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The Real Economy

The Real Economy

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On 20 June 2013 the RSE hosted a public discussion on “The Real Economy”. This examined how the various constitutional options, whether devolution as defined in the Scotland Act 2012, further devolution as being discussed by various parties, or independence as proposed by the Scottish Government, are likely to influence the future economic performance of Scotland.
On 20 June 2013 the RSE hosted a public discussion on “The Real Economy”. This examined how the various constitutional options, whether devolution as defined in the Scotland Act 2012, further devolution as being discussed by various parties, or independence as proposed by the Scottish Government, are likely to influence the future economic performance of Scotland.

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Published by: The Royal Society of Edinburgh on Aug 23, 2013
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Enlightening theConstitutionalDebate
The fourth in a series of discussion events to enlighten thepublic debate on Scotland’s constitutional future.
The Real Economy
20 June 2013 at the Royal Society of EdinburghIntroducon
The public discussion seminar on the Real Economy was the fourth in a seriesof seminars aimed at enlightening the debate around Scotland’s constuonalfuture. The Real Economy refers to aspects of the economy besides banking,currency and financial and monetary policy. This seminar examined Scotland’sglobal reputaon and aracveness as a trade and business desnaon,Scotland’s energy market, and Scotland’s labour market, and how these might beaffected by constuonal change. This seminar aimed to bring new perspecvesinto the debate on Scotland’s constuonal future.The subject of The Real Economy was addressed by a panel of four speakers:• Mr Brandon Malone, Chairman, Scosh Arbitraon Centre;• Mr Stephen Boyd, Assistant Secretary, Policy and Campaigns Department, ScoshTrades Union Congress;• Professor Gordon Hughes, Professor of Economics, University of Edinburgh; and• Professor Jeremy Peat OBE FRSE, Director of the David Hume Instute.The discussion was chaired by Mr Douglas Fraser, Business and Economic Editor, BBC Scotland.The seminar was conducted as an open, public discussion seminar. This report provides a summary of the posionsoutlined by the speakers, and of the subsequent discussion.
Mr Brandon Malone,Chairman, Scosh Arbitraon Centre
MrMalonesuggestedthat,withreferencetotheRealEconomy,the decision to vote ‘Yes’ or to vote ‘No’ in the ScoshIndependence Referendum would not be made on the basisof accounng issues. He therefore proposed to examine thebusinesscaseforindependence.MrMalonebeganbyobservingthatmuchofthedebateaboutScotlandsfuturehascentredonthe noon of risk; for example, the potenal risk of ScoshindependencetoaspectssuchasScotland’sglobalcompeveness,to Scosh pensions, to Scotland’s membership of the EU, etc.In business, however, risk tends to be associated with reward,andtakingcalculatedrisksisanintegralpartofbusinessdecisionmaking. He acknowledged that there are risks associated withScoshindependence,butsuggestedthatthequesontoaskis not whether there are risks, but whether the potenalreward outweighs these risks.MrMalonebrieflyreferredtothefactthatScoshindependencewould enable the Scosh Government to have more fiscallevers available to it, but he did not wish to focus on the issueof taxaon and spending. He proposed to look at the widerpicture,andtofocusonScotland’sbranding,PRandpromoon.Addressing the issue of branding first, Mr Malone suggestedthat UK branding is slightly confused, with the naons of theUK operang under several different brands; for exampleGreat Britain, the UK and the naonal brands of each naon(England, Wales, Northern Ireland and Scotland). Hesuggested that the internaonal percepon of Scotland as anaon with its own disnct and unique identy suffers as aresult of this, with Scotland being subsumed by the UKbrand. Mr Brandon referred to his work as a solicitor andsuggested that when trying to promote Scotland as adesnaon for internaonal arbitraon, he is oen calledupon to explain to people that Scotland has its own disnctlegal system. He suggested that internaonally there is a lackof understanding about what Scotland is, but indicated thatsince the Scosh Referendum has been announced, therehas been greater global awareness of Scotland as a uniqueand disnct enty. He argued that it is only through theaainment of independent statehood that the problemsaround Scotland’s branding will be resolved.
On the subject of Scotland’s global PR, Mr Malone suggestedthat Scotland’s global reputaon is suffering as a result of theUK intenon to hold a referendum on EU membership.Mr Malone suggested that the Scosh Government is morepro-European than the UK Government, and pointed out thatthe UK Independence Party (UKIP) has so far made noprogress in Scotland. He made the point that internaonalpercepons of Scotland are coloured by UK foreign policy.Turning finally to the queson of how Scotland is promotedabroad, Mr Malone observed that, at the UK level, thispromoon is undertaken by the Foreign and CommonwealthOffice (FCO). He referred to a document entled
Plan for Growth
produced by the UK Government, purporng topromote UK legal services internaonally, but observed thatthe original document referred to the ‘supremacy of Englishcontract law’, which is different from Scosh contract law.He argued that this demonstrates a tendency to conflate UKlaw with English law, and in parcular with the London legalscene. The document was subsequently revised, but MrMalone suggested that it is sll heavily focused on Londonand the English legal system, and promotes English lawyersover Scosh lawyers.Summing up, Mr Malone concluded that brand confusion,negave PR and confusion in promong Scotland could allbe eliminated by Scosh independence. He added thatIndependencepresentsanopportunityforScotlandtomanageits own PR internaonally, to showcase Scosh businesswithout caveat, and to create a world capital in Edinburgh.
Mr Stephen Boyd, Assistant Secretary, Policy and CampaignsDepartment, Scosh Trades Union Congress
Mr Boyd addressed the issue of the labour market, andsuggested that this is an area which has so far not beendiscussed as part of the debate on Scotland’s constuonalfuture. Mr Boyd observed that the economy is affected byhow the labour market funcons. He added that the labourmarket is also highly relevant to some of the issues that havebeen at the forefront of the constuonal debate; forexample, opons for a currency union, which is heavilyinfluenced by labour force mobility, as well as policy aroundtaxaon. Mr Boyd suggested that tackling inequality has beena key theme of the constuonal debate. He pointed out thatinequality at the Scosh level cannot be tackled unless andunl inequalies in the labour market are tackled. Mr Boydobserved that in spite of its relevance, the only aspect of thelabour market which has been addressed by either side of the constuonal debate is pensions, but that even this areahas not been addressed in a very enlightened way.Mr Boyd observed that the labour market is a complex enty.Recent stascs on the Scosh labour market have beenreasonably posive relave to the rest of the UK, and theScosh labour market is highly integrated with the rest of the UK. The Scosh labour market is lightly regulated, andhas labour market instuons which are UK-wide and/or UK-affiliated. He added that trade union density in Scotland ishigherthanfortheUKasawhole.Inrelaontotheperformanceof the Scosh labour market, Mr Boyd observed that it hasperformed well since devoluon, relave to the UK and byinternaonal standards. Scotland has maintained relavelyhigh employment levels, but does suffer from long-standingregional unemployment, as well as high levels of low-paidwork and high levels of under-employment. Mr Boydsuggested that some of these, and other, negave labourmarket trends were apparent before the recession began in2008, and asked what might happen with regard to thesetrends as Scotland and the UK move towards recovery. Hesuggested that these negave labour market trends will havetobeaddressed,especiallyiftheaspiraonsofthe‘Yes’campaignin Scotland for the Scosh economy are to be achieved.Mr Boyd turned to the queson of what Scoshindependence might entail with regard to the labour market.He suggested that it is difficult to discern a raonale fordevolving labour markets under enhanced devoluon, butobserved that independence is an enrely different maer.He suggested that a newly independent Scosh Governmentmight want to do as lile as possible to upset the levels of integraon between Scosh and UK labour markets. On theother hand, it may wish to shi towards a model morealigned with that of small European naons, for example theNordic naons to which Scotland oen compares itself.Mr Boyd addressed the queson of what this might look like.He observed that, contrary to popular belief, Nordic labourmarkets are not heavily regulated, only slightly more so thanthe UK. Instead these labour markets are characterised byhigh trade union density and wide collecve bargainingcoverage. Nordic naons invest massively in European labourmarket programmes, as compared with the UK, which investsvery lile as a proporon of GDP. Unemployment insurancein the Nordic states is amongst the most generous in theworld, and significantly more generous than that in the UK.Given this very different environment, Mr Boyd posed thequeson:
How might an independent Scotland begin to movetowards this model? 
Responding to this queson, he observed that the ScoshGovernment has recently published its economic case forindependence, which introduced into the debate some issuesaround the labour market. Mr Boyd observed that, within thisdocument, there are demonstraons of a shi towards asystem of centralised bargaining mechanisms like those of theNordicstates.Thisproposalincludedintroducingmechanismsto formalise the relaonship between Government, employerorganisaons and employee associaons.Mr Boyd indicated surprise at how lile response this proposalhas generated, given that it could have a profound impact onthe Scosh economy and the labour market. He suggestedthat the challenges involved in bringing about a shi towardscentralised bargaining mechanisms are significant. Hepointed out that bargaining structures are part of thecultural and historic fabric of sociees, and are therefore not
easily changed by Government acon. While the social andcultural condions exist in Nordic states to allow socialpartnershipstoflourish,thesameisnottrueofScotland,whichhas no recent history of successful bargaining mechanisms.He added that social partnerships in Scotland are weak andthat the employer side of these partnerships is fragmentedand unrepresentave. Mr Boyd referred to a recent report byMichael Heselne which stresses that the way employerorganisaons in the UK are set up is detrimental to the policydevelopment process, and recommends establishing amechanism closer to the European Chamber model. Mr Boydalso observed that the way Government in Scotland is set upis not conducive to social partnerships. He argued that thereis a capacity issue; the instuonal infrastructure does notexist to support a move towards more formal styles of socialpartnerships.Discussing next steps, Mr Boyd suggested that there is notlikely to be much consensus for reform of the currentstructure, observing that the UK flexible labour market hasvery widespread polical support and suggesng that anyiniave for heavier monitoring of social partnerships islikely to face strong opposion.Concluding his discussion of labour market issues, Mr Boydobserved that significant change is required to address someof the problems of the Scosh labour market, and suggestedthat it is incumbent upon both sides of the constuonaldebate to present their arguments for how they wouldaddress these issues and bring about the required change.He added that the way people are treated in work on a dailybasis has to be a part of the debate about Scotland’sconstuonal future.
Professor Gordon Hughes, Professor of Economics,University of Edinburgh
Professor Hughes proposed to focus on the energy sector,as a key aspect of the Real Economy. He pointed out thatthe energy sector in Scotland is large and will, in a variety of ways, be central to any prospect for an independent Scotland.Professor Hughes observed that, according to ScoshGovernmentfigures,thegrossvalueadded(GVA)bytheenergysector in Scotland is around 15% of Scosh GDP, with thisfigure varying from year to year depending on the oil price.However, he suggested that if all of the industries that aredependent on the energy sector are added in to this, thefigure is above 20%. He also pointed out that employmentinenergyaccountsforlessthan2%ofScotland’semployment,revealing that the energy sector is very capital intensive.He observed that the energy sector in Scotland is projectedto aract between 60% and 80% of all business investmentover the next ten years. The energy sector is therefore hugelyimportant in terms of investment acvies, and in terms of the energy sector’s contribuon through taxaon and rents(meaning the various forms of income which accrue throughthe extracon of oil, or the exploitaon of renewable energy).For those numbers to connue, Professor Hughes observed,there has to be a large connuing flow of investment, andthis investment has to come in a variety of forms. Scotlandtherefore faces a need to maintain a connuous flow of investment back into the sector. This is a major lesson whichmany countries with large energy sectors have ignored, heobserved. Professor Hughes provided the example of Norwayto illustrate this point. The crucial feature of Norway is that ithas a state-owned oil company;
Stat Oil 
, and has ploughedback a very large share of the earnings back into Stat Oil.A contrary case is
in Mexico. The lesson to be takenfrom this example is that an economy with a large energysector cannot consume the investment required to keep thissector going. Energy naons must therefore make a choicebetweenusingthebenefitsoftheenergysectorforenjoymentin the future, or consuming the revenue earned by this sectortoday and foregoing what those benefits might be worth inthe future. The more that is consumed now, the lower theincomes that can be generated by the sector in the futurewill be. The major challenge, Professor Hughes observed,is in geng the balance between these two opons right.ProfessorHughesraisedasecondissueabouttheenergysectorinanimaginedindependentScotland,inwhichScotland wouldhave a small, energy-dependent and relavely open economy.Economiesofthiskind,heobserved,tendtosufferenormouslyfrom volality of prices. All energy prices have a tendency toextreme swings, which can be cyclical, or dependent uponexternal factors. The more reliant an economy is upon theenergy sector, the more likely it is to find itself squeezed if energy prices work adversely, and the greater the bonus willbe in terms of revenue if they work posively. Spending thisrevenue has a consequence however, which is widely referredtoas‘DutchDisease’.Thisisendemicinallenergy-dependentcountries. The manifestaon of this phenomenon is that inmes of economic growth, the prices of non-traded goods(goods made and consumed at home) are driven up bydemand, meaning that the costs for other traded sectors(e.g., manufacturing) are higher than they would otherwisebe. These sectors ulmately find themselves squeezed, theconsequence being that in all energy-dependent countries,traded goods outside the energy sector get squeezed out andeventually die. In Scotland, this is likely to have a huge impact,because manufacturing industries account for a far largerproporon of employment in Scotland than the energy sectordoes. ProfessorHughesprovidedtheanalogyofthecarindustryin Australia, which doesn’t exist, because mineral boomshave driven up prices such that Australian car manufacturerscannot compete with the prices of imported cars.Thinkingaboutthepossiblesoluonstothisproblem,ProfessorHughessuggestedthatfindingasoluonwillposeaconsiderablechallengetoanindependentScoshGovernment.Oneoponwould be to create a ‘sovereign wealth fund’ as Norway has,funded by revenue from the energy sector. Norway’ssovereign wealth fund was started a long me ago, andProfessor Hughes pointed out that Norway’s real wealth isnot its sovereign wealth fund, but Stat Oil. Scotland would

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