Solid foundations for change

An independent Scotland would be more self-governing in two respects. It would have gained new competences, notably in finance and social welfare; and it would be free of constraints imposed by membership of the United Kingdom. Yet these in themselves by no means guarantee the ability to control the destiny of a nation. Scotland would still have to convert its new competences into policy capacity; and as a small nation in a globalised world, it would need to develop the ability to set the terms of its engagement. In our present research project, we are examining the experience of small European states to see what can be learnt.

There are, to simplify, two modes of adaptation to global markets. One is the market-liberal state, which fully accepts the logical of global capitalism and adjusts to its needs. Taxes, especially corporate taxes and higher rate income tax, are kept low in order to attract investment, with a concomitant low level of public expenditure and minimal welfare provision. There are pronounced economic cycles of boom and bust, with wages and public expenditures going up and down accordingly. Labour markets and environmental conditions are largely deregulated and government intervention in the economy is minimal. Some of the transition states of central Europe and the Baltic, with their flat income taxes and low corporate, taxes correspond to this model.

History is not destiny. New institutions can be built. Should Scotland gain independence without the tools to govern effectively, it could indeed end up at the mercy of corporate power – but there is another way.

Another group of small states, however, has a large public sector, rather high taxes and extensive welfare provision. Here the public sector acts as a stabilising force in the face of economic cycles and public expenditure is seen as contributing, rather than detracting from growth. Public services are universal rather than selective and residual, in order to keep the middle classes on board, and social and economic inequalities are contained. These are the social investment states, typified by the Nordic countries.

Independence supporters have often argued that Scotland needs first to gain independence and then it can decide democratically which policies to adopt. Yet the choice of strategy must be an integral part of the independence package itself if the case is to have any credibility. If it is true, as some on the political right maintain (and celebrate), that small states are condemned by the demands of global competition to pursue market-liberal strategies, then there is no reason for left-of-centre voters to support it. If it is not true, then advocates of independence need to specify the alternative. Nor is the case that we can cherry-pick items from each menu to suit our convenience. Cutting corporation tax in order to spark a race to the bottom with other European jurisdictions is not consistent with a social investment strategy; nor, alas, is is true that cuts in taxation pay for themselves through increased production. Ireland’s experience during the boom is instructive here as it sought to combine the market-liberal with the social investment strategies, and so failed to use its newfound wealth to lay the foundations of a real welfare state or the infrastructure for long-term growth.

The social investment strategy has obvious attractions for the political left and, indeed, is the foundation of Nordic social democracy, although it is also compatible with a more conservative ideological orientation. It is also in line with the dominant trends in Scottish politics. Realising it in practice is another matter and requires particular conditions, some of which Scotland might have to create for itself. It implies rather high levels of taxation and a broad tax base since taxes on the rich alone are not enough. There needs to be a social consensus on the essentials of the settlement. This does not require that everyone be a social democrat or complete agreement on policy but at least an acceptance of some of the basic elements. One is that public expenditure is not a mere drain on the purse but does come back in the form of increased welfare and can actually contribute to growth. Another is that vast inequalities of income and wealth, far from being a spur to the economy, are actually a hindrance to economic development.

Although we tend to think of Scotland as somehow naturally social democratic, this may be due to the absence of a viable conservative party rather than any natural proclivity. The evidence suggests that, individually, Scots are only slightly further to the left than England on the main issues. It takes political leadership to make the connections, including political parties prepared to abandon ‘triangulation’ (the technique of getting close enough to their opponents to steal their votes) and develop a clear vision. The political class also need to avoid the temptations of populism, such as debt-fuelled consumer booms or promising to spend the oil proceeds on current expenditure at the same time as creating a sovereign wealth fund. Norway, which has used its oil revenues in a vastly more intelligent manner than the UK, offers and example here.

The key issue here is the design of institutions, which can encourage positive-sum forms of politics, the wider public good and long-term thinking, while not stifling day-to-day politics and the disagreements that are the essence of democracy. Successful small states often practice social partnership, in which employers, trades unions and government come together to agree on long term goals and to overcome collective action problems. This can provide for adjustment to external shocks without mass unemployment and link bargaining about wages with a consideration of the ‘social wage’ in the form of welfare and public services. This kind of policy making was tried briefly in the United Kingdom in the 1970s but abandoned as bad ‘corporatism’ after 1979. In fact, for all its faults, it had managed to tame inflation without the mass unemployment or huge inequalities that marked policies in the 1980s. Elsewhere in Europe, it has been rediscovered in a more flexible form as social concertation or ‘lean corporatism’. It is perhaps surprising that post-devolution Scotland has not adopted anything similar, but rather followed the rest of the UK in what is essentially a market-driven approach. There is perhaps a more negotiated style of policy-making within individual sectors here but, despite some interest among trade unions, no return to peak-level agreements.

If social partnership is to be more than an excuse for the imposition of austerity, it needs strong and vibrant trade unions, another missing element in the Scottish (and UK) equation. It also requires that employers be at least willing to sit down at the table, rather than expecting to get their way on everything without giving in return. It also needs to be flexible enough to avoid creating multiple veto points and entrenching existing interests.

Social partnership is not the only element that is needed to meet the challenges of independence. The structure and organisation of government is also critical. The Scottish Government is descended from the old Scottish Office, which was not a policy-making department and has only slowly adapted to the challenge of being a government in its own right. It has gradually developed a more strategic capacity, focused on policy objectives rather than administrative divisions and has freed itself from some of the rigidities of the Whitehall model. Yet the budgetary process still tends to be rather incremental, making it difficult to shift resources into new priority areas. It has no doubt been wise to avoid creating something like the UK Treasury, whose reach has extended deep into Whitehall departments, centralising policy and imposing its will, a tendency which was massively intensified under Gordon Brown. On the other hand, there does need to be a central place where policy options can be compared and evaluated and resources directed to where they are most needed. There also needs to be more scrutiny of expenditure plans and outcomes by Parliament. The UK Coalition has created the Office of Budget Responsibility to hold itself to its own plans but, in a typical Whitehall fashion, has made OBR responsible to itself. Plans for a Scottish equivalent envisage that it be responsible to the Parliament and its remit could be expanded to open up debate on where the money goes and how well it is being spent.

The good intention at devolution was that the Scottish Parliament would break with the Westminster model by being more open, less subservient to the executive and less concerned with partisan posturing. Despite some welcome differences, it has turned out very much in the Westminster mode and in some respects even worse. There are hardly any of the independent, awkward squad of members who still exist down south and rebellions against the whips are rare (while increasingly common in Westminster). Committees have mostly failed to get a grip on their brief, while those Westminster committees with strong leaders have begun to make a real name for themselves. Scotland, like the UK, has nurtured a self-reproducing class of professional politicians with little experience outside politics and who, once in Parliament, stay there until ejected by the voters. There is no regular circulation in and out of politics.

Over the last thirty years, the idea has become entrenched in British politics that the only possible mode of collective action is that of the market, and the only outside source of wisdom worth listening to is that of the business community. These are two separate issues since, as Adam Smith famously noted, business people, left to themselves, do not actually like markets, preferring monopolies and cartels. Yet the New Public Management has sought to create bogus markets in public services and to replicate business models right across the board, from the civil service, through education to the arts. Partnership, in UK parlance, usually refers to bringing in business interests to public policy (to the bafflement of some of my European colleagues for whom it means something much wider). Scotland has been spared some of the excesses of bogus markets in education and health but the idea that business always knows best is still widespread.

This, combined with excessive reliance on management consultants, has stripped government of the ability to manage large projects, to undertake contracts and to monitor compliance. Even the contracting out of contracts is often contracted out. Governments seem particularly gullible when it comes to high technology, regularly being sold expensive, over-complex and unreliable solutions to complex problems by consultants and firms who know that, if anything goes wrong, they will be bailed out. The emerging fiasco of the implementation of Universal Credit was utterly predictable. Government needs to re-equip itself with the professional skills to meet the private sector on equal terms.

Small countries by definition have small governments, unable to mobilise the expertise and resources of large ones. It is therefore all the more important that they be focused on key priorities and know when and how to intervene. They have the advantage of having shorter lines of communication and able to make links across policy sectors. This may enable them to focus on objectives and avoid capture by the interests they are supposed to be regulating. This does not, however, happen automatically. Ireland shows how government can be captured by powerful interests (in that case the property industry) to the detriment of the wider good.

Political parties are not in good odour these days. They have an ever tighter grip on power but are less and less representative of anyone. Yet we still need them in order to pose policy alternatives and to provide responsible government. Scottish parties are little different from those elsewhere in the UK and in Europe, and desperately in need of renewal. They need internal democracy, more internal dissent and less discipline, and better links to civil society and local communities.

It is sometimes argued that the experience of the Nordic countries cannot be exported because of their unique history and culture. History does indeed matter and Scotland has a long way to go, but history is not destiny. New institutions can be built and, as they work, embed themselves in daily practice and understandings. Were Scotland to gain formal independence without equipping itself with the tools to govern effectively, it could indeed end up at the mercy of international markets and corporate power – but there is another way.

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