Full text of a speech delivered by the Secretary of State for Scotland to the David Hume Institute at the Royal Society, Edinburgh
Securing Scotland’s Future Prosperity
Introduction
Thanks Jeremy for that kind introduction.
It’s a real privilege to be here tonight with such a distinguished audience, at such a special venue, and at such a significant time for Scotland’s economy.
In the spirit of intellectual enquiry that is the hallmark of the David Hume Institute and our hosts the Royal Society of Edinburgh, I want to take some time to reflect on how I believe that Scotland can come out of the current global downturn strong and prosperous.
To do that I want to look at the enduring strengths - and some weaknesses - of our economy, as well as the future poles of growth.
Much of what I say will command broad support; the rest I hope will stimulate debate.
For Scotland got to where it did today – over two and a half centuries since the dawn of the Scottish Enlightenment - through a deep belief in the value of ideas and debate.
Scotland is brave and it is clever. More than anything else I believe it is upon these two longstanding national attributes that we will build our future prosperity.
As today’s global and local marketplaces face a crisis of confidence, I firmly believe there is still cause for canny Scottish optimism. But first we must be wise to the difficulties in our midst.
The present economic circumstances we find ourselves in – internationally, as Scots, as British citizens – are unprecedented.
I believe we have reached a turning point in economics, and in politics too.
One of those moments when the intellectual tide is changing and a new consensus will emerge.
The deregulation of the 1980s, which did so much to ignite global growth, did not have the capacity to curb capitalism’s most unrestrained excesses.
Only six weeks ago, the past chairman of the US Federal Reserve Alan Greenspan, had to acknowledge that:
“A critical pillar to market competition and free markets did break down. I still don’t fully understand why it happened.”
What we do know is that good governance did not buttress our economies against the riskiest global market forces.
For the last decade Gordon Brown has argued for the reform of international institutions. In his words:
"We now have global financial markets, global corporations, global financial flows. But what we do not have is anything other than national and regional regulation and supervision."
Now he has emphasised the pressing need to crackdown on the shadow banking system of financial institutions that trade complex and obscure financial products.
We will always be a pro-enterprise Party but we must make sure that excessive and irresponsible risk taking is not rewarded.
As we lead international efforts to build the necessary protections against free market meltdown, it is clear that the State is back.
It’s not the discredited corporate state of the 1970s. But a strategically agile State.
A State that celebrates free trade but acts in the public interest in the face of market failure.
For to do nothing in the face of what has been described by the Bank of England Governor as the biggest financial crisis since the Great War is the ultimate irresponsibility.
It will be some time before we have the language to describe precisely how the new relationship between governments and markets works out, but Peter Mandelson’s recent Hugo Young Memorial Lecture is a very good early draft of the new settlement.
Last week Peter said:
“It is not a choice between, on one hand, the post-war, big state as a primary instrument of economic planning and a guarantor of equity; and on the other, the minimalist view that state intervention simply gets in the way of efficiency and enterprise.”
Or, to paraphrase, we need markets where possible, government where necessary.
Scotland’s future prosperity is dependent upon adapting to these new economic realities and being swift to adapt to the changing circumstances constantly presented by the global economy.
So tonight I want to draw on the lessons of the past and sketch a vision for the future.
My aim this evening is to be both constructive and reflective.
This is a distinguished gathering. And I am as keen on hearing your thoughts as I am on presenting some of my own.
Historical context
Let me turn first to the experience to date.
Professor Brian Ashcroft has said:
“The story of the Scottish economy in the twentieth century is one of glory, followed by rapid demise, resurrection and consolidation.”
There is no doubt the Scottish economy has experienced huge change over the last hundred years. And while it now has greater resilience than ever before, this was hard fought.
Occasionally in the past we had an economy that was cumbersome in the face of change.
Scotland’s early industrial fame was of course built primarily upon textile manufacturing, then mining and heavy engineering and shipbuilding.
While producing a top ten economy of the early 19th Century, it proved to be a heavy base from which to shift.
Our industrial traditions faced powerful forces of change as new 20th Century economies like Germany and Japan exposed Scotland’s uncompetitive underbelly.
The horrors of Depression in the 1930s led to a post-war period of state intervention by both Labour and Tory Governments. And while the approach had some success, it wasn’t sustainable.
The interventionist model was fundamentally flawed - exposed in the 1970s when the then Labour Government was forced to go to the IMF. That moment started the drumbeat of industrial closures across Scotland that dominated the next decade.
Many economists have argued that the following chapter in Scotland’s story, authored by Margaret Thatcher, simply accelerated the demise of outdated technology, outclassed industry sectors and substandard business models.
However my critique is that those soulless economic rationalist reforms in Scotland during the 1980s were not matched by any attempt to assist people to adjust to new careers. As heavy industry closed people’s careers were decommissioned as the numbers on incapacity benefits trebled.
And it is worth reflecting just how cruel a fate it is for many to end up on Incapacity Benefit.
The 2.7 million people in Britain on IB have on average spent 9 years on that benefit, and statistically after 2 years on IB you are more likely to die or to retire than to ever get a job again.
One of my most passionately held political beliefs it that abandoning workers to a life on benefits is just as bad an economic policy as it is social.
During the 1990s we turned a corner, insofar as the high volume electronics manufacturing jobs that moved to the Far East were progressively replaced by a broader base and more sustainable enterprises.
By the time the tech wreck hit in 2000 we had the fundamentals and strategies in place that enabled us to take the hit without resultant mass unemployment.
These struggles Scottish families and enterprises have faced in the last century does leave us with a very important legacy for today.
There can be no doubt that we are a brave nation.
What we must do now is match this bravery with the brains to prosper out of today’s economic circumstances.
For while the size of our planet has never felt smaller, it’s complexity has never been greater.
Globalisation and the pace of change
The pace of global transformation in all our lifetimes has been extraordinary.
My childhood was spent in a bi-polar world – with the US and the USSR facing off against each other. A contest between two models – capitalism and communism. With a Third World seen as political and economic pawns and proxies in that contest.
The fall of the Berlin Wall led to a brief moment where some commentators argued the world was unipolar.
The re-emergence of China into the global economy soon brought another economic superpower. A development which anyone with a deep sense of history would have anticipated.
I say re-emergence for in reality it is the 20th century that was the anomaly - the only century in the last 1000 years when China was not one of the major economies of the world.
China today has some 14 cities whose population exceeds Scotland’s population as a country.
In truth, today’s is, economically, a tri-polar world. With the European Union – and its 455 million population – an economic Modelpower alongside the Superpowers of China and the US.
But even now we can see the seeds of change with the steadily rising economic strength of new economies in India and South America.
It is this new buzzing marketplace – filled with a huge Chinese middle class, cashed up Indian investors and other wealth creators where Scotland must direct its future attentions.
The World Bank estimates that the global middle class is likely to almost treble from 430 million in 2000 to 1.15 billion in 2030.
China and India account for two-thirds of this expansion, with China alone contributing up to 350 million more people to the new middle class.
For Scottish business and industry they represent new and major opportunities.
Yes we have to fight for this new custom – but we’ve learnt past lessons and are now better prepared for the competition.
Our response to the current economic challenges must remain global.
We can’t stop globalisation but - as Scotland in Britain, and through Britain in Europe - we can influence it. Indeed we can continue to benefit from it.
And though a globally integrated market traded us into the current difficulties, only a globally integrated market can trade us out - because there is no other.
With the world economy still set to double in size over the next 20 years the potential of its growth, new markets, and job opportunities for us here in Scotland remains undiminished in the long term.
Global Institutions
So if we accept that our nation’s future prosperity is inextricably linked to a fully functioning global free market – what do we need to do? Especially considering the crisis in lending that has emerged in recent months.
In short, the answer is we need better rules, rather than more rules. New governance to make the global market function better.
And that is why the Prime Minister’s efforts – aimed at redesigning the global financial market’s regulatory architecture – are so important. As the world moves on and out of the credit crisis we need the power of free trade to lift us up. The best way to encourage this surge is a swift conclusion of the Doha Round and further progress on trade liberalisation.
This is important for developed economies such as the UK and crucial for developing economies for whom the current crisis could be catastrophic.
And so moving forward - within a better regulated free market system - Scotland must capitalize on the emerging opportunities that emerge.
Implicit in my comments throughout is the crucial significance of trade to the Scottish economy.
Scotland has a centuries long tradition of exporting goods across the globe, and despite changes to the composition of these exports, that tradition prospers today.
The latest data shows that Scottish international exports are worth around £20 billion a year, and that international exports account for over 20 percent of Scottish Gross Value Added.
However, international exports only account for part of the success.
Exports to the rest of the United Kingdom account for a massive £40 billion a year, representing around 45 percent of Scottish Gross Value Added.
The facts show we trade more with another part of the UK – our nearest neighbour England - than all the other 195 countries in the world together.
If we take Scottish international exports and Scottish exports to the rest of the UK together, then we can see that they account for over two thirds of Scottish Gross Value Added.
This makes the Scottish economy an export oriented one and we are therefore well placed to take advantage of an expanding - and more confident - global market in the future.
My argument therefore is that Scotland’s future depends crucially on a world with:
- a rejuvenated and stable financial system;- free and open world markets; and- protection of our existing constitutional arrangements.
The UK Government works every day with these objectives in mind.
UK Government’s role
Responding to the credit crisis and associated downturn, you will know that the Government’s initial focus has been on:
- assuring financial market stability;- stimulating the economy in the face of recessionary pressures; and - influencing developments on the world stage.
All three are crucial.
The Credit Guarantee Scheme has helped address the collapse of inter-bank lending and the Bank Recapitalisation Scheme has done much to stabilise the banking system.
The £20 billion fiscal stimulus package announced last month by the Chancellor rightly prioritises families. Scotland’s economy alone stands to benefit by some £2 billion.
The Prime Minister’s homeowner interest rate holiday initiative announced just last week is a confidence shot in the arm for working families who are worried about losing their home if things get really tough.
There is a vigorous debate about what the appropriate response of the UK Government should be. We’ve made it clear that to do nothing is not an option.
Conservative Leader David Cameron has recently made some misguided claims about “economic crimes” attempting to suggest that the UK’s projected borrowing levels mean we will have Italian levels of debt.
He is wrong. Because of what this Government has achieved over the last decade, Britain is in a strong position to take this action.
Failure to act makes no moral or economic sense. We will not just blithely leave people’s financial security totally exposed to the “automatic stabilisers” - as the Opposition Leader would do.
There is fiscal room and a responsibility for government to respond.
The IMF’s Net Debt comparison for this year stood the UK at 37.6 percent of GDP.
As a comparison Italy stands at 101.3 percent. An enormous comparative gap by any measure.
Among the world’s other major economies UK national debt is low.
From being the third worst in the G7 in 1997 we are now the second best. And our Public Sector Net Debt to GDP is forecast to be lower than the most recent IMF estimate of all other G7 countries, bar Canada.
No stimulus action would most likely mean a deeper and more prolonged recession which would result, amongst other things, in a longer strain on public finances.
I am sure you all know full well that the rest of the world is getting on with supporting their own economies with responsibly structured stimulus measures.
This is the approach President Elect Obama favors. Just last Sunday he made clear that the immediate concern is the need to:
“jump-start the economy… on a glide path for long-term sustainable economic growth”.
Coordinated Government action and investment is required here just as much as across the Atlantic.
HM Treasury have forecast that the Government’s stimulus package could save some 400,000 jobs – up to 40,000 of those could be in Scotland.
We have acted and will continue to act to protect jobs where we can. Though despite all of our combined efforts unemployment is forecast to continue to rise in 2009.
Having learned from the 1980s however we will not walk on by, abandoning Scots to a life on benefits.
That is why we need to press on with reforming the welfare state.
Welfare reform and skills investment
In terms of the challenges of today, the Beveridge model suffers from something Aneurin Bevan once called a poverty of ambition.
Labour’s implementation of that famous Liberal’s report has been one of the greatest influences on the modern British state, but it was designed for a different era.
Beveridge’s values are timeless but we need to reapply them to a modern world; to a more sophisticated, more personalised society.
The reality is Beveridge’s settlement is no longer ambitious enough.
Today the issue is how to best support those people who need state assistance.
In the 1990s too many were diverted to incapacity benefits and abandoned.
This is not an approach of either intelligent or compassionate leadership.
Our society today demands something more - not relief for preciously passive recipients - unemployed as a result of economic change. But opportunity in the form of skills and training to encourage and promote participation in a changing economy.
Undoubtedly work is the only sustainable route out of poverty and this principle has guided us over the last decade. That is why the Welfare Reform White Paper published yesterday sets out the next wave of reforms.
In Glasgow, we will pilot ‘localised welfare’. Allowing a local consortium – in which I am sure the City Council and the private and voluntary sectors will be key partners – to develop innovative ways of helping people back to work and to share in welfare savings which can be recycled into future projects.
The welfare reform bill fully implemented by 2011 will further adjust the welfare and benefit systems to improve support and incentives for people to move from benefits into work.
And of course further investment in education, skills and training is the base on which future Scotland is home to less lives on welfare than ever before.
Contributing to the Scottish Enterprise Skills strategy, my friend Jack Perry the Chief Executive of Scottish Enterprise recently wrote:
“Skills development needs to be a cornerstone of any successful strategy to drive productivity and growth. However, it is the alignment of skills with other drivers in the economy – enterprise, innovation, competition and investment – that will ultimately deliver economic success.”
I agree wholeheartedly.
Securing our future prosperity
Scotland must keep its fire of enterprise and entrepreneurship burning – and we must identify the right places to direct our energies.
Never more is this relevant than at times of financial stress and economic downturn.
Now I believe our trajectory of innovation prior to the credit crunch was, frankly, too modest.
More than ever now we really must consolidate our intellectual investment in innovation as a countervailing force against the pressures of economic downturn.
We must innovate, in order to compete – and the greater the pressures, the more we must steel our resolve.
So holding on to this commitment to new ideas, let’s look at the likely platforms for Scotland’s future economic growth and national wealth.
Financial Services
Scotland can continue to be a world leader on financial services.
Without doubt financial services, including banking, insurance and funds management are the jewels in the crown of Scotland’s recent growth.
Despite going through a very difficult time at present there will always be a demand for high quality financial services – and with a return to global growth in the medium term, that demand will inflate.
While the value of equities and funds have recently plummeted, the corporate knowledge of those who work in the industry is as strong as ever in Scotland. There has been no crunch on our collective financial literacy.
Edinburgh alone is the 9th biggest centre for funds management in the world and there is no reason why it can’t continue to be.
As the new economies establish their own financial services sector we can either educate them, train them or own them. The objective of course should be all three.
And as these new middle classes grow they will need savings vehicles, pension funds, portfolio management – things in which we all know Scotland already leads.
This is already a competitive advantage for us – what we need to do now is built a bridge to these emerging markets.
Energy
There are many strands for Scotland to grab hold of in the 21st Century energy market.
North Sea oil and gas and nuclear power remain important components of a balanced energy policy for Scotland.
Both are industries in which we can build strong centres of excellence from which we can export our expertise. We have over 30 years experience in extracting oil and gas in some of the most challenging conditions on the planet.
Our companies should be in demand worldwide as the search for fresh reserves reaches more and more inhospitable places.
And the global renaissance of nuclear energy will provide massive opportunities across the supply chain. Scotland, with its scientific and engineering heritage, should not miss out.
In addition there are new sources to explore and exploit.
The longer term objective is surely in exploiting renewable energy sources and in developing local industries based on generation through wind, water and tidal.
It’s estimated that by 2050 the overall global value of the low carbon energy sector could be as high as £3 trillion per year and could employ more than 25 million people. We need to move on this now.
For two centuries, Scotland energy has come from our coal, oil and gas reserves. We have relied on our geology. It’s now time to rely on our geography.
Our windswept coasts and moors and the tides around and between our islands, offer us a vast new energy bonus.
A study from 2001 estimated 60 gigawatts of Scottish renewable electricity potential.
Of that there is estimated to be 27.5 between offshore and onshore wind and a further 21.5 of wave and tidal energy potential.
Even a basic assessment of Scotland’s potential against future world demand presents a major economic opportunity for us.
In addition to renewables, we cannot ignore the growing demand for clean technologies through methods such as carbon capture and storage and other clean coal technologies. The incredible construction rate of Chinese power stations is a hugely lucrative opportunity for clean coal innovators.
High Technology Engineering
Evolution in High Technology Engineering looks set to be our 21st Century equivalent of last century’s manufacturing horsepower.
This is particularly true in our three main engineering areas – aerospace, defence industries and marine.
The integral role hi-tech engineering plays in supporting Scottish manufacturing cannot be understated. This was recognised by the most recent Scottish Economic Report from the Scottish Government.
Whilst manufacturing’s share of overall output has declined since the 1970s, the absolute output in our manufacturing sector has continued to grow. The reason for this though, is strong productivity growth in the sector.
I know we have to continue to create the correct investment environment for high tech engineering to flourish.
Tourism
Scotland itself is a unique product – and tourism is undoubtedly a boom industry of the global economy.
Many parts of the economy benefit from tourist patronage, just as many regions benefit.
Consumers round the world are increasingly looking for tourist experiences that embrace adventure and the great outdoors. Eco-tourism is as fashionable as it is sustainable.
In Scotland we have rugged beauty and adventure in abundance - we must seek to both protect and reward ourselves with it.
Foreign competitors can produce all the t-shirts and stainless steel they like, but they can’t produce Ben Nevis and Loch Ness.
I believe the opportunity exits for Scotland to develop eco-tourism into one of our important exports.
Tourism is a growing success for Scotland but it does show up a trend in our labour market.
I am delighted that we have so many new Europeans working in the sector but it also highlights that so many Scots are unwilling or unable to work in the sector.
But substantially it also reflects the underlying demographic challenge Scotland faces. And I just want to reflect on that and other areas that I think Scotland will have to address if we are to continue to prosper.
Demographic challenge and other weaknesses
I know that demographic change was a subject that the David Hume Institute considered quite recently, so I don’t want to dwell on it. But it is of course very significant.
Because we are an aging population services and industries across the board are finding it harder to recruit the young people they need.
This will put pressures on the welfare state, but there is a broader economic impact. Because there is no doubt that young people tend to be the dynamo of an innovative economy. They are hungry consumers and often the risk takers of tomorrow.
The expansion of the European Union has given us a broader workforce to draw from. But Jack McConnell when he was First Minister identified the need to draw on a broader pool of talent. His Fresh Talent initiative has been hugely successful in attaching to and keeping in Scotland the highly skilled graduates who are a key driver of economic success.
But I also think we need to challenge the view of an ageing population through the prism of economic liability.
We need a more sophisticated assessment of what an aging population means. What are the benefits?
Delayed retirements can assist employers in their workforce planning.
There will be added incentive for workplace or industry training and re-skilling to be through-career, not just in early career.
Then the increasing economic independence and of retirees prompts one to think about where they will want to spend their money. A new silver economy of leisure will emerge. Who can reap dividends and how?
There are other challenges.
Another fundamental problem is insufficiently granular Scottish economic data collection and analysis.
Just one example has been provided by John McLaren, of the CPPR, who pointed out recently that the statistics apparently show that there has been no overall growth in the hospitality industry over the last 10 years. But a stroll down the main street of any Scottish town demonstrates that this data is surely misleading us.
Bill Jamieson made this point very well in a thoughtful column on the Scottish economy this week. I believe the UK Government, the Scottish Government and Scotland’s businesses can together resolve this.
Scotland’s language skills also need improvement as the global market increasingly exposes deal making to languages other than English.
Our high quality education institutions are well placed to increase our national competency in this area.
Indeed in a knowledge economy the fundamental, creative powers of universities have never been so great. But we still need to crack one critical, underlying problem - that Scotland’s universities produce a high number of patents but we are still not able to commercialise them effectively here at home.
Productivity remains a problem. It is poor relative to the UK as a whole.
It may be that this is, in part, a reflection of the inevitable lag as we have reshaped our economy over the last 25 years. But it remains a necessity to work not just harder, but smarter.
And there is a huge challenge in public sector productivity. One which is sharpened by the need to increase the efficiency of increasingly personalised public services in the coming years.
We also need to continue to work on ensuring Scottish business and industry have the right transport links for a global economy.
Further analysis is also needed on levels of R&D, innovation and relative levels of small business start ups. And government needs to make sure that it is moving unnecessary regulatory burdens from small business. I know from my time as a Cabinet Office Minister how important the reform of planning legislation is for business in England in Wales. I have no doubt the same applies here in Scotland.
Finally, while small is beautiful for certain purposes it is not in terms of domestic market. Growth therefore depends upon more innovative ways of identifying what consumers abroad actually want.
Scotland in the United Kingdom
Meeting these challenges and securing tomorrow’s wave of prosperity will require us all to work together.
Since I have become Secretary of State I have been clear about my ambition to work with anyone in the interests of Scotland.
That is why within days of becoming Secretary of State I called the first ever meeting between the UK Government and the Scottish Government, the CBI and the STUC. And these will of course continue in the new year.
However, while emphasising in these meetings that we should set aside the daily disagreements that unnecessarily litter Scottish politics, there isn’t a unanimity of political or economic philosophy.
Because there remain two competing visions of Scotland - whether Scotland would be stronger by separating from the UK or remaining within the UK.
I love Scotland too much to see it leave the UK.
The truth is that the position of Scotland within the UK, the world’s fifth largest economy, is a major plus.
Not only is the UK Scotland’s largest market for goods and services, it is also has the scale to underpin our banking sector.
Not only does it offer Scotland the top seat at the table of the UN Security Council, the EU and the G8, it also has the scale to absorb the fluctuation of the oil and gas price.
In the space of a few months we have seen the oil price crash from over $150 a barrel to barely $40. Anticipated oil revenues to the UK have fallen by £6 billion – a fifth of the total budget of the Scottish Government.
In truth our Union of the United Kingdom is about pooling resources, reward and risk. It provides prosperity in good times and ensures greater security in today’s more difficult times.
Conclusion
In closing, I spoke earlier about Scots moving forward with canny optimism.
As Scotland benefitted from the mercantile age, now it can benefit from the global age.
Our beloved malt whisky industry offers us some pertinent inspiration.
A resonant champion in high value, high end consumer markets all over the world, the whisky industry encapsulates how Scottish tradition can evolve so successfully to prosper in to the most modern and competitive of marketplaces.
In 2004 brandy was the best selling premium spirit in China. But government working with the Scotch Whisky Association has boosted the brand and now scotch whisky is the top selling high value spirit in China.
The lessons we have learnt from past experience should set our course for the future. This future is intensely linked to the immediacy of innovation.
Our investment in ideas ought to focus especially on the high value export markets that I discussed - financial services, energy, tourism and high tech engineering – sectors that will find more and more custom from the new economies.
Meanwhile the strength of our Union within the United Kingdom ensures us stability and a powerful voice in important global forums.
But real weaknesses exist and in an increasingly competitive environment these weaknesses must be mitigated.
I will be relentless in seeking views, and representing Scotland’s best interests in all the forums at my disposal – from here, to London, to Europe and beyond.
The primary question we inevitably ask ourselves this evening is – how do we navigate Scotland swiftly and safely through the immediate global downturn?
And the next is how do we secure our nation’s longer term prosperity beyond?
I say firstly through action and then through innovation.
Both require courage.
A run on confidence has crippled the global marketplace in recent times.
Concerted international action has created, at least for the moment, some stability. But we must not lose the sense of urgency – at home or abroad.
I am clear about where we should go as a nation. But I am also certain that government does not have a monopoly on the best ideas on how to get there.
If we are to move forward as rapidly as we need to, we will have to work together.