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Last Updated: Wednesday, 29 October, 2003, 09:49 GMT
Scotland seeks key to growth

By James Arnold
BBC News Online business reporter

Storms in Edinburgh
Is the outlook just as stormy?

Five years ago, a BBC survey found that two-thirds of Scots thought their economy would improve through devolution.

It seems they were wrong.

As the overall UK economy has borne up well under the hammer blows of the past few years, Scotland has fallen rapidly behind.

Now, Scottish growth is close to zero, while the UK as a whole is expanding by almost 2%.

Devolution has, many say, been a political triumph - can the same be said for the economy?

Ups and downs

Scotland's economy is poised in a rather complicated situation.

Gross domestic product (GDP) shrank in the first quarter and edged up in the second, but some feel a recovery of sorts may already have begun. The Scottish Chambers' Business Survey, a regular measure of commercial confidence, has pointed to a likely upturn before the end of the year.

Scotland is a serial underperformer
Jeremy Peat, Royal Bank of Scotland

And the Royal Bank of Scotland's Purchasing Managers' Index (PMI), arguably the most closely-watched indicator of Scottish business activity, has turned in an unexpectedly strong performance for the third quarter.

But Scotland's main PMI figure remains by far the lowest in the UK

And CBI Scotland's latest manufacturing survey showed that October was the weakest month in a year-and-a-half - and that the percentage of Scottish firms working below capacity was the highest in 11 years.

'Serial underperformer'

Whatever the precise definition of Scotland's current predicament, a predicament it certainly is.

"Scotland is a serial underperformer," says Jeremy Peat, Royal Bank of Scotland's chief economist.

Jim Wallace
Jim Wallace says government is starting to understand business
Growth has lagged the UK average for five years; in broader measures, notably quality-of-life scores such as healthcare, Scotland has been behind for far longer than that.

The present malaise is the result of the Scotland's phenomenal success in attracting hi-tech manufacturing investment during the 1990s.

"Silicon Glen" - a term no-one seems to use any more - seems to have contracted by about one-third last year alone, provoking the loss of tens of thousands of jobs in the industrialised Glasgow-Edinburgh corridor.

And while Scottish Enterprise, the agency that looks after business north of the border, claims that inward investment has steadied this year, the longer-term trend is dismal.

Shrinking slice

In the early 1990s, Scotland accounted for close to one-fifth of total UK inward investment; now, it garners less than 7%.

"The cake is getting smaller, and Scotland's share of that cake is shrinking," admits Jim Wallace, minister for enterprise.

Where big foreign investors such as Motorola and IBM have retrenched, local business has failed to fill the gap.

Some critics now point to a debilitating lack of commercial dynamism in Scotland, the country which arguably did more than any other to define entrepreneurial capitalism.

Critics lay the blame at the door of the Scottish Executive, which is accused of simultaneously featherbedding Scots through lavish grants and welfare payments, and battering companies with increased bureaucracy and higher business costs.

Exchanges over rates

The debate over whether Scotland's business environment really has deteriorated is fierce, and still unresolved. Devolved Scotland has little fiscal leeway, but critics say the executive has unfairly ramped up business rates - which are now some 9% higher than in England and Wales.

Mr Wallace points out that the Scottish business tax burden is "just under the European average - better than France, and about the same as Germany".

But CBI Scotland director Iain McMillan argues: "We must remember that Scottish firms operate against a skills and transport infrastructure deficit [compared with other EU countries]. Our business tax system should be compensating for this. It is not."

At the Scottish Chambers of Commerce, deputy director Warrick Malcolm is wary about blaming devolved government for worsening business conditions.

"But we are looking forward to seeing evidence that the [Edinburgh] government understands how to help business," he says.

"It's slim pickings so far."

Home-grown hopes

To be fair, Scotland's five-year-old government has now made the economy - belatedly, say many - one of its top priorities.

After a frosty first couple of years, Mr Wallace and his colleagues now claim a much cosier relationship with the business community.

Skye
Scotland is an expensive country to run

Their big idea - the somewhat irritatingly-named "Smart, Successful Scotland" programme - aims to make the country a fertile breeding-ground for hip, high-value indigenous businesses.

Smart, Successful Scotland urges progress towards a range of macroeconomic and productivity targets, as well as improving innovation, use of technology and quality of life.

And modest progress is indeed being made, according to an audit of the programme carried out earlier this year by the Fraser of Allander Institute at Strathclyde University, which carries out research on the Scottish economy,

"The essential ingredients seem to be in place," says Brian Ashcroft, the institute's director.

Population problems

But it's much too early to cheer, critics warn.

Smart, Successful Scotland is failing in one glaring regard - attracting people to work in Scotland, and persuading Scots to stay put.

Emigration is not the flood it once was, but it is still worrying, especially among the aspirational young.

And the birth rate has fallen to 150-year lows, leading one tabloid to dub Scotland "the granny-flat of Europe".

While most European countries are turning away immigrants, Scotland cannot attract them - something that has led some politicians to demand an exemption from tight UK immigration controls.

A demanding country

Many - including the Edinburgh government - fear that demographic factors could choke off Scottish growth.

In fact, this fear may be exaggerated: historically, population growth is not a pre-requisite for economic growth, but tends to follow as a consequence of it.

Far more serious as a long-term constraint to growth is the lumpy shape of the Scottish economy.

(Click here for a map of Scottish regional incomes)

Most of the population live in the central belt, roughly along the M8 motorway between Glasgow and Edinburgh, and up the east coast towards Aberdeen.

The sprawling isolation of the rest of the country demands high levels of investment in transport and other public services.

Combined with significant levels of deprivation in west-central Scotland, and a generally poor level of public health, the country can hardly avoid a higher basic level of public spending than the UK average, says Jeremy Peat of the Royal Bank of Scotland.

"The demands placed on public funds in Scotland are simply higher than those elsewhere," he says.

Spreading it out

Consciously or not, Scotland may have sacrificed some of its growth potential in order to redistribute wealth more equitably.

According to Brian Ashcroft, the structure of devolution makes Edinburgh almost exclusively a spending government, while macroeconomic decisions are made in remote London.

"The population is really not all that concerned with economic growth," he says.

"The executive has little incentive to worry about growing the economy."

But as Mr Peat points out: "It's a lot easier to redistribute wealth in an economy that's growing strongly."

Maybe Scotland's stuttering economy needs more devolution, not less.


Over the next few weeks, BBC News Online will be looking more closely at some of the issues raised in this story. Next week, we report on attempts to revive the fortunes of Scotland's most isolated rural communities.


Click here to return



SEE ALSO:
Manufacturing outlook 'bleak'
21 Oct 03  |  Scotland
Economy 'has turned the corner'
13 Oct 03  |  Scotland
Exports in further decline
08 Oct 03  |  Scotland
'Overseas threat' to economy
02 Oct 03  |  Scotland
Export figures slump by 25%
09 Apr 03  |  Scotland
Manufacturing still in recession
02 Mar 03  |  Scotland


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