A radical economic strategy for Scotland might be defined as one that prioritises democratic public and social ownership at national, regional and local level and which is driven by, and is responsible to, those whose livelihoods depend on it. It is radical because it confronts current centralising government agendas in both Britain and Scotland, because it directly challenges the corporate power that drives this process and, most of all, because it is about building the collective strength of those who produce.
At British level centralisation is moving fast. Johnson has already annulled the modest economic and industrial powers devolved to the parliaments in Scotland and Wales. Henceforth economic intervention in the nations and regions will come direct from London. It seems likely to take the form of large-scale infrastructure projects tendered to the private sector in line with EU regulations and politically badged as gifts from a Conservative government. The rhetoric will be about levelling up. The reality will be enhanced corporate dominance in a period that will see the public sector squeezed as never before and many fragile regional economies damaged beyond repair. Overall the government’s focus will be on paying down the mountain of public debt incurred as a result of Covid and its corporate mismanagement. Such retrenchment is essential for the government’s overriding objective. This is to maintain the international position of sterling on which depends the City of London’s role as a world centre for the corporate finance.
A centralising agenda
The political perspectives of the SNP reflect a similar corporate agenda – though from a different angle. It is set out in the party’s 2018 Growth Commission Report and prioritises a relatively immediate return to the EU using sterling as its interim currency.[1] As David Byrne notes in his contribution, it sees growth as being secured largely through external corporate investment – much of it post-Brexit investment flight from south of the border. In particular, the Report highlights the degree to which Edinburgh’s long-standing banking expertise, matched with EU membership, would facilitate the migration of London-based international banks.
Even before Covid struck this agenda represented a daunting fiscal challenge and it is this that explains the SNP’s own centralising drive, one that has already done considerable damage to Scotland’s local economies. The figures are stark. Already before 2019 Scotland needed to reduce its annual budget deficit from around 7.5 per cent of GDP to 3 per cent to meet the EU’s convergence terms (and to 0.5 per cent for full euro membership). National debt would need to fall from around 80 per cent of GDP to 60 per cent. Correspondingly, the ten years of SNP administration have witnessed a drastic centralisation of key public services often combined with outsourcing and cuts. This has been the case for the NHS, the police, fire and rescue, further education and justice. While this partly results from the British government’s austerity cuts, its zealous application matches the SNPs’s own agenda. In local government even fiercer budget controls have been imposed. Real cuts of almost 10 per cent over the past nine years have resulted in a 28 per cent reduction in council spending on economic development, 23 per cent in culture and leisure, 24 per cent on roads and 20 per cent on planning.[2] Public sector house building has largely ceased. And Scottish government itself has made little direct investment in industry – with EU rules against state aid repeatedly used. In 2019 the country’s last remaining areas of manufacturing expertise in locomotive engineering and wind turbine construction were lost when the Scottish government used EU regulations to claim it was unable to intervene. Since then the collapse in oil prices has increased the budget deficit to 8.5 per cent while Covid is likely to take Scotland’s share of the national debt to well over 110 per cent of GDP. The annual deficit on current expenditure will also rise significantly as a result of Covid’s longer-term consequences for structural unemployment. By how much remains uncertain.[3]
Undaunted, the SNP pressed ahead with its independence agenda. At its November 2020 conference., with the City of London participating as a corporate sponsor, the SNP leadership demanded a referendum in 2021. For the authors of the Growth Commission Report speed is essential if London’s overseas banks and financial service firms are not to slip away meantime to Frankfurt, Paris and Dublin.
Public and Social Ownership
What is the public sector alternative ? The most immediate example of locally-based and democratically controlled economic regeneration is what has become known as the ‘Preston Model’.[4] This seeks to maximise local employment and wealth through redirecting the use of monies that ultimately come from the public purse into the local economy and employment – and particularly into sectors where income is not syphoned off into externalised profit streams. As practiced by Preston Council, this has involved taking contracts back in house for elderly care, transport services and house building and maintenance and entering into agreements with other local public sector and charitable institutions, universities and hospital trusts, to do the same. It has also involved using planning permissions to persuade commercial firms to recruit and source locally and to employ on union conditions. In Scotland one or two councils, particularly North Ayrshire, have attempted to follow this example.
The strength of this model is that it is democratically responsible to the local community, builds the collective strength of an increasingly unionised workforce and retains more public income locally. Its weakness is that it is largely limited to services, may sometimes tend to take income streams from other equally disadvantaged areas and is largely restricted to, and potentially sharply constrained by, income through the public purse, often ultimately from the Westminster government. It also has limited capacity for production: the competitive manufacture of marketable commodities involving high levels of expertise and capital investment.
This is why the wider industrial strategy embodied in both the 2017 and 2019 Labour Party election manifestos remains important. The key requirements are a State Investment Bank that can take stakes in private companies and require the presence of trade union representatives on company boards, full public ownership for developmental companies in strategic areas, the renationalisation of companies in transport, power, communications and posts and the use of government purchasing to require contractors to buy locally and to bargain collectively with appropriate trade unions. Such powers, whether at administered at Westminster or at national and regional level, would first and foremost rebuild the strength of organised labour. It would enable the trade union movement and those it represents to develop a countervailing power to that of capital directly within the process of economic decision-making and, in doing so, to act as champion of the wider communities it represents. Organised labour would constitute the core of an alliance that would, together with professions and small business, anchor productive power and enable the redevelopment of what Scotland has largely lost: centres of expertise linking major exporting companies, supply firms, smaller production cooperatives, schools, colleges and universities.
The immediate problem with this perspective is not economics but politics. Corbyn has gone and Labour is in retreat. Can such a programme now be carried forward ?
This answer must be Yes. The alternatives are so destructive that the labour movement and its allies must make it happen – and be armed, in a way it was not previously, with the arguments needed to build a wider alliance of support. This will be essential not just to win such a programme electorally but to carry it through subsequently. As at the time of the original Red Paper on Scotland in 1975, wider political mobilisation will be required.
Arguments for public sector intervention
The labour movement needs to win a much wider understanding of just how weak Scotland’s productive economy has become, of the reasons for it, and, hence, why public sector intervention is essential.
Britain is almost unique in terms of its regional inequalities. Wealth and capital investment is overwhelmingly concentrated in the south-east. Across the midlands, the north and west and Wales it is disproportionately low. So, correspondingly, is productivity, research and development and new firm formation.[5] For Scotland the situation is even worse. Although still somewhat masked by the residual strength of investment in the north-east oil economy, de-industrialisation had already gone further than in any other region. Industry and manufacturing amount to scarcely 10 per cent of GDP and the country’s export potential is today restricted to a handful of externally-owned large firms. Worse, the specialist base of what remains of Scotland’s industry is narrow and scientifically-limited: salmon, whisky, the remnants of an externally-dependent electronics industry, wood products and small pockets of shipbuilding, engineering and chemicals. Correspondingly industrial research and development is minimal. Uniquely, compared to English regions, the bulk of Scottish R&D is provided through the university sector and, even so, remains below the British average.[6] This is Scotland today, a country which only a half century ago still remained an industrial powerhouse.
There are some general historical reasons for this decline. There was, in the 1960s, 70s and 80s, the political destruction of the post-1945 public sector economy (coal, steel, electric power, railways, oil refining) which in the post-war period had sustained a significant private sector in heavy industry and engineering. There was the structural weakness of the branch plant economy inherited from the 1950s and 60s followed by disinvestment from traditional industries in face of the inflationary effects of North Sea investment in the 1970s and 80s. Throughout the higher profitability offered by Edinburgh’s investment trusts, largely investing overseas, drew money out of home industry.
But, while all these factors served to weaken the country’s industrial base, they did not destroy it. Still at the beginning of this century a number of technologically strong, locally-controlled companies remained. Some like Weirs were old. Others like John Wood Engineering had grown in tandem with the oil industry.
The real damage to Scotland’s economy over the past twenty years has resulted from a largely new development. Previous editions of the Red Paper have documented how virtually all significant Scottish-based firms have become dominated by large blocks of shares controlled by external (British, European but mainly US) investment companies. These companies themselves reflect and represent a new phenomenon: the massive growth in private wealth held globally by individuals and institutions – with investment firms competing to offer the best returns to individual wealth-holders. Their board room power is therefore used short-term to extract maximum profit income – leaving less money for productive investment. Hence the secular decline in productivity.
Andrew Haldane, chief economist at the Bank of England, raised the dangers back in 2016. At that point it was estimated that the share of company profits taken by dividends had risen from 15 per cent in the 1960s to nearer 60 percent.[7] Haldane spoke out again in 2020 attacking the primacy given to shareholders under the 2006 Companies Act: ‘the model of shareholder-focused capitalism is beginning to fray’. Blaming it for Britain’s intensifying regional under-development, he called for alternative modes of company finance and a reconsideration of the role of ‘regional, development and infrastructure banks’.[8] A few months before the Financial Times had published a study showing that dividend pay-outs were double the level, in terms of share values, of those two decades earlier.[9] The OECD report for 2019 highlighted the same problem. For the US and Britain it found a massive concentration of control by investment companies. On average, across all quoted companies, ten investment companies together owned just under 30 per cent of shares, representing a dominating control, the ‘shareholder power’ identified by Haldane.[10] For Scotland this would seem to explain why business investment fell from 11 percent of GDP in 1997 to 7 percent between 2004 and 2016 and lower still in 2016-17.[11] Without investment companies fail.
These, then, are the arguments. Capitalism has always had a tendency to monopoly. This favours the biggest companies controlling the biggest markets. It can be seen in action across the EU and the US and tends to penalise weaker regions and countries such as Scotland. Now, wealth concentration has taken a new turn, operates remotely through competing investment companies which suck resources out of the production firms they temporarily own. This new ‘financialisation’ would appear to be main the reason for the secular decline in growth and productivity over the past two decades and why regions and nations like Scotland are at the sharp end of the decline.
It is for this reason that public sector intervention is so essential and why there need to be publicly-owned stakes in major companies and trade unionists on company boards. Locally rooted growth depends on creating regional and national alliances that can campaign for these public sector objectives – against those of both Johnson and the SNP
[1] https://www.snp.org/snp-growth-commission/; George Kerevan, ‘SNP at the Crossroads’, Conter, 7 July 2020 provides details of the SNP’s corporate involvment.
[2] Local Government Benchmarking Report, National Benchmarking Overview Report 2018-19, 2020
[3] Fraser of Allender Economic Commentary, December 2020.
[4] https://www.preston.gov.uk/article/1334/Community-Wealth-Building; Centre for Local Economic Strategies https://cles.org.uk/about/cles/
[5] Philip McCann, The UK Regional-National Economic Problem, 2016 and ‘Perceptions of Regional Inequality’, Regional Studies, 54/2, 2020.
[6] Scottish National Statistics Q4 2019 for research and development at 1.63 per cent GDP; Royal Society, Research and Innovation in Scotland: 12,000 research staff in business and 15,000 in HE. Kenny Richmond and Jennifer Turnbull, ‘Scotland’s Productivity Performance’, Fraser of Allander, 2015, Vol. 39.2
[7]Andy Haldane, Speech to the Edinburgh University Corporate Finance Conference May 2015 http://www.bankofengland.co.uk/publications/Pages/speeches/2015/833.aspx; W. Hutton, ‘Quarterly Capitalism’, Guardian 26 July 2015.
[8] Haldane, Speech at Bloomberg, reported in City AM, 24 February 2020
[9] Siobhan Riding in Financial Times, 28 August 2019
[10] De la Cruz and others, Owners of the World’s Listed Companies, OECD 2019.
[11] Scottish Government National Accounts 2018 and Fraser of Allander, ‘Recent Trends in Business Investment in Scotland’, February 2018.