The Economic Case For Scottish Independence

Patrick Basham | Director, Democracy Institute

Should Scotland be an independent country? Next week, Scottish voters answer that question and a new YouGov poll puts the yes camp in the lead for the first time.

That’s bad news for President Obama, who declared America’s “deep interest in making sure” the UK remains a united country.

Similar to Obama’s White House, Scotland is an anachronistic place where leftist thinking remains in vogue. Scots strongly dislike, for example, the UK government’s introduction of market forces and fiscal discipline into the provision of health care, education, and welfare.

Nonetheless, the strength of the pro-independence case is vastly underappreciated. An independent Scotland would be a prosperous, stable, pro-American democracy. Economically, there‘s every reason to assume that an independent Scotland will do as well as independent Ireland, which departed British rule almost a century ago.

As a wealthy, well-educated, highly-skilled nation, an independent Scotland would rank 14th in the world, according to OECD data. At the outset, she would enjoy a GDP per capita of $47,000, higher than either the UK ($41,000) or Germany ($44,000), both of which have AAA credit ratings.

Although the Scots are ideologically to the left of their English neighbors, in practice their semiautonomous government is comparatively frugal. For example, Scotland has a lower deficit and lower public spending relative to GDP than the UK. And, the Scots are better tax generators. Scotland has generated more tax per capita than the UK every year for the past 33 years, including $1,500 more in tax per capita last year.

Already one of the world’s top exporters, Scottish products sold abroad are worth $160 billion annually, with the lion’s share sent to the U.S. and continental Europe.

Scotland also has tremendous potential as a destination for direct foreign investment. Currently, Scotland’s ranked first within the UK (outside London) as the most popular destination for outside investment.

Investors are attracted to its human capital, world class universities, and flexible product and labor markets. Therefore, multinational companies that have operated in Scotland for decades aren’t going to pull out simply because of independence. Instead, corporate decisions will depend upon the specific tax and regulatory environments that are put in place.

On the natural resources front, market research firm Wood Mackenzie estimates that 85 percent of remaining UK oil reserves lie under Scottish waters, mainly in the North Sea. The 25 billion barrels of remaining North Sea oil are worth over $2 trillion.

An independent Scotland will receive at least 90 percent of the tax revenue from this oil. As such, Scotland could follow the example of the Canadian province of Alberta, which built an enormous sovereign wealth fund from oil revenues.

Yet, the Scottish economy isn’t a one trick pony, as oil accounts for less than 15 percent of total output. In fact, the credit rating agency Standard & Poors says Scotland could manage very well without her oil, as her oil-less GDP would be comparable to many other economies.

In addition to the division of oil revenues following a yes vote, London and Edinburgh will negotiate other outstanding matters, from a sensible currency arrangement to the division of debt obligations.

British Prime Minister David Cameron warns that he won’t form a currency union with an independent Scotland. Don’t believe it; he’s simply bluffing for short-term effect.

If the Scots vote yes, it will be in the two nations’ mutual self-interest to agree to an amicable monetary divorce. Pragmatism will prevail and the terms under which Scotland retains sterling will be resolved, possibly with Scotland using sterling as Panama uses the U.S. dollar.

Given that Scotland’s top parties, the nationalists and Labor, are left-wing, it’s also possible that an independent Scotland will tax, spend, and regulate itself into an economic tailspin. That would be a travesty for many individual Scots, but not a national tragedy.

Hitting the economic wall without a UK-size safety net would teach an invaluable lesson. It would rapidly cure Scotland’s entitlement culture, as a critical mass of taxpayers learned the true cost of fiscally unsustainable statism.

Such an ideological reawakening would revive the nation’s entrepreneurial spirit, a cultural trait prevalent among the Scottish diaspora throughout North America. As the Business for Scotland lobby group forecasts, “[A] Yes vote will act as a catalyst for Scottish people to become more entrepreneurial, confident, … ambitious, and international in their outlook.”

Ultimately, such a self-reliant, market-friendly political culture may transform Scotland into an international center of commerce and finance, such as Hong Kong, or perhaps into a tax haven, such as Guernsey or Jersey.

The bottom-line is that, if Scotland decides to go it alone, it will become a very different place. An even better place.

Patrick Basham directs the Democracy Institute, a London- and Washington-based think tank.

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