Continuing our theme of productivity, we're delighted to share a guest blog from Alison Moore, Director of the Scottish Policy Foundation.
Scotland’s economy lags similar sized advanced economies in most measures, including that of productivity. Closing this so-called productivity gap – for Scotland and for the UK as a whole - is an economic prize that is well worth pursuing, since productivity is the single most important factor in determining the wealth of a nation.
Indeed evidence shows that the more productive an economy, the higher the per-capita income and the healthier the nation. Increasing productivity for an advanced economy is considered to be the most sustainable way of improving living standards over time.
Productivity encompasses all parts of the policy sphere. Clearly, the economic levers that are available to a government are critical tools in improving productivity, but so are policies on education, welfare, health etc. Thus, the devolved settlement in Scotland affords the Scottish Government many of the policy levers that will have an impact on productivity.
The picture, however, is made more complicated by the fact that policy choices that affect productivity can also have negative impacts on other aspects of the nation’s economy. For example, productivity can be increased through greater investment by businesses in physical capital, but this can have a negative effect on employment levels. Indeed, of the countries ranked higher than Scotland in productivity tables, only a handful have lower unemployment rates.
Scotland is ranked in the third quartile of OECD countries but the Scottish Government has a target of the top quartile. The challenge is to improve our productivity while mitigating against risks such as greater levels of unemployment. It is clear, therefore, that policy choices open to the Scottish Government need to be well designed.
The Scottish Policy Foundation has developed a macro-economic model of the Scottish economy in conjunction with the Fraser of Allander Institute at the University of Strathclyde. The model shows what the likely impact will be on Scotland’s economy if a series of changes is effected. Bold, innovative and well thought-out policy prescriptions are needed to tackle Scotland’s productivity challenge, and the Scottish Policy Foundation is working with think tanks and other organisations in Scotland to enable them to test out their policy ideas using our macro-economic model.