The Economic Advantages of an Independent Scotland

If its voters choose independence next week, Scotland will join the ranks of the world’s small, affluent countries. Over the past couple of decades, that’s been a good club to belong to. As Gideon Rachman put it in the FT in 2007:

This is the age of the small state. Look at almost any league table of national welfare and small countries dominate.

Things have gotten a little more complicated since then. (Rachman in 2009: “Big is beautiful again.”) Several small nations suffered brutally from the financial crisis and subsequent Euro mess: Greece, Iceland, Ireland, Portugal.

Still, several of the emerging bigs (Brazil, India, Russia) have since run into economic headwinds too. And small countries remain overrepresented near the top of lists of the world’s most affluent, most competitive, healthiest, and smartest nations.

So it’s not crazy to think that Scotland, which on its own would be a country of 5.3 million people with a GDP per capita ranking between Finland’s and Belgium’s (that’s counting offshore oil revenue), could be an economic success. But it’s not guaranteed, either.

What has made small countries so economically successful over the past few decades is less their smallness than the ways they’ve taken advantage of it. David Skilling, a former New Zealand government official and McKinsey consultant who now advises small-country governments and companies from a base in Singapore, has spent as much time thinking and writing about the strengths and weaknesses of small states as anybody. In a 2012 paper that should be required reading in Scotland, he lists two main characteristics of successful small states:

1. They’re cohesive, and thus able to make policy decisions quickly and stick with them.
2. They tend to make good policy decisions, in part because they’re very aware of the world around them and what it takes to compete in it.

In polls, Scotland appears evenly split on whether to leave the United Kingdom. That doesn’t look very cohesive. But one of the forces that’s been driving Scotland toward possible separation has been the divergence between Scottish political priorities and those of the rest of the UK. The ruling Conservatives hold only one of the 59 Scottish seats in the British parliament; two leftist parties, Labour and the Scottish National Party, dominate Scottish politics. If the question of independence were settled, it seems like the Scots would be able to find lots of other things to agree on.

Would they agree on the right things? A generous welfare state and economic success aren’t incompatible for small nations — there are several examples of this just across the North Sea from Scotland. But since a stretch of tough economic times in the early 1990s, Denmark, Sweden, and Finland have combined their generosity with remarkable efficiency and economic savvy (Norway, with its vast oil riches, hasn’t had to make quite as many hard choices). They and other successful small states tend to balance their budgets, export more than they import, and invest heavily and smartly in infrastructure and R&D. As Skilling tells it, they have designed their economies to be globally competitive.

“Being a small country offers a lot of in-principle upside, brings with it significant risks, and is what you make it — but it’s only for serious countries,” Skilling replied when I emailed him about Scotland.

So is Scotland serious? Skilling thinks it is, but the leaders of the “Yes” movement don’t seem to be quite there yet. They assume that they can continue in a currency union with London when officials in London say that won’t work, for one thing. What’s more, Scotland today has giant government deficits, a fast-aging population, and not much in the way of exports apart from oil, The Economist argued this summer. That, and it has spent the past three centuries becoming ever more economically intertwined with the rest of Britain. Set loose alone on the rough seas of the global economy, it seems likely to founder at first.

After that, the question is whether the small-state effect would kick in. Would the Scots be able to get their act together and rally around things like fiscal discipline and smart tax policies and R&D investment? This is the land that spawned such great economic thinkers as Adam Smith, David Hume, and — what the heck — John Law. Surely the Scots could figure it out eventually. And once they did, it is entirely possible that an independent Scotland with a clear economic identity would be a more vibrant, cosmopolitan, thriving land than the sometimes-neglected northern appendage of a populous country that it is now.

The big question — which neither I nor anybody else outside Scotland can really answer — is whether it would be worth the pain it will probably take to get there.