Both the short-term and medium-term prospects for the Scottish economy are favourable. To date there is little evidence that the upheavals in the equity and currency markets during the final quarter of last year have had a harmful effect on Scottish firms

Ashcroft, Brian

Boyle, Stephen

Draper, Paul

Dunlop, Stewart

Jenkins, Iain

Lockyer, Cliff

Love, Jim

McGregor, Peter

McNicolI, Iain

Pearlman, Mike

Simpson, David

Stevens, Jim

University of Strathclyde Institutional Repository

Strathprints Institutional RepositoryAshcroft, Brian and Love, Jim and Boyle, Stephen and Draper, Paul and Dunlop, Stewart and Jenkins, Iain and Lockyer, Cliff and McGregor, Peter and McNicolI, Iain and Pearlman, Mike and Simpson, David and Stevens, Jim (1988) Outlook and appraisal [March 1988]. Quarterly Economic Commentary, 13 (3). pp. 1-3. ISSN 2046-5378 , This version is available at http://strathprints.strath.ac.uk/53210/Strathprints is  designed  to  allow  users  to  access  the  research  output  of  the  University  of Strathclyde. Unless otherwise explicitly stated on the manuscript, Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Please check the manuscript for details of any other licences that may have been applied. You may  not  engage  in  further  distribution  of  the  material  for  any  profitmaking  activities  or  any commercial gain. You may freely distribute both the url (http://strathprints.strath.ac.uk/) and the content of this paper for research or private study, educational, or not-for-profit purposes without prior permission or charge. Any  correspondence  concerning  this  service  should  be  sent  to  Strathprints  administrator: strathprints@strath.ac.ukQuarterly Economic Commentary we gratefully acknowledge the contribution of the Buchanan and Ewing Bequest toward publication costs FRASER of ALLANDER INSTITUTE The Fraser of Allander I n s t i t u t e for Research on the Scot t i sh Economy was es tabl ished in the University of Strathclyde on 1 January 1975, as the r e su l t of a generous donation from the Hugh F rase r Foundat ion. I t s p r i n c i p a l funct ion i s t o ca r ry out r e s e a r c h on the Scot t ish economy and i t s research programme includes the analysis of short term movements in economic a c t i v i t y . Along with the Quarterly Economic Commentary the I n s t i t u t e also publishes a s e r i e s of Research Monographs and a s e r i e s of Discussion Papers to provide an ou t l e t for o r ig ina l research on medium term and long term aspects of the Scot t ish economy. The I n s t i t u t e i s a r e s e a r c h u n i t in the S t r a t h c l y d e Business School , a f a c u l t y of the University of St ra thc lyde . Information for subscribers The Q u a r t e r l y Economic Commentary i s pub l i shed i n February , May, August and November. Annual s u b s c r i p t i o n r a t e s a r e £20.00, or £5.50 per s i n g l e i s s u e . Quer ies should be addressed to the Secretary, the Fraser of Allander I n s t i t u t e . Notes to contributors The e d i t o r s welcome c o n t r i b u t i o n s t o the Br i e f i ng Paper, Fea tu re A r t i c l e and Economic P e r s p e c t i v e s e c t i o n s . Ma te r i a l submi t ted should be of i n t e r e s t t o a predominant ly S c o t t i s h r e a d e r s h i p and w r i t t e n i n a s t y l e i n t e l l i g i b l e t o a n o n - s p e c i a l i s t audience . F o o t n o t e s and r e f e r e n c e s s h o u l d conform t o r e c e n t i s s u e s of t h e Commentary. Contributions should be typed and two copies submitted to the Editor. Commentary Team Editor: Assistant Editor: Br ian Ashcrof t Jim Love Contributors: Graphics: Production: Stephen Boyle, Paul Draper, S t ewar t Dunlop, I a i n J e n k i n s , C l i f f Lockyer, Peter McGregor, Ia in McNicoll, Michael Pearlman, David Simpson and Jim Stevens Stephen Boyle (TSB Fellow) Christ ine McKenzie and Isobel Sheppard The Fraser of Allander I n s t i t u t e Curran Building 100 Cathedral S t ree t GLASGOW G4 OLN 041-552 4400 Ext. 3958 QUARTERLY ECONOMIC COMMENTARY » « » « * COMMENTARY » « » « * OUTLOOK AND APPRAISAL 1 THE WORLD EC01OMT 4 THE BRITISH ECONOMY 8 M a c r o e c o n o m i c T r e n d s 8 Labour M a r k e t 1 1 THE SCOTTISH ECOBOMT I n d u s t r i a l P e r f o r m a n c e 16 The S e r v i c e S e c t o r 36 L a b o u r M a r k e t 41 R e g i o n a l Rev iew 4 9 » « » * » VIEWS » * » * * FEATURE ARTICLE The BP bid for B r i t o i l : should Scotland take i t lying down? by John Scouller 52 BRIEFING PAPER Going i n t e r n a t i o n a l : the development of export-oriented indigenous e lec t ron ics firms by James McCalman 61 Opinions expressed in s igned c o n t r i b u t i o n s a r e those of the authors and not necessarily those of the Fraser I n s t i t u t e (c) Fraser of Allander I n s t i t u t e 1988 Outlook and Appraisal Both the shor t - t e rm and medium-term prospects for the Scott ish economy are favourable. To date there i s l i t t l e evidence that the upheavals in the equity and currency markets during the final quarter of l a s t year have had a harmful effect on Scottish firms. The Scottish Chambers* Business Survey (SCBS), provides one of the best guides to the short-term prospects of the Scottish economy. The most recent SCBS, which was conducted between 7 December 1987 and 6 January 1988, suggests that prospects are continuing to improve (see B u s i n e s s Surreys section). A balance of firms in a l l s e c t o r s repor ted an i nc rease in optimism about the general bus iness situation. In manufacturing, a net 7% of companies were more optimistic than they were three months ago, although i t i s perhaps worth noting that th i s posi t ive balance had fallen somewhat from the previous survey. In construction, the balance of firms expressing increased confidence was, at 33?, the highest ever recorded by the survey. This was the f if th successive quarter in which the indus t ry had recorded a growth in confidence fol lowing f a l l s in nine previous quarters (see Construct ion section). In wholesaling, the number of firms reporting increased optimism was the h ighes t s ince July 1987, while the continuing boom in r e t a i l sales led to a net 36? of respondents being more optimistic about the business climate (see D i s t r i b u t i v e Trades section). The heightened optimism reflects the sustained growth of new orders and sales in a l l sectors. Of particular interest here, is the evidence of a substantial increase in the balance of manufacturing f i rms experiencing growth in Scottish orders and sales. Moreover, expectations of further growth during the f i r s t quarter of 1988 were at a high level. These par t icular findings represent a s i g n i f i c a n t depar tu re from previous q u a r t e r s and are encouraging on two counts. First , they suggest that growth in the Scottish economy is becoming more broadly based ref lect ing the pattern of growth in the res t of the UK. Secondly, the revival in the domestic component of f inal demand i s timely in view of the concern, shared by many commentators, that export o rders a re vu lnerab le to the continuing uncertainties in the world, and p a r t i c u l a r l y American economies . However, with a substantial balance of manufacturing firms reporting increased growth of export orders and sales , there i s no i n d i c a t i o n a t p r e s e n t of a deterioration in export performance. Employment prospects also appear to be encouraging. During the final quarter of 1987 a positive balance of respondents in manufacturing, retailing and construction witnessed an increase in total employment, with the upward trend expected to continue in t he t h r e e mon ths t o March. Wholesaling i s , however, something of an e x c e p t i o n , wi th a l a r g e b a l a n c e experiencing a decl ine in employment during the f inal quarter of 1987 and a small balance a n t i c i p a t i n g a fu r the r decrease during the f i rs t quarter of 1988. In manufacturing, in line with anticipated increases in employment, firms are also revising the i r investment i n t e n t i o n s upward for plant and machinery although not for investment in buildings. The upward revision in investment intentions r e i n f o r ce s the genera l ly o p t i m i s t i c outlook revealed elsewhere in the survey. I t suggests that many firms view the recent upturn as something more than a temporary phenomenon. For these firms, confidence is sufficiently strong to allow an increased commitment of resources for investment to meet expected future growth. Indeed, increased domestic investment may be necessary to sustain the current ra te of growth. The main cause for concern in the recent SCBS was the emergence of ev idence t h a t t h e o u t p u t of the construction and r e t a i l sectors may be becoming cons t ra ined by supply-s ide factors. While shortages of ski l led labour are important in construction, insufficient floor space is the key factor in r e t a i l i ng , a constraint that can only be relieved by further investment. What of the medium term? The Institute's Medium-Ten Forecasting Model predicts that Scottish GDP growth wil l achieve an annual average ra te of 2.1% in the period 1 to 1992. This i s slightly lower than our previous f o r e c a s t s and r e f l e c t s the depress ing e f f e c t s of the expected downturn in world economic ac t iv i ty . Nevertheless, our forecast for Scott ish GDP growth during 1988 of 2.9? is greater than the forecasts for UK GDP growth of 2.8% and 2.2% prepared, respectively, by the National I n s t i t u t e and the London Business School. The forecast must be seen against a background of Scotland's lagging economic performance in recent years and in part reflects the significant boost to t ou r i s t expenditure in Scotland provided by the Glasgow Garden Fest ival ; buoyant personal income growth; and a con t inua t ion of recovery in the o i l industry. The Ins t i tu te ' s forecasts are rev ised in the Spring so with l a t e r information we shall know by then how well founded the current forecasts are. At the sectoral level , the computer and e l e c t r o n i c s i ndus t ry i s f o r e c a s t to display the highest r a t e of growth, with an expected average increase in output of 8.76? per annum over the five-year period 1987 to 1992. The forecast growth of oil and gas e x p l o r a t i o n i s a l m o s t as impressive. This sector i s forecast to grow by an average 8.17? per annum over the same period, although to some extent this represents a process of recovery from the effects of the o i l price collapse in 1986. At the o ther extreme, the f o r e c a s t s for the t r a d i t i o n a l heavy manufacturing sectors of shipbuilding, mechanical engineer ing and v e h i c l e s , suggest t h a t these i n d u s t r i e s w i l l continue to exhibi t slow growth. The same also applies to public administration and defence. Employment growth is also expected to be fa i r ly buoyant over the forecast period, rising on average by 3.9% between 1987 and 1992. Both m a n u f a c t u r i n g and construction are expected to display above average rates of employment growth, indeed higher than tha t for the service sector. However, t h i s in part r e f lec t s the low levels reached by employment in the two sectors during recent years. In considering the future prospects of the Scott ish economy i t would be foolish to ignore the longer-run consequences of the changes to regional policy which were introduced by the government in January. I t i s beyond question that these changes represent a radical sh i f t away from a consensus that has existed for forty years and more on the nature and causes of Br i ta in ' s regional problems and the role of regional policy. This goes far beyond the questions that have been subsequently r a i sed about whether expendi ture in Scotland wi l l be more or l e s s under the new regime or whether the proposals promise better or worse value for money. Tradit ionally Britain's regional problems have been viewed as the outcome of an imbalance between supply and demand in regional labour markets. A deficiency in the demand for labour in the peripheral regions was matched by excess demand and congestion elsewhere, and especialy in the prosperous South East. One could argue about the causes of the problem: regional myopia and metropolitan bias by firms in the 'south' on the one hand, or a fa i lu re of workers to accept lower wages or migrate from the 'north' on the other, but the key point was that the fortunes of the north and south were inextricably linked. The south might prosper at the expense of the north but tha t prosperity would be limited by shortages of skilled labour and space, leading to higher prices and a lower level of competitiveness than in the absence of regional imbalance. Regional policy sought to tackle t h i s problem e i ther by ass i s t ing workers to move south to find work, or more usually by encouraging firms to locate the i r new and existing operations in assisted areas in the north. The objective of promoting a "balanced d is t r ibu t ion of industry and population", which could be found in the preamble to almost a l l the regional policy legislation since the war, was justified on national economic efficiency grounds as well as regional considerations. The new measures implicitly reject the view that the regional problems of the prosperous and depressed areas are interdependent. Certain areas in Scotland and the north are to remain assisted but in focusing the pol icy on indigenous development and enterpr ise the government i s s ignal l ing t h a t the a s s i s t e d a reas must look primarily to their own devices to improve the i r r e la t ive posit ion. Meanwhile, Greater London and the South East are currently experiencing a significant boom in land and proper ty p r i c e s , whi le s h o r t a g e s of s k i l l e d l a b o u r a r e increasingly reported. There i s thus mounting evidence of a high and possibly increasing imbalance in regional labour and p r o p e r t y m a r k e t s . In t h e s e circumstances, the implementation of the new policy could result in damage to both national economic efficiency and regional equity. The government have argued tha t they intend to channel more funds to both local 2 and mobile industry through discretionary regional se lect ive assistance (RSA). In addition, by introducing two new aids for small firms, a regional investment grant and a regional innovation grant, coupled wth a major expansion of business advisory services for small and medium size firms a t preferent ia l ra tes in the assis ted areas, the government claim that regional pol icy in the fu ture w i l l be more relevant, be t te r resourced and more able to assist the growth of enterprise. None of these claims i s easy to accept. The shif t from the Regional Development Grant (RDG) to the RSA r e f l e c t s the government's be l i e f t h a t under the automatic RDG much assistance was given to p r o j e c t s t h a t would have gone ahead anyway. This i s despite the fact that after the November 1984 changes the RDG was more precisely targetted to minimise this problem. Nevertheless, redirecting assistance through the discret ionary RSA appears to offer the prospect of resources only being provided for viable projects that would not otherwise occur. But the change effectively amounts to the adoption of a policy of "picking winners", contrary to so much government rhetor ic about businessmen and the market place knowing best. Moreover, even assuming that civil servants can successfully identify the viable projects that would not otherwise occur, t he r e i s no guaran tee t h a t a p p l i c a t i o n s w i l l be rece ived on a sufficient scale to make the adoption of a d i s c r e t i o n a r y approach wor thwhi le . Empirical evidence suggests tha t firms often discount discretionary aid in their investment a p p r a i s a l s because of the uncertainty attached to the receipt of assis tance. Many mobile firms in the South of England previously applied for an RDG because the grant made a material d i f f e r e n c e in t h e i r a p p r a i s a l of a l t e r n a t i v e l o c a t i o n s ; and academic evidence suggests that the RDG contributed to the successful a t t r ac t ion of large numbers of mobile jobs from the congested and overheated south. If in the future such f i rms simply view the RSA as a possible "windfall gain" then either they may not apply for the grant preferring a n o t h e r l o c a t i o n i n s t e a d , or an application and hence a decision to locate in assisted areas wi l l be made on other grounds. Even if civil servants can weed out the majority of this l a t t e r group, the volume of regional aid applicat ions from mobile investments from the south that would not otherwise have occurred i s likely to be lower than under the RDG. The government's d e s i r e to promote enterprise and raise management ski l ls i s laudable. There i s considerable evidence to support the view that many Scottish companies have exh ib i ted a lack of entrepreneurial f la i r and other management skil ls . However, while the provision of subsidised advice and the incentives for innovation in small firms would have provided a valuable supplement to the existing policy regime, i t i s questionable whether they can be viewed as an effective replacement . The encouragement and stimulation of small firms i s important b u t even i n o s t e n s i b l y more entrepreneurial economies they contribute only marginally to the overall performance of the economy. Indeed, while the ra te of new firm formation has tended historically to be fairly low in Scotland, i t has been the managerial performance of some of the la rger Scottish firms which has l e f t much to be desired. Yet, there i s l i t t l e if anything in the new proposals to help improve the performance of the larger Scott ish firm. The government's c o n t i n u i n g p e r m i s s i v e approach to takeovers and the acquisi t ion of key regional companies in particular suggests t h a t , in t h i s area a t l e a s t , i t i s prepared to leave management improvement to the disciplines of the market. Yet, to the extent that Scotland does have a "dependency culture" i t i s to some degree due to the indirect effects of the high l e v e l and continued growth of external ownership and control rather than any l a t en t deficiencies in the national c h a r a c t e r . External takeovers, for example, often do improve the managerial performance of the acquired companies but as local linkages are severed and key functions switched to headquarters in the south there i s a drain of managerial and other operational ski l ls from the Scottish economy. Th i s r e d u c t i o n in t he managerial t a l en t available to Scotland inevitably results in less spin-offs from the larger companies and hence a lower rate of new firm formation. I t i s true tha t the RDG may have in part contributed to a reduced demand for high level managerial s k i l l s by encouraging English and foreign firms to locate branch plants in Scotland. But to abolish the key instrument which attracts mobile firms and therefore substant ial jobs to the Scottish economy without doing anything to mitigate the effects of external takeovers suggests a blinkered approach to the UK regional problem. 7 March 1988 3 

Outlook and appraisal [March 1988]

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Outlook and appraisal [March 1988]

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