Scotland isn’t Ireland

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.