Is Scotland a Region? Grant Allan and Kim Swales Urban and Regional Economics Seminar Group Open University of Wales 25 th - 26 th September 2013

Outline What is a region? Regional modelling Is Scotland a region? Sub-regional heterogeneity Impact of independence/greater devolution

What is a region? Difficult question to answer in abstract. At least two ways to consider a region: A homogeneous space (Gwilym Price) A structured space (John Parr) Scotland is an administrative (devolved) region. Is it correct to treat it as an economic region? Recent Treasury Report “Macroeconomic and Fiscal Performance of Scotland” shows the performance of Scotland is comparable to the UK in recent past: (gdp/worker), growth.

A region for policy modelling Considered the way the region has been defined in use. Outline the assumptions that we (FAI) make in regional modelling Ask why we have applied the model to Scotland Consider whether Scotland is an appropriate economy to be modelled in this way, given the heterogeneity within Scotland. Raise some issues on inter-regional models

Modelling Assumptions Sectors have classical/neo-classical production technology Constant returns to scale technology Competitive product markets Trade driven by imperfect competition (Armington assumptions) Open factor markets Unified national financial market (exogenous r/i) Unified (but imperfectly competitive) labour market Inter-regional migration (flow equilibrium) Typically no other fixed (region specific) input Industrial disaggregation (Industrial structure and linkages matter) Welfare transfers financed exogenously. Impose no individual macroeconomic constraints

Classical long-run characteristics For demand shock, you get an extended IO model of the Batey-Madden type. (Industrial structure and linkages matter, endogenous population) For a supply (efficiency) shock you get the IO price-dual (Ghoshian) model. Structurally, the region has a large traded sector, so that the impact on export demand (and import substitution) are typically important for both demand and supply shocks. In the long-run it operates as a classic export-base type model

General characteristics In the short run fixed labour force and specific capital stocks limit full adjustment (reflected in prices). In many ways like a NEG model in the sense that imperfect competition in the market for traded goods is very important but with no increasing returns (long run expansion limited by export markets).

Why apply the model to Scotland? Data Calibration: IO tables, National Account data Parameter values Policy Regional policy Scottish specific policy (Scottish Office/Scottish Enterprise) Over time these arguments strengthened Devolution and Independence debate Improved data sources

The system of regions in the UK Shouldn’t Scotland be modelled as part of a UK national system? Almost certainly (Mark Partridge) What should a UK regional disaggregation look like? Individual devolved regions? Disaggregation of England?

How far do the assumptions hold? Essentially the model assumes homogeneity within the region Key economic characteristics should be similar: Labour market conditions Production function Or in some constant structure

Intra-Scottish labour market variation Employment rate (16-64), %Unemployment rate (16-64), % NUTS3 levels Orkney Islands Shetland Islands ! Caithness & Sutherland and Ross & Cromarty Abderdeen City and Aberdeenshire Inverness & Nairn and Moray, Badenoch & Strathspey South Lanarkshire East Lothian and Midlothian Lochaber, Skye & Lochalsh, Arran & Cumbrae and Argyll and Bute West Lothian Falkirk Edinburgh, City of Scottish Borders Perth & Kinross and Stirling Eilean Siar (Western Isles) Inverclyde, East Renfrewshire and Renfrewshire East Dunbartonshire, West Dunbartonshire and Helensburgh & Lomond South Ayshire North Lanarkshire Clackmannshire and Fife Angus and Dundee City Dumfries and Galloway East Ayrshire and North Ayrshire Mainland Glasgow City

Employment rates

Unified labour market Difficult to argue that this is a unified labour market with such big variation in unemployment and employment rates. But perhaps there is an underlying urban/rural structure (high employment rates in the rural (particularly highland)) regions. Low employment rate and high unemployment rate in urban regions. Doesn’t appear to be the case

GVA per head

GVA per employee

Gross Domestic Household Income

GVA growth (cumulative growth, 1997 to 2010 minus Scottish GVA growth)

Shift share full calculations National shareIndustry mixRegional shift Absolute GVA change, , (£m) National share (£m) Industry mix (£m) Regional shift (£m) Eastern Scotland Angus and Dundee City Clackmannanshire and Fife East Lothian and Midlothian Scottish Borders Edinburgh, City of Falkirk Perth & Kinross and Stirling West Lothian South Western Scotland East Dunbartonshire, West Dunbartonshire and Helensburgh & Lomond Dumfries & Galloway East Ayrshire and North Ayrshire mainland Glasgow City Inverclyde, East Renfrewshire and Renfrewshire North Lanarkshire South Ayrshire South Lanarkshire NEAberdeen City and Aberdeenshire Highlands and Islands Caithness & Sutherland and Ross & Cromarty Inverness & Nairn and Moray, Badenoch & Strathspey Lochaber, Skye & Lochalsh, Arran & Cumbrae and Argyll & Bute Eilean Siar (Western Isles) Orkney Islands Shetland Islands

Cumulative Regional shift by region

GDP figures Much less easy to tell a rural/urban story. Glasgow has low productivity and negative differential growth in the shift share analysis although favourable structure. Dundee has both low industry mix and regional shift. Edinburgh and Aberdeen are major sources of growth

Growth Sectors in space

Is Scotland a Region? Is It appropriate to treat Scotland as a unified region? Does spatial structure affect performance. Does the intra-regional location of a shock affect the regional impact? At present Scotland has two primary geographical sources of GDP growth: Edinburgh and Aberdeen (with Inverness and North Lanark). Does Scotland face the same issue of polarised growth as the UK? Should there be more spatially unbalanced industrial policy in Scotland? Independently of the independence vote, will sub-regional concerns become much more prominant?

Scottish Government/ESRC-funded modelling North Sea oil+gas is an important input: Likely that there will be an augmented set of (semi?) official IO accounts Should be formally modelled Labour market: Greater skill disaggregation (unskilled more region specific) Is geographic disaggregation needed? Income distribution Household disaggregation Should there sub-regional disaggregation Scotland RUK NEG model