A New Development Model for Scotland

A new development
model for Scotland?
Sukhdev Johal, Adam Leaver and Karel Williams
www.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 activities
Aim 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 view
Nordic 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

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

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)

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

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 democracy
plus 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- territorialisation
and 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

A New Development Model for Scotland

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A New Development Model for Scotland