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Wings Over Scotland

Scotland is not Slovakia

Posted on November 29, 2012 by

It was reported in the Scotsman on Wednesday that the President of the Czech Republic Vaclav Klaus had raised doubts over whether an independent Scotland could successfully keep using Sterling, because when Czechoslovakia split into the Czech and Slovak Republics in 1993 it took only 38 days for the currency union to split.

His views led to a rush of comments from supporters of the UK union arguing that a currency union is only possible with political union. Then a spokesman from the Treasury asserted that protectionism grew between the Czech Republic and the Slovak Republic after the split.

The evidence cited by the Treasury spokesman was the fall in Slovak exports to the Czech Republic from 42% of all exports to 13% between 1993 and 2003. Conversely, Czech Republic exports to the Slovak Republic fell from 22% of total exports to 8%. He noted ominously that currently 59% of Scottish exports are to the rest of the UK.

While the basic facts cited are correct, the interpretations put on them by Vaclav Klaus and the UK Treasury spokesman are, shall we say, at odds with the truth.

Scotland in 2012 or 2014 is not the Slovakia of 1992 or 1993.

First, Czechoslovakia was a planned economy, part of the Soviet bloc that practised autarky and state direction of production and resources. At the time of the split, the eastern bloc had dissolved and the two new states were seeking to become market economies increasing their trade and other economic links with the wider world.

Slovakia was much the weaker state, heavily dependent on resource transfers from Czech, with GDP per head at 76% of the Czech figure (having risen with the help of a state policy promoting convergence), while labour productivity stood at around 89% of the Czech figure, as this table shows:

Note also from the table that wages were much closer, at 97% of the Czech average monthly wage. Hence, Slovaks were consuming much more than they were producing. This leads on to the second key fact about the relationship between the two nations.

Prior to the split, the extent of resource transfer from Czech land to the Slovak lands was about 11% of Slovak GDP and about 4% of Czech GDP – see this very informative research paper by R?žena Vintrová in 2009 from which the above table is taken. The transfer of resources was outstripping the Czech rate of growth and this is one reason why many Czechs wanted rid of Slovakia.

Now, while there is a sizable transfer of resources to Scotland from rest of UK, this is only the case if you do not allocate to Scotland a geographical share of oil revenues. And the average size of Scotland’s fiscal deficit since 1990, even if a population share rather than geographical share of oil revenues is assigned, is 6.5%. With a geographical share there is still a deficit of 3.6% since 1990, but this is much less than 11% – see my blog post here.

So, the reason why the Slovak Republic chose a 10% one-off devaluation thereby breaking the currency link to the Czech Republic was because as an independent country it was consuming beyond its means, running a large current account trading deficit and a large effective fiscal deficit. Given its low productivity the devaluation was necessary to reduce domestic real wages and get unit labour costs down to more competitive levels.

Further depreciation against the Czech koruna occurred in later years. Slovak wages started to fall relative to wages in the Czech Republic. From almost parity in 1993 at 3% below to 30% below in 2007. This policy was largely successful as the Slovak economy began to diversify away from heavy industry and armament production to new forms of competitive advantage such as motor vehicle production. A diversification based on trade, low wages and imported foreign technologies.

The result of these adjustments was a rapidly growing economy, more diversified and trading with many countries, especially Germany, compared to the pre-split centrally planned days. Hence trade with the Czech Republic fell for growth and market reasons mainly and had little do with a rise in protectionism. This was further facilitated by entry to the EU in 2004.

So, Scotland is not Slovakia. With a geographical share of oil revenues Scotland is close to paying its way, labour productivity levels are almost identical to the UK – see here – although total factor productivity growth could be somewhat lower. Moreover, Scotland is a well developed market economy trading with many nations not a centrally planned, autarkic state.

For these reasons it makes sense for Scotland, if independent, to stick with sterling. A rise in protectionism between an independent Scotland and a rest of the UK state is possible in subtle ways that might circumvent the EU single market. But my judgement is that it would not be great. It would be insufficient to undermine the rest of UK as Scotland’s major trading partner and its integrated UK labour market and hence the justification for retaining sterling.

But as the oil revenues begin to run out an independent Scotland will need to raise its performance in manufacturing and tradable services. If productivity growth is insufficient to achieve this then that might be the time for the link with sterling to be broken. While if Scotland remains within the UK, the burden of such adjustment will be borne by the whole of the UK.


Brian Ashcroft is Emeritus Professor of Economics at the University of Strathclyde, and writes the Scottish Economy Watch blog. He is married to former Scottish Labour leader Wendy Alexander.

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21 to “Scotland is not Slovakia”

  1. Scott Minto (Aka Sneekyboy)

    An excellent analysis that will never see the light of day in the Scottish MSM.

    Acknowledgment of the ability of independence to facilitate diversification of an economy and its trading partners as a driver to benefit the people. A great acknowledgment that never seems to pass the lips of Westminster politicians.

    Yet still the inbuilt unionist within him comments that “While if Scotland remains within the UK, the burden of such adjustment will be borne by the whole of the UK”. 

    But there is no evidence that funding would be forthcoming for such a rebalancing of the economy. In fact, experience with the subsidies for renewables and the Carbon Capture Storage shambles prove the reverse, that the costs will not be borne by the UK as a whole but rather from the Scottish Block Grant.

    And further to this, the Scottish government will be denied the fiscal levers to implement tax and investment policies to grow targeted industries.

    No, the man is 95% there, but not quite.

  2. redcliffe62

    Mr Ashcroft knows his stuff. I do not agree with all of it but he makes a cogent case.

  3. Scott Minto (Aka Sneekyboy)

    Yes thats a great article Mato. I read it earlier. To the point.

  4. scottish_skier

    The irony of all this is that people will vote yes if they prefer the Scottish Parliament running things as opposed to Westminster. Add in the party political aspect, i.e. in addition to the Scottish parliament you get parties with more attractive manifestos running things too and hey presto.

    Both sides can argue over economics, currencies, EU etc until they are blue in the face and it won’t make a blind bit of difference. Polls and surveys consistently show Scots are already sold on the economics; the majority thinking things will be at least the same or better.

    Ultimately, the only way to save the union is to somehow persuade the majority of the Scottish electorate to vote contentedly for London Tory or Labour parties in roughly equal proportions again, with a suitably comparable to England fraction swinging between these two which is sufficient to cause an electoral swap every 10-15 years or so.
    In 1997, even though only the Tory vote in Scotland had collapsed, people were still ready to vote for independence. Now the Liberal vote has collapsed and the Labour vote is in minority/hanging on by the skin of it’s teeth. 

    You don’t march steadily in a specific direction for 60 odd years just to stop and head backwards again just as you reach your destination. 

    That’s why there’s a referendum coming. It’s not just for fun. 

  5. Doug Daniel

    Let me get this right – Slovakia, once the weak link of the Czechoslovakian union, is now in a far stronger position as an independent nation, rather than as part of a union of nations?

    I’ve got that right, yeah? Becoming independent helped them get stronger, rather than weaker? I mean, this can’t be right, it’s totally against all the truthful things Alistair Darling & co tell us.

    Unless… No, this is unthinkable… But, could the Better Together bunch be… Lying? 

  6. Doug Daniel

    Interesting to note that at FMQs today Johann Lamont specifically argued against Scotland and England having different press regulation, which leads you to wonder what other devolved powers she thinks should only be devolved in name and not in practice. 

  7. Oldnat

    Interesting that we are now seeing a much more rational level of debate developing over independence.

    Congratulations to Prof Ashcroft. 

  8. JPJ2

    “With a geographical share of oil revenues Scotland is close to paying its way”

    Still can’t quite bring himself to sayScotland is paying its way-still he is getting very “close” to saying it.

    He has never been quite as unionist as Wendy Alexander was.    

  9. Arbroath1320

    He does come out with some good stuff occasionally. I always wonder how Mrs Ashcroft takes it when she reads, as most likely does, articles like this?

  10. clachangowk

    “But as the oil revenues begin to run out an independent Scotland will need to raise its performance in manufacturing and tradable services”

    What Prof Ashcroft and other commentators never mention is that as North Sea Oil runs out oil will be running out everywhere else around the world. There will be much more to worry about than increasing performance in manufacturing and tradeable services.
    The French investment bank Ixis-Cib forecasts oil at $ 390 per barrel by 2015. If not in 2015 these prices will come soon enough. This will be the end of globalisation; manufacturing will be local again as transport costs become unaffordable. Those oil producing countries which can husband and possibly ration their oil will fare best in an ever more chaotic world.

    Say goodbye to cheap air flights, formula 1 racing, driving for pleasure by car and affordable TVs and computers with plastic housings. 

  11. Holebender

    You’re assuming we won’t have effective replacement technologies by then. As the price of ever-scarcer oil increases the incentives to develop alternatives will also increase. I have confidence in our species’ ingenuity.

  12. flakijaki

    and Alex Salmond isn’t Vaclav Klaus.

    whose sock puppet is Klaus?

  13. douglas clark

    It does not matter whether oil is running out or not. It clearly isn’t, but that is not the arguement I wish to make.
    If Scotland can be self sufficient in clean energy, then we win a watch.
    If we can export, or import clean energy through a Scandinavian interconnector, then we also win a very fancy watch.
    It seems to me that any nation that is energy rich, it does not actually matter much about which energy we are talking about, although hydrocarbons are not where I would want to be, will be the dominant powers in the future.
    Our advantage, given we exploit tidal, is that we will be energy rich.
    I am assuming that the future of fusion is still in our future, and always will be.
    Though that would be a game-changer!

  14. Holebender

    The real trick is to get a portable fuel for transport, especially aviation. Hydrocarbons have a massive advantage here, but alternatives are feasible.

  15. clachangowk

    There is no foreseeable alternative to oil based fuel for aircraft. As diminishing availability of oil forces prices ever higher, air travel will become too expensive for all but essential and/or military travel.

    See this for an interesting take on a world with decreasing quantities of ever more expensive oil

  16. maxstafford

    A new era of shipbuilding?

  17. douglas clark

    Apparently, there is:

  18. Scott Minto (Aka Sneekyboy)

    Synthetic fuels have been around for years.

    Earliest example I remember reading about was a Nazi jet that ran on a synthetic fuel that was made from coal.

    More recently though the USAF were experimenting with Bio fuels in their fleet but there had to be normal jet fuel in the mix to stop freezing.

    The South Africans are already testing a synthetic fuel in passenger jets

    Other options are to reduce fuel consumption through better engine design (Nasa has been working on this) and also one of the european airports was tugging planes out to the runway rather than let them move on their own power. Apparently its quite a lot of energy.

    Alternatively there could be greater use of Hybrid Airships (These are really cool) as they use far less fuel but would work quite well for short haul flights (such as around europe for instance)  

  19. David Cairns of Finavon

    The decline in trade between the two new countries immediately following the split in 1993 is raised by No campaigners as a reason to stay a junior member of the UK.  However, in addition to the clear differences analyzed in this article, it is worth noting that both the Czech Prime Minister, Petr Necas and his Slovak counterpart, Robert Fico publicy agree that the split of Czecoslovakia had a ‘positive impact on the economy’, and that ‘relations are perhaps better than even before the federation’s split’.  See the Daily.SK (independent English news for Slovakia) 13th October, 2013.  Like ALL other nations that have decided for independence, Norway from Sweden, Ireland from the UK, etc. etc. etc. there is no desire to return to the way things were.

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