In the late Nineties, there were was a strange economic phenomenon occurring: the formerly booming South East Asian economies, which had been collectively called the ‘Asian Tigers’, were showing instances of economic primitivization. Local economies had become poorer, in fact, not only were they getting poorer, they were regressing.
Due to the depletion of fishing resources in South East Asia, it had become more and more expensive for the fishermen to use outboard motors on their fishing boats. The men were forced to abandon their ‘capital intensive technology’ – machines that cost money – and return to more ‘primitive’ methods such as nets and spears. So, in the late twentieth century, a technologically advanced part of the world saw some of its inhabitants go back to age-old ways as they could not make a decent return on their current methods.
This example of a lessening return may be thought of as a unique incident, however, it is not. It is extremely common. One particularly apropos example is Mongolia. Again in the 1990s, it received a visit from a series of international economic institutions, including the World Bank, which promoted the idea of opening-up Mongolia’s economy to global trade and thus help find its Comparative Advantage. Comparative Advantage means finding the markets that your country excels at, putting your resources into it, and then importing the goods that other countries do better. It is a global Utopia where all markets are brought into perfect equilibrium, making everybody very wealthy.
Before we see how Mongolia entered this economic Shangri-La , it is worth noting that since the Second World War, Mongolia had slowly built-up an industrialised economy with steel plants, manufacturing and agriculture: it was diversified and even high-tech in some areas. But the World Bank and global finance thought that it could do better. Opening-up to world trade would allow Mongolia to focus on Comparative Advantage.
Predictably, after removing all tariffs and support for local industry, the whirlwind of global exports wiped out a great deal of Mongolia’s industry. Manufacturing could no longer make a sustainable return. (The products that replaced the domestic wares often came from countries that used tariffs, supported their industry with government funds and were adept at currency manipulation, all to cheapen their goods: none of these things Mongolia was allowed to practise.) However, cruel though it may seem, according to the World Bank’s ideology, the country could now find its Comparative Advantage. What did it do better than others?
And what did Mongolia do better than any other country in the world: herding – yaks…and a few other animals. When the industrial jobs disappeared, Mongolians moved to their vast grass covered lands to herd; thus regressing back to the ancient ways of turning a buck. It will come as no surprise to any reader that the world had a limited demand for yaks, complicated by the fact that they were hundreds of miles away from international centres that could have exported them. No profit was made by the Mongolian herdsmen. With the army of unemployed thrown onto the land due to the closure of manufacturing plants, there was just too many herdsmen and herds – the price plummeted and no decent return could be made. Mongolians became subsistence farmers. In just four years, 1991-1995 Mongolia lost an industrial base that took 45 years to build.
Both tragedies, in South East Asia and Mongolia, were caused by a simple economic fact – the Law of Diminishing Returns. The Law is exactly as stated and can be characterised easily: if the fish cannot sell at a good enough price, then the fisherman has to reduce his costs, out goes the outboard motor and in come the nets. It’s exactly the same for yak prices, goat prices or anything. If people cannot get a decent return, then something must be cut or that particularly economic activity is bankrupt. (The World Bank was actually phlegmatic about this fact, and, in the case of Mongolia, suggested all Mongolians had to do was retrain for a growth market – the example advised by Jeffrey Sachs was computer programming. Only 4% of Mongolians had electricity at this point.)
How is any of this relevant to Scotland? What has the Growth Commission Report got to do Mongolian yak herding? South East Asian fishermen and Mongolian farmers were subjected to an economy where their government was in debt in a currency that was not controlled by their government (Sterlingisation anyone?) The creditors, owners of the debt, called the tune about government spending, exposure to markets, privatisation and budget. Since, at face value, the creditors were primarily concerned about having their debt repaid, they did not want government spending to develop the economy or simply protect what was there. They wanted repaid.
(Some might say that it’s really about power and buying assets on the cheap, however, the explicit impact of these arrangements on people’s lives are bad enough without looking at how a country can be asset-stripped therefore making the prospect of future prosperity impossible.)
Cash for servicing debts means less money in the economy, which guarantees Diminishing Returns for someone somewhere in the economy, which will then impact another part and then another as the tide of liquidity recedes. The usual remedy is government intervention, as Keynes always claimed, but the creditors, the owners of the debt, hold the key to that kind of action, especially if the debt is held in another currency. (If the IMF lends Mongolia $1 billion then Mongolia has to find dollars to pay that back, same for Scotland if it’s using Sterling.)
The GCR is setting Scotland up to be caught between the Scylla and Charybdis of Greek mythology (a double whammy): cuts will be insisted upon to reduce Scotland’s deficit based on GERS figures – the ones that will probably be used –which will drain cash from circulation and lead to Diminishing Returns across the economy; the fact that Westminster will hold the debt in its currency, not a Scottish currency, means it calls the shots on debt relief and re-inflating the economy.
Losing control of our debt through Sterlingisation and having to scramble for a foreign currency will entail losing control of our assets and resources, and the design of our economy, including imports and exports. Exports and assets would be taken off our hands cut price, and Scottish industry and business will be open to cheap imports flooding the market – we won’t be able to protect ourselves since government spending or tariffs will be out of the question.
All this does not mean that Aberdeen fishermen need to start carving spears or weaving nets, not yet anyway, but what should be understood is that there is no bottom line to this downward progress. Unless Westminster stepped in out of humanity, the graph of Scottish GDP could lessen and lessen to an unknowable, yet known to be disastrous, point. By way of example, Mongolia in the year 2000 had imports greater than exports by a factor of 2 to 1 and a real interest rate of 35%. The only two sectors of the country that showed economic growth after the collapse were alcohol production and ‘combed down’ from birds – this is collecting bird down and selling it! Closed steel mills and manufacturing led to a population collecting bird feathers; a fact that cannot be called anything else other than economic primitivization.
The above might seem like hyperbole and wild exaggeration, yet it is the logic of currency, debt and interest combined with real world experience. In these circumstances, if we are not to be reduce to Third World state at the edge of Europe, perhaps an aid package would be forthcoming, with what strings attached no one can say, yet, sure as modern economies cannot be built on yaks alone, such a ‘bail out’ would mean the death of a genuinely independent Scotland. We should see the GCR for the retrograde step it is and reject it.