Wednesday, 15 October 2014

Why Scotland decided not to kick? Divergence in preferences and transition costs.

Today what we have got is an example of Team Scotland against Team Westminster. The breadth and reach of the 'Yes' campaign is there for all to see - it is not about the Scottish National Party, the Green Party or political parties. It goes right through the whole sector of Scottish society. What we are seeing today on the other side is Team Westminster jetting up to Scotland for the day because they are panicking in the campaign.
Alex Salmond, former Scottish MP 

In the aftermath of the Scottish Referendum, Professor Brigitte Granville dissected the possible economic consequences of the result at the QMUL Centre for Government and Leadership blog. One of the assumptions underpinning her analysis is that Scotland preferences are markedly more redistributive than the rest of England.  This is an argument highlighted during the referendum campaign by the “Yes” side, arguing that Holyrood channels better Scotland’s aspirations than Westminster, an idea explicit in the “Team Westminster” quip used by Alex Salmond to identify the main British parties.  This idea, beyond the self-serving interests of the Yes Campaign, has been highly visible in media narratives: In the eve of the referendum the BBC dedicated its Panorama to Scotland’s decision, developing the idea that the claim for a Scottish independence was an answer to Thatcherism, Irvine Welsh plea for an Independent Scotland relied on the contrast between a lefty Scotland and a “neo-liberal” Britain.  This vision was so extended that David Cameron felt compelled to clarify that the referendum was not about “give the effing Tories a kick”.  

In contrast with other popular media narratives, this hypothesis is backed by the theoretical developments on the academic literature literature.  As Professor Granville points in her blog, different countries have different preferences regarding their optimal balance between taxation on public services. Furthermore, a change on the British or Scottish consensus regarding this optimal point could explain the drive for devolution and even independence experienced in the last decade. A process that is not unique to Scotland but that is mirrored across Catalonia, the Basque Country, Quebec, or in the increasing tensions between Flemish and Walloons across Belgium.  These political processes pushing towards political disintegration contrasts with the nature of the globalisation, making strides towards economic integration. Noticing this phenomenon, a group of scholars lead by Alberto Alesina and Enrico Spolaore, had been analysing the political economy of the number and size of nations, developing a framework highly useful to explain why secession processes have arisen and gained momentum across the last decades.  Their analysis is based on the provision of public goods, where countries face a trade-off between economies of scale and heterogeneous preferences. Larger countries benefit from more efficient forms of taxation, and the costs of public goods decrease as they are financed by more people. In contrast, they tend to be less homogeneous, encompass more diverse ethnic groups, and more heterogeneous preferences regarding the optimal provision of public goods.  The increase on number and intensity of de-centralisation processes across the last decades is explained by political and economic factors. They argue that democratisation eases the demands of secession or further autonomy, and that economic integration diminishes one of the main comparative advantages of larger states: the size of the market. In a situation of complete autarky the size of the state equals the size of the market, making larger states more attractive. However, in a globalised economy with fewer barriers to trade the economic costs of secession seem to decrease. This framework could explain the political developments experienced in Scotland since the eighties. If it is true that Scottish preferences regarding public services have considerably differed from the overall British preferences and that globalization lowers the costs of secession, these two factors could explain the rise of Scottish separatism. 

So, there are two important questions to answer: Do Scottish preferences really diverge in respect of British preferences? Do Scots perceive that the current global economy reduces the costs of setting up an independent Scotland?
The first question is answered by Figure 1 which charts the evolution of the mainstream British political parties in Scotland, those dubbed as “Team Westminster” by Alex Salmond.

Figure 1 shows the combined share of the Labour, Conservatives and the Lib-Dems’s vote in UK parliamentary elections since 1970 across England, Scotland, Wales, and the United Kingdom overall. We can see how after 1982 the share of votes decreases considerably though they still obtain more than the 75% of the overall vote.  Nevertheless it is striking to compare the English with the Scottish evolution, the similarity between England and the overall UK would seem to confirm that the Houses of Commons represent more English preferences than Scottish preferences.
Following this thread, figure 2 charts the share of votes that the governing party enjoyed across Scotland, England, Wales, and overall UK, to assess whether the British Governments enjoy less support in Scotland compared to other regions,

Figure 2 highlights the striking resemblance between the English trend and the trend for all United Kingdom. In contrast, Scottish and Welsh evolution seems to point towards the much commented Tory collapse beyond English constituencies. The conservative governments have systematically enjoyed less support across Scotland than across England, as we detail more in Figure 3.

The divergence is shaped by the decline of the conservative on the right side of the political spectrum rather than by the substitution of British parties by local parties across left and right, as could be the case of Northern Ireland. This could point towards a divergence in preferences, between a Westminster system, where Labour and Conservatives compete on the centre, and a Holyrood system, where Labour and the SNP compete on the centre-left. Although far from claiming causality, Scotland’s electoral evolution, analysed jointly with other indicators such as the higher support for independence in the more deprived areas of Scotland, seems to point to a solid link between the support for an independent Scotland and a desire for higher redistribution. 

The evidence reviewed is in line with the first working assumption: divergence in the preferences for public goods provision seems to lead towards demands for higher decentralization.  The development of the referendum campaign seems to confirm the second assumption, though through a more refined argument: An independent Scotland would be as viable and economically integrated as any other country in the long run, but in the short run the transition costs of the independence remain uncertain.  

For Alesina and Spolaore (1997), a globalised economy diminishes the importance of national markets, and therefore the costs of secession are reduced. That seems true, but on the other hand, a speedy integration on the global economy cannot be taken for granted. As could be seen during the referendum campaign, where the main questions focused on how much speedily could Scotland be integrated on the global economy: Would they be able to keep the pound? Would they become a member of the European Union? What would happen with financial institutions based in Scotland? In this context, we can understand the insistence of the Yes campaign in dismissing these costs and the No campaign in highlighting them.  
In the aftermath of the Scottish referendum and in the context of the Catalan demand of secession, the social and political analysis blog “Piedras de Papel” compared the different secession processes in the last four decades, pointing that although high income countries have started more secession processes in these last decades they may be less likely to conclude them, without any precedent of a region with the income level of Scotland or Quebec successfully seceding. Although wary to establish any causal relationship they point towards a refined version of Alesina and Spolaore model: it might very well be that economic globalisation increases incentives to start secession processes across richer countries but that transaction costs are far too uncertain to allow these processes to conclude successfully.  

In a nutshell, this post tried to explain the drive for independence through the diverging preferences for public goods provisions between Scotland and the UK overall and the victory of the union through the uncertainty generated by the transaction costs of economic integration. These hypotheses, though far from being proven, are coherent with the class bias of the yes vote and the fact that the risks of a yes vote on currency, jobs and the European Union were the main worries of the no supporters.  Let’s conclude with a word of warning to those that believing that, if this was the case,  there is no need to address Scots’ demands for further self-government: the divergence on preferences for the provision of public goods seems solid and if not addressed could push the yes beyond the 45%,  ignoring the demands for a “devo-max” could be self-defeating for England as Professor Perri 6 argues in his last post.

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