The Economic Advantages of an Independent Scotland

12 09 2014

Harvard Business Review:

A thoughtful piece by Justin Fox of Harvard Business School on the economics of Scottish independenc.

Originally posted on HBR Blog Network - Harvard Business Review:

If its voters choose independence next week, Scotland will join the ranks of the world’s small, affluent countries. Over the past couple of decades, that’s been a good club to belong to. As Gideon Rachman put it in the FT in 2007:

This is the age of the small state. Look at almost any league table of national welfare and small countries dominate.

Things have gotten a little more complicated since then. (Rachman in 2009: “Big is beautiful again.”) Several small nations suffered brutally from the financial crisis and subsequent Euro mess: Greece, Iceland, Ireland, Portugal.

Still, several of the emerging bigs (Brazil, India, Russia) have since run into economic headwinds too. And small countries remain overrepresented near the top of lists of the world’s most affluent, most competitive, healthiest, and smartest nations.

So it’s not crazy to think that Scotland, which on its…

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Scottish Independence and the Markets

11 09 2014

andrewdsmith:

Jason Sorens has published a very thoughtful and well-informed blog post about how capital markets are responding to the threat of Scottish independence. The media has reported that the value of Scottish companies plunged when trading opened on Monday, largely in response to the shock YouGov poll over the weekend. Sorens points out that this so-called plunge primarily affected firms in particular sectors, with financial stocks taking a beating.

My reading of the situation is that the government of a large country is in a better position to bailout failed banks. When Scotland’s Royal Bank of Scotland collapsed, the UK government stepped in. It probably wouldn’t act as a lender of last resort to a bank in an independent Scotland, although British taxpayers did end up bailing out an Icelandic bank during the financial crisis. Of course, that raises the question of whether government bailouts of Too Big To Fail banks are indeed desirable. One could argue that the fragmentation of big countries into smaller ones could help to reduce moral hazard in the banking sector by eliminating the implicit guarantee that TBTF banks in large polities enjoy.

Big countries facilitate the pooling of risks between regions and firms. Such pooling has advantages, especially in the face of natural disasters such as the tsunami that affected north-eastern Japan in 2011. However, the pooling of risks facilitated by large states also creates moral hazard. Iceland, a country that was too small to bail out its banks, arguably had the best response to the 2008 financial crisis.

Originally posted on Pileus:

What can we learn from capital markets about the likely consequences of Scottish independence? A trio of recent polls has shown the “Yes” side to have pulled roughly even with “No.” With momentum on their side, it’s not unthinkable at all that “Yes” will pull it out, resulting in the first secession from a Western democracy since Iceland withdrew from Danish union in 1944. Most American commentators, from Paul Krugman to Tyler Cowen, oppose Scottish independence and forecast economic disaster for the new country. Are they right?

Let’s look at the behavior of capital markets in Britain since these polls’ release to find out. First, let’s set the stage by looking at how betting markets price the probability of Scottish independence. Unfortunately, there are no nice InTrade-style charts for implicit probabilities anymore, at least not that I can access from the United States. From oddschecker.com, I am able to…

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Krugman, Hayek, and Scottish Independence

8 09 2014

 

Paul Krugman has published an interesting article on the economics of Scottish independence, an issue that is front and centre in the wake of a poll saying that the Yes side may win this month’s referendum on independence.

One of the reasons Krugman’s article is interesting to me is that he discusses Canada. Canada is one the countries that has inspired modern Scottish nationalism: many Scottish nationalists want Scotland to have the same degree of autonomy from the England that Canada enjoys from the United States. (Norway is, however, clearly the most important role model of Scottish nationalists—thanks to the peaceful 1905 separation of Norway from Sweden, Norway controls all of its oil revenue, unlike Scotland. Other nationalist movements referenced by Scottish nationalists include Catalonian nationalism and Quebec nationalism).

 

Krugman coherently argues that the analogy between Canada’s current relationship with the United States and an independent Scotland’s future relationship with England is misleading because the Scottish nationalists envision a currency union between Scotland and the rest of the United Kingdom, whereas Canada has control over its own monetary policy.

Comparing Scotland with Canada seems, at first, pretty reasonable. After all, Canada, like Scotland, is a relatively small economy that does most of its trade with a much larger neighbor. Also like Scotland, it is politically to the left of that giant neighbor. And what the Canadian example shows is that this can work. Canada is prosperous, economically stable (although I worry about high household debt and what looks like a major housing bubble) and has successfully pursued policies well to the left of those south of the border: single-payer health insurance, more generous aid to the poor, higher overall taxation.

But Canada has its own currency, which means that its government can’t run out of money, that it can bail out its own banks if necessary, and more. An independent Scotland wouldn’t. And that makes a huge difference.

 

Krugman’s point is a very valid one. It also reminds me of a book that Jane Jacobs published in 1980, on the eve of the first referendum on Quebec independence. Jacobs argued that Quebec independence would only be beneficial if an independence Quebec has its own currency.

I think we need to be very careful in how we use the Canadian analogy to understand alternatives to current Anglo-Scottish Union.  As John Kendle demonstrated in his book on the federal tradition in British politics, British politicians have a long track-record misusing the Canadian experience as a data point.   

The use of the Canadian example in British constitutional politics is certainly not new. In Canada has loomed large in Scottish debates over nationhood since the early twentieth century.  Canada first started being used in British debates on constitutional reform in the 1880s, when Irish Home Rule was on the agenda in British politics. Gladstone and other supporters of Home Rule frequently used Canada as an example of the benefits of devolving a degree of autonomy to a restive outlying region. Their reasoning was straightforward: prior to the grant of Responsible Government (i.e., internal autonomy), Canada was convulsed by political disturbances. Responsible Government had, according to Gladstone cured the problem and turned the Canadians, even the Roman Catholics, into loyal British subjects. Ergo, Home Rule would pacify Ireland. This line of reasoning overlooked two crucial facts: most Irish Protestants hated the idea of Home Rule, and the Atlantic Ocean is a helluva lot wider than the strait between Ireland and the British mainland.

 In the early 20th century, when Irish Home Rule was again on the agenda in Britain, the Canadian example was again used. By this point, a small Scottish nationalist movement had emerged. In an attempt to form a tactical alliance with Irish Home Rulers, the Scottish nationalists advocated Home Rule All Round, the conversion of the United Kingdom into a federal state modelled on the Canadian Confederation. Under this arrangement, England, Scotland, Wales, and Ireland would each have their own legislature for local matters such as education and property and civil rights. The problem with this analogy was that creating a federation of autonomous colonies is very different from breaking-up a unitary state.

 

When the Scottish nationalist movement re-emerged in the 1960s and 1970s, Canada’s experience was again referenced. (Scottish independence emerged as a real political force in the 1960s thanks in part to the end of the British Empire. The discovery of oil in the North Sea and its subsequent jump in value in 1973 also helped to make Scottish nationalism more mainstream).

 

  I suspect that Canada looms large in the present-day debate on Scottish independence in part because of the Iraq War: even though the vast majority of Scots were opposed to the 2003 invasion of Iraq, the rest of the UK dragged Scotland into the conflict. Canada, in contrast, was able to opt out of the Iraq War because of the degree of autonomy it enjoys from the United States includes control over its foreign policy.  Scottish nationalists who admire Canada’s stand on the Bush-Blair invasion of Iraq would do well to take a close look at Canadian foreign policy in that period: while Canada’s government deferred to domestic public opinion and ultimately decided not to participate in the Iraq War, it actually helped the US invasion behind the scenes.  The action of Canada’s government at this juncture suggests that the degree of actual autonomy enjoyed by normally independent countries is perhaps more circumscribed than the idea of sovereignty might suggest.

There is a more serious problem with the attempts to the Scottish nationalist to use Canada, Norway, or indeed any other country, as a “model” of what an independence Scotland would be like. That’s because nation-states are such complex entities that any attempt to design what they will be like in advance according to some sort of master plan is likely to fail in the much the same way that central planning of economies always fails to deliver the promised results. I think that Scottish, nationalists and indeed anyone else who supports rapid change in the constitutional status quo would do well to consider Hayek’s writings on emerged orders and the limits of human reason. Hayek developed these ideas during the debate in the interwar period on the desirability of Soviet-style central planning, but the underlying principles are of more general applicability.

I think that Scottish nationalists may be rushing things. Nations such as Canada and Norway achieved their independence very gradually. (Canadians still quibble about the precise date on which Canada became fully independent).  By most metrics, they have outperformed the nations that went from zero self-government to full sovereignty very rapidly. The Canadian province of Quebec has been gaining powers and building capacity for self-government very gradually over several generations. If Quebec ever becomes independent, that outcome could be depicted as the natural culmination of a graduate process that began with the creation of the Quebec legislature back in 1867. In contrast, Scotland’s has only had its own parliament since 1999, when the devolved Scottish government was created. Of course, some of Scotland’s institutions, such as its distinctive court system and municipal governments are far older.  But the institutions of the Scottish state are quite new.

Don’t get me wrong: I’m very sympathetic to all forms of decentralization and am this inclined to feel that smaller nations are, ceteris paribus, better than large ones. I believe in cascading powers down to the smallest possible unit of government (subsidiarity).  So all of my instincts are to support Scottish nationalism. However, I fear the consequences of compressing a community’s progress to full statehood into a very short period.  The currency issue also needs to be resolved.  





Why Ukraine Should Study Canadian History

6 09 2014

A research collaborator sent me a recent article on Ukraine by the famous political scientist John Mearsheimer, who writes:

“Imagine the American outrage if China built an impressive military alliance and tried to include Canada and Mexico…This is Geopolitics 101: great powers are always sensitive to potential threats near their home territory…”

This offhand remarks reveals how the US policy-making establishment views Canada and Mexico– dependencies in the same way that, say, Belorussia is a dependency of Russia.

Ukraine Crisis


It has the ring of truth– not that there is anything inherently wrong with being a dependency! One of the great things about Canada is that it doesn’t making a fetish over sovereignty or maintaining control over every last inch of its territory. It acquiesced long ago to previous acts of US territorial aggression (thinking Oregon and Washington states, plus the Alaska Panhandle and a some other bits of land. That was probably a good thing. Moreover, Canada allows the US military to tramp over Canadian soil without getting too worked up about it. Mexico has also given up pining for the territories it lost in the 1840s and is now busy exporting stuff to the US.

US Territory in 1842

Perhaps there is a lesson there for Ukraine. Learn to compromise. Learn to roll over. Then focus on getting rich.

Just sayin’.





Empire, Trees, and Climate in the North Atlantic: Towards Critical Dendro-Provenancing

5 09 2014

AS: I’m involved in a new research project entitled “Empire, Trees, and Climate in the North Atlantic: Towards Critical Dendro-Provenancing.” The project will advance our understanding of the flows of timber around the Atlantic world in the nineteenth century. The research findings should be interest to a wide range of people, including business historians, historical geographers, archaeologists, and others.  I’ll working as part of an interdisciplinary team that includes some great academics. They are:

Project Director : Kirsten Greer (Geography & History, Nipissing University) is a trained historical and cultural geographer interested in links between networks of empire, imperial defence, and the natural world during the nineteenth-century British Empire.

Co-Applicant : Adam Csank (Geography, Nipissing University) is a dendrochronologist, who specializes in the use of isotope dendrochronology in order to reconstruct past climate.

Co-Applicant: Kirby Calvert (Geography, Pennsylvania State University) examines the role of energy in coupling human-environment systems.  His work draws on geo-visualization techniques and mixed methodologies using geographic information systems.

Co-Applicant : Kimberly Monk (Archaeology & Anthropology, Bristol University) specializes in marine archaeology and will survey historic shipwrecks.

Co-Applicant: Andrew Smith (Management School, Liverpool University) researches  business history and the history of the British Empire.  (That’s me). 

Canada Docks Liverpool

Canada Docks Liverpool

As a business historian, my role will be to explore business archives. I’ll be researching  the timber agents in Liverpool who sold Canadian timber. I’ll map out their locations along the dockyards (see image above) and do archival research on Liverpool’s Canada Docks, which were built to handle imports of timber. I’ll also compile  timber trade statistics between BNA, Bermuda, Britain, and West Indies in the late 18th to mid 19th centuries. My research will done mainly in the National Museums Liverpool, Maritime Archives & Library, Liverpool University Special Collections & Archives, and Liverpool’s Central Library and Archives. I’ll also make at trip to the National Maritime Museum in Greenwich and may be involved with field research in Bermuda.

 

P.S. This image gives a sense of what dendrochronology is:

 

 

 





Some Thoughts on Zingales’s “Preventing Economists’ Capture”

4 09 2014

Luigi Zingales, an economist who works at the Booth School of Business in Chicago, has published an interesting paper that suggests that economists in business schools have a strong pro-business or rather pro-management bias. The ungated version of the paper is available here.

Abstract: The very same forces that induce economists to conclude that regulators are captured should lead us to conclude that the economic profession is captured as well. As evidence of this capture, I show that papers whose conclusions are pro-management are more likely to be published in economic journals and more likely to be cited. I also show that business schools’ faculty write papers that are more pro management. I highlight possible remedies to reduce the extent of this capture: from a reform of the publication process, to an enhanced data disclosure, from a stronger theoretical foundation to a mechanism of peer pressure. Ultimately, the most important remedy, however, is awareness, an awareness most economists still do not have.

 

http://www.youtube.com/watch?v=dFPt2fvtB5k

The publication of this paper is very timely, given that “regulatory capture” is on the lips of most Americans this week in the wake of news that Eric Cantor’s move to investment bank Moelis & Co. (See TYT video above).  The thesis of Zingales’s paper is broadly similar to that of the provocative movie _Inside Job_, which argued that corrupt economists contributed to the 2008 financial crisis by legitimating bad behaviour.

http://www.youtube.com/watch?v=FzrBurlJUNk

I’ve read Zingales’s paper with tremendous interest. It’s a good paper, although I’ve discovered several problems with his claims and several oversights that create possibilities for additional research.

Problems:

1) The author’s distinction between “pro-business and antibusiness biases” in journal articles is a bit crude, given the sheer diversity of interests that go under the label “the private sector”. For instance, is an economist who teaches the efficient market hypothesis a friend or foe of “business”? One could argue that he is a foe, since if all investors accepted the EMH, they would pull their money out of mutual funds with expensive management costs and invest instead in simple index funds like Vanguard. One of the problems with the much hyped book by Thomas Piketty is that its author regards “capital” as a sort of monolithic entity when it is actually far from homogeneous.

2) The academic journal articles coded and counted by Zingales for ideological bias may have less of an impact on students than the ideas presented in the classroom or in textbooks. Attempting to measure the net ideological bias of lectures delivered in hundreds of business schools around the world would be very complex. Studying textbooks is easier and has actually been done.

3) Academics are themselves unionised workers and, in many cases, work in the public sector, which partially insulates them from corporate pressure and may cause them to sympapthise with fellow public-sector workers.

Research Opportunities:

1) The majority of academics in business schools are not economists. It would be interesting to try to compare the degree of pro-management bias among business-school economist with other groups of academics in business schools.
2) Is the extent of economists’ capture greater in the United States than in other countries?





Cool Article on the 1867 Reform Act

2 09 2014

AS: I’ve stumbled across an interesting article on the impact of the 1867 Reform Act on the price of shares on the London Stock Exchange. Essentially, passage of this legislation caused share prices to dip, which suggests that investors thought that expanding the franchise might result in socialistic legislation that reduced profits. It seems to me that you could adapt the author’s methodology for looking at the impact on the stock market of other events in this period. For instance, what was the impact of the passage of the British North America Act on the London prices of shares in Canadian companies. That’s something that needs investigation.

Turner, John D., and Wenwen Zhan. “Property rights and competing for the affections of Demos: the impact of the 1867 Reform Act on stock prices.” Public Choice 150, no. 3-4 (2012): 609-631.

Abstract: The 1867 Reform Act in Britain extended the electoral franchise to the skilled but propertyless urban working classes. Using stock market data and exploiting the fact that foreign and domestic equities traded simultaneously on the London market, this paper finds that investors in British firms reacted negatively to the passage of this Act. We suggest that this finding is consistent with investors foreseeing future alterations of property rights arising from the pressure that the large newly enfranchised group would bring to bear on government policy. We also suggest that our findings appear to be more consistent with the Tory political competition explanation for the Act rather than the Whig threat-of-revolution explanation.








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