Scotland's Economy

Learning from small advanced economies

February 10, 2013 by Dr David Skilling, Director at Landfall Strategy Group No Comments | Category Economy

As Scotland debates whether or not to become an independent country, there is value in looking to the experience of other small advanced economies.

Many small economies have performed strongly over the past few decades; Norway, Sweden, and Singapore to name a few. The small advanced economies have held their share of global GDP constant over the past 30 years, while the shares of many of the large advanced economies have reduced. And four of the top five positions in the World Economic Forum’s Global Competitiveness report have consistently been filled by small countries.

The experience of small advanced economies can also provide guidance in terms of the challenges and opportunities associated with independence.

Scotland does not seem to differ systematically from other successful small economies in terms of policies, human capital, or natural resources. Indeed, on some of these dimensions it is well-placed. And yet Scotland’s economic performance has consistently lagged its peers.

There is no small country policy template for success, and each of these countries pursued different approaches, but they did so in an integrated, coherent manner that worked for their economic context. This experience suggests that a key missing feature in Scotland is policy autonomy; the ability to set policy in a way that responds to Scotland’s specific circumstances.

Scotland has some policy autonomy, but has less than full control over industry policy, science and innovation, fiscal policy, and the like. As a result it has not had the same ability to pursue the type of economic growth policies of its small country peers like Denmark or Finland. These policy constraints are likely to have had a negative impact on Scottish economic performance.

Scotland is constrained in its ability to set policy in a way that fits its local context and preferences. Policies that work well from a London perspective may not be those that enable Scotland to pursue a coherent competitive strategy. And London exerts a powerful gravitational pull – without the ability to set policy to respond, Scotland may find it difficult to attract and retain the capital and labour required to grow.

For example, the industry policy that is a common feature of small advanced economies involves aligning specific policies behind areas of competitive strength.  This requires the ability to control a wide range of policy levers and to be able to focus these on local areas of strength.

International experience suggests that the debate about the existence and nature of the economic benefits from independence should be about the specific benefits that policy autonomy will generate.

Does the greater policy autonomy associated with independence offer a better prospect of achieving the economic and social outcomes that Scotland wants?

My reading is that well-managed policy autonomy can be a source of economic benefit. But to understand the case in Scotland requires consideration of how greater policy autonomy would be used here. What are the specific risks that can better be managed, and the opportunities that can better be seized?

Policy autonomy can confer real economic benefits, however, small countries are exposed to a greater incidence of shocks, and have reduced margin for policy error relative to large countries. Financial discipline and a clear seriousness of purpose are required for small economies to perform well.

Being small clearly does not guarantee success – there are risks with any option, including the status quo. The economic and political complexity of many larger economies is one reason that some are struggling to respond to the challenges they currently face. In contrast, many small economies are adapting well. And an economic case for retaining the current set of arrangements would need to account for Scotland’s historical economic performance, which has lagged many of its neighbours.

Overall, the record of small advanced economies suggests that the policy autonomy that comes with independence has the potential to generate upside by allowing Scotland to better design policy to respond to its specific challenges and opportunities. However, independence also creates challenges and risk exposures for Scotland that need to be considered and managed. Ultimately, independence is what you make it to be.

Dr David Skilling is Director at Landfall Strategy Group, a Singapore-based research and government advisory firm.

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