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16 June 2021

The dark side of the SNP’s economic model

Without fundamental change, Scotland’s strategy of attracting inward investment may end up heightening inequality and insecurity rather than tackling it.

By Rory Scothorne

This month, a survey by the international professional services company EY showed Scotland going against the UK and European trend on foreign direct investment (FDI) in 2020. While the number of inward investment projects to Europe and the UK fell by 13 and 12 per cent respectively compared to 2019, Scotland’s rose by a sturdy 6 per cent. 

The Scottish government has revised its inward investment strategy in recent years in a bid to attract 50 “leading global companies” to Scotland, and will be encouraged by further findings from EY that suggest that 15 per cent of foreign investors rank Scotland as the most attractive UK location outside London (that number was just 7 per cent in 2019). Edinburgh is now the UK’s most attractive city for FDI outside London, while Glasgow and Aberdeen are also in the top ten.

This may sound like success for the Scottish government’s new strategy, which involves establishing Innovation and Investment Hubs in European cities and reorganising Scottish Development International. It can easily be portrayed as a vindication for the SNP, which has spent the years since the Brexit vote obsessively playing up Scotland’s open-for-business status, carefully embedding its pitch to investors in a wider appeal to the values of social openness and progressivism encapsulated in the “Scotland is Now” campaign. 

That campaign has sought to emphasise that Scotland is not indulging the insular, bridge-burning political instincts that prevail down south. Yet Brexit still poses deep problems for the SNP’s cosmopolitan economic and social vision. In order to push Scotland back into Europe, the SNP must pull the country away from the UK, its largest trading partner and the source of its largest national minority: the English. The UK’s willingness to pursue an increasingly substantial divergence from the EU may not be the SNP’s fault, but it is its problem, for – as we are now seeing in Northern Ireland – it makes it hard to avoid a hard border somewhere. 

There are further complications, too. Scotland’s success is also part of Britain’s relative success in attracting inward investment, which has recovered somewhat from the years of uncertainty that followed the Brexit vote. EY found that investors view the UK as Europe’s most attractive country for their projects. Scotland, they argue, is “well-positioned to pick up a disproportionate share” of a “resilient pipeline of UK projects”, with investors encouraged by Britain’s successful vaccine roll-out and its economic recovery strategy. The constitutional sweet-spot for Scottish capitalism may be right where it presently is: a distinctive realm of the post-Brexit UK where open-society values still thrive, balancing the self-confidence of devolved nationalism atop the relative size and strength of the British state. 

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The “democratic deficit” that so tortures Scottish nationalists is hardly a problem for international capital. Indeed, by muddying the waters of democratic accountability, devolution may enhance Scotland’s desirability, offering not one but two governments to lobby and play off against each other. Here is a country with substantial powers to roll out the red carpet, in terms of subsidies and other come-hither policy treats, branded in the progressive rainbow-wash of inclusivity that attracts intelligent and inventive young professionals – but without the power and sovereign political will to actually call capital to heel should the public demand it. 

This darker underbelly of Scotland’s FDI success can also be spotted in the EY figures. Manufacturing investment has suffered a “sharp decline”, almost halving from 32 projects in 2019 to 17 in 2020, with Scotland’s share of UK manufacturing investment falling from 24 to 15 per cent. The success of projects in digital tech and agri-food was not accompanied by a boost in employment: the jobs generated by FDI in Scotland have fallen by 30.1 per cent since 2019, dropping below the decade-long average of 4,650 per year. Scotland’s share of UK jobs generated by foreign investment fell, with the country dropping to third place behind the West Midlands. The Scottish government’s new investment strategy calls for investors to share its “core values”, including the fair treatment of employees and emissions reduction – but if these trends continue, Scotland’s model of attracting inward investment may end up heightening inequality and insecurity rather than tackling it.

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This is part of a broader problem that many people, especially on the Scottish left, have been pointing out for decades. In the 1970s the economist John Firn argued that Scotland was becoming a “branch-plant” economy, as native industries became subsidiaries of multinational firms, posing problems not just for economic resilience and sensitive local management but also democratic control. Addressing this became part of the arguments for both devolution and independence. Yet by the time a Scottish Parliament was achieved in 1999 Scotland was largely following Britain’s embrace of globalisation, with Alex Salmond praising countries such as Ireland and Iceland. 

The critique of branch-plant capitalism remains powerful and relevant. In a letter to the Financial Times about the Scottish government’s inward investment strategy last year, professors Colin Mason and Richard Harrison, of the Glasgow and Edinburgh University Business Schools, argued against allowing Scotland’s economy to be further “locked into global corporate supply chains”. Global corporations, they suggested, are far too powerful to be bound by the “core values” of national government. These “trophy” investors should not be prioritised over supporting “locally owned, managed and headquartered” business, which can better provide the national economic “resilience” the Scottish government claims to want. 

There is another, more radical way of putting this, which is becoming increasingly popular within the independence movement. In the pro-independence newspaper the National, Jim Osborne of the nationalist Scottish Banking & Finance Group writes that for Scotland to make “the transition to a zero-carbon economy in as short a time as possible”, a “very large proportion” of national resources and capital will have to be “divert[ed]” from elsewhere in the economy – a hint at the kind of economic autarky that would require a large amount of industry to be located and controlled in Scotland in the first place. In other words, achieving the progressive, “world-leading” objectives of Scottish nationalism will require far more economic nationalism than the SNP presently seems comfortable with.

This is especially important in the case of renewable energy. In a recent article for Political Quarterly, the economic historian Ewan Gibbs criticises the Scottish government’s failure to turn the country’s dramatic renewable energy potential into native industry and jobs, with employment falling even as capacity surges. The offshoring of green industries could be reversed, he argues, by making government support for industry – through subsidies and licensing – conditional on domestic supply chain benefits, an argument that has been made repeatedly by trade unions and environmentalists. The SNP’s usual excuse for inaction has focused on the EU’s state aid rules, yet Gibbs points to the considerable flexibility of these rules in practice across the EU. They ought to be even less of an issue now. 

This is where political and economic nationalism are directly at odds with each other. Political nationalism is more reliant than ever on popular distaste for the sovereigntist, border-closing project of Brexit, and the prospect of European re-entry is vital to rising support for independence among the more affluent swing voters required for a majority. Yet ensuring the fastest, smoothest possible re-entry also requires Scotland to present itself as a diligent rule-follower, resisting the post-Brexit temptation to break more clearly with European rules and norms. As Laurie Macfarlane argued in OpenDemocracy in 2019, the UK had a remarkably good deal within Europe, with plenty of room to bend the rules. Now that the country has left, there is little reason to assume Scotland will be granted such preferential treatment, in considerably harder circumstances. 

In theory, this ought to present an opportunity for unionists. In theory, Westminster could be a source of “foreign” direct investment that is more democratically accountable and socially conscious than multinational capital, using the wealth that is still concentrated in London to underwrite support for green jobs and industry rooted in Scotland that would supply cheap renewable energy across the UK. Devolution of further borrowing powers and employment law would be vital to this. In theory, this could be the economic basis for the “federalist” political vision that Labour claims to support. Yet this will all remain purely theoretical for as long as the Conservative Party’s brainless “muscular unionism” dominates the constitutional horizon, and for as long as Labour fails to embrace some form of Scottish self-determination – economic, if not political. 

Until those things change – and there is little sign that they will – Scotland looks set to be trapped in an unenviable binary choice: either consciously take the leap into the globalised whirlpool of post-sovereign “independence” and see what we can make of it, or let devolution facilitate the same process at arm’s length, permitting us at least the comfort of having someone else to blame.