Thinking differently about the economy

Oxfam Humankind IndexTomorrow, the Parliament holds its first debate on the Scottish Government’s proposed budget for the coming year. Most of the MSPs’ speeches we’ll hear will be about specific taxes or expenditures, but I hope some will take the opportunity to question whether the prevailing economic strategy as a whole is the right one.

We got an insight into how Ministers think about the economy in a Government-led debate two weeks ago entitled “Boosting the Economy”. MSPs were discussing and voting on this motion by John Swinney, the Deputy First Minister and Cabinet Secretary for Finance, Constitution & Economy:

Motion S4M-11993: John Swinney, Perthshire North, Scottish National Party, Date Lodged: 06/01/2015

Boosting the Economy

That the Parliament welcomes the continued growth of Scotland’s economy and the fact that Scotland’s unemployment rate is the lowest in the UK; further welcomes the fact that, since 2007, Scottish exports have increased by a third, business research and development has risen by 29% and that the total number of registered businesses in Scotland has grown by 10%; agrees that delivering sustainable economic growth and addressing longstanding inequalities are reinforcing, and not competing, objectives, and welcomes the actions that the Scottish Government is taking to foster a supportive business environment, invest in infrastructure, support entrepreneurship, innovation and internationalisation, and to help to ensure that economic growth is characterised by income, regional and social equality.

I was hoping to speak in the debate, but I wasn’t called by the Presiding Officer – instead, here are some thoughts on what I think are two vital issues in creating an economy that works for ordinary people: small-business-friendly government procurement, and seeing past GDP figures to measure what really matters.

Human-scale government contracts

42% of private sector workers in Scotland are employed in firms with fewer than 50 employees, and that’s much higher in the Highlands and Islands:

  • Orkney: 72% (the highest in Scotland)
  • Eilean Siar: 64%
  • Shetland: 59%
  • Argyll & Bute: 57%
  • Highland: 50%
  • Moray: 48%

Small businesses are particularly essential if we’re serious about the ambitions in the last line of John’s motion. They have far lower wage inequality than big firms, and being locally-based means they don’t suck money out of regions like the Highlands and Islands and into their headquarters in Edinburgh, Glasgow, London or beyond.

Governments have sought to make public procurement contracts more accessible to small and medium-sized enterprises, with varying success. But what is notable in these efforts, for example the Scottish Government’s Suppliers’ Charter, is that the focus is always on information and process, not on the contracts themselves.

Things like simplified tender processes and adequate advertising of tenders are very welcome, but don’t help much if the job can only reasonably be fulfilled by a large firm. It would be good to see a commitment to delivering more public spending through smaller-scale projects which smaller businesses are able to deliver. That means things like encouraging schools to serve locally-produced food instead of demanding massive bulk orders; or ordering new social housing in tenders of a few houses at a time, instead of massive estates of identikit boxes.

The energy sector has particularly low small-business involvement. Perhaps there was really no alternative to that when it was about oil-fired power stations or nuclear reactors. But our renewable future can and should have a huge contribution from community-scale clean energy facilities. There’s no reason to assume we have to replace giant corporately-owned nuclear power stations with nothing but giant corporately-owned windfarms.

In general, smaller projects have more opportunity for community involvement, provide more local jobs, and have a host of other social advantages over huge contacts. But they do require a bit more work on the part of the government. I think that extra effort is worth it.

Measuring what matters

John Swinney’s motion starts with the ‘growth’ of the economy. For the Scottish Government it is ‘growth’, measured by Gross Domestic Product (GDP), that is the most important measure of economic success or failure. That’s not surprising, because that’s also the attitude of almost every other government in the world. But they’re all wrong.

GDP is a terrible indicator of whether the economy is doing its job, which is delivering the things that people want and need, from physical goods like food and shelter to social ones like security and community.

It measures only the size of monetary transactions in the economy, regardless of what the money was spent on. That means if all of a sudden the number of car crashes doubled, GDP would tell you things were going great – all those repair bills and new cars would ‘boost the economy’. But would people actually be happier, safer, better off?

And because it only measures the bits of the economy that run on money, it pays no attention to the value of the work done by carers, stay-at-home parents, grandparents who babysit or volunteers who run sports clubs – who are all benefiting the real wellbeing of Scots as much as any paid worker.

GDP was never intended to be used as the paramount measure of economic success. Its inventor, Simon Kuznets, recognised the shortcomings I’ve mentioned, and warned that “the welfare of a nation can scarcely be inferred from a measure of national income.”

I give credit to the Scottish Government for beginning to recognise more useful economic indicators, for example including them in the National Performance Framework. But the fact remains that these aren’t mentioned in John’s motion, while the GDP figures are the first clause.

Encouragingly, there are alternatives. Oxfam’s Humankind Index provides an excellent example of how we could measure the performance of the economy in terms of things that actually matter to people’s lives.

It’s difficult to imagine us achieving a country, in John’s words, “characterised by income, regional and social equality” until we make the clear decision that that equality, rather than an abstract and abused 1930s econometric, is the yardstick by which we judge our economic success or failure.