Independence in the modern world. Wealthier, happier, fairer: why not Scotland?
This paper sets out a detailed analysis of the UK’s performance across a range of economic and social indicators relative to that of ten European countries. It is the first in the 'Building a new Scotland' series, focusing on independence.
Observations on the UK model
The UK has long pursued a different economic path to that of most countries in northern and western Europe, and the policy choices it has made have resulted in different – often radically different – outcomes.
Without the powers of independence, it is difficult – if not impossible – for Scotland to take a different path.
Drawing on a range of research and analyses, it is possible to list a set (in no particular order and not exhaustive) of characteristics that help define the UK model and explain its enduring structural problems.
The UK has a very distinct approach to ownership and corporate governance, one that differs markedly from the other nations considered in this paper. It is much more open to foreign buyouts, low prevalence of public ownership and a particularly active market for corporate control. The UK has more fragmented shareholding (fewer 'blockholders') and a low prevalence of large family-owned firms.
The Bank of England's former Chief Economist Andy Haldane has argued that "there is both direct and indirect evidence of investment having been adversely affected by short-termism on the part of either investors or managers or both". His conclusion is supported by the review of UK equity markets undertaken in 2012 by John Kay, ex-member of the First Minister's Council of Economic Advisers, the work of the Purposeful Company Taskforce, Bank of England survey evidence ("80% of all the publicly owned firms agreed that financial market pressure for short-term returns to shareholders had been an obstacle to investment" 2017) and numerous analyses linking poor corporate governance to fragmented shareholding, weak employee engagement, low prevalence of family firms and a relatively high prevalence of hostile takeovers. The adverse outcomes include pay inequality and weak investment.
The UK's relatively low productivity has long been a concern of policymakers but a wide range of policy initiatives, including the deregulation and tax cuts of the 1980s and, more recently, a series of industrial strategies, have failed to close the gap with the best performing nations. The UK's approach to industrial policy has suffered from a lack of commitment, weak institutions and multiple coordination failures.
In a recent paper, Diane Coyle and Adam Muhtar argued that: "the UK's industrial policy since the 1970s has been characterised by frequent policy reversals and announcements, driven by political cycles, while multiple uncoordinated public bodies, departments and levels of government are responsible for delivery…A consequence of the policy inconsistency and poor coordination identified here is that UK industrial policy lacks adequate information feedback channels from outcomes to the policy process; there is a failure to learn or to build on successes".
The UK's labour and product markets are among the most deregulated in the advanced world. It has been argued that the low regulation environment encourages firms to adopt 'low road' approaches to competitiveness through cost minimisation and work intensification rather than 'high road' approaches based on patient investment and greater focus on skills formation/utilisation.
The UK Internal Market Act 2020 has already opened the door to the possibility of forced deregulation across the UK nations, where market access principles risk driving down standards and threaten devolved policy choices to maintain alignment with high EU standards on social, environmental and public health issues. Further deregulation relative to current EU standards is now an explicit goal of the UK Government.
Labour market inequality
One consequence of deregulation, relatively low trade union density, inadequate industrial policy and a low rate of capital investment is a labour market more polarised in terms of wage distribution than other advanced nations: the UK has a relatively high proportion of both low wage workers and very high earners (and therefore high income inequality). Recent research for the Institute for Fiscal Studies argues that "the balance of bargaining power between employers and workers must be an essential part of a credible explanation for observed differences in the structure and change of national earnings distributions". Again, the current balance of bargaining power in the UK reflects deliberate policy choices.
The UK also has few of the deliberative and co-ordinating institutions common in Europe's co-ordinated market economies (e.g. national Economic and Social Councils, sectoral collective bargaining, works councils). The UK's few remaining institutions of social partnership have in recent years been abolished (e.g. the UK Commission for Employment and Skills) or weakened (e.g. the role of the Low Pay Commission has diminished as government has started playing a direct role in setting the national minimum wage). As noted above, the lack of such institutions is particularly damaging in designing and implementing effective industrial policy.
The various components of the UK model discussed above combine in ways that help distinguish the UK from the comparator countries and explain its weak performance across the range of indicators discussed in this paper. For example, a number of commentators have attributed relatively weak productivity and relatively high income inequality to the short-termism resulting from the UK's distinct approach to ownership and governance, the failure to develop effective institutions and lack of commitment to industrial strategy.
It is also important to note that the UK's distinguishing characteristics are to a large extent the results of a deliberate set of policies pursued since the 1980s. As one commentator has put it "the growth of finance, a flexible labour market, and a smaller state imprint on the economy than most western European countries were all components of the decision to chart a course towards a mid-Atlantic position".
Box 6: Ireland in the EU
Ireland's rapid growth in the 1990s and 2000s was due to the conflation of a number of factors: membership of the EU; creation of the single market; a large pool of English-speaking, underemployed but well-educated labour; a time zone convenient for US multinationals; the absorption of large amounts of EU structural funds used to boost skills and infrastructure; and, social partnership agreements that moderated wage demands and helped create macroeconomic stability.
It is instructive to compare Ireland's economic performance post-EU accession with that of Scotland, Northern Ireland and Wales who, over this period, remained too reliant on the relatively poorly performing UK economy:
"…not only that the European Union was fundamental in transforming the Irish economy, but that Irish independence was essential in exploiting the opportunities which the European Union afforded…[Ireland] would never have done anywhere near as well as we in fact did, had we remained a mere region of the UK. Policy flexibility at a time of rapid change was essential, and that is what independence gave us".
It is instructive to consider Ireland's recovery from the serious fiscal challenges it experienced 2008-2013. This was driven not by the structural reforms proposed by its creditors but by the effectiveness of its inward investment strategy, especially its ability to target and attract parts of important global supply chains in technology, pharmaceuticals and finance. Ireland had the flexibility and capability to respond rapidly in response to crisis.
Ireland also highlights the importance of immigration policy. The growth in Ireland's IT services sector would not have been possible without access to large numbers of skilled migrants. Higher levels of immigration would have a number of economic benefits for Scotland but would be particularly important for internationalisation: for instance, employing a recent immigrant increases the propensity of a firm to export to that person's home market. Ireland has also reversed the pattern of emigration that was prevalent until the 1990s.
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