more open-minded and mature Scotland with international ambitions, I don’t feel quite such a need to justify my identity. Hopefully the increasing number of ethnic minorities, English and people coming from overseas feel equally secure.

It seems worthwhile ending with a more upbeat joke.

In Glasgow the other day I went to the barber. I settled down in the chair.

“Comfy?” asked the barber.

“Scotland,” I replied, with self-assurance.*

* explanations/translations

Rodrik: almost there, but not quite

August 17, 2014

Somehow this Project Syndicate piece from Dani Rodrik really irritated me. I think it’s because he’s half right  — he’s one of the few contemporary neoclassical development economists who I think bark up the right tree — but also scarily misleading.

Rodrik’s main point is that disagreement among economists is healthy; that it’s harmful for economists to coalesce around a narrow model of the economy. Rodrik rightly criticises the apparently near-unanimous agreement in a 2009 survey among ‘top’ economists (whoever decides who they are) on at least five policies: trade, rent controls, exchange rates, outsourcing and fiscal policy.

Rodrik says that trade policy shouldn’t always involve lower tariffs and an absence of quotas because some models have shown that in a situation of increasing returns to scale or externalities trade restrictions can raise welfare. There’s a huge neoclassical literature in this area, including famous papers by James Brander and by Paul Krugman, who won the Nobel prize for his work broadly on this stuff. Political economists like Ha-Joon Chang convincingly argue the case for infant-industry protection.

Rent controls, Rodrik says, are similarly debatable in the case of imperfect competition (which is always the case, in my view).

Exchange rate policy is also open to discussion and should differ according to circumstances. “[T]he proposition that floating exchange rates are an effective system relies on assumptions about the workings of the monetary and financial system that have proved problematic”.

No single model works anywhere. One size doesn’t fit all, which Rodrik has argued before and which I argue in my book.

So far, so good.

But when Rodrik describes economics as a “discipline [which] comprises a diverse collection of models, and that matching reality to model is an imperfect science with a lot of room for error” I think he goes badly wrong. Modelling, especially of the mathematical sort, isn’t always the route to the truth.

Loads of well-known economists (and some lesser names) have unearthed important concepts without models and have explicitly said that models shouldn’t be the only method going. Adam Smith, for example, wrote about the division of labour after physically observing the operation of the pin factory in Pathhead. He didn’t build a model. The whole Scottish tradition of political economy grew out of a combination of empirical observation and reasoning, combining the universal and the particular.

None of Keynes, Ricardo or Marx were ‘modellers’ as such, and Keynes famously rubbished Tinbergen’s attempt to apply econometrics to his theory. One of my favourite development economists, Albert Hirchsman, preferred to observe and draw conclusions rather than go to poor countries armed with a model. Michal Kalecki was similarly suspicious of generalisations. Chang doesn’t model but he’s really useful.

It’s certainly been my own experience that very few policy prescriptions or models are universally applicable in developing countries. People don’t all behave the same way; they tend to be influenced by different things (even that touchstone of all safety-conscious economists, ‘incentives’, means varying things in various places); and institutions and values vary. Modelling, with its inevitable reductionism and falsity of assumption simply isn’t the best way to understand other economies. This is one of the themes of a great book, Postmodernism, Economics and Knowledge, by Cullenberg, Amariglio and Ruccio.

So economics isn’t a discipline characterised by models. Even if most mainstream economists now perform modelling, the existence of a few non-modellers or economists who don’t fetishise the model proves Rodrik wrong.

It’s therefore despairingly narrow to imply that disagreement between advocates of various types of model is enough. Proper disagreement needs to take place on a much wider plane — and it has done so in the past, between competing schools of thought: Austrian, Marxist, Post-Keynesian, neoclassical, green, whatever. Real dialectic is necessary for genuinely new thinking.

I’ve always been dubious about the stale joke about the ambivalent economist which Rodrik prods into life like a seaside donkey halfway through his piece. President Eisenhower is supposed to have wished for a one-handed economist because they kept saying “on the one hand, on the other”. The joke’s not that funny, and in my experience mainstream economists tend to be rather unanimous in their worldview and policy prescriptions. If only they’d been a bit more two-handed in the run-up to the 2007/8 crisis.

[Update: here's a slightly fresher quip from @elianalorch: Have you heard the joke about the economist? ...Well, if it was funny, you would've heard it already.]

I just don’t think that economists try to “match reality to model”. They rigidly stick to an approach which says that modelling is the only way to discover things about economies. Many economists fight to prove their model correct even in the face of contrary evidence. Look at the so-called ‘debate’ between freshwater and saltwater economists in the United States. I can think of a few pubs in Edinburgh where that sort of bust-up would be sniggered at as a lovers’ tiff.

To describe mainstream economics as an “imperfect science with a lot of room for error” suggests that we’re almost on the right track but we need to tweak things. How can economics be almost correct when most of its prominent practitioners so patently failed to predict the crisis and when the discipline remains so far from useful in many important situations, such as in the developing — ie. majority — world?

I think the Rodrik piece is so irksome because he’s the upstart, the leftfield critic wheeled out to satisfy the doubters. In reality his view is quite conventional and serves to delude the non-specialist that the discipline is vigorously searching for answers. I don’t want to criticise Rodrik too much because he sounds like a good bloke, but something’s wrong when the damaging claims of an ersatz radical are broadcast to such a wide audience.

Boosting the domestic economy is the key to raising Papua New Guinea growth

August 13, 2014

The creation of the PNG LNG project highlights the next major challenge facing Papua New Guinea: how to grow the non-mining sectors. Economist Dan Gay says growing domestic demand, the internet and service industries can help overcome inherent problems.

Whatever the Pacific’s been doing until now, it hasn’t been working.

Overall economic growth in the region has been lacklustre and trade growth disappointing.

World Bank data shows that in 1980, just after most countries became independent, merchandise trade in Pacific Island small states was 88.8% of GDP.

Twenty-two years later, in 2012, it had actually fallen to 76.5%. In the rest of the world, it rose from 35.2% to 50% of GDP over the same period.

Main challenges

Some of the main challenges are transport costs, including shipping both internationally and domestically, as well as energy, finance, infrastructure and costs resulting from a lack of domestic competition.

Low formal employment is a challenge, as are the tyranny of distance, a lack of economies of scale, geographic fragmentation and isolation.

Policymakers had imagined that trade agreements would somehow automatically solve all the Pacific’s trade problems.

Currently Pacific exports comprise about the same proportion of GDP as in 1989, roughly the start of the liberalisation period, manifested in the signing of trade agreements.

Clearly trade agreements haven’t much boosted either trade or exports.

To boost productive capacity you need an activist government (and donor community) capable of stimulating capital accumulation, technological progress and structural change through policy. This is what happened in almost all other successful developing economies, with and South Korea and Japan being the prime examples.

The Pacific is borrowing an inappropriate trade model from elsewhere, and needs to use a much more development-focused model, which is tailored to its own ends.

Boosting production

I don’t think there’s much scope for intra-regional goods trade. The Pacific island countries aren’t going to sell much fish or coconuts to each other.

To boost productive capacity you need an activist government (and donor community) capable of stimulating capital accumulation, technological progress and structural change through policy.

This is what happened in almost all other successful developing economies, with and South Korea and Japan being the prime examples.

They were able to export their way to success partly because they built such a big domestic engine, not just via the increasing penetration of international markets. The issue of boosting domestic demand has been neglected in the Pacific, with too much faith placed in demand from overseas.

In my view, the Internet represents a huge and until now under-exploited opportunity for services trade in the region. It doesn’t matter where you are in the world. It addresses many the problems of the islands, like distance, smallness and fragmentation.

Service industries

The one bright spot for trade in the Pacific is in services.

Principally this means tourism but other areas are emerging too, like the export of labour.

My calculations, using World Bank data, show that average trade in services from the Pacific island states has risen from 39.2% of GDP in 2005 to 50.0% in 2012.

Business process outsourcing and call centres, even things like engineering, education and architectural services can all be potentially traded online.

The Melanesian Spearhead Group trade in services agreement is an example. There is provision for nurses and others to bypass the normal immigration and work permit rules.

In my view, the Internet represents a huge and until now under-exploited opportunity for services trade in the region. It doesn’t matter where you are in the world. It addresses many the problems of the islands, like distance, smallness and fragmentation.

And certain countries in the region have good education and skills, the kind of things that could be sold online.

Business process outsourcing and call centres, even things like engineering, education and architectural services can all be potentially traded online.

The Pacific needs to develop a trade and economic development model that suits its own circumstances.

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