economic report 2001

Scottish Economic ReportJune

2001

Scot

tish

Econ

omic

Rep

ort

June

200

1

SCOTTISH EXECUTIVE Making it work together

2001The Scottish Economic Report June

SE/2001/119: Laid before the Scottish Parliament by the Scottish Ministers, June 2001.

© Crown Copyright 2001

Application for reproduction should be made to:HMSO Copyright UnitSt ClementsNorwich NR3 1BQ

First published 2001

British Library Cataloguing in Publication DataA catalogue record for this book is available from the British Library

ISBN 0 7559 0135 5

Designed and produced on behalf of the Scottish Executive by Astron B20478 6-01

iii

Contents

Page

Preface iv

Summary vi

Chapter 1: Global, European and UK Economic Developments 11.1 The Global Economy 2

1.1.1 Recent Economic Indicators in the Global Economy 2

1.1.2 Economic Risks and Prospects 71.1.3 Economic Developments in the US and Japan 10

1.2 The Euro Area 111.2.1 Euro Area Developments and Economic

Indicators 111.2.2 Monetary Developments in the Euro Area 12

1.3 The UK Economy 141.3.1 Overview of UK Economy 141.3.2 Current UK Monetary and Fiscal Indicators 181.3.3 Prospects and Forecasts in the UK Economy 221.3.4 UK Budget 2001: Announcements

and Economic Impact 23

Chapter 2: Report on Economic Development Initiatives 262.1 Selected Economic Development Initiatives 27

2.1.1 National Priorities in Education 272.1.2 Transport Delivery Plan 292.1.3 Future Skills Scotland 312.1.4 Careers Scotland 322.1.5 Knowledge Economy Cross Cutting Initiative 332.1.6 Strategy for Enterprise 352.1.7 Local Economic Forums 38

2.2 On-going Economic Development Initiatives 402.2.1 Education and Skills 402.2.2 Enterprise Support 432.2.3 Social Justice 452.2.4 Health 46

Chapter 3: The Scottish Economy: Recent Developments andFuture Prospects 493.1 Summary 503.2 Output and Demand 503.3 Rural Scotland 583.4 Labour Market 593.5 Prices and Costs 643.6 Forecasts 653.7 Assessment 67

Chapter 4: Selected Economic Issues 68A Productivity in Scottish Manufacturing Plants:

1994-1997 69B Productivity in Scotland 74C Health as a Driver of Economic Development 80D Living in the Past: why is Scotland’s financial services

sector ignored? 91E Job Creation and Destruction in Scottish Firms 96F Defining Rural Scotland 104

Preface

iv

This is the fourth edition of the ScottishEconomic Report. It is published twice-yearlyand incorporates a review of the progress andprospects for the Scottish Economy, togetherwith a review of the broader economiccontext in which the Scottish economy is set,as well as a selection of summary articles ofkey topical interest.

The Development of Economic Policy

As is demonstrated, in particular, by theScottish Executive's Framework for EconomicDevelopment in Scotland (published in June 2000)and A Smart, Successful Scotland (published inJanuary 2001), economic policy is continuallyevolving to meet the changing context andneeds of the economy. In chapter 2 of the lastedition of the Scottish Economic Report, therewas a first up-date on the progress made inthe field of economic development since thelaunching of the Framework.

This edition of the Report provides a moredetailed review of the progress of the ScottishExecutive on the Priorities for Actionidentified in the Framework (in chapter 2:Report on Economic Development Initiatives).The chapter is split into two sections: the firstsets out a detailed analysis on a selection ofnew initiatives undertaken by the Executiveover the past year, while the second sectionprovides brief summaries of a more extensiverange of existing initiatives undertaken by theExecutive in the field of economic development.Together, these sections provide a picture ofthe principal new and existing initiatives thatunderpin the Executive's effort in pursuit of itskey economic vision and objectives.

The Scottish Economic Report.

This fourth edition of the Scottish EconomicReport has four parts to it:

• Chapter 1: Global, European and UKEconomic Development provides anoverview of the important economicdevelopments in the Global, European, andUnited Kingdom economies, and considersthe economic context over the recent pastand the outlook for future prospects;

• Chapter 2: Report on EconomicDevelopment Initiatives provides anoutline of recent issues in the economicdevelopment field, providing a follow up tothe Framework for Economic Development inScotland;

• Chapter 3: The Scottish Economy:Recent Developments and FutureProspects provides an overview of theScottish economy. This section summarisesthe recent developments and prospects forthe Scottish economy;

• Chapter 4: Selected Issues in EconomicDevelopment provides an opportunity forbrief surveys of selected economic issuesto be presented. The papers are intendedto review or summarise more substantivedocuments or work of value to the thinkingof the Scottish Executive, or to provide anopportunity to present new or differentperspectives to stimulate further debate inareas of topical interest.

v

This edition incorporates six articles:

• Productivity in Scottish Manufacturing Plants:1994-1997

• Productivity in Scotland

• Health as a Driver of Economic Development

• Living in the Past: why is Scotland's financialservices sector ignored?

• Job Creation and Destruction in Scottish Firms

• Defining Rural Scotland.

The Development of Economic Statistics

The second edition of Scottish EconomicStatistics was published in March 2001. Itprovides a range of tables and charts coveringthe primary economic statistics data availablein Scotland, together with a series of articleson current statistical topics.

The first article in that document – the ScottishEconomic Statistics Programme – is especiallyimportant in setting out the direction andfocus for future statistical developmental workin the economic field that the ScottishExecutive will be pursuing throughout 2001and beyond. In particular, it highlights thepriorities for our work and the manner inwhich these priorities are determined incollaboration with the external community.

Acknowledgements

Finally, in addition to those named authors inchapter 4, I would like to acknowledge themajor contribution to the preparation andcompilation of this report by Linda Ferguson,Assistant Economist in the Scottish Executive.Chapters 2 and 3 reflect the major contributionsfrom Richard Murray and David Ritchie andfrom a variety of other contributors across theGovernment Economic Service in the ScottishExecutive.

I would also like to acknowledge theconsiderable contribution made to thedevelopment of this Report – and to theScottish Economic Bulletin – by our colleagueGraeme Storie who sadly died in March thisyear. Graeme's knowledge of, and insights into,the Scottish Economy were immense and he isgreatly missed, on both a professional andpersonal level.

Dr Andrew GoudieChief Economic AdviserJune 2001

Summary

vi

Global, European, and UKEconomic DevelopmentsGlobal and Euro Area Developments

• Global activity has weakened significantlysince the January 2001 edition of theScottish Economic Report. After a year ofrapid expansion in 2000, the prospects forglobal growth look set to ease in 2001,mainly as a result of a sharp slowdown inthe US economy and a weakening Japaneseeconomy. However, Europe could prove tobe relatively insulated from the recent globaldownturn.

• Growth is expected to slow in all majorregions of the world, and forecasts havebeen revised downwards for the year 2001as a whole. IMF forecast world growth of3.2 per cent for 2001 – revised down 1.0percentage point from 4.2 per cent inOctober 2000 – moving back up slightly to3.9 per cent in 2002. By contrast, OECDestimate output growth of 2 per cent in2001 in the OECD area, before recoveringsomewhat to 2.8 per cent in 2002.

• The global growth outlook is somewhatuncertain, with several key risks. The fragilerecovery in Japan appears to have stalledfrom its previous strong growth in the firstquarter of 2000, and IMF forecast growthfor 2001 of just 2 per cent. This couldsuggest that the US slowdown is unlikely tobe offset by higher demand growthelsewhere in the world economy. Also,there has been little change to previous IMFcurrent account forecasts, with financialimbalances in external current accountsremaining a key risk. The impact on anindividual country's current account, fromthe recent global downturn, will depend toa large extent on trade patterns, andlinkages with the global economy.

• Domestic demand in the Euro area appearsto be healthy and should help protectEurope to some extent, from the globaldownturn. The National Institute forecastdomestic demand to grow by 2.7 per cent

in 2001. Growth in 2001 is expected toremain relatively healthy at about 22 percent – exceeding growth in the US for thefirst time since 1991. The outlook for theEuro area appears favourable relative toNorth America and Japan. Relative to theUK, the Euro area as a whole is lessvulnerable to external developments.

• Overall, global developments will dependto a large extent on the future outlook forthe US economy and how sharp and howprolonged is the present slowdown. If a'hard landing' scenario for the US becomesa reality, then this could worsen marketconfidence and real domestic demandforecasts.

UK Developments

• UK inflation is at its lowest level since the1960s, helping to keep interest rates athistorically low levels. Underlying inflation(RPIX) for 2001 is forecast at 2.0 per cent –with the actual rate having reached 2.0 percent in April 2001 – and is forecast toreturn to the 2.5 per cent target by spring2002.

• UK interest rates remain low by historicalstandards. The base rate stood at 5.25 percent up to May 2001, falling 0.75percentage points between January andMay 2001.

• Treasury GDP forecasts are unchangedfrom the previous Pre-Budget Report. GDPgrowth rose to 3 per cent in 2000, and isexpected to ease back to its assumed trendrate of 2.25 to 2.75 per cent in 2001 andlater years.

• UK GDP in 2001 Q1 is up 2.6 per cent on ayear earlier and up 0.4 per cent on theprevious quarter.

• The UK Government remains on track tomeet its fiscal rules in the next five years.The current budget surplus has increasedby a further £6.5 billion since the Pre-Budget Report in 2000-01, and by £1 billion

vii

in 2001-02, and is projected to be £17billion in 2001-02 (1.7 per cent of GDP).This implies that the Government is well ontrack to meet the golden rule.

• Public sector net debt is projected to fall asa share of GDP from 36.8 per cent in1999/00 to 29.6 per cent in 2002/03.

• The Treasury's March 2001 Budget Reportoutlined the main Budget measures inbuilding on the UK Government’s centralobjective of high and stable levels of growthand employment. In building a fairer societythe UK Government announced newmeasures to support families and tacklechild poverty, provide security in old ageand ensure a fair tax system. There werealso key measures to help modernise roadtransport and protect the environment;measures to help businesses close theproductivity gap; and tax and benefitreforms to help increase employmentopportunity for all, by helping people tomove from welfare to work and to makework pay.

Report on Economic DevelopmentInitiativesThe Scottish Executive's Framework forEconomic Development in Scotland (FEDS) waspublished in June 2000. The last edition of theScottish Economic Report contained the firstup-date on the progress made in the field ofeconomic development. This edition of theScottish Economic Report will continue togauge the progress of the Scottish Executiveon the Priorities for Action identified in theFramework. This chapter will be split into twosections; section one will carry out a detailedanalysis on a selection of new initiativesundertaken by the Executive, while sectiontwo will provide brief summaries of a moreextensive range of existing initiativesundertaken by the Executive in the field ofeconomic development.

The Scottish Economy: RecentDevelopments and Future prospects• Output growth in the Scottish economy

strengthened in the fourth quarter of 2000,although the year on year change was belowthe long-term trend. Both manufacturingand services under-performed the UK as awhole over the year to 2000 Q4, althoughthe service sector, as well as total growth,did perform better than the UK over thefinal quarter. Official figures published bythe Scottish Executive Rural AffairsDepartment showed that 2000 had beenanother difficult year for Scottish agriculturewith average net farm incomes falling forthe fifth consecutive year. The chapterreports on the likely impact of the Foot andMouth outbreak and the work that theExecutive has put in place to identify itseffects across sectors and areas.

• The business survey results for 2000 Q1are mixed. The CBI and Scottish ChambersSurveys both indicate a continued positiveperformance in orders and output in themanufacturing sector, although the mostrecent data from the Bank of Scotland showsmanufacturing output falling. Within theservice sector, the Scottish ChambersSurvey indicates that optimism remainsweak, although declines in demand generallyeased, whereas the Bank of Scotland Surveyshows service sector performance continuingto outperform manufacturing.

• Conditions for manufactured exporters havebeen difficult over the year to 2000 Q4,primarily due to the instability of the Euro.However, the level of exports increasedover the four quarter period to 2000 Q4 inreal terms.

• Over the course of 2000 and the beginningof 2001, the labour market continued toperform strongly by historical standards,with employment reaching its highestrecorded level since 1960 and ILOunemployment reaching its lowest ratesince comparable data became available.

Summary

viii

Claimant count unemployment reached thelowest level since 1976, while the activityrates moved above those recorded in theUK for the first time.

• Growth in Scotland is expected to bebelow that in the UK in 2001, butindependent forecasters expect strongergrowth in 2002, with the differential withthe UK narrowing.

Selected Issues in ScottishEconomic DevelopmentProductivity in Scottish Manufacturing

Plants: 1994-1997

This article looks at differences in productivitybetween manufacturing plants in Scotland inthe period 1994 to 1997. The main conclusionsare first, the distribution of productivity inindividual manufacturing firms in Scotland issimilar to that found in the UK as a whole.Second, more productive firms (defined asthose whose productivity lies at the 90thpercentile of the distribution) are around5.3 times as productive as less productivefirms (defined as those whose productivity liesat the 10th percentile of the distribution).Third, the spread of productivity in themanufacturing sector as a whole is notexplained by different productivity levels inindividual industries. There is evidence thatwithin individual industries there remains asignificant variation in productivity.

Productivity in Scotland

There is a productivity gap between Scotlandand its major competitors. The Treasuryestimates that output per employee in theUSA is 45 per cent above the UK level, withthat of France 19 per cent higher than the UK.Regional Accounts data show that the averageproductivity level in Scotland is broadly similarto that of the UK, excluding the ContinentalShelf.

In Scotland, "unadjusted" productivity growth(defined on the basis of total employment) waslow from the mid 1980s through to the early1990s – less than 1 per cent per annum inmost years – but was higher in the period to1999.

The 4-year moving average of the "adjusted"productivity growth rate (which takes accountof the changing balance between full-time andpart-time employment) was in the 1$ -22 percent band in 1999 and the first half of 2000.Estimates suggest that the average rates ofproductivity growth in Scotland and the UKwere very similar between 1995-2000.However, there was a deceleration in Scotlandin 2000, partly due to the stronger thanaverage growth in employment. The 4-yearmoving average to 2000 Q4 was 1.2 per cent.

Within the manufacturing sector in Scotland,there was a marked acceleration in productivitygrowth in the mid 1990s, the 4-year movingaverage reaching 6.7 per cent in 1995. Thecurrent underlying trend rate of productivitygrowth is between 3-4 per cent per annum.

The key indicator is productivity across thewhole economy. Real incomes in Scotland willonly rise if the labour resources released bysectors of declining employment areproductively used elsewhere and ifproductivity levels also rise in the rest of theeconomy.

Health as a Driver of Economic

Development

This article identifies health as a potentialdriver of economic development. It sets outthe links between health and economicdevelopment, reviews the empirical evidence,quantifies the impact of selected healthindicators on output and employment inScotland, and highlights the potential policyimplications.

ix

The evidence suggests that improved healthmay have an important role to play inincreasing productivity and economic growthin Scotland. Further research is required,however, to establish the magnitude andimportance of the causal links in Scotland.While the primary rationale for healthimprovements should not be to stimulateeconomic development, if improvements inhealth can contribute to increased economicopportunities, (which, in turn, can reduce illhealth, poverty, inequality and social exclusion),this implies that greater emphasis should begiven to preventative health policies and toassessing the health impacts of policies acrossthe Executive.

Living in the past: why is Scotland's

financial services sector ignored?

In this article, Ray Perman of Scottish FinancialEnterprise argues that economic analysis andthe compilation of economic statistics areundertaken on the basis of an economy whichis decades out of date and fail to give anadequate picture of fast-growing servicesectors, such as financial services. This, it isargued, colours the economic debate andhinders a proper understanding of the forcesshaping the Scottish economy. This article setsout the crucial importance of the financialservices sector to the development of theScottish economy.

Job Creation and Destruction in Scottish

Firms

Between 1995 and 1999, the number of jobswith Scottish employers increased by 70,000(5.4%). In that time, closures and contractionsresulted in the destruction of 314,000 jobs.However, at the same time, a fifth ofemployers increased employment and therewere 37,000 new employers. Together, theycreated 374,000 jobs – with a net increase inemployment. This article draws on a new datasource to examine the contributions of largeand small firms. Job creation rates did notshow much variation by firm size but jobdestruction was much higher in small firms.New firms accounted for 40 per cent of all thenew jobs. There are some small butinteresting differences between what isreported for Scottish firms and the pattern ofjob creation and destruction for the UK as awhole.

Defining Rural Scotland

This article outlines work which has been ledby Scottish Executive Environment and RuralAffairs Department economists to produce aconsistent approach to defining rural Scotlandacross the Executive. In addition to outliningthe background to this work, the article alsoexplains why a framework approach has beenadopted and how this will be used in the future– particularly in terms of analysis to underpinfuture rural policy developments.

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2001

chapter one: Global, Europeanand UK EconomicDevelopments

chapter one: Global, European and UK Economic Developments 11

2

1.1 The Global Economy1.1.1 Recent Economic Indicators in theGlobal Economy

Global activity has weakened significantly sincethe January 2001 edition of the ScottishEconomic Report. After a year of rapidexpansion in 2000, the prospects for globalgrowth look set to ease in 2001 mainly as aresult of a sharp slowdown in the US economyand a weakening Japanese economy. Worldtrade growth is expected to fall back sharply,with emerging Asia experiencing a significantslowdown as the global electronics marketsweaken. Oil exporting countries are facingmoderating prices, and countries with closetrade links with the US are also experiencingweaker exports growth. In addition to worldtrade links, US financial market developmentsare also a key concern, due to the possibletransmission of risk across world financialmarkets. However, on the upside, Europecould prove to be relatively insulated from therecent global downturn, as it continues togrow healthily from strong domestic demand.

The UK Budget Report, March 20012, set outrelevant global indicators (Table 1). Weakeningglobal activity is expected to persist into thefirst half of 2001, with growth picking up to

20002

2001 2002 2003

Real GDP1

4 2 22 22

Consumer price inflation1,3

22 24 24 24

World trade in goods & services 11$ 6 54 5$

Table 1: World Economic Forecasts (% change on previous year)

1 G7: US, Japan, Germany, France, UK, Italy and Canada.2 Estimates except consumer price inflation3 Final quarter of each period for UK RPIX.Source: UK Treasury Budget Report, March 2001 & IMF, World Economic Outlook, May 2001.

1 This chapter is based on data available up to 16 May 20012 HM Treasury, Financial Statement and Budget Report, Investing for the Long Term: Building Opportunity and Prosperity for All,

March 2001, available at http://www.hm-treasury.gov.uk/budget2001/fsbr/contents.html3 IMF projections are prepared on the basis of internationally consistent assumptions about world activity, exchange rates,

and conditions in international financial and commodity markets.4 NIESR (2001) National Institute Economic Review, April 2001.

22 per cent in 2002 and 2003 as the USslowdown is expected to be short-lived.

The International Monetary Fund published itsforecasts for global output growth in its WorldEconomic Outlook (WEO), May 20013. Growthis expected to slow in all major regions of theworld. The IMF forecast world growth of3.2 per cent for 2001 – revised down1.0 percentage point from 4.2 per cent inOctober 2000 – moving back up slightly to3.9 per cent in 2002. (Chart 1.1 and Table 2).The National Institute Economic Review(NIESR)4 forecast global output growth of 2.9per cent in 2001, mainly as a result of equitymarket declines in the first quarter of 2001.

By contrast, forecasts in the OECD WorldEconomic Outlook, May 2001, estimate outputgrowth of 2 per cent in 2001 in the OECDarea, before recovering somewhat next yearto 2.8 per cent. OECD forecasts are somewhatbelow IMF estimates for the same periods.However, the OECD view is that thedownside pressures on growth will start toclear during the latter part of 2001, with signsof a moderate recovery in Japan taking placelater in the year, and an expectation that theUS slowdown will be relatively short lived.

3

1

Chart 1.1: GDP: World, US, Japan, Euro Area

May 2001 Projections Difference from (IMF October 2000 forecasts in brackets) October 2000

Projections (% points)

1999 2000 2001 2002 2000 2001

World Output 3.5 (3.4) 4.8 (4.7) 3.2 (4.2) 3.9 - -1.0

Advanced economies 3.4 (3.2) 4.1 (4.2) 3.2 (3.2) 2.7 -0.1 -1.3

Major industrial countries 3.0 (2.9) 3.8 (3.9) 1.6 (2.9) 2.4 -0.1 -1.3

United States 4.2 (4.2) 5.0 (5.2) 1.5 (3.2) 2.5 -0.2 -1.7

Japan 0.8 (0.2) 1.7 (1.4) 0.6 (1.8) 1.5 0.3 -1.2

Germany 1.6 (1.6) 3.0 (2.9) 1.9 (3.3) 2.6 0.1 -1.4

France 3.2 (2.9) 3.2 (3.5) 2.6 (3.5) 2.6 -0.3 -0.9

Italy 1.6 (1.4) 2.9 (3.1) 2.0 (3.0) 2.5 -0.2 -1.0

United Kingdom 2.3 (2.1) 3.0 (3.1) 2.6 (2.8) 2.8 -0.1 -0.2

Canada 4.5 (4.5) 4.7 (4.7) 2.3 (2.8) 2.4 - -0.5

Other advanced economies 4.8 (4.7) 5.2 (5.1) 3.0 (4.2) 3.8 0.1 -1.2

Euro area 2.6 (2.4) 3.4 (3.5) 2.4 (3.4) 2.8 -0.1 -1.0

Newly industrialised

Asian economies 7.9 (7.8) 8.2 (7.9) 3.8 (6.1) 5.5 0.3 -2.3

Developing countries 3.8 (3.8) 5.8 (5.6) 5.0 (5.7) 5.6 0.1 -0.7

Countries in transition 2.6 (2.4) 5.8 (4.9) 4.0 (4.1) 4.2 0.6 -0.2

Source: IMF, World Economic Outlook, May 2001.

Table 2: World Output Trends and Projections, Percentage Growth, 1999-2002

-2

-1

0

1

2

3

4

5

World Output

2002200120001999199819971996199519941993

Note: Year 2001 & 2002 are forecastsSource: IMF, World Economic Outlook, May 2001

YearUK Japan Euro area United States

Re

al G

row

th, p

er

cen

t

1

4

The global slowdown and falling growthprojections are largely a result of recentdevelopments taking place in the US andJapan, as well as slowing growth patterns inemerging Asia and Latin America. Economicactivity in Japan appears to have stagnated inthe latter part of 2000 as a result of fallingconsumer confidence and business investment,as well as weakened external demand. The USslowdown has been seen as partly a result ofearlier monetary policy tightening to targetincreased demand pressures. This has beenexacerbated by a series of shocks – mainly

Of the major industrialised countries, thelargest revision to the IMF's growth forecastfor 2001 is for the US – revised down by1.7 percentage points – with growth expectedto fall to 1.5 per cent in 2001 (see Table 2).The outlook for world growth depends in parton the closeness of trade linkages with the US.Thus countries both within and outside theOECD area will experience weaker worldtrade growth patterns, partly a result of fallingUS import demand. IMF estimate that world

energy price shocks and the sharp fall in equityprices – which have contributed towards thesharper than expected pace of the USslowdown, as well as the long boom ininformation technology and communicationsinvestment resulting in overspending by manybusinesses.

The recovery in emerging markets is alsoexpected to stall in 2001, with newlyindustrialised Asian economies expected to behit hardest. Growth is forecast at 3.8 per centin 2001; a downward revision of 2.3 per cent.

trade grew at a healthy rate of 12.4 per cent in2000, with slowing world growth in 2001contributing to a downward revision offorecasts for 2001, down from 7.8 per cent to6.7 per cent. Similarly, the OECD estimateworld trade volumes growth to fall to 7.2 percent in 2001. As a result, the growth in thevolume of imports and exports in developingand advanced economies is forecast to fall in2001 (Chart 1.2).

Chart 1.2: World Trade Volumes

0

2

4

6

8

10

12

14

World Trade Volumes

2002200120001999199819971996199519941993

Note: Year 2001 & 2002 are forecastsSource: IMF, World Economic Outlook, May 2001

Tra

de

Vo

lum

e, P

erc

en

t

YearVolume of Imports (Advanced Economies)

Volume of Exports (Advanced Economies)

5

The reaction to the global downturn by manyworld central banks has been to loosenmonetary policy to help maintain financialmarket confidence, and prevent business andconsumer confidence from declining. As a

result, there have been a series of interest ratecuts in 2001 by many central banks. Box 1provides a discussion of recent movements inworld interest rates.

As fears continue to grow over the future of the world economy and, in particular, the slowdown in the USeconomy, interest rates1 have been cut by the world's largest economies, the US, Japan and the Euro Zone, in anattempt to prevent any further economic decline. The European Central Bank was the latest central bank to cutinterest rates, from 4.75 per cent to 4.5 per cent in May 2001, having kept rates unchanged since October 2000.

The US Central Bank, the Federal Reserve, cut interest rates in May 2001 for the fifth consecutive month,leaving base interest rates at 4 per cent, down from 6.5 per cent at the start of the year (Chart 1.3) This is thelowest US base rate for seven years.

Despite the Federal Reserve's policy of cutting interest rates, there are fears that it acted too slowly inresponding to the US economic slowdown and some believe this has contributed to the uncertainty which hangsover the US economy. Consumer confidence and business investment have both fallen in recent months aseconomists and commentators alike are undecided on whether or not the cut in interest rates will be enoughto prevent the US economy from falling into recession. Spillover effects from the US slowdown, through thefinancial markets and the falling consumer and business confidence, could spread to other coutries and ultimatelyaffect output.

Meanwhile, the Bank of Japan announced the reduction in short term interest rates to zero as part of an attemptto revive the Japanese economy which has suffered a long-term recession since the early 1990s. The main causeof this slump in economic fortune has been the reluctance of Japanese consumers to spend money. This is aconsequence of Japanese companies cutting back on their workforce and no-longer offering a "job for life"guarantee. This uncertainty over future job prospects has resulted in households saving rather than spending, asthey fear further job cutbacks. The Bank of Japan predicts that the zero interest rates will encourage growthand dampen any deflationary pressures which currently exist.

1 Official Discount Rate for Japan, Main refinancing operations for Euro zone, and the Federal Funds Rate for the US.

Box 1: World Interest Rates

Chart 1.3: World Base Rates

0

1

2

3

4

5

6

7

Euro ZoneJapanUS

May-01

Apr-01

Mar-01

Feb-01

Jan-01

Dec-00

Nov-00

Oct-00

Sep-00

Aug-00

Jul-00

Jun-00

May-00

Apr-00

Mar-00

Source: Bank of Japan, Federal Reserve, ECB, OECD.

Inte

rest

Rat

e

Date

1

Falling global growth reduces the demand for UK goods and services (relative to supply capacity) and leads to areduction in inflationary pressures (prices of goods and services will be lower, reducing the price of imports tothe UK). The impact on the UK current account will depend on UK trade patterns and linkages with the globaleconomy (see Table 3 below).

Table 3: UK Exports by Region, as percentage of GDP in 1999

North America European Union Rest of the World Total UK Exports

5.0 13.7 7.3 25.9

Clearly the success of such a policy will be dependent on how Japanese consumers and businesses react to thefurther lowering of interest rates. Such a policy move has failed to stimulate the economy in the past and thereare fears that it will not be enough to lift the Japanese economy out of its current predicament. Despite this, theBank of Japan remains committed to the zero interest rate policy for as long as consumer prices in the countrycontinue to decline.

1

6

Oil prices have been falling from their previoushighs in late 2000, and their volatility remains arisk to global growth and commodity prices,with price levels remaining heavily influencedby the decisions taken by the Organisation ofthe Petroleum Exporting Countries (OPEC).Oil prices have fallen from the highsexperienced in the latter part of 2000, wherethey remained consistently above $30 per

barrel, to within their target bandof $22-$28 per barrel ($28 per barrel inApril 2001). This has contributed to thestabilisation of headline inflation in mostindustrialised countries, and underlyinginflation remaining relatively subdued. (Chart1.4). Box 2 provides some further discussionon recent global developments and the impacton the UK economy.

Box 1: World Interest Rates (continued)

Box 2: Global Developments and the impact on the UK Economy 1

-1

0

1

2

3

4

5

Euro areaUnited Kingdom Japan United States

2002200120001999199819971996199519941993

Infl

atio

n, P

erc

en

t

Year

Note: Year 2001 & 2002 are forecastsSource: IMF, World Economic Outlook, May 2001

Chart 1.4: World Inflation Rates

7

Global Outlook

Overall, global developments will depend to alarge extent on the future outlook for the USeconomy and how sharp and prolonged is theslowdown. If a 'hard landing' scenario for theUS becomes a reality, then this could worsenmarket confidence and real domestic demandforecasts. In this case, the IMF predict that theadjustment of trade balances in the US wouldbe twice as large.

On the upside, many commentators believethat the slowdown will be short lived due tofalling global interest rates and recent lower oilprices. OECD believe that a number of factorsmay work to limit the global slowdown, thefirst being the recent ease in monetary policyin the US, Australia, Canada, Japan and the UK(mainly through the downward trend in long-term interest rates). Also, global inflationarypressures are receding, with most economieshaving sufficient room for policy to react toadverse conditions – with Japan being theexception – and fiscal positions in mostcountries have strengthened on the whole. Afurther factor giving rise to optimism is thestrengthening external and financial conditionsin most emerging countries since the 1997-98

financial crisis, as well as the shift away fromexchange rate pegs, improving the ability tomanage external shocks.

1.1.2 Economic Risks and ProspectsRecent Economic Risks

The January 2001 edition of the ScottishEconomic Report highlighted several riskswhich still remain key areas of concern in theworld economy, including:

• The outlook for the US and Japaneseeconomies;

• Financial imbalances in external currentaccounts;

• A fragile global financial and corporatesector.

US and Japanese Economy

The previous expansion in the US economyplayed a crucial role in stabilising global growthby offsetting weak performance elsewhere in the world. The fragile recovery in Japanappears to have stalled from its previousstrong growth in the first quarter of 2000.Given the general downward revision to IMFgrowth forecasts across countries, Japanese

The effect of recent base rate cuts (see Box 1) depends on their transmission into financial markets. UK financialmarkets are highly integrated with the global economy. Approximately 25 per cent of UK overseas securityholdings held are in the US, and may fall if consumer and business confidence continues to weaken from theglobal slowdown. Falling consumer confidence can lead to consumers increasing precautionary savings andlowering expenditure. However, the Bank of England Inflation Report, March 2001, suggests that there is littlesign to date of any transmission of falling confidence in the US, impacting upon UK market confidence.

Credit conditions may also tighten, as financial institutions perceive potential borrowers in the US as more risky,and hence, restrict lending as a result. The impact in the UK is thought to be limited, since the majority ofEuropean banks currently financing a high rate of investment in the US have a low concentration of US assets inUK-based operations.

When considering the correlation between US and UK growth – and the relative effect on inflation rates – theBank of England Inflation Report suggest that a 1 per cent temporary reduction in US growth (assuming amoderate reduction in equity prices, and no change in interest rates and exchange rates) may result in a 0.2 per cent reduction in UK inflation.

Overall however, the transmission of risks from the US into the UK economy is dependent on the size andduration of the slowdown in the US, and central projections are that US growth will experience only a shortlived slowdown, and will recover in the second half of 2001.

1 The Bank of England Inflation Report, February 2001, discussed the likely impact on the UK economy of recent globaldevelopments. This box summarises some of the main points from the report's analysis of the UK.

1

1

8

growth for 2001 has been marked down to2 per cent. The main causes being fallingconsumer confidence and business investment,as well as weakening external demand andsignificant deflation. Taken alongside theslowdown in the newly industrialised Asianeconomies, this suggests that the slowdown inthe US is unlikely to be offset by higherdemand growth elsewhere. This could lead togreater spillovers to other countries throughfinancial markets, and falling confidencecontributing towards a sharper decline inJapan, and exacerbating the impact of adverseshocks in the global economy.

External Current Accounts

Current account positions remain a keyconcern in the global economy. There hasbeen little change to previous IMF currentaccount forecasts. The deficit in the US was42 per cent of GDP in 2000 and forecast to be4.3 per cent in 2001 – larger than that of mostother advanced economies (Chart 1.5).OECD forecast the deficit in the US to fallfrom 42 per cent of GDP in 2000 to 4 per cent in 2001. Deficits of this size are notusually sustained for too long, with manycommentators suggesting that adjustmentcould lead to slower real income growth andgradual currency depreciation.

-5

-4

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3

4

JapanEuro area United States

20022001200019991998

Pe

rce

nta

ge

of

GD

P

Year

Note: Year 2001 & 2002 are forecasts. Forecasts for 2002 for the Euro area are not available.Source: IMF, World Economic Outlook, May 2001

Chart 1.5: Current Account Positions: US, Japan, Euro Area

Previous experience would suggest thatadjustment of current accounts has beencoupled with significant depreciation of theexchange rate. Many commentators believethat if US growth slows further, theninvestment flows (that have been previouslyfinancing the US current account) could bedisrupted, and result in market instability. If,however, the US economy enjoys improvedgrowth, an adjustment should not be sodisruptive and relatively manageable.

Fragile Financial and Corporate Sector

Lower global growth forecasts could pose

further risks to global financial markets. Recentpatterns have seen US equity markets fall, withsharp declines in the technology sector beinga major negative factor. The increasedexpectation of a US slowdown, coupled withfalling corporate profits, has led to a tighteningin banks lending standards. The NationalInstitute's view is that the main risk to theworld economy from further falls in marketswill be an estimated 20 per cent decline inAmerican equities, reducing growth in 2001 to1.6 per cent in the US and 2.5 per cent in theEuro Area. Therefore, the future outlook willdepend, to some extent, on financial marketdevelopments.

Date

Co

nfi

de

nce

In

dex

(19

95

=10

0)

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ance

80

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US (left scale)

Feb-01

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Sep-99

Source: OECD, Conference Board USNote: Indicators are not comparable across countries.

UK (right scale) Euro Zone (right scale)

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Source: OECD, Conference Board US.Note: Indicators are not comparable across countries.

Chart 1.6b: Consumer Confidence

9

Chart 1.6a: Business Confidence

Alongside falling financial markets, businessand consumer confidence in the US havedeteriorated significantly since late 2000. TheOECD view is that this may partly reflect thesteep falls in equity prices, concentratedmainly in the medium and high-technologysectors. These declines have played a role in

dampening market confidence, since asubstantial part of household wealth is nowheld as equities and equity financing hasbeen an important source of funds inhigh-technology sectors. Recent lay-offannouncements in this sector will also havecontributed to the decline in confidence.

1

1

10

The mood elsewhere in the world economyappears more balanced. Business andconsumer confidence stabilised in Japan duringthe second half of 2000, following a generalrise in the previous two years. In Europe,household confidence has remained steadydue to healthy employment prospects in manycountries (Chart 1.6a and 1.6b).

1.1.3 Economic Developments in the USand Japan

The US Economy

Economic growth in the US has slowedsharply, from an annual growth rate of 54 percent in the first half of 2000, to an annual rateof just 1 per cent in the fourth quarter of 2000.This was mainly due to increasing energyprices, tightening financial conditions, anappreciation of the US dollar in the latter partof 2000, and falling business and consumerconfidence. The IMF forecasts for the US arefor weak growth in the first half of 2001.

On the upside, forecasts predict a pickup inactivity as a result of lower short-and long-terminterest rates, with growth of 12 per cent in2001 and 22 per cent in 2002. Planned tax cutsin the US should contribute towards morepositive growth in 2002, with the mostsignificant risks being with the future outlookfor corporate and household debt levels, andthe amount of investment in certain sectors -in particular, telecommunications whereinvestments have previously been high.Overall, the future pattern of these factorsremains a crucial component of US growthprospects.

The National Institute’s growth forecasts forthe US are similar to those of the IMF, 1.6 percent in 2001, supported by lower interestrates and tax cuts. The recent interest ratecuts in January, March, April and May 2001,should help boost falling economic confidencealongside the planned income tax cuts.

The Japanese Economy

The recovery in Japan appears to be stalling.The IMF forecast that, following economicgrowth of 1$ per cent in 2000, consumerconfidence and private consumption began tofall as a result of uncertainty surroundingfuture economic prospects, with growthforecast at 0.6 per cent in 2001. In addition tothe general deterioration of global conditions,Japan has been vulnerable to the globalelectronics cycle and declining equity priceshindering market confidence.

Forecasts for growth by the National Instituteare also on the downside, although slightlymore optimistic than IMF forecasts. GDP isexpected to grow by only 1 per cent in 2001 –down from an estimated 1.7 per cent in 2000.The National Institute's view is that slowergrowth will be the result of a sharp decline inthe contribution of net exports to growth, dueto slower world trade, and domestic demandsuffering from falling business confidence.

Recent policy initiatives – including a fiscalstimulus package in November 2000 and anew monetary framework in March 2001 –are intended to revitalise economic activity in2001 and give a temporary boost to publicinvestment. A Japanese recovery will dependon the future path of business investment andexports, as well as strengthened consumerconfidence. The economy remains open toshocks (especially from the fragile financial andcorporate sector), with a limited capacity forpolicy to react.

A further factor contributing to current weakgrowth has been falling business investmentand debt in the corporate sector. The outlookappears to be for continued deflation. With thecurrent high levels of public debt, observersare arguing for a gradual fiscal consolidation toprevent a recession.

-1.0

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2002200120001999199819971996199519941993199219911990

Gro

wth

, pe

rce

nt

Year

Source: OECD Economic Outlook, May 2001Note: 2001 and 2002 are forecasts

Chart 1.7: Output Growth in the Euro Area 1990-2002

11

1.2 The Euro Area5

1.2.1 Euro Area Developments andEconomic Indicators

Despite the decline in growth in the UnitedStates and the delayed recovery in Japan, thefundamentals of the Euro area are consideredto remain broadly favourable. Although anelement of uncertainty with regard to theworld economy and its potential impact onEuro area developments exists, there are fewsigns at present that the slowdown in the USeconomy is having significant and lastingspillover effects on the Euro area. Howevercontinual monitoring of global developmentsremains essential.

According to Eurostat's estimate in theEuropean Central Bank's (ECB) MonthlyBulletin for April 2001, real GDP increased by0.7 per cent quarter-on-quarter in the fourthquarter of 2000. This confirms that growthslowed down in the second half of 2000, albeit remaining robust. Year-on-year growthdeclined from 3.6 per cent in the first half of2000 to 3.1 per cent in the second half.Overall, the Euro area average for 2000 was3.4 per cent. This is similar to the OECD'sestimate of 3.4 per cent of annual growth in

real GDP over the same period. However,they predict that real GDP will fall to2.6 per cent in 2001 and to 2.7 per cent in2002 (See Chart 1.7).

Despite this predicted decline in GDP growth,observers consider that the general outlookfor this year and next remains positive6. TheEuro area's high rate of capacity utilisation,continuing employment creation and decline inunemployment should contribute to fosteringprivate investment and consumption.

The ECB reports that consumer confidenceincreased in December 2000 compared to theprevious month, despite a fall in industrialconfidence over the last quarter of 2000. Theincrease in consumer confidence was mainlyaccounted for by a more positive assessmentby households of their current and futuregeneral economic situation.

The National Institute also predicts a broadlyfavourable outlook for the Euro area, withexpected growth of 2.5 per cent in 2001.Household spending is expected to be healthy,due to increased income, continuedemployment growth and personal tax cuts.

5 Figures in this section include Greece as part of the Euro area.6 European Central Bank, Monthly Bulletin, March 2001.

1

1

12

The stable growth in the Euro area has led to afall in the standardised rate of unemployment7

to 8.5 per cent in December 2000, and to8.4 per cent in March of this year. This is thelowest unemployment rate recorded sinceearly 1992. The average unemployment ratefor 2000 was 9.1 per cent, compared with10.0 per cent in 1999. Despite the rapiddecline in unemployment during 2000, it wasslower in the second half of the year.

The Harmonised Index of Consumer Prices(HICP) for the Euro area fell over the end oflast year and the start of this year with a fallfrom 2.9 per cent in November 2000 to

1.2.2 Monetary Developments in theEuro area

After the Euro's appreciation in the second halfof December 2000, it stabilised at around thesame level in nominal effective terms. Thefears of the slowdown in the US economy ledto a temporary rally of the Euro at the start ofJanuary. However, as the market's perception

2.5 per cent in January 2001 (Chart 1.8). Thisfall mainly reflected a significant fall in thecontribution from energy prices as a result ofrecent oil price developments. However inFebruary 2001 HICP rose to 2.6 per cent,mainly due to the volatility in energy andunprocessed food prices. The former has beenaffected by fluctuations in oil prices and theexchange rate, while the latter has beeninfluenced by health concerns relating to meatconsumption and to the consequences of thefoot-and-mouth outbreak. Despite this, theoverall risks to price stability in the mediumterm appear to be more balanced thantowards the end of 2000.

of the duration and depth of the US slowdowngrew less pessimistic, the Euro declinedtowards the end of January 2001 (Chart 1.9).The Euro stabilised throughout February2001, although March and April 2001 saw afurther depreciation to levels experienced inearly December of last year.

7 Equivalent to ILO unemployment measure.

0.0

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Infl

atio

n (

HIC

P),

pe

r ce

nt

Month/YearSource: ECB Monthly Bulletin, April 2001.

Chart 1.8: Euro Area Inflation Sep 99-Mar 01

13

January 2001 saw the first signs of moderationin the growth of the monetary aggregates inthe Euro area since the spring of last year, withthe annual growth of M3 falling to 4.7 per centfrom 5.2 per cent in December 2000. Inaddition, M1 slowed down significantly due, inpart, to the past rise in short term interestrates. Despite this, the pace of growth incredit to the private sector remained strong,mainly reflecting a pronounced demand bynon-financial corporations for credit and loans,while annual growth rates of loans tohouseholds declined continuously during thecourse of 2000. Overall, it is argued that therisks to price stability stemming from themonetary side have become more balancedover recent months.

In April, the ECB kept the interest rate on themain refinancing operations constant at4.75 per cent for the seventh month insuccession. However after coming underincreasing pressure to lower interest rates asAmerica's Federal Reserve cut interest ratesfor the fourth time this year and the Bank ofJapan cut its interest rates to zero on the 19March 2001, the ECB cut rates to 4.5 per cent

in May 2001. The decision reflected the ECB'sassessment that the risks to price stability inthe medium term currently appear morebalanced than towards the end of last year.Therefore, factors which might pose upwardpressure on price stability in the medium termare still present and will continue to be closelymonitored by the ECB.

There has been much debate throughoutEurope and the rest of the world regardinginterest rates for the Euro zone. Many fastgrowing Euro-zone countries – such as Spainand Ireland – have supported the ECB'sdecision to keep interest rates on holdbetween January and April 2001, as they fear acut in interest rates would lead to overheatingwithin their respective countries. On the otherhand, Germany – Europe's largest economy –has had to revise down recent growthforecasts with business confidence at itslowest level since July 1999. Germany,alongside many organisations outside Europe –including the Federal Reserve and the IMF –has led calls for the ECB to lower interestrates in order to prevent the furtherslowdown in the world economy.

85

90

95

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110

1-May-011-Apr-011-Mar-011-Feb-011-Jan-011-Dec-001-Nov-001-Oct-001-Sep-00

Source: www.oanda.com

Euro/USD Euro/GBP

Eu

ro E

xch

ang

e R

ate

Date

Chart 1.9: The Euro Exchange Rate Against USD and Sterling,1 Sept 00 – 22 March 01 (1 September 2000 = 100)

1

One of the main reasons behind the formation of European Monetary Union was to eradicate the high level ofinflation Europe had experienced over the past three decades. The European Central Bank sets the interestrates for the entire Euro area in order to limit inflationary pressures within the Euro zone. Therefore there isonly one rate of interest for every member country in the Euro zone. The table below tracks how the short-term interest rate, the Euro area growth rate, and the range of growth rates experienced by member countriesvaried from 1998 to 2000.

1998 1999 2000

Official Short Term interest rate for Euro Area 4.0 3.1 4.4

Average Euro growth in Real GDP on previous year 2.8 2.5 3.5

Growth rate range in Real GDP for the Euro countries 1.5 - 8.6 1.4 - 9.8 2.8 - 11.0

Source: OECD Economic Outlook December 2000.

1

14

Despite such calls for further cuts in interestrates it is argued that the ECB has pursued anarrower objective than the Federal Reservefocusing upon price stability as its primaryobjective. The Federal Reserve cited the fallingmarkets and economy as its reasons behindcutting interest rates, not the fact that inflationwas falling.

1.3 The UK Economy1.3.1 Overview of UK Economy

The Chancellor of the Exchequer presentedthe Budget Report on 7 March 20018, which setout the prospects for the UK economy. Recentindicators for the UK economy show that:

• UK inflation is at its lowest level since the1960s, helping to keep interest rates athistorically low levels. Underlying inflation(RPIX) for 2001 is forecast at 2.0 per cent –with the actual rate having reached 2.0 percent in April 2001 – and is forecast to returnto the 2.5 per cent target by spring 2002.

• UK interest rates remain low by historicalstandards – the base rate stood at 5.25per cent up to May 2001, falling 0.75percentage points between January andMay 2001.

• Treasury GDP forecasts are unchangedfrom the previous Pre-Budget Report. GDPgrowth rose to 3 per cent in 2000, and isexpected to ease back to its assumed trendrate of 2.25 to 2.75 per cent in 2001 andlater years.

• UK GDP (at constant 1995 market prices),increased by 0.4 per cent in the first quarterof 2001, and by 2.6 per cent compared withthe first quarter of 2000.

• The Government remains on track to meetits fiscal rules in the next five years. Thecurrent budget surplus has increased by afurther £6.5 billion since the Pre-BudgetReport in 2000-01, and by £1 billion in2001-02, and is projected to be £17 billionin 2001-02 (1.7 per cent of GDP). Thisimplies that the Government is well ontrack to meet the golden rule.

• Public sector net debt is projected to fall asa share of GDP from 36.8 per cent in1999/00 to 29.6 per cent in 2002/03.

Table 4 provides a summary of the mostrecent Treasury forecasts for output andinflation in the UK economy.

Box 3: Euro area growth

8 HM Treasury, Financial Statement and Budget Report, Investing for the Long Term: Building Opportunity and Prosperity forAll, March 2001, available at http://www.hm-treasury.gov.uk/budget2001/fsbr/contents.html

Recent ONS data on the UK manufacturing sector showed some slowdown in manufacturing output in recentmonths. Manufacturing output in March 2001 was 1.1 per cent higher than a year ago, but fell by 0.7 per centon the previous three months. The UK manufacturing index has fallen from 105.1 in December 2000, to 103.9in March 2001 (chart 1.10).

15

Recent Economic Developments and Risks

Despite the recent global slowdown, the year2000 was on the whole a successful year forthe UK economy. GDP growth increased to3 per cent due to strong growth in domesticdemand, including a 3.6 per cent rise inhousehold consumption. Consumption growthin 2000 was weaker than expected, but hasremained steady into 2001, alongside healthyconsumer confidence and a strengthening UKhousing market. Business investment fellsignificantly in 2000 following rapid growthover previous years, but regained pace in thesecond half of the year; up 3.2 per cent in 2000Q4 on the previous quarter, and up 4.0 percent on a year earlier.

Manufacturing output in January to March2001 was down 0.7 per cent on the previous3 months and up 1.1 per cent on a year earlier.The recent fall in manufacturing output isthought to be a reflection of the sustainedweakening of the global technology sector.The UK's manufacturing sector slumpedfurther in April 2001 to its weakest in morethan two years, according to the CharteredInstitute of Purchasing and Supply (CIPS)survey. Many commentators believe thesefigures suggest that the US slowdown is having a knock-on effect on the UK. Box 4provides a more detailed discussion on the UKmanufacturing sector.

Box 4: UK Manufacturing Sector

9 The Bank of England, Inflation Report, February 2001

Budget 2001 2001 2002 2003

GDP growth, % 2.25 - 2.75 2.25 - 2.75 2.25 - 2.75

RPIX inflation, % 2.0 2.5 2.5

Table 4: Budget 2001 Forecasts for UK Growth and Inflation

Sources: HM Treasury, Budget Report, March 2001.

99

100

101

102

103

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106

Mar-01

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Date

Man

ufa

ctu

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g I

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ex (

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5=

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)

Chart 1.10: Manufacturing Output, April 1999 – March 2001

1

Independent information on manufacturing activity for the fourth quarter of 2000 was optimistic, but with slightconcerns into the first quarter of 2001. The British Chamber of Commerce data also showed modest rises inboth services and manufacturing orders and deliveries into the fourth quarter of 2000. The CBI monthlymanufacturing survey showed signs of optimism for the fourth quarter of 2000, but with data for January andFebruary 2001 showing falls in confidence.

The latest data released by the Chartered Institute of Purchasing and Supply (CIPS) showed a fall in the UKmanufacturing index to 49.8 in March 2001 – from an upwardly revised 52.2 in the previous month – and afurther fall again to 47.8 in April. A number below 50 marks a contraction in the sector, and a figure above 50indicates growth. The CIPS index provides an overall view of the manufacturing economy by collatinginformation from a wide selection of Purchasing Managers. The 47.8 figure was below market expectations andthe worst recorded figure since February 1999.

There has been continuing strength in the UK labour market. Labour Force Survey (LFS) employment has risenby well over a million between spring 1997 and the fourth quarter of 2000 – the working-age employment ratehas risen from 72.9 per cent to 74.7 per cent, across all working age groups. LFS employment increased by225,000 during 2000, and ILO unemployment fell by 520,000 – down from 7.2 per cent to 5.3 per cent (1.5million) – between spring 1997 and the fourth quarter of 2000. Claimant unemployment fell to its lowest levelsince 1975, with falls in December 2000 and January 2001, pushing the rate down to 3.5 per cent. Chart 1.11demonstrates the gradual upward trend in UK working-age employment and falling unemployment, between1997 and the fourth quarter of 2000.

1

16

Services output in 2000 Q4 was up 0.7 percent on the previous quarter and up 3.5 percent on a year earlier, and households'consumption in 2000 Q4 was up 0.7 per centon the previous quarter and up 3.3 per centon a year earlier. Retail sales volumes in the3 months to February were up 1.6 per cent onthe previous quarter and up 4.6 per cent on ayear earlier.

Total export volume growth was 7.5 per centin 2000, due to healthy external demand. Thiscontributed towards an overall healthy nettrade performance in 2000. The Office forNational Statistics reported a deficit of £7.7bnin the UK's global trade in goods in the firstquarter of 2001 – the biggest trade gap sincerecords began. January-March 2001 figures

showed strong domestic demand for importedconsumer goods, and the UK's deficit in tradewith non-EU countries rose to a greater thanexpected £2.6bn in April 2001. Manycommentators believe the widening deficit willcontinue into the latter part of 2001 due toweaker UK exports, particularly to the US.

Unemployment reached 5.3 per cent on thepreferred International Labour Organisation(ILO) measure and just 3.5 per cent on aclaimant count basis by the end of 2000, itslowest level since the 1970s. Box 5 provides adetailed update of recent UK labour marketdevelopments.

Box 4: UK Manufacturing Sector (continued)

Box 5: UK Labour Market Developments

There have also been signs of increasing wage pressures. Headline earnings growth reached 4.4 per cent in thethree months to December 2000, and underlying earnings growth (excluding bonuses) increased to 4.5 percent. More encouragingly, unit wage cost growth fell below 2.5 per cent in the fourth quarter of 2000, mainly aresult of increased productivity growth in the UK.

Overall, the UK Treasury view is that increased labour supply into employment suggests that employer demand-side factors have contributed towards employment growth in recent years. One possible reason for increasinglabour demand is greater economic stability, lowering the risk of hiring and firing costs, and encouraging firmsto take on permanent employees and reduce overtime. The number of temporary employees as a proportionof total employment has fallen from 6.7 per cent in spring 1997 to 6 per cent in 2001.

The positive UK labour market performance is thought also to be a result of structural rather than cyclicalimprovements in the UK, given the subdued trend in wage inflation. The sustainable or non-accelerating inflationrate of unemployment (NAIRU) has fallen sharply, and broadly in line with actual unemployment over recentyears, to around 5.5 per cent on the ILO definition. This has underpinned estimated trend output growth of justover 2.5 per cent a year since the first half of 1997. Thus, the falling NAIRU has also helped to provide animportant supply-side boost to the UK economy by raising the availability of labour supply.Source: HM Treasury, Budget Report, Investing for the Long Term: Building Opportunity and Prosperity for All, March 2001

17

There remain a number of risks to the UKeconomy. Among the most prominent are:

• Slowdown of US and Japanese economies;

• UK outbreak of Foot and Mouth Disease.

A harder landing for the US economy wouldimply further weakening in demand for UKexports (see box 2), but this risk may be partly

offset by adjustments in world exchange rates.Also, world conditions might temporarilydepress UK business and consumerconfidence. However, many commentatorsbelieve that a healthy balance sheet in the UKsuggests that adjustment in private demandshould be gradual enough to provide somecushion against adverse external events.

Box 5: UK Labour Market Developments (continued)

Chart 1.11: ILO Unemployment & LFS Working Age Employment, 1997-2000

0

1

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6

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ILO Unemployment

Q4Q3Q22000

Q1Q4Q3Q21999

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Q1

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LF

S W

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ing

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e-E

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e (

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)

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Source: ONS, available at: http://www.statistics.gov.uk/statbase/

Quarter

1

The Budget Report, while recognising that this has potentially serious implications for the livestock farming andrelated sectors of the economy makes no allowance for the economic effects of the current outbreak of Foot& Mouth Disease in its economic forecasts. It is difficult to estimate the duration and direct knock-on effects ofthe outbreak, although there is unlikely to be a discernible impact on aggregate UK GDP growth on the whole.The agriculture sector – including non-directly affected output such as arable products and forestry – currentlyaccount for only slightly more than 1 per cent of GDP (at current prices) and less than 2 per cent of employment.Source: HM Treasury, 'Recent Economic Developments and Prospects' 26 March 2001

1

18

The Treasury view is that sound public financesand low inflation means that UK policy is wellplaced to respond to adverse shocks from theglobal economy. The Chancellor of Exchequerrecently highlighted that no country can everbe insulated from world economic events, andthat the UK economy is much better placedthan it has been in the past, to deal with globalinstability10, 11.

1.3.2 Current UK Monetary &Fiscal IndicatorsMonetary Indicators

Interest rates are at historically low levels and,since 1997, have been much less volatile thanpreviously. The Bank of England's officialinterest rate stood at 5.25 per cent up to May

The current outbreak of foot and mouth hasserious implications for the livestock farming,tourism and related sectors of the economy,although assumptions about the duration anddirect knock-on effects of the outbreak aredifficult to estimate (see Chapter three forfurther discussion of the particular impact onthe Scottish Economy).

2001. The Monetary Policy Committee (MPC)cut base rates by 75 percentage pointsbetween February and May 2001, subsequentto eleven months of rates remainingunchanged at 6 per cent (see Chart 1.12). Amajor factor in the recent downward pressureon UK interest rates has been the slowdown inthe US economy.

Box 6: Foot and Mouth Disease and Economic Forecasts

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Chart 1.12: UK Base Rates, Jan 99-May 01

10 Speech by Chancellor of Exchequer, Gordon Brown at the EBRD, 24 April 2001, available at:http://www.hm-treasury.gov.uk/speech/cx240401.html

11 Further discussion of the prospects for the US and Japan, and for the ECB interest rates, is contained in sections 1.1 and1.2 of this chapter.

19

RPIX has averaged 2.4 per cent since May1997, remaining within a narrow band of 1.8 –3.2 per cent. Inflation was below theGovernment's inflation target for 23 monthsup to April 2001 – falling by 0.2 percentage

The National Institute's12 central forecast forinflation is that it will fall below 1.5 per cent bythe end of 2001, possibly resulting in anexplanation from the Governor of the Bank ofEngland13. However, the MPC's remitrecognises that monetary policy affects therelationship between output and inflation withvariable lags, and thus, as a consequence,inflation may temporarily deviate from target.

points to 1.8 per cent in January 2001, andmoving back up slightly to 2.0 in April 2001.Inflation is expected to reach its 2.5 per centtarget by spring 2002 (see Chart 1.13).

Box 7 provides a discussion of a new measureof core inflation in the UK.

The latest independent forecasts are veryclose to the mid-points of the Budget 2001forecast ranges. Inflation is forecast at 1.9 percent and 2.3 per cent for the years 2001 (yearto Q4) and 2002 (year to Q4).

1

2

3

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*Outturns until 2000 Q4; forecasts for 2001 Q1 to 2003 Q4Source: Scottish Executive Economic Statistics Database

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Chart 1.13: UK Inflation (RPIX) 1983-2003

12 National Institute Economic Review (NIESR), January 2001.13 If inflation falls below, or rises above, the Government's 2.5 per cent target by 1 per cent, the Governor of the Bank of

England is required to write a letter of explanation to the Chancellor, setting out how he intends to raise or reduce inflation.

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Table 5 provides an overview of the averageindependent forecasts for 2001 and 2002, forsome of the main monetary indicators.

A recent discussion paper by Joanne Cutler, considers the usefulness of measures of core inflation, and presentsa new measure of core inflation in the UK. Core inflation measures are used by many central banks in settingmonetary policy.

The new measure of core inflation is based on the same goods and services used in the measurement of RPIXinflation, but weighted by the persistence of their past inflation rates. This derives a persistence-based measure

of retail price inflation (RPIXP), and weights individual price components by their importance in households'budgets. Therefore, if a particular component has had a significant persistent inflation rate over the past, thisshould help provide more information on the 'on-going' element of inflation to help better predict future RPIXinflation. The author suggests that this could improve policy making – which takes account of future expectedinflation when setting policy, given the time lag for changes in interest rates to affect inflation – since a measureof core inflation with better predictive properties would complement a model-based inflation forecast.

The current measure of core inflation, based on the RPIX index, excludes certain sectors (e.g. seasonal food andenergy) believed to have volatile inflation rates and hence, not thought to be representative of generalinflationary pressures. The paper argues that such measures of inflation may ignore important information aboutunderlying inflation because they are essentially ad hoc rather than analytically based on the persistence ofindividual inflation rates.

Overall, the new measure (RPIXP) aims to overcome some of the limitations of existing measures of coreinflation, and is found to have a better predictive ability of RPIX of up to 6 months and 12 months. The paperconcludes that the new measure can be a useful leading indicator of RPIX inflation. RPIXP suggeststhat underlying inflation was just 1.2 per cent in February and that RPIX will remain below its target level of2.5 per cent for at least the next 6 to 12 months.Source: External MPC Unit Discussion Paper No. 3, Core Inflation in the UK, Joanne Cutler, March 2001.

Box 7: A New Measure of Core inflation in the UK

2001 2002

RPIX Sterling 3-month RPIX Sterling 3-month(Q4) index interest rates (Q4) index interest rates % (Q4) (Q4) % % (Q4) (Q4) %

All forecasts 2.0 102.0 5.55 2.3 100.3 5.77

City forecasts 2.0 101.7 5.56 2.4 99.8 5.83

Table 5: Average Independent Forecasts (percentage change on year earlier)

Source: HM Treasury ‘Forecasts for the UK economy: a comparison of independent forecasts’, March 2001.Note: RPIX represents the percentage change on a year earlier.

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Fiscal Indicators

The underlying position of UK public sectorfinances remains strong. The Treasury's mostrecent forecasts from the Budget Report 2001indicate that the Government remains on trackto meet the fiscal rules in the next five years:

• The current budget surplus has increasedby a further £62 billion since the Pre-Budget Report in 2000-01, and by £1 billionin 2001-02, and is projected to be£17 billion in 2001-02 (1.7 per cent ofGDP). The surplus on the current budget isexpected to continue over the period to2004/05. This implies that the Governmentis well on track to meet the golden rule14.

• Public sector net debt is projected to fall to31.8 per cent of GDP by the end of 2000-01, and to fall further to under 30 per centin 2002-03. Thereafter, it is estimated toremain at around 30 per cent of GDP afterMarch 2003.

• Cyclically-adjusted public sector netborrowing is estimated to be a repayment of1.4 per cent of GDP in 2000-01, and0.3 per cent of GDP in 2001-02, with amodest deficit estimated from 2002-03.These deficits are at the same levels as inthe Pre-Budget Report and are consistentwith the sustainable investment rule15.

14 The Golden Rule states that over the economic cycle, the Government will borrow only to invest, and not to fund currentspending.

15 The Sustainable Investment Rule, states that net public debt will be held over the economic cycle at a stable and prudent level.

Item 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

Surplus on Current Budget 19.2 (19.4) 23.1 (16.6) 17 (16) 15 (14) 8 (8) 8 (8)£ billion

Public sector net borrowing, £ billion -16.0 (-16.4) -16.4 (-10.1) -6 (-6) 1 (1) 10 (10) 11 (12)

Public sector net borrowing (% of GDP) -1.8 -1.7 -0.6 0.1 0.9 1.0

Cyclically-adjusted PSNB (% of GDP) -1.6 -1.4 -0.3 0.3 1.1 1.1

Maastricht deficit (% of GDP) -1.7 - 1.7 -0.5 0.1 0.9 0.9

Maastricht debt ratio(% of GDP) 43.7 40.6 37.6 36.1 35.7 35.6

1 Excluding windfall tax receipts and associated spendingSource: HM Treasury, Budget Report, March 2001.

Table 6: Summary of UK Public Sector Finances1 (Pre-Budget 2000 forecasts in brackets)

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1.3.3 Prospects & Forecasts in the UKEconomy

The UK Budget Report for March 2001outlined recent forecasts for the UK economy.The economy is forecast to continue to grow at around its trend rate, with theGovernment's pursuit of economic stability

Output and Demand

The overall prospects for growth havechanged little since the Pre-Budget Report,with Treasury forecasts for GDP growthsuggesting that it will ease back to its assumedtrend rate of 2.25 to 2.75 per cent in 2001 andremain at trend growth until 2004. TheNational Institute17 forecast GDP growth of2.4 per cent in 2001 and estimate that the footand mouth outbreak will cut GDP growth by aquarter of a percent point in 2001. The mostrecent independent forecasts for GDP growth(2.4 per cent for May 2001) are slightly weakerthan Budget 2001 estimates, possibly areflection of recent global economicconditions.

Household consumption is also forecast togrow by 3.25 to 3.5 per cent in 2001, about1 per cent higher than Pre-Budget forecasts.

having delivered low interest rates, lowinflation and low unemployment for the firsttime since since the 1960s. Table 7 outlinesboth the Budget 2001 forecasts for the UKeconomy, and independent forecastscontained in the Treasury's May edition of'Forecasts for the UK Economy'16.

Balance of Trade

UK export volumes are forecast to grow byaround 5.5 to 5.75 per cent in 2001 and 2002.The contribution of net trade to GDP growthis forecast to strengthen as a result of easingimport growth and healthier export demand.

The trade deficit is expected to widen overthe next two years, with export volumegrowth forecast to fall between 4.75 to5.25 per cent in 2002. The trade in goods andservices deficit is also forecast to widen to3.25 per cent of GDP in 2002, with importvolume growth expected to ease to trend dueto healthier than expected domestic demand.However, trade prospects remain uncertain inlight of the risks to US and global growth.

% Change on a year earlier2001 2002

Independent Independent Treasury Forecasts Treasury Forecasts

GDP growth 2.25 - 2.75 2.4 2.25 - 2.75 2.7

Household consumption 3.25 - 3.5 3.0 2.5 - 3.0 2.8

Fixed investment 5.5 - 5.75 3.6 3.0 - 3.5 3.7

Current Account (£billion) -21.75 -19.6 -25.25 -21.0

Manufacturing output 1.75 - 2.0 1.3 1.5 - 2.0 2.1

Table 7: Forecasts of the UK Economy, 2001 and 2002

Source: HM Treasury, Budget Report, March 2001. HM Treasury, Forecasts for the UK Economy: a comparison of independent forecasts, May 2001.

16 The independent forecasts are a summary of forecasts made in the last three months (March, April, May 2001). Theseforecasts reflect the views of the forecasting organisation only, and do not provide new information on Treasury's views.

17 National Institute Economic Review (NIESR), April 2001.

23

The deterioration in the real trade balancemeans the current account deficit has beenrevised upwards by around £7 billion fromprevious Pre-Budget forecasts, and isexpected to rise from £14 billion in 2000 to£20.75 billion in 2001 and £25 billion in 2002.

Manufacturing Output

Manufacturing output growth is estimated tobe between 1.75 and 2 per cent this year(down 0.25 per cent from Pre-Budgetestimates), and is forecast to grow at aroundthe same annual rate up until 2002. With GDPgrowth of around 2.5 per cent, manufacturingis expected to continue to fall as a proportionof overall output this year. Independentforecasts are similar to Treasury's for 2001,although independent estimates for 2002 areslightly more optimistic at 2.1 per cent.

The Scottish Executive estimate that as a resultof Budget 2001 tax and benefit measures,Scottish households will be £580 a year betteroff, and Scottish households with children£970 a year better off. A single earner familyon average earnings (£25,400 a year) and withtwo children, will be £520 a year better off inreal terms.18

1.3.4 UK Budget 2001 Announcements &Economic Impact

The Treasury's March 2001 Budget Reportoutlines the main Budget measures designedto achieve the Government's central objectiveof high and stable levels of growth andemployment. In working to deliver its centralobjective, the Government has five key long-term economic goals:

• Raising productivity;

• Increasing employment opportunity for all;

• Providing educational opportunity for all;

• Abolishing child poverty;

• Delivering strong and dependable publicfinances.

Box 8 provides a brief summary of the key UKBudget measures.

In seeking to build a fairer society, theGovernment announced new measures tosupport families and tackle child poverty,provide security in old age and ensure a fair taxsystem. These included increasing theChildren's Tax Credit (replacing the marriedcouple's allowance withdrawn in April 2000),and the Working Families' Tax Credit (WFTC),

18 The Scottish estimates are over the course of the Scottish Parliament, comparing the situation in 2001 with that in 1997,and converted into real terms.

• in Scotland, as a result of the extra spending announced in the Budget, there will be an extra £64 million foreducation, £81 million for health and £22 million for fighting drugs over the next three years;

• an extension of the 10p income tax band by £300 over and above inflation from April 2001;

• a £1.50 a week increase in the Children's Tax Credit to £10 from April 2001 and an increase to £20 a weekfrom April 2002 for families in the year of a child's birth;

• a £5 a week increase in the basic credit in the Working Families' Tax Credit from June 2001;

• an increase in maternity pay to £100 a week by April 2003 and an extension of the period of maternity payfrom 18 to 26 weeks;

• an increase in the National Minimum Wage for workers aged 22 and over to £4.10 an hour in October 2001and, subject to the economic conditions at the time, £4.20 an hour in October 2002; and

• a 2p per litre duty cut on ultra-low sulphur petrol and a 3p per litre duty cut on ultra-low sulphur diesel fromBudget day.

Box 8: Main UK Budget Announcements

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and the Income Support and Jobseeker'sAllowance child premia. A range of measureson maternity pay and parental leave wereintroduced, including increasing the flat rate ofStatutory Maternity Pay and MaternityAllowance.

There were also key measures designed tohelp modernise road transport and protect theenvironment, including a reduction in the taxon smaller cars and support for the UKhaulage industry with a freeze in car andmotorcycle vehicle excise duty (VED).

The National Minimum Wage for workersaged 22 and over will rise by 40p to £4.10 anhour from October 2001 and, subject to theeconomic conditions at the time, to £4.20 anhour from October 2002. This aims to helpincrease employment opportunity for all bybuilding on tax and benefit reforms alreadyintroduced to help people to move fromwelfare to work and to make work pay.

Measures designed to help businesses closethe productivity gap included a reduction inthe administrative and compliance costburdens placed on small and medium-sizedfirms, as well as consultation on tax measuresto boost research and development (R&D) bylarge firms. Enterprise Management Incentivesare also being expanded to help encourageemployee share ownership.

The Tax BurdenThe ratio of net taxes and social securitycontributions as a percentage of GDP isestimated to fall steadily over the next threeyears. In addition to the effects of the tax cutsannounced in the March Budget and theNovember Pre-Budget Report, the Treasuryview this to be a result of slightly weakerprojections of GDP growth, and lower levelsof North Sea production.

Income tax receipts (net of tax credits) in2000-01 are expected to be about £102 billion,£3 billion higher than forecast in the Pre-Budget Report. These upward revisions aredespite the fact that overall levels of wages andsalaries are estimated to grow by slightly lessin 2000-01 than in either of the two previousforecasts. About half the increase since the Pre-Budget Report reflects higher than expectedSelf Assessment receipts, which mainly reflectthe tax due for the 1999-2000 tax year on self-employment earnings and other income notsubject to PAYE. Most of the rest of theincrease reflects higher than expected PAYEreceipts, probably from bonus payments.

Overall, public spending is expected to rise as ashare of GDP over the forecast period (Table 8).Following an increase in the tax burden in2000/01 the ratio of taxes and social securitycontributions to GDP is expected to fall overthe next three years.

Outturn Estimate Projections

(%GDP) 1999/00 2000/01 2001/02 2002/03 2003/04

Public Expenditure1 37.9 38.9 39.8 40.3 40.8

Tax Burden2 36.9 37.7 37.5 37.3 37.0

Table 8: Public Spending and UK Tax Burden

1 Total Managed Expenditure.

2 Net Taxes and social security contributions: net of income tax credits (cash basis)

Source: UK Treasury Budget Report, March 2001 & UK Treasury, Public Expenditure Statistical Analysis, 2001-02.

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References:

ECB (2001), Monthly Bulletin, March 2001

ECB (2001), Monthly Bulletin, April 2001

External MPC Unit Discussion Paper No. 3,Core Inflation in the UK, Joanne Cutler,March 2001

HM Treasury, Financial Statement and BudgetReport, Investing for the Long Term: BuildingOpportunity and Prosperity for All, March 2001

HM Treasury (2001), Recent EconomicDevelopments and Prospects, 26 March 2001

HM Treasury (2001), Forecasts for the UKeconomy: a comparison of independent forecasts,May 2001

HM Treasury, Public Expenditure StatisticalAnalysis (PESA), 2001-02

IMF (2001) World Economic Outlook, May 2001

NIESR (2001) National Institute EconomicReview, January 2001

NIESR (2001) National Institute EconomicReview, April 2001

OECD (2000) OECD Economic Outlook,December 2000

OECD (2001) OECD Economic Outlook,May 2001

Speech by Gordon Brown, The Chancellor ofthe Exchequer at the annual conference of theEuropean Central Bank for reconstruction andDevelopment (EBRD), 24 April 2001

The Bank of England, Inflation Report,February 2001

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chapter two: Report on EconomicDevelopment Initiatives

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chapter two: Report on EconomicDevelopment Initiatives

The Scottish Executive's Framework for EconomicDevelopment in Scotland (FEDS) was publishedin June 2000. The last edition of the ScottishEconomic Report contained the first up-dateon the progress made in the field of economicdevelopment. This edition of the ScottishEconomic Report will continue to gauge theprogress of the Scottish Executive on thePriorities for Action identified in the Framework.This chapter will be split into two sections;section one will carry out a detailed analysis ona selection of new initiatives undertaken by theExecutive, while section two will provide briefsummaries of a more extensive range ofexisting initiatives undertaken by the Executivein the field of economic development.

2.1 Selected EconomicDevelopment Initiatives2.1.1 National Priorities in Education

The Framework focuses attention on thecritical contribution of school education toeconomic development. It identifies educationand skills as being among the primarydeterminants of both economic and socialdevelopment. Furthermore, education plays akey role in promoting an economy which canrespond rapidly to changing globalcircumstances. The Framework emphasisesthat school education must address the coreskills that children will need in their latereducation and in work.

The national priorities in education are part ofa new statutory framework established underthe Standards in Scotland's Schools Act 2000.This framework for school education requireslocal authorities and schools to plan, monitorand report on improvements in education.Under the framework Scottish Ministers andlocal authorities are required to endeavour tosecure improvement in the quality of educationin Scotland's schools. Scottish Ministers –following consultation – will give strategicdirection to the education system by publishingnational priorities and measures of performance

for education in Scotland. Meanwhile localauthorities will publish annual statements oflocal improvement objectives which show howthese national priorities will be implementedlocally, and will also be required to report eachyear on their success. Finally, each school will berequired to have a School Development Plan –linked to the local authority's statement ofobjectives – which is prepared following localconsultation, and will also be required to preparean annual report on progress against the plan.

Defining national priorities was the first stagein implementing this improvement framework.An extensive public consultation exercise wascarried out and Ministers paid close attention tothe views expressed. Proposals on the prioritieswere approved by parliament and they cameinto effect in December 2000. Local authoritystatements of local improvement objectiveswill be in place by December 2001, followedby school development plans by June 2002.

To reflect the clear opinion expressed in theconsultation, the priorities are deliberatelyfocused on outcomes and not the means bywhich they are achieved. That will be theresponsibility of the authorities and schoolswho have the local knowledge and expertisenecessary to meet local needs. Authorities'improvement plans and school developmentplans should show how the priorities will beimplemented in their areas, taking into accountthe needs of the children they are responsiblefor. This will mean that the priorities are takenforward in different ways in different areas.

The national priorities also reflect afundamental statement of purpose for schooleducation in Scotland, which was establishedin the new education Act:

"…it shall be the duty of the authority tosecure that the education is directed to thedevelopment of the personality, talents andmental and physical abilities of the child oryoung person to their fullest potential."

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The national priorities in education are definedunder the following headings:

• Achievement and Attainment: to raisestandards of educational attainment for allin schools, especially in the core skills ofliteracy and numeracy, and to achievebetter levels in national measures ofachievement including examination results;

• Framework for Learning: to support anddevelop the skills of teachers, the selfdiscipline of pupils and to enhance schoolenvironments so that they are conducive toteaching and learning;

• Inclusion and Equality: to promote equalityand help every pupil benefit from education,with particular regard paid to pupils withdisabilities and special educational needs,and to Gaelic and other lesser usedlanguages;

• Values and Citizenship: to work withparents to teach pupils respect forthemselves and for one another and theirinterdependence with other members oftheir neighbourhood and society and toteach them the duties and responsibilities ofcitizenship in a democratic society;

The role of knowledge is becoming increasingly important to economic development, with the skills and thecapabilities of the workforce influencing general productivity growth and the spread of the benefits of growthover the long-run. The Framework identifies that future economic activity in Scotland will need to be increasinglyknowledge intensive, with more focus on research, product development and innovation, and on productsrequiring highly skilled labour. Therefore enhancing the general level of skills within Scotland is one of the mainlevers for sustainable economic development.

Many indicators can be used to gauge the level of skills within Scotland: literacy levels, qualifications gained,attendance rates, and in-work training. Chart 2.1 traces the educational achievements of pupils in Scotland,England and Wales in 1997/98.

Chart 2.1 shows that Scotland performs favourably compared to England and Wales in terms of pupils with 5 ormore GCSEs grades A to C (or equivalent) with around 10 per cent more students gaining awards. Furtherevidence1 reinforces Scotland's performance with some 38.2 per cent of students gaining GCSE grades A-C (orequivalent) in all core subjects2 compared with the UK average of 29.1 per cent. However in relation to 2 ormore GCE A levels (or equivalent), Scotland has a slightly lower percentage than England and a higherpercentage than Wales. Caution should be taken when using these results as it is unclear whether suchqualification equivalents are an accurate measure of the difficulty of qualifications achieved across the country.

Box 1: Enhancing Skills

Chart 2.1: Enhancing Skills

1 ONS Regional Trend Data Set2 Subjects include Mathematics, English, a science and a modern language.

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• Learning for Life: to equip pupils with thefoundation skills, attitudes and expectationsnecessary to prosper in a changing societyand to encourage creativity and ambition.

National policies, local improvement plans andschool development plans will all be focusedon these key priorities.

Social justice considerations are at the heart ofthe national priorities. Social justice milestonesare already in place which challenge everyonein the education system to bring the poorestperformers closer to the performance of thebest, reduce truancy and exclusion, and ensurethat young people leaving care do so withqualifications that give them a solid start in life.In covering the national priority on inclusionand equality in their plans, local authorities andschools will have to consider how they rise tothe challenge of delivering an education whichbenefits every pupil.

The priorities reflect the importance of schooleducation in terms of both academicachievement and the development of thefoundation and life skills which will becomeincreasingly important in a changing globaleconomy. A number of other considerationshave been taken into account: the need forpupils to learn respect for themselves andothers; to learn about citizenship and learninghow to learn; the need to raise self confidence,skills and aspirations of young people; the needto support teachers and enhance schoolenvironments; the principles of sustainabledevelopment; the needs of disabled pupils andthose with special educational needs; and theneed to provide for those for whom English isnot their first language.

The national priorities are not intended to bea list of all that is important in delivering schooleducation. The priorities reflect the areaswhere particular focus and attention needs tobe given over the next 3 to 5 years, thoughshould not be taken to underestimate the

value or the importance of other areas whereattention is required. As improvements aresecured, Ministers will again consult andconsider whether any areas of new priorityemerge and require particular attention.

2.1.2 Transport Delivery Plan

The Framework recognises the importance oftransport to economic development withinScotland. Transport is crucial to the delivery ofan economically and environmentally sustainableScotland, which delivers social justice for all itspeople, wherever they live.

The Executive is committed to deliveringeffective, modern transport services inScotland. Working together for Scotland, aProgramme for Government, published inJanuary 2001, sets out the Executive's keyhigh-level priorities for transport. Work isprogressing on a number of fronts, across allmodes and addressing both the short andlonger-term.

As foreshadowed in the Framework theExecutive has begun work on a TransportDelivery Plan for Scotland, scheduled forpublication in the autumn of this year. This willset out investment priorities for Scotlandlooking out 10-15 years, drawing togetherongoing work on rail re-franchising, transportcorridor studies, air services review, the roadsprogramme and the tendering of CaledonianMacBrayne services. The aim will be toestablish a framework for the Executive's ownspending, as well as that of the LocalAuthorities and the emerging regionalstrategies. Work will be taken forward inconsultation with business interests, localauthorities, regional transport partnershipsand operators.

The Transport (Scotland) Act 2001 was passedby the Scottish Parliament on 20 December2000 and received Royal Assent on 25 Januarythis year. The key legislative provisions cover

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Joint Transport Strategies, bus services, roaduser charging, travel concession schemes,grant making powers, Freight Facilities Grants,disabled persons and Home Zones. A range ofstatutory and non-statutory regulations andguidance will be appearing over the comingmonths.

The Minister for Transport and Planningannounced in March 2001 a £680 millionpackage of improvements to Scotland's

motorway and trunk road network over thenext three years. This package builds on thelong term programme which began last yearand will see investment in new construction,repairs and improvements rise from£180 million this year to almost £250 millionby March 2004, an increase of nearly 40 percent. The package encompasses 63 schemes,each costing more than £0.5m. The Executiveexpects that 23 schemes will be completed byApril 2002, 13 by 2003 and 15 in the year to

Securing the physical, educational and electronic infrastructure will help underpin the productivity ofenterprises, according to the Framework. Benchmarking Scotland's performance in this area can involveexamining transportation networks, the housing market, the labour force and the accessibility of education,along with many other factors. However as the focus of recent economic analysis falls on the "new economy"and the increasing importance of Information and Communication Technology (ICT), an appropriate measure ofScotland's enabling infrastructure is the degree of "connectivity". Chart 2.2 illustrates Scotland's position withinthe international business community.

The ICT business connectivity indicator measures business use of at least one of three selected technologies:websites, external e-mails, and electronic data interchange. The connectivity indicator for Scotland for 2000stands at 79 per cent, with nearly four out of every five businesses in Scotland having/using one of theaforementioned technologies. This marks a dramatic increase on last year's connectivity indicator which stoodat below 60 per cent. In relation to Scotland's performance compared to the international business community,Scotland ranks favourably compared to most countries in the benchmarking exercise, while lagging only slightlybehind the UK, US, Canada, Sweden and Germany.

Box 2: Enabling Infrastructure

Chart 2.2: ICT Business Connectivity Indicator

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ScotlandUKFranceGermanyItalySwedenUSCanadaJapan

Source: E-Business Benchmarking Report 2000, Scottish Enterprise

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2004. Some of the larger projects, includingthe construction of the M74 Extension and thenew Forth crossing at Kincardine, will takelonger but preparation work is alreadyunderway.

The Scottish Airports and Air Services Study,jointly commissioned by the Scottish Executiveand the Department of Environment, Transportand the Regions, was completed in July 2000.This study is part of an ongoing review ofaviation and airports policy leading to thedevelopment of an aviation policy for the next30 years. The main objectives of the revieware to consider how airports, both small andlarge, can contribute to the economies of thearea they serve, how any future developmentsin response to growth in traffic can beachieved in a sustainable manner, and thedevelopment of more direct services as ameans of both enhancing provision withinScotland and relieving congestion in the southeast of England.

The next stage in the policy developmentprocess is the production and issuing of aScottish Air Consultation Document whichwill highlight the emerging findings from theScottish Study and seek views on the policymatters which need to be considered indeveloping an aviation policy for the next 30years. The consultation document will bepublished during the summer and aconsultative seminar held in the autumn. Theresponses will feed into the production of aUK Aviation White Paper in 2002.

There has been an encouraging response tothe Executive's consultation on "StrategicPriorities for Scotland's Passenger Railway"which ended on 28 February 2001. Over 200responses have been received to date. Allresponses are now being considered and it isour intention to publish conclusions from theconsultation later this year in advance of theExecutive's directions and guidance to the

Strategic Rail Authority for the next Scottishpassenger rail franchise.

The Executive recognises that rail freight is anessential part of an integrated transportsystem for Scotland. Key sectors of theScottish economy such as whisky andelectronics are dependent on efficient andreliable rail links to the rest of Great Britain andthe Continent. The Executive is committed toworking closely with the Strategic RailAuthority in the development and subsequentdelivery of the SRA's Freight Strategy inScotland, and the Executive is commissioningresearch on the constraints and opportunitiesto inform future policy in this area.

Following Parliamentary approval, the 2002-07subsidy contract for the Northern IslesPassenger Ferry Services was awarded toNorthLink Orkney & Shetland Ferries Ltd (ajoint venture between Caledonian MacBrayneand the Royal Bank of Scotland) in December2000. NorthLink will take over the provisionof ferry services to the Northern Isles from1 October 2002 and the new contract willprovide 3 new vessels, shorter journey times,more frequent sailing and cheaper fares.Scottish Executive officials are workingwith both companies to ensure a smoothhandover.

2.1.3 Future Skills Scotland

The Framework emphasises the crucial roleproductivity plays in stimulating sustainableeconomic growth. Creating a skilled andknowledgeable workforce is central to raisingthe level of productivity within Scotland. TheFramework highlights the possible marketfailures associated with both the privateprovision of training and in the demand fortraining. There is, therefore, a key role for thepublic sector to play in securing a workforcewhich has the right skills in the ever-changingglobal economy.

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The new Future Skills Scotland (FSS) unit,which will become operational from July 2001,will have a central role in helping to betterprepare today's people for tomorrow's jobs.Its objectives are to ensure that the rightpeople have the right information andintelligence at the right time. It will bring

2.1.4 Careers Scotland

The Framework's theme of skills andknowledge in the enhancement of Scotland'sproductivity and international competitivenessrequires more and more Scots to makemultiple transitions in their working lives. It isvital that there are support structures in placeto enable individuals to make informed andeffective transitions.

uniformity and quality to the collection oflabour market intelligence. It will also ensurethat policy makers, education and trainingproviders, employers, job matchingorganisations and other users have readyaccess to information on skills gaps andshortages, and projected skills needs.

The Executive has committed to theestablishment of a National Careers Supportstructure aligned with the Enterprise Networkby April 2002. Careers Scotland will bringtogether the Careers Service, Adult GuidanceNetworks, Local Learning Partnerships andEducation Business Partnerships, to provide anall age, one stop shop approach to CareersGuidance.

Key Outputs from Future Skills Scotland:• regular, high quality, national and local skills maps;

• information about Scotland-wide and local skills shortages/gaps to common standards;

• improved planning and relevance of education and training provision;

• individuals better informed of labour market opportunities;

• improved access to labour market information and intelligence; and

• direct links to job matching services through the FSS website, the Employment Service and their job bank,private recruitment agencies and on line recruitment sites.

Productivity is one of the key drivers of economic growth and competitiveness within an economy. TheFramework identifies the enhancement of productivity as being the critical element in stimulating sustainableeconomic growth. One of the ways of increasing the rate of growth in productivity is through increasing theskills and knowledge of the workforce.

Scotland's productivity performance has been slightly below the UK's over the past five years (Refer to section3.2). However, of greater concern is the substantial productivity gap (in terms of output per worker) whichexists between the UK and such countries as France, Germany and the US. Therefore it is not the performanceof the UK to which Scotland should be aspiring, but that of the leading economies which have between 15 per cent to 25 per cent higher rates of productivity. The Framework identifies a number of important areaswhich have to be improved in order to increase productivity within the country.

Box 3: Improving Productivity

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Careers Scotland will:

• put the client first by reducing the currentconfusion created by organisational clutter;

• expand the access and range of careerssupport services available to all client groups;

• offer an informed, impartial and co-ordinated service to clients through itsassociation with other initiatives such aslearndirect Scotland and Future SkillsScotland;

• ensure National service standards andNational service guarantees;

• allow quality services to be developed thatbest reflect local regional needs;

• promote and inform individuals of thebenefits of lifelong learning;

• strengthen impartiality giving all relevantstakeholders a national voice;

• ensure a better reflection of today's careerprogressions by encouraging educationalinterests to have a stronger voice locally;

• provide a national careers structure for allstaff within Careers Scotland itself; and

• offer a clear one-stop door approach forclients and employers.

This alignment with the Enterprise Networkswill ensure 'Careers Scotland' has the necessarylinks with lifelong learning opportunities andthe jobs of tomorrow.

Careers Scotland will offer all Scots, regardlessof age, background or ambition, a streamlinedcareers guidance service, which will help themdiscover what they want to do, how to do itand how to use those skills in tomorrow'seconomy.

Employability is essential for the success ofboth the individual and the Scottish Economy.The alignment with the Enterprise Networkswill ensure Careers Scotland has the necessarylinks with lifelong learning opportunities andthe jobs of tomorrow.

2.1.5 Knowledge Economy CrossCutting Initiative

The Framework states that future economicactivity in Scotland will become increasinglyknowledge intensive, with more of a focus onresearch, product development and innovation,and on products requiring highly skilled labour.

Wendy Alexander, the Minister for Enterprise& Lifelong Learning, announced on 5 February2001 the publication of the Scottish ExecutiveReport on the Knowledge Economy Cross CuttingInitiative. The report commits the Executive tospending more than £40m over the next3 years to help Scotland develop into aknowledge-based, globally competitive,inclusive economy.

The report placed great emphasis on theeconomic analysis provided by the Framework,in particular the critical part played by anincrease in productivity (output per worker) instimulating sustainable economic growth anddevelopment. The report clearly states that itseconomic underpinnings are rooted in theFramework and its recommendations areconsistent with it.

The report acknowledges the vital role thatknowledge now plays in economic growth andthe profound changes taking place in the waywe live and work. The UK Government andthe Scottish Executive are addressing theseissues on a number of fronts. The report setsout the further action the Executive and itsagencies will take to enable Scotland to thrivein the new economy.

The immediate steps for the Executive and itsagencies are identified in the report as:

• communicating to firms and the public avision of where Scotland stands in thedevelopment of the knowledge-andpeople-driven economy, and where itsplace should be;

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• equipping Scotland's workforce with theskills it needs, with particular emphasis onthe new information technologies;

• encouraging all firms to intensify theirknowledge-based activities and to innovate;

The main recommendations and fundingcommitments in the Report on the KnowledgeEconomy Cross Cutting Initiative include:

• The Scottish Higher Education FundingCouncil (SHEFC) and the Scottish FurtherEducation Funding Council (SFEFC) willdevelop further the concept of Informationand Communications Technologies (ICT)pervasiveness and use the levers ofinstitutional funding to accelerate the use ofICT in the management, research, teaching

• improving transformation systems and thetransfer of intellectual property to release theflow from the knowledge-base to Scottishbusinesses; and

• improving the internal productivity of firmsin all sectors.

and learning functions of all institutionsengaged in further and higher education inScotland. Individual Learning Accounts(ILAs) will provide a further route toupskilling to support these initiatives. A totalof £15 million over 3 years is being madeavailable to the Funding Councils togetherwith £5.5 million to the enterprisenetworks for additional funding of IT skillsvia ILAs.

The impact of information and communication technologies (ICT) is often cited as one of the main contributorsto the rapid increase in economic growth experienced in the world economy throughout the 1990s. Inparticular, many commentators have cited ICT as being the reason behind the US's unprecedented level ofgrowth over the period which has left Europe trailing in its wake. However before such a hypothesis can beproven, it is necessary to understand the various ways in which ICT can effect economic growth. In a recentpaper3 it was claimed that there are four channels through which ICT can have an effect on economic growth:

• ICT Investment and Growth: growth can be achieved through the investment channel itself, namely theincrease in productive potential due to the accumulation of ICT capital. This can take the form of increasedoutput of existing goods and services but can also mean the provision of new products and services;

• Technical Progress in the production of ICT goods and services;

• Production externalities4: these can influence economic growth through either embodied effects or througheconomy-wide network externalities that may be associated with the ICT investment;

• Impact on other forms of capital and labour: the increase in demand for ICT may spur demand for otherforms of capital and labour. However, to the extent to which ICT capital replaces other inputs and therestructuring leads to frictions in capital and labour markets, the fourth channel could potentially also havesome negative effects on growth, at least in the short and medium run.

Recent empirical evidence is summarised in the latest edition of the European Economy, which suggests that thegrowth rates experienced in the US have benefited from both ICT production and from ICT investment, whileEU growth appears to have only been affected by investment in ICT.

Furthermore, there is little evidence to prove that there are substantial spillover effects in the form of higherdisembodied technical progress in the rest of the economy due to ICT investment. This does not mean thatthere are no productive improvements due to general ICT investment, rather any such improvements aremodest and do not solely account for the dramatic rise in the world growth rates experienced during the 1990s.

Box 4: ICT and Economic Growth

3 "The contribution of information and communication technologies to growth in Europe and the US: A macroeconomicanalysis", European Economy Supplement A (Economic Trends) No.12 December 2000, European Commission.

4 Defined in the Oxford Dictionary of Economics as "an external effect of production, which neither harms nor benefits theperson or firm controlling the production. Adverse production externalities include noise and air pollution".

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• Scottish Enterprise and Highlands andIslands Enterprise will encourage the softerbusiness and language skills necessary forScotland to be a leading centre ofe-commerce in Europe and includenecessary actions in their plans. SHEFC andSFEFC will also consider how to ensurethat FE and HE Institutions develop coursesin these areas. Scottish Enterprise andHighlands and Islands Enterprise willconsider what can be done to takecommercial advantage of "e-learning"opportunities and those stemming from theglobal market in educational software.

• Scottish Enterprise and companies will alsoinvestigate the development of softerbusiness skills in the United States and learnfrom the American experience. Inwardinvestment companies are already showingthat those skills should become a priority.To support these initiatives, along withthose immediately above, £6 million over3 years is being made available to theenterprise networks.

• The Executive and Scottish Enterprise willconsider the case for public support andfunding for an E-Institute or Institutes whichmaximise the economic benefits whichaccess to top class research and expertiseat home and abroad can bring. £12 millionover 3 years is being made available toScottish Enterprise for this purpose.

• The Executive will develop an informationand publicity strategy for the knowledgeeconomy. The target audience will be bothSMEs and individuals. The message willclearly state that the knowledge economy isfor, and about, everyone and explain therelevance of the knowledge economy toScotland. Key messages will be aimed at aswide an audience as possible by, forexample, the use of presentations, articlesand television programmes.

• Those universities who are partners in theScottish Institute for Enterprise, inconsultation with CONNECT and

Technology Ventures Scotland, will workwith the private sector to create an onlineexchange mechanism to increase industrypull, improve effectiveness and, at the sametime, assist the commercialisation andknowledge transfer activities of Scotland'suniversities and research institutes.

• The Executive will provide £18 million over3 years to enable the Proof of ConceptFund to continue beyond the initial period.The means of distributing this funding willbe kept under review and made as simpleas possible.

• £7.5 million will be provided over 3 years toextend existing schemes of supportprovided by the Scottish Executive:SPURPLUS, TCS and Faraday Partnerships.

The report not only develops the approachoutlined in the Framework but also the thinkingembodied in other existing Executivepublications including the Digital ScotlandTaskforce and Lord MacDonald's KnowledgeEconomy Taskforce Report published in April1999.

2.1.6 Strategy for Enterprise

It has never been more important for allenterprises to be dynamically competitive,according to the Framework. Enterprises mustwork continuously to secure a competitive edgein their products – goods or services, new orold. Success will be closely tied to theperformance of the economy overall, but it willdepend most heavily on the effectiveness of theenterprise itself, at every step of the productionprocess, from innovation to final sale.

The Framework provides strategic clarity in thenational policy framework for economicdevelopment. The strategy for enterprise "ASmart Successful Scotland"5 published on 30January 2001 is one of the economicdevelopment "policy statements" envisaged inFEDS. It is the first comprehensive statementby the Executive setting out the direction and

5 On the Scottish Executive Website and available from Enterprise Networks and Tourism Division of ELLD(Telephone 0141 242 5781)

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priorities for Scottish Enterprise and Highlandsand Islands Enterprise. It delivers acommitment from the Review of EnterpriseNetworks in Scotland by addressing the needfor strategic clarity to the EnterpriseNetworks and sets challenging targets for theNetworks to achieve while signalling theactions they are expected to take.

The strategy document lays out the foundationfor sustained improvement in economicperformance by focusing on three keychallenges for raising productivity: encouragingentrepreneurship; raising skill levels; andconnecting Scotland globally. The Executive'svision is for a Scotland where creating, learningand connecting faster is the basis for sustainedproductivity growth, competitiveness andprosperity. The Executive's vision is of aScotland where a strong economy and astrong society are two sides of the same coin.The Enterprise Networks have the role of keypartners in delivering that vision and thestrategy translates the changes required intothree key organising themes for the activitiesof the Enterprise Networks:

• Growing Businesses: to make Scotland afast learning, high earning nation;

• Global connections: to make Scotland aglobally connected nation; and

• Learning and skills: to get every Scotready for tomorrow's jobs.

The strategy recognises that the Networksface a different set of challenges from those ofthe past and these vary around Scotland. Thefuture challenges for Scotland are:

• "not countering mass unemployment butachieving full employability;

• not to cling to old ways but to ensure allindustries are using new technologies;

• not to target action simply on issues ofphysical capital when supporting theproductivity of human capital might delivermore."

In doing so the strategy recognises that theNetworks must be willing to pull back fromthose activities where market failure has beenaddressed or at least reduced, decommissioningpast activities to provide further scope forrealignment of effort.

In each of the key organising themes thestrategy identifies the key priorities for theNetworks to address and identifies a rangeof levers to use in addressing each prioritychallenge. To address the theme of GrowingBusinesses, the strategy sets the challengeof raising the long-run sustainable growth rateof the Scottish economy and identifies fourpriority areas: greater entrepreneurialdynamism and creativity, including the socialeconomy, more e-business, increasedcommercialisation of research and innovation,and global success in key sectors. The strategyoutlines the Executive's commitment toeffective partnership working with public,private and social economy organisations inpriority disadvantaged areas.

The Framework identifies increasing innovation and embedding technical advances in the production process asbeing two of the main determinants of sustainable increases in productivity growth. Increasing the rate ofinnovation in Scotland will help to not only improve the provision of goods and services available to consumers,but will also help to improve the production processes involved in providing those goods and services.

Box 5: Promoting Innovation

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On the theme of Global Connections, thestrategy sets the challenge of ensuringScotland is a globally connected nation. Itidentifies the four priority areas of digitalconnectivity, increased involvement in globalmarkets, Scotland to be a globally attractivelocation and more people choosing to live andwork in Scotland.

To meet the theme of Learning and Skills,the strategy sets the key challenge of raisingthe employment rate across Scotland. To meetthis challenge it identifies four priority areasfor the Networks: improving the operation ofthe Scottish Labour Market, encouraging the

best start for all our young people, narrowingthe gap in unemployment, and improvingdemand for high quality in-work training.

The Strategy for Enterprise documentreplaces the previous annual cycle of strategicguidance letters to the Networks as theExecutive develops a more strategicrelationship with the Enterprise Networks.The new relationship will see the Executivebecome responsible for setting the directionthrough the strategy for enterprise. TheExecutive will then work jointly with theNetworks to measure how effectiveperformance has been. This will mean allowing

Benchmarking Scotland's position on the level of innovative activity is not easy. One possible indicator is to useexpenditure on R&D. Chart 2.3 shows R&D expenditure in Scotland, England and Wales for 1996 to 1998,broken down into HEI, Government and business expenditure.

Source: ONS

The chart shows that Scotland's R&D expenditure as a proportion of regional GDP is higher than Wales'R&D expenditure but lags behind England. HEI and Business R&D expenditure contribute the most to R&Dexpenditure in Scotland.

Box 5: Promoting Innovation (continued)

Chart 2.3: R&D Expenditure

0.0

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the expertise and insight within the Boards andstaff of the Networks the scope to deliver, butthe Networks in turn must become better atresponding to their customers. The Executivewill set the broad direction and encourage thenetworks to focus better and prioritise theiractivities. It will then work with the agencieson monitoring and evaluation.

Key to this new relationship will be a JointPerformance Team (comprising the Executive,the Networks and using external assistancewhere necessary) which will becomeresponsible for rigorous reviews of strategicapproaches and target setting. The first task ofthe Team will be to devise stretching targets toenable performance to be judged against thechallenges identified in each of the key areas ofactivity. The joint team approach will allowmore independent scrutiny of performancewhilst allowing the Networks themselves totake responsibility for implementation. Workon the Joint Performance Team is now in handand the Team will set implementation targetsover the next few months.

2.1.7 Local Economic Forums

One of the main priorities identified in theFramework is to support enterprises and tohelp them face up to the challenges of theglobal economy.

A Smart Successful Scotland provides strategicguidance to the Enterprise Networks and setsout the direction and priorities for ScottishEnterprise and Highlands and IslandsEnterprise. Local Economic Forums willprovide a mechanism for implementing bothreports at a local level, and lead to better co-ordination of the delivery of local economicdevelopment services between the range ofagencies involved.

The Enterprise and Lifelong LearningCommittee, in its final Report on the inquiryinto Local Economic Development publishedin May 2000, concluded that there wasconfusion and overlap in the field of localeconomic development. This was also aconsistent theme raised in consultation duringthe Review of Enterprise Networks inScotland. The Committee suggested that theExecutive should take the lead in guaranteeingthat a simpler, more cohesive structure exists.A range of initiatives are already driving thepace of change in both national and localeconomic development services to build amore cohesive network delivering morecustomer focused services. In the ScottishEnterprise area these include the SEN 2000reforms which are already delivering greatercoherence and effectiveness, and the SmallBusiness Gateway launched in July 2000 isremoving duplication and overlap in the field ofsmall business support. The Review outcomeswill continue the improvement in national co-ordination in the networks, streamlining andimproving access to business support services,improving appraisal and evaluation and makingthe network more transparent.

The ELL Committee proposed LocalEconomic Forums, composed of all therelevant public and private sector bodies, as avehicle for driving simplification in localeconomic development. The Executive hasaccepted the principle of Forums and LocalEconomic Forums are now being set up toconsider local needs within the nationalframework, to agree to align activities inpursuit of these local needs, to develop clarityin roles and responsibilities for the agenciesinvolved, and bring more coherence in thedelivery of local economic development.Following an extensive consultation exercise,national guidelines on Forums were issued on7th March 20016.

6 Available on the Scottish Executive Website and from Enterprise Networks and Tourism Division of ELLD(Telephone 0141 242 5781)

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The Minister for Enterprise and LifelongLearning has also indicated that the activities ofLocal Economic Forums should be outcomebased, demonstrate real benefits in respect ofmeeting jointly approved targets for the localeconomy and achieve greater effectiveness indelivery. The guidelines therefore identify keytasks for the Forums in Year 1 of operationwhich include eradicating wasteful duplicationof economic development services,undertaking a local assessment of "whatworks" in that area and improving the quality

of business support services. Thereafter othertasks will include tackling skills and labourmarket issues.

The Forums will be set up at Local EnterpriseCompany (LEC) level which provides astrategic level of operation which will minimiseduplication and reduce displacement of activitybetween areas. The Forums will have a small,focussed core membership, with a significantbusiness element, complemented bymechanisms for engaging the wider communitywho will have an interest in the work of

The degree of enterprise development within the economy will have a strong influence on productivity and,ultimately, future economic growth7. New businesses play a crucial role in determining how dynamic andcompetitive markets are and contribute to the creation of new jobs.

Chart 2.4 illustrates the number of VAT registrations per 10,000 adults in Scotland, the UK and the UK minusLondon and the South East from 1994 to 1999.

The chart shows that the rate of new starts has changed little over time but that all areas of the UK suffered aslight decline in 1999. The main point to notice is that the gap between Scotland and the UK has not narrowedover this time period – Scotland's start-up rate is around three-quarters of the UK average. The chart showshowever that the gap is much less when London & SE are excluded.

Many factors influence the number of new businesses being formed including the economic climate, attitudes tostarting a business, and the support mechanisms in place to help people who wish to start new businesses. Muchwork remains to be done in order to improve our business start-up rate and Scottish Enterprise has recentlycommissioned an independent review of the business birth-rate strategy.

Box 6: Enterprise Development

Chart 2.4: VAT registrations

7 OECD. "A new economy? The changing role of innovation and IT growth", 2000.

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Source: Department of Trade and Industry, 2000.

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Forums. While membership at local level willbe a matter for each Forum, the guidelinescontain suggestions and Local EnterpriseCompany chairs, as initial Forum facilitators,have been asked to outline their proposedmembership and wider mechanisms forconsultation and review, for consideration bythe Minister.

The Forums will have a high degree ofdiscretion and self-monitoring but there is arole for assistance and support at the nationallevel. This will come from two MinisterialTaskforces, one for the Scottish Enterprisearea and one for the Highlands and IslandsEnterprise area, to disseminate good practice,monitor LEF progress and consider thechallenges for future years. The Taskforces willalso address how to enhance progress in areaswhere progress is inadequate or too slow. TheTaskforces will be made up of representativesfrom: COSLA, the Scottish Chambers ofCommerce, the Scottish Tourist Board,Universities Scotland, the Association ofScottish Colleges, Scottish Enterprise (for theSEn area Taskforce only), Highlands andIslands Enterprise (for the HIE area Taskforceonly), the Enterprise and Lifelong LearningCommittee, Trade Unions, the Federation ofSmall Businesses and the Confederation ofBritish Industry. In addition, the social sectorare key constituents for wider mechanisms forliaison and review which the Forums aredeveloping. It is anticipated that the firstmeetings of the Taskforces will take place inApril 2001. The Scottish Enterprise areataskforce met on 30 April and the HIE areataskforce met on 18 May. The next meetingsare due in late October/early November ofthis year.

2.2 On-going Economic DevelopmentInitiatives

By way of follow-up to the Framework forEconomic Development in Scotland, this sectionbuilds on the chapter in the last edition of theScottish Economic Report to provide an up-date on existing initiatives in the field ofeconomic development

2.2.1 Education and Skills

Basic Education

National priorities in education: Thesereflect the importance in school educationboth of academic achievement and thedevelopment of foundation and life skills whichare becoming increasingly important in achanging global society. Education authorities'improvement plans and schools' developmentplans will be developed taking the nationalpriorities in education into account. Refer tosection 2.1.1 for more detail.

Beattie Implementation Programme –Update: The Beattie Committee wasestablished in April 1998 to examine the needsof young people who require additionalsupport to make the transition to post-schooleducation, training, or employment. Thecentral theme of the Committee's Report andcore recommendation is Inclusiveness.Inclusiveness means that post-school learningshould be designed and delivered to meet theneeds, abilities and aspirations of young people.

In response to the Beattie Committee Report,the Scottish Executive has established aNational Action Group. The remit of thegroup is "to develop and implement action inresponse to the Beattie Report; and to providea national lead and focus for implementingInclusiveness in Scotland." Ministers announcedfunding of £22.6 million over 3 years to takeforward the Inclusiveness agenda in a numberof areas including key worker support,improved identification of learning and supportneeds, and support for students in furthereducation. Within the overall funding packageavailable, some £15.1 million has beenearmarked to take forward multi-agencypartnership Inclusiveness projects. Theproposals were co-ordinated by the 17 careers service companies. Eight of thethree-year projects started on 1 June 2000,with others coming onstream during theperiod July-October 2001.

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Education Maintenance Allowances: TheExecutive announced in March 2001 theextension of Education Maintenance Allowance(EMAs) from an existing pilot in East Ayrshireto schools and further education colleges in3 new areas in Scotland – Glasgow, Dundeeand West Dunbartonshire. EMAs are designedto encourage young people from low-incomehouseholds to remain in post compulsoryeducation. They are available for eligible16 and 17 year olds subject to parentalincome. In order to receive an EMA the youngperson is asked to sign a learning agreementwhich will last for up to two years, and whichsets out the expected level of achievement,attendance rate and standards of behaviour. Ifthe learning agreement is met the youngperson receives a weekly allowance of up to£40 plus further bonuses of £75 and £50 forretention and achievement at the end of thescheme. The Executive will be investing£21.6 million in the new pilot areas over thenext 3 years. Together, the four pilot areas willoffer EMAs to an estimated 7,500 young people.

Skills Development

Future Skills Scotland: The remit of theScottish Labour Market Intelligence Unit hasnow been extended and the Unit has beenrenamed Future Skills Scotland (refer to section2.1.3 for more detail). Future Skills Scotlandwill set quality standards for labour marketintelligence, identify skill gaps and shortages,and ensure that employers, policymakers,education and training providers and otherusers have ready access to information andintelligence on current and emerging skillsissues. Scottish Enterprise, operating inassociated with Highlands and IslandsEnterprise, will manage the new Unit, whichwill facilitate the delivery of a faster andsuperior jobmatching service across Scotland.The new Unit will be operational by July 2001.

Skills Development: The Scottish Executivehas established a Fund to support the skills

agenda by strengthening the role of NationalTraining Organisations in Scotland. A total of£1.5 million has been allocated, representing£500,000 each year between 2001-2002 to2003-2004. A Prospectus will be issued shortlysetting out how NTOs can bid for grantsunder this Fund.

Careers Scotland: Additional resources of£9 million over three years were madeavailable in Spending Review 2000 for thedevelopment of multi-agency All-Age CareersGuidance projects in Scotland. The CareersService Companies were asked to co-ordinateand submit bid proposals and following theirevaluation, sixteen projects were approvedand are expected to be up and running by theend of the year, with the first nine projectsstarting in June. The Executive is working tosupport the development of a further project.

The range of projects includes the use ofinnovative marketing strategies to encouragekey client groups to access information andguidance, delivery of community based careersguidance and the establishment of ICT basedcareers and learning information points.

Scottish Union Learning Fund: A ScottishUnion Learning Fund has been established inScotland to promote activity by trade unions insupport of the Scottish Executive's objective ofcreating a lifelong learning culture in theworkplace. The Fund has been allocated atotal of £1.6 million over the four-year period2000-2001 to 2003-2004 inclusive. The aim ofthe Fund is to secure effective and sustainableactivity by trade unions individually, collectivelyor in partnership with other organisations, topromote learning in its widest sense. The Fundis presently supporting 12 projects being runby 11 trade unions for their Scottish members,with total funding of over £500,000.

Adult Literacy and Numeracy: The AdultLiteracy 2000 Team was set up in June 2000 toreview the policy and strategic framework for

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raising literacy and numeracy levels inScotland. The Team's draft report is beingconsidered carefully by Ministers at presentprior to its publication. £22.5 million will beavailable for adult literacy over the next3 years to implement the Team'srecommendations.

Young Students Retention Fund: TheExecutive introduced £1.6 million forparentally supported full time further educationstudents aged 16-24 years to ensure thatcolleges can offer help to students frompoorer families who are faced with a financialcrisis during the year. Under the newarrangements around 90 per cent of studentsaged 18 or over will get a full bursary – theirfamilies will need to make no contributiontowards the maintenance package.

learndirect scotland: The Scottish UfI'sservices became operational in October 2000,under the brand name learndirect scotland.Designed to widen participation and easeaccess to learning, SUfI is a broker, not aprovider of learning. It has begun helpingpeople to access learning opportunitiesthrough its freephone telephone helpline,website and comprehensive database oflearning opportunities. Already some 600 –1000 calls a day are being received by thelearning helpline. The Scottish UfI is alsoestablishing a network of learndirect scotlandbranded learning centres, operated by a rangeof providers across Scotland. Some 76 learningcentres have been branded to-date, inworkplaces, colleges, schools, libraries,shopping centres etc. Now that it hasestablished its core services the Scottish UfIwill be turning its attention to identifying gapsin current learning provision and materials andcommissioning to meet these gaps. It will alsobe looking to develop its services forbusinesses, particularly small to medium-sizedfirms, which are a priority. In the summer itwill launch its Integrated Learning Systemwhich will allow people to learn and track their

progress from home, work or a learningcentre.

Individual Learning Accounts (ILAs):Pilot ILA schemes were followed byfull implementation across Scotland on1 September 2000. ILAs help overcomefinancial barriers to, and widen participation inlearning by offering people a facility to pay fortheir learning development throughout theirlifetime. The Executive set a target of 100,000learning accounts to be opened by 2002 andlocal enterprise companies are targetingmarketing on small to medium-sized firms(SMEs) and the socially excluded. The first100,000 ILA holders receive £150 towards thecost of their eligible learning for a personalcommitment of £25. Thereafter discounts of20 per cent on a wide range of courses, and80 per cent on basic literacy and numeracycourses, are available. From 1 April 2001eligibility for the 80 per cent discount wasextended to include ICT courses at Level 2 aswell as the Level 1 ICT courses that wereeligible prior to that date. A further£5.5 million over 3 years from April 2001 wasadded to help boost IT skills, in particular inSMEs. More than 70,000 ILAs have beenopened to date.

Modern Apprenticeships: In March 2001the Executive announced that almost 17,000Modern Apprentices were in training, up from5,000 in 1997 and good progress towards itstarget of 20,000 in training by 2003. TheExecutive also announced its intention toremove the upper age limit (24) for fundingModern Apprenticeships, in order to givelifelong learning opportunities to people injobs at apprenticeship level.

New Deal: To date, £82 million has beenspent in the provision of the New Deal forYoung People in Scotland with more than32,000 young people finding jobs. The mainthemes of current New Deal policy areimproving employer linkages, ensuring basic

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skills for employment and helping the mostdisadvantaged in the labour market. Sectoralinitiatives for strengthening links withemployers include the New Deal Project Teamset up by NHS in Scotland. From April 2001,the UK Government is investing £200 million ayear to improve the New Deal 25 Plus. Theprogramme is becoming more flexible andintensive with increased support for hard tohelp groups. Support for the mostdisadvantaged includes extra funding to helpdrug misusers. New Deal for Lone Parents isto be extended and improved. The GlasgowEmployment Zone, launched in April 2000, hasbegun to make a significant impact with 41 percent of those joining in April and May 2000finding jobs.

2.2.2 Enterprise Support

Business Support

Strategy for Enterprise: "A Smart, SuccessfulScotland", like FEDS, also stresses the need toincrease the number of new businesses,including those groups under-represented inbusiness, and highlights the role of theEnterprise Networks in providing qualitybusiness advice and information to help meetthat challenge. A great deal of work hasalready been done in reviewing the range ofassistance to small businesses in Scotland. TheStrategy for Enterprise promotes the effectivepartnership working of public, private andsocial economy organisations. A more detailedanalysis of the Strategy for Enterprise iscarried out in section 2.1.6.

Local Economic Forums: These will providea mechanism for implementing both documentsat the local level and better co-ordination ofthe delivery of local economic developmentservices between the range of agenciesinvolved. National guidelines on the Forumswere issued on 7 March 2001 and a moredetailed analysis of their role is carried out insection 2.1.7.

Report on the Knowledge Economy: Thiswas published on 5 February 2001 andaddresses a number of key issues relating tothe "new economy". The report sets out thefurther action the Executive and its agencieswill take to enable Scotland to thrive in thenew economy. A more detailed analysis of thereport is contained in Section 2.1.5.

Business birthrate: The Scottish Executivewill continue to work closely with ScottishEnterprise to ensure the creation of a clearand effective Business Birth Rate Strategy(BBRS) for the 21st century. ScottishEnterprise has commissioned an independentreview of the Strategy undertaken by theFraser of Allander Institute and possibleimprovements to supply side measures will beconsidered in light of the report's conclusions.

Support to small businesses: The ScottishExecutive has initiated action to both improvethe quality and consistency of small businesssupport and tackle confusion over access. TheSmall Business Gateway, launched in July 2000,provides a 'single brand' for small businesssupport across the Scottish Enterprisenetwork and a number of core supportprogrammes delivered on a consistent basisacross the LECs.

To help encourage more women into business,the Women into the Network programmehas just been announced. This offers specificbusiness support services for womenentrepreneurs and helps them become awareof mainstream business support services. Thewide scale networking of WIN will ensure allpotential women entrepreneurs, and thosecurrently in business, have access to thissupport and to networking opportunities.

The Executive has also been working closelywith Highlands and Islands Enterprise toensure easier access to public sector supportfor new and small businesses in the Highlandsand Islands Enterprise area. A number of

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significant developments are in hand in theHighlands and Islands area to improve start-upsupport. For example, Highlands and IslandsEnterprise has recently introduced HIEStarts, a flexible new programme which hassupport from the Highlands & IslandsTransitional Programme. HIE Starts providesinformation, advice, training and financialassistance to small business starts that have thepotential to contribute to the growth of thelocal economy.

Clusters policy: The cluster approach inScotland has been developed and undertakenby Scottish Enterprise, in partnership with therelevant parties in the public and privatesectors. Through this partnership approach,Scottish Enterprise has produced 5 yearAction Plans for a number of Scottish clusters:Biotechnology, Food and Drink, Semi-conductors, Creative Industries, Opto-electronics and Forest Industries. In addition,work is on-going on the Scottish Tourismcluster. A Smart Successful Scotland: Ambitionsfor the Enterprise Networks sets out thestrategic priorities for Scottish Enterprise andthe role of the cluster approach in addressingthese priorities.

Proof of Concept Fund: This was launchedin October 1999 with £11 million allocatedover three years. The objectives of the Fundare: to improve the level and quality ofcommercialisation by funding early stagedevelopment activity in Scotland's universities,research institutes and NHS Trusts; tocontribute to the development of Scotland'sclusters by supporting the exploitation ofenabling technologies from within thefundamental and strategic research base; andto contribute to the longer term developmentof a strong knowledge-based economy inScotland. Additional funding of £18 millionover a further three year period wasannounced in February 2001.

SPUR/SMART: The White Paper onEnterprise, Skills and Innovation published on13 February 2001 announced that the SMART,SPUR and SPURPlus Schemes are to beextended to encourage entrepreneurs fromabroad with experience in establishing orgrowing high-tech businesses to establish newbusinesses in the UK. The EntrepreneursScheme will be a new marketing tool for InvestUK and LIS, as well as overseas CommercialSections, Press and Public Affairs andTechnology attachés. Individual projects will behandled by the Scottish Executive, DTI's SmallBusiness Service and their equivalentsthroughout the UK.

The Executive outlined in March 2001 anincrease of £2.5 million in ELLD InnovationSupport in each of the years 2001/02, 2002/03and 2003/04. Most of this additional fundingwill go towards supporting additional leadingedge R&D projects under the SPURPlus

Scheme.

Review of Regional Selective AssistanceScheme (RSA)

The Scottish Executive has a clear agenda toprovide jobs for all and tackle regionalobjectives. RSA has a key role to play.Globalisation, increasing competition forinward investment projects and the increasedfocus on the knowledge based economypresent new opportunities and challenges andit is essential that potential investmentopportunities in the more deprived areas arenot missed.

A review group has now been set up, chairedby Gavin Masterton, Treasurer and ManagingDirector of the Bank of Scotland, to redefinethe scope and focus of the scheme so thatit can best contribute to economicdevelopment, employment and prosperity inScotland. Their report is due by the autumn.

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Change is already underway with Invest forGrowth being launched last year tocomplement mainstream RSA through allowingbusinesses a quicker, simpler, applicationprocess for grants up to £100,000, making itmore accessible for smaller businesses. Initialuptake of this has been very encouraging with140 applications received in the first 8 monthsfollowing the launch, leading to grant offers inexcess of £3.5 million. Application numbersare up by two thirds and 78 per cent of alloffers have been made to small businesses.

More recently, the Minister announced thatRSA would make a contribution to theachievement of Modern Apprenticeshipstargets, helping to bring about the increase inthe skilled workforce in Scotland necessary tocompete successfully in the knowledgeeconomy.

International Enterprise Support

Inward Investment: A Smart SuccessfulScotland outlines the importance of Scotlandbeing a globally attractive location. Inwardinvestment activity will therefore be furtheraligned to the strategic intent of focusingstrongly on "inward attraction of knowledge"and FDI projects which support sustainablegrowth. Locate in Scotland (LiS) will alsocontinue to work as part of a team in achievingScotland's economic development goals –addressing 4 key themes: exploiting"e-business" opportunities; the strengtheningof key industry clusters; the attraction ofhigher quality projects such as those with ahigh research, design and developmentcontent; supporting, where possible, thecomplementary economic development goalsof inclusion and rural development.

Trade and Export Development

The Framework highlighted the importance ofintegrating the Scottish economy with theglobal economy. This theme has been further

developed in A Smart Successful Scotlandpublished in January 2001 which stresses theneed for Scotland to be a globally connectednation and gives a commitment to thepublication of a Global Connections Strategythis summer. One of the key challenges withinthis is to ensure Scotland's increasedinvolvement in global markets. Scottish TradeInternational will have a key role in taking thisforward to ensure that companies in Scotlandare able to realise the full benefits of trading ininternational markets.

2.2.3 Social Justice

It is important that all groupings in Scottishsociety – that are able to contribute – shouldcontribute to economic development, andequally important that all benefit from thatdevelopment. Promoting the participation ofthose living in the most deprived areas createsan important source of income for thoseindividuals, but also contributes to the broaderdynamism of the economy through thecreation of greater entrepreneurial activity andstronger markets.

The Framework is concerned with the inclusionof all individuals in society who can contributeto the economic development of the country and with overcoming their barriers toparticipation. There is a direct link betweenthe Framework and the Executive's socialjustice agenda.

A strong and successful economy whereeveryone can achieve their full potential, and noone is left out, is at the foundation of deliveringsocial justice. The Executive is committed totackling poverty and promoting social justiceand equality of opportunity. Social Justice…aScotland where everyone matters (1999) set outthe long-term strategy and committed theExecutive to ending child poverty; employmentfor all those who can work; dignity andsecurity in old age; and building strong andinclusive communities.

2

2

46

Delivering on social justice and supportingeconomic development requires integratedpolicies and action across the Executive,working together with the whole range ofpartners with a role to play. The programmesto address social justice apply across variouspolicy areas, as reflected in other parts of thisarticle. By improving education and skills,widening access to further and higher education,and helping the most disadvantaged into thelabour market, the Executive is helping toensure Scotland is equipped to maintain asuccessful economy, while meeting the needsof individuals at every stage of their lives.

The social justice framework set targets foreach stage of the life-cycle – children; youngpeople; families and people of working age;and older people – and underpins these withspecific milestones to guide the Executive'sprogrammes and to help monitor progress.The first Social Justice Annual Report, issued inNovember 2000, gives details of the emergingtrends, and of the key policies the Executive ispursuing in partnership with the UKGovernment.

Progress on social justice is linked to economicdevelopment in a wide variety of ways,reflecting the complex nature of problems ofpoverty and exclusion. Reducing the proportionof children living in workless households is akey component of efforts to end child poverty,while providing parents with the means toachieve this supports the economy. Steps arealso being taken to pull together all that theExecutive is doing to build strong andsustainable neighbourhoods, including thework of the Social Inclusion Partnerships, whichaim to deliver local solutions for disadvantagedareas and groups. A Neighbourhood RenewalStatement for Scotland will be produced bythe end of the year, which will take accountof economic development in deprivedcommunities. Guidance is also being issued bythe Scottish Executive to local authorities on theuse of the £90 million Better Neighbourhood

Services Fund, which will be linked to agreedimprovements and outcomes in deprivedareas. The Fund was announced jointly by theMinister for Finance and Local Governmentand the Minister of Social Justice on 15 January2001.

The Housing (Scotland) Bill has beenconsidered by the Scottish Parliamentthroughout the first quarter of this year. TheBill is being brought forward as part of theExecutive's commitment to social justice andto strengthening Scotland's communities. Itwill reform the social rented sector; improvetenants rights; tackle homelessness; and helpto achieve the overall aim of fostering successfulbalanced communities with high qualityaffordable houses to rent and to purchase.

We are also taking a range of measures totackle financial exclusion, which will help tocreate a socially just economy. We recentlypublished an Action Plan for the credit unionmovement in Scotland, which aims to removebarriers to credit union growth in Scotland andto ensure that all credit unions have access tothe support and development services theyrequire. We are working to establish atelephone debtline for Scotland, to make freequality money advice available to everyone inScotland, wherever they live and whatevertheir income, whether they have the means torepay their debt or not. In collaboration withother public and private sector partners, weare setting up a new investment fund, SocialInvestment Scotland (SIS), to providedevelopment advice and loan funding for socialeconomy organisations.

2.2.4 Health

Scottish Health Plan: In December 2000,the Executive published Our National Health: aplan for action, a plan for change. This Planprovides a clear statement of the nationalpriorities for health and for the NHS inScotland. The Plan is the result of extensive

47

consultation with NHS staff, patients and thepublic and reflects a widespread consensus forchange. The Plan recognises that "Good healthmatters. It matters to people, it matters to ourcountry. Without good health we cannot fulfil ourpotential and our nation cannot thrive."

The core aims of the Plan are to improvehealth and reduce health inequalities. Tacklinginequalities in health is central to theExecutive's commitment to social justice. It isrecognised that, in the past, health policy andhealth services have focused on the treatmentof ill health rather than on its prevention and anumber of initiatives have been announced tostart shifting that emphasis. These include: theHealth Improvement Fund, Scotland-widelearning network for national demonstrationprojects on prevention, and the establishmentof a Public Health Institute for Scotland.

The Scottish Health Plan also recognises thatthe root causes of ill health and healthinequalities (e.g. poverty, poor housing,homelessness and the lack of economicopportunity) need to be tackled to raise thelevel of health in Scotland. The Plan identifiesnumerous initiatives which show howGovernment and communities are workingtogether to fight poverty, raise educationalattainment and improve health. These include:

Healthy Living Centres, Health Homes Initiative,establishment of health promoting schools unit,cessation of tobacco advertising, Social InclusionPartnerships, the Rough Sleepers Initiative,Working for Community Pathfinders, NewCommunity Schools, Sure Start and theaward-winning Scottish Community Diet show.

New Standing Committee for ResourceAllocation: In the last edition of the ScottishEconomic Report, it was noted that a newformula has been developed to distribute£4 billion of NHS funds between the 15 HealthBoards. The aim of this formula is to promoteequity of access to health care for people livingin Scotland.

A Standing Committee for Resource Allocationhas now been established which will bechaired by Professor Sir John Arbuthnott (chairof the original Steering Group which developedthe formula). The remit of the committee isto: keep the data which underpins the formulaunder review; advise on possible formulaicapproaches for other areas of healthexpenditure not currently covered by theexisting formula (e.g. general dental, generalophthalmic and community pharmaceuticalservices); develop and advise on alternativemethods of adjusting the formula forinequalities prior to consultation.

The Framework highlights increased productivity as the key to stimulating sustainable economic growth, andidentifies priority areas where action is required to raise the level of productivity within Scotland. The Frameworkalso emphasises the need to enhance knowledge of what drives economic development in Scotland and for theFramework to evolve in light of this knowledge.

This edition of the Scottish Economic Report presents new evidence (Chapter 4 article C) which suggests thatimprovements in health may have a substantial contribution to make to economic development. Although there aregood, intuitive, reasons to expect improved health to result in improved productivity, health has been ignored inmacroeconomic models of economic growth. Recent empirical studies of growth in developing countries, however,have shown, quite strikingly, that when standard growth models are extended to include health variables, thesevariables are more significant than traditional key variables (e.g. education, initial incomes, technologicaladvances etc.). The latest evidence suggests, therefore, that health is a major determinant of economic growthin developing countries. Serious attention is now being given to this issue in developed countries.

Box 7: Links Between Health and Economic Development

2

2

48

While the impact of improved health on economic development is likely to be far lower in developed economies(as the levels of health are far higher than in developing economies), there are good reasons to expect significanteconomic returns from health improvements, even in developed economies. For example, improvements inhealth will reduce the productivity losses associated with ill-health (i.e. from working days lost, early retirementand premature deaths of people of working age). Improvements in health may also have indirect impacts bypositively affecting other determinants of economic growth, such as the acquisition of education and skills andcapacity and interest in enterprise creation. Finally, an issue of increasing concern in developed countries is theimpact of rising dependency ratios on future growth rates. While improved health is one of the factors explainingthe rise in dependency ratios, health status is also one of the factors affecting the participation of those ofworking age in the labour market. Improving the health of older cohorts in the working population, therefore,represents one way of exerting downward pressure on dependency ratios.

These links suggest that improvements in health may have a significant and increasingly important contributionto make to economic development in developed economies. This may be particularly true for Scotland as thehealth of the Scottish population compares poorly with that of other countries in the European Union. Thepreliminary analysis of selected health indicators on output in Scotland set out in Chapter 4 article C, providessupport for this argument

While the primary rationale for health improvements should not be to stimulate economic development, ifimprovements in health can contribute to increased economic opportunities, (which, in turn, can reduce illhealth, poverty, inequality and social exclusion), this implies that greater emphasis should be given to preventativehealth policies. Further, that the health impacts a wider range of policies (e.g. transport, housing, environment)should be assessed, since health spending is not the only, nor necessarily the most effective way, of generatinghealth improvements.

Further research is now planned to derive more robust and comprehensive estimates of the potentialcontribution of improved health to economic development in Scotland.

Box 7: Links Between Health and Economic Development (continued)

2001

chapter three: The Scottish Economy:Recent Developmentsand Future Prospects

3

50

chapter three: The Scottish Economy: Recent Developmentsand Future Prospects1

3.1 Summary

• Output growth in the Scottish economystrengthened in the fourth quarter of 2000,although the year on year change was belowthe long-term trend. Both manufacturingand services under-performed the UK as awhole over the year to 2000 Q4, althoughthe service sector, as well as total growth,did perform better than the UK over thefinal quarter. Official figures published by theScottish Executive Rural Affairs Departmentshowed that 2000 had been anotherdifficult year for Scottish agriculture withaverage net farm incomes falling for the fifthconsecutive year.

• The business survey results for 2000 Q1are mixed. The CBI and Scottish ChambersSurveys both indicate a continued positiveperformance in orders and output in themanufacturing sector, although the mostrecent data from the Bank of Scotlandshows manufacturing output falling. Withinthe service sector, the Scottish ChambersSurvey indicated that optimism remainsweak, although declines in demand generallyeased, whereas the Bank of Scotland Surveyshows service sector performance continuingto outperform manufacturing.

• Conditions for manufactured exportershave been difficult over the year to 2000Q4, primarily due to the instability of theEuro. However, the level of exportsincreased over the four quarter period to2000 Q4 in real terms.

• Over the course of 2000 and the beginningof 2001, the labour market continued toperform strongly by historical standards, withemployment reaching its highest recordedlevel since 1960 and ILO unemploymentreaching its lowest rate since comparabledata became available. Claimant countunemployment reached the lowest levelsince 1976, while the activity rate movedabove that recorded in the UK for the firsttime.

• Growth in Scotland is expected to bebelow that in the UK in 2001, butindependent forecasters expect strongergrowth in 2002, with the differential withthe UK narrowing.

3.2 Output and Demand

Overview

Growth strengthened in the fourth quarter of2000, with total GDP in Scotland growing by1.0 per cent. Over the year as a whole, growthwas 1.5 per cent, below the long-term trend.The strengthening in growth differed from thetrend witnessed in the UK (0.3 per cent) overthe quarter, although output growth overthe year was slower in Scotland than the UK(2.9 per cent). Directly comparable data(excluding oil and gas) show that output grewby 1.0 per cent in the fourth quarter,compared with 0.5 per cent in the UK. On ayear on year basis, growth was 1.5 per cent inScotland and 2.8 per cent in the UK.

Over the period between 1995 and 2000,Scotland underperformed the UK economy,with growth averaging 2.2 per cent perannum, compared with 2.8 per cent in the UK.Performance between 1995 and 1997 Q2 wasstronger overall than in the UK but, althoughgrowth was faster in Scotland in the middletwo quarters of 1999, there has been awidening gap in performance since then. Chart3.1 shows movements in output in Scotlandand the UK over this period.

1 This chapter is based on data available to 10 May 2001.

51

Chart 3.1: GDP, Scotland and the UK, 1995 Q1-2000 Q4

90

95

100

105

110

115

120

UKScotland

Q4

Q3

Q2

20

00

Q1

Q4

Q3

Q2

199

9 Q

1

Q4

Q3

Q2

199

8 Q

1

Q4

Q3

Q2

199

7 Q

1

Q4

Q3

Q2

199

6 Q

1

Q4

Q3

Q2

199

5 Q

1

GD

P I

nd

ex

(19

95

=10

0)

Source: Scottish Executive, National StatisticsNote: Data are for gross value added at basic prices excluding extraction of mineral oil & natural gas

The latest data show that the service sectoroutperformed the production sector, althoughboth sectors grew at a slower year on yearrate than in the UK. The construction sectorgrew strongly on a quarterly and year on yearbasis. Agriculture, forestry and fishing outputincreased at a moderate rate but remainedbelow 1996 levels.

Production

Production sector output grew by 0.2 per cent

in 2000 (UK: 1.5 per cent). The relatively lowrate of growth seen in the production sectorprimarily reflected slow growth inmanufacturing (0.4 per cent, compared with1.6 per cent in the UK), while energy andwater supply growth declined over the year.Mining and quarrying output increased by0.8 per cent. Chart 3.2 shows thatmanufacturing growth has been below the UKsince 1999 Q2, reversing the trend over mostof the period since 1995.

Chart 3.2: Manufacturing, Scotland and the UK, 1995 Q1-2000 Q4

95

100

105

110

115

120

UKScotland

Q4

Q3

Q2

20

00

Q1

Q4

Q3

Q2

199

9 Q

1

Q4

Q3

Q2

199

8 Q

1

Q4

Q3

Q2

199

7 Q

1Q4

Q3

Q2

199

6 Q

1

Q4

Q3

Q2

199

5 Q

1

Man

ufa

ctu

rin

g I

nd

ex

(19

95

=10

0)

Source: Scottish Executive

3

In 2000, electrical & instrument engineeringremained the strongest performingmanufacturing sub-sector in Scotland, whiletransport equipment, mechanical engineeringand drink all performed strongly over the finalquarter. The weakest performing sectors overthe year were metals & metal products,refined petroleum products & nuclear fuel andtextiles, footwear, leather & clothing.

Business survey evidence suggests thatmanufacturing sector performance in the firstquarter of 2001 was little changed incomparison to the final quarter of 2000. TheBank of Scotland Report on Scotland showedthat the rate of output growth fell betweenMarch and April. The Scottish ChambersSurvey for 2001 Q1 reported output anddemand in manufacturing to be strong;however, optimism was weak over the period.The CBI Survey also reported a further declinein manufacturing business optimism, whiletotal orders and output continued on a similarpattern to the previous quarter's relativelypositive results. The Scottish EngineeringSurvey indicated that optimism was positive,after three successive quarters of decline, andthat output and orders rose for the fourthsuccessive quarter.

Services

Service sector output grew by 1.7 per centin the year to 2000 Q4 (UK: 3.4 per cent).All industries within the service sectordemonstrated growth over the year, withthe exception of transport, storage &communication, which showed a decline inoutput of 1.7 per cent. Retailing & wholesaling,with growth of 3.3 per cent over the year andreal estate and business services (2.9 percent), were the strongest performers.Financial services (2.2 per cent), other services(2.2 per cent), hotel & catering (1.5 per cent)and public administration, education & health(1.3 per cent) showed more moderate growthover the year.

Financial services were the strongestperforming sector in 2000 Q4: 4.3 per cent,compared with 0.9 per cent in the UK. Therise in this sector was mainly due to asubstantial rise in the Life Assurance series,partly reflecting the large increase incommission income brought about by higherthan normal year-end work in some lifeassurance companies. In addition, there wereincreases in most of the other series in thefinancial services sector, although these hadless impact than Life Assurance, which has thelargest weight in the sector.

The Bank of Scotland Report on Scotlandsuggested that growth in service sectorbusiness activity continued to be markedlystronger than in manufacturing, althoughcomparable results for the UK suggest that thepace of growth in service sector businessactivity was higher than in Scotland in the sixmonths to April. The Scottish ChambersSurvey was more negative, reporting continueddeclines in both confidence and demand inwholesaling, retailing and tourism in the firstquarter.

Chart 3.3 shows the trends in total servicesector output in Scotland and the UK since1995.

3

52

53

Construction

The Scottish construction industry grew by5.6 per cent in 2000. This performance wasconsiderably stronger than the wider Scottisheconomy (1.5 per cent) and the UKconstruction industry (1.6 per cent). Theconstruction business does tend to fluctuatemore than most other sectors i.e. it tends toexpand faster when the economy is growingbut also declines further when the economy isnot growing. Over the long term, however,construction has shown relatively slowaverage growth, which marks out its currentrate of growth as quite exceptional in terms ofthe last 30 years. This may in part be due tothe relatively stable pattern of UK interestrates over the last couple of years.

Table 1 summarises a mixture of the latestindicators of activity for Scottish constructionin terms of official output statistics, businesssurveys and forecasts. Business surveyevidence from both the Scottish Chambers'Business Survey (SCBS) and ConstructionConfederation Survey (CCS) has mirrored the

output figures in general by being largelypositive over the latest 4 quarters to 2001 Q1.However, although a net balance of firmscontinued to record increases in total neworders for 3 out of the 4 quarters shown (lines4 and 7), there appear to be different patternsemerging from public and private sectorcustomers. For example, total orders from thepublic sector have consistently remained weakaccording to the SCBS (line 4a). This contrastswith private sector orders (line 4b).

The recruitment difficulties of the constructionindustry appear to be easing, but only slightly.At least 3 out of 4 firms surveyed reportedrecruitment difficulties in each of the latest4 quarters (line 6). This would suggest thatskills shortages in most of the main tradesremain a long-term problem for the industry,and will have to be addressed if the industry isto deliver (to time and to budget) theinvestment plans of both the public and privatesector over the next few years. Despite thedifficulties recruiting, construction companiesare still reporting increases in employment(line 5).

Chart 3.3: Service Sector, Scotland and the UK, 1995 Q1-2000 Q4

95

100

105

110

115

120

125

UKScotland

Q4

Q3

Q2

20

00

Q1

Q4

Q3

Q2

199

9 Q

1

Q4

Q3

Q2

199

8 Q

1

Q4

Q3

Q2

199

7 Q

1Q4

Q3

Q2

199

6 Q

1Q4

Q3

Q2

199

5 Q

1

Se

rvic

e S

ect

or

Ind

ex

(19

95

=10

0)

Source: Scottish Executive

3

3

54

The latest outlook from the 3 independentforecasters who provide construction industryforecasts for Scotland are reasonably optimistic,although a slowdown from the current stronggrowth is expected this year and next.

However, as lines 10, 11 and 12 in table 1show, these forecasts can easily be revisedupwards or downwards depending on eventsand trends in the wider Scottish, UK andworld economies.

2000 Q2 2000 Q3 2000 Q4 2001 Q1

Construction output (GDP)

1. Annual % change (latest 4 quarters

on previous 4 quarters) 8.1% 9.3% 5.6% Aug-01

2. Quarterly % change (latest quarter

on previous quarter) -5.1% -2.8% 1.4% Aug-01

Scottish Chambers' Business Surveys(1)

3. Business optimism 0 + + -

4. Total new orders + + - +

4a. -Public sector orders - - - -

4b. -Private orders + + 0 +

5. Total employment + + - +

6. Percentage of firms reporting

recruitment difficulties 85 75 81 74

Construction Federation Survey(1)

7. Output + - + +

8. New enquiries + + + -

9. Output expectations over next

12 months + + + +

Independent Forecasts(2)

Construction GDP annual % change

10. 2000 2.3 3.0 3.0 4.4

11. 2001 1.4 -0.7 -0.7 2.0

12. 2002(3)

2.2 0.6 0.6 2.2

Table 1: Scottish construction industry indicators over the last 12 months

Notes(1) The signs relate to the net balance of firms reporting an increase or decrease in the indicator. A positive sign, for example, indicates that a majority of firms reported an

increase in the indicator.The responses are weighted according to the size of the firm being surveyed.(2) Average forecast of the 3 independent forecasters monitored by EAS-ELLD. Forecasts updated twice a year.(3) Forecasts for 2002 are based on the average from BSL and Cambridge Econometrics

55

Housing

The available price data on the Scottishhousing market are currently giving conflictingsignals. Table 2 sets out the latest availabledetails on average house prices from the mainindices and how they have changed over themost recent 4 quarters. The figures reflect thedifferences in the coverage and methodologyemployed in the construction of house prices.According to the Halifax House Price Index,Scottish house prices fell by almost 4 per centin the 4 quarters to 2001 Q1. However, theNationwide Quarterly Review and Council ofMortgage Lenders (CML) both reportedincreases of around 2 per cent over the sameperiod.

There appear to be some differences in thefirst-time buyer market (where prices havedrifted down) and the established owner-occupier (i.e. second, third time-buyers etc)market. After accounting for current inflation(RPIX = 1.9 per cent, March 2001), most ofthe various indices point to a market whoseprices are constant or falling in real terms.Moreover, with wage growth in the UKcurrently around 5 per cent, the affordabilityof housing (in terms of the ratio of houseprices to incomes) has been improving inScotland. This implies that any inflationarypressures from the housing market in Scotlandremain very weak although there remain areasof Scotland (most notably Edinburgh) wherethe prices are holding up more strongly. It isalso likely that certain rural areas (especially inDumfries and Galloway) have seen a sharp fallin activity and prices, as potential house-buyers postponed their property searches inthe early part of this year.

The demand for domestic property inScotland, as proxied by the number of newmortgage advances to first-time buyers andestablished owner-occupiers, appears to havebeen growing strongly. However, separateanalyses of these two parts of the market

reveal different trends. According to figuresreleased by the Council of Mortgage Lenders(CML), the total number of new mortgageadvances in Scotland last year was 83,000. Thisrepresented an increase of 8,000 or 10 percent on the number in 1999. The first-timebuyers' share of the market was 42,000mortgage advances – an increase of 4,000 or10 per cent. This increase suggests that thisgroup seems more than willing to enter themarket at the present time and that the levelof owner-occupation in Scotland may edge upthis year as a result.

The number of new mortgage advances in theestablished owner-occupier part of the markethas also increased from 37,000 to 41,000between 1999 and 2000 – again an increase of4,000 or 10 per cent. However, this isprimarily due to higher remortgage activity inScotland. The CML have calculated that, in2000, some 27 per cent of total new mortgageadvances in the UK were for remortgagingpurposes as opposed to 24 per cent in 1999. Ifthis scale of increase was applied in Scotland, itwould imply that the number of remortgageadvances rose quite substantially between1999 and 2000. In contrast, the number ofnew mortgage advances taken out byestablished owner-occupiers moving house hasprobably remained stable over the sameperiod. Thus, it is likely that there is currentlya higher level of activity at the first-time buyerend of the housing market than amongstestablished owner-occupiers. Activity in themortgage market, on the other hand, isincreasing more widely across both groups.This probably reflects a relatively stable periodof mortgage rates together with fiercecompetition in the mortgage industry.

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Exports

Chart 3.4 shows manufactured exports (incurrent and constant prices) from 1995 Q1. Itwill be noted that the level of manufacturedexports at 1995 prices is higher than the

corresponding level at current prices. This isdue to the effects of exchange rate movementssince 1995. The relatively high exchange rate hasled to exporters having to sell at lower sterlingprices in order to maintain market share.

2000 Q1 2001 Q1 Annual % change

Halifax Quarterly House Price Index £64,473 £62,099 -3.7%

Nationwide Quarterly Review £62,829 £64,138 2.1%

Lloyds TSB (2)

£55,860 £60,313 8.0%

Council of Mortgage Lenders

(Survey of Mortgage Lenders) (2)

— All buyers £73,500 £74,000 0.7%

— First time buyers (3)

£55,853 £54,004 -3.3%

— Established owner occupiers (3)

£82,971 £84,716 2.1%

Table 2: Average, mix-adjusted house prices in Scotland 2000 Q1 and 2001 Q1(1)

Notes(1) All prices are nominal, mix adjusted (i.e. adjusted for size and location of property)(2) Refers to percentage change from 1999 Q4 to 2000 Q4. Will be updated in May when Q1 figures will be available(3) Non mix adjusted.

Chart 3.4: Manufactured Exports, 1995 Q1-2000 Q4

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Current prices 1995 prices

Q4

Q3

Q2

20

00

Q1

Q4

Q3

Q2

199

9 Q

1

Q4

Q3

Q2

199

8 Q

1

Q4

Q3

Q2

199

7 Q

1Q4

Q3

Q2

199

6 Q

1Q4

Q3

Q2

199

5 Q

1

£'s

(B

illio

ns)

Source: Scottish ExecutiveNote: Data are not seasonally adjusted

57

Scottish Executive economists have derived atrade weighted exchange rate index forScotland (TWERS) in order to assess changesin the effective exchange rate that Scottishmanufacturing companies face when exportingabroad. Data on the origin of Scottish importsare not available, so the index is solely exportbased. The index is a useful indicator forassessing the exchange rate conditions facingScottish manufacturing exporters. However, itshould be recognised that the series does notincorporate broader competitiveness trends,

Recent business survey evidence onmanufacturing suggests conditions in exportmarkets remain difficult. The Bank of ScotlandReport on Scotland recorded falling exportorders for the second successive month inApril, after increasing for the first time in fivemonths in February. This was attributed to theeconomic slowdown in the US, slower growthin continental Europe and Asia and unfavourableexchange rates. However, the ScottishEngineering Quarterly Review (March 2001)reported export orders as maintaining their levelof the previous quarter, which was the mostpositive level since June 1995. The ScottishChambers Survey for 2001 Q1 reported that

such as the impact of exchange ratemovements on manufacturers' input costs.

Chart 3.5 shows that the TWERS increasedfrom the start of 1999, due largely to theweakness of the Euro since its launch. TheTWERS has been volatile throughout last year,showing two separate peaks in April (116.5)and October (117.1), with the rate at 112.2(1990=100) in April 2001. The peak in theTWERS coincides with the Euro's weakestlevel relative to Sterling.

export orders increased over the period,reaching their most positive level since 1997Q1. This strong performance was echoed bythe CBI Industrial Trends Survey (April 2001),which showed that the growth in exportorders is continuing to be positive. Finally, theLloyds TSB Business Monitor for the threemonths to February indicated that morecompanies experienced a decrease in exportactivity than an increase. However, exportactivity was expected to increase over theperiod of the six months to August 2001 dueto the expectation that prospects in Scotland'skey export markets would remain favourable.

Chart 3.5: Trade-weighted Exchange Rates, Scotland and the UK, 1995-2001 (April)

80

85

90

95

100

105

110

115

120

Sterling effective exchange rate index Trade weighted exchange rate for Scotland

Mar

20

01

Jan

No

vS

epJu

lM

ayM

ar2

00

0 J

anN

ov

SepJu

lM

ayM

ar19

99

Jan

No

vS

epJu

lM

ayM

ar19

98

Jan

No

vS

epJu

lM

ayM

ar19

97

Jan

No

vS

epJu

lM

ayM

ar19

96

Jan

No

vS

epJu

lM

ayM

ar19

95

Jan

Exc

han

ge

Rat

e I

nd

ex

(19

99

=10

0)

Source: Scottish Executive, Bank of England

3

3

58

3.3 Rural Scotland

Farm Incomes

Shortly after the publication of the January2001 Scottish Economic Report, the ScottishExecutive Environment and Rural AffairsDepartment published the 2000 Farm Incomefigures2. These showed that 2000 had beenanother difficult year for Scottish agriculturewith average net farm incomes falling for thefifth consecutive year and Total Income fromFarming falling to £230m. This represents a12% (£31m) fall on 1999 as the sectorcontinues to deal with external pressures suchas the weakness of the Euro (making importscheaper, exports more expensive, andreducing the sterling value of subsidypayments), reduced world commodity prices,autumn floods and increased fuel and fertilisercosts.

Fishing

While some sectors of the fishing industry,particularly the pelagic and Nephrops fisheries,have continued to provide healthy incomes, thewhitefish fleet have faced significant pressures.Cod stocks are in particularly bad conditionand quotas have had to be cut significantly toprotect the stock. Other demersal stocks, suchas whiting, hake and haddock, are also in needof protection despite the good year class ofhaddock which should enter the fishery later thisyear. All these stocks have also been subject toquota cuts while cod and hake recovery planshave added further restrictions to the whitefishfleet. In recognition of these difficulties, andthe need to balance fishing capacity to theamount of fish available, the Scottish Executivehas agreed a £27m package for the industry.The bulk of this money will be used todecommission around 20% of the whitefishfleet. This will reduce pressure on stockssignificantly while improving the long-termsustainability of the industry. The remainder ofthe money will be used to pay fishermen toundertake fishing trials using more selectivegears, and to implement a number of measuresaimed at helping the fish processing sector.

Foot and mouth disease

The dominant issue facing rural Scotland hasbeen the outbreak of Foot and Mouth Disease(FMD). In addition to creating significantanimal welfare problems the highly contagiousdisease also has implications for the UK'sability to export meat and meat products. Thefirst outbreak occurred in Scotland on 1 March2001 (a week after it had been first identifiedin Essex) and, peaking in April, by 4 May 182cases had been identified. All the Scottishcases were concentrated in the South ofScotland, principally Dumfries and Galloway.

The UK Agricultural Departments took a robustresponse to the outbreak. On 23 February,UK livestock movement ban was introducedand guidance issued to encourage the public tostay away from livestock areas to help reducethe risk of the disease. In addition, a cleareradication policy was conducted to halt thespread of the disease with infected livestockbeing culled, as well as all sheep within a 3kmradius of an infected place and all sheep andpigs on contiguous farms. By 10 May, the cullhad led to compensation in Scotland (based onmarket values) of £170m.

The nature of the outbreak and the impositionof movement restrictions have imposedproblems for many rural businesses, especiallythose reliant on access to the countryside andfarms. Agriculture and tourism have beenmost affected and an initial visitscotlandestimate is that the outbreak has led to a lossof tourism expenditure (i.e. on accommodation,attractions etc) in the range £110-£335m in2001.

In March, the Minister for Environment andRural Development established an ImpactAssessment Group – consisting of sectoralexperts within the Executive, the EnterpriseNetworks, Employment Services, visitscotland,local authorities, Scottish Agricultural Collegeas well as members from the most affectedarea, Dumfries and Galloway – to assess the

2 Full details can be found in Scottish Agriculture Output, Input and Income Statistics published by SERAD in March 2001.A copy of which is on the Scottish Executive Website at www.scotland.gov.uk/agri/documents/ag_io_stats00-00.asp.

59

impact across sectors and areas. As part of itsassessment, the Group has commissioned asurvey of over 2,000 Scottish businesses toestablish a quantified estimate of FMD impact.(The final report of the survey will bepublished on 29 June).

The Impact Assessment Group's work isfeeding into the Ministerial Committee forRural Development sub-group on FMD, whichhas been established to co-ordinate theExecutive's response and help those affectedby the outbreak. The first priority has been onproviding immediate relief and the Executivehas delivered funding packages to theEnterprise Networks (to allow them tofurther assist affected businesses) andvisitscotland (to reinforce the message thatScotland remains open for business) andbusiness rates relief. Farmers have also beenable to benefit from £24m draw-down agri-money compensation, most of which will havebeen paid by the end of May.

In addition to these measures, the Executivehas implemented a further package designedto meet the specific and urgent needs of areasworse affected by the outbreak. This aims tooffer short-term hardship relief and assistanceto help businesses build for recovery andincludes payments for costs incurred incontrolling the disease and other supportmeasures. Work remains in hand to develop along term recovery package for rural Scotlandin the light of interim and final findings ofthe survey commissioned by the ImpactAssessment Group.

3.4 The Labour Market

Unemployment

ILO unemployment (seasonally adjusted) inScotland fell by 10,000 over the quarter toDecember 2000-February 2001 to 152,000.The rate of ILO unemployed fell by0.4 percentage points, to 6.0 per cent, over

the same period. Over the year, the level ofILO unemployed was down by 39,000, withthe rate falling by 1.6 percentage points. Thedeclines over both the quarter and the yearwere more marked than the UK, where therates decreased by 0.2 percentage pointsand 0.6 percentage points, respectively, to5.2 per cent.

The ILO unemployment rate in Scotlandwas lower than the EU (15) average of 8.0 percent (February 2001). The rate was below 7of the other EU (15) countries – includingFrance (8.6 per cent), Germany (7.8 per cent)and Italy (9.9 per cent) – but was higherthan the remaining 7 countries, includingIreland (3.8 per cent) and the Netherlands(2.6 per cent).

The seasonally adjusted count of claimants onunemployment-related benefits in Scotland fellby 1,200 between February and March to107,000. The claimant count rate was 4.3 percent of the workforce, unchanged fromFebruary, and 1.0 percentage points abovethat of the UK. The March claimant count was15,300 lower than one year previously and141,100 below the recessionary peak inDecember 1992. The claimant count remainedat its lowest point since January 1976.

The client group for the New Deal includesthose aged 18-24 who have been claimingunemployment-related benefits for more than6 months, those aged 25 and over who havebeen claiming for 2 years or more, and thoseaged 50 and over who have been claiming forover 6 months. There were 3,800 aged 18-24in Scotland claiming for over 6 months inMarch, down 1,000 (20 per cent) on a yearago. There were 10,100 aged 25 and overclaiming for 2 years or more, down by 2,000(17 per cent) on a year ago. Finally, there were9,100 aged 50 and over claiming for 6 monthsor more3, down by 1,900 (17 per cent) overthe year.

3 The latter group overlaps with the over 25s claiming for 2 years or more.

3

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Table 3 shows that, within the Scottish localauthority areas, the claimant count rates (notseasonally adjusted) ranged from 1.7 per centin Shetland Islands to 9.8 per cent in NorthAyrshire in March 2001. The equivalent rate

for Scotland stood at 4.6 per cent. In the yearto March 2001, the rate of unemployment fellin 30 of the 32 unitary authority areas,remained unchanged in one (Dundee City) androse in one (Fife).

Area March 2001 (%) Change on Year (% points)

Aberdeen City 2.0 -0.9Aberdeenshire 2.4 -0.9Angus 4.9 -0.6Argyll and Bute 4.7 -0.5Clackmannanshire 7.8 -1.6Dumfries and Galloway 4.9 -0.6Dundee City 8.1 0.0East Ayrshire 8.5 -1.0East Dunbartonshire 4.1 -0.2East Lothian 3.3 -0.7East Renfrewshire 4.9 -1.0Edinburgh, City of 2.4 -0.5Eilean Siar (Western Isles) 6.3 -1.6Falkirk 5.5 -0.7Fife 6.1 0.1Glasgow, City of 5.2 -0.7Highland 5.0 -0.2Inverclyde 5.8 -0.6Midlothian 3.7 -0.4Moray 4.1 -1.5North Ayrshire 9.8 -0.9North Lanarkshire 6.3 -0.8Orkney Islands 2.9 -0.1Perthshire and Kinross 2.7 -0.2Renfrewshire 4.3 -0.8Scottish Borders 3.1 -0.4Shetland Islands 1.7 -1.0South Ayrshire 5.7 -0.5South Lanarkshire 4.6 -0.6Stirling 3.1 -0.4West Dunbartonshire 9.7 -0.8West Lothian 4.4 -0.6

Scotland 4.6 -0.6

Source: Office for National Statistics

Table 3: Claimant Count Rates in Scotland's Local Authority Areas (Workforce Basis): March2001 (Seasonally Unadjusted)

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The Glasgow economy plays a key role in influencing the performance of Scotland as a whole. The latest figuresshow that Glasgow accounts for 15 per cent of Scotland's total GDP.

Glasgow also plays an important role in terms of the labour market, with the current employment rate belowthat of Scotland. The labour market in Glasgow has changed over the last thirty years. In 1971, over 40 per centof jobs were in the production and construction sectors, whereas these sectors now account for less than aquarter of total jobs. In 1971, Glaswegians held 73 per cent of jobs in Glasgow; this had fallen to 58 per cent in1991. The total number of jobs based in Glasgow fell over these 20 years, which implies that the total numberof Glasweigans who work in Glasgow fell significantly.

Most of the remaining jobs are taken by people living in the surrounding areas, the major contributors being EastDunbartonshire, and East Renfrewshire where over half of all workers had jobs in Glasgow. Around one quarterof workers in North Lanarkshire, Renfrewshire, South Lanarkshire, and West Dunbartonshire also held jobs inGlasgow. Most of these commuting areas outside Glasgow City have residence based employment rates at orabove the Scotland average. Therefore, the employment rate for the Glasgow Travel to Work Area is muchnearer the Scotland average than the employment rate for Glasgow City.

Of the 340,000 jobs in Glasgow, approximately half are based in the city centre. These are typically in thefinance/business and the public sector, as well as hotel, restaurant, and retail sectors. The only other parts of thecity where there are more jobs than residents are along the Clyde and in parts of East Glasgow. Most areas ofGlasgow have less than one job for each two working aged residents. However, there is little correlationbetween areas with low numbers of jobs and a high unemployment rate. This suggests that transport is not toomuch of a barrier in getting to work.

Over the 1990s, the number of jobs in Glasgow increased by 5 per cent, compared with little change for Scotlandas a whole. The increase in Glasgow was mainly due to the expansion in finance and business, mostly full timejobs. Jobs growth in this sector accounted for half of new finance and business jobs in Scotland between 1991and 1998. However, the decline in manufacturing and construction jobs was much greater in Glasgow than inother parts of Scotland. Table 4 shows that Glasgow has undergone a much bigger production to service sectorshift than other parts of Scotland.

Table 4: Change in employee jobs 1991-1998

Scotland GlasgowIndustrial Sector No. (000s) % No. (000s) %

All industries 1.2 0 15.4 5Agriculture, forestry, fishing -14.8 – – –

Production & construction

Total -56.4 -11 -16.0 -23Mining & energy -1.3 -3 2.9 91Manufacturing -38.4 -11 -11.6 -27Construction -16.7 -13 -7.4 -31

Services

Total 72.4 5 31.7 13Retail and hotels 22.7 5 4.5 7Transport & communications -11.6 -10 -1.8 -8Finance & business 32.2 12 15.5 26Public sector and other 29.1 5 13.5 12

Sources: 1998 Annual Employment Survey, 1991 Census of Employment

The current working aged population of Glasgow City is 392,000. This number is expected to rise by 6,000(2 per cent) over the next 15 years. This is different from the areas surrounding Glasgow, and other parts ofScotland, which are expecting a fall (of 3 per cent) between now and 2016. This means that even to maintainits employment rate, Glasgow needs to attract more people into work, whereas other parts of the country willincrease their employment rate if they keep the level of jobs constant** Projections on Glasgow are taken from Government Registrar Office which is 1998 based.

Box 1: Glasgow Labour Market

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Employment

Labour Force Survey (LFS) data showed thattotal employment (seasonally adjusted) inScotland decreased by 7,000 over the quarterto December 2000-February 2001. However,over the year, employment was estimated tohave increased by 55,000. In December 2000-February 2001, the employment rate (thepercentage of the working age population inemployment) in Scotland was 73.8 per cent.This was below the UK rate of 74.7 per cent,but up 1.8 percentage points on a year earlier(UK: increase of 0.5 percentage points).

Increases in employment over the year toDecember 2000-February 2001 have beenmainly attributed to a rise in full-timeemployment, which rose by 65,000, while

Economic Activity and Inactivity

Economic activity covers those in employment(i.e. employees, the self-employed, those ongovernment employment and trainingprogrammes and unpaid family workers) andthe unemployed who are actively seekingwork. There were 2,541,000 economicallyactive people in Scotland in December 2000-February 2001. This total was comprised of

2,388,000 in employment and 152,000 ILOunemployed. Given the decrease (of 7,000) inemployment, and the decrease (of 10,000) inunemployment, the total number ofeconomically active in Scotland decreased by18,0004 in the quarter to December 2000-February 2001. There were 1,499,000economically inactive people in Scotland inDecember 2000-February 2001, 19,000higher than the previous quarter (given the

part-time employment fell by 11,000. Of the573,000 part-time workers (employees orself-employed), only 74,000 (12.9 per cent)were doing so because they could not find afull-time job.

Data from the long-term series shown inChart 3.6 indicate that the number of workingage in employment in May 2000-July 2000 washigher than at any time over the period forwhich data are available (since 1960). Theworking age employment rate is at its highestsince 1974. This reflects a dramatic change inthe balance between male and femaleemployment over this period; the employmentrate for males has fallen from 90.8 per cent to83.4 per cent, while the female rate has risenfrom 57.0 per cent to 69.7 per cent.

Chart 3.6: Employment in Scotland, 1960-2000

4 Levels are rounded to the nearest thousand to prevent spurious accuracy.

1900

1950

2000

2050

2100

2150

2200

2250

2300

2350

Total Employment

200

0

199

8

199

6

199

4

199

2

199

0

198

8

198

6

198

4

198

2

198

0

1978

1976

1974

1972

1970

196

8

196

6

196

4

196

2

196

0

Employment rate

0

10

20

30

40

50

60

70

80

Em

plo

ym

en

t (t

ho

usa

nd

s)

Em

plo

ym

en

t ra

te (

pe

r ce

nt)

Source: Scottish ExecutiveNote: Based on June data for those aged 16 to 59/64

63

trends in employment and ILO unemploymentoutlined above and a slight increase in thepopulation aged 16 and over).

As Chart 3.7 shows, there have beensignificant differences in the rate and trend ofScottish and UK activity rates over the lastdecade. UK activity rates have been relativelystable, varying between the range of 78.2 per cent and 79.2 per cent. By contrast,Scotland's activity rates have been more

Vacancies

The level of vacancies notified to Jobcentres inScotland (seasonally adjusted) fell by 1,700(5.9 per cent) between February and March to27,000, but was up by 2,100 (8.4 per cent)compared with the same period a year ago. InMarch 2001, 14,100 people were placed inpreviously unfilled vacancies by Jobcentres,700 less than in February. The number ofunfilled vacancies notified to Jobcentres wasprovisionally estimated at 45,700 in March.

Skill Shortages and Earnings

Business surveys provide an insight into theextent of skill shortages and changes in pay

pressures in the Scottish economy. There areindications of skill shortages in some sectorsbut little sign of any general pick up in paysettlements and pressures.

The CBI Survey records the proportion offirms that expect output to be limited byskilled labour. This stood at 21 per cent in2000 Q1, up from the previous survey (14 percent). The Scottish Chambers survey impliedthat skilled labour shortages in the first quarterof 2001 were quite significant: this was thethird successive quarter in which a largenumber of respondents in the manufacturingsector cited a lack of skilled labour as a majorfactor in limiting output. The proportion citing

volatile, fluctuating between 77-79 per cent.The average UK rate over the period ofMarch-May 1992 to December 2000-February2001 was 78.7 per cent, while Scotland'saverage activity rate over the same period was77.6 per cent. However, over the six-quarterperiod from March-May 1999, Scottish activityrates showed continued growth and the peakof 79.1 per cent in September-November2000 is the highest over the period for whichdirectly comparable data are available.

Chart 3.7: Scottish and UK Activity Rates, Spring 1992-Winter 2000/2001

75.5

76.0

76.5

77.0

77.5

78.0

78.5

79.0

79.5

UK Scotland

200

0 S

ep-N

ov

200

0 M

ar-M

ay

199

9 S

ep-N

ov

199

9 M

ar-M

ay

199

8 S

ep-N

ov

199

8 M

ar-M

ay

199

7 S

ep-N

ov

199

7 M

ar-M

ay

199

6 S

ep-N

ov

199

6 M

ar-M

ay

199

5 S

ep-N

ov

199

5 M

ar-M

ay

199

4 S

ep-N

ov

199

4 M

ar-M

ay

199

3 S

ep-N

ov

199

3 M

ar-M

ay

199

2 S

ep-N

ov

199

2 M

ar-M

ay

pe

r ce

nt

Source: Office for National Statistics

3

3

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skilled labour as a factor likely to limit outputalso rose in the construction sector to a higherlevel than seen since 1995.

Official data from the New Earnings Surveyshows that the average gross weekly earningsof full-time employees in Scotland in April2000 were £379.8, a 2.8 per cent increaseover the year. The average gross weeklyearnings for full-time employees in Scotland inApril 2000 were £30 (8 per cent) lower thanthe GB average. The Scottish ChambersSurvey in 2001 Q1 reported that pay increasesranged from 3.5 per cent in retailing to 5.2 percent in wholesaling, but that there was littleevidence of increased pay pressures.

3.5 Prices & Costs

The Bank of Scotland Report on Scotland surveyfor May indicated that manufacturers' averageinput prices rose for the twenty-first monthrunning. However, the rate of inflation easedfor the second consecutive month, to a pace

well below that seen a year ago. The reasonscited for the moderation of input pricepressures were surplus supplier capacity, thedownturn in global demand and the strengthof sterling. Service sector costs continued torise, although the rate of increase slowed tothe lowest level since February 1999, assistedby lower fuel prices.

The CBI reported that unit costs rose in 2001Q1, after falling in the previous quarter.Average domestic prices fell less sharply thanin the previous survey, but they are expectedto continue to fall, suggesting a squeeze onprofit margins. Within the Scottish Chamberssurvey, transport costs were commonly citedas causes of pressures to raise prices withinthe manufacturing, wholesaling and retailingsectors. Raw materials were also recorded asa major factor in manufacturing and wholesalingin terms of pressure to raise prices. ScottishEngineering report that the general trend inprices for the UK market is down.

Recent survey evidence has provided some encouraging results regarding prospects for the United KingdomContinental Shelf. The DTI's UKCS Capital Expenditure Intentions Survey 2000 reported that total intendedexpenditure (excluding exploration, appraisal and decommissioning) would rise from £3.0 billion in 2000 to£4.0 billion in 2001. Comparison with the previous (1999) DTI survey showed a considerable rise in optimism,with total intentions for the future five years around 30 per cent higher.

More recently (April 2001), the Royal Bank of Scotland Oil and Gas Survey has reported the most positive resultsin the three years in which the survey has been undertaken. The majority of firms – 69 per cent – report thatbusiness volumes have increased in comparison with the previous 12 months. This improvement in businessconditions is widely expected to continue over the next 2 years with 74 per cent of respondents anticipatingbusiness volumes in the UKCS to rise in 2001 (compared with 2000) and 61 per cent of respondents expectingbusiness volumes to continue to increase in 2002.

The survey also reports on the progress against the industry's target of reducing production costs from $12 to$8 per barrel by next year. Respondents continue to report that meeting this target will be very difficult. In fact,over the previous 12 months, only 8 per cent of companies experienced a decline in costs, while around half –46 per cent – saw costs rise. Confidence that cost reductions can be made next year is not high, with only 8 percent expecting costs to fall. 27 per cent of firms expect costs to rise.

The Royal Bank considers the evidence of rising costs to be the greatest cause for concern though, givenrelatively high oil prices and increased investment, the threat to the competitiveness of the UKCS is not felt tobe immediate. It is concluded, however, that "renewed efforts will be required to achieve the ambitious – butnecessary – targets for the cost reduction if the UKCS is to continue to attract investment in the long run".

Box 2 The North Sea Oil Industry – Recent Survey Evidence

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3.6 Forecasts

The Scottish Executive monitors the projectionsof 3 independent economic forecasters, whichare published on a biannual basis. Theforecasters and the dates of their latestprojections are:

Business Strategies Ltd(BSL) Spring 2001

Cambridge Econometrics(CE) February 2001

Fraser of Allander Institute(FAI) January 2001

GDP Growth

CE forecast that GDP growth in Scotlandwould be 2.6 per cent in 2001, above the long

Employment

CE expect employment in Scotland to increaseby 6,000 (0.3 per cent) in 2001 and by 2,000(0.1 per cent) in 2002. UK employment isforecast to grow by 0.8 per cent and 0.4 percent, respectively.

BSL forecast that total employment in Scotlandwill decrease by 0.2 per cent this year. This

compares to an increase of 0.1 per cent in theUK. Employment is forecast to rise next year,by 0.6 per cent, in comparison to the UKforecast increase of 1.0 per cent.

FAI forecasts employment growth in Scotlandin 2000 and anticipates continued growth in2001 and 2002.

run trend rate but below the forecast growthrate for the UK of 3.0 per cent. In 2002, theforecasts are 1.9 per cent in Scotland and2.3 per cent for the UK.

BSL forecast that output in Scotland would riseby 2.0 per cent in 2001 (1.4 per cent, 2000),compared with an increase in UK output of2.6 per cent (2.9 per cent, 2000). Scottishoutput growth is expected to accelerate in2002, reaching a level of 2.6 per cent, a similarrate to that forecast for the UK.

FAI predicts that GDP growth in Scotland for2000 will be 2.1 per cent. The rate is expectedto fall slightly during 2001 to 2.0 per cent,before strengthening to 2.3 per cent in 2002.

2001 2002

Scot UK Scot UK

BSL (Spring 2001) 2.0 2.6 2.6 2.6

CE (Feb 2001) 2.6 3.0 1.9 2.3

FAI (Jan 2001)(2)

2.0 2.5 2.6 2.6

Table 5: Independent forecasts of GDP growth 2001-2002: Scotland and UK(1)(2)

Notes:

1. FAI produces forecasts for GDP, whereas CE and BSL produce forecasts of GVA. UK excludes continental shelf.

2. FAI does not produce UK forecasts. For 2001 and 2002 FAI quotes forecasts monitored by HM Treasury.

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Unemployment

CE expect the average claimant count rate ofunemployment in Scotland to rise to 5.2 percent in 2001. The rate in the UK is expectedto rise to 4.0 per cent. However, given theofficial rates in 2000 (4.8 per cent in Scotlandand 3.7 per cent in the UK), this implies amarginal increase during the course of theyear. CE expects the claimant count inScotland in 2002 to increase to 5.6 per cent.The UK rate is forecast to rise to 4.2 per cent.

BSL anticipate that the average ILOunemployment rate will fall to 6.0 per cent thisyear, from a predicted 6.9 per cent in 2000 and

to 5.8 per cent in 2002. A similar pattern isforecast for claimant count unemployment;the average unemployment rate is expected tofall from an actual average of 4.8 per cent in2000 to 4.2 per cent in 2001 and 3.8 per centin 2002.

FAI forecasts that ILO unemployment willaverage 7.3 per cent in 2000, falling marginallyto 7.2 per cent in 2001 and 7.1 per cent in2002. The claimant count is expected toaverage 4.9 per cent in 2000 (actual rate was4.8 per cent), 4.6 per cent in 2001 and 4.3 percent in 2002.

2001 2002

Scotland UK Scotland UK

’000s(%) ’000s(%) ’000s(%) ’000s(%)

BSL (Spring 2001) +4 (-0.2) +18 (+0.1) +9 (+0.6) +212 (+1.0)

CE (Feb 2001) +6 (+0.3) +230 (+0.8) +2 (+0.1) +115 (+0.4)

FAI (Jan 2001) +6.5 (+0.3) (+0.3) +9.9 (+0.5) (+0.3)

Table 6: Independent forecasts of the change in employment in Scotland and the UK,2001 – 2002(1)

Note:1. The BSL and CE data refer to total employment. The FAI data are for employees only.

2001 2002

Scotland UK Scotland UK

% % % %

BSL (Spring 2001) 4.2 3.4 3.8 3.2

CE (Feb 2001) 5.2 4.0 5.6 4.2

FAI (Jan 2001) 4.6 n/a 4.3 N/a

Table 7: Independent economic forecasts of claimant count unemployment rates in Scotlandand the UK: 2000 and 2001

Note:1. The actual average (seasonally adjusted) unemployment rate in Scotland in 2000 was 4.8 per cent (UK: 3.7 per cent).

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3.7 Assessment

A range of data on the Scottish economysuggest that performance improved in thefourth quarter of 2000 and remained relativelystable in the first quarter of 2001, with GDPgrowth steady, employment growing andunemployment falling. The labour marketindicators covering the period from the finalquarter of 2000 to the data released in April2001 suggested that the performance from thelabour market compares favourably byhistorical standards. The April claimant countof those receiving unemployment-relatedbenefit was the lowest since January 1976.

Survey results for the first quarter of 2001 arenot as strong as those seen in the final quarterof 2000, although all the surveys suggestedcontinued growth in the manufacturing sector.In general, the leading business surveys of theScottish economy have shown a mixed pictureof performance throughout 2000 and 2001 Q1for both manufacturing and services.

The dominant issue facing rural Scotland hasbeen the outbreak of Foot and Mouth Disease(FMD). In addition to creating significant animal

welfare problems the highly contagiousdisease also has implications for the UK's abilityto export meat and meat products. The Ministerfor Environment and Rural Development hasestablished an Impact Assessment Group toassess the impact across all sectors and areas,to tackle and measure the impact on theScottish economy.

Evidence from business surveys offers mixedsuggestions on the impact of the Foot andMouth Disease outbreak. The ScottishChambers survey suggests that the tourismsector has been badly affected, with thesituation expected to get worse in 2001 Q2.

The three main independent forecasters are inagreement that the growth rate in Scotlandwill increase in 2001, with estimates rangingbetween 2.0 per cent and 2.6 per cent. All thesurveys suggest that the gap between Scotlandand UK growth rates will either stay the sameor narrow in the next year. Prospects willdepend on the future path of the exchangerate, oil prices and, more generally, oncontinuing developments in the UK and globaleconomies.

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2001

chapter four: Selected Economic Issues

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chapter four: Selected Economic Issues - Section A

Productivity in ScottishManufacturing Plants: 1994 - 1997

Fiona Roberts, Scottish Executive1

Summary

This article looks at differences inproductivity between manufacturingplants in Scotland in the period 1994 to1997. The main conclusions are first, thedistribution of productivity in individualmanufacturing firms in Scotland is similarto that found in the UK as a whole.Second, more productive firms (definedas those whose productivity lies at the90th percentile of the distribution) arearound 5.3 times as productive as lessproductive firms (defined as those whoseproductivity lies at the 10th percentile ofthe distribution). Third, the spread ofproductivity in the manufacturing sectoras a whole is not explained by differentproductivity levels in individual industries.There is evidence that within individualindustries there remains a significantvariation in productivity. Therefore, thearticle provides a starting point forlooking at differences in productivitybetween individual plants, and shows thatthere are quite large differences inproductivity between the best and worstperforming plants in the manufacturingsector in Scotland, and that thesedifferences persist when individual sectorswithin manufacturing are considered.

Introduction

In November 2000, the Treasury's paper'Productivity in the UK: The Evidence and theGovernment's Approach' compared UK levelsof productivity with those in other majoreconomies and examined the reasons for thedifferences at a national level. It also drew ona draft paper by Barnes and Haskel2 to look atproductivity differences between individualfirms.

At a UK level, Barnes and Haskel found thatthe distribution of productivity levels of UKmanufacturing plants was widely dispersed.They found that the plant at the 90thpercentile of the productivity distribution was5.5 times as productive as the plant at the 10thpercentile of the distribution. These differenceswere not merely due to differences inproductivity between different industrieswithin manufacturing, since these levels ofproductivity dispersion persisted when theylooked at the distributions for individualindustrial sectors.

This paper replicates some of this analysis forScotland.

Definitions and Sources

Data on productivity at individual manufacturingplants in Scotland can be derived from theScottish Production Database (SPD) maintainedby Scottish Executive statisticians. The figuresrelate to selected plants only: i.e. those thatwere sent, and returned completed, AnnualBusiness Inquiry questionnaires. A plant isdefined as the smallest autonomous unit withineach firm, for which data can be supplied. Aplant is often equivalent to the whole enterprise,and may cover one or more individual sites.Larger or more complex companies mayreport separately on individual sites or groupsof sites, and will thus comprise several plants.Where a plant covers both Scottish and non-Scottish sites, the methodology used toidentify the Scottish component implicitlyassumes that productivity is the same in all sites.This means that, in replicating a UK wideanalysis, there will be a greater level ofagreement between the Scottish and UK resultsthan may actually be the case. The Annex givesfurther details on definitions and sources.

Productivity for an individual plant in a givenyear is defined as gross value added at theplant divided by average total employment atthe plant. Gross value added is the extra value

1 Fiona Roberts is a Statistician in the Enterprise and Lifelong Learning Department of the Scottish Executive2 Productivity in the 1990s: Evidence from British Plants, Queen Mary, University of London, 2000

4a

4a

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added to the inputs used by the plant, duringthe process taking place within it –approximately the value of outputs less thevalue of inputs.

To allow comparison between years, andto minimise the effect of outliers orunrepresentative data in any particular year,data from four years (1994 to 1997) areanalysed. SPD data are held at current prices.The gross value added figures were thereforeconverted into constant (1995) prices usingdetailed industry price deflators.

Chart A.1 shows the distribution ofproductivity in individual plants. This givessome indication of the spread of productivitycontained within these averages. It can be seenthat, while a lot of plants have productivityclose to the average, there is a largedifferential between the best and worstperforming plants. The chart shows the 10thand 90th percentile points i.e. the values of

Productivity in the manufacturing sector

Table A.1 shows the number of plants,employment and average productivity in eachyear. In real terms, productivity has risen eachyear, except for a small fall in 1996. Theproductivity figures are rather higher thanthose calculated for the UK in the Barnes andHaskel paper. This is partly due to differencesin the mix of industries present, including therelatively high number of (high productivity)firms in the electronics sector in Scotland.

productivity below which 10 per cent and90 per cent of the plants lie. Taking the ratio ofthese productivity values gives an indication ofthe spread of the distribution. The ratiobetween these two points is 5.3 i.e. betterperforming plants are more than 5 times asproductive as worse performing plants.

Year Number of Plants Average Plant Average Plant ProductivityEmployment £ (1995 prices)

1994 1,471 169 34,800

1995 1,345 166 38,800

1996 1,460 173 38,500

1997 1,413 175 39,100

Average: 1994-97 1,422 171 37,800

Table A.1: Plants, Employment And Productivity In Scottish Manufacturing

Source: Scottish Production Database

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Chart A.1: Distribution of Productivity in Manufacturing Plants.

Frequency

Source: Scottish Production Database

-50,000 010th percentile£10,400 90th percentile

£55,100

Mean£37,800

50,000 100,000 150,000 200,000

The spread of productivity is not causedmerely by differences in productivity levelsbetween industries within manufacturing. Thedifferentials persist within individual industries.Table A.2 shows that the ratio of the 10th and

90th percentile points varies between 3.3 and6.2 for most sectors, with a couple of sectors(15: food and beverages, and 35: other transportequipment) showing even larger differentials.

Average Productivity DispersionSIC92 Sector (£ 1995 per worker) (p90/p10)

1

15-37 All manufacturing2

37,800 5.31

15 Food & beverages 35,900 8.28

17 Textiles 18,100 3.37

18 Wearing apparel 23,700 4.71

20 Wood & wood products 33,800 5.66

21 Pulp, paper & paper products 42,500 5.07

22 Publishing & printing 34,700 4.48

24 Chemicals & chemical products 64,600 5.82

25 Rubber & plastic products 29,500 3.47

26 Other non-metal mineral products 33,800 4.22

27 Basic metals 53,200 4.31

28 Fabricated metals 29,500 3.74

29 Machinery & equipment nes 31,000 3.35

30 Office machinery & computers 54,800 6.20

31 Electrical machinery & apparatus 24,900 3.45

32 Radio, television & communication equipment 65,600 5.87

33 Medical, precision & optical instruments 37,000 4.32

34 Motor vehicles & trailers 29,100 3.53

35 Other transport equipment 28,100 7.91

36 Furniture, other manufacturing 20,100 5.44

Table A.2: Spread Of Productivity By Industry Sector

Notes: 1. Dispersion is defined as the ratio of the productivity of a firm which lies at the 90th percentile of the productivity distribution, to the productivity of a firm whichlies at the 10th percentile of the productivity distribution. It gives a measure of the spread of productivity among plants.

2. Divisions 16,19,23 and 37 contain less than 40 selected plants and are not shown separately. They are included in the total manufacturing figures.Source: Scottish Production Database

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For some divisions, where the number ofsampled units is large enough, it is possible tolook at a finer industry breakdown. Table A.3gives a typical example, for division 33.

In most industries the intra-industryproductivity distributions remain as dispersedas the distribution for the industry as a whole.This implies that the spread of productivity is

Conclusion

This analysis has provided a starting point forlooking at differences in productivity betweenindividual plants. It has shown that there arequite large differences in productivity betweenthe best and worst performing plants in themanufacturing sector in Scotland, and thatthese differences persist when individualsectors within manufacturing are considered.These findings are consistent with those fromBarnes and Haskel's analysis for the UK as a whole.

not merely caused by differences in what theplants are producing. Indeed, in only twosectors (21: pulp, paper and paper productsand 26: other non-metal mineral products) isthere any evidence that productivity differentialsdecrease when more homogeneous industrygroups are considered.

This paper has not begun to look at thereasons for these productivity differences.Factors such as the skills of the workforce orlevels of capital investment might be presumedto be important, but further investigation intothe effect of these and other factors arebeyond the scope of this paper.

Average Productivity DispersionSIC92 Sector (£ 1995 per worker) (p90/p10)

1

33 Total medical, precision & optical instruments 37,000 4.32

331 Medical, surgical & orthopaedic 33,500 5.25

332 Measuring, checking, testing 35,200 3.40

333/4/5 Process control, optical, photographic,clocks & watches 43,200 4.53

Table A.3: Spread Of Productivity Within Division 33

Notes: 1. Dispersion is defined as the ratio of the productivity of a firm which lies at the 90th percentile of the productivity distribution, to the productivity of a firm which liesat the 10th percentile of the productivity distribution. It gives a measure of the spread of productivity among plants.

Source: Scottish Production Database

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AnnexThis paper attempts to replicate the analysiscarried out by Barnes and Haskel in their draft paper "Productivity in the 1990s:Evidence from British Plants", Queen MaryCollege, University of London, 2000. Most ofthe sources and definitions below havetherefore been chosen to be consistent withtheir methodology.

In their analysis, Barnes and Haskel used theARD (ABI Respondents Database). This is adatabase of Annual Business Inquiry (ABI) data,held at individual firm level, and maintained bythe Office for National Statistics. The dataused in this paper comes from the ScottishProduction Database (SPD). The SPD is adatabase constructed by statisticians in theScottish Executive Enterprise and LifelongLearning Department. This is also based ondata from the ABI and relates to units in theproduction sector in Scotland.

The SPD contains data for all manufacturingunits in Scotland. The data for some units havebeen provided directly by the company via anABI survey form. Data for the remaining unitshave been imputed, based on the actual valuesreturned by "similar" companies. The analysisin this paper relates only to "selected" units i.e.units who were selected to be part of the ABIsample and who returned data. Units withimputed data have not been included.

ABI information is collected from "reportingunits". These are defined as the smallestautonomous unit within each firm, for whichdata can be supplied. The composition of

reporting units varies between companies, butis often equivalent to the whole enterprise.A reporting unit may cover one or moreindividual sites. Larger or more complexcompanies may report separately on individualsites or groups of sites, and thus compriseseveral reporting units. The analysis in thispaper has been carried out at reporting unitlevel. However, where a reporting unit coverssites in Scotland and elsewhere in the UK, onlythe Scottish sites have been included.

Where a plant which completes an ABI returncovers sites in both Scotland and elsewhere inthe UK, the methodology used to create theSPD between 1994 and 1997 was such thatthe Scottish element of the return wascalculated pro-rata to Scottish employment inthe plant. This means that measures that aredefined in terms of employment, such asproductivity, are implicitly assumed to beuniform across both the Scottish and non-Scottish sites of the plant. Unfortunately, it isnot possible to separately identify sites whichare part of a larger, non wholly Scottish, plant.In replicating a UK wide analysis, we wouldtherefore expect there to be a greater level ofagreement between the Scottish and UKresults than might otherwise have been thecase, because of the way the Scottish datahave been constructed.

The figures for productivity are defined asgross value added (at constant 1995 prices) forthe plant, divided by total year averageemployment at the plant. The constant pricefigures have been calculated using producerprice indices at a 5 digit Standard IndustrialClassification 1992 level.

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chapter four: Selected Economic Issues - Section B

Productivity in Scotland1

John Rigg, Scottish Executive2

Summary

There is a productivity gap betweenScotland and its major competitors. TheTreasury estimates that output peremployee in the USA is 45 per cent abovethe UK level, with that of France 19 percent higher than the UK. RegionalAccounts data show that the averageproductivity level in Scotland is broadlysimilar to that of the UK, excluding theContinental Shelf.

In Scotland, "unadjusted" productivitygrowth (defined on the basis of totalemployment) was low from the mid 1980sthrough to the early 1990s – less than1 per cent per annum in most years – butwas higher in the period to 1999.

The 4-year moving average of the"adjusted" productivity growth rate(which takes account of the changingbalance between full-time and part-timeemployment) was in the 1$ -22 per centband in 1999 and the first half of 2000.

Estimates suggest that the average ratesof productivity growth in Scotland andthe UK were very similar between 1995-2000. However, there was a decelerationin Scotland in 2000, partly due to thestronger than average growth inemployment. The 4-year moving averageto 2000 Q4 was 1.2 per cent.

Within the manufacturing sector inScotland, there was a marked accelerationin productivity growth in the mid 1990s,

the 4-year moving average reaching6.7 per cent in 1995. The currentunderlying trend rate of productivitygrowth is between 3-4 per cent per annum.

The key indicator is productivity acrossthe whole economy. Real incomes inScotland will only rise if the labourresources released by sectors of decliningemployment are productively usedelsewhere and if productivity levels alsorise in the rest of the economy.

The name of the game

The growth of productivity – defined here asoutput per person employed – has beenidentified as a key requirement for theimprovement in Scottish living standards(Scottish Executive, 2000c and 2001b). It isreasonable for non-economists to ask why somuch attention is paid to an apparentlyesoteric concept.3

The analytical starting point is thestraightforward identity:

GDP per head = GDP x Employment

Employment Population

(productivity) (employment rate)

The critical element in stimulating sustainableeconomic growth – and economic developmentin the broader sense – is the enhancement ofproductivity throughout all Scottish enterprise.In turn, the returns for producing aneconomy's output can be divided into wagesand profits: ie,

Output per head = Wages per head + Real profits per head

(productivity) (the real wage)

Accordingly, if real wages grow faster thanproductivity, the profit rate will be squeezed.

1 This paper is based on – and updates – material submitted by the Enterprise and Lifelong Department of the ScottishExecutive to the ELL Committee Enquiry on the New Economy. See Scottish Executive (2001b). The paper draws on dataavailable to 2 May 2001.

2 Senior Economic Adviser in the ELL Department and Visiting Professor in the Department of Economics at the Universityof Strathclyde.

3 This section draws on a paper by Professor Alan Blinder (2000). Blinder's paper outlines the underlying assumptionsrequired for this analysis, of which a simplified version is given here. His approach is also in terms of per hour returns,rather than per head.

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This can occur over the short period, but it isnot sustainable in a modern developedeconomy. Similarly, whilst the share of profitsin output might rise over the course of a cycle,this cannot continue indefinitely. Over the longrun, therefore, productivity growth and realwage growth must correspond. Blinder makesthe point emphatically:

"Productivity is no abstract number – in thelong run, it is the name of the game."

How does productivity increase? Threesources of growth can be identified:

• improvements in the quality of theworkforce through education and training;

• increased use of, and better quality, capitalequipment;

• technological progress, enabling a given setof inputs to produce more outputs.

The last of these sources of growth –incorporating what economists describe as"total factor productivity (TFP)" – has attractedthe interests of academic researchers andpolicy makers for two reasons:

• In the US, there is a widely held view thatthe rate of TFP growth has increased inrecent years after a long period (broadlyfrom 1974 to 1995) in which its averageannual growth rate was little more thanzero. Notwithstanding the slowdown in USGDP growth since the end of last year,economists remain interested in thisapparent upward shift in the medium termproductivity performance.

• In conceptual terms, there has been amovement away from regardingtechnological progress as exogenous to thegrowth process (and therefore outside thescope of influence by policy makers). Thediscussion about "post industrial

endogenous growth theory" – cuttingthrough the jargon – is really about howgovernments can create conditions inwhich technological developments can beencouraged or accelerated: ie, providingappropriate incentives in order toendogenise a process that had previouslybeen assumed to be unalterably given. Thishas clear implications for public policy,including in Scotland.

The progress of the Scottish Executive's supplyside policies for economic development isdiscussed elsewhere in this edition of theScottish Economic Report. In this article, newestimates are presented of the comparativelevel of productivity in Scotland and its growthrate in recent years.

Productivity levels

The Treasury (2001) notes that output peremployee in the USA remained 45 per centabove the UK level in 1999 and that the levelsin France and Germany were higher than theUK by 19 per cent and 7 per cent,respectively.4 These estimates are based oncurrent GDP at current purchasing powerparities (PPPs), which allow the comparisonsto be expressed in a common currency.

The Scottish Executive has previouslypublished comparative data for GDP peremployee in 1997 and 1998 in Scotland, theUK and selected other developed economies.5

Scotland's relative position can be updated –also to 1999 – on the basis of the RegionalAccounts data published by the Office forNational Statistics (ONS). GDP per employeein Scotland was 97 per cent of the UK level, or99 per cent of the UK figure excluding theContinental Shelf.6

4 There has been a downward revision in Germany's output per worker, compared with previous estimates, due to new(higher) figures for German employment brought about by stricter application of ILO employment definitions and otheradministrative changes.

5 Scottish Executive (2000a, p28; 2001a, p53).6 Strictly, the comparison between Scotland and the other major economies is not possible, as the GDP figures used are at

market prices, which are not available for the countries/regions of the UK. However, an approximation can be made byusing Scottish and UK data on GDP at basic prices in 1999 (published by the ONS in February 2001) and Labour ForceSurvey data on total employment. The PPPs for Scotland are assumed to be the same as for the UK.

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The interpretation of these figures requiressome caution, as there are unavoidablestatistical difficulties associated with this typeof comparative exercise which mean that theresults should be viewed as estimates.Nonetheless, the general orders of magnitudeappear valid and some important conclusionscan be drawn.

These conclusions remain unchanged from theprevious comparisons:

• The UK has a sizeable productivity gap,especially compared with the USA.7

• Scotland's performance (in terms of labourproductivity in the whole economy) isbroadly similar to that of the UK as a whole.

The latter point suggests that the underlyingfactors affecting overall productivity levels inthe UK also apply in Scotland. This can beillustrated with reference to current researchby Scottish Executive statisticians on relevantissues identified by the Treasury (2000b) in itsdetailed analysis of the constraints on UKproductivity performance.

For example, the Treasury report notes thewide distribution of productivity at firm and

plant level in the UK. Whilst the leading firmshave productivity levels that are comparablewith the rest of the world, each sector also hasa long tail of firms, which are substantially lessproductive. Within UK manufacturing, thereport refers to research showing the mostproductive plants to be over 5 times asproductive as the least productive plants. Theaccompanying article by Fiona Roberts in thisedition of the Scottish Economic Reportconfirms that very similar results are found forthe manufacturing sector in Scotland.

Productivity growth: whole economy

To some extent, the examination of productivitygrowth in Scotland is constrained by thelimitations of data availability. However,sufficient information is available to permit somebroad measures of Scotland's performance to beassessed over time. The most straightforwardapproach is to examine the change in real GDP(as published by the Scottish Executive) perperson employed (as given by totalemployment in the ONS's Labour ForceSurvey (LFS)). Chart 1 shows annual data from1985-20008, which are presented as the"unadjusted" productivity series.

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Chart B.1: Unadjusted Productivity Growth in Scotland

7 According to the OECD (2000, Table 1.5), employment/population ratios were higher in the US and Germany than the UKin 1998, with the result that output per capita was even higher, relative to the UK, than the respective output peremployee figures.

8 The LFS has been quarterly since Spring 1993 and the results are now presented on a rolling quarterly basis. Prior that that(from 1984), it was an annual survey conducted each Spring (March to May).

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A more sophisticated approach introduceseither or both of two refinements. The first isto acknowledge that the year-on-year serieswill be affected by the stage of the economiccycle and/or statistical quirks affecting aparticular year's data. For example, in the earlystage of an upswing, output growth will tendto accelerate faster than the rise inemployment. One way to mitigate this is topresent the productivity growth as an averageof a number of years. Accordingly, Chart B.1also shows a 4-year moving average of theunadjusted productivity series.9

For the Scottish economy as a whole, theevidence of Charts B.1 and B.2 suggests that:

• "Unadjusted" productivity growth was lowfrom the mid 1980s through to the early1990s – less than 1 per cent per annum inmost years – but was higher in the periodto 1999.

• The 4-year moving average of the"adjusted" productivity growth rate

(which takes account of the changingbalance between full-time and part-timeemployment) was in the 1$-22 per centband in 1999 and the first half of 2000.

• There was a deceleration in productivitygrowth, as defined, in 2000. The 4-yearmoving average to 2000 Q4 was 1.2 percent.

The second amendment to the unadjustedproductivity series seeks to take account ofthe shifting balance between full-time andpart-time work. This information is availablefrom the LFS on a quarterly basis from 1994Q110. If one adopts the usual practice ofcounting a part-time employee as one-half of afull-time employee, the annual changes in the"adjusted" productivity series can be derived foreach quarter from 1995 Q4; the 4-yearmoving average is available from 1998 Q4.These series are shown in Chart B.2 for theperiod to 2000 Q4.

Chart B.2: Adjusted Productivity Growth in Scotland

9 Hence, the 1999 data point shows the average growth of productivity between 1995-99. The 4 year average is chosen inorder to provide some smoothing without losing too many data points, rather than due to any evidence of a 4 year cycle.Following the 1988 peak (4.1 per cent), the annual rate of GDP growth in Scotland decelerated to 0.1 per cent in 1991and has remained in the 1.5-3.2 per cent band since 1993.

10 Rccording to the LFS, the proportion of employment in Scotland that is part-time has risen from 23.3 per cent in 1994 to24.9 per cent in 2000. Half of this increase has occurred in the last 2 years.

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Two aspects of the recent trends in productivitygrowth warrant closer examination. The firstis the deceleration in 2000. This was broughtabout by the combination of a slowdown inthe growth of GDP (to 1.5 per cent, comparedwith an annual average of 2.4 per centbetween 1992-99) and stronger than averageemployment growth in Scotland (1.8 per cent).

On the supply side, the growth of employmentin 2000 did not reflect an increase in thepopulation of working age (defined here asthose aged 16-59/64). Rather, it was the resultof a rise of 22 percentage points in theemployment rate of the working age cohortbetween the first half of 1999 and the secondhalf of 2000. A key issue in the analysis ofproductivity performance is the type ofworker represented by this increase in theemployment rate. It is generally recognisedthat a temporary effect of bringing largenumbers of people into employment issubdued productivity growth, as thoseentering work tend to have lower thanaverage productivity levels.

The impact of this composition effect onoverall productivity growth should not beoverstated11. However, it serves to illustratethe short-term difficulties associated withmonitoring the performance of a given policytarget – in this case, productivity growth (asdefined) – when its outcome can be affected bypolicy instruments directed at other targets.

The second issue concerns Scotland's recentproductivity performance in comparison withthe UK as a whole. A straightforward means ofmaking such a comparison is to draw on therespective series for GDP and averageemployment in 1995 and 2000 in order toestimate productivity growth over the last5 years.

The currently available data show that, overthis period, the growth of total output washigher in the UK (15 per cent, compared with112 per cent) and that this was accompanied bya faster increase in employment (62 per cent,compared with 3 per cent). However, thecumulative growth in output per head between1995-2000 was the same in both cases, at 8 percent. This finding adds weight to the view thatthe key issues concerning the productivity gapbetween the UK and the US, France andGermany also apply in the Scottish context.

Productivity growth: manufacturing

A longer time series of productivity growth inthe Scottish manufacturing sector is availableusing the data on manufacturing output(published by the Scottish Executive) and theONS's series of employee jobs.12

Chart B.3 shows the year-on-year changes inmanufacturing productivity from 1985 to 2000,together with the 4-year moving average from1988. It can be seen that:

• There was a marked acceleration inmanufacturing productivity growth in themid 1990s, the 4-year moving averagereaching 6.7 per cent in 1995;

• The current underlying trend rate ofproductivity growth is between 3-4 percent per annum. The 4-year movingaverage to the end of 2000 was 3.3 percent.

11 The Treasury estimates that, in the UK, between the first half of 1997 and mid 1999, one effect of the increase in theemployment rate was to reduce productivity growth by 0.3 per cent. (See Treasury (2000a), Annex A, Table A2.)

12 The employee jobs series does not separately identify full-time and part-time employment. Hence, the productivity seriesis "unadjusted" under the definition used earlier for the whole economy.

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The chart for Scottish manufacturingproductivity is included here because of thesector's significance as a traded sector and as itcontinues to be the focus of key elements ofpublic policy.13 Over the period since 1984,productivity in Scottish manufacturing – outputper person employed – has increased by anaverage of 4.1 per cent per annum. However,of this, 2.2 per cent represents the annualaverage growth rate in output and 1.9 per centreflects labour shedding. It is important toemphasise, therefore, that the central theme ofthe Scottish Executive's drive to improveproductivity is that the key indicator isproductivity across the whole economy. The realincome of the people of Scotland will only riseif the labour resources released by sectors ofdeclining employment are productively usedelsewhere and if productivity levels also rise inthe rest of the economy.

ReferencesA. Blinder (2000), The Internet and the NewEconomy, Internet Policy Institute, January.HM Treasury (2000a), Pre-Budget Report:Building long-term prosperity for all, November.HM Treasury (2000b), Productivity in the UK,November.

HM Treasury (2001), Budget 2001: Investing forthe Long Term: Building Opportunity andProsperity for All, March.Organisation for Economic Co-operation andDevelopment (2000), Employment Outlook,June, ParisScottish Executive (2000a), Scottish EconomicReport, Stationery Office, January.Scottish Executive (2000b), Created inScotland: The Way Forward for ScottishManufacturing in the 21st Century, February.Scottish Executive (2000c), The Way Forward:Framework for Economic Development inScotland, June.Scottish Executive (2001a), Scottish EconomicReport, Stationery Office, January.Scottish Executive (2001b), A Smart, SuccessfulScotland: Ambitions for the Enterprise Networks,January.Scottish Executive (2001c), The New Economy,Productivity – and Scotland. Evidence given bythe Enterprise and Lifelong Department to theELL Committee Enquiry on the NewEconomy, February. Available on:http://www.scottish.parliament.uk/official_report/cttee/enter-01/elp01-05.pdf.

Scottish Office (1999), Scottish EconomicBulletin, Stationery Office, March.

13 See, for example, Scottish Executive (2000b).

Chart B.3: Productivity Growth in Scottish Manufacturing

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chapter four: Selected Economic Issues - Section C

Health as a Driver of EconomicDevelopment

Dr Jennifer Steedman and

Andrew Mortimer, Scottish Executive

Summary

This article identifies health as a potentialdriver of economic development. It setsout the links between health andeconomic development, reviews theempirical evidence, quantifies the impactof selected health indicators on output andemployment in Scotland, and highlightsthe potential policy implications.

The evidence suggests that improvedhealth may have an important role to playin increasing productivity and economicgrowth in Scotland. Further research isrequired, however, to establish themagnitude and importance of the causallinks in Scotland. While the primaryrationale for health improvementsshould not be to stimulate economicdevelopment, if improvements in healthcan contribute to increased economicopportunities (which, in turn, can reduceill health, poverty, inequality and socialexclusion), this implies that greateremphasis should be given to preventativehealth policies and to assessing the healthimpacts of policies across the Executive.

Introduction

The Executive's vision is that economicdevelopment should raise the quality of life ofthe Scottish people by increasing economicopportunities for all in a socially andenvironmentally sustainable way. In June 2000,the Executive published The Way Forward:Framework for Economic Development inScotland1; this sets out current knowledge onhow economic development can best be

progressed and acts as an instrument to focusthe Executive's thinking and action.

The Framework highlights increased productivity(output per worker) as the key to stimulatingeconomic growth and identifies priority areaswhere action is required to improveproductivity. One of the key priorities isincreasing the quality of human capital(traditionally understood to mean theknowledge, skills and competencies embodiedin individuals) in recognition of the fact that aknowledgeable and skilled workforce is a keyelement in the enhancement of productivity.The Framework also emphasises the need toenhance knowledge of what drives economicdevelopment in Scotland2 and for theFramework to evolve in light of this knowledge.

This article draws attention to new evidencewhich suggests that health should be viewed asa second component of human capital, which,like education, can enhance the productivity ofthe workforce and hence contribute toeconomic growth. While it has long beenrecognised that there are links betweeneconomic growth and health, it has generallybeen assumed that the direction of causalityruns from income to health3. The newevidence emerging, however, suggests that thelink may also run in the opposite direction –i.e. health may itself be a driver of economicdevelopment. If this is the case, potentialvirtuous circles exist, with health improvementscontributing to greater economic opportunities,which in turn generate resources for furtherinvestments in health and other sectors.

Potential Links between Health,Economic Development and SocialJustice

Figure C.1 sets out the potential direct andindirect links between health improvements,economic development and social justice.

1 Scottish Executive (June 2000).2 Two new consultative groups have been established by the Executive to enhance knowledge on economic development in

Scotland. See Scottish Executive (February 2001) for report on the Knowledge Economy.3 For example, Pritchett and Summers (1996), Parkin et. al. (1987).

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There are three main ways in which improvedhealth can contribute to economic growth.First, better health may enhance productivityby reducing: the number of working days lostdue to illness, the number of people whoretire early on health grounds, and the numberof people of working age who die prematurelyfrom illness. Second, health improvementsmay positively affect other determinants ofeconomic growth. It is recognised, forexample, that education and skills have a vitalunderpinning role to play in the newknowledge-based economy by increasingknowledge and encouraging innovation andenterprise4. Improvements in health (particularlychild health) can contribute to this as healthierchildren derive more benefit from schoolingthan children in poor health, leading to higherlevels of educational attainment.

Third, health status impacts on economicgrowth by affecting the size and compositionof the population. Improvements in health,access to health care and medical advanceshave led to rapid rises in the proportion ofelderly people in the population and, hence, independency ratios5 in developed economies.In Scotland, for example, the most recentdemographic projections6 suggest that theproportion of the population aged 60 or over,will increase from approximately 20 per centto 32 per cent between 1998 and 2038. Theeffect of rising dependency ratios on growth inGDP per capita is expected to be strong in

developed economies unless trends in labourforce participation are altered7. Whileimproved health is one of the factorsexplaining the rise in dependency ratios, healthstatus is also one of the factors affecting theparticipation of those of working age in thelabour market. If a greater proportion of theworking age population are economicallyactive, rather than chronically ill, this willdampen pressure on dependency ratios.

All of these impacts – direct and indirect – actto increase the number of people activelyengaged in productive activity, stimulatinggrowth levels and increasing incomes per headof the population. Higher incomes, in turn, can(with the correct guiding policies) reverse themutually reinforcing links between poverty, illhealth, inequalities, low educational attainmentand social exclusion.

Empirical Evidence for Links

Table C.1 summarises the key characteristicsand findings of studies which have investigatedthe relationship between health and economicgrowth. The studies fall into two types:macroeconomic studies which investigate thelink between health and growth directly incross-country regressions; and microeconomicstudies which analyse the statistical linksbetween health and productivity in particularcountries.

4 Scottish Executive (June 2000), Scottish Executive (February 2001).5 Defined as the ratio of the population of young and old in relation to working age population.6 Registrar General for Scotland, 1999.7 Sanghoon and Hemmings (2000).

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Figure C.1: Potential Links between Health, Economic Development & Social Justice

Reductions in:• working days lost• premature death• early retirement

Economic Development

Reductions inill Health

Other Determinantsof Population Growth:

• acquisition of education & skills

• capacity and interest inenterprise creation

• capacity & interest ininnovative activity

Direct Indirect

Reduction inPoverty

Reductionin Inequalities

IncreasedEmployment

Improvementsin Education

IncreasedIncomes

SocialJustice

IncreasedProductivity

Reduction inDependency

Ratio

HealthImprovement

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It is clear from Table C.1 that the majorityof studies (8-21) relate to developingeconomies8. The consistent result to emergefrom macroeconomic studies of theseeconomies, is that health status – typicallymeasured as life expectancy – is a significantand strong predictor of economic growth.Similarly, numerous micro studies show thatbetter health results in improved functionalityand productivity, with the size of the effectvarying with specific health indicators adopted.

Of more interest from the Scottishperspective, however, are studies whichanalyse the effects of health and growth in highincome countries. Fogel (1) analyses the long-run dynamics between health, nutrition andeconomic development in Britain and estimatesthat as much as 30 per cent of the estimatedper capita growth between 1780-1979, mayhave been due to improvements in health andnutritional status. Stronks et.al. (2) analyse therelationship between disability and income inthe Netherlands and find a strong associationbetween health and income (largely explainedby employment status). Of more interest,however, would be the impact of generalhealth and well being (including mental health)on the earnings of the general population. The effects of such factors on individuals’productivity have not been estimated. Riveraand Currais (3) use health expenditure as anexplanatory variable in growth regressions toestablish the nature of the link between healthand growth in a sample of OECD countries.A strong statistical link between healthexpenditure and growth is found. There aremethodological problems, however, in usinghealth expenditure as a proxy for health (dueto the two-way causality that exists betweenhealth and income) which could bias theresults.

A recent study by the OECD (Sanghoon andHemmings, 2000) reviews the evidence linkinga large number of factors to economic growth.This study recognises that health status canpotentially have positive feedback on levels ofhuman capital and exert downward pressureson dependency ratios by increasing the shareof the working age population in employment.

Some studies have analysed the links betweenhealth and economic growth using data fromdeveloped and developing countries (5-7).Although these studies confirm the importanceof health for growth in poor countries, studies5 and 6 suggest that health ceases to becomeimportant after a certain threshold level ofGDP is reached. While this suggests that thebenefits of better health apply primarily topoor countries, the World Health Organisation(5) has advised against this interpretation,pointing out that life expectancy (the proxyused to measure health in these studies) isunlikely to reflect the productivity lossesassociated with ill health in developedeconomies. This reflects the fact that althoughpeople in developed economies may bephysically incapable of performing productivetasks, they may still have high life expectancydue to access to medical care. Othermeasures of health, such as indicators ofphysical and mental health, are likely to affordsharper insights into the effects of health ongrowth in high income countries.

Finally, an important issue from the policyperspective, is the issue of lags between healthimprovements and the impact on productivity.Very little evidence is presented on lags in theliterature but the information which isavailable suggests relatively long lag times (e.g.study 10 suggests a lag of fifteen years betweenan additional year of life expectancy and anincrease in GDP).

8 For a more comprehensive list of citations see WHO (1999). For a comprehensive review of the links between health andproductivity, see Strauss and Thomas (1988).

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DEVELOPEDCOUNTRIES

1. Fogel (1994)

2. Stronks et. al.(1997)

3. Rivera andCurrais(1999a, 1999b)

4. Fox et. al. (1988)

DEVELOPING &DEVELOPED

5.Bhargava et. al.(2000)

6. Barro (1997)

7. Knowles &Owen (1995)

Britain

Netherlands

24 OECDcountries

92 countries

84 countries(22 developedcountries)

various

disability

HealthExpenditure

-morbidity-mortality

LifeExpectancy

Lifeexpectancy

Healthexpenditure

EconomicGrowth

Income

GDP

Employment

GDP

Income perCapita

perhaps 30 per cent of theestimated per capita growthbetween 1780-1979, due toimprovement in health andnutritional status.

Strong effect of health onincome, mainly due toemployment status.

Strong statistical linkbetween healthexpenditure and growth.

Exit from the labourmarket is health-related.

1 per cent change in LEassociated with 0.05 percent increase in growth forpoorest countries.Threshold effect beyondwhich LE has negligibleeffect.

Lower mortality associatedwith faster growth (most ofpayoff at low income levels).

Overall: stronger relationshipbetween income & healththan income & education.High income: good fit ofequation almost entirelyexplained by GDP perworking-age person.

Health EconomicStudy Country Measure Indicator Findings

Table C.1: Summary of Empirical Literature

85

DEVELOPEDCOUNTRIES

8. Barro and Sala(1995)

9. Bloom &Canning (2000)

10. Pan AmericanHealthOrganisation

11. Berhrman(1990) WorldBank

12. AsianDevelopmentBank (1997)

13. Bloom & Sachs(1998)

14. Gallup et. al.(1998)

15. Bhargava (1997)

16. Dow et. al.(1997)

Developingcountries

Estimatesbased onseveralstudies ofdevelopingCountries

LatinAmerican/Caribbean

Developing

East Asia

Sub-SaharanAfrica

TropicalRegions

Indonesia

LE at birth

LE

LE

Decline ininfant andchildmortality

Nutrition

Nutrition

GDPEducation &Investment

Income perCapita

GDP

Demo-graphics

Demo-graphics

Economicgrowth

Productivity

LabourSupply

3yr increase in LE raisesannual growth rate by1.4 per cent.

Real income per capitagrows 0.3-0.5 per centfaster in country with5 years more LE.

For every additional yearof LE, 1 per cent increasein GDP 15 yrs later. Similarresults for schooling.

Healthier workforcerelated to human capitalaccumulation.

Explains perhaps a third of"economic miracle"between 1965 and 1990.

Intractable diseaseburden inhibits growth.

Significant costs in terms ofeconomic performance.

Improved nutrition leads tobetter health and improvedproductivity.

Significant declines inlabour force participationamong poor.

Health EconomicStudy Country Measure Indicator Findings

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Scottish Evidence

Table C.2 estimates the impact of workingdays lost9 on Scottish output and employment.A number of strong assumptions werenecessary to generate these estimates. Forexample, it has been assumed that: attendanceat work translates directly into a rise in output,each industry has the capacity to produceadditional output, the price of each industry'sadditional output will remain constant, anddemand will exist for the additional output.

Table C.2 shows if no working days were lostdue to ill health10, there would be an increasein Scottish output to final demand of almost£2 billion per annum. Once the knock-oneffects upon supplier industries are consideredand changes in consumer spending are

accounted for, this figure rises to £3.36 billionper annum (at 1996 prices). In terms ofemployment, it is estimated that almost16 thousand jobs FTE could be created(through indirect changes in demand andchanges in consumer spending). This is aconservative estimate as it has been assumedthat there would be no direct employmenteffects, reflecting the expectation thatproductivity gains brought about byimprovements in health would allow Scottishindustry to meet this increase with currentstaffing.

Health EconomicStudy Country Measure Indicator Findings

17. Dwyer et. al.(1999)

18. Handa et. al.(1998)

19. Spurr (1983)

20. Schultz andTansel (1997)

21. Savedoff &Schultz (2000)

Japan

Cote d'Ivoire

Presents sixstudies ofvarious LatinAmericanCountries

Adultmortality

Chronicdisease

Child health

Days ill

Various

Earlyretirement

Retirement

Productivity

Wages

Income

Improved health improvesdependency ratio, byreducing mortality amongeconomically active &premature retirement.

Chronic disease encouragesearly retirement.

Poor child health associatedwith reduced physical workcapacity in adulthood.

Wages 11-24 per cent lowerWages 9-28 per cent lower

Positive effect of health onwages

9 These figures include days lost due to injury as well as ill health. Comparison with figures from CBI, however, suggest thatthe majority of working days lost are due to illness.

10 While it is unrealistic to suggest that ill health in the working population can be eliminated, it is useful to estimate theupper bound of the potential contribution that could be made by improving health.

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Table C.3 presents estimates of the number ofworking life years lost in Scotland due topremature deaths11. In 1999, a total of 98,315working years of life were lost. Over 70 percent were due to deaths from cancer, chronicheart disease and mental disorders. Althoughit has not been possible to estimate the impactof these premature deaths on output andemployment, it is clear that chronic diseaserepresents a substantial cost to the Scottisheconomy.

Since there are substantial productivity gapsbetween Scotland and many of the advancedeconomies (e.g. France) and a slight gapbetween Scotland and the UK, it is interestingto extend the life years lost (LYL) analysis toother countries. Table 412 shows that whenScottish figures are calculated on the samebasis as the OECD figures, the number of LYLis much higher in Scotland than in the UK andmost other OECD countries.

11 Working age population includes 16-65 years olds for men and 16-60 year olds for women.12 The figures presented in Table C.4 relates to "all causes" and therefore includes deaths from accidents as well as deaths

from ill health. Further, rather than using the working age population, the OECD calculate years lost from ages 0-70.

DirectAbsence impact

rate upon(percentage output/

of scheduled Estimatedworking increase

Industry Number of days lost in final Indirect Induced Direct Indirect InducedGross employees through demand output output employment employment employment

Industry Sector Output (£M) (FTE) absence) (£M) effect (£M) effect (£M) effect (FTE) effect (£M) effect (£M)

Agriculture & fishing 3,549 31,295 0.9% 19 29 6 — 258 56Energy and water 4,374 26,092 0.7% 11 59 34 — 329 194Manufacturing 41,857 356,064 2.4% 767 205 68 — 1,718 502Construction 7,524 112,972 1.3% 67 54 18 — 800 260Distribution, hotels andrestaurants 18,084 343,355 2.0% 225 148 111 — 2,489 2,196Transport andcommunications 8,577 98,909 2.2% 94 100 35 — 1,124 394Banking, finance andinsurance 5,892 66,883 2.2% 51 82 22 — 933 238Public administration,Education and health 11,923 565,381 2.5% 298 4 12 — 107 305Other services 22,002 271,799 3.2% 395 217 145 — 2,767 1,235Total 123,783 1,872,749 2.2% 1,926 898 452 – 10,524 5,381

Table C.2: Estimated effects of eliminating absence on Scottish Industry (at 1996 prices)

Sources: 1996 Input-Output tables for Scotland, Labour Force Survey (1993-2000)

Notes on the calculation used to derive estimates:

Absence rates are based upon two quarters of data (Spring & Summer 2000) from the Labour Force Survey that gives both information onscheduled working days per week and number of these days absent. An estimate of the annual weekly absence figure (and consequently, figuresfor the Autumn and Winter quarters) has been imputed by applying seasonal adjustment factors derived from a previous LFS series (giving onlynumber of days absent that included days where respondents were not scheduled to work). The assumption is made that the Seasonality ofthe older LFS series is identical to the newer series although no data is available to test the validity of such an assumption.

The number of days absent of three sectors ('agriculture, forestry and fishing'; 'energy and water' and 'construction') in the new series weresuppressed and subsequently imputed on a pro-rata basis from corresponding UK figures.

Although analysis of the previous LFS series found a slight downward trend in absence over time, no attempt has been made to adjust the 'new'LFS series for this trend – in part due to a lack of information about the relationship between the two series. Consequently, the absence ratesfound in 2000 have been applied directly to the 1996 Input-Output figures.

Each of the 9 sector absence rates calculated above have been applied to the appropriate industry outputs in the 128-industry input outputtables to gain an estimate of the output lost through absence/additional output gained through 100 per cent attendance. Each of the 128 valuesfor additional output have been applied to the Type I and Type II Leontief Inverse matrices to estimate the indirect effect (upon the industriessupplying each industry) and the induced effect (once changes in consumer spending are accounted for) of 100 per cent attendance at work.

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Rate per Per cent ofTotal years 100,000 Total years

Rank Cause of Death of life lost population of life lost

1 Cancer 30,098 588 30.6%

2 Diseases of the circulatory system 26,893 525 27.4%

3 Mental disorders 12,814 250 13.0%

4 Disorders of the digestive system 11,266 220 11.5%

5 Diseases of the respiratory system 5,835 114 5.9%

6 Diseases of the nervous system 4,355 85 4.4%

7 Endocrine, nutritional & metabolic diseases 2,075 41 2.1%

8 Infectious & parasitic 2,007 39 2.0%

9 Congenital anomalies 899 18 0.9%

10 Symptoms, signs and ill-defined conditions 675 13 0.7%

11 Diseases of the genitourainary system 631 12 0.6%

12 Diseases of the musculoskeletal 290 6 0.3%

13 Diseases of the blood 219 4 0.2%

14 Complications of pregnancy and childbirth 201 4 0.2%

15 Diseases to the skin 53 1

16 Conditions during the perinatal period 4 0 0.0%

Scotland 98,315 1,921 100%

Table C3: Years of Working Life Lost in Scotland by Cause of Death, 1999

Source: Registrar General for Scotland, Annual Report, 1999

Years of life lost per 100,000

Sweden 3,402

Netherlands 4,123

Greece 4,444

U.K. 4,455

Austria 4,695

Ireland 4,727

Germany 4,748

Finland 4,753

France 4,782

Luxembourg 4,969

Denmark 5,190

Scotland 5,278

Portugal 6,289

Table C4: Years of Life Lost Due to All Causes in OECD countries (per 100,000), 1996

Source: OECD Health Data 2000, Registrar General for Scotland

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Potential Policy Implications

If further research confirms there are stronginter-relationships between improved health,economic growth and indeed social justice inScotland, this would have a number ofimportant implications for policy. It would, forexample, provide strong economic argumentsfor a greater proportion of funds to be allocatedto public health policies which prevent diseaseand promote good health (particularly cancer,circulatory disease and mental health), ashealth-induced productivity gains will begenerated by preventing, rather than treating,ill health. Further, it would suggest that thehealth impacts of a wider range of policies (e.g.transport, housing, environment) ought to beassessed, since health spending is not the only,nor necessarily the most effective way, ofgenerating health improvements.

Conclusion

The empirical evidence for the links betweenhealth and economic development in developedeconomies is limited and inconclusive. However,the evidence which does exist, and thepreliminary investigation of the links inScotland, suggests more detailed research iswarranted to derive more robust andcomprehensive estimates of the potentialimpact of health on economic developmentin Scotland.

REFERENCES

Scottish Executive (2000), The Way Forward:Framework for Economic Development inScotland, June 2000

Scottish Executive (2001), Report on theKnowledge Economy Cross-Cutting Initiative,February 2001

Pritchitt, L. and Summers, L.H (1996),"Wealthier is Healthier" The Journal for HumanResources, 31, 841-68

Parkin, D., McGuire, A. and Yule, B. (1987),"Aggregate health care expenditures andnational income: Is health care a luxury good?Journal of Health Economics, 6, 109-27.

Sanghoon, A. and Hemmings, P (2000), "PolicyInfluence on Economic Growth in OECDCountries: An Evaluation of the Evidence",Economics Department Working PapersNo.246, OECD

WHO (1999), World Health Report 1999:Making a Difference (WHO, Geneva,1999)

Strauss, J. and Thomas, D. (1998), "Health,Nutrition and Economic Development",Journal of Economic Literature, 36, June 1998,766-817

Fogel R.W. (1994), "Economic Growth,Population Theory and Physiology: TheBearing of Long- Term Processes on theMaking of Economic Policy", The AmericanEconomic Review, 84, June 1994, 369-395.

Stronks, K., Van de Mheen, H., Van Den Bos,J. and Makenbach, J.P. (1997), "TheInterrelationship Between Income, Health andEmployment Status, International Journal ofEpidemiology, 26, No.3, 592-600.

Rivera, B. and Currais, L. (1999a), "IncomeVariation and Health Expenditure: Evidencefor OECD Countries", Review of DevelopmentEconomics, 3, 1-16

Rivera, B. and Currais, L. (1999b), "EconomicGrowth and Health: Direct Impact or ReverseCausation?" Applied Economic Letters, 6,761-764

Fox A.J. and Shewry M. (1988), "NewLongitudinal Insights into Relationshipsbetween Unemployment and Mortality", StressMed, 4, 11-19

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Bhargava, A., Jamieson, D.T., Lau, L. andMurray, C.J.L (2000), "Modelling the Effects ofHealth On Economic Growth" GPE DiscussionPaper Series, 33, Evidence and Information forPolicy, WHO

Barro, R.J. (1997), Determinants of EconomicGrowth, Cambridge, MA, MIT Press

Knowles, S. and Owen, P.D. (1995), Healthcapital and cross country variation in incomeper capita in Mankiw-Romer-Weil model.Economic Letters, 48, 99-106

Bloom, D.E. and Canning, D. (2000), "TheHealth and Wealth of Nations", Science, vol.287, 18 February 2000

Barro, R.J. and Sala-I-Martin, X. (1995),Economic Growth, New York: McGraw-Hill

Asian Development Bank (1997), EmergingAsia, Asian Development Bank

Bloom, D. E and Sachs, J.D (1998), BrookingsPap. Econ. Act., Macroeconomics, 2, 207

Bhargava, A. (1997), "Nutritional Status andthe Allocation of Time in RwandeseHouseholds, Journal of Econometrics, 77, 277-295.

Spurr, G.B. (1983), "Nutritional status andphysical work capacity", Yearbook of physicalAnthropology, 1-35.

Savedoff, W.D and Schultz,T.P (eds). (2000),Wealth From Health, Linking Social Investmentsto Earnings in Latin America, Inter-AmericanDevelopment Bank, Washington, D.C.

Schultz, T.P., and Tansel, A. 1997 (1997),"Wage and Labour Supply Effects of Illness inCote d'Ivoire and Ghana: Instrumental VariableEstimates for Days Disabled", Journal ofDevelopment Economics, 53 (2), 251-86

Handa, S., and Neitzert, M. (1998), "ChronicIllness and Retirement in Japan", LivingStandards Measurement Study, Working PaperNo.131,The World Bank, Washington D.C.

Dow, W.H. (1997), "Health Care Prices,Health and Labor Outcomes: ExperimentalEvidence", RAND (unpublished)

Dwyer, D.S. and Mitchell O.S. (1999), "HealthProblems as Determinants of Retirement: AreSelf-Rated Measures Endogenous?" Journal ofHealth Economics, 18, 173-193

91

Living in the past: why is Scotland’sfinancial services sector ignored?1

Ray Perman, Chief Executive,

Scottish Financial Enterprise

Summary

Economic analysis and the compilationof economic statistics are undertaken onthe basis of an economy which is decadesout of date and fail to give an adequatepicture of fast-growing service sectors,such as financial services. The articlediscusses the view that this colours theeconomic debate and hinders a properunderstanding of the forces shaping theScottish economy. This article sets outthe crucial importance of the financialservices sector to the development of theScottish economy.

Introduction

Let's imagine not an alien from outer space butconsultants working for a multinational lookingfor a location for a European headquarters hadarrived in Scotland at the beginning of this year.

The weight of words emanating from bothofficial and academic sources – and thestatistical base upon which these words arewritten – would lead our consultants to thinkof Scotland as predominantly an agriculturalnation with a large manufacturing sector.Construction was obviously less important,ranking about the same in importance asServices.

This article seeks to rectify this impressionby setting out the critical importance of thefinancial service sector to the development ofthe Scottish economy. It looks at the directand indirect impacts of the sector in termsof both output and employment, and alsoconsiders the wider importance of theheadquarters functions of these financialenterprises and their contribution to thecorporate life of the Scotland.

In reality, the structure of the economy isstrikingly different from the past. Agriculture is avery small and dwindling part of the economy.Even on the outdated (1995) weightings usedby the Scottish Executive, agriculture, forestryand fishing together accounted for only 3.2 percent of output. The proportion has fallen sincethen. Manufacturing was only 20 per cent ofgross domestic product (GDP) in 1995, and isalso likely to have fallen. Nearly two-thirds ofthe economy was accounted for by services in1995 and that proportion is likely to have risen.

The same pattern is visible in employment.The vast majority of working Scots are in theservice sector. There is no region of Scotland– including the rural areas and islands – whereservice employment is not substantially morethan all other sectors combined.

This should not be a surprise. Scotland is verylittle different in its broad economic structureto the UK as a whole or to most developedWestern economies. I could go on, but I thinkyou get the picture. Wherever one looks atofficial statistics one gets an impression of aScottish economy stuck in the industrialrevolution or even earlier. Agriculture is a pre-occupation (even before foot and mouthdisease), manufacturing is the main industrialsector. The truth – were our consultants toignore what is written and look at the numbers(or at least at what numbers they can find) isvery different.

I welcome the recent progress in developingthe official statistical base in Scotland, as setout in the latest Scottish Economic Statistics.However, why, for example, do officialstatistics continue to measure on a quarterlybasis the output of the food and tobaccoindustries in Scotland (1995 weight 1.9 per cent– all food, the Scottish tobacco industrydisappeared decades ago), the drinks industries(1.6 per cent) or the transport equipmentindustries (1.2 per cent), when they cannotdistinguish between banking, life assuranceand pensions and investment management, all

chapter four: Selected Economic Issues - Section D

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1 This article has been contributed to the Scottish Economic Report by Ray Perman, Chief Executive of Scottish FinancialEnterprise, and represents his own views and not necessarily those of the Scottish Executive.

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of which are larger in both output andemployment terms and growing very stronglycompared to the rest of the economy?

Lest you think this is all special pleading, let mealso draw attention to Real Estate and BusinessServices, a catch-all category whose outputand employment in 1995 were not far short ofthe whole of the manufacturing sector (andmay since have overtaken it), but about whichvery little is known – or at least published. Ithas grown much faster than manufacturingover the past six years, yet merits littleattention or study.

Better statistics lie at the heart of good analysisand I would welcome the further developmentof data. But before collecting more figures weneed to ask why we are doing it. In the pastthere has appeared to be a tendency to go on collecting information merely for the sakeof consistency. Economists hate to breakseries, so data is published about individualsectors long after they have declined to a levelwhere they are of incidental importance to theperformance of the economy as a whole. Onthe other hand, activities which were ofmarginal importance 20 years ago are nowgrowing strongly: professional consultancyservices, including IT, are an example of this.

The Minister for Enterprise and LifelongLearning has stated that one of the objectivesof the Executive is to increase the long termgrowth rate of the Scottish economy. To dothat, in my view, we need to identify thegrowth industries and encourage them. In themodern economy that may not be byproviding capital grants as it was in the past,but by investing in education, training andinfrastructure: telecommunications ratherthan new roads, better public transport withinScotland and direct air links outside.

Does it matter that published statisticsgive an incomplete picture of the moderneconomy?

Well, yes, it does. Economic commentaryfrom the Scottish Executive and from the

academic community sets the agenda for theeconomic debate in Scotland. It is picked up byacademics and the press and, inevitably, whatthe Executive writes about colours what theywrite as well. They, in turn, influence MSPs,local authorities and other opinion makers.

There is, for example, very little understandingof the size or importance of financial servicesas a component of the Scottish economy. Untillast year there was no civil servant in Scotlandwhose full time job it was to follow theindustry and no-one in Scottish Enterpriseeither. (Now, I am pleased to say there are twopeople in the Enterprise and Lifelong LearningDepartment and Scottish Enterprise isdeveloping an Action Plan for financial services).

Economic Impact study

It was to try to improve knowledge ofthe financial services industry that ScottishFinancial Enterprise (SFE), the sector'strade body, and Scottish Enterprise jointlycommissioned an economic impact study fromthe Fraser of Allander Institute at StrathclydeUniversity. The study found that the sectordirectly contributes just less than 7 per cent ofScotland's GDP. This is a far larger estimatethan that implied by the weightings used bythe Scottish Executive, even if these aregrossed up using the growth rate of financialservices since 1995. Such a contribution wouldmake it one of the largest single sectors of theeconomy, comparable with electronics, forexample.

The study also found that financial servicesdirectly employs 91,000 people, orapproximately 5 per cent of Scottish full-timeequivalent jobs. There is quantity, but there isalso quality of employment. The study foundthat labour productivity in the sector is highand that about 34 per cent of employees can beclassified as being in managerial or professionalpositions, compared to 25 per cent for theeconomy as a whole.

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Part of the reason for this is that financialservices requires a high number ofprofessional staff – bankers, accountants,actuaries, lawyers, IT professionals – as well asmanagers. But a second significant reason isthe presence of head offices in Scotland.

Financial services is one of the few sectorswhich retains significant managerial controlwithin Scotland. In contrast to, say, electronics,where only the smallest companies arecontrolled from Scotland, many of the largestfinancial companies have either ultimatemanagerial control or operational controlhere. In the former category are The RoyalBank of Scotland Group (since its takeover ofNatWest, one of the largest banks in Europe),Bank of Scotland and Standard Life. In thelatter, Scottish Widows, Scottish Mutual,Scottish Equitable and Clydesdale Bank, whoseultimate parent, National Australia Group alsohas its European headquarters in Glasgow.

Head offices are important, not only becausethey employ higher value staff (who thus putmore back into the economy in wage income),but also because they tend to buy higher valueservices and have a greater propensity to buylocally than branches or subsidiaries.

Fraser of Allander found that financial serviceshas a high "multiplier" effect, that is itgenerates further economic benefits in thewider companies through the supplies andservices it buys: "While the degree ofintegration varies across the sector, itnevertheless compares quite favourably withothers. For example, in the three biggest sub-sectors: banking; life assurance & insurance;and fund management, 58 per cent, 64 percent and 74 per cent, respectively, of totalexpenditures are placed in Scotland. Whilethese percentages are somewhat less than theaverage for the service sector in Scotland of 86per cent, they are generally greater than themanufacturing average of 58 per cent. But theimpact on the wider economy does not stop

here. When allowance is made for thespending and re-spending of the incomesreceived by staff and suppliers the impact onthe economy multiplies.”

"The study estimates that the production of£7.18 billion of gross output – formallyequivalent to sales or turnover – in financialservices generates a further £10 billion ofoutput elsewhere in Scottish industry.Similarly, in terms of employment, the 91,000FTE jobs in the sector are found to support afurther 89,000 FTE jobs right across theScottish economy. Specific sectors benefitingfrom these knock-on effects include retail &wholesaling, where 16,400 jobs are directlyattributable to the financial services sector,manufacturing (7,300 jobs), other businessservices (7,200 jobs), other services (6,900jobs), hotels & catering (5,800 jobs), property(5,700 jobs) and post & telecommunications(4,700 jobs)."

Financial services also plays a vitally importantrole in the corporate life of Scotland, an aspectusually ignored by economists in favour ofindustry-wide aggregations. Ten of the 20largest companies in Scotland are in financialservices, accounting for 60 per cent of sales,63 per cent of profits and 30 per cent ofemployment of this group (source: Insider 500,January 2001).

It is also a fast growing sector. The Fraser ofAllander study points out that from theExecutive's own figures it can be seen that"between 1995 and 1999 finance was the thirdfastest growing sector in the Scottish economy.With growth of gross value added of 5.4 percent per annum only chemicals (6.2 per cent)and electronics (11.4 per cent) grew fasterthan finance. Moreover, in view of the relativescale of the sector it is clear that financialservices contributed significantly to overallScottish GDP growth of 2.6 per cent perannum during this period."

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Since the study was published, this higher thanaverage growth has continued. In the fourquarters to June 2000 the gross value added offinancial intermediation grew by 10.1 per centcompared to 2.1 per cent for the Scottish

Another factor which makes financial servicesworthy of closer attention is its internationalstanding and importance. Evidence collected bySFE suggests that in the three main activities ofthe sector in Scotland (banking, life assuranceand pensions and investment management) werank among the top ten centres in Europe,

ahead of many capital cities or nations muchlarger than Scotland.

Using market capitalisations as a guide, Scotlandranks about sixth in the European top ten forbanking and is home of two of the top 40 banksin Europe. Royal Bank is now the third largestbank in Europe on this measure (table D.1).

economy as a whole (Chart D.1). Although inthe following quarter it fell back by 2 per cent,compared to growth of 0.7 per cent in theeconomy its long term growth trend is abovethe economy average.

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95

100

105

110

115

120

125

130

135

140

Services Manufacturing Financial Services

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2

Gro

ss V

alu

e A

dd

ed

Time

Source: Scottish Executive Information Directorate, Nov 2000

Chart D.1: Gross Value Added. Q1 1995 – Q2 2000

1 UK (ex Scotland) 261.60

2 Switzerland 124.60

3 Spain 104.40

4 Germany 99.00

5 Italy 67.30

6 Scotland 59.00

7 France 50.30

8 Belgium 33.90

9 Scandinavia 20.20

10 Ireland 10.70

Table D.1: Nationality of TOP 30 quoted banks in Europe

Source: Financial Times. Market caps in Millions Euros as at 12/6/00

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In life and pensions, Scottish life assurancecompanies managed about 15 per cent of thetotal UK business and about 4.5% of the total

In investment management, an internationalcomparison by the US consultancy ThomsonFinancial ranks Scotland sixth in Europe in

In few other industries do we punch so muchabove our weight. Surely policy makers shouldknow more about this sector?

References

"The Economic Impact of Financial Services onthe Scottish Economy" – A report by the Fraserof Allander Institute for Scottish FinancialEnterprise/Scottish Enterprise. August 2000

"2000 International Target Cities Report" –Thomson Financial.

terms of institutional equities managed and15th in the world.

for the European Union. This would rankScotland seventh in the top ten centres.

Market share of EU total

1 UK (ex-Scotland) 25.20%

2 France 18.20%

3 Germany 14.80%

4 Italy 7.50%

5 Switzerland 6.10%

6 Netherlands 5.30%

7 Scotland 4.50%

8 Spain 3.60%

9 Belgium 2.30%

10 Sweden 2.20%

Table D.2: Life assurance and pensions new premium income

Source: Association of British Insurers. Figures relate to 1999

2000 1999

1 London, England 2,460.7 2,177.6

2 Paris, France 458.2 420.4

3 Zurich/Basel/Winterthur 413.6 491.4

4 Amsterdam, Netherlands 326.8 294.4

5 Frankfurt, Germany 310.9 269.5

6 Edinburgh/Glasgow, Scotland 252.7 238.8

7 Milan, Italy 195.8 187.1

8 Geneva, Switzerland 184.8 172.3

9 Brussels, Belgium/Luxembourg 162.3 131.1

10 Stockholm, Sweden 161.0 134.9

Table D.3: Top Ten European fund management centres

Institutional equity holdings $ billions Source: Thomson Financial 2000. Figures relate to 31 December in each year.

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Job Creation and Destruction inScottish Firms

Paul Teasdale and Joanne Briggs,

Scottish Executive

Summary

Between 1995 and 1999 the number ofjobs with Scottish employers increased by70,000 (5.4 per cent). In that timedissolutions and contractions resulted inthe destruction of 314,000 jobs. Howeverat the same time a fifth of employersincreased employment and there were37,000 new employers. Together theycreated 384,000 jobs – with a net increasein employment. This article draws on anew data source to examine thecontributions of large and small firms. Jobcreation rates did not show muchvariation by firm size but job destructionwas much higher in small firms. Newfirms accounted for 40 per cent of all thenew jobs. There are some small but

Description of the dataset

These figures come from a new dataset thathas been designed to provide new informationon job creation and destruction in theeconomy. Much of the work on job creation is

dated and there has been criticism fromacademics that some of the early work tendedto give a misleading picture of the relativeimpact of small firms. The Department ofTrade and Industry commissioned TRENDSBusiness Research to examine data for a more

interesting differences between what wereport for Scottish firms and the patternof job creation and destruction for the UKas a whole.

Introduction

In this article we present data that helps us tounderstand the process of job creation and jobdestruction. A change in the number of jobs inthe economy should be seen as the netoutcome of four components: on the positiveside growth of employment in some firms, andthe birth of new enterprises, and on the negativeside contraction in some firms and closures.These are, of course, not separate processesbecause the jobs created in new and growingbusinesses are, for the most part, displacingjobs in similar but less competitive businesses.Table E.1 shows the number of firms based inScotland that changed size between 1995 and1999 and the associated change in employment.Overall job creation exceeded job destructionby 69,500 and overall employment increasedby 5.4 per cent.

Firms that Number Employmentbetween 1995 and 1999: of firms 1995 1999 Change

increased employment 15,900 355,400 566,700 +211,300

reduced employment 6,400 257,000 178,600 -78,400

had stable employment 26,800 436,000 436,000 Nil

closed 24,700 236,000 Nil -236,000

were born 37,000 Nil 172,600 +172,600

Total 111,000 1,284,900 1,354,300 +69,500

Table E.1: Number of firms based in Scotland that changed size, and the associated changein employment, 1995 – 1999

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recent period. TRENDS have over many yearslinked successive updates of Dun & Bradstreetrecords1 to produce a longitudinal businessdataset, which they used for this study. Allrecords were included that had both validemployment data for the beginning of 1995 (ora birth date after then) and valid employmentdata for the beginning of 1999 (or a death datebefore then). Extensive checks were thencarried out to ensure that, as far as possible,employment change between 1995 and 1999reflected real change, rather than inaccuratedata or simply the restructuring of enterprises.

In this article we report on the data forScottish firms2. Before presenting the resultswe will describe the data and how to interpretthe numbers.

• The data refers to employment in Scottishfirms (that is ones with a head office inScotland), not to employment in Scotland.The biggest employers within Scotland arein the public sector or are based in England3

and these are excluded from the panel,while many of the people employed byScottish firms are elsewhere in the UK. Thenumber employed by Scottish firms at thistime was equal to about sixty per cent ofemployment in Scotland4.

• The panel excludes businesses with noemployees. These zero employee businessesaccount for two-thirds of all businesses, butvery few of them ever grow and many closequickly5. The Labour Force Survey indicatesthat over the period being examined inScotland the number of self employedpeople without employees was broadlyunchanged, around 145,000.

• Firms can grow organically or throughmerger and the dataset does not distinguishbetween these. Similarly closures(dissolutions or deaths) and contractionsinclude undertakings that were transferredto another firm. In such cases there wouldnot necessarily be a job loss to individualsor the economy. (It is possible that thiscould be the case in many of the closures ofmedium and large firms).

• The data compares employment at twodates. It is possible that between these datesemployment in a firm went through severalups and downs. It is also possible that manyjobs were lost in a firm that shows netexpansion, if, for example, it closed someplants while expanding or acquiring others.

We should note that, although for public policywe are very interested in employment growththis is not an objective of businesses. Some firmsmay have an objective of reducing employment,and many owners of small businesses arecontent as they are and have no wish to grow,so employment growth should not be seen assynonymous with business success.

Main findings

Chart E.1 illustrates the jobs flows as set out inTable E.1. Two sub totals that we areparticularly interested in are:

• Net growth, i.e. what happened to the1995 cohort – this is the sum of the firstthree columns and is clearly negative

• Gross job creation – an indicator of theamount of change in the economy, this is thesum of births and growth, and the balancebetween these provides information on thesources of the new jobs.

1 Dun & Bradstreet is a business information company that holds a database of companies in the UK.2 Some data for the UK can be found on the website of the Small Business Service and more details will be added shortly. An

extended version of this article with a fuller analysis of the data for Scottish firms will be put on the Scottish Executivewebsite.

3 See Scottish Business Insider January 2001 for details of the biggest employers in Scotland. About three quarters of the largefirms in Scotland are not based in Scotland. The panel included about 500 large firms compared with the over 2,000 firmsthat employ over 250 people in Scotland.

4 The Labour Force Survey indicates that over this time employment in Scotland increased by about 30,000. Within thattotal, employment in the public sector fell by about 60,000.

5 If a one person (zero employee) business were to take on an employee it would appear in the panel as a "new business"with two "new" jobs.

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In the rest of this paper we examine thecontribution to job creation and destruction offirms in various size bands. For this purpose

the firms are grouped into four bandsaccording to their employment in 1995, asshown in Table E.2.

-250,000

-200,000

-150,000

-100,000

-50,000

0

50,000

100,000

150,000

200,000

250,000

Overall changeBirthsExpansionContractionDeaths

Jo

bs

“Contractions” and “Expansions”

Chart E.1: Components of Change in Scottish Firms

Number of Scottish Share of employment Share of employmentCategory Definition firms 1995 Scottish firms All UK firms

micro 1-9 employees 58,730 18% 18%

small 10-49 employees 12,223 18% 17%

medium 50-249 employees 2,268 17% 14%

large 250+ employees 500 46% 50%

Total All employers 73,721 100% 100%

Table E.2: Number of Firms Based in Scotland in 1995, by Firm Size Band

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Chart E.3 expresses these changes inpercentage terms. The growth figure (newjobs/initial stock) can be described as themeasure of "fertility". Overall this was 16 percent. We see that (contrary to some pastclaims) the rate in micro firms was not greatlyabove average, and in other small firms the

rate was below average. What does differsignificantly by size is the probability of jobdestruction which was much less in the largerfirms. The effect is to flatten the bars on theright – the large number of new jobs in largefirms is merely consistent with the large firms'share of the initial stock of employment.

Chart E.2 presents the components of netgrowth for enterprises of various sizes. Thebottom bar shows that 45,000 jobs werecreated in enterprises that had 1-9 employeesin 1995. But at the same time 93,000 jobs

were destroyed in other micro enterprises, sooverall employment shrank among the 1995cohort of micro firms. The same pattern isfound in all size bands except for the largeenterprises.

-100,000 -80,000 -60,000 -40,000 -20,000 0

contractionsclosures

0 20,000 40,000 60,000 80,000 100,000

growth

Jobs

micro

small

medium

large

Chart E2: Job Creation and Destruction by Firm Size band

-45% -35% -25% -15% -5%

contractionclosure

5% 15% 25%

growth

Jobs

micro

small

medium

All

large

Chart E.3: Job Creation and Destruction by Firm Size band (per cent) 4e

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Chart E4 combines the absolute net growth ofemployment in existing firms (negative in allbands except for large firms) with the jobs innew firms6. There were 37,000 firms in thepanel in 1999 that had not been there in 1995– that is one new firm for every two firms in1995. The new firms are, here, categorised bytheir size in 1999. It illustrates the importanceof new firms in gross job creation (and, also,that not all new firms are small). We must,

however, be careful in how we describe this.Even though net growth was negative in thefirms that were in existence in 1995, wecannot say that without the new firms thenumber of jobs would have fallen. It is partlycompetition from the new firms that destroysthe jobs in the older firms (and, also, becausein some cases the new firms were transfersfrom older enterprises e.g. Scotrail formedfrom British Rail).

-60,000 -40,000 -20,000 0 20,000

growth of 1995 firms

40,000 60,000 80,000 100,000 120,000

jobs in new firms

Jobs

micro

small

medium

large

Chart E.4: New Jobs by Firm Size Band

6 See Note 5. Some of these "new" firms may have been in business in 1995 but without employees. However, we believethat this can account for relatively few of the new firms. Examination of the Labour Force Survey shows that few zeroemployee businesses become employers.

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Chart E.5 slices the data (from Chart E.1) in adifferent way: to show the shares of the jobscreated or destroyed in the various sizedfirms. The top bar shows that most of the jobsin new firms were in micro firms, while the

second row shows that of the jobs createdthrough growth about 45 per cent were inlarge firms. The bottom bar shows that smalland micro firms accounted for two thirds of allthe jobs lost through death of a firm.

Chart E.6 shows the proportions of firmscontributing to these changes. It shows that athird of micro firms from 1995 had closed by1999 and a fifth had increased employment.Among large firms contraction was morecommon than death, affecting 30 per cent of

firms, while over a third increased employment.Overall, between 1995 and 1999 over one thirdof firms closed. Looking at the panel at the endof the period, of all the employers in businessin 1999 over 40 per cent had been formed inthe preceding four years.

0 50,000 100,000 150,000 200,000 250,000

largemediumsmallmicro

closures

contractions

growth

new

Jobs

Chart E.5: Shares of Job Creation and Destruction

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We should note that only a small part of theseflows are accounted for by changes inindustrial structure. Most of the change takesplace within industries, as some firms grow atthe expense of the less efficient.

The overall effect of all this change was to shiftemployment towards large firms – in 1995they accounted for 46 per cent of jobs in thepanel and that rose to 49 per cent in 1999while the share employed in small and mediumfirms declined. This shift is seen in the UK as awhole and is confirmed by other sources.There was a shift towards small firms in theearly 1980s but it was reversed in the 1990s.

Comparison with UK as a whole

The pattern of growth in Scottish firms was verysimilar to that for all UK firms. Net growth inthe 1995 firms was the same (-8 per cent) butwithin that there were interesting differences.

(a) The large Scottish firms showed a netincrease in employment while in the UKthe figure was negative (the loss being

mainly in London and the South East). Thiswas the result of less job destruction inlarge Scottish firms while the fertility rateswere similar.

(b) The net reduction of employment in themicro Scottish firms was greater than inthe UK overall. The rate of job destructionwas the same, but the fertility rate waslower7. The proportion of micro firmsachieving growth was the same, but theScottish firms that grew grew (on average)by a smaller extent (perhaps limited bymarket size).

There is also a difference in the overall changein employment. The 5.4 per cent increase inemployment in Scottish firms was greater thanthe change for the UK as a whole (3.9 percent). This difference was due to the largercontribution of new employers. These weremore numerous in Scotland (equal to 51 percent of the 1995 stock compared with 44 percent in the UK as a whole) and on averagethey employed more people (4.6 each insteadof 4.4).

Chart E.6: Probability of Firms Changing Employment

0%

10%

20%

30%

40%

50%

60%

70%

80%

expanding contractionsclosures

alllargemediumsmallmicro

Jo

bs

7 It maybe tempting to see some relationship between less growth of small firms – suggesting that the large firms werebetter able to defend their market. But it is unlikely that these are in direct competition. It is more likely that some of theadditional employment of large Scottish firms was not in Scotland.

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Conclusion

In summary the key messages that emergefrom this work are:

• Fertility of micro firms is only slightly aboveaverage and for other small firms it is below.

• Job loss is high in micro and small firms.

• Growth between 1995 and 1999 did notoffset job loss in any size band except thelargest (and there the Scottish firms were incontrast to the UK as a whole).

• New firms are crucial in the job generationprocess, accounting for nearly half of grossjob creation in this period.

• Of the jobs created though growth nearlyhalf were created by large firms, while mostof the jobs lost were in small and micro firms.

• Overall there has been a shift inemployment to large enterprises.

• New firms made a bigger contribution togross job creation in Scotland than in theUK as a whole.

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Defining Rural Scotland

Neil Ritchie, Scottish Executive

Summary

This article outlines work which has beenled by Scottish Executive Environmentand Rural Affairs Department economiststo produce a consistent approach todefining rural Scotland across theExecutive. In addition to outlining thebackground to this work, the article alsoexplains why a framework approach hasbeen adopted and how this will be used inthe future – particularly in terms ofanalysis to underpin future rural policydevelopments.

Background

For a number of reasons there has beenincreasing attention paid to rural areas overrecent years. Some of this has been Europeanled with an increasing trend within theCommon Agricultural Policy towards broaderrural development objectives rather thandirect agricultural support. In Scotland theheightened priority has been more visible,particularly since Devolution, with increasedattention being given to spatial variationswithin Scotland. Indeed, the establishment ofthe Scottish Executive saw the appointmentof the UK's first ever Minister for RuralDevelopment as well as the creation of a RuralAffairs Department.

The attention to rural matters – economic,social and environmental – is a cross-cuttingissue and has implications for all parts ofthe Executive. Reflecting this, a MinisterialCommittee on Rural Development, involvingMinisters from across the Executive's policyportfolios was established in 1999 to promotea joined-up response to rural development.

Review of Existing Definitions

One of the first issues that the MinisterialCommittee discussed was the definition of ruralScotland. Over time, a number of differentdefinitions had been used and at an earlymeeting the Committee was told that therewere around 20 different rural definitions inuse across the Executive – eg for the VillageShops Rate Relief Scheme and Rural PetrolStations Grant Scheme.

Each of the definitions was justified in its ownright and there were similarities betweenmany of them, principally their derivation fromthe Census of Population. The Committeerecognised that given the way that the termrural is used (often within a wider context – egrural transport or social exclusion), a singledefinition was unlikely to be achievable andthat individual policies and initiatives wouldneed to be set against their own specificobjectives. Nevertheless there was a clearview that a more consistent approach wasrequired.

A Framework definition

In response to this request a core frameworkapproach to defining rural Scotland wasdeveloped. This has a core definition, whichdefines rural Scotland as being areas outsidesettlements of more than 3,000 residents.

Map 1 shows the resultant picture of ruralScotland. Under the core definition, ruralScotland accounts for 98% of the Scottishlandmass and 18% of the population(approximately 1m people). The settlements(essentially communities with more than 210postal addresses, broadly equivalent to 500people) are identified on the basis of workdone by the General Registrar's Office forScotland, in preparation for the analysis of the2001 Population Census1. The use of thepopulation threshold reflects that it would be

1 For more details on this see 'Scottish Settlements – Urban and Rural Areas in Scotland', available at: www.gro-scotland.gov.uk/grosweb/grosweb.nsf/pages/scosett

chapter four: Selected Economic Issues - Section F

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simplistic to suggest that all settlements areurban (eg Brora with 1,480 people; Findhornwith 820) and the 3,000 level fits withhistorical usage and broadly reflects an urban-rural divide.

The core definition provides a basic definitionof rural Scotland. Recognising that it is notsuitable for all purposes a framework approachhas been adopted, whereby other, morespecific definitions can be used to build uponthe core and allow individual initiatives to beeffectively targeted (and thus maximiseefficacy against objectives). For example, thePre-School Education Grants scheme extendsupon the core definition to include settlementsup to 10,000 people; and the Rural PetrolStation Grant Scheme gives assistance topetrol stations which are (amongst othercriteria) 30 minutes drive-time from asettlement of 30,000 people.

From time to time, some initiatives designedto assist rural communities and areas willdevelop which use an approach that fallsoutside the core framework. It is anticipatedthat such situations will be rare, but suchvariations will be permitted, subject toclarification that the alternative approach isrequired to provide maximum effectiveness.

Future uses

The core framework to defining rural Scotlandis now in use across the Executive and willhelp guide future policy development. Inaddition, the core definition of rural Scotlandwill be used to provide a more accuratedescription of rural Scotland.

Historically, much rural analysis has been doneon the basis of local authority areas with apopulation density of less than one person perhectare. This is a fairly crude definition since itwould fail to include rural areas in those localauthority areas which fall outside thepopulation density threshold (eg East Lothian,South Lanarkshire) but would include largesettlements within 'rural' council areas (egPerth, Inverness). Reflecting the importance ofan evidence based approach to policydevelopment (as outlined in 'Rural Scotland: ANew Approach' and the 'Framework forEconomic Development in Scotland'), the coredefinition will allow the development of amore accurate description of rural Scotland.

Indeed, the Scottish Household Survey isalready starting to allow such analysis. As thequantity of information develops this will allowmore detailed consideration of variationswithin rural Scotland. This latter point issignificant, as it is not possible to consider ruralScotland as a single entity. Furthermore, thedefinition will also be used to guide the spatialdisaggregation used in the development ofNeighbourhood Statistics. Whilst for somestatistics it would not be meaningful todisaggregate below the local authority area (egGDP), the Executive is developing a majorwork programme of providing a greateramount of small area data.

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Published

Articles Published in Recent Scottish Economic Reports

Methodologies used in the Evaluation ofEffectiveness of European Structural Funds

Measuring Efficiency in the NHS

Explaining the decline in Business Starts inScotland 1997-1999

Levels of Agricultural Support in Scotland1990-1999

Economic Trends in the Highlands andIslands during the 1990s

Estimating the Output Gap for Scotland

Changes in the Revenues of the ScottishFishing Fleet

Economic Regulation of the ScottishWater and Sewerage Industry

Health, Deprivation and Inequalities

SACTRA Report on Transport andthe Economy

The Allocation of Health Service Resources

Employment in Rural Scotland

Corporate Sector statistics for Scotland:Business Start-ups and Failures

Fabian Zuleeg

Gary Gillespie and TomHarvie-Clark

Joanne Briggs,Paul Teasdale andDr Brian McVey,Scottish Enterprise

Uzma J khan

Dr Stuart Black, Headof Economics, Highlandsand Islands Enterprise

Graeme Storie

Robert Henderson

Charles Stuart Roper

Gavin Lewis,Alasdair Munro andMathew Sutton

Peter Conlong

Alasdair Munro

Kenny Lawson andNeil Ritchie

Chris Dodds andJoanne Briggs

January 2001

January 2001

January 2001

January 2001

July 2000

July 2000

July 2000

July 2000

July 2000

January 2000

January 2000

January 2000

January 2000

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Published

Articles Published in Scottish Economic Bulletins

The Index of Production for Scotland:Rebasing to 1995

Small and Medium-Sized Enterprises inScotland

The Scottish Ship Building Industry

Labour Market Statistics in Scotland

The Housing Market in Scotland

VAT Registrations and Deregistrations inScotland and the UK

Change in the Location and Size Structureof the Scottish Fishing Fleet, 1986-1996

The Scottish Economy: Official Statisticsfor the New Milennium

The Scottish Whisky Industry

The Construction industry in Scotland

1994 Scottish Input-Output Tables

Sources of Official Statistics on theScottish Economy

The Textiles and Clothing Industryin Scotland

The Road Freight TransportRequirements of Scottish Industry:A Logistical Perspective

Hugh McAloon

Angela Campbell andDonald MacDonald

Chris Dodds andBen Maguire

Jackie Horne

Jamie Hamilton andKeith MacKenzie

Angela M Campbell

Bob Henderson

John Rigg, Jill Alexanderand Ann Thomson

Calum Scott andPeter Winstanley

Jamie Hamilton andKeith MacKenzie

Jill Alexander andStuart Martin

Ann Thomson

Calum Scott andLouise Sutherland

A C McKinnon

No 58 1999

No 58 1999

No 57 1998

No 57 1998

No 57 1998

No 56 1998

No 56 1998

No 56 1998

No 55 1997

No 55 1997

No 55 1997

No 55 1997

No 54 1997

No 54 1997

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Published

Articles Published in Scottish Economic Bulletins (continued)

Skills Content of Scottish Trade –An Input-Output Analysis

The Common Agricultural Policy &Measuring Support to the ScottishAgricultural Sector

Estimating Employment Arising fromTourism in Scotland

Measuring the Output of the ScottishFinancial Sector

The Scottish Economic Bulletin1971-1996

Local Sourcing by the ElectronicsIndustry in Scotland

Long Term Unemployment in Scotland

Scottish Results from the 1993 Census ofEmployment

The Impact of Urban RegenerationPartnerships on Unemployment

Social Accounting Matrices – An Extensionof the Scottish 1989 Input-Output Analysis

Scottish Results of the 1992 Retail Inquiry

Output, Income and EmploymentMultipliers for Scotland

Gross Domestic Product (Output) forScotland: Regasing to 1990

Prospective Activity Levels in the UKContinental Shelf under Low Oil PriceScenarios

J M Alexander andI H McNicoll

David Patel andMichael O'Neil

Neil Ritchie,John Templeton &Andrew J Wilson

Angela Campbell

John Rigg

Neil Jackson andDavid Patel

John Rigg andFiona Robertson

Ann Thomson

A McGregor andI Fitzpatrick

J M Alexander andI H McNicholl

Ann Thomson

J M Alexander andT Whyte

Ann Thomson

A B Kemp

No 54 1997

No 53 1996

No 53 1996

No 53 1996

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No 52 1996

No 52 1996

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No 51 1995

No 51 1995

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This is the fourth edition of the Scottish Economic Report. It is published twice-yearly andincorporates a review of the progress and prospects for the Scottish economy, together witha review of the broader economic context in which the Scottish economy is set, as well as aselection of summary articles of key topical interest.

This fourth edition of the Scottish Economic Report has four parts to it:

• Chapter 1: Global, European and UK Economic Development provides an overviewof the important economic developments in the Global, European, and United Kingdomeconomies, and considers the economic context over the recent past and outlook forfuture prospects;

• Chapter 2: Report on Economic Development Initiatives provides an outline of recentissues in the economic development field, providing a follow up to the Framework forEconomic Development in Scotland;

• Chapter 3: The Scottish Economy: Recent Developments and Future Prospectsprovides an overview of the Scottish economy. This section summarises the recentdevelopments and prospects for the Scottish economy;

• Chapter 4: Selected Issues in Economic Development provides an opportunity forbrief surveys of selected economic issues to be presented. The papers are intended toreview or summarise more substantive documents or work of value to the thinking of theScottish Executive, or to provide an opportunity to present new or different perspectivesto stimulate further debate in areas of topical interest.

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