View from the Street: Wealth of the Nation

Jane-Frances Kelly

For a year in 2004, I worked for the government of the Australian state of Victoria (population 5 million). On arrival, I was struck by how some of their politicians seemed fixated on comparisons with neighbouring New South Wales. For example, as long as crime rates were better than New South Wales, they didn’t think to ask how their performance compared with anywhere outside Australia. As long as they were top of the class, they didn’t think to ask whether such a class might be near the bottom of the school.
 
I was reminded of this recently when I realised that debate about Scottish economic performance tends to start and finish by comparing ourselves to the rest of the UK.
 
When we look only that far, the picture isn’t too bad. Scotland’s productivity is currently only outperformed by London and the South-East.
 
But UK performance as a whole is middling. So, while Scotland’s productivity doesn’t look so bad compared to the rest of the UK, putting it into an international context shows that we have quite a challenge on our hands. We fall far behind other European economies such as the Netherlands, France, Germany and Belgium. To move to the top quarter of the table, Scotland would need to achieve productivity levels close to Denmark, some 20% higher. It’s notoriously hard to increase productivity by such large amounts, but even tiny increases can translate into big GDP numbers. For example, a one per cent increase in total factor productivity would increase GDP in Scotland by over £2.3 billion.
 
Our productivity challenge has a range of aspects. It’s well known that business investment is relatively low, as is R&D spending, and that international exports are lower than OECD averages, from a narrow base of industries and firms.
 
Scotland does have a relatively well-educated workforce, but we don’t make the most it, with lots of small, lower-productivity firms and a poor record on management quality. (Anyone who’s ever had a bad boss will identify.)
 
Tomorrow’s workforce is also critical, and here recent Scottish education survey scores give cause for concern. Both the Scottish Government’s Survey of Scottish Literacy and Numeracy (SSLN, now discontinued) and the OECD’s Programme for International Student Assessment (PISA) show worryingly large declines.
 
Finally, Scotland has a shrinking working-age population. That means that we don’t have many options for increasing living standards; we have to become more productive.
 
So, what to do? We took a look at what has worked elsewhere, in places that made a real difference to their economies.
 
Perhaps unsurprisingly, there were no quick fixes.
 
Three things came out strongly.
 
First, these places focused on evidence to face up to and understand their challenges. Problems were neither denied nor wished away.
 
Second, significant efforts were made to build consensus and collaboration across political parties, policymakers, business and trade unions. Responses were developed by these parties together, hammering out the choices and trade-offs necessary to make real progress. For example, does there need to be wage restraint for a period of time? What safety net protections or other social policy reforms might be negotiated in return? How might the benefits of increased productivity be shared widely?
 
Third, reform was underpinned by strong and credible institutions which were independent of day-to-day politics, commanded the confidence of people across the country and were able to hold decision-makers to account.
 
There is no consensus on how the global economy will develop – whether on international trade patterns, the pace of digitalisation, or the changes that automation and AI will bring. Focusing on skills makes us more adaptable, as well as increasing people’s individual opportunities. A focus on skills doesn’t just apply to universities, but also on improving schools, colleges, and in-work training and re-training.
 
Productivity is a long-term game, and turning it around is something a whole country does – government, business, unions and others – by getting its act together.
 

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The David Hume Institute’s Wealth of the Nation report was published 6thSeptember 2018 and can be found here.
 
The David Hume Institute is an independent, non-partisan, evidence-based policy institute that has been operating at the heart of Scottish policy debate for over 30 years.
 
We aim to produce original research with a strong emphasis on economic and education policy issues. Our research is independent and evidence-based and we share our ideas with policy makers from all sides of the political spectrum.
 
We take the perspective of the Scottish public rather than that of any interest group. To safeguard our independence, we receive no government funding and do not undertake commissioned work. We are rigorous in obtaining the best available evidence from our own data analysis and from published work.