Speech by Grahame Smith, General Secretary to Holyrood Manifesto Series

Economic Development: Smarter and More successful?

Monday 26 February 2007

The Royal Museum, Edinburgh

I am delighted to be here today and to be able to participate in the Holyrood Manifesto Series and hopefully to contribute to a constructive and mature discussion about economic development policy in Scotland.

The first thing to say is that STUC enthusiastically shares the Scottish Executive’s commitment to sustainable economic growth. We are passionate about the economy, the jobs it provides and the proceeds it generates to allow our country to flourish.

However, we are dismayed by much of what passes for debate on the Scottish economy. Shrill lobbying on marginal issues, by a plethora of organisations jockeying for position post-devolution, has produced a culture where debate is very narrowly focused. Orthodoxies emerge and become ingrained, despite being founded on little or no evidence. Analysis is selective and distorted through highly politicised prisms to support policy positions that are fundamentally ideological in nature.

This sad spectacle is not what the STUC envisaged when campaigning for a Scottish Parliament. Rather, we believed devolution would provide an environment in which politicians of every hue, government, employers, trade unions, enterprise agencies and civic Scotland were afforded a meaningful and regular opportunity to debate, discuss and, when necessary, constructively disagree about Scotland’s economic present and future.

So let us hope that today is a new start – an opportunity to discuss, debate and disagree. We should all be a little wiser at the end and policy development should benefit as a result.

I come here aware of the many and varied challenges Scotland faces, but hopefully also with a proportionate appreciation of the advantages we can build on. Perhaps, understandably, many commentators focus on Scotland’s long-term growth deficit with the UK as a whole.

But this disguises the massive industrial change that Scotland has undergone over the past 30 years. It isn’t complacency to argue that Scotland has emerged in reasonably good shape with many comparative advantages to build on.

Today I will focus on some key themes:

• The importance of challenging dominant orthodoxies about the Scottish economy; • The productivity challenge; • The institutional infrastructure; and • The role of government

I also want to suggest some key strategic actions for a new Scottish Executive administration.

Dominant orthodoxies

Serious discussion about the Scottish economy is undermined by the persistent promotion of myths about the so called regulatory ‘burden’, levels of taxation and the relative size of the public sector.

On taxation:

Listening to some organisations during the first half of this decade, you could have been forgiven for thinking that the most important issue facing the Scottish economy was the marginal difference in the business rate poundage with England!! Whilst this is demonstrable nonsense, it distracted large sections of the business community, media and political parties from far more pressing issues.

It is also worth noting that levels of business taxation in Scotland are in fact very competitive by international standards as is the time taken to comply with taxation responsibilities. On ‘crowding out’:

Whilst private sector employment has grown at twice the rate of public sector employment since devolution, we are consistently told that the private sector is being ‘crowded out’, this despite the majority of public sector growth happening in education and health - areas where private sector demand is minimal.

Proponents of crowding out theory also wilfully ignore the positive economic impact of public spending.

Scotland faces many serious economic and social challenges: a declining and ageing population, an appallingly low rate of r&d investment, retaining a manufacturing base in the face of global competition, upskilling and tackling the legacy of the disastrous labour market policies of the 80s and 90s that have left us with pockets of persistently high economic inactivity.

It is high time the business community acknowledged the simple truth that a strong public sector is fundamental to meeting these challenges effectively.

On regulation:

International surveys consistently find that Scotland is a very lightly regulated economy, but this doesn’t prevent lobbyists arguing the contrary. Strangely enough, those who argue that Scotland is over regulated find it almost impossible to be specific about which regulations they wish to see dropped.

I think this type of muddled thinking derives from a deep-seated need for simple, universal explanations of complex phenomena. It is comforting to believe - for instance - that a reduction in corporation tax will, in and of itself, solve all Scotland’s economic ills. But it won’t. Companies invest after analysing a range of factors only one of which is taxation responsibilities (not burdens).

Promoting myths does a disservice to us all. Scotland has no future as a low cost, low skill, low wage economy. The type of vision set out in a Smart Successful Scotland (SSS) cannot be realised in this way. It is time that ‘American business model fundamentalists’ recognised this simple truth.

Productivity

The purpose of today’s conference is to discuss the appropriateness of the current policy framework for economic development and how this might be improved.

Not so long ago, there was widespread consensus that the framework for economic development provided by FEDS and SSS was broadly correct - it recognised that Scotland could no longer compete on low-cost widget making with emerging economies, and it sought to provide a clear pathway for how we might compete more effectively in the future.

This has since been enhanced by Scottish Enterprise’s priority industry strategy which seeks, again correctly, to focus on comparative advantage whilst retaining flexibility to help grow enterprises in all sectors.

However, the framework was always incomplete and has been further diminished by a number of factors:

• The relentless focus on the myths outlined earlier;

• It is diminished by those who claim to support the strategy, but continually propose solutions that emphasise cost minimisation at the expense of productivity augmentation;

• It is diminished by those who draw a false distinction between ‘pure’ economic development and social inclusion. Our people are our most important asset. The pockets of persistently high economic inactivity that persist, particularly in West Central Scotland, represent an economic as well as a social challenge - and one we must get right; and

• Most importantly, the policy framework ignores the workplace - a framework supposedly aimed at enhancing productivity completely overlooks those who are meant to become more productive. It ignores how work is organised and how jobs are designed. It fails to provide a framework for ensuring that investment in skills will lead to increased productivity, and it fails to recognise the clear link between productivity and fair employment practice.

Skills continue to dominate the discourse on raising productivity. I have no problem with this. The STUC has long advocated greater investment in skills as a key component of Scotland’s response to globalisation. Recognising that 75% of those who will form the workforce in 2020 are already in work, it is imperative that we develop better mechanisms for training in the workplace. This must involve a higher degree of commitment from employers in partnership with unions and government.

We recognise how vital effective education for young people is in meeting the skills challenge, and the importance of government interventions that aim to manage effectively the transition between education and work.

However, too much attention and most of it ill-informed, is given by government and employers to the apparent need to reform our ailing school system. This fails to acknowledge the evidence that our schools perform well by international standards and diverts focus from the need for policies to support the training and retraining of the current workforce.

But the economic development framework must also recognise that productivity will only be enhanced if new or higher skills are deployed effectively in the workplace. This element of the productivity challenge is currently completely overlooked by the policy framework. I cannot understand the reticence of policy-makers to address this issue.

Scotland (and the UK) is unusual in taking such an approach. Issues, such as how work is organised and how jobs are designed, is widely recognised as an important issue in a number of other European countries, where state-sponsored workplace development programmes have emerged in the pursuit of enhanced productivity and improvements in the quality of working life. These include Norway, Sweden, Germany, Finland and Ireland.

We also must recognise that skills and the deployment of skills are only part of the story. Academic studies identify skills deficiencies as accounting for only between a fifth and an eighth of the UK’s relative productivity gap with France and Germany. Skills do not appear to account for the productivity gap with the USA at all.

The main explanation for the gap with Germany, France and the USA is the UK’s persistently poor record on investing in physical capital, r&d and infrastructure. The government’s policy response to these glaring deficiencies has been to build and sustain macroeconomic stability in the hope that, in the long run, such stability will create a climate in which businesses want to invest.

However, despite ten years of stability, the evidence suggests that UK companies still prefer growth through merger and acquisition rather than organic growth. Why do we never hear politicians challenge business on their lack of investment?

Institutional infrastructure

The STUC sees no pressing need to reform the enterprise networks, but their future is clearly in doubt post-election.

We have had some difficulties with the approach undertaken by the current Chair and Chief Executive of Scottish Enterprise.

The separation of ‘pure’ economic development activity and social inclusion/employability orientated initiatives is unhelpful. But the priority industries strategy is appropriate and it is certainly legitimate to have a mature debate about which agency is best placed to deliver. I am very uncomfortable about the prospect of SE being broken up post-election. I can see no merit in separating the delivery of business support and workforce development initiatives, and the possibility of an expanded role for democratically-elected local authorities should be part of the debate.

The STUC also supported the Enterprise Committee’s recent proposal that a national economic forum should be established. I find it curious that, in the analysis of Ireland’s economic success, its approach to social partnership is almost always overlooked. This created the consensus for growth that many in Scotland discuss, but appear unwilling to act on.

Collective action involving all stakeholders is necessary to tackle the substantial challenges ahead of us - climate change is the perfect example.

For instance, we cannot pursue economic development policies that are truly sustainable without effective but proportionate regulation. This will be most efficiently designed in a collective forum.

The STUC has argued for stronger social partner involvement in designing and implementing regulation, especially in the labour market. Where this has been done, the outcome is often better designed and commands wider support than when regulation is left entirely to government.

The role of government

The economic orthodoxy of the 1980s and 1990s told us that interfering with the functioning of free markets is almost never justified. We should aim for a minimal state whose economic role should extend no further than the definition of property rights and the enforcement of contracts.

Proponents of this view resembled the Marxists they displaced in their belief in the inevitability of market primacy. They demonstrated the same ingenuity in attributing all social and economic ills to governments that Marxists displayed in attributing all social and economic problems to capital. The free market model offers its adherents the same confident certainties as Marxism does its.

Economic thinking has moved on and free market fundamentalism has lost its credibility - it still has its supporters, but they tend to speak from the opinion pages and, unfortunately, from parliamentary benches, rather than respectable academia.

The simple fact is that, if Scotland is to maintain and build on its current comparative advantages, government must play a more interventionist role. By this, I do not mean that government should subsidise failing industries at the expense of productive investment elsewhere. Rather, I mean that government should use all the tools at its disposal, for instance: procurement, state aids, investment in skills, business support, and support for innovation - strategically to maximise the economic and employment opportunities available to Scotland. Other countries have done this to exploit comparative advantages far more effectively than we have done - Denmark in renewables, France in energy, Sweden in engineering, and Belgium in car making, for example.

Economic debate

Economic debate is too narrow. It is regrettable that senior politicians of all Scotland’s major parties must share in the responsibility for getting us to this point. Politicians have to be reminded that we seek to develop the economy for the benefit of all and that many different stakeholders have a valuable contribution to make.

The parties continually seek to attract and then parade successful entrepreneurs in the party cause. The aim is apparently to provide their economic policies with the lustre of credibility.

Unfortunately, the cumulative effect is to suggest that only such people should be listened to on economic development issues.

• Whatever their good intentions, are successful business people really likely to have the answers to, for instance, long-term economic inactivity? • Can the experience of one individual or company really be cast wider to identify structural defects in the formulation and delivery of economic development policy? • Is it the case that someone who has been successful at selling training shoes or car exhausts knows how best to educate our children?

I would argue not. It is incumbent on politicians to recognise that the quality of debate must improve. If it does not, we can kiss goodbye to the national consensus on growth that they all apparently crave.

In conclusion

In concluding, I would like to suggest some key strategic actions for a new Scottish Executive administration.

• First, the creation of a national economic forum - involving government, employers, public and private sector, and the trade unions to propose policy initiatives to address the economic challenges we face in a mature, evidence based way; second

• the development of a viable, balanced energy policy for Scotland, within a UK framework - one that seeks to maximise industrial opportunities in renewables and clean coal; third

• a Scottish skills strategy that would enable a consensus to be achieved on skills priorities; roles and responsibilities, particularly in relation to investment; the skills profile we require; and the institutional infrastructure necessary to support it; fourth

• the development of a voluntary, fair, employment standard to support employers in the public, private and third sectors to achieve the highest standards of employment practice in equality at work; work/life balance; dignity and respect; health and safety; workforce skills and lifelong learning; and the involvement of workers in decision making; and finally

• the creation of a national centre for the improvement of workplace performance - how work is organised is widely recognised as an important issue in a number of other European countries, where state-sponsored workplace development programmes have emerged in the pursuit of enhanced productivity and improvements in the quality of working life.

In our objectives for the future development of the Scottish economy, there is considerable consensus amongst unions, employers and government and we all have much to contribute to developing the policy framework necessary to achieve these objectives. What we need are the mechanisms to enable the discussion to take place, the decisions to be taken and the commitments to action made.

I know we’ll be criticised and accused of promoting a return to 1970’s corporatism?

Well we are not. What I’m talking about is social partnership - the same approach used effectively by many of our economic competitors and one from which Scotland has much to learn and much to gain.

Thank you.