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Rebuttal to LSE’s Study on Scottish Prosperity after Independence and Brexit

The London School of Economics has published a paper claiming that Scotland leaving the UK could see income per person drop by 6.7% to 8.7% over time, depending on whether border costs are low or high, which is a worse outcome than the 2% reduction over the long term due to Brexit. According to the paper, a low border cost will increase trading penalties to 15% and a high border cost will increase them to 30%.

Without going into great detail, the LSE outlines four scenarios. The second scenario involves no Brexit, so we can safely ignore it now. The other three scenarios which it presents are: Brexit and Scotland remains part of the UK; Brexit, Scottish independence, but Scotland remains in a common market with the rest of the UK (rUK); Brexit, Scotland becomes independent and rejoins the EU. The report finds that Scotland as part of the UK does less damage to the Scottish economy, followed by an economic union with rUK being less harmful and, for the final option, Scotland would have to be already damaged badly to make re-joining the EU a better policy.

As with so many of these documents, there are many, many provisos and assumptions making it fairly easy to criticise, question and dismiss (the only available data for these conclusions was provided in 2014, so not only is out of date, it can in no way capture a post-lockdown world). The paper openly admits that it does “not consider other potentially important economic effects of Scottish independence, such as changes in investment flows into and out of Scotland, whether Scotland continues to use sterling as its currency and the fiscal implications of independence”. In reality, this makes any conclusion dead-on-arrival, since how could these factors not radically alter the GDP, income and trade of a country? A safe prediction is that whatever world the London School of Economics is envisioning for Scotland, portrayed by these figures, will not be the world an independent Scotland will have to face.

Criticism aside, there is a notable fact raised worth tackling. It is provocatively made through the comparison between Scotland and rUK and colonies and former colonizers: “when former colonies become independent, trade with their colonizer falls by an average of 65%”. Interesting comparison! (Although, in fairness, the paper also compares regions which achieved statehood and their trade with the legacy state.)

It is churlish to deny that the rUK does not receive the majority of Scottish exports, about 60% of the total, with the EU less than a third of that number. A border between an independent Scotland and rUK, even a tariff-free one, will require paperwork and bureaucracy and those are costs. The same will apply with the EU, which is initially less likely to be tariff-free.

These added costs feed into prices making Scottish goods more expensive. Higher prices usually mean fewer sales and less money coming back to Scotland. Perhaps the fact that a lot of Scottish products are exported as luxury items such as whisky, food and some distinctly Scottish produce may give them a certain inelasticity in demand, however, as a general rule there would be a fall in exports. Less exports, less cash, less tax, less government spending and so on. All in all, it could be considered a grim prospect.

Yet there are plenty of ways to mitigate this, even the worse case scenario. Costs do not just work one way: they work both ways. If the rUK will not buy Scottish beef, then Scots can buy it and forego the now more expensive Welsh lamb. This is traditionally how countries react to the reduction of ‘foreign’ markets. Perhaps, the US might like Scottish beef too. Markets are flexible and being out-priced in one market nearly always means an opening to another market. The little-discussed premise of Brexit for many UK corporations was to get out of the restrictive and limited EU market and into the expanding markets of Asia, South America and Africa. Scotland can take similar approach.

However, Scotland need not scour the globe for opportunities or be intimidated by increased costs of trade or even by tariffs. We only have to make sure the basic tools of any independent country are in place: a Scottish currency, all debt denominated in a Scottish currency and a trade policy. These empower us to export as easily, possibly more easily, than we do currently. (We could reduce taxes and build exporting infrastructure, but I’ll avoid those other realistic possibilities for now.)

History shines an illustrative light on these circumstances. Takahashi Korekiyo was Japan’s Finance Minister on several occasions, most notably during the Great Depression. He has links with Scotland, surprisingly. The ships that won the Russo-Japanese War in 1905 were built on the Clyde (having been purchased second-hand from Britain for Japan’s use after negotiations by Korekiyo). As a very polite gentleman of the Old School, he came to Glasgow to thank the ship workers for their magnificent and effective constructions. He was received rapturously by the workers of the Clyde, cheered continuously, and carried aloft by the exuberant men who supported Japanese national freedom against Imperial Tsarist autocracy!

However, his reputation rests not on his diplomatic skills but on his financial ones. During the Depression he daringly took Japan off the Gold Standard, a system crushing economies globally, and did what is now common monetary policy – he ran deficits. He used these deficits to fund Japanese exports which now reached other countries cheaper, irrespective of export costs or tariffs. Japan avoided the slump and became a great regional power. For these actions, he has been dubbed the ‘Japanese Keynes’.

Tragically, since aggressive war was not part of his agenda, he cut the military, and since economic empire through exports, not colonisation was his method, he was loathed by ultra-nationalist Japan. Young officers broke into his house in 1936 and hacked him to death with swords. One of the greatest statesmen and financiers of the 20th Century, a roadblock to war, was removed by fanatics.

Yet his legacy of using government deficits to fund exports provides a roadmap for Scotland if we do not get the custom deals we want. We can mitigate costs and even provide cheaper exports than we currently do on any product we wish. We do not have to be averse to using tariffs either: to protect industries and fund new ones. The LSE may sketch a statistical world in which Scotland loses over time, but we know that we will live in a world where Scottish luxury products will always be in demand, that the need for electricity generated by our renewables industry will grow and that flexibility and creativity of the Scottish economy, empowered by a Scottish currency, can meet any challenge.

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