GROWTH COMMISSION RESPONSE: 1. SMALLER ISN’T NECESSARILY BETTER

The report’s basic thesis is that an independent Scotland would be a “Small Advanced Economy” (SAE) and that we should therefore judge Scotland’s potential, and seek to identify best-practice to replicate, by studying a “peer group of the 12 most successful small advanced economies”.^{13.1 (p.12)} This is an eminently sensible approach when it comes to seeking best-practice to replicate.

However, a word of caution is needed. Although the criteria used for selecting the peer group (the ‘cohort’) are not explicitly given, the wording above makes clear this cohort is pre-screened for success. This point is very simply illustrated by figure 1, which draws on the same data sources the Growth Commission uses.

Figure 1

This table only shows all ‘advanced economies’^{2as defined by the IMF} with populations greater than 2m and less than 25m. Looking at the final column, it’s obvious that all countries with a materially lower GDP/capita than Scotland have simply been excluded from the Growth Commission’s SAE ‘peer group’.

We shouldn’t be surprised, therefore, when the report later observes “there is a gap between Scotland’s economic performance and that of other small advanced economies”^3A1.31 given that the evidence offered is a GDP/capita comparison with this ‘peer group’. Understanding how this group has been selected, any other finding would have been inconceivable.

The report claims that “In a similar way, a benchmark group of 10 large advanced economies is constructed”.^4A1.86 This is misleading. In contrast to the SAE group where a number of underperforming countries were excluded, the LAE group contains all of the 10 largest advanced economies, including low GDP/capita countries like Spain, Italy and Korea (as well as low growth countries like Italy and Japan). The only country excluded that satisfies the Growth Commission’s stated criteria^{5IMF defined ‘advanced economies’ with populations over 20 million people [A1.86]} for LAEs is Taiwan, a country with particularly high historic GDP growth.^{6Over the GC’s chosen 25 year period, Taiwan enjoyed 4.6% pa growth compared to the SAE cohort’s average  growth of 2.8%}

Perhaps the clearest illustration of the bias in the construction of the cohorts is that Spain is included in the LAE group, but Portugal is excluded from the SAE group (without explanation).

In the Summary the report asserts “Small economies perform better than larger ones consistently by around 0.7 percentage points per year over the last 25 years on average.”^73.17 This statement is simply wrong. It is just one of several examples^{8There are too many examples to list here: the report adopts the terms ‘small advanced economies’ as a misleading shorthand for the ’12 chosen SAEs’} where the report casually refers to ‘small advanced economies’ rather than ‘our selected group of better performing small advanced economies’.

This is not a trivial point: readers are given the clear impression that conclusions are being drawn about all small advanced economies, whereas in fact they are observations about this specially selected cohort only.

Even when data is not involved, the Commission appears only able to see the positive arguments for being a small country. They state “small countries have benefited from a relatively benign global political environment in which being small does not create major security risks”.^9A2.19 One doesn’t need to be an inveterate pessimist to observe that – in a world of Trump, Putin and Kim Jong-un – it would be naive to rely on a ‘relatively benign global political environment’ persisting.

The Commission does concede that small economies’ “GDP growth trajectory tends to be more variable. A lesson therefore is to be aware of exposure to externally sourced volatility and plan accordingly.”^10A2.13 Unfortunately the report does not address the question of how to ‘plan accordingly’, and no analysis is offered to show how sensitive their proposed economic model is to different growth outcomes.

The Commission’s determination to only seek positives and to ignore the negatives of being a small advanced economy is perhaps best illustrated by the fact that, in over 119,000 words of text, Greece is not mentioned once.^{11Greece appears in two charts only; Slovak Republic, Israel, Portugal and Czech Republic are only mentioned in passing} This omission is particularly disappointing because lessons can be learned from others’ failures as much as they can from others’ successes. The hazards of using a currency over which one has little or no monetary control is but one obvious example.

The report does not tell us how ‘small advanced economies’ perform generally, it tells us how well some successful small advanced economies have performed.

<< Previous Chapter             >> Next Chapter

Quick-links to all Chapters

Executive Summary

Context & Response

1. Smaller isn’t Necessarily Better

2. Stretching the Empirical Data

3. Failing to Make a Case

4. A Reality Check

5. The Truth about Austerity

6. Aiming Too Low

7. The Missing Model

8. Currency – an Unsolved Conundrum

9. Making the Case for Union

Endorsements