Professor Michael Keating says we need to look beyond independence to find our way forward

The national conversation invites us to consider Scottish independence against a range of other options, including stronger devolution. This puts Scotland in line with other stateless nations (Catalonia, Quebec, the Basque Country among others) where the old unionist-separatist dichotomy has given way to a more sophisticated understanding of self-government and self-determination in a complex and inter-dependent world. After all, within the european Union, national sovereignty is no longer the absolute it used to be. The broader processes of globalisation sets limits on what even the biggest states can do. Scotland cannot defend itself outwith a wider alliance (whether based on the EU or NATO) and even the SNP has abandoned plans for a Scottish currency. Yet this does not mean that Scotland must be a prisoner of global forces and cannot influence its own future.

The contention that Scotland could not ‘afford’ independence can be dismissed. Scotland is a middle-income west European country with a population and resource base larger than several EU states. We have seen a spate of writing about Scotland’s long-term economic decline, its failure to maintain economic growth rates equivalent to the UK average and its gloomy prospects. Most of these exaggerate Scotland’s woes by comparing GDP growth rates rather than GDP per capita. Scotland’s income per head has fluctuated over the last hundred years between just under 90 and just over 100 per cent of the UK average and is at present 96 per cent.

There are arguments about the fiscal imbalance, especially over oil revenues. Assuming that the truth is somewhere between the nationalist and the unionist calculations, there might be an increase in Scotland’s fiscal deficit, disqualifying it from the euro, but not an impossible one. Oil prices are volatile, as are rates of production, so that it would not be prudent to spend revenues at the peak. Independence would allow Scotland, like Norway, to husband the resource and use it for long-term development, but this would not permit an oil-based boom after independence.

These arguments are based on a static analysis of how Scotland would do if it were independent, but policies were otherwise the same. Scotland might, however, pursue quite different policies. There are two views of the dynamic effects of independence. One holds that under conditions of globalisation Scotland would not have any power to alter its basic economic orientation. The other is that it could seize control of the ‘levers’ of economic change. The conventional form of this argument is that London has pursued overly restrictive macro-economic policies in the interests of the financial sector of the City of London, to sustain an unrealistic exchange rate, and to avoid overheating in the South East of England. An independent Scotland could take a more expansionist line. however much validity this argument had in the past, it must be questioned now. A Scotland without its own currency would be subject to monetary policies set in Frankfurt or in London and fiscal policies would have to adjust. It might be necessary, at times of high oil revenues, to run a fiscal surplus as in Norway (currently 17 per cent of GDP). An expansionary policy would require an increase in the labour supply, through immigration or active labour market policies and a reduction in welfare dependency. So Keynesian expansion would not in itself be enough. In any case, it is difficult now to argue that London is pursuing deflationary policies, when concern with the balance of payments has been abandoned, consumer debt is soaring and the budget is in deficit. Indeed an independent Scotland would probably be under strong pressure from Europe and international markets to be more responsible than has the UK Government in recent years.

One path to growth is to cut taxes sharply in order to attract inward investment. This is seductive but misleading, and the claim that such tax cuts pay for themselves is reminiscent of the wishful thinking of the Reagan administration in 1980s America, where it led to ballooning deficits. Its current popularity in Scotland stems from the example of Ireland, which has replaced the Nordic countries as the poster-child for the independence dream. A great deal has been written about the Irish example but the best conclusion is that we do not know why it has done so well. Every commentator has his/her own theory, mostly ad hoc and not transferable to other places. In a broader comparative context, it is not obvious that corporation tax cuts are the best way to stimulate investment. The manufacturing industries at which they have been aimed are now migrating to even lower-cost jurisdictions in central and eastern Europe, Asia and elsewhere. Multinational firms use lowtax jurisdictions to declare their profits by transfer-pricing, and the repatriated profits sharply reduce the advantage to national income. Low taxes, since they do not pay for themselves, imply reduced public services. Indeed this strategy has been described as the ‘race to the bottom’.

Some argue that this would be no bad thing, as the public sector in Scotland is currently ‘crowding out’ private investment and growth. There are several versions of this argument, one of which is that taxation for public services is squeezing out consumer spending, hardly a plausible argument in present conditions. Another is that it is creating a shortage of investment capital, again difficult to sustain at present; a more plausible villain here would be over-investment in the property market. Then there is the argument that the public sector is absorbing too much of the labour force. Yet what matters is what these people do, not whether they are employed in the public or the private sector. There is a good argument that the very weakness of the private sector in Scotland means that the public sector must be both strong and efficient. The poor contribution of the private sector in research and development is partly offset by the performance of universities. Scotland’s poor health conditions are an economic as well as a social problem and require a large investment in both preventative and curative care, which will come only from the public sector.

Model cases of development usually seem to have occurred from a mixture of chance, muddling through, experimentation and learning from mistakes. There is consistent evidence, however, that small states can adapt better than large ones to globalisation. They have short lines of communication, small and cohesive policy communities and practices of social concertation enabling them to respond rapidly to changes in external conditions. Since they cannot afford long-term and largescale unemployment, they must engage in active labour market policies. The literature on local and regional development similarly now stresses the importance of social relations, practices and networks.

A common theme is the social construction of the market and the need in a market economy to balance competition with co-operation. Development requires both private rewards for investors and public goods, such as infrastructure, an educated workforce and good environment. It also requires the capacity to generate and diffuse knowledge and innovation beyond the individual firm. Networks among firms, government, universities and others need to be strong enough to sustain themselves but flexible enough to adapt to changing circumstances. There needs to be broad social consensus on the development framework but lively debate on the policy options.

This might sound like the list of oxymoronic appositions beloved of third way politicians unless we can give it some more specific institutional form. One element is certainly a shared sense of national identity, providing an overarching theme within which policy debates are possible. Beyond this, we see small states adopting practices of social concertation, bringing together business, trade unions and social actors with government to discuss development requirements. This bears some resemblance to the ‘corporatist’ arrangements of the 1970s which have subsequently got a (not entirely deserved) bad name. Modern forms of concertation are lighter and more flexible. Business and trade unions are no longer monoliths with defined interests and leadership, and governments are no longer committed to fixed plans, with targets for everything. Concertation, rather, provides a forum for agreement on positive-sum moves to improve performance and how to distribute the burdens and rewards of change. In this way, a mechanism that could otherwise lead to blockage and a multiplication of veto points becomes a device for encouraging change. Indeed one explanation for the Irish economic miracle is the success of social concertation in the face of external threats and the crisis of the 1980s.

Scotland is a long way from this form of concerted action, or even the partners who could engage in it. Its interest group structure is a legacy of the industrial age and the welfare state and its public administration is not designed for the new needs. The old economic networks are now fragmented and integrated in transnational chains. There is a shared identity, but it has not been harnessed to development projects. Scotland has not yet learnt to distinguish between nationality, which can be a unifying theme underlying social co-operation, and nationalism, which is divisive and which the parties have chosen to make the main political cleavage. There is nothing comparable to catalanismo, a shared orientation that allows Catalan nationalists and the socialists to share an ideological framework of territorial development and social solidarity, while disagreeing on politics and policy. A similar spirit is visible in Quebec, where strong partisanship exists within an overall commitment to the shared frame of reference. Independence might be the catalyst for the construction of a new development coalition, a change in interest representation and a reform of policy-making capacity, but it will not happen by necessity. There may be incentives to adopt pro-growth policies in order to break the fiscal constraints but this does not mean that politicians would respond. After its own independence, Ireland stagnated under the domination of conservative and anti-development forces.

An independent Scotland could thus be not only viable but successful, but only with structural change. One form would be the deregulated, low tax model, subject to the vagaries of the international marketplace. Another would be a concerted and networked economy, with a stronger emphasis on public services and high-value activities and able to manage its own relations with the world. This is, rather than flags and seats at the United Nations, the real meaning of self-government in the modern era. As other nations have shown, this might be achieved even without formal independence.

Michael Keating is Professor of Regional Studies at the European University Institute, Florence; and Professor of Scottish Politics at the University of Aberdeen. His most recent book is ‘Scottish Social Democracy’ (PIE-Peter Lang, 2007).

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