To be told off by one Professor may be a misfortune; to be told off by two shows desperation

In early May, Yes East Kilbride held a training session for its growing band of volunteers.

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.

Three strikes and you’re out for No camp

As the sun returns to Scotland for this momentous year, the shape of the campaigns raging around the independence referendum are revealed. Those campaigning for a No vote have found it an unhappy experience.

At a national level, the No campaign has faced growing criticism over the negativity of its campaign; this stems from those backing the union trying to face two ways. David Cameron talks of the UK as a ‘family’ and of his emotional attachment to it. But, he does this from London and when he does come to Scotland, he refuses to debate Scotland's future with Scotland's First Minister.  In the meantime, his government argues that, far from joining a family, Scotland ceased to exist in 1707 and only Westminster has any claim on the inheritance of 300 years of union.

This stance first came a cropper on the issue of the UK's £1 trillion plus of national debt. The Scottish Government pointed out that claiming all the benefits of union, including use of the currency, also meant taking responsibility for the debts. The people who loaned the money to the UK Government also weighed in; they demanded clarity over who would pay them back. Chancellor George Osborne had to issue a statement, supported by the Governor of the Bank of England, confirming that the Treasury accepted its responsibility for 100% of the debt if Scotland votes Yes.

Failing to learn its lesson, the UK Government then sent George Osborne to threaten Scots with the loss of the pound in the event of a Yes vote. This time, Labour’s Shadow Chancellor, Ed Balls, cheered him off. In a ‘Yes Minister’ kind of gesture, the senior Civil Servant at the Treasury provided a letter for Osborne to wave. Having made his statement and refused to answer questions, Osborne retreated south. As it became clear that Scots had reacted badly to this episode, Osborne was attacked for his ‘Sermon on the Pound’ having been a monumental error.

Fortunately for the Governor of the Bank of England he had stayed clear this time – in fact he had been up a week earlier to talk about how a currency union might work, during which he stressed his admiration for one of the authors of the currency union proposal. Then, one of Osborne’s Tory colleagues confirmed to the press that a Yes vote would be followed by agreement on a currency union. Trying to save face, the UK Government tried to link the currency union to Scotland keeping Trident on the Clyde. In his last speech to an SNP conference before the referendum, Alex Salmond rejected this proposal as unacceptable and confirmed that Trident would go.

Shifting from high finance to low blackmail, the Tory Defence Secretary, Philip Hammond, joined in. He arrived in Glasgow to lecture workers in the Clyde’s defence contractors on their prospects after a No vote. Knowing he has no credibility with shipyard workers, many of whom already face redundancy, he spoke to the workers at Thales – formerly Barr and Stroud, the specialist optical suppliers founded in Glasgow over 100 years ago.

Members of the workforce reacted angrily to what they described as ‘emotional blackmail’ from a man known for serving redundancy notices on soldiers still serving on the front line. The fact that Thales is 40% owned by the French Government appears to have escaped the hapless Defence Minister and his advisers.  It seems all his visit has done is emphasise how badly London, with its focus on financial services, has mismanaged the industrial base of Scotland and the rest of the UK.

The longer the referendum campaign has run, the more the central argument of the No campaign has unraveled. Scotland is not ‘Better Together’ in the union, it is Westminster that is is better with us in the union. Its politicians see issues solely from this perspective, which is why they are now panicking. With Ed Balls supporting Osborne’s currency bluff, it clearly doesn't matter who forms the UK Government in 2015, Scotland’s interests will not be well served.

By contrast with the disastrous No campaign, Scots are being won over to the Yes side, not by arguments about what we have done in the past, but the potential we have for the future. The resulting swing to a Yes vote can be seen from this graph.

Source TNS UK

While the proportion of people who are undecided is almost unchanged, those supporting No have dropped by 4%, and those supporting Yes have risen by 5%. This augurs well for continued progress by a Yes campaign that is delivering a positive message here in East Kilbride and in communities right across Scotland.

The visit by these out of touch ministers making threats that don’t stand up to scrutiny does the job of the Yes campaign, by demonstrating the importance of cutting the London link and letting Scotland take its own decisions.

Please show your support and sign the Yes Declaration:

I believe it is fundamentally better for us all, if decisions about Scotland's future are taken by the people who care most about Scotland, that is, by the people of Scotland.

Being independent means Scotland's future will be in Scotland's hands.

There is no doubt that Scotland has great potential. We are blessed with talent, resources and creativity. We have the opportunity to make our nation a better place to live, for this and future generations. We can build a greener, fairer and more prosperous society that is stronger and more successful than it is today.

I want a Scotland that speaks with her own voice and makes her own unique contribution to the world: a Scotland that stands alongside the other nations on these isles, as an independent nation.