Monthly Archives: May 2013

The Scottish Economy and Independence.

Talking at Edinburgh University Business School earlier this month, Jeremy Peat from the David Hume Institute (and formerly head economist at RBS) reckons that the debate on independence for Scotland needs the injection of some rational thinking, so that voters can make an informed decision in the referendum next year.

His beef is that there are a lot of questions, and each side is picking its answers politically, rather than factually: for example, his institute produced a paper on the possible range of oil income; one newspaper printed only the lower limit, and the campaign for the opposing argument used only the upper limit. Neither is wrong, but both warp the discussion – and confuse people by promoting the figure which supports their argument as “fact”.

Peat set out to clarify what the questions are, and what the options might be. He doesn’t have a fixed viewpoint, and wouldn’t say whether he was pro- or anti-independence. Indeed, he believed remaining objective was key, giving access to all parties and bringing informed debate to their arguments.

He covered both macro and micro economic issues.

The main macro concern is the currency, where he saw four options:

  • keep formal currency union with the UK
  • use sterling as a parallel currency (just as some countries use the US dollar) without formal currency union
  • join the euro
  • establish a new, Scottish currency

No surprise there, then. For me, this is the crucial matter. But Peat went on to identify several issues around the currency.

Both a formal currency union and adoption of the euro would introduce strict fiscal and monetary constraints. Monetary policy would be set by either the BoE or the ECB, and Scotland would have limited influence over either.

Adopting the euro would take time to negotiate following independence (including membership of the EU and the need to meet the euro stability requirements, which could take years), and there would need to be an interim solution; similarly, the UK government has said that an independent Scotland would need to negotiate currency union. The impact on borrowing and trade under any option need to be assessed. (Peat recommended a paper by Brian Quinn, a Scot and former deputy governor of the Bank of England, on the impact of currency on an independent Scotland [PDF].)

Under any currency solution, who would be the lender of last resort? What about bank regulation? These are things that can only be decided once the result of the referendum is known, but the make a rational decision, the options and likely outcomes need to be considered.

Peat did say that Scotland wouldn’t be wholly independent inked it controlled its own monetary and fiscal policies – that is, its own currency. This may be why some of the Yes campaign have come out in favor of an independent currency, despite the SNP favouring sterling. (I couldn’t find a statement on the Yes campaign website – they do not have a search function on their website [at least not one I could find] – and the SNP doesn’t mention “sterling”, “pound” or “currency” in its vision.) There would however be significant costs transitioning from sterling, and small countries with a stable currency tend to have very rigid monetary and fiscal policies to protect the value of their currency. Any benefits of independent mindset and fiscal policies could therefore be lost.

The other major macro issue concerns the public finances. The global economic situation means that an independent Scotland would be starting from a very weak position. Public spending in Scotland is higher than the non-North Sea tax take from Scotland; the difference is generally made up by the income from oil and gas. The value of the income from the North Sea is therefore crucial, and depends on the price of hydrocarbons, the volume of production – and the basis of taxation. These are unknowable, though it is possible to estimate likely ranges. (These are the figures which Peat was irritated had been taken out of context, each side quoting the figure which supported their argument rather than the range in context.)

Much would depend on the share of government debt taken on by Scotland. There’s a lot of uncertainty about this. For instance, what comprises government debt? There’s government borrowing; a share of the RBS and HBoS bailouts; public pension liabilities. What about the decommissioning liability for nuclear power stations? The cost of decommissioning North Sea installations? Rail infrastructure? And so on. Much of this is unknowable – but of course it is possible to estimate these debts, and to model what it might mean for the economy.

The micro issues Peat discussed mostly involved the opportunities that existed for policy which an independent government would need to decide and enact. These were legion. What would competition policy look like? Financial regulation? Transport (though already a devolved power)? Energy policy? All these need regulation, as well – the competition for economists might mean a boom in wages… There would need to be the creation (or duplication!) of all sorts of institutions, including an equivalent to the Office of Budget Responsibility to keep government accountable. (Peat suggested the “Scottish Office of Budgetary Accountability” – or SoBA…)

The policy involving the non-Scottish bits of UK-wide firms represents lots of issues. How about cross-border mergers and transactions (and that is after the currency has been decided…). The interactions with the rest of the UK over all sorts of matters could become key – and might involve all sorts of transaction costs.

Once policies have been decided – government’s role – implementation and regulation would down to other bodies, operated at arm’s-length from government to reduce political interference. What others might call quangos. The establishment of these might cause a surge in the demand for skilled economists, administrators – and change managers (like me! I definitely see a way of hedging my bets here…). The SNP has set out a timetable to independence following a “yes” vote of about 18 months. Not long to get all the institutional infrastructure set up. Where will these skills come from? And what will this mean for business competing for the same talent?

One of the key benefits of independence identified by Peat would be freedom over taxation. Under devolution, the Scotland Act 2012 allows the Scottish government to set income tax and land transactions tax (currently stamp duty). An independent Scotland could completely revamp the tax system – simplifying it (and therefore saving individuals and businesses large costs in fulfilling their obligations), and designing it to meet specific policy objectives. This could be quite powerful in driving policy outcomes and the economy. (ICAS have an extensive report on the practicalities of tax devolution [PDF].)

It is hard to know how an independent Scotland would perform. David Skilling reckons that that small countries outperform larger ones, though Peat thought the jury was still out on that one. The psychological outcome of independence might be positive – the “Braveheart” factor – which could spur innovation, but of course (as so much else) this is unknowable before independence. (It would be interesting to see if there were any such boost to the economy following the start of devolution in the early 2000s.)

Peat concluded that independence was feasible, but that there were so many unanswered – and even unasked – questions that we cannot say if it would be beneficial. (Indeed, we’d have to define what “beneficial” means – there is more to this world than economics!) To get answers, we need to have a more subtle, nuanced debate, rather than the rather shabby level we’ve currently got.

We also need to think about the alternatives. A “no” vote wouldn’t mean “keep Britain and carry on”. All three unionist parties are contemplating further devolution following a “no” vote, be it “devo plus” or “devo max” (neither of which is defined). To decide if “yes” or “no” is the right choice, we need to understand the different options.

But why wait for independence? There is much that the government could do under the current conditional set up. Blaming Westminster for a lack of progress seems rather childlike – always blaming the big boys, and never taking responsibility for our own actions. The SNP have been in power for six years; what have they really achieved? (I think I’ll have to go and find out. I may be sometime.)

[The David Hume Institute has several papers relevant to the debate on its research page.]

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Everything in the Garden…

When I was thinking about how the online world might change in the future, I suggested there may be some pressure for the resurrection of “walled gardens” – specialist areas of the internet where interactions happen behind password-protected access.

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When I first started using the internet, back in 1995, this was common. I signed up with Compuserve (which I am amazed to see still exists!), and there were specific areas of interest curated by the the organisation; to access the internet proper, you had to click an icon to leave the walled garden. There were other, similar services, too – AOL, for instance.

Accessible browsers like Internet Explorer and Netscape – and, later, Firefox, Chrome et al – freed up the internet and enabled non-technically savvy users (like me) to get around. The walled gardens more or less died: users didn’t like being walled in, and had no reason to be so.

My reasoning for thinking walled gardens might make a return was a commercial one: suppliers of content – like Facebook, Twitter, Apple or Google – want to keep you on their site as long as possible, to sell your eyeballs to advertisers and others willing to pay them. That’s how they make their money. Part of the bargain is that we get to look at the content they provide (albeit, if they’re Facebook or Twitter, that it is created by other users). In a more competitive environment, they will set up walls to keep you there.

(A corollary was that there would also be a move to more openness, driven an increasing awareness and technical know-how.)

A couple of weeks ago I saw a demonstration of what this might be like, and I’ll admit I didn’t really get it. Kiltr is

the largest social media platform focused on connecting Scottish interests globally to create economic, cultural and social value for its members

and, believing that the only way to understand new networks is to play around with them, I signed up to join last September.

I made some connections, mostly with people I follow on other networks, looked at some brands (most of which I follow on other networks…), and I don’t think I have been back in the last three months (until just now!). The reason for my resistance is that the “exclusive” nature of Kiltr doesn’t really make sense to me: if I want to share stuff, I want to share it with my friends and contacts pretty much anywhere – many of whom may be on Kiltr, but most are not.

A couple of guys from Kiltr were demonstrating their new platform at the University business school’s Entrepreneurship Club; they are rolling it out in June, I think. It was very, very snazzy – a whole world away from the current experience. But I am not sure that an excellent new interface will make a difference to me. I think that Flipboard is an excellent app – it looks great, works very well, does what I might want. But I hardly ever use it: however good it looks, it didn’t actually add anything to my use of social media.

(They will be developing the interface for other enterprises as part of their business model.)

Similarly, I am not sure what more I will get from Kiltr that I can’t get from my existing social networks. To connect with peopleĀ  and content I want, I would need to go to Kiltr in addition to the other networks. I assume that I can connect to the same people and brands elsewhere that I can on Kiltr – all it gives me, aside from a superb experience after the relaunch, is the walled garden of Scottishness.

I can see what brands and advertisers – they get access to consumers or businesses with less noise; there may be fewer eyeballs, but there will be more attention.

But for individuals, I’m not sure.

It may just be me. There are other networks I’m a member of which I rarely if ever visit. The ConnectingHR network (developed using Ning, I think) is full of interesting, like-minded people – most of whom I connect with in other ways, mostly Twitter. It is so long since I logged into the site that I have no idea what my password is; but I engaged with other members on Twitter just this morning.

I am not sure what it would take for me to use these walled gardens more effectively – what would make the loss of “shareability” with those not on a particular network worth paying.

I will certainly give Kiltr’s new site a go when it is launched in June – but I am doubtful it will be enough.