Thursday, September 11, 2014

The Scottish and Quebec Referendums Compared

Although I haven't made any statements on this issue, as a Brit I obviously have a viewpoint on whether Scottish independence would be good for Scotland and if so, whether this would be also good for the UK.

I also have a unique perspective on this particular referendum, which pundits and policymakers are comparing directly to the 1995 Quebec referendum for separation from the rest of Canada. I happen to have been in Montreal, Quebec on the night of October 30th, 1995, and delivered a report for the Canadian Broadcasting Corporation radio in Eastern Canada by phone early on the morning of the 31st, so I guess I know a little bit about close referendums. That referendum was incredibly close, with the "No" (to separation) vote obtaining 50.58% of the vote, and an incredible 98.18% of the electorate turned out to vote.

The similarity between the two referendums is uncanny, but there are some important differences between the Scottish and Quebec referenda, which have not been stressed in the media (see here for a selection from the BBC).

First and probably most obviously, Scotland speaks the same language as the rest of the UK, whereas Quebec is the only province in Canada that has a majority of French speakers, so they basically speak a different a language. That linguistic identity gives the Quebecois an added reason to seek sovereignty as they are recognized as "distinct" within Canada - to put it bluntly, in linguistic terms they are the only province where French is the first language in Canada.  That is not the case in Scotland.  Whatever you might think, language does give identity to nations.

Secondly, there are the geographic differences.  If Scotland leaves the United Kingdom, this indeed is the end of the 307 years political and currency union and the United Kingdom would consist solely of England, Wales, Northern Ireland and some smaller territories. That could have dramatic political effects, but it wouldn't impede movement of factors of production between what remained of the UK.  That could not be said if Quebec had left Canada.  Any casual glance at a map of Canada reveals that an independent Quebec would basically split the rest of Canada in two.  In fact 20 years ago when Quebec separation was a distinct possibility I remember the large degree of anxiety in the debate in Eastern Canada as Eastern Provinces realized that they would be small economies physically separated from the powerhouse of Canada, which is Ontario, as well as with all the other Western Provinces which make up the rest of Canada.

The other big difference is in terms of currency. When Quebec was looking at sovereignty, the currency question was a major problem for the Partis Quebecois under Jacques Parizeau.  The Bank of Canada stated that there was no guarantee that Quebec could continue to use the Canadian dollar after separation from the rest of Canada.  That left a void in terms of what the Partis Quebecois could claim in terms of what might happen in the event that the referendum approved separation from the rest of Canada.  There was talk of Quebec adopting the US dollar, of creating a separate currency (the Quebec franc) and of just using the Canadian dollar against the will of the rest of Canada.  With Scotland the Bank of England (led by a Canadian, Mark Carney, who perhaps remembers the uncertainty that the Quebec referendum generated in Canada) has declared that Scotland would be able to use the UK pound for two years after independence. And although there would have to be a choice made after two years about what would happen to the currency for an independent Scotland, there are feasible options, such as the adoption of the euro, which wouldn't entail any loss of monetary sovereignty (as the Scots would be able to make an input into euro area monetary policy whereas if an independent Quebec had adopted the US dollar it would have had to accept a "made in the US" monetary policy). Certainly if the euro is on the cards for Scotland then they would need to move fairly rapidly to set up their own central bank, as member states are not permitted to join the euro unless they have a central bank.

Source: The Scotsman.
The point I am trying to make here is that Scottish independence is feasible economically ( - in contrast to commentators like Paul Krugman here and here, who seem to be fixated on comparing the Scottish situation to the instability of the early days of the euro area).  The big issue is whether it is desirable.  For the Scots it has just become a lot less desirable as two big UK banks (Royal Bank of Scotland and Lloyds) have said that they will move their headquarters south of the border, which would mean higher unemployment north of the border as those workers would be laid off or faced with moving south.  But on the other hand Scotland does have oil revenues, and does have a sizable industrial base already, so it would not be a complete disaster but would likely be mildly disruptive.  What is interesting as well is that in the final days before the Quebec referendum the Bank of Montreal, plus several other major Canadian companies headquartered in Canada also threatened to move their headquarters west to Toronto, so that is a commonality between the referendums ( - in fact the major move of Canadian corporations out of Quebec came after the first Quebec referendum in 1974).. But headquarters are usually symbolic in this instance as most of the business of banking has already located to where the clients are, and in Canada's case that is Toronto and in the UK's case that is most definitely London. So there wouldn't be a huge corporate downsizing in Scotland, and thus only a small number of private sector jobs lost. On the other hand, more government jobs would be created as UK government departments now serving Scotland from London would be redundant and new equivalent departments would be created in Edinburgh.  So from Scotland's perspective there are both economic costs and benefits which make the decision unclear.

For the UK's perspective it is clearly undesirable, as not only would they lose those oil revenues, but also it would alter the political equilibrium for years to come ( - as the Scots tend to either vote Labour or vote for the Scottish Nationalist Party (SNP), with a small number of constituency seats going to the Liberal Democrats), so that conservative governments would be elected in what remains of the UK for years to come. Single party dominant (uncompetitive) democracies are unhealthy ( - just look at South Africa if you need an example of this), and lead to complacency and corruption.  Also, losing part of the UK that is fairly well off will bring down the overall GDP per capita of the UK as the weight of the poorer parts of the UK (Wales and Northern Ireland) would be higher. Of course as only the Scots get to vote, the rest of the UK is beginning to realize these ramifications and is now turning up the heat to assure the Scots that they will gain greater political powers if they stay inside the UK, as did the Canadian government when it was clear that the Quebec referendum would be extremely close.

The decision is not an easy one, as not only is it a single decision that will affect a country for a long time to come, but also it is not a decision that would be easy to reverse for the Scots. This is what economists call "dynamic inconsistency" - in other words, what might be good in the short term, might not be good in the longer term or vice versa. I read a recent article in the New Statesman (see here) that talks about the "velvet divorce" between the Czech Republic and the Slovak Republic at the end of 1992, and how incredibly painful it was to begin with, but that now the Slovak Republic appears to be doing better than the Czech Republic in terms of economic growth.  The main point is that the economics depends on the terms of the divorce, which is a difficult thing to determine in advance. Nevertheless, the English are unlikely to make it easy for the Scots, so I think the first few years of Scottish independence would be extremely rocky.

As the 18th September (polling day) nears, I wouldn't be surprised to see the type of spontaneous outpourings of nationalistic pride in the current UK that would be similar to the mass rally that occurred in Montreal before the Quebec referendum, and indeed this type of emotional outpouring can sway undecided voters. The danger though is that the vote is extremely close, as this encourages the SNP to consider another attempt in the future ( - what the Quebecois used to call the "neverendum"), and indeed although the "No" side of the campaign has the powerful argument that independence is very difficult to reverse once it is achieved, the opposite holds true as well - that future referendums might then occur. The best outcome is that the vote is decisive - with either the "Yes" or "No" side gaining at least 55% of the vote.  Of course, that now appears unlikely, with all the polls that I am currently seeing indicate a very close run race..

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