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

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

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

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

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

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

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

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

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

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

11. Intra-Scottish labour market variation Employment rate (16-64), %Unemployment rate (16-64), % NUTS3 levels2004201220042012 Orkney Islands83.481.31.65.3 Shetland Islands85.079.71.5! Caithness & Sutherland and Ross & Cromarty80.878.53.64.6 Abderdeen City and Aberdeenshire76.178.45.34.8 Inverness & Nairn and Moray, Badenoch & Strathspey78.076.044.6 South Lanarkshire73.075.14.55.3 East Lothian and Midlothian75.874.94.15.2 Lochaber, Skye & Lochalsh, Arran & Cumbrae and Argyll and Bute79.174.22.86.1 West Lothian76.974.03.85.5 Falkirk74.372.94.67.7 Edinburgh, City of74.072.85.25.8 Scottish Borders77.572.52.96.2 Perth & Kinross and Stirling75.171.84.18.1 Eilean Siar (Western Isles)77.871.35.18.1 Inverclyde, East Renfrewshire and Renfrewshire72.470.45.29.3 East Dunbartonshire, West Dunbartonshire and Helensburgh & Lomond73.870.04.78.3 South Ayshire71.869.96.710.9 North Lanarkshire69.169.56.412.8 Clackmannshire and Fife74.569.15.29.8 Angus and Dundee City69.469.07.28.3 Dumfries and Galloway75.667.23.910.1 East Ayrshire and North Ayrshire Mainland66.664.18.112.7 Glasgow City62.959.77.912

12. Employment rates

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

14. GVA per head

15. GVA per employee

16. Gross Domestic Household Income

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

18. Shift share full calculations National shareIndustry mixRegional shift Absolute GVA change, 1997-2010, (£m) National share (£m) Industry mix (£m) Regional shift (£m) Eastern Scotland Angus and Dundee City435.7977.2-83.1-458.5 Clackmannanshire and Fife656.71203.5-238.6-308.1 East Lothian and Midlothian425.4446.1-77.757.0 Scottish Borders209.6306.0-58.4-38.0 Edinburgh, City of4362.42834.91201.8325.7 Falkirk600.5505.4-130.8225.9 Perth & Kinross and Stirling837.0813.348.8-25.1 West Lothian611.7695.6-137.453.4 South Western Scotland East Dunbartonshire, West Dunbartonshire and Helensburgh & Lomond381.4604.1-10.6-212.1 Dumfries & Galloway328.9463.1-96.6-37.6 East Ayrshire and North Ayrshire mainland164.4727.8-194.8-368.6 Glasgow City3636.33422.7892.7-679.1 Inverclyde, East Renfrewshire and Renfrewshire54.21316.2-185.7-1076.3 North Lanarkshire1369.6869.2-144.8645.2 South Ayrshire268.7435.8-48.4-118.6 South Lanarkshire655.7993.3-202.6-135.1 NEAberdeen City and Aberdeenshire3402.02515.2-312.41199.2 Highlands and Islands Caithness & Sutherland and Ross & Cromarty340.6247.3-27.0120.3 Inverness & Nairn and Moray, Badenoch & Strathspey1087.7494.3-113.2706.6 Lochaber, Skye & Lochalsh, Arran & Cumbrae and Argyll & Bute251.5320.5-49.2-19.9 Eilean Siar (Western Isles)42.486.3-9.2-34.7 Orkney Islands55.468.3-22.49.4 Shetland Islands120.294.5-24.149.8

19. Cumulative Regional shift by region

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

21. Growth Sectors in space

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

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