How foreign investors extract wealth from Scotland

Every year, foreign investors pull more money out of Scotland than is earned by Scots abroad. Welcome to the extractive Scottish economy.

Last week, a new bi-annual "Scottish Government Economic Insights" report was launched by the chief economic adviser. Technical in parts, it had a lot to say for itself.

Money flows out of Scotland

Money is the lifeblood of any economy. Increasing the amount of money in circulation tends to increase growth without raising inflation. Money is used to purchase goods and services, employ people and start or expand businesses. To bring more of our idle resources into play, the Scottish economy needs more money.

Unable to wield any of the macroeconomic powers available to a currency-issuing government like the UK, and having less borrowing powers than a Scottish local authority, part of the Scottish Government's strategy to increase the amount of money in Scotland has been to increase the amount of Foreign Direct Investment (FDI).

Last year's Government's "Shaping Scotland's Economy: Inward Investment Plan" stated: “Inward investment makes a distinct and significant impact on Scotland's economy at both a national and regional level”. Under the current policy framework, the Scottish economy needs this flow of money to keep people employed and to boost aggregate demand.

The objective of securing FDI is one notable Scottish Government success. A recent report by E&Y said: “Scotland’s foreign investment outpaces UK and Europe," adding: “Scotland's the place to be when it comes to foreign direct investment." So what happens to all this money that comes into Scotland? Should we be celebrating this "success"? Get ready for a depressing answer.

According to the Scottish Government's chief economist: "Every year between 1998 & 2021, Scotland’s primary income debits (flows of income from Scotland to investors in RUK & ROW) have been higher than credits (flows of income into Scotland), creating a primary income deficit (or a negative net balance). In 2021, Scotland’s Primary Income Account showed a net outflow of £10.1bn or 5.6% of GDP."

This means that the significant outflow of currency from Scotland continues year on year. This is financial wealth leaving Scotland. We can’t really be surprised by this. The money that enters Scotland is looking for a return. In fact, if you are an investor, the more money that is paid out, the better (all things being equal, this means that the bigger the deficit in Scotland’s Primary Income Account).

There is a flipside to this, of course. If Scottish investors and companies were doing well abroad, they would be returning more revenue to Scotland. Theoretically, Scotland could have both an increase in FDI and a Primary Income Account surplus if more money was being returned from Scottish investors. But unfortunately, that is not happening. The leak continues.

READ MORE: Experts urge diversity for Scotland in investment market

So where are we at the moment? The Scottish Government wants more FDI. It is successful. It encourages a flow of finance into the country. And more money is withdrawn by foreign investors than comes from Scottish investors abroad. Is this a success?

It is worth digging down and seeing what is going on. The report adds: "The primary income account deficit is driven by a range of factors, including relatively high levels of foreign ownership among Scottish industries and a relatively low proportion of UK companies having headquarters in Scotland, particularly in the oil and gas and financial services sectors.

"In 2021, the majority of the income flows made a negative contribution to the Primary Income Account and GNI. The largest outflow was returns on direct investment (-3.2% of GDP) followed by portfolio investment from debt securities (-1.4%) and equity securities (-0.7%)."

You can spot the three structural deficiencies that are peculiar to the Scottish economy.

1. The relatively high levels of foreign ownership among Scottish industries. Although only 3% of businesses in Scotland are owned outside of Scotland, they account for 34% of Employment (624,000 jobs).

2. There is a relatively low proportion of UK companies headquartered in Scotland, particularly in extractive industries like fossil fuels and finance. Overall, less than 5% of UK companies are registered in Scotland. On a per capita basis, it should be over 8%.

3. The largest outflow was returns on direct investment. Despite the drag from Scotland, the UK, in quarter one of 2023, reported a 1% GDP surplus in the UK's Primary Income Account balance.

In summary, foreign companies are set up in Scotland and make a lot of money from our people and our resources. And then pay out those profits outside of Scotland. They provide jobs to Scots to allow them to do this.

In this very real sense, Scotland’s economy resembles the colonial extraction-based model that dominates the global south. In economic terms, we would argue that Scotland is still a colony, and there is no sign that this is going to reverse anytime soon.

Within the UK, Scotland will remain in its extractive position. With little power, limited options and a neoclassical economics straightjacket, the Scottish Government will continue along the same path.

By choosing to retain Sterling after independence, the economy will rely even more heavily on FDI. Paying tax in England’s currency will do little to encourage firms to relocate to Scotland.

The economic outlook for the UK is dire, but it is worse for the Scottish economy. Scotland faces the additional challenges of stymieing more wealth and resource extraction than the UK.

Two questions spring to mind. One for those who support the Union. Would you leave the economy in the hands of those who have created this extractive economy and expect anything different?

And perhaps more pertinent for our readers. Would you agree with the current Scottish Government administration that allowing Westminster to control our monetary policies and greatly impact our fiscal spending AFTER we are independent is the wisest decision?