MONETARY unions (like the UK) are excellent in theory. Shame that reality gets in the way.

Across any nation or a monetary union like the UK, zones will differ in economic productivity. Some will be in “deficit”, receiving more government spending than they return in taxes, and others will be in “surplus”.

Where a region appears on this spectrum depends on the different levels of infrastructure, skilled labour, population density and a whole list of other practical economic reasons. On top of this, there is the proximity effect. The closer a part of that country is to the key institutions – like company HQs, parliament, courts, universities, etc. – the more critical it appears to policymakers. Structural and institutional differences favour certain parts of whatever “union” we consider.

Regional economic disparities have been observable for centuries and came into particular focus during industrialisation. Cities transformed natural resources into goods with more value added than the countryside. But they couldn’t do that without the food from the towns and villages. As economies and industries matured, coal, oil and other forms of energy tended to be drawn in from the periphery to enable different parts of the “union” to “add value”. This specialisation, in theory, all makes economic sense.

A good union ensures a level paying field. When one region struggles, the more prosperous regions help out. The best-known example is the United States, where significant regional transfers at a federal level are common and considered a fundamental part of the system (of course, there are HUGE issues in the US). On the other hand, we have the EU, which is designed to ensure surplus and deficit nations without any significant corrective transfers. I would place the UK in the middle as regional transfers are part of the economic narrative but are too low to rebalance the structural issues.

The outcome, therefore – by design – within any union is several “deficit” and “surplus” regions.

(Image: PA)

The structural design of the UK from the late 1970s was for Scotland and all the other regions except London and the South East to be in deficit. Of course, this part of the story is missing from any mainstream narrative on Scotland's economic performance. In reality, it is a miracle that it performs as well as it does. Scotland has been a surplus nation for around half of the years since the 1980s, primarily due to oil. In a sense, this was an anomaly. The system wasn’t designed for this to happen.

THE INVISIBLE HAND

IN the late 1970s, deindustrialisation took place across the UK (where we were losing competitiveness), and focusing on the financial services-driven industry (where we could secure a competitive advantage) took hold. This was supposed to be the start of something wonderful.

Economists persuaded policymakers that redistribution via large fiscal transfers between the nations and regions should play a minor role. The market would sort everything out, and the UK would find a happy equilibrium.

At the same time, economists were chirping in the ears of policymakers across the rest of the globe, including the CFA area in Northern and Central Africa and the European Union. It is no coincidence that these unions lack the infrastructure for significant fiscal transfers and have increased inequality between the regions using the single currency.

Spearheading the new economic religion, Margaret Thatcher (above) was delighted with the theory. Economists suggested that as there were no barriers to the movement of capital and labour throughout this monetary union, the deindustrialised regions would quickly recover. There may be some initial pain but lots of gain down the line. As soon as prices for land and labour rose in London, the investment would head off to Barrow-in-Furness, Girvin or Hartlepool, searching for a more significant return. And all would be well. This elementary and naive theory allowed governments to keep internal transfers to a minimum.

Neoclassical economists justified, supported and encouraged Thatcher’s ideological desire to scale back government spending and economic involvement.

As we all know, this was a spectacular disaster.

The UK economy is one of the most geographically unequal among OECD countries. London sucks in all of the resources and keeps most of the financial wealth. According to the ONS, eight of the top 10 best-performing regions in terms of GDP are in London and the surrounding areas, but only one of the 10 poorest-performing regions is even close to London.

This is a wonderful but tragic example of the power of economic theory.

Forty years later, the same economic theory dominates our policies, and it still justifies low transfers to the nations and regions across the UK. It supports scaling back government involvement in the economy, also known as austerity. Our new chancellor swears by the same economic dogma. How long must we wait for it to be proven to be a failure?

This is a story of mismanagement across the UK, but there is a Scottish angle. When Unionists cry out, “What’s the economic plan for independence, eh?” We have an answer. First, we point out that the UK has never had a growth or development plan for Scotland. It still doesn’t. The economists said the UK didn’t need one.

Our plan is simple; it starts with actually having one.

Over the next few weeks, I will start to outline our plan for the economy of an independent Scotland.