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When one city hogs a national economy - Francis Moran & AssociatesFrancis Moran & Associates

When one city hogs a national economy

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Editors Note: As guest blogger Denzil Doyle addressed last month, Canada is a branch-plant economy with fewer and fewer head offices, which are usually the driving force behind the R&D needed to create a strong innovation economy. In today’s post, Maurice Smith relates Scotland’s comparable situation as a result of the concentration of economic decision-making in the south of England and how this impacts the rest of Britain. 

3_articleimageBy Maurice Smith

The independence debate is dominating Scottish political debate right now, and will continue to do so for at least the next 15 months.

On Sept. 18, 2014, Scotland will decide whether or not to remain within the U.K. The political debate embraces many issues, but the biggest is the economy.

I realize I don’t have to tell readers in Canada too much about the nuances of constitutional debate. TV reporters in Scotland and Quebec are already boosting their air miles crossing the Atlantic to produce speculative pieces about next year’s poll.

Scotland’s constitutional relationship with the rest of the U.K. has been the subject of debate over the last 50 years, which witnessed the rise, fall and rise again of the Scottish National Party, which won an outright majority in the devolved Scottish Parliament in 2011.

Scots have much in common with our brothers and sisters in England. The political debate, which centres on the 1707 Act of Union, is rooted in history and culture as much as anything else.

But since the days of Margaret Thatcher (an essentially English politician who failed to endear herself to Scotland) the post-war national cohesion of “Britain” has eroded. Its underlying fault line has been economics.

Campaigners say an independent Scotland, with its own hands on the levers of power, would develop policies better suited to improving Scottish economic performance than anything dreamt up way south in London. The decline of manufacturing witnessed during the 1970s and 1980s, which has accelerated since the days of Thatcher, paralleled a lurch towards financial services that favoured London more than any other part of the U.K.

The politics of alienation, the economics of what in this case amounts to a North – South divide, are the very stuff of debate. Those U.K. regions that have lost out most to the dominance of London are south Wales and northern England. Scotland is in fact the U.K.’s second most prosperous region after southern England. It is also its most vociferous critic.

Why does this matter? London is a world city, on par with New York, Paris, Tokyo and so on. Surely its magnetic relationship to money should result in a trickle-down effect for the British hinterland?

The evidence says not. London and southern England dominate nearly every economic indicator, from GDP to public spending. Intentionally or not, the city benefits from a near perfect virtuous circle of high public and private sector investment, one feeding from the other.

Now a Scottish economist, Margaret Cuthbert, has responded to the official No campaign (known as “Better Together”) with a fierce analysis, The Dysfunctional UK Economy.

Cuthbert examines the slump in British manufacturing, a fact that is accepted with a collective shrug by the mainstream body politic. British society assumes that its decline is matched in most of the West, when in fact industrial production has risen healthily in most countries (U.S. 50.5 per cent, Germany 32.7 per cent, Canada 35.9 per cent, for example) since 1990. U.K. production fell by 1.2 per cent during the same period.

Meanwhile, as Cuthbert demonstrates, London has sucked private and public investment into its maw. Its economic indicators are at odds with the rest of the U.K. For Yes supporters (including Mrs. Cuthbert) the argument is that Scotland has a unique opportunity to change things for the better, forever.

One stat that jumped out for me was the relative spend on innovation (R&D). According to the OECD, British spending on R&D as a percentage of GDP is very average. It’s on a par with Canada at just over one per cent, well behind the U.S., Japan, Germany and the Nordic countries.

Scotland’s R&D spend is much lower, at 0.5 per cent. U.K. business R&D spending is massively concentrated in London and the south of England. Academic research in Scotland is relatively high, but its links to local industry are stubbornly low. As I’ve said before, Scottish business startup rates are also too low.

Business R&D is vital to any healthy economy. Where we find major companies headquartered, we tend to find them spending large sums on research close to home. This is true in all the powerhouses like southern Germany, northern  California and parts of Japan.

That R&D tends to happen alongside major spending on government and academic research. If we take a typical high-tech device like the iPhone, we can trace every key component – processor, screen, battery, GPS system and so on – to its roots in government spending, usually in military and space research. This is where economies derive real value.

Coming back to Scotland, the pro-independence analysis is that the existing arrangements of the U.K. drive high value investment into one region at the expense of others. Even though Scotland is often “the best of the rest” in economic performance, the gap between first and second place is a wide one. In a long-centralized state like the U.K., it is no surprise that a third of all government research spending lands in the south-east.

Cuthbert portrays a country (U.K.) with an economy that is hopelessly skewed in favour of a single region. It challenges the assumptions of the Better Together campaign that asserts Scotland would be worse off independent.

The question of business R&D is a tough one. Independent or not, it will take a lot to reverse the current situation.  We need to innovate if we are to improve our economy.

Scotland is known as the historic home of free enterprise (Adam Smith) and to innovation (including tarmac, penicillin, TV and the telephone). Whatever its constitutional future, that history must be matched and surpassed because modern economies define themselves by innovation.

The question is whether Yes campaigners can persuade Scottish business that an independent Scotland can indeed do better.

Maurice Smith is a journalist, consultant and entrepreneur based in Glasgow, Scotland.

Image: TotalPolitics 

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