Wednesday 13 December 2006

Highly Effective Scotland?

Brian Micklethwait has written about his meeting with Leon Louw, the prominent South African libertarian. Louw was one of the attendees at the recent Libertarian Alliance conference in London.

Brian has produced a series of excellent podcasts in which he interviews various libertarian luminaries. The Leon Louw podcast can be heard here with Louw discussing his new publication, Habits of Highly Effective Countries: Lessons for South Africa. Brian writes:

What came across most strongly was Leon’s absolute, fist clenched determination to distinguish between, on the one hand, what he would merely like to be true about what happens in well (and badly) governed countries, and, on the other hand, what he is actually able to report to be true about these places. As he said right at the start, what he is trying to do is to amass facts that are simply impossible to argue against. This is what successful countries do. This is what failed countries do. And so on.

For instance, he has discovered the incontrovertible fact that the mere level of taxation simply is not as important as we libertarians would have the world believe. (By the way, Leon Louw is an unswerving and utterly uncompromising libertarian and he said it very plainly in our talk.) What matters, it turns out, is how a government behaves, and how it spends its money. If it behaves in a predictable, rule-bound manner, that’s good. The “rule of law” is good, very good. If it behaves in an arbitrary, discretionary manner, even if the scale of its operations is a lot smaller, that’s bad.

As I listened to Brian and Leon talk it occurred to me that they were discussing something that's become a red-hot issue here in Scotland: a country's economic growth rate and how to improve it. Even some in the Labour Party are beginning to realise that the Scottish economy needs to speed up, to put it mildly. I thought that it would be useful to extract some quotes from Leon Louw's document so as we can have a think about how some of his ideas could help our own political class to move Scotland up the economic growth league, whether independent or not.

First, what about North Sea oil? Does it matter? And isn't Scotland too "remote" to be successful?

Neither resource abundance nor resource scarcity make much difference, resources being neither an automatic curse nor an automatic blessing. Size doesn’t matter, nor geography, not history.
Moreover, sending 50% of the population to university isn't a panacea:
There is a powerful notion, for instance, that natural resource endowment or substantial spending on education coincides with high economic growth. It is easy to assume that countries rich in natural resources outperform countries that lack resources and that the presence of natural resources may be a statistically significant non-policy factor in foreign exchange revenue, or that conducive climates ensure high agricultural yields. As already observed, the most important factors are government policies, which means that any country can achieve almost any policy goal by adopting the right policy mix.
Controversially, democracy isn't essential for economic growth, although it is usually preferable to the alternatives for other reasons:
Democracy does correlate with prosperity. Democracies without market economies are not prosperous, though they do seem to be somewhat more so than nondemocracies with similar economic policies. Economic policies and the integrity of the legal system are much more significant.
What about all those plans we hear about for a new Forth Bridge (or tunnel), bullet trains, trams, new motorways and airport expansion?
Government spending on infrastructure as a proportion of GDP does not correlate significantly with prosperity. The evidence does suggest that spending on certain kinds of infrastructure, especially transport infrastructure, contributes to growth. A priori, since government infrastructure spending entails removing more wealth from the economy than spending on infrastructure (after administration, expenses, etc), it will constitute a net gain only if that spending produces more wealth than would have been generated had the resources been left in the private sector.
So let's get on with the new bridge, but no more spending on new government buildings please.

Louw has this to say about the welfare state:

There is a curious argument to the effect that welfare statism promotes growth because it increases the buying power of the poor, which increases demand, promotes investment and so on. It overlooks the fact that welfare money given to A has to be taken from B, and that people from whom tax is extracted are more likely to spend (invest) money in ways that create rather than consume wealth. It is not a surprise therefore that welfare states under-perform on average, which could also be attributable to the fact that welfare statism tends to coincide with other policies which compromise growth – Sweden. The same German people in East and West Germany brought about disaster in the former GDR and the wirtschaftswunder in West Germany. Likewise North and South Korea, and Taiwan-Hong Kong versus China. However, Thomas Sowell, perhaps the leading authority on the economic significance of culture, has published at length on the subject, and concludes that culture is important and tenacious, but that the most significant factors are economic policy and the institutions of a free society.
So what the welfare-dependent parts of west-central Scotland need is a rigorous application of sound economic policies, not more dole money.

Again, it's the policies that matter most, not other factors often discussed by politicians:

Our analysis went beyond policies per se to establish the significance of such variables as natural resource endowment, climate, stage of development, demography, geography and constitutional orders. Fortunately for governments, none of these variables correlated nearly as significantly with good society indicators as policy variables. This means that a country’s fortunes are almost entirely within the power of government to determine.
High economic growth is up to us. There's nothing and no one else to blame.

Although Louw favours a small state on moral grounds (as do I), it's not necessary for developing a growing economy, although a "business-friendly" regime is essential:

Furthermore, there is a great deal of evidence to the effect that governments tend to use resources less efficiently than entrepreneurs. The most significant point is that what matters more than how much governments take in tax is what they do with it. The evidence suggests that governments are more likely to promote growth if they use their revenue primarily to: build infrastructure, especially transport infrastructure; provide services, rather than regulate economic activity; do things that don’t duplicate what the private sector can do, specifically that they do not compete with it; and increase efficiency by outsourcing and privatising. Though there is no significant correlation between aggregate tax and growth, the following graph shows a strong correlation between ‘business tax friendliness’ and growth. Tax friendliness measures the impact of tax complexity and incidence on business, and shows more growth in states with friendlier tax policies.
So, if Scotland does become independent, for God's sake don't let Gordon Brown near the tax system.

There is a message for those nationalists who constantly look to the Scandinavian countries as models for an independent Scotland:

It finds that efficient economies rely more on commonlaw than regulation, and that social democracies (like Denmark, Norway and Sweden) benefit from streamlined business regulation – they offset the burden of welfare by liberating productive market forces
I think the key quote is this:
The evidence suggests that there is not much governments can do to promote growth, but there is much they can do to curtail it. In other words, governments are best advised to do less rather than more because the downside risk of what they do is greater than the upside potential.
There's much food for thought here. Jack McConnell tells us that Scotland is the best small country in the world. Not yet, I fear. We could at least start by becoming highly effective.

1 comment:

David Farrer said...

Comments made on previous template:

Thanks for that David i will read the whole paper shortly. An example that strikes me regarding low personal taxes not automaticly being helpful is the caomparison with the US & UK rates. Our tax is about 40% & the USA's slightly over 30% but almost all of the 8% of GNP we spend on health comes through the government whereas the large majority of the 14% they spend on health is personal (usually funded by insurance). Therefore after taking off tax & healthcare we have at least as much of our money lrt.  
The problem is not then government spending but wasted spending - which government usually, but not always, manage more of.

15 December 2006, 13:00:43 GMT
– Like – Reply

Andrew Duffin
Never mind Ireland, the models we should aspire to are Norway and Iceland. 
And it's interesting to see how many Swiss youngsters go to Uni - a surprisingly small percentage.  
No doubt that, combined with their inexplicable refusal to join the EU (see also Iceland and Norway, above), explains the poverty and general decreptitude of Switzerland.

14 December 2006, 12:48:33 GMT
– Like – Reply

Chris A
If Scotland ever becomes independent, then the socialist mentality of Scots must be challenged. If a sovereign Scotland isn't very pro-enterprise in its economic policies, then it may not prosper as a sovereign state.  
If the Republic of Ireland is to be the model, then it's imperative that Scotland accepts the market to a far greater degree.

13 December 2006, 21:45:44 GMT