Choosing a strategy for Scotland's economic growth
By Brian Ashcroft - Posted on 16 July 2015Brian Ashcroft, Economics Editor of the Fraser of Allander (FAI) Economic Commentary, analyses the current state of Scotland’s economy and examines how growth can be generated.
The timing to review the Scottish economy is optimal with the 2015 General Election over and Holyrood elections less than a year away. There is currently a small window of opportunity for politicians and policymakers to reflect on challenges facing our economy and consider what can be done to simulate growth.
Economic Growth
Long-term economic development can be determined through capacity growth, which refers to the level of output of goods and services an economy can produce over a period of time. This is measured through Gross Domestic Product (GDP): the monetary value of all the finished goods and services produced within a country’s borders, within a specific time period.
So how is Scotland’s economy doing overall? The answer is not too badly. Over the last 50 years, Scotland’s capacity growth has been equal to the UK, averaging at a rate increase of 2.3% p.a. If we consider population, GDP per head has grown faster here (2.2% p.a.) over that period compared to the UK (2% p.a.). But it’s not all good news. Scottish and UK GDP have both recovered since the recession, however, the UK outperforms Scotland in this area suggesting there is no room for complacency.
Productivity
Productivity is weaker in Scotland though it’s also low in the UK. Productivity is another economics term we use which refers to the measure of output (revenue) per unit of input (labour and capital). Productivity growth is vital for strengthening the economy as maximising the impact of our inputs allows us to gain more outputs for less. Increasing employees’ skill levels, advancements in technology and improvements in supply chain and logistics can all enhance productivity growth. The evidence indicates Scotland’s weak productivity growth is due to low business R&D and innovation, weak entrepreneurship and, particularly, a low firm formation rate.
What is Scotland’s current strategy?
The Scottish Government’s current economic strategy focuses on two major goals of increasing competitiveness and tackling inequality. Four priorities fall under these goals:
- Investing in people and infrastructure in a sustainable way
- Fostering a culture of innovation and R&D
- Promoting inclusive growth by creating opportunity through a fair and inclusive jobs market and regional cohesion
- Promoting Scotland on the international stage
This approach is well grounded both in theory and practice, however, the current strategy appears weak on implementation and lacks an organising theme specific to Scotland’s economic needs, which all initiatives developed under the strategy should be based upon.
What should our strategy be?
It’s clear the extreme openness of the Scottish economy should be the overarching principle of its growth strategy. Such a strategy would focus on building an export base that links more effectively to global growth hubs and recognises the key role cities hold in generating growth.
The current strategy’s focus on promoting inclusive development through regional cohesion, ignores the fact growth is optimally concentrated in space and if broadly spread, risks losing the advantages of economies of agglomeration. This refers to benefits firms obtain by locating near each other, such as shared resources and knowledge, which can lead to increased R&D and innovation, ultimately having a positive impact upon productivity.
This doesn’t mean our economic policy should neglect rural and peripheral areas. Instead, we need an integrated policy that covers the labour market, transport, housing and planning, which helps ‘non-growth’ areas take advantage of progress in urban hubs. For example, develop efficient and affordable transport links that help workers outside of cities get to jobs in the hub, rather than creating these jobs in their home areas. These individuals could then spend income earned in the city at home, improving economic growth in so-called ‘non-growth’ areas.
What theme do you think should link Scotland's economic initiatives together? Share your comments below.
