UK: Brave hearts, crossed fingers.

UK: Brave hearts, crossed fingers. - Brave hearts, crossed fingers - Dreams of a second 'Celtic tiger' economy are haunted by the unpredictability of a Scotland unchained, but John Murray finds business in a confident mood as the nation faces up to a tou

by JOHN MURRAY.
Last Updated: 31 Aug 2010

Brave hearts, crossed fingers - Dreams of a second 'Celtic tiger' economy are haunted by the unpredictability of a Scotland unchained, but John Murray finds business in a confident mood as the nation faces up to a tough transition.

If Edinburgh is, as many say, the Athens of the north, then its Parthenon is St Andrew's Square, where the economic elite of what is still one of Europe's most substantial financial centres sit in lofty suites behind elegant Georgian facades, above vast banking halls. In this rarefied atmosphere, encased by wood panelling bearing the rich patina of sober tradition, the bankers exult in the order, prudence and industry that has made Scottish commerce synonymous with shrewd success.

But there is something else in the air round the square as the millennium approaches. For some it is the scent of hope; for others the smell of fear as Scotland embarks on a journey into the unknown. And if unpredictability is a bad dream to most bankers, to a Scottish banker it's a nightmare. In this case it is the looming spectre of Scotland as a tartan Quebec.

Scots go to the polls on 6 May to elect a parliament, the first since 1707 when the Act of Union abdicated political power to Westminster. It is the manifestation of the commitment of the Labour Government to devolution for the nations that make up the United Kingdom. This parliament, to be administered by an executive and led by a first minister, will have modest tax-varying powers, but many important responsibilities will remain at Westminster, which will retain a quota of directly elected Scottish MPs.

Labour, long dominant in Scottish politics, would have expected all to progress serenely at the outset of this constitutional change. The party would easily control the Holyrood parliament and work in harmony with its brother government at Westminster. The Scots' stubborn hankering after a measure of self-determination would be satisfied.

But it has not worked out quite like that. Significant numbers of Scots, now addicted to oppositional mode after two decades of a Tory government that was spectacularly unpopular north of the border, are unimpressed with their New Labour masters. And the separatist Scottish National Party, which was supposed to be killed off by devolution, is riding high in the opinion polls.

This is of bitter satisfaction to those who warned about letting loose constitutional change, many of them prominent business figures. But for the most part they are not saying 'I told you so'. Like most of Scottish business, they are keeping their heads down, afraid of being embroiled in another lost political cause.

It was not always thus. In the years preceding the election of the Labour Government in May 1997, many of those most prominent in the Scottish business community were vocal in their opposition to devolution, let alone independence.

They have, almost to a body, moderated that stance, wishing home rule well, but also warning that constitutional change must stop there. The argument rages on, and for the most part Scottish business gets on with what it has always done: making money. The question remains, however, whether devolution or independence will be positive or negative for Scottish business and the economy.

Most of those who once opposed even home rule - anxious now not to alarm their shareholders, customers and employees - say it will make little difference. Business as usual is the mantra of the likes of Sir George Mathewson, chief executive of the Royal Bank of Scotland. An engagingly direct if vaguely iconoclastic figure, he is an undisputed symbol of Scottish business success. His arrival at RBS 12 years ago, when it was near collapse, began a process of renewal that has seen the bank become one of the outstanding performers in the UK's financial services sector.

Imaginative extension into areas related to banking but distinct from it, such as insurance, catapulted profits skywards throughout the 1990s. Such integration is commonplace now as the financial services industry has consolidated, but the creation of the successful Direct Line telephone insurance operation in 1985 was far-sighted and innovative by any standard.

Mathewson reckons Scotland has natural advantages that set it apart from the rest of the UK and from the South-East of England, in particular. Prime among them is the quality of the workforce. 'The very tight labour market in London and the South-East means it is much more difficult to get the quality of staff that is available in Edinburgh,' he says. This emphasis on education and the quality of the workforce is a constant theme among those who argue that Scotland is in pole position to grow and prosper mightily in the next century.

Industry minister Lord Macdonald of Tradeston is keen to promote the intellectual backbone that runs through Scotland's industrial policy: 'Thirteen world-class universities; more computer graduates per capita than anywhere else in Europe. We're incredibly well-placed to benefit from the knowledge economy.'

He points to Scotland's lead in developing the cluster theory of stimulating enterprise. Scottish Enterprise, the quango responsible for promoting industry, was a pioneer in developing the strategy, born like so many new ideas in the US. The idea is to encourage businesses operating in the same industry to cluster close together geographically. Research has shown that, in spite of technology and the Information Revolution, businesses that in theory could operate in isolation do better when they are located close to similar enterprises.

It is not just the exchange of information, ideas and talent which this encourages that is important. The most successful clusters also include related businesses and support organisations. Famous clusters which developed organically include the City of London, Hollywood and Silicon Valley. Indeed Scotland has made some progress in emulating the latter through the growth of Silicon Glen, although the electronics industry has been battered by the global recession in the semiconductors market.

Macdonald is proud of Scotland's lead in promoting industrial regeneration. 'Our work on clusters has now been adopted by the DTI in their recent white paper on competitiveness, and when John Prescott came to Scotland recently, he told me we were far ahead of the English regions in that sort of enterprise promotion.'

Macdonald's personal political journey is an interesting one and is instructive about how attitudes have changed in Scotland. Well-known as Gus Macdonald, the broadcaster, he had been a firebrand left-winger in the Clyde shipyards of his youth. He mutated from broadcaster to businessman in the 1990s, becoming chief executive, then chairman of Scottish Television. Under his leadership, what was formerly an ITV minnow grew into a substantial media player, swallowing up Grampian TV and the Glasgow Herald stable of newspapers.

Now he readily concedes the collectivist errors of the past: 'Nationalisation wiped out our native industrial class; municipal socialism did the rest.' But despite his attacks on Nationalists, Macdonald concedes that even the SNP has to a degree embraced the new economic orthodoxy. 'The truth is there are ostensibly four pro-enterprise parties going into the election for the Scottish parliament, which is in itself an indication of how Scotland has changed, and of the new realistic climate,' he says.

'Our great natural advantage is having a market 10 times our size on our doorstep, where we all speak the same language. It is one of the most successful common markets in the world. Why add political risk? Look at what has happened in Canada, where separatist Quebec has stagnated economically because of political and constitutional instability.' He goes on to add: 'Scots were at the cutting edge of the empire - before that at the heart of the democratic enlightenment. We have the resources to be one of the most dynamic economies anywhere.'

This dream of a second Celtic tiger to rival Ireland is one shared by Macdonald's political opponents in the SNP. But they come at it from a wholly different perspective. Instead of seeing the union as an advantage, they believe it is precisely the client relationship with Westminster that has enervated Scottish enterprise. Jim Mather is a chartered accountant who worked for IBM for 10 years before founding the ComputerLand master franchisee in Scotland. He is also an SNP candidate for the new parliament and is convinced of the economic case for independence. He prefers the analogy of Canada's relationship with the US to any talk of Quebec.

'Scotland has been hiding its economic light under the British bushel for too long. There are great opportunities for promoting Scotland as a brand, capitalising on the enormous goodwill towards a new Scotland that will exist.' He points to the fashion in business for demerger and focus, and does not see why this should not also apply to nations. 'It's about releasing Scottish confidence. In the British context, we've been less confident, marginalised by distance; backed into a siding, kept away from the centre of power.'

The SNP, clearly learning from the example of New Labour, has been assiduously attempting to court the business community, but its success has been limited, with very few leading business figures responding with open support. Perhaps the best known was Brian Souter, the executive chairman of Stagecoach, the aggressively acquisitive bus company, and even in his case the support was tacit rather than explicit. The Nationalists did little or nothing to help their cause with the business world when, in the wake of Gordon Brown's last Budget, they resolved that if they were in power after this month's election they would not accept the 1p cut in the basic rate of tax proposed for next April. Developments such as these make some prominent Scots, who have made their names outside their homeland, deeply pessimistic in the short term. Andrew Neil, the former editor of the Sunday Times and now editor-in-chief of the newspaper empire of the Barclay Brothers' (which includes The Scotsman), believes that the political and civic culture is of an irredeemably corporatist, tax-and-spend nature. This echoes the views of many others in the business community who say privately that they are happy to live with devolution as long as the Scottish executive doesn't actually do anything.

David Murray, the metals tycoon turned football baron, takes a slightly different tack. Although fiercely opposed to independence, he wants the devolved government to be active on behalf of Scotland.

'As long as there isn't SNP control, devolved power is a good thing - it is right to control our own destiny. But what we do not want is just another talking shop with the rules of normal party politics applying.

The parliament and the executive will have to do something to promote and encourage enterprise and growth, not just add another level of bureaucracy and red tape,' he says.

But many of Scotland's business figures are frightened of the 'tartan tax' and mostly dubious of the SNP. A hundred of them, led by David Murray and including Nick Nairn and David Moulsdale (see below), paid for a two-page advertisement in The Scotsman to signal their concern. Although the Nationalists have made proposals to lower corporate taxes, on the Irish model, most commentators insist that income-tax rates are far more relevant to economic stability and success. A survey published in February by the Scottish Chambers of Commerce showed members strongly opposed to the use of tax-varying powers. When MORI polled 100 of Scotland's leading 400 companies in January for the Scottish Industry Forum, three out of four indicated their view that independence would be a disaster for Scotland. Only six believed such a move would benefit trade.

Neil says business people are quite right to be wary. He argues that if Scotland had voted for devolution at the earlier opportunity in the late 1970s, it would have been insulated from Thatcherite reforms and as a consequence would now be an economic basket case. 'A Scottish parliament in the 1980s would have defended every clapped-out coal mine, every run-down shipyard - and there would have been no privatisation.'

Neil points to the irony that it was privatisation, which was deeply unpopular in Scotland at the time, that actually helped to recreate an indigenous enterprise class and send back a measure of corporate power to Scotland - by way of Stagecoach, Scottish Power, Scottish Hydro and so on. 'That policy was fought tooth and nail by the same people who will dominate the new parliament,' he says. 'Alex Salmond would promise to keep open the fires of hell,' he adds.

He is scathing about the political class. 'Donald Dewar is an old-fashioned right-wing social democrat. Alex Salmond is on the right of his own party but is the most left-wing party leader in Scotland, which goes to show just how leftist the SNP really is. The Tories are not prepared to be a radical voice,' he says.

'Meanwhile, Scottish business has been incredibly passive and needs to find its voice. Some elements are actually threatened by the idea of a thriving entrepreneurial culture. Everybody blethers on about our success and expertise in financial services, when in fact there is a lot of mediocrity, with the exception of the banks. I fear it will get worse before it gets better.'

Mathewson of the Royal Bank points out: 'It is easy to get the idea that Scotland is a left-wing country ... the truth is the Government spends huge amounts of its money in the South-East because the whole panoply of the state is located there. Scotland historically hasn't got the wealth. That is, I believe, one of the fundamental reasons for the lower level of business start-ups. We are at a disadvantage because there is not the sort of capital base built up by inheritance that exists in the south. Another problem is simply the relatively small size of the local market.' He professes to be relaxed about the political culture but does rail against bureaucracy - in particular the attitudes of planners who look to obstruct rather than facilitate development.

Another bugbear is the infrastructure. Mathewson is particularly enraged by the terrible transport connections between the main Scottish cities and London and further afield. This is a problem echoed by CBI Scotland, which in a recent report argued that there were serious signs of underinvestment in transport infrastructure. The report also argued that, despite Lord Macdonald's hopes for a knowledge economy (very much the buzzphrase among Scottish politicians), there is a low level of innovation in Scottish companies and complacency about continuing education and development of employees and managers.

Mathewson is more upbeat. 'Edinburgh is a natural advantage we have,' he says. 'It is a relatively small city but has strong industries such as financial services. It has a better labour force, good education, hospitals, research centres, etc. And it will be more of a government centre in the future, which gives a boost.

'We can market Scotland more effectively in some ways as a separate brand. I am hopeful that one positive thing to emerge from devolution is that we will have to look to ourselves rather than to England. It will give us an opportunity to do something about Scottish education for example,' he enthuses.

He is relaxed about a long-term shift towards independence. 'The way things are going, it's not going to matter that much soon. It looks as though we will soon be in the European single currency. We are getting more fluid and open markets. What governments can do on a national level matters less in such an environment. I don't have this fear of change. We were here when Bonnie Prince Charlie rode into town, and we will remain in Edinburgh and in control.'

That's fine for those who are prepared to take the long view. In the short term, however, Scotland's transition to home rule will certainly not be painless. Privately, the Labour high command is aghast at the inroads being made by the SNP. There are also worries that, as the general economic climate worsens, there will be more unavoidably high-profile factory closures and job losses to add to a rash of trouble this year. Large overseas investors, such as Volvo, Kvaerner and Motorola, have closed or are about to close factories. Geopolitical events, such as the incipient trade war between the US and Europe, have arrived out of the blue - in this case threatening the traditional cashmere industry in the Borders.

The truth is, of course, that Scotland is still going through a tough transition from an economy dominated by heavy manufacturing industry, such as shipbuilding, to a more service-based, high-tech future. In the interim, the nation has to get to grips with structural problems such as a poor business start-up rate and a corporate sector which is lamentably small in proportion to the population vis-a-vis England.

There are only about 100 quoted companies headquartered in Scotland and that number has been declining this year, with takeovers such as Ladbroke's acquisition of Stakis and Ford Motor's purchase of Kwik-Fit. On the other hand, it is a place that is alive with possibilities. To add to its traditional virtues, there is undoubtedly a new mood of confidence and excitement in Scotland as the new parliament building rises at Holyrood.

Behind those solid facades in St Andrew's Square, the business elite - in common with compatriots from the Highlands to the Borders - have their fingers crossed. They hope fervently that the millennium will usher in Scotland the Brave and not, as some typically gloomy Scottish wits have it, Scotland the Grave.

John Murray is editor of the Scottish Express

SCOTS TO WATCH

TOM HUNTER (37) - Sold the Sports Division retail chain for £250 million in '98. Now building an empire which includes menswear retailing and jet hire. Sponsor of Jackie Stewart's Formula One team

SUE CLARKE (34) - Director of corporate affairs at Scottish Power, notorious for working 10-hour days even when pregnant and spent four hours at her desk, clinching a deal, shortly before giving birth

DAVID MOULSDALE (30) - Founder and chief executive of Optical Express, Britain's fifth-largest optical retailer, and winner of the 1998 Scottish Entrepreneur of the Year Award

NICK NAIRN (40) - TV superchef and New Labour restaurateur. Cooked for the Blairs on their visit to China last October. Ex-merchant navy, now owner of the eponymous Nairn's in Glasgow

WENDY ALEXANDER (35) - Former parliamentary researcher, now official Labour Party candidate for Paisley North in the new Scottish parliament and tipped for a Scottish cabinet position

Sarah Smith (30) - Daughter of the late Labour leader John Smith. Appointed last year as first Scottish correspondent for Channel 4 News, with a brief to cover the big political and economic events.

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