Written evidence from the Economics Department
Aberdeen University
The witness is a Senior Lecturer in Economics
at Aberdeen University. He has researched widely on the performance
of the Scottish economy and the economic policy roles of the Scottish
Parliament and the Scottish development agencies.
MANUFACTURING AND
TRADE IN
SCOTLAND
1. Parallels between Scotland and Wales
This submission discusses the recent performance
of manufacturing in Scotland and Scottish policy towards manufacturing
in the belief that the Scottish experience may hold lessons for
Wales.
There are a number of similarities between Scotland
and Wales, in their past dependence on manufacturing, its continued
importance to their economies, and the role of devolved institutions
in the formulation and implementation of policy towards manufacturing.
Such institutions predate the creation of the Scottish Parliament
and Welsh Assembly in 1999 in the powers wielded by the Scottish
and Welsh Offices and by the development agencies, particularly
the Scottish Development Agency/Scottish Enterprise and the Welsh
Development Agency. Devolution has permitted Scotland and Wales
to devise economic policy packages which reflect detailed knowledge
of local conditions and opportunities. However, the role of policy
making at UK level is still crucial and, to some extent, devolution
has made the effective conduct of UK policy towards manufacturing
more difficult. In particular, there persist justified fears that
some of the apparent gains from devolution, particularly from
the attraction of inward investment, are zero sum games.
2. The performance of manufacturing in Scotland
Scotland has witnessed a significant decline
in manufacturing employment, by approximately a third over the
last 20 years to the current figure of about 300,000. Most of
the job losses are attributable to the decline of traditional,
labour intensive industries such as textiles, steel, shipbuilding
and motor manufacture. In addition to direct employment, manufacturing
in Scotland supports roughly the same number of jobs in dependent
services. Thus, directly and indirectly, manufacturing accounts
for some 30% of total employment in Scotland.
The share of manufacturing in Scottish GDP has
also fallen, to just over 20%, although again manufacturing's
indirect contribution to Scottish income and output has to be
taken into account. For example, Scottish manufacturers spend
over £6 billion per annum on services from companies in Scotland.
Even inclusion of the indirect contribution
of manufacturing to employment, income and output does not fully
capture the continuing importance of manufacturing, in Scotland
and elsewhere. Manufacturing will always be a key sector because
it has all the characteristics of key industries which drive successful
contemporary economies. Although they generate some of their income
from domestic markets, key industries are primarily export led.
Thus, the bracketing of manufacturing and trade is completely
justified. Key industries have a high income elasticity of demand.
Since demand rises significantly as income rises, such industries
have favourable growth prospects. Key industries have strong linkages
with other local industries and thus transmit their own growth
impulses more widely within the economy. Finally, key industries
have a high ability to innovate, generating new products and processes.
Of course, manufacturing is not the only sector of the economy
which has these characteristics of key industries. Some services,
particularly business services, also fit the bill. However, the
fortunes of a number of services are themselves bound up with
the performance of the manufacturing sector.
Scotland's share of UK manufactured exports
is much higher than its share of manufacturing employment. Indeed
Scotland's export share has increased over the last 20 years while
its share of employment has fallen. This is principally due to
the volume of export oriented inward investments. Non-UK companies
account for over 70% of Scottish manufactured exports. Electronics
is especially important. It accounts for over 50% of all manufactured
exports from Scotland. There are of course risks as well as benefits
of such reliance on inward investment and on just one sector.
There have been large productivity gains in
Scottish manufacturing over the last 20 years, output per head
approximately doubling, partly because of reduced employment and
partly higher output growth. Labour productivity in Scottish manufacturing
is now above the UK average but below that in France and Germany
and especially the US. In contrast, capital productivity in Scotland,
although again below that of the US, is higher than in France
and Germany. This would suggest that further investment in human
capital is necessary to match productivity levels elsewhere although,
since the causal mechanisms are not simple or unidirectional or
even fully understood, there are few concrete policy implications
of any use.
3. Scottish policy towards manufacturing
A variety of interesting policy initiatives
towards manufacturing are being pursued in Scotland. These are
interpreted here as policies which impact significantly on manufacturing
since very few are specific to manufacturing. The majority are
distinctive policies formulated and implemented within Scotland
by the Scottish Executive or the development agencies but some
involve the customisation of UK wide policies to Scottish conditions
or priorities.
Several shifts in policy towards inward investment
are identifiable. The institutional arrangements have changed
with the recent merger of Locate in Scotland and Scottish Trade
International to form Scottish Development International, thus
bringing the attraction of inward investment and trade promotion
together under the same umbrella. The stated focus of policy has
also changed, from large projects providing significant employment
to higher value, sustainable projects, although this shift is
yet to be tested against the constant political pressures to seek
additional employment from inward investment.
Initiatives to support the commercialisation
of university research in Scotland include the Proof of Concept
Fund and the three new Intermediary Technology Institutes (ITIs),
in Energy, based in Aberdeen, in Life Sciences, based in Dundee,
and in Techmedia (covering communications technologies and digital
media), based in Glasgow. The Proof of Concept Fund is a fund
of £33 million which makes awards to academic institutions
and the NHS to finance pre-commercialisation research work. The
role of the ITIs is to identify, commission and support university
research ideas capable of development and commercialisation.
Improved linkages between businesses and universities
are also part of the clusters approach pursued by Scottish Enterprise.
This seeks greater competitiveness, innovation and new firm formation
within the Scottish economy through the development of industrial
clusters in key sectors. Cluster plans have been developed for
seven sectors: biotechnology, creative industries, forest industries,
food and drink, microelectronics, optoelectronics, and tourism.
An example of the Scottish differentiation of
a UK policy is Regional Selective Assistance (RSA). RSA is a national
grant scheme but is administered within Scotland by the Scottish
Executive and certain features of the scheme have been customised
by the Executive, albeit in fairly minor ways. The process for
applications of up to £250k has been streamlined. A more
integrated business service has been introduced through closer
working with Scottish Enterprise. Support has been extended to
projects which are low on capital expenditure but are still expected
to provide significant employment. Improved support for R&D
and commercial projects has been provided. A grant premium (of
up to £5,000) to assist in the recruitment and retention
of New Deal employees has been introduced.
David Newlands
Senior Lecturer in Economics at Aberdeen University
March 2004
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