Speech
It’s always a great pleasure to visit Scotland, and a particular pleasure to be at the Investment Summit.
I should start by explaining that the Bank of England, despite its name, is by no means solely an English institution. We serve the people of the United Kingdom, right across our country. To that end we have twelve regional agencies covering the whole country. These agents are our eyes and ears on the economy, talking every day to a large number of business contacts about their experiences and expectations. Our Agent in Scotland, Will Dowson is here today, and if you want a real read on the Scottish economy I highly recommend a conversation with Will. I undertake regular visits with all of the Agents, and I can let you into a secret, it’s the most fun part of my job. I love spending time with businesses, talking to people from Peterhead to Penzance, and getting their up to date assessment is invaluable assistance in our role of setting interest rates.
Those who have heard me speak before will know I am a keen historian, so it wouldn’t do to come all this way without reflecting on the history of the Bank as it pertains to Scotland. In fact, the scheme that led to the founding of the Bank in the late 17th century was actually the idea of a Scotsman, William Paterson. He was a great ideas man. Some of his later schemes were, admittedly, less successful, and a particular adventure did a lot of damage to the Scottish economy, but he had at least one very good idea. You might regard it as ironic that the son of a Dumfrieshire farmer thought up the Bank of England – all the more so since it was an Englishman, John Holland, who is credited with establishing the Bank of Scotland!
I won’t bore you with the long story of why our banknotes don’t circulate as the main currency in Scotland – suffice to say, Scotland is rightly very proud of its banknotes, and we are happy to support that.
The other two stories I’d like to mention concern recent visits I have made to Scotland, and go some way to illustrate the great investment opportunities here. Earlier this year I was in Glasgow and met with a group of start-ups connected with developing economic capacity in Space – outer Space that is. Scotland has an emerging specialism in this field. We met in the historical surroundings of the Boardroom of one of the former Upper Clyde Shipbuilders, its new occupants now concerned with a somewhat different kind of vessel to the naval ships that are still proudly built in the area. Progress is really in the air there, as once again we harness the miracle of space flight to spur scientific discovery. I learned, for instance, how much faster you can grow medical crystals in zero gravity, and about quantum computing in space, to describe just two of the start-ups I was lucky enough to meet.
On my previous visit in 2023 I ventured to the North East of Scotland and Orkney, visiting firms connected with the energy sector. Energy has long been – if you’ll excuse the pun – part of the bedrock of Scottish industry. And as the energy industry evolves at pace it should be no surprise that Scotland is there at the forefront: after all Scotland has an endless and ample supply of renewable energy – the weather and coastline is the clue. The challenge is to invest to capture and convey this abundant green energy to where it is needed, and to make it available when it is needed – but that’s increasingly possible to do at scale with the right investment. I recall visiting the oil terminal at Flotta in Orkney. The fact that stuck in my mind is that planning consent was given for Phase 1 of the terminal in January 1974, and it was operational by summer 1976.
That pace of progress feels like an achievement that we must aspire to in terms of efficiency of construction if we are to exploit this generation’s white heat of technology moment. There are big plans to emulate the discovery of oil around Orkney in the 1970s with the development of renewables.
I hope these examples give you a flavour of how exciting the opportunities are in Scotland. And, just as a Scotsman helped the Bank of England get going, I hope a Sassenach like me can do something to help develop these opportunities.
With that in mind let me offer a few thoughts on why the Investment Summit is so important in the context of economic developments. What really drives the growth of economies? Two things drive growth in the capacity of economies (the supply side), the available labour force, and productivity (the efficiency with which that labour force produces things). Of these two, it is productivity that drives living standards forward, so it matters a lot. And, investment does a lot to drive productivity – reflecting innovation and the putting to work of ideas and inventions, again a sphere in which Scotland boasts a proud history across communications, medicine and transport. Investment isn’t just good for business, its good for the economy, the country and the public.
What drives investment and productivity then? Lots of things shape and affect them, but history strongly suggests that really to move the dial – to do more than affect an incremental change - takes a breakthrough in so-called General Purpose Technology, or GPT for short. By the way, that’s not ChatGPT, which stands for Generative Pre-Trained Transformer, just to confuse things. Rather, in history, examples of GPTs are things like the steam engine (where Greenock’s James Watt was instrumental), electricity, and most recently the Internet. Their significance is that these technologies lead to economy-wide growth, re-shaping industries and markets. They spread out into many sectors of the economy, and for some quite extended period of time they keep developing and improving productivity, and they create an environment in which one innovation leads to another.
Why does this matter today? It matters a lot, because the evidence would suggest that across many economies, the UK included, we are in one of those periods of waiting for the next GPT to come along and lift economic growth. Of course, many other things determine actual economic growth, but in terms of the growth of potential and living standards, productivity matters a lot. And behind that sits investment.
The benefits of such technological shifts can, however, take some time to come through, hence the rather famous quote from the economist Robert Solow who said in 1987, “You can see the computer age everywhere but in the productivity statistics”. Give it time was the lesson from this era – though that does not mean waiting to invest, lest we miss our chance. The other thing to say is that technological impacts on the productivity growth rate are not permanent – they can have a permanent effect on the level of activity and what we do day-to-day, but innovations have a life cycle in terms of their contribution to growth rates. And then, we have to wait for the next GPT to come along.
So, should we be optimistic today? Yes is my view. But only if we make the necessary investment, and that depends on a lot of commitment. I am very much glass half full when it comes to investment opportunities. As I said earlier, I am hugely impressed when I visit businesses and witness innovation. The opportunities really are there.
What then is the next GPT? Time for the crystal ball. I don’t think it is too hard to imagine that it will come in the area of AI, whether that is applied via robotics, quantum computing biotech/medical technology, or a number of other fields all of which are related. Many other things will contribute no doubt, so there is nothing exclusive about this list.
Moreover, in the spirit of the GP in GPT, many other areas will benefit from the happy spillovers of general purpose technology.
Of course, much investment has already been made. You can reasonably ask, why aren’t we seeing more positive benefits yet? I would go back to the Robert Solow quote I gave earlier. Another fact from history is that it is reckoned to have taken 40 years between Edison – another innovator with at least some Scots lineage - first wiring up a light bulb and electricity showing up in the productivity statistics. Edison himself is supposed to have said over the length of time it took him: “I have not failed. I’ve just found 10,000 ways that won’t work”. With these new technologies, we are very much still at the experimentation stage. And that’s where investment and persistence is crucial.
What else does growth take? Let me pick out a few things.
If we are on the cusp of seeing another advance in GPT, we need the conditions to support an environment where investment occurs across the economy. From the official side, we need to provide a policy framework which sustains growth and innovation. I recognise that this sounds rather like motherhood and apple pie, but there is substance to it. For instance, we must take a pragmatic and open-minded approach to the potential and risks of AI. We must understand what it can and cannot deliver, and where it can create broader issues that will need to be tackled. But I would say to the alarmists that it is all of our responsibility to solve such issues rather than just broadcast them.
A second point – going back to my Orkney story – is that we need to ensure that we have good infrastructure, using which the innovation can succeed. The lesson for me of the 1970s story at Flotta was to have the vision and then get on with it – obvious I know, but not always realised.
Third, as I said earlier, GPT innovation in history has benefitted from, and needed, long development periods, so it is important that we have an investment environment that supports this type of patient progress. Again, going back to my earlier stories, I don’t suppose commercial crystal manufacturing in Space will take off quickly.
And a final point is that we must do all we can to ensure the domestic investment environment – by which I mean the institutions and individuals who direct investment to where it is needed - is supportive. The Mansion House reforms and the reforms proposed by the Government are intended to increase the level of investment by UK pension funds in the real economy, in other words in British businesses. I too am a strong advocate of these reforms. Not only do they make good business sense for pension funds, but they will demonstrate a level of commitment to growth in the economy and to the British public.
Likewise, the British Business Bank, which is the largest investor in UK venture and venture growth capital funds, is increasing its commitment to create more growth capital in UK unlisted high potential companies. And, here in Scotland the Scottish National Investment Bank is seeking to support longer term investment projects, as is the National Wealth Fund at a UK level. I have no doubt there are untapped opportunities for this type of investment, that much is clear from my visits around the country.
These developments provide a real opportunity to generate external institutional capital into high potential companies. This summit is well timed. I am, to repeat, glass half full when it comes to the opportunities for investment, innovation and growth. The reason? I spend time going around the country visiting companies, talking to start-ups. It’s that simple.
Thank you.
I would like to thank Jennifer Adam, Will Dowson, Lee Foulger, Karen Jude, Roshan Lachman, Katie Martin, Rhys Phillips and Benjamin White for their comments and help in the preparation of this speech
