Growing the Scottish Economy: is Scotland well served on international trade and development?
Margaret Cuthbert, September 2015
1 Introduction
This paper examines how well Scotland is served by the UK and Scottish Governments and by their agencies in international trade and development support. In one sense, this may seem an odd task to undertake as there has been a recent review into the matter carried out for the Scotland Office and a Scottish Parliamentary enquiry. However, there are two aspects which were inadequately examined in these cases and that require further examination. The first concerns whether the current management of trade support agencies is likely to achieve the objectives of the Scottish Government’s economic strategy. The second is whether the quality of the databases available, and the most fundamental tool by which to judge performance, are up to the task in hand.
The Scottish Government’s Economic Strategy of 2015, sets out its ambition ‘to create a more cohesive and resilient economy that improves the opportunities, life chances, and wellbeing of every citizen in our country’ (p7). The approach it wishes to pursue is based on increasing competitiveness and tackling inequality. It states ‘We want to move Scotland onto a more balanced growth path, with a greater contribution to economic growth from investment and net trade, rather than consumption. This will allow our economy to better withstand economic shocks and help ensure that everyone in Scotland can contribute to, and benefit from, growth’ (p26). So trade is, thus, a central pillar of the Scottish Government’s strategy.
An essential prerequisite to any investigation of this nature is reliable data. The paper therefore begins with an examination of the data available on Scotland’s trade movements and its quality. This is particularly important given the number of recent reviews and enquiries which have studied Scotland’s trade and which have relied on available data.
The findings of this paper are:
· There has been a fundamental failure of the UK and Scottish government in the collection, collation, and analysis of trade statistics for Scotland.
· The government agencies funded to improve Scotland’s trade performance have had an easy passage to date. They have failed to collect and to provide solid data on how they have improved trade performance. And they have not been asked for it.
· Following the collapse in Scotland of sectors which were important to trade, such as textiles and electronics, there has been an almost total failure to examine the causes of their collapse and examine the role of trade policy in their collapse.
Without good data, and without analyses, economic strategies can end up as ‘wish lists’ and can actually harm the economy. The effect of past strategies in Scotland cannot be adequately scrutinised to determine whether or why they were successful and cost efficient, or why they failed: whether, for example, failure of some sectors was due to stricter regulation on the environment in the EU than in some other countries, low productivity in Scotland, UK tax policies that failed to adequately encourage innovation, low skills in Scotland, or unacceptably low wages in other countries.
The conclusion of this paper is that unless there is a radical change in attitude, in systems, and in working methods by government and government agencies, Scotland will be seriously hampered in improving trade performance, and in particular, in trade helping to make substantive inroads into austerity and into improving economic growth. The content of this report is as follows.
· Section 1 covers the importance of trade to the Scottish economy.
· Section 2 examines the statistics available on exports from and imports into Scotland: how good our export performance has been: and how good the quality of the data is.
· Section 3 looks at the actions that are taken by both the Scottish and UK governments to assist trade in Scotland, examining their costs and success.
· Section 4 gives a précis of the evidence submitted to the Wilson Review and to the Scottish Parliament.
· Section 5 summarises the findings of the report, puts forward the need for change, and outlines important steps that need to be taken to improve trade performance.
2 The importance of trade to the Scottish economy
The Scottish Government states that there are two key pillars to their strategy: increasing competitiveness and tackling inequality. It also sees a pressing need to rebalance the economy after the financial crisis of 2008, and in its latest strategy paper acknowledges that improving our export performance is essential, with manufacturing exports in particular being key to success. To satisfy its twin aims of increasing competitiveness and tackling inequality, the strategy that the government puts in place to improve internationalisation must therefore be broadly inclusive to all shapes and sizes of business as well as being ethically acceptable.
Its target is to deliver a 50% increase in the value of international exports. This target is set in money terms and is for the period 2010 to 2017: in other words, the target is not a hard target but is softened by the impact of inflation: the greater inflation, the less the increase needed in the real value of exports to meet the target.
The latest, June 2015, ‘State of the Economy’ report from the Scottish Government records that, in 2014, net trade acted as a drag on the growth of the economy ‘with a small positive contribution from exports outweighed by faster growth in imports.’ In particular, the index of manufactured exports, a subset of total international exports, contracted in the last quarter of 2014. This is worrying.
Further, the changes proposed by the Smith Commission to government funding of public services in Scotland mean that not only does Scotland need a healthy tax base to provide funding for public services, but also that Scotland needs an even more vibrant economy. The flaws in Smith as the proposals currently stand are likely to result in the funding of the Scottish government being progressively squeezed unless Scotland can grow its economy at least as fast as the rest of the UK (Cuthbert 2015, Cuthbert and Cuthbert 2015). It is therefore really important that we make the best use of available resources and improve our economic performance.
3 Trade statistics
Scotland’s trade statistics are widely quoted in analyses of the Scottish economy: often with a very positive interpretation with regard to short term improvements in trade, but with little reference to how trade efforts are, and could be, affecting austerity. The result is a simplistic short term view of Scotland’s trade – a type of analysis far removed from the substance that is needed to fulfil the Scottish Government’s economic strategy pledge of “In the context of our International Framework, we will develop a Trade and Investment Strategy which sets out the Scottish Government’s approach to international trade and investment and how we will work with businesses, the wider public sector and the third sector”.
The major data sources on Scottish trade are the Scottish Government’s Global Connections Survey of January 2015, the Scottish Government’s quarterly Index of Manufacturing Exports, and the HMRC’s quarterly regional analysis of trade called Regional Trade Statistics. These statistics are supplemented by statistics collated by particular industry bodies, for example the Scotch Whisky Association, Oil and Gas, and the banking sector. There are also some data from transport statistics. Looking at each of these in turn:
A. Trade statistics: the Global Connections Survey
The Scottish government carries out a survey of exports each year: its Global Connections Survey. The survey does not cover imports. It is, in its own words, ‘the only export survey covering all sectors of the Scottish economy.’ However, it omits oil and gas exports from the North Sea. The latest available data is for 2013, published in January 2015, and covering the years 2002 to 2013 inclusive.
On the basis of the survey, the Scottish government estimates:
Total exports in 2013 (excluding oil and gas) £74.1bn
Of this, exports to overseas £27.9bn
exports to rest of UK £46.2bn
The key findings are all presented in a positive light, beginning with the statement that Scottish international exports had increased by 7.2% over the previous year. Much of the presentation is based on the latest year’s data and comparison with the year before but with little reference to longer term trends in trade; to the factors that are likely to be influencing these trends; and to the implications of these export trends for the economy and austerity.
This positive presentation masks some important issues, which demand analysis and discussion, and are either not covered, or, not adequately covered. These are:
For International Exports
1) In real terms, although the rise in Scotland’s international exports between 2012 and 2013 was 4.36%, between 2002 and 2013, international exports from Scotland actually fell by 2.5% in real terms from £20.14bn in 2002 to £19.64bn in 2013 (2002 prices). Therefore, despite the good performance in 2013, Scotland still lags in exports behind where it was in 2002.
2) Although exports to the EU rose in the one year between 2012 and 2013 by almost 9.5% in real terms, this has still not brought us back to the levels of 2002. Indeed, over the total period, 2002 to 2013, exports to the EU have fallen, in real terms, by 19%.
3) Exports to Germany, in many ways the economic power house of Europe, have fallen over the period by 23%.
4) Exports to the rest of the world outside the EU showed an increase in the year 2012/13 of 3.4% in nominal terms, but only 0.7% in real terms. But, over the period 2002 to 2013, it is these exports which have shown the most promise with an increase of 19.5% in real terms, such that international exports to countries outside the EU are 51% of all our international exports compared to only 41% in 2002.
5) Among international exports, two groups of exports stand out: distilling etc. of spirits and refined petroleum. Together they account for 46% of the value of manufactured exports and 27.9% of all international exports. These export statistics, and our export performance dependence on them, require examination in more detail. (See whisky and oil sections below).
6) Turning to the size of companies that are exporting: Large firms of more than 250 employees dominate Scotland’s export trade. They are responsible for 64% of all exports in the production and construction sectors: down from some higher peaks such as 78% in 2003. Companies of between 50 and 249 employees are responsible for 31% of exports, with small companies of less than 50 employees responsible for the remainder. The situation is radically different in the export of services. Here small firms compete effectively and are responsible for 38% of service exports.
7) At one point, the Global Connections report does make reference to the following: ‘The concentration of international exports is skewed with around 30 per cent of international exports attributable to around 10 businesses; 50 per cent of international exports attributable to around 50 businesses, and 60 per cent of international exports attributable to around 100 businesses.’ It could have gone on to emphasise the vulnerability of Scotland’s exports to such concentrations. For example, ‘computer, electronic and optical products’ was one of Scotland’s most important international exports in 2002, responsible for 27.7% of all international exports. Much of this screwdriver electronics industry in Scotland, which was heavily dependent on inward investment businesses collapsed shortly thereafter, and with it, many of the foreign direct investors in the electronics sector either left or downsized considerably. As other countries succeeded in moving forward to more advanced research and design based electronics, Scotland’s electronics industry crashed: whole research teams, many educated at higher education institutions in Scotland, were moved elsewhere by foreign multinationals or dismissed: many finding employment in research in Europe and the US. Scotland failed to recover from the hit. Its own local electronics industry was not vibrant enough to become a leader in the new ICT industries: and this had a big effect on export performance. The sector is now responsible for only 5.7% of Scotland’s international exports.
For exports to the rest of the UK
8) In 2002, 58.6% of Scotland’s exports went to the UK: since then the share has become larger, reaching 68% in 2007, before falling back to 62.4% in 2013: still a higher percentage than in 2002. We are now more dependent on the rest of the UK for our export trade than we were in 2002. While our international export trade in real terms has fallen between 2002 and 2013, Scotland’s export trade to the rest of the UK has risen in real terms by 14.2%.
All of the above would indicate that the overall picture from the Global Connections Survey of Scotland’s export performance is not a particularly rosy one. But before we swing to conclusions, it is worth looking at the statistics collection and collation on which the Global Connections results are based, as there are major issues with the survey.
Global Connections Survey issues:
i) There is no requirement for companies to take part in the survey.
ii) The response rate is low averaging 34% across sectors, being as low as 23% in financial and insurance activities, and 25% in telecommunications companies. No information is given about whether the survey succeeded in getting responses from some of Scotland’s largest exporters. The largest number of responses was from the group ‘wholesale, retail trade, repair of motor vehicles and motorcycles’, where the category ‘wholesale’ is very wide and covers the wholesale of agricultural products, fish, crustaceans and molluscs.