Scotland - less than brave

Anyone out there who has a few hundred million dollars to invest and whose name starts with "Mc"? Then Scotland's First Minister, Jack McConnell, would like to meet you.

His message: It's time to come home.

In the next few weeks, McConnell will visit New York and Canada as part of a global tour to persuade the tartan diaspora to think about investing in the "auld country".

Scotland needs to focus on economics, not sentiment. It is no good wrapping yourself in plaid and expecting people to rally round. The country's economy has problems and they have worsened since it got its own Government within Britain, a process known as devolution.

Sadly, Edinburgh, the birthplace of modern free-market economics, appears to be the one place where its prescriptions are now least likely to be put into practice.

McConnell is putting a lot of energy into promoting the Scottish economy.

"The main reason for his visit is economic and trade promotion," said Susan Dalgety, a spokeswoman for the minister. "The idea is to tap into Scottish expatriates and others.

"We want to promote Scotland as it is now, not just as a place with misty mountains. This is a modern, strong economy."

There will be no shortage of people to talk to. The United States, Canada and Australia are full of big companies with Scottish roots.

The Standard & Poor's 500 Index has four companies whose names start with "Mc". The Museum of Scotland in Edinburgh estimates there are 90 million people of Scottish heritage worldwide.

Tribal loyalties count for something, but are not as important as facts and figures. For Scotland, those are not encouraging.

Scottish economic growth has not been as strong as in the rest of Britain. Last year, the Scottish economy expanded 1.9 per cent, compared with 3.1 per cent for the whole of Britain. From 2000 to 2003, the Scottish economy grew at an average rate of 1.7 per cent a year.

The country is ageing rapidly as well. Without immigration, Scotland's population will slip below 5 million by 2017 from 5.08 million now, government statistics show. The number of inhabitants peaked at 5.24 million in 1974.

None of that sounds like a robust, thriving economy.

In reality, modern Scotland is not dynamic. It is kept afloat on a wave of public spending. The Government says public expenditure accounted for 50 per cent of Scottish gross domestic product in 2001-2002. That compared with 41 per cent for Britain as a whole and a euro-area average of 48 per cent.

The public sector accounts for 23.5 per cent of all employment in Scotland. In some regions, the private sector has shrivelled to levels that are more reminiscent of Eastern Europe before the fall of the Berlin Wall than a modern capitalist economy.

The Scotsman newspaper this month reported that John Ward, chairman of the economic development agency Scottish Enterprise, pointed out that in the Ayrshire area, Government spending accounted for 74 per cent of the economy. He said those were "Eastern bloc" levels.

The determination of the Scottish Parliament to boost public spending is crowding out the private, wealth-generating economy.

"They are big on zealous regulation, but they are not good at real economics," said Stuart Thomson, a fixed-income strategist at Charles Stanley Sutherlands in Edinburgh.

"They have the power to make micro-improvements to the economy, but they haven't even tried it."

Just across the Irish Sea, there is an example of a small, Celtic economy that has taken a different path. In Ireland, taxes have been cut consistently. OECD figures show the state accounts for 33 per cent of the economy.

The result: Ireland has been rewarded with one of the highest growth rates in the world.

This year, the OECD ranked it as one of the five "high-income" countries in the world, along with Luxembourg, Norway, Switzerland and the US. Ireland now has net migration into the country.

It is a long time since an Irish prime minister felt the need to tour the world asking people called Murphy and Callaghan to come back and invest in the "emerald isle".

One big difference is that Ireland is independent. Yet, since devolution, the Scots have had a high degree of self-government.

They cannot vary corporate taxes from British rates, but they are allowed to vary the basic rate of income tax as much as 3 per cent in either direction.

Think of the dramatic impact a cut in tax rates below English levels would have. Entrepreneurs would be attracted north, as would investors and skilled workers. Many Londoners might start to appreciate the charms of Edinburgh and Glasgow.

Most of all, Scotland would be sending out a message that it understood the path to greater prosperity lay in lower taxes and less Government control of the economy.

"The First Minister knows he can't just fly the Saltire and say come to Scotland," said Susan Dalgety, referring to the Scottish flag. "We also have one of the best education systems, a highly skilled workforce and a high quality of life."

No doubt McConnell does understand that. He needs to demonstrate it by making positive moves to boost the economy. So far, there is no evidence of that.

Scotland was the country of Adam Smith, author of The Wealth of Nations, which right now appears to be the most influential work of political and economic philosophy ever penned.

His ideas are triumphing everywhere from Moscow to Beijing, and from Tokyo to Washington. Everywhere, except for the country of their birth.

- BLOOMBERG