THE SECOND major economic crisis suffered in a dozen years by the UK and world economies has prompted a widespread questioning of economic policy. The questions haven’t kept pace with events. Around the world, central banks have transformed their own functions to manage the extreme turbulence.
The experience of the 2008 crisis led to demands for a new kind of finance, the dysfunction of the existing banking sector having helped pile the pyre high before lighting the match for the global conflagration. In the afterglow of the 2014 independence referendum, with homes still high for a wider political transformation, a group of economists and activists gathered around the idea of a Scottish National Investment Bank.
Dr Craig Dalzell, Head of Policy and Research at the Common Weal think tank which helped to instigate the campaign, reflects: “The Scottish National Investment Bank (SNIB) is one of Common Weal’s earliest campaigns and goes right back to our founding manifesto, which called for better ways to invest in Scotland.
“Essentially, we need to move away from the financialism and rentier capitalism that typifies the UK. The worst excesses of this was seen in and around the 2008 financial crisis, where banks were deliberately calling in loans on their business customers with the explicit intent of bankrupting them and claiming their assets and property.”
The idea was straightforward enough – freed from crude commitments to rapid return and profitability, governments could use their own investment banks to encourage sustainable economic activity in socially useful fields. ‘Patient finance’ could invest in this way by ignoring market imperatives which draw finance towards areas of aggressive, chaotic growth and speculative bubbles.
Outside of the UK, in parts of Europe where huge financial houses had not achieved the same levels of destructive hegemony, there were ample examples of better practice, Dalzell argues: “We were greatly inspired by both the German investment banking model used by KfW [Credit Institute for Reconstruction] and by the German culture of Mittelstand companies which are small and medium companies, often family owned and often very closely embedded in their local economies where stability of service is prioritised over growth or fast profits.”
After years of pressure, and with demands for the SNIB passed from the SNP conference floor, the Scottish Government officially launched its version of the initiative on Monday 23 November, financed with £2 billion over 10 years.
However, Dalzell notes, “the SNIB as implemented is fundamentally a weaker version of the SNIB than we envisage.”
There are three fundamental problems with the Scottish Government SNIB from the perspective of campaigners such as Dalzell. First, its governance structures. The Common Weal-New Economics Foundation (NEF) plan had envisioned an advisory board drawn from public stakeholders able to directly address the governing board of the bank. Instead, in the Scottish Government version it will speak only to ministers, leaving the SNIB in the full sway of its governors.
Secondly, the personnel who now staff the SNIB has raised concern, though not surprise. Non-executive directors will include a slew of private equity insiders steeped in corporate culture, as well as former UK Government and European investments officials.
Finally, and perhaps most fundamentally, the funds accessible to the SNIB are strictly limited by the devolution settlement. £2 billion may sound like a lot of money, but it is loose change in the world of capital investments for infrastructure.
Laurie Macfarlane, an economist who drafted the joint Common Weal-NEF paper proposing the SNIB in 2016 and then advised the Scottish Government on the design of the SNIB with the UCL Professor and renowned public intellectual Mariana Mazzucato, is well versed in the limitations facing the SNIB in its current form.
On the particular obstacles posed by the UK constitution, McFarlane says: “Due to the constraints of devolution, the SNIB will not be able to issue bonds without first being granted permission from HM Treasury, which so far hasn’t been forthcoming. While this may not be a huge problem in the first few years, it will significantly undermine the ability of the SNIB to have the kind of impact similar institutions have in other countries over the longer term.”
Of course, from the perspective of Nicola Sturgeon and the Scottish Government, the final unveiling of the SNIB is a pre-conference giveaway, serving at least three constituencies: those who want a more robustly social democratic profile from their party, environmentalists, and SNP democrats simply tired of conference decisions, passed from the delegate floor, not arriving as completed policy.
Sturgeon was at particular pains to stress the environmental credentials of the policy at its launch, saying: “The Scottish National Investment Bank will help to tackle some of the biggest challenges we face now and in the years to come, delivering economic, social and environmental returns.
“The launch of the bank is one of the most significant developments in the lifetime of this parliament, with the potential for it to transform, grow and decarbonise Scotland’s economy.”
But environmentalists, jaded by recent failures to finance a just green transition, instantly raised significant concerns.
According to Ric Lander of Friends of the Earth Scotland: “The Scottish Government has promised their new public bank will invest ethically to cut climate pollution and provide green jobs. With no ethical standards published and missions not yet approved by Parliament the SNIB appears to be spending cash before it has its house in order.
“Despite lending having begun, we can’t yet say whether the SNIB is an ethical or green bank.”
The group points out that the first company to be awarded funds, Msquared, operates in the fields of oil and gas, and defence, among others.
All policies, slogans and causes which migrate from the extra-parliamentary to the governmental sphere face similar contradictions. SNIB has a foot in the door, and this will create some hope that its remit and funds can one day be expanded. In principal, economists that back the idea would like it to form only one item of a wider institutional furniture, such as a national infrastructure company, energy company and so on. This would mean a greater degree of national economic planning and strategy, but looks a long way off.
The current Scottish political arrangement is relatively unused to an institution like SNIB, as Macfarlane says: “The key challenge now is to ensure the SNIB operates like a public bank, not a private one. This means ensuring that it focuses on its core missions of accelerating the zero-carbon transition and tackling inequalities, rather than providing corporate handouts or pursuing short-term profits. Given Scotland’s relative inexperience in public banking, it is critical that the SNIB rapidly develops the capacity to invest directly in the economy, rather than relying on private sector consultants and intermediaries.”
The fear may be that the incorporation of an enfeebled version of SNIB will lead to waning interest in the policy, as part of a general cynicism surrounding official political life. The UK Chancellor Rishi Sunak has also now proposed a national infrastructure bank – and ubiquity of like proposals will bring new challenges for campaigners seeking their own interpretation of the SNIB.
Might independence create the basis for the expansion of SNIB’s influence? It would certainly release it from the borrowing constraints of the Scottish Government under devolution – although, as ever, the form and extent of independence would matter for the future of its operations.
Under SNP Growth Commission plans, Scotland would maintain UK financial regulation and this, argues Dalzell, could represent a threat: “There is the risk that an rUK regulatory environment could develop that severely limits our SNIB”.
Debates of economic planning via state action and regulation are only just beginning. Rishi Sunak has announced that UK public sector borrowing now rides at £394 billion, a sum of unimaginable scale and consequence. Attempts to rein-in public spending have been blown away in the blizzard of historic events. But when these debates return, the role of the state in investment will be a key battleground.