Economy Q&A: Are the Scottish and UK governments right to focus so heavily on infrastructure as a means of promoting growth?

Written by Staff reporter on 24 January 2018 in Inside Politics

Holyrood asked five economists for their views about key questions on the Scottish economy

Professor Charles Nolan, Professor Julia Darby, Professor Ronald MacDonald, Professor Jeremy Peat, Professor Catia Montagna - Image credit: Holyrood

Professor Charles Nolan, Bonar McFie Chair of Economics, University of Glasgow:

I don’t know. I think, as a long run proposition, poor infrastructure must be something of a drag on productivity growth, particularly when combined with other factors (rigid planning laws, expensive housing, constraints on small business financing, for example). I can see some intuitive sense underlying the Northern Powerhouse project, linking large northern English cities and urban areas in the hope that network effects take hold, expand local markets and attract investment that might otherwise be directed at the South East and London.

Moreover, it may encourage highly skilled locals to stay, and attract other such skilled workers to migrate north (and maybe south, from our perspective), again boosting productivity and growth in the north of England.  I don’t quite see that same rationale in the Scottish context; I’m not sure the same opportunities exist.

That said, there are other reasons for investing in infrastructure such as linking remote communities to the mainland, say, and maintaining existing infrastructure precisely so it does not becomes  a future drag on growth.  

Professor Julia Darby, Head of Department of Economics and Fraser of Allander Institute, Strathclyde Business School:

In principle, yes. Efficient and effective infrastructure is widely regarded as a key driver of long-term economic growth. That being said, it is important that such investments are prioritised and evaluated appropriately. There are many examples, both at a UK and Scottish level, where significant sums of money have been wasted on projects that have only had limited benefit to the economy.

Professor Jeremy Peat, Visiting Professor, University of Strathclyde International Public Policy Institute:

In a word, yes. As noted above before, there is a critical need for enhanced investment by both the public and the private sectors. Public infrastructure matters – especially given past neglect. Both Scotland and the UK, for example, would benefit in terms of potential economic growth from a much improved transport network, across each nation, and likewise for digital communications. Such investment will assist the efforts to make the most of business investment and work towards improving productivity.

At the same time, investment in housing is another priority, especially investment in so-called ‘affordable’ housing which will open up opportunities for the younger generations to take their place on the housing ladder (or should I say, housing escalator, as we expect house prices to continue to grow).

Two caveats should be noted. First, productivity and business performance will not be improved by expenditure on infrastructure alone – this is a necessary but not sufficient condition to achieve faster growth. A focus is also needed on skill development, throughout the actual and potential labour force. Here it was good to see at least a tentative first step towards a greater emphasis on further education and skill development throughout careers.

Also, government needs to work with employers organisations and the HE/FE sectors to consider how Scottish business management can be made more efficient, more ambitious and more innovative.

Professor Catia Montagna, Chair in Economics, University of Aberdeen:

Infrastructure investment is very important in generating a fertile ground for the virtuous circles discussed earlier and ought to be a key element of a country’s industrial strategy. The UK lags behind many OECD countries in the quality of its infrastructure and a more active approach to this is to be welcomed.

The draft budget sets out commitments to an expansion in capital expenditure, the establishment and capitalisation of a Scottish National Investment Bank (£340m over the period 2019-2021, preceded this year by a new £150m Building Scotland Fund), a £600m procurement for a superfast broadband, commitments to enterprise and skills, an increase in the grant support for business R&D, and additional funding for city deals.

The effectiveness of these measures, however, will not only depend on how investment is targeted, but also on how it interacts with the other areas of policy, and on the behavioural responses of agents.

For example, investment in connectivity can address Scotland’s shortage in digital technology, but its adoption ultimately depends on firm-level factors such as managerial skills: the Scottish Digital Manufacturing Index is very low, with only three per cent of Scottish businesses classified as ‘Digital Champions’ and about 70 per cent as either ‘Basic Browsers’ or ‘Tentative Techies’. Clearly, there are sectors and firms that are at the technological frontier. But the productivity puzzle can only be resolved if innovation adoption is diffused throughout the economy and affects the average business.

Professor Ronald MacDonald, Research Professor of Macroeconomics and International Finance, University of Glasgow:

Yes. Improved infrastructure is an important factor in improving productivity and growth for the Scottish and UK economies, although not all infrastructure will have an equal payoff, or indeed any payoff. However, what is going to be critical going forward is a move away from an over-reliance on the oil sector, which is so sensitive to changes in the price of oil, and on financial services, that have relatively low productivity returns, and a greater emphasis on a return to manufacturing – perhaps light engineering products – and also the further development of current success stories such as life sciences.

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