Imagine our surprise when one of the requests to attend came from Ontario - not Ontario Park, Westwood, but Ontario, Canada. Having made contact, we found that our long-distance request came from Professor Robert (Bob) Young, of Western Ontario University.
Professor Young's research interest is in how governments of different levels work together - and what happens when they don't and a people opt to pursue their independence. Much of his research is based on the federal structure of government in Canada, including the option of Quebec pursuing an independent path. Finding himself in Scotland, and with some time on his hands, he chose to drop in on the Yes and No campaigns.
We were pleased to have him attend what proved to be a very enjoyable event, with dozens of volunteers, some experienced, some brand new, wrestling with the best way to get our message across in East Kilbride.
When Bob left us that night, we thought that would be the last we might hear of him; how wrong we were. Just a short while later, safely back in Canada, he found himself as one of two professors forced to distance himself from yet another of the UK Government's never-ending scare stories. This time, the Treasury claimed that start up costs for an independent Scotland would be somewhere between £1.5 billion and £2.7 billion.
Treasury publicity said these estimates were based on the work of Professor Young and of Professor Patrick Dunleavy at the London School of Economics. Professor Dunleavy described the Treasury's calculations as "bizarrely inaccurate". Bob Young's response was perhaps more measured, advising the press that the estimate was not his, but was extrapolated from the top of a range of estimates by other academics.
In an attempt to shed some light on the subject, Professor Young wrote a short piece. With his kind permission, we reproduce his piece here. This article first appeared on the ESRC 'The Future of the UK and Scotland, website.
One of his critical findings is the role of uncertainty in driving up transition costs for both sides. The period of the referendum should be the time of peak uncertainty. In the event of a Yes vote, it is in the interest of both Scotland and rUK that, post 18 September, the spirit of the Edinburgh Agreement is implemented and both governments move quickly to finalise the key terms on which independence will occur.
Financial Reflections: Clarifying transaction costs in secessions
Robert Young, University of Western Ontario, 2nd June 2014
The week of May 26th featured a bitter exchange between the UK and Scottish governments about the set-up costs of an independent Scotland. My work was cited, and I want to set the record straight and also to clear up some of the confusion about this issue.
In secessions, the transition to independence is a crucial period. I argued this at length in The Secession of Quebec and the Future of Canada, a scholarly book in which I tried to predict the outcome of a Yes vote in the 1995 Quebec referendum. In the Quebec-Canada case, economists were unanimous that there would be short-term costs for both countries.
These transition costs comprise losses arising from political and economic uncertainty, fiscal costs as transfers end, and transaction costs.
Last week's dispute was about transaction costs. What are these?
Transaction costs include:
1. resources devoted to negotiating new arrangements,
2. the cost of disentangling the two states,
3. the cost of creating new institutions and programs, and
4. the cost to firms and citizens of learning about the new arrangements and accommodating themselves to the new realities.
In the case of Quebec-Canada, estimates of transaction costs varied considerably. As I reported, Pierre Fortin estimated the costs of re-organizing the Quebec state at about .4% of its GDP. Patrick Grady, no optimist about secession, estimated the cost of "institutional restructuring" to be "large" for both Quebec and Canada, meaning over 1% of GDP.
It is not unreasonable that estimates of transaction costs differ, because they can be deployed to affect voters. More fundamentally, they would take place in the future, which is unknowable. Finally, these costs can be divided into "fixed" and "variable" costs. There is unquestionably some minimum cost associated with negotiating independence, carrying it out, and learning about it. But costs can rise much higher if negotiations are difficult, if there is little cooperation in implementing new arrangements, and if the new system is very much different from the old one.
In the case of Scotland and the rest of the UK, there is a great deal to negotiate, more than in Canada. On the other hand, a lot of preparatory work has been done in the White Paper and through the Scotland Analysis studies. As well, the Edinburgh Agreement commits the two sides to working together constructively "in the best interests of the people of Scotland and of the rest of the United Kingdom." This helps.
On the other hand, some issues would involve hard negotiations - over Trident and the currency, for instance. Moreover, independence would involve two sets of interlocking negotiations, with Westminster on the one hand and the EU on the other. A lot of expensive person-days would be consumed in these.
Disentangling Scotland from rUK would be much more costly. This is the business of implementing independence - transferring public servants, dividing the armed forces and their assets, making arrangements about pensions and other payments, terminating and co-ordinating programs, transferring records, and much more. Without a great deal of cooperation here, costs rise.
The expense of creating new Scottish institutions has drawn much attention because of the recent Treasury estimates of £2.7billion. But everything depends on what is set up and how it is done. Patrick Dunleavy sensibly suggests that Scotland would need ministries of defence, foreign affairs, revenues, and welfare. This neglects the many specialized agencies that HM Treasury counted in its estimate. An independent Scotland would need more institution-building than Quebec, which has a very extensive administrative apparatus (including offices abroad).
But here is where cooperation could come in. It is conceivable that Scotland need not set up a Driving and Vehicle Licensing Agency, for instance. It might purchase services from the DVLA, and avoid set-up costs almost completely. Such arrangements would erode over time as Scottish and rUK policies diverged, but they can help limit transaction costs.
To the extent that independence does not radically disrupt existing rules and practices, the learning costs to the public are also lessened.
Four concluding observations are warranted.
First, estimates of transaction costs vary, in part because the future is unknowable and in part because politicians deploy estimates to affect voters.
Second, transaction costs are short term. If a small, nimble economy with custom-made policies can do better economically, short term costs of all kinds can be offset by higher growth (see my analysis on the LSE website).
Third, transaction costs are strictly financial. There may be other compelling values in vote choice, such as a secure position in the EU or a stronger welfare state.
Finally, however, after a Yes vote, there will inevitably be transaction costs. The key is to anticipate them and manage them.
No comments:
Post a Comment