A Free Market Case For Independence: Let’s Make Scotland Like Hong Kong
In September, Scottish residents will vote in the independence referendum, following months of intense political debate between the Yes and No campaigns. Even statements presented as purely financial or economic in nature have not been based on proper facts or sound analysis. The Scottish National Party is pursuing an inherently emotional case, while the Westminster establishment is employing scare tactics: Scotland should hold on to nurse for fear of something worse.
There is no reason why 5m Scots cannot do far better as an independent nation, but it will require that they ditch both welfare dependency and subsidies, and embrace reality. Get it right and Scotland’s diaspora, many of whom have abandoned Scotland’s parochial, socialistic shores for free markets elsewhere, would be back like a shot.
In leaving the UK, Scotland would establish its own constitution. The country could give greater protection to property rights, while reducing the scope for political intervention in economic and business affairs. Its own legal system gives Scotland a head start in this process. Contrary to the threats from Westminster about not keeping the pound, an independent Scotland could run a currency board pegging the new local currency to sterling or even the euro, providing the restraints for monetary stability. The prize for the taking is that Scotland could become an entrepot centre in its own right.
This is the basic formula behind Hong Kong’s success. Remember that Hong Kong emerged from the rubble of Japanese occupation in 1945, and has climbed a far higher mountain than that faced by Scotland. There’s no reason (from a purely economic point of view) why Scotland cannot be a roaring success as an independent nation, as long as it embraces free markets, rejects state intervention and provides legal security.
Unfortunately, the majority of Scottish voters view things very differently. They believe North Sea oil will be part of the independence settlement, and that oil and whisky revenue will pay for welfare and pensions. They hanker after increased socialisation of the means of production, providing an intellectual gloss for the unthinking majority that simply wants more for less. But independence means giving up the security of the Union, and (under the Barnett formula) the subsidy of English taxes.
On figures published in the Treasury’s Public Expenditure Statistical Analysis 2014, Scotland received total identified expenditure on government services of £10,152 per head in 2013, compared to a UK average of £8,788. Tell that to a family of four. Public sector employment in Scotland (at 22.1 per cent of the employed total) is also higher than for England’s 18.8 per cent – a dependency which will have to be addressed. Tell that to 566,300 state employees, most of whose salaries are covered directly or indirectly by Westminster.
Much has been made of the difficulties of separation, and problems certainly exist. The currency threat has already been mentioned, and there is the issue of what proportion of the UK’s national debt should be taken on by Scotland. But none of this is new to Whitehall, which has achieved financial settlements with a diverse range of newly-independent countries that left the British Empire. Despite the threats from politicians in the Westminster establishment, the process need not be difficult or complicated.
Banks and large businesses with headquarters in Scotland have threatened to relocate. Industry can simply be encouraged to retain employment in Scotland through lower taxes, and it really doesn’t matter where their headquarters are. If the Yes campaign is right that Scotland would be able to negotiate continued membership of the European Union, it could find a European role in the same vein as Hong Kong’s to mainland China.
Westminster’s threats and posturing are pure politics, and a denial of what is possible if Scotland embraces free markets. Equally, it is clear that Edinburgh’s political establishment has not grasped the economic nettle in any meaningful way. They were even too flat-footed to counter the threat of exclusion from sterling by proposing a currency board.
As a Scot, I would like to see the country go it alone, despite its lack of a realistic economic plan. Independence would free Scotland from the economic tyranny of subsidies, and the nation would eventually be forced to embrace free markets and live within its means. That will always be the precursor to the undoubted economic potential Scotland has been denied as a dependent member of the Union. However, I think it is a racing certainty that the Scots will funk it, and hold on to nurse for fear of something worse.
Alasdair Macleod | Head of Research
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Alasdair became a stockbroker in 1970 and a Member of the London Stock Exchange in 1974. His experience encompasses equity and bond markets, fund management, corporate finance and investment strategy. After 27 years in the City, Alasdair moved to Guernsey. He worked as a consultant at many offshore institutions and was an Executive Director at an offshore bank in Guernsey and Jersey.