A LOT OF HEAT can be produced from economic forecasts, but as we know from the Brexit debate such modelling efforts do not really shed light on the future. Events have a habit of taking their own path, destroying the presumptions of pundits.
I was reminded of this when I read the latest LSE report attempting to find a cost balance between an independent Scotland linked into the European Union and Scotland remaining part of the British union – the UK. The analysis solely focusses on trade costs, although it is bound to be used more widely as a hammer to bludgeon Scotland’s secessionists. Such is the fate of mathematical analyses thrown into the wider commentariat. Heat but not much light.
Rather more interesting to me was the Scottish Government’s own “Vision for Trade” – a 93 page position statementthat seems to have sunk without trace the moment it appeared. For me, it tells me more in its stated aim to set out “our principles and our values for the trading relationships we want Scotland to have in the future” than the LSE’s digging about on trade costs.
It is a very peculiar document. In many ways it is a homily to socialism; inclusivity, well-being, fairness and other tenets of the left abound. Yet it also nods quite strongly now and then to the need for free trade and its virtues. As such, it often seems to bounce around trying to be reasonable in all things to everyone; in the process becoming a massif de blancmange that doesn’t quite know if it isn’t sure what it is not trying to deny.
Yet, at heart it is very definitely a document about the managed control of trade. Clearly, the freedom of business to do trade has to be circumscribed by the ideals of the Scottish Government intent on “collaborations” and “partnerships”. This is described as “influencing the trading environment”. The paper could just as easily have been titled “Trading? You will be watched”.
Business people, especially those running the gauntlet of trading internationally are not blind; this set of intrusive ideals has consequences. Unlike the LSE paper above, the costs implied by the position of the Scottish Government are not amendable to modelling; they are tacitly absorbed by traders living with their business.
When Scotland introduced its increased tax rates for higher earners I suggested that some talented Scots and Scottish businesses might vote with their feet. This was met with some scepticism despite me saying that those with physical capital on the ground in Scotland would not find it easy to do this quickly.
What I stressed instead was that owner managed companies are highly conscious that their private capital is today’s and tomorrow’s family capital. More often than not these owners have sons and daughters; and there is always discussion of financial matters around the kitchen table. This exchange of ideas and intentions is not visible to governments (although Humza Yousaf may take a different view).
When I listened to Kate Forbes recent budget I was reminded of this; what policy wonks call the “optics” were all about vote-buying through public service activity. This is not surprising with an election only a few months away; much of the SNP electorate is mostly paid by taxpayer largesse.
However, kitchen table discussions are quite different; they are intergenerational with timescales to suit. That has a great advantage; decisions can be made with a gradualism quite different from political agenda needs and, crucially, no-one can know those decisions have been made. I would add that many Scots’ business families are global, party to a wider perspective on new opportunities. This knowledge of different business networks drives new investment migration.
Can we find any evidence of this kitchen table decision-making? Business “barometers” done by our banks have shown lower confidence in Scotland among business for some time prior to the pandemic , and we know that Scottish economic growth seems to be tracking around half to one percent below that of the UK, but I am not convinced these surveys are useful predictors of future trends, rather they echo reactions to events of around the past six months.
One longer-term trend that could echo the overall sentiment among the 99% of small businesses that make up Scotland’s business eco-system is the change in net capital formation seen below.
The trend here is not good. Choices are being made that mirror the growth rate. Leaving aside what may be a Brexit effect during the interminable negotiation period through 2016, Scotland seems to be seeing a slowdown in investment. The question arises whether this is inexorable?
Applying Occam ’s Razor to why this is happening, my presumption is simply that businesses, faced with serving Scotland internally with high costs and an uncertain future, as against trading into Scotland from rUK where events are more predictable, are gradually voting with their feet and investing elsewhere. Over a decade, this slowdown will affect every Scot, because the networking gains intrinsic to a thriving business sector will shrink geometrically; a process that has been seen globally where bad governance creates a perception of despair. Nations can very quickly be left with a rump of state-sponsored semi-zombie entities. Think Greece, or Venezuela.
I could of course be wrong. There are still many thriving, outward-looking Scottish businesses; we are a wealthy nation. But if we are eating up that trading capital already, it does not help if the Scottish Government comes out with statements in its “Trade Vision” such as:
“Regulation is a tool for government to influence choice and behaviour to further a broad range of public policy objectives across economic development, health and wellbeing, environmental protection, climate, labour and fair work and education among others.”
So business faces regulation driven by political incentives, despite a recognition that …
“Regulatory differences can be costly for traders, irrespective of cause, and can also occur as a consequence of the failure of governments and regulators to consider the international environment when developing policy.”
Although this is not a market environment being referred to – it’s mercantile regulatory rules. These are recognised as costly if you are not party to them …
“… the internationalisation of rules is increasingly at the heart of the trade debate. WTO studies from 2009 and 2012 found non-tariff barriers such as regulatory divergence were equivalent to 12% tariffs, contributing more than twice as much as tariffs to restricting access to international markets.”
However, rather than a reason to eschew regulation, a commitment to controlling trade is deep, apparently at minimal cost (contrary to the above paragraph):
Shared policy commitments, sometimes called the level playing field, can also incentivise positive change and make it easier for countries to make regulations that meet wider priorities or tackle social challenges, without reducing the competitiveness of domestic producers. It can also encourage higher standards of production through the incentive of being able to export goods produced at that higher standard to international trading partners. This means that shared policy commitments in, for example, environmental protection, climate change or social and labour protection can improve the quality of goods, the quality of the environment they are made in and the quality of life for the people who make them.”
Which can be read essentially as a paean to the EU and the Scottish Government wishing to return into its regulatory protectionist regime, avoiding the competition and creative destruction that leads to the innovation that drives economic growth; and the very fuel that smaller family businesses use to progress by doing things large corporates do not do, or cannot do as efficiently.
The folly here is one that is endemic in all governments and is known as the Fatal Conceit; they assume knowledge about their economies that they do not have. Their vision is really one based on aspirations to adopt a fraudulent agenda for a quasi-socialist Scotland; where all human endeavour is monitored, guided and policed by a central know-all state.
As a business owner myself, I know what side my bread is buttered, and it is certainly not going to be within such a politicised nation that pretends it can engineer a future through well-meaning decision-making in the offices of central planners. Those who make decisions about their futures around their kitchen tables will soon make such arrogance an exercise in futility and creeping impoverishment.
Photo by Philipimage from Adobe Stock