‘A New Scotland: The Economy’ I am grateful to Gavin McCrone for commenting on an earlier draft. George Peden (Published in The Oxford Handbook of Modern Scottish History, ed. T. M. Devine and Jenny Wormald (Oxford: Oxford University Press, 2012) In the late twentieth century the Scottish economy underwent restructuring no less radical than in the Industrial Revolution. Whereas almost one in three Scots was in industrial employment in 1979, by 1986 fewer than one in four were. Throughout this chapter industrial employment is defined to include mining, quarrying, oil and gas extraction, and electricity, gas and water utilities as well as manufacturing. On the other hand, Christopher Harvie’s characterisation of the Scottish experience under Margaret Thatcher’s government of 1979-90 as ‘instant post-industrialisation’ Christopher Harvie, No Gods and Precious Few Heroes: Twentieth-Century Scotland, 3rd ed. (Edinburgh: Edinburgh University Press, 1998), 164. is open to two modifications: first, economists were discussing what they already called de-industrialisation before she became prime minister; Frank Blackaby (ed.), De-industrialisation (London: Heinemann, 1979). second, the decline in industrial employment continued long after she resigned. Industrial employment peaked in the mid-sixties, and industry’s share of total employment had already fallen from 39.3 per cent in 1965 to 32.3 per cent by 1979 (figure 1). There was a marked acceleration in the trend thereafter, with industry’s share falling to 17.7 per cent over the next 14 years to 1993, but there was a further fall to 11.1 per cent over the following 14 years to 2007. In contrast, employment in services increased from 48.7 per cent of total employment in 1965 to 81.5 per cent in 2007.  Figure 1: Percentage shares of total employment in Scotland Note: Agriculture includes fishing and forestry. Sources: Abstract of Regional Statistics (London, 1966), table 4; Regional Trends (London, 1984), table 7.5; Scottish Economic Statistics (Edinburgh, 2000), table 3.11; Employee jobs – Scotland 1998-2008, http://www.scotland.gov.uk/Topics/Statistics/Browse/Labour-Market/DatasetsEmployment This chapter addresses three questions. First, what is the nature of de-industrialisation and how does it fit into long-term trends in Scottish history? Second, how have Scottish industries and services fared since 1965? Third, how did restructuring of the economy impact upon different regions of Scotland? THE NATURE OF INDUSTRIALISATION De-industrialisation is an ambiguous term. Sometimes it is used to refer to employment and sometimes to industrial output. Whereas the numbers employed in industry fell sharply after 1979, the absolute value of industrial output fell by much less (figure 2). Indeed, industrial output was on a modestly rising trend from the late 1980s to the end of the century, even although its share of gross domestic product (GDP) was falling. In contrast, industrial employment tended to fall even when the value of industrial output was increasing. In all advanced economies in the last 50 years labour productivity has risen more rapidly in manufacturing than in services, with the result that increasing numbers of workers have been drawn into services. Robert Rowthorn and Ramana Ramaswamy, ‘Deindustrialisation: causes and implications’, in Staff Studies for the World Economic Outlook (Washington, DC: International Monetary Fund, 1997), 61-77. Mass production of goods required greater transport, and financial, wholesale, and retail services. Employment in catering, hotels, and entertainment rose in response to changing patterns of consumer spending: as people became more prosperous, they spent smaller proportions of their incomes on food, and larger proportions on consumer goods or services. As mass production lowered the cost of consumer goods, the proportion of incomes spent on leisure and tourism increased. The expansion of education, health, and social services also created employment.   Figure 2: Indices of employment and gross value added in Scottish industry (2004=100) Note: gross value added (GVA) is also known as GDP at constant basic prices. Source: Employment: Employee Jobs by Detailed Industry, Scotland, 1982-2009, Office for National Statistics; GVA: Gross Value Added chained volume measures at basic prices, 1963-2009, table 7, Office of the Chief Economic Adviser, The Scottish Government. The timing and extent of de-industrialisation varied between countries. For example, industrial employment in Scotland in 2000 was less than half of what it had been in 1970, whereas the absolute size of the manufacturing labour force in the USA remained fairly stable between these dates, even if it was a declining proportion of the total labour force. As regards industrial output as a proportion of GDP, the Scottish figure in 1996, 27.8 per cent, was rather higher than that for the UK as a whole (25.2 per cent), but lower than Germany (33.4 per cent) or Norway (32 per cent). The fortunes of industry depended on ability to compete in international markets. In common with the rest of the UK, Scotland seems to have suffered from the ‘Dutch disease’, so called after the experience of the Netherlands, where the exploitation of natural gas in the 1960s was associated with high unemployment in traditional industries. As oil flowed ashore in increasing quantities from 1977, the UK’s balance of payments improved and sterling’s exchange rate rose against other currencies. Industry’s international competitiveness was partly determined by the exchange rate, since a higher rate made exports more expensive, and imports cheaper. In these circumstances firms had either to reduce costs, which usually meant shedding labour, or go out of business. Figure 3 suggests there was a relationship between the rate of change in industrial employment and movements in the exchange rate. The rise of almost 20 per cent in the exchange rate between 1977 and 1981 was followed (with a two-year lag) by a 28.5 per cent fall in industrial employment between 1979 and 1983. The downward trend of the exchange rate between 1981 and 1996 was associated first with a slackening of the decline in industrial employment until 1994, and a brief rise thereafter to 1998. Sterling rose again from 1997 and the downward trend in industrial employment resumed from 1999.  Figure 3: Employment in Scottish industry (000s) and effective exchange rate (1990=100) Note: The effective exchange rate is a trade weighted average, with the scale of all currencies set so that the average 1990 value is 100. Sources: Employment: Abstract of Regional Statistics and Regional Statistics (various issues 1966-84); Employee jobs by detailed industry, Scotland, 1982-2009, Office for National Statistics; Exchange rate: Bank of England’s Statistical Interactive Database, http://www.bankofengland.co.uk code http://www.bankofengland.co.uk, series code XUAAGB The exchange rate was not, however, the only factor shaping Scotland’s industrial experience. At the end of 1973 and again in 1979 the Organisation of Petroleum Exporting Countries (OPEC) engineered increases in the price of oil by restricting output. Between 1972 and 1974 the price quadrupled, and in 1979-80 it increased 2¼ times. Scotland benefited in so far as the exploitation of North Sea oil became more profitable. On the other hand, the long boom in the international economy since 1945 ended as most oil-importing countries responded to a sharp deterioration in their balance of payments with deflationary policies. Down to 1976 British governments tried to maintain full employment with expansionary fiscal and monetary policies, but the resulting inflation saw retail prices rising at over 26 per cent in 1975. The Thatcher government came to power determined to curb inflation, and bank rate was held at 14 per cent or more for 21 months from June 1979 and again in the winter of 1981-82. High interest rates hit business investment and were the principal reason why the UK’s GDP fell by 4.6 per cent between 1979 and 1981, and the 1979 level of output was not reached again until 1983. High interest rates also attracted an inflow of foreign funds, increasing the demand for sterling, and adding to the balance-of-payments effect of North Sea oil on the exchange rate. The Thatcher government also aimed to make the British economy more competitive by relying more upon market forces. Regional policy since 1945 had encouraged industrial investment in development areas where unemployment was above the national average, first with tax allowances, and later with grants. Since Scottish unemployment was higher than the UK average, the effect had been to subsidise industrial employment in Scotland. However, by the early 1990s government assistance to industry in Scotland was only about a quarter (in constant prices) of what it had been ten years earlier. Loss-making industries were allowed to fail, and enterprise zones set up in Clydebank, Dundee and Motherwell had a fairly minor impact. On the other hand, as Clive Lee points out, once the worst phase of industrial closures was over by late 1980s, GDP rose faster in Scotland than in the industrial regions of England and Wales. C. H. Lee, Scotland and the United Kingdom: The Economy and the Union in the Twentieth Century (Manchester: Manchester University Press, 1995), 52-7. Scotland’s growth rate also improved relative to other mature economies, including Belgium, Denmark, the Netherlands, and Sweden. John McLaren, ‘Scotland’s improving economic performance: a long-term comparative study’, Fraser of Allander Quarterly Economic Commentary, 28, no. 2 (2003), 42-8. Indeed, the effect of the reduced importance of loss-making industries, a rise in electronics production, and the increased importance of profitable services such a banking and finance, was to raise Scotland’s GDP per head to the UK average in 1995. That relative position was not sustained, but in 2007 Scotland’s GDP per head, at 96 per cent of the UK average, was higher than that of any other region apart from London and the South-East of England. INDUSTRY Scotland’s dependence on its Victorian staples continued into the second half of the 20th century, long after newer industries, such as motor vehicles, electronics, and consumer durables, had expanded in the south-east and midlands of England. Despite wartime dispersal of electronics production to Scotland and inward movement from the later 1940s of American light engineering firms, a study by Glasgow University’s Department of Applied Economics in 1954 found that the country’s industrial structure was very much the same as it had been at the beginning of the century. A. K. Cairncross (ed.), The Scottish Economy: A Statistical Account of Scottish Life (Cambridge: Cambridge University Press, 1954). This was a serious disadvantage, as the industries in which Scotland specialised tended to be those in which there was increasing competition abroad. The need for structural change was recognised in 1961 by the Toothill Report, which called for the development of science-based industries, newer capital-goods industries, and engineering-based consumer industries. Scottish Council (Development and Industry), Inquiry into the Scottish Economy, 1960-61 (1961). The development of petrochemicals at Grangemouth in the 1950s and 1960s encouraged a belief in Whitehall and the Scottish Office that modern industries could be successfully located in Central Scotland. The discovery of North Sea oil in 1969 appeared to offer an opportunity for the regeneration of Scottish heavy industry, but outcomes fell short of early hopes. William Pike estimates that the Scottish content of expenditure on exploration, development and production of oil in the Scottish sector of the North Sea down to 1989 was less than 23 per cent. William Pike, ‘The Development of the North Sea Oil Industry to 1989, with Special Reference to Scotland’s Contribution’ (Aberdeen University PhD thesis, 1991), 263, and ‘The oil price crisis and its impact on Scottish North Sea development, 1986-1988’, Scottish Economic and Social History, 13 (1993), 56-71. Pending publication of Alex Kemp, The Official History of North Sea Oil and Gas, the best general account is Christopher Harvie, Fools Gold: The Story of North Sea Oil (London: Hamish Hamilton, 1994), which has been described by its author as ‘an interim and necessarily somewhat journalistic account’ − ‘The Development of North Sea Oil and Gas’, witness seminar held on 11 December 1999 (Institute of Contemporary British History, 2002, HYPERLINK "http://www.icbh.ac.uk/witness/northsea/" www.icbh.ac.uk/witness/northsea), 37. Scottish firms lacked experience of making the specialist equipment required. For example, the shipbuilding firm of Scott Lithgow took on contracts for the oil industry, but built only three semi-submersible rigs and two drill ships, all of them behind schedule and without making a profit on any of them. The John Brown yard, which was taken over by the American firm Marathon in 1972, and then by the French firm Union Industrielle d’Enterprise (UIE) in 1980, enjoyed only moderate success constructing rigs and later production platforms. Sam McKinstry, ‘Transforming John Brown’s shipyard: the drilling rig and offshore fabrication businesses of Marathon and UIE, 1972-1997’, Scottish Economic and Social History, 18 (1998), 33-60. Most Scottish heavy industry was located in the west of the country, but the best sites for rig construction were on the east coast. Pike argues that had North Sea oil development been slower and subject to greater government control, as in Norway, Scottish firms would have had more time in which to adjust to oil industry standards. However, successive London governments in the 1970s and 1980s looked to rapid development of the North Sea as a means of ending the UK’s hitherto chronic balance-of-payments problems, as well as of bringing in revenue. In the event, rapidly growing unemployment after 1979 meant that much of the additional revenue had to be expended on social security. International oil companies were anxious to exploit the North Sea quickly in the wake of the OPEC price hike in 1973 and preferred to place orders with experienced suppliers abroad rather than wait for Scottish firms to acquire the necessary knowledge and skills. In 1985 the OPEC cartel broke and the price of oil fell, ending the North Sea boom. Some Scottish firms established a permanent presence in the oil and gas industry, but mainly as suppliers of onshore and offshore logistic, engineering, and drilling services. Of these the most successful was the Aberdeen-based John Wood Group which has developed into an international energy services company operating in 50 countries. However, the opportunity to develop indigenous technology and manufacturing capacity had been largely lost. Scotland’s traditional source of energy, coal, was affected by changes in oil prices. Coal had been long been losing market share to oil, and employment in mining in 1973 was only a third of what it had been in 1957. The actions of the OPEC cartel in 1973 gave coal a price advantage, but the industry still faced competition from natural gas and imported coal. Moreover, years of retrenchment had left the industry with no capacity to respond to market expansion. In 1977, in an attempt to reduce heavy losses incurred in deep mining in Scotland, the Labour government brokered a five-year agreement between the National Coal Board (NCB) and the electricity industry in Scotland whereby Scottish power stations guaranteed minimum purchases of coal at reduced prices. The reduction in prices was made possible partly by a government subsidy and partly by the closure of some uneconomic pits. The National Union of Mineworkers agreed to the latter in return for NCB undertakings to invest in other Scottish pits. Seven pits were closed but in the fifth year of the agreement (1981-82) all the remaining twelve pits were making operating losses. Meanwhile the Conservatives’ Coal industry Act of 1980 had set the goal of a self-funding, unsubsidized industry by 1983/4, something which was almost impossible to achieve while the post-1979 recession was reducing demand for coal. William Ashworth, The History of the British Coal Industry, vol. 5: The Nationalized Industry (Oxford: Clarendon Press, 1986), 236-7, 330-1, 381-2, 414-16. The implications were particularly serious for the Scottish Area of the NCB, given that, according to NCB figures in 1984, it incurred more than half of the UK industry’s current loss on deep-mining although it was responsible for little more than 5 per cent of UK output of coal. The government eased the industry’s cash limits when confronted with the prospect of a miners’ strike in Scotland in 1981, and used the breathing space to make preparations that enabled it to defeat the national (UK) miners’ strike in 1984-5. Jim Phillips, ‘Workplace conflict and the origins of the 1984-85 miners’ strike in Scotland’, Twentieth Century British History, 20 (2009), 152-72. With the fall in the price of oil in 1985 any hope of the Scottish Area meeting the requirements of the 1980 Act disappeared, and by the end of the decade only two pits were active. With the failure of an attempted miners’ buyout at Monktonhall in 1997, only Longannet in Fife remained, dependent on a contract to supply an adjacent electricity generating station, and after that pit was flooded in 2002 an industry that had employed 27,000 men thirty years earlier became extinct, apart from open-cast mining. Shipbuilding in Scotland, in common with the rest of the UK, had also lapsed into a state of dependency on the state before the Thatcher government took office. Failure to modernise in the post-war period meant that, once an initial boom ended in the late 1950s, Scottish yards were unable to match competition from Germany, the Netherlands, Sweden, and Japan, where credit arrangements or subsidies encouraged investment in more modern techniques, and where industrial relations were better. In return for financial assistance, the shipbuilding firms agreed in 1967 to the Clyde yards being rationalised into two groups and the east coast yards into one group. The Conservative government attempted to stop support for the industry in 1971, prompting a famous work-in organised by the shop stewards at the Upper Clyde Shipbuilders, which led in 1972 to the retention of two of UCS’s yards, Yarrow and Fairfield, renamed Govan Shipbuilders. Demand for ships fell in the post-1973 recession, and in 1977 shipbuilding was nationalised. In 1979/80 Scottish yards were responsible for half of British Shipbuilders’ losses, and closures and redundancies were inevitable. The nationalised corporation was privatised and its assets disposed of. Yarrows, which specialised in warships, was purchased in 1985 by a major defence contractor, GEC, who sold it to BAE Systems in 1999-2000. Fairfields was bought in 1988 by the Norwegian group Kvaerner Industrier, which modernised the yard to specialise in the construction of liquefied natural gas and chemical tankers, but by the later 1990s the market for such vessels was depressed and in 2000 the yard was sold to BAE Systems. With the tailing off of orders for oil rigs and production platforms, and the closure of UIE’s former John Brown’s yard in 2001, the industry became heavily dependent upon warship construction. By 2009 shipbuilding provided work for 5,400 Scots, compared with 40,600 in 1971. In the early 1960s considerable hopes were vested in motor vehicle production as an alternative to shipbuilding as a market for steel, and as a stimulus to light engineering. However, the British Motor Corporation (BMC) and the Rootes group agreed to come to Scotland only because of government pressure, including both financial inducements and the withholding of industrial development certificates from sites closer to areas where the industry was concentrated. BMC invested in 1961 in a factory at Bathgate in West Lothian to make trucks, and Rootes followed in 1963 with a car factory at Linwood. The Linwood project was handicapped by the mediocrity of its products, initially the Hillman Imp, and plagued by poor industrial relations. Workers accustomed to the craft labour and work group autonomy embodied in the shipbuilding trades were alienated by the deskilling involved in working on automated assembly lines, and strikes and other forms of protest were frequent. Remote location from suppliers and markets, and the weak financial position of the factory’s owners, were further factors that ensured that Linwood did not flourish even when the economy was buoyant. The American Chrysler Corporation took control of Rootes in 1967 as part of a rescue plan involving a government subsidy. Employment at Linwood rose from 7,600 in that year to 8,400 in the early 1970s. However, profits were elusive. In 1978, only two years after receiving a further government subsidy, Chrysler UK was acquired by the French firm Peugeot Citroën, which showed little interest in Linwood. The end came in the post-1979 recession, Linwood closing in 1981, and two years later the BMC factory at Bathgate also ceased production. Alison Gilmour, ‘The trouble with Linwood: compliance and coercion in the car plant, 1963-1981’, Journal of Scottish Historical Studies, 27 (2007), 75-93; Jim Phillips, The Industrial Politics of Devolution: Scotland in the 1960s and 1970s (Manchester: Manchester University Press, 2008), 13-15, 27-35, 41-4, 169, 180-1. The decline first of shipbuilding and then motor vehicle manufacture was bound to impact unfavourably on the steel industry. Indeed, the political decision in 1958 to erect Colvilles’ steel strip mill at Ravenscraig near Motherwell was taken in the belief that the high quality light strip and sheet steel it would produce was a prerequisite for the development of motor vehicle production and light engineering in Scotland. Harold Macmillan, the prime minister, was concerned that unemployment was higher in Scotland than the UK average, and wanted jobs taken to the workers. As a result, an opportunity to relocate the steel industry to the Clyde coast, to minimise transport costs of imported ores, was missed. Sir Andrew McCance, the chairman of Colvilles, the company that built the mill, predicted it would be a financial disaster, but, granted a government loan facility, he gave way to political pressure. In the event, there was insufficient demand for the mill’s products to make it profitable and by the time Colvilles was nationalised in 1967 the company was close to bankruptcy. Peter Payne, Colvilles and the Scottish Steel Industry (Oxford: Clarendon Press, 1979), 374-83, 393-405, 424. When the Linwood car factory closed in 1981 Ravenscraig lost its major customer. It remained open only because Scottish Conservatives were reluctant to incur the opprobrium of closing what was still a nationalised enterprise. However, following the privatisation of the British Steel Corporation in 1988, Ravenscraig had to pay its way and, despite improvements in labour productivity, production finally ceased in 1992. David Stewart, ‘Fighting for survival: the 1980s campaign to save Ravenscraig steelworks’, Journal of Scottish Historical Studies, 25 (2005), 40-57. The industry is not extinct in Scotland, however: there is a steel mill at Dalzell in Motherwell and in 2010 its owner, the multinational Corus, announced that it would invest £8 million to help meet rising demand for heavy plate products, creating 60 jobs there and at the neighbouring Clydebridge site. Attempts to establish industrial growth points with the aid of government subsidies in the Highlands were likewise unsuccessful. A wood pulp and paper mill was built between 1963 and 1965 by Wiggins Teape at Corpach near Fort William, with a view to providing a market for Highland forestry. However, there were technical problems with the process chosen for producing pulp, which proved not to be particularly suitable for the type of paper most in demand. The decision to close the mill was taken in April 1979 and production ceased in 1981. An aluminium smelter was constructed between 1969 and 1972 at Invergordon, but there were technical problems with the supply of electricity, and the effects on demand for aluminium of the recession of 1980-81, allied to the strength of sterling, led to the smelter’s closure in 1981. The decline in employment in textiles began well before 1979. The jute industry, centred on Dundee, had been protected since the Second World War by a government Jute Control that fixed prices of imported goods. However, higher prices encouraged substitution: for example, paper instead of hessian for sacks, or man-made fibres for carpet backing. Employment in jute fell from a peak of 21,000 in the mid-1950s to 16,000 by 1969, when the Jute Control was replaced by a system of quotas, and to 7,000 by 1979. The quota agreements were allowed to lapse in 1984 and production ceased in 1998. Polypropylene, a synthetic fibre, was adopted as an alternative to jute by some firms from the late 1960s, but polypropylene required only about one-sixth of the labour per yard required in jute. Moreover, polypropylene production came to be dominated by the producers of the raw material, multinational petrochemical firms which organised the industry on a global scale. Don and Low of Forfar, a highly profitable firm in the 1980s, became a wholly-owned subsidiary of Shell in 1986, thereby gaining access to the multinational’s research and development facilities and financial resources for investment at the cost of loss of independence. Jim Tomlinson, ‘Influencing government’, in Jim Tomlinson and Christopher Whatley (eds.), Jute No More: Transforming Dundee (Dundee: Dundee University Press, 2011); Christopher Whatley, Onwards from Osnaburgs: The Rise and Progress of a Scottish Textile Company, Don and Low of Forfar 1792-1992 (Edinburgh: Mainstream Publishing Company, 1992), 259-64. Of the old Dundee textile firms Low and Bonar maintain a presence in the city, producing carpet yarn and polyethylene grass yarns, but the firm is now an international group and its headquarters were moved to London in 2000. The dominant firm in the Paisley thread industry, J & P Coates, amalgamated with Vantona Viyella in 1967 to form Coates Viyella, registered in Uxbridge, Middlesex. Despite diversification into synthetic fabrics in the 1950s, the Paisley mills found it difficult to compete with cheap foreign imports. Coates established mills in India and Brazil and the last mill in Paisley closed in 1993. Between 1965 and 1979 output in the Border knitwear industry fell by 38 per cent and the labour force from 20,400 to 14,700; rationalisation in the 1980s saw a further loss of over 60 per cent of manufacturing capacity. In Ayrshire the US chemical company Monsanto closed its nylon factories at Dundonald and Cumnock in 1979, but a remnant of the cotton industry − about one in five of the mills that had been active in the 1950s − survived into the 21st century by specialising in high quality goods. Harris tweed was protected by statute, in that it must be handwoven in the Outer Hebrides, but following changes in fashion towards lighter materials, and an ill-conceived attempt in 2007 to standardise production by reducing the range of designs, an industry that had employed up to 2,000 weavers in the 1970s was on the verge of extinction in 2009, with only 130 weavers in work. The importance of entrepreneurship and an eye for fashion was shown elsewhere in the clothing industry by the example of Michelle Mone, whose lingerie company MJM International, which started in Glasgow in 1996, was valued at £48 million in 2008. No industry was more dependent on international markets than whisky, with about 80 per cent of output being exported. Consequently the rise of sterling in 1980 led to a sharp decline of sales. For most of the period, however, whisky was sufficiently profitable to attract takeover bids from outside Scotland, with the multinational Diageo becoming the dominant firm in 1997. The industry was protected in so far as Scotch whisky could only be distilled in Scotland (although there has been an increase since the 1970s in the proportion of bulk-blended whisky bottled and packaged overseas), but rationalisation led to a decline in direct employment from 23,600 in 1978 to 9,500 in 2000. Elsewhere in the food and drinks sector there were signs that Scottish firms could expand. A. G. Barr, the makers of Irn-Bru, a carbonated soft drink dating from 1901, increased production in the 1990s by moving from Glasgow to a new plant in Cumbernauld, and using innovative marketing campaigns to make the brand the third most popular in the UK after Coca-Cola and Pepsi. Irn-Bru is also manufactured under licence in North America, Russia and South Africa. Another success story concerns Baxters of Fochabers, a family firm dating back to 1868, which expanded output of its range of soups and other food products in the 1980s by responding to changing consumer tastes and improving marketing and distribution, and went on to acquire ownership of food companies in Canada in 2007 and Australia in 2009. The most successful industrial sector in the late 20th century was electronics, a category including avionics, computers, semi-conductors, and electrical components. Major American multinationals created branch factories in the post-war period, attracted by cheap, female labour and the chance to exploit the potentially large European market, as well as by government financial incentives. Further overseas firms followed from the 1960s, and by the late 1970s electronics was the manufacturing sector attracting most inward investment. Employment rose from about 30,000 in 1970 to 46,000 by 1997. Productivity growth was striking: output rose by 556 per cent between 1980 and 1992, while employment rose by only 12 per cent. Had it not been for electronics, industrial output in Scotland would have fallen instead of rising in the 1990s. On the other hand, ‘Silicon Glen’, stretching from Ayrshire to Dundee, was then overly dependent on multinationals interested in low-cost assembly, with only 12 per cent of material inputs sourced locally in 1993. Output fell by over 40 per cent between 2000 and 2003 as a result of a worldwide ICT downturn, and there was an exodus of assembly work to low-cost locations. Since then there has been an increased emphasis on research and development, with links being established between universities and the industry in such fields as microelectronics, nanotechnology, optoelectronics, and digital media. Overall Scottish industry became more competitive after 1979 as labour-intensive industries were replaced by more capital-intensive ones. Whereas productivity growth in manufacturing in Scotland had lagged behind the G7 average in the 1960s and 1970s, in the 1980s the average annual change, 5.2 per cent, was higher than the G7 average (3.5 per cent) and a striking improvement on the Scottish figure for the 1970s (2 per cent). Gavin McCrone, ‘European challenges to Scotland’, Scotland Europa Centre, paper no. 7 (Brussels, 1996), 20-1. Improvement was not confined to new industries, like electronics. Innovation and an eye for market opportunities could bring success even in older sectors, such as food and drink, and textiles and clothing. SERVICES Financial services provide a remarkable example of an old-established sector innovating and expanding. For example, in 1959 the Bank of Scotland became the first British bank to install a computer to process accounts centrally, and in the 1970s the Clydesdale was a pioneer of automated banking. Despite increasing use of labour-saving IT, employment in financial services increased from 63,400 in 1985 to 112,700 in 2005. Scottish banks, insurance companies, and investment trusts, with associated accountancy and legal services, had accumulated experience which, combined with an educated and numerate labour force, and low costs compared with London, gave them a comparative advantage. In the seven years following deregulation of British financial markets in 1986, the funds under management by Scottish life offices and independent fund managers increased threefold, placing Edinburgh in fourth place among European financial centres after London, Frankfurt, and Paris in terms of equity assets. In 2008 financial services accounted for over 7 per cent of Scotland’s GDP. Scottish clearing banks had long been open to takeovers by their English equivalents: the British Linen Bank, the Clydesdale, and the National Bank of Scotland had lost their independence in 1918-19, and Barclays acquired a substantial stake in the Bank of Scotland when a merger between the latter and the British Linen Bank was completed in 1971. In 1979 Lloyds Bank made a takeover approach to the Royal Bank of Scotland (RBS), which the latter’s board rejected. In response to this pressure, RBS began talks in 1980 with Standard Chartered Bank that resulted in a bid. A counter-bid was made by the Hongkong and Shanghai Banking Corporation (now HSBC). There followed a campaign to preserve RBS’s independence. It was argued that Scotland derived major benefit from having two independent banks, not only in terms of employment but also by providing services for Scottish business. Among the people who gave evidence to the Monopolies and Mergers Commission to this effect was George Matthewson, then chief executive of the Scottish Development Agency, who subsequently as chief executive of RBS built it up into one of the UK’s biggest banks. Cmnd. 8472. In 1999 the usual direction of takeovers was reversed when the Bank of Scotland and RBS competed in making hostile bids for the National Westminster, a London clearing bank twice the size of either. RBS won, making it the UK’s second largest banking group; considerable efficiency savings were made, largely south of the Border, and back office functions were concentrated in a new £350-million headquarters in Edinburgh. The Bank of Scotland, fearing a hostile takeover during a period of consolidation in the financial services sector, sought security in a merger in 2001 with Halifax plc to form HBOS. However, HBOS was British rather Scottish, having its operational headquarters in West Yorkshire, although its corporate headquarters were in Edinburgh. The survival of the Scottish banks down to the 1990s was attributed by the Bank of Scotland’s official historian to a tradition of knowing borrowers’ ability to repay and carefully working out the limits of risk. Richard Saville, Bank of Scotland: a history 1695-1995 (Edinburgh: Edinburgh University Press, 1996), 812-13. These were not conspicuous characteristics of HBOS or RBS in the period 2001-8. The ready availability of funds on international money markets prior the ‘credit crunch’ of September 2008 encouraged banks to borrow in order to increase their lending, while falling interest rates led to greater risk-taking in order to maximise profits. Such behaviour was common among the world’s bankers, who believed, wrongly as it turned out, that risk could be minimized by being diversified through new forms of paper assets, collateralised debt obligations and credit default swaps, which obscured who the ultimate borrower was. All major banks suffered losses when it became apparent that many of the ultimate sources of the income for these assets, often poor people who had taken out ‘sub-prime’ mortgages on houses in the USA, could not maintain payments. HBOS and RBS, however, made mistakes that led to a loss of their independence. The Halifax component of HBOS, having previously been a building society, was heavily exposed to residential property, and a policy of diversifying risk would have pointed to a decrease in the proportion of lending secured against property; instead HBOS lent extensively to building firms or to commercial property companies that proved to be unable to service loans once the credit-fuelled boom was over. On 17 September, following the failure of the American bank Lehman Brothers and the freezing of money markets, there was intense speculation in HBOS shares and the government agreed that a takeover bid by Lloyds TSB would not be referred to the Competition Commission. Although the arguments in favour of Scotland having two independent banks were no less compelling in 2008 than in 1980, attempts to maintain HBOS’s independence were brushed aside by the Treasury, and the takeover took effect in January 2009. Meanwhile RBS had undertaken a huge expansion of its balance sheet relative to its capital base since Sir Fred Goodwin succeeded Matthewson as chief executive in 2001. RBS’s vulnerability was increased by participation in a consortium with a Belgian and a Spanish bank to take over the Dutch bank ABN Amro in October 2007, whereby it acquired more sub-prime assets at a price above what Barclays had been willing to offer in a rival bid. In the next eleven months RBS shares fell from 402.47p to 71.7p. On 13 October 2008 the government moved to recapitalise the banks, giving it stakes of 43 per cent in the Lloyds TSB/HBOS bank and 57 per cent in RBS. On 19 January 2009 RBS shares fell by two-thirds to 11.6p, following the announcement of a £28 billion loss for 2008 – the biggest in UK corporate history (the corresponding loss by HBOS was £10.8 billion). Further government assistance raised the state’s holding in RBS in November 2009 to 84 per cent. Consolidation and loss of independence were characteristics of other Scottish financial services. Perth-based General Accident acquired Yorkshire Insurance in 1967, becoming one of the largest composite insurance companies; in 1998 it merged with Commercial Union, and two years later there was a further merger with Norwich Union to form what is now Aviva. At the beginning of the 1990s Scotland had three powerful mutual life insurance companies: Standard Life, Scottish Widows, and Stirling-based Scottish Amicable. Following demutualization Scottish Amicable was taken over by Prudential in 1997 and Scottish Widows by Lloyds Bank in 2000. Standard Life demutualized in 2006 but retains its independence and headquarters in Edinburgh. Aberdeen Asset Management, established in 1983 by way of a management buy-out, expanded in 2000-9 by acquiring a number of Scottish fund managers and parts of Deutsche Asset Management and Credit Suisse Asset Management to become the UK’s largest listed fund manager. A formal merger in 2006 of Alliance Trust with Second Alliance Trust, two companies which had long shared the same headquarters in Dundee, made it the largest investment trust in the UK. There was much more, then, to Scottish financial services than two failed banks. Even so, employment in financial services peaked in 2005 (figure 4), before the credit crunch, and it seems a limit to the size of sector has been reached. Figure 4: Employment in selected service sectors (000s) Source: Employee jobs by detailed industry, 1982-2009, Office for National Statistics Tourism is one of Scotland’s largest business sectors, providing direct employment for 218,200 people in 2006 according to VisitScotland. It was not clear how many of these jobs were part-time or seasonal. There is no tourism category in the annual official statistics, but trends are probably mirrored in the category of hotels and catering. Employment in hotels and catering was static at less than 110,000 for most of the 1980s but rose thereafter to 180,400 in 2006 (figure 4). Tourism became big business, with major improvements in the quality of accommodation. In the early post-war years tourism had differed little from that of Victorian period, being largely geared to British visitors, with seaside resorts, hydro hotels, fishing and golf being the principal attractions. The advent of cheap package air tours to resorts abroad where sunshine could be relied upon was a severe challenge that led in 1969 to the creation of the government-funded Scottish Tourist Board (VisitScotland’s predecessor). Scotland still competes internationally thanks to its scenery and rich historical and literary heritage. A distinctive feature of the Scottish economy was the higher proportion of GDP accounted for by government and public services (28.8 per cent in 2004) compared with the UK average (23.5 per cent). Allocation of public expenditure under the Barnett formula of 1978 and its later modifications perpetuated a situation which was more generous to Scotland than to England or Wales, and public expenditure per head in Scotland was consistently higher than the UK average. The numbers employed in the public sector increased after devolution in 1999, particularly in health and social work (figure 4). The official statistics for employment in heath and social work do not distinguish between public and private sector, but most is in the public sector. However, by 2010 the growth in the UK’s government’s budget deficit and the national debt had reached the limit of financial markets’ tolerance, and the expansion of public sector employment was over. REGIONAL DIFFERENCES As David Newlands points out, neoclassical economic growth theory suggests that differences between regions should decline over time, as prices guide capital to invest where profits are greatest, and labour to move to where wages are highest. On the other hand, theories of cumulative causation suggest that market forces create disparities as regions specialise in different industries, which generate clusters of inter-linked firms drawing upon local skills and experience. David Newlands, ‘The regional economies of Scotland’, in Thomas Devine, Clive Lee and George Peden (eds.), The Transformation of Scotland: The Economy since 1700 (Edinburgh: Edinburgh University Press, 2005), 160-1. On the whole, Scottish experience in the late 20th century suggests that cumulative causation was the dominant source of change, for good or ill. It is instructive to compare the fortunes of Scotland’s four largest cities and their surrounding regions. The Glasgow area had been an early example of a successful industrial cluster in the 19th century. However, the Clyde Valley Regional Plan of 1946 concluded that shipbuilding had monopolised too many of the West of Scotland’s resources, a view endorsed by Sydney Checkland who noted in his study of Glasgow that heavy engineering discouraged the growth of other industries. S. G. Checkland, The Upas Tree: Glasgow 1875-1975 (Glasgow: Glasgow University Press, 1976), 48. The West of Scotland’s limited range of industrial skills compared with the English Midlands became all too apparent in the 1960s and ’70s as the Linwood experiment progressed. Edinburgh, on the other hand, had never been dominated by a single industry and, as Scotland’s principal administrative, legal, and financial centre, was well placed to benefit from a shift in the economy from industry to services. GDP per head in the Strathclyde region increased by 32.4 per cent in real terms between 1977 and 1995, but Lothian’s increased by 57.8 per cent. Strathclyde’s share of Scotland’s population fell from 49.2 per cent at the time of the 1971 census to 44.4 per cent thirty years later; over the same period Lothian’s share rose from 14.3 per cent to 15.4 per cent. As a result of the North Sea oil boom being concentrated on Aberdeen, the Grampian region’s GDP per head increased by 73.8 in real terms between 1977 and 1995; the comparable figure for Tayside, Dundee’s hinterland, was 40.7 per cent. Whereas in 1971 the populations of Aberdeen and Dundee had been about the same size, just over 180,000, by 2001 Aberdeen’s had risen to 213,000 but Dundee’s had fallen to 142,000. Dundee had managed to reduce its dependence on jute through inward investment by American firms in the post-war period, but in the 1970s these largely branch-factory operations began to contract. Multinational oil companies preferred to cluster in and around Aberdeen. By the end of the century the largest employers in Dundee were the National Health Service, the city’s two universities, and the local authority. Jim Tomlinson suggests that Dundee is an example of a city that has moved from integration with the international economy, first through jute and then through multinational companies, to increasing disengagement, a process he calls ‘deglobalisation’. David Newlands, ‘The oil economy’, in W. Hamish Fraser and Clive Lee (eds.), Aberdeen 1800-2000 (East Linton: Tuckwell Press, 2000), 126-52; Jim Tomlinson, ‘The deglobalisation of Dundee, c.1900-2000’, Journal of Scottish Historical Studies, 29 (2009), 123-40. Despite falling employment in agriculture, forestry and fishing, most rural areas did not experience depopulation. Between 1971 and 1997 the Highland Region’s share of Scotland’s population rose from 3.3 per cent to 4.1 per cent; Dumfries and Galloway’s from 2.7 per cent to 2.9 per cent; and the Borders, despite the problems of the textile industry, from 1.9 per cent to 2.1 per cent. In the Highlands the population decline, which had begun in the 1840s, began to be reversed from 1965, when the establishment of the Highlands and Islands Development Board was followed by a marked increase in public expenditure aimed at stimulating economic activity. The granting by the European Union of Objective 1 status, reserved for regions with less than 75 per cent of average EU income per head, in 1994-9 and transitional status in 2000-6, had a similar effect. Improved Highland roads encouraged tourism. In the Lowlands agricultural subsidies benefited market towns indirectly, as well as farmers directly, and the boundary between cities and countryside became increasingly porous as commuters used their cars to turn rural communities into Arcadian suburbs.  Table 1: Regional GDP per head in Scotland (UK=100) 1981 1991 Highland 99.2 87.3 Grampian 120.5 134.8 Tayside 89.7 89.1 Fife 98.7 84.7 Lothian 102.7 110.5 Central 100.9 87.7 Strathclyde 89.8 88.3 Borders 87.2 81.5 Dumfries & Galloway 94.3 86.6 Scottish average 96.3 95.8 Source: Clive Lee, Scotland and the United Kingdom: The Economy and the Union in the Twentieth Century (Manchester, 1995), 55.  Table 2: GVA per head in selected areas 1995 2005 Shetland 98 95 Highlands and Islands 75 74 Aberdeen and NE Scotland 139 125 Dundee and Angus 96 87 Fife and Clackmannan 77 70 Edinburgh 150 159 West Lothian 118 97 Glasgow 121 137 Inverclyde and Renfrewshire 100 79 North Lanarkshire 72 76 North and East Ayrshire 80 65 Borders 84 66 Dumfries and Galloway 84 69 Scotland 100 95 Source: Scottish Economic Statistics (Edinburgh, 2008), table 1.3 Table 1 shows how disparities in regional GDP per head increased during the 1980s, with Grampian and Lothian pulling ahead of the rest of the country. Table 2 breaks the country down into smaller units, and shows that the city of Glasgow improved its relative position, but Inverclyde and Renfrewshire, and Ayrshire, became relatively poorer. Both tables warn against making sweeping generalisations about the Scottish economy. For example, the Scots have been criticised for lack of enterprise, but the business birth rate is not uniform across the country. The number of new businesses in 2008 per 10,000 people varied widely between the four principal cities: Aberdeen 45.2; Edinburgh 39.5; Glasgow 32.1; Dundee 23.2. Out of 64 cities in the UK, Aberdeen ranked 10th, Edinburgh 20th, Glasgow 44th, and Dundee 63rd. The stock of VAT-registered businesses also varied markedly, with rural areas typically having rates of 300 firms per 10,000 people, well above the UK average, but urban areas having rates below 200. The data suggest two or three major reasons why business birth rates differ. One is the expectation of profit, which is linked to GDP and population growth – both highest in and around Edinburgh and Aberdeen. Another is availability of capital, which is linked to home ownership, since property can provide security for loans. Edinburgh and Aberdeen have high house prices, and rural areas have much higher rates of home ownership than urban areas with large local authority housing estates. It has also been suggested that people whose only experience of employment has been in large workplaces like shipyards or steel mills, or with local authorities, may be less entrepreneurial than others, and the urban-rural difference would be consistent with that explanation. There were also regional and class disparities in social conditions. While the problems of workless households and of people eking out an existence on social security benefits have not been restricted to any one region, they are most prevalent in former industrial areas, mainly in the West of Scotland. Neoclassical growth theory may be correct in stating that capital and labour will respond to market forces to achieve an optimum distribution in the long run, but for some communities a generation has not been long enough. UNANSWERED QUESTIONS AND FUTURE RESEARCH From the vantage point of 2011, when most Scots are visibly more prosperous than when industrial employment peaked in the mid-1960s, the economic changes of the 1980s seem more benign than they did at the time. Even so, it is open to debate whether de-industrialisation was unnecessarily abrupt and whether some of its adverse social consequences could have been avoided. Notwithstanding an expansion of higher education, it is not clear that all of the labour force has been provided with the education and skills appropriate to the knowledge-based economy of the future envisaged by Scottish government agencies. There are other questions in a formidable agenda for research on the last 50 years. For example, business historians could investigate why some firms, even in declining sectors like textiles, survived and sometimes prospered. The financial sector is in need of attention, Charles Munn’s forthcoming history of the Alliance Trust being a welcome start. Tourism requires a study equivalent to Alastair Durie’s ground-breaking book on the pre-1939 period. Alastair Durie, Scotland for the Holidays: Tourism in Scotland c.1780-1939 (East Linton: Tuckwell Press, 2003). Comparative urban and regional history could bring out the diversity of Scotland’s experience of economic growth and social change. Bibliography: Devine, Thomas, The Scottish Nation 1700-2007 (London: Penguin, 2006). Devine, Thomas, Lee, Clive, and Peden, George (eds.), The Transformation of Scotland: The Economy since 1700 (Edinburgh: Edinburgh University Press, 2005). Fraser, W. Hamish, and Lee, Clive (eds.), Aberdeen 1800-2000: A New History (East Linton: Tuckwell Press, 2000). Harvie, Christopher, No Gods and Precious Few Heroes: Twentieth-Century Scotland (Edinburgh: Edinburgh University Press, 1998). Lee, Clive, Scotland and the United Kingdom: The Economy and the Union in the Twentieth Century (Manchester: Manchester University Press, 1995). Payne, Peter, Growth and Contraction: Scottish Industry c.1860-1990 (Dundee: Economic and Social History Society of Scotland, 1992). --------------, ‘The economy’, in Thomas Devine and Richard Finlay (eds.), Scotland in the 20th Century (Edinburgh: Edinburgh University Press, 1996), 13-45. Peat, Jeremy, and Boyle, Stephen, An Illustrated Guide to the Scottish Economy, ed. Bill Jamieson (London: Duckworth, 1999). Phillips, Jim, The Industrial Politics of Devolution: Scotland in the 1960s and 1970s (Manchester: Manchester University Press, 2008). Saville, Richard (ed.), The Economic Development of Scotland 1950-1980 (Edinburgh: John Donald, 1985). Tomlinson, Jim, and Whatley, Christopher (eds.), Jute No More: Transforming Dundee (Dundee: Dundee University Press, 2011). PAGE 4