A new development model for Scotland?

Sukhdev Johal, Adam Leaver and Karel Williamswww.cresc.ac.uk

Adam Leaver and Karel Williams are based at the University of Manchester. adam.leaver@mbs.ac.uk and karel.williams@mbs.ac.uk Sukhdev Johal is based Queen Mary, University of London. s.johal@qmul.ac.uk

What is Scotland’s model of development/ idea of economic policy?

• Here’s a question for Scotland after the referendum:What’s your model of economic development/ idea of economic

policy?

• What’s the difference between independence or devolution, if your model of development is like rUK:

Do you have/ can you have distinctive economic policies/what would they look like?

• But choice of development model was not a major issue in the referendum; Yes or No were divided by many things but shared a common framing which limited the visible policy choice to either “re-industrialisation” or the “Nordic Social Model”

Argument for a new development model: thro’ presentation in two halves:

1. How choice is limited by three old framings shared by yes and no

See Scotland as a wealthy nation not a territorially divided nation Troubled by an uncertain future but won’t de- risk finance Distracted by models of “reindustrialisation” vs “Nordic Social

Model” which is economically unrealisable vs politically utopian

2. Argument for a new development model from three new principles

Re-focus on the foundational economy of mundane activitiesAim for foundational security instead of jobs and growth Promote new policies for grounded localities

1. Framing Scotland’s choices:

assumptions shared by yes and no

Framing assumption (1)“Scotland is a wealthy nation” • Framing = the field of the visible: what was discussed and how in

the referendum debate (plus what was not discussed)….yes and no disagreed noisily but shared unexamined common assumptions

• “Scotland is a wealthy nation” = John Swinney’s opening in the SG white paper Building Security and Creating Opportunity (p ii, Nov 2013)

• Claim and assumption is architectural framing in referendum debate; supported by standard national indicators like GVA per capita, GDP growth, unemployment etc; cross section or time series comparisons show Scotland is near UK average (not a laggard region like Wales where GVA per capita falls steadily behind)

• An economic framing which plays a key political role: Caledonia is like Catalonia or Padania: Scotland becomes part of a group of rich regional economies which could choose to detach themselves from ailing national economies and press their common interests in a new EU (= the SNP story line)

Alternative view:Scotland is a territorially divided nation

• rUk recognises territorial division via narrative of North vs South or London v the rest; admits territorial division and glosses over deprivation in London and the money up North.

• Scotland’s divisions have no simple geography (Glasgow’s East End, recently deindustrialised Dundee or coal fields, rural areas) plus Scots underestimate counterweight of affluence in Glasgow; Gini coefficients confuse.

• Scotland is a country which is more shockingly territorially divided than rUk

• 14.2 % of Scots population live in locally failed economies with GVA per capita of less than £13k (compared with 4.2% in rUK)

• 29.3% of Scots population live in the three urban centres dominated by affluence with GVA of £26k or above (compared with 11.2% in rUK) GVA per capita in Edinburgh, Glasgow and Dundee is in line with major Southern English cities like Bristol, Swindon and MK

Framing assumption (2): Scotland’s future is uncertain • Yes vs no was “project Pollyanna” vs “project fear” for Carol

Craig; debate focused mainly on what was uncertain and uncontrollable by Scottish government (these issues also dominated the letter of the 55 economists):

Yes campaign’s optimism about North Sea Oil reserves and about how London and Brussels would be accommodating about the terms of divorce from the English and re-entry into EU

No campaign inverted these assumptions and added there were no easy choices eg. on currency, Scottish Govt’s currency union was unacceptable to London and sterlingisation offered independence without economic sovereignty over monetary policy or public spending

Alternative view: Refusing to de-risk Scotland by downsizing finance

• De-risking Scotland by downsizing finance is unthinkable for Scottish political classes (as for rUK or US) even though financial liabilities have to be socialised at public cost after long chains go wrong

• Scots banking sector (Edinburgh HQd) has a mountain of liabilities ex RBS and BOS pre-2008 expansion which are being run down: how large = disputed between HM Treasury (2013) and Scottish government

• Arithmetic: Treasury claim = banking liabilities are still 12 times GDP (including oil) in 2013; Scottish Govt gets it down to 6 or 7 after excluding RBS “markets division” and BOS/Lloyds; still frighteningly like Iceland or Cyprus = 7-8 X GDP and worse than UK = 4-5 X GDP

• Referendum consensus about desirability of finance: Scottish Govt policy to grow “business and financial services” sector went unchallenged vs while no campaign played on fear of losing finance with threats about firms moving HQs south.

Source: Bankscope; Scottish Govt ‘Long-run GDP at current market prices 1980-2013 Q3: An experimental statistics publication for Scotland’NB GDP figure includes a geographical share of UK extra-region activities (i.e. including all oil and gas extraction from the portion of the UK continental shelf offshore from Scotland).

Framing assumption (3) Policy choice = “reindustrialisation” vs “Nordic S. M.” • SG promised “a genuinely bespoke set of complimentary policies” matched with

“Scottish needs and circumstances” (2013, p.65) Industrial policy dominated with regional policy dispatched in 1-2 pages in 2013

and 14 policy documents; Scotland aiming for manufacturing growth with targets like a 30% increase in manufacturing output by 2029-30 and a 50% increase in exports by 2017 (2014, p.iv); export success in targeted sectors of high value added manufacturing encouraged by institutions like Development Bank plus tax incentives.

The SG vision of “reindustrialisation” was generic and not in any way distinctive; cross out the local identifiers and SG policy documents are interchangeable with BIS documents under Mandelson or Cable in UK and in other European country

“The Nordic social model” was canvased as an alternative ideal by Nordic Horizons/Lesley Riddoch and the Jimmy Reid Foundation; ignoring the right turn in Scandinavian conservatism eg. Sweden’s 8 years of centrist public sector reform, far right at 13%.

Alternative view: reindustrialisation = economically impossible • Scottish reindustrialisation is economic fantasy about a happy ending; it

was a mistake to let manufacturing go and it would be nice to bring manufacturing back with lots of high wage, knowledge intensive jobs; but that’s not going to happen

• Scottish manufacturing’s size and specialisation make growth targets and structural change unlikely: Scotland is a long odds outsider in a manufacturing race where all of Europe can’t succeed

Small output base: real output below late 70s, now employs 8% of Scottish workforce and largest sub sector = food and drink with 30% of output

High tech is in a mess with modest expansion of pharma not compensating for near halving of electronics output since the mid 90s;

Export sector is increasingly narrowly resource based; with whisky and refined petroleum accounting for >60% of export values in recent years; resource based export economy unlikely to convert to modern manufacturing.

Alternative viewNordic Social model = politically utopian• Nordic Social Model for Scotland is a political utopia, an ideal society

that is not realisable; reaches for a 20th century social democracy that is beyond our grasp

• Centrist political classes favour low taxes as “business friendly” and incentives eg. SNP’s only firm tax promise is 3% lower corporation tax with prospect of more tax breaks:

• NSM then becomes a Scandi-lite vision whereby we get Swedish outcomes (without mentioning the price of high taxes); implicit in Scottish Govt. documents and explicit in JRF (Danson 2013) which argues higher wages can increase tax take

• But massive tax hikes would now be required: 30 years of American style labour markets spreading low pay and European style social protections subventing wages have shifted balance between tax paying and benefit claiming households so it is hard to raise taxes and easier to cut benefits; late 70s 25% of non-retired households get more in benefits now nearly 40%

(2) A new development model: grounded localities in the foundational zone

(1) Re-focus “the economy”:the foundational zone • The economy as the sphere of competition? right insists we must

compete globally and left regrets that we have lost control over national affairs; only true up to a point when economies are heterogeneous zones and foundational zone remains large

• Foundational zone = mundane activities meeting everyday needs of all households (regardless of income) and therefore distributed according to population through branch or network with local monopoly: includes privatized utilities (pipe and cable plus transport) food processing and distribution, de-commodified health education and care still mostly state provided; (what’s left after tradable goods have collapsed

• The foundational zone directly employs c. 36% of the Scottish workforce (using Nomis 2012 data for UK comparability); some 25% of the Scottish workforce are employed delivering mainly free at point of use public services with roughly equal numbers in health, education and care each accounting for around 6% of the workforce; another 10% in private or privatized activities which are less employment intensive because pipe and cable utilities employ few though supermarkets employ 4%

• By contrast, all of Scottish manufacturing employs 8% and by value or employment the largest sub sector in manufacturing is food and drink where typical activities are mundane foundational type, like bread baking

(1) Re-focus “the economy”:Size of the foundational zone

Private sector, State and state supported mundane activities, 2012

State and state supported mundane activities, 2012

Mismanaging the foundational:point value • Foundational economy is increasingly mismanaged by private and

state actors making point value calculations; that means each company or organisation pursues most profit or least cost to improve their own revenue account; cf mutual co-dependence is necessary for social outcomes along a supply chain:

Financialized PLCs and private equity use power against suppliers or customers; eg supermarkets capturing supplier margins hence closure of Halls of Broxburn with 1700 jobs lost and reduced meat processing capacity and in turn smaller Scottish herds because livestock cannot be transported long distance to slaughter

Outsourcing leads to value extraction by predatory operators eg of railways where the TOCs take a profit without investing capital or taking revenue risk because they can walk away from unprofitable franchise if revenues turn down in recession; and when there’s not enough money in the fare box the state covers operating deficit and cap ex

Privatized utility operators will not invest in network construction and renewal unless incentivised with initial subsidies or revenue guarantees: PLCs have no mandate to cross subsidise like old state utilities on rural provision; eg of broad band where competing suppliers cherry pick urban consumers and only BT will build rural broad band if incentivised without any kind of open book accounting

(2) Promote foundational security (not jobs and growth) • We need to shift the measures of success towards adequate and

reasonably priced supplies of the key foundational goods (housing, utility services, food, health and social care, education). These goods are the basis of material security and civilized life for all citizens including those in the lower income deciles.

• Metrics of success do matter: many of the problems of economic policy in UK, USA or EU stem from the unthinking use of growth and jobs as the two indicators of success: to be fair the Scottish Govt recognises problems and aims to get beyond GDP with a new National Performance Framework.

• Fundamental objection = growth and jobs are irrelevant since 1979 because growth and jobs increase inequality rather than diffusing prosperity. Our figures cover UK non retired/ wage earning households but we do not believe Scotland is different

• In terms of nominal income growth, under Thatcher and New Labour the top decile of working households captures 30% of income gains and the top 20% capture 45%; as for the bottom decile and bottom 20% they get nothing in terms of original income and their gains come from redistribution through benefits plus in kind services; Scotland’s post 2007 targets for reduced inequality are quixotic

Meet two tests:economic and social relevance • We need to build grounded localities through new kinds of re-

territorialising policy which meets two tests of relevance and engages with the world as it is ( not as we would wish it to be)

• (1) Economically relevant to the existing stock of small businesses when 40% of Scots employ is in firms employing less than 50 employees (p 134, 2014) and often of limited ambition; by way of contrast, reindustrialisation is preoccupied with the “vital 6% “of fast growing firms or the absent group of middling sized firms

• (2) Socially relevant to all the localities in a deeply, multiply divided country i.e. the East End of Glasgow, the ex coalfields of Fife and Ayrshire, the remote Highlands and the middle class suburbs of Edinburgh, Glasgow and Aberdeen; foundational economy is not (as in SG, 2013 p 170) a consolation prize of public jobs for failed localities; it is about re-organising sectors to connect the demands of prosperous localities with the resources and capabilities of deprived areas

Policies for grounded localities:reinvent taxation

• An adequate supply of (de-commodified) public goods requires tax revenues but meets political resistances to higher taxation

• The two key moves:1. End the waste of broad based business friendly concessions which

have made corporation tax voluntary and pay (some) firms to do what they would have done in any case

2. Reinvent the social technologies of taxation (not changed since PAYE in 1940s); add some form of land value tax which captures the unearned social increment

• Soberly recognise that problems of foundational supply cannot be solved by loading expense and liabilities onto the state (limits of current irresponsibility which adds cumulative liabilities from PPP, state underwriting of utility returns and subvention of inadequate wages)

Policies for grounded localities:social licensing for business• Private business must share the burden of social responsibility which

has private costs even if it is win/win socially• The key move: some form of government social licensing aimed at

changing capitalist and public sector practice through specification of relevant local obligations; supercharging the idea of SME friendly contracts with community benefit in the Scottish Procurement Reform Act of 2013 and applying to private business.

• What this means eg. breaking down of private and public procurement contracts so that local supply by small firms and labour becomes much more important eg. with supermarkets sourcing meat regionally, local councils insisting contractors pay living wages

• Soberly recognise that this has a cost in terms of reduced private profits which needs to be met by a rethinking of how we finance foundational assets. Shareholder value expectations of ROCE and growth are delivered by socially dysfunctional strategies and financial engineering; take productive advantage of low interest rates with bond finance for limited and lower returns on the Dwr Cymru model is more sensible

Policies for grounded localities:press social innovation• Press social innovation to meet unsolved foundational needs in areas like

adult care; much more relevant than technical innovation to raise productivity digital innovation on the Apple model (a) which materially rewards the top 5% and (b) often cheapens goods whose low cost and unrepairability is already a problem

Two key moves:• Debate about unsolved social problems and new priorities eg. is how we care

for our elderly one of the tests of a civilized society? Recognise we have expensively failed to solve the problem of adult care by using an army of low paid and unqualified carers to deliver often poor quality care (with lots of intermediate value skimming)

• Empower the public and third sectors to take a leading role; because in areas like adult care, financialized private business is too often levered on sweating labour and innovation is financially directed towards containing liabilities and reducing tax payments (nursing home op co, prop co and tax havens) .

But……..this isn’t practical

politics

Practical politics?not with our existing political classes

• Wildly unrealistic and not practical?

• Yes with our present political classes in Scotland (and rUK) who will quarrel about devolution vs independence without questioning the framing of choices; their enthusiasm for industrial policy without downsizing finance is the real give away

• Scottish (like English) political classes want to do gardening without weeding; want “rebalancing” by growing manufacturing and not rooting out banking activity which brings macro instability plus tax payer liability

• Part of a larger problem about focus group politics; saying things which play well, never saying anything which offends swing voters or alienates interests like business who influence voters

Post democracyplus Scottish centralisation• Part of a larger problem about post democracy i.e.. representative

politics failing to articulate alternatives (not changed by the high turn out for Scottish referendum).

• Compounded in the Scots case by the political centralisation rightly criticised by the Commission on…Local Democracy (2014): Edinburgh has sovereignty when one tier of 32 large unitary Scottish LAs drawing 80% of revenue from centre

• Devolution and independence would both transfer powers from Westminster political elites to Scottish political elites; about which we must be queasy if we think not of Scandinavia but of Ireland; a small country with a hollowed out economy, a low tax strategy and a highly centralised political system; political, business and financial elites were all complicit in a ruinous property bubble and then passed the costs to the masses

Re- territorialisationand local democracy • Economic policies of re-territorialisation require political

decentralisation; discouraging because that piles up the preconditions

• But the good news is that the grounded locality is not an all or nothing monolithic project; it can eg. be pressed quietly in social policy areas when economic advisers are kicking and screaming against innovation in economic policy

• Even with centralised systems one enlightened council can make a difference if it thinks ‘grounded’ as Enfield shows in North London; maximising local benefits for SMEs and local labour from insulating social housing, building greenhouses; accepting hostility by pressing a scheme for licensing private landlords..

• You need to think it through but you don’t need permission to start doing something new and different

The ideas in this presentation are drawn from our latest book ‘The End of the Experiment? From competition to the foundational economy’

The research team are all part of the CRESC research centre and have published a range of public interest reports and working paper. You can download them for free from http://www.cresc.ac.uk