By Graeme Roy

One of the benefits of devolution has been the demand for new statistics to better understand the Scottish economy.

Back in late 1999, ministers agreed to publish a quarterly gross domestic product (GDP) series for Scotland to provide the new Parliament with regular data to help track the performance of our economy.

This GDP series has become the benchmark for assessing the health of the Scottish economy, including government targets, ever since. Arguably however, a better measure of economic conditions is gross national income (GNI).

What’s the difference? Whilst GDP measures how much is produced in a country at a given point in time, GNI measures the income earned by a country. By focussing upon income (and crucially who ‘owns’ that income), it can help provide a more complete picture of the economic prosperity of a nation.

In most countries, the difference between GDP and GNI is small.

The value of what a country produces is broadly in line with the income it receives.

But in some cases, the gap can be a bit larger. If, for example, there is a high level of foreign ownership of domestic businesses or natural resources, then whilst production might take place within a country, some of the proceeds – in profits and dividends – end up of flowing to investors living elsewhere.

This can be particularly true for small open economies like Scotland. In Ireland for example, where a high number of multinationals headquarter their European operations, the difference is particularly pronounced. In 2022, Irish GDP was measured at around €500 billion, but its GNI was just over €360bn.

What do we know about Scotland’s recent GNI performance?

Earlier this summer, and as part of its ongoing process of developing economic statistics, the Scottish Government published revised experimental figures for Scottish GNI.

These data show that Scotland’s net national income has continued to grow since the pandemic.

But overall, in 2021, the figures reveal a net outflow of income from Scotland of around £10 billion. As a result, our national income is around 5% less than the value of what we are producing. Whilst Scotland’s GDP in 2021 was measured at £181bn, Scotland’s GNI in that same year was just £170.9bn.

This difference can be explained by two key factors. First, with a successful pension, insurance and asset management sector which serves both the UK and global markets, there is naturally a large ‘profit’ on portfolio returns made by Scottish investment firms that flows to policyholders outside Scotland.

But it also reflects a second trend – the weak growth in (and loss of traditional) Scottish-headquartered companies. This is particularly true in markets, such as oil and gas, whisky and pharmaceuticals. But it is also reflective of a general trend in the centralisation of the UK corporate base in London.

Successful Scottish companies are always going to be attractive takeover targets but structural challenges – including growing the number of high potential firms – means that many of our most successful companies are headquartered outside of Scotland.

External investment has undoubtedly been positive for the Scottish economy. It has brought jobs, supported local supply chains and unlocked innovation and, in turn, further capital inflows.

But the weakening of local corporate ownership, the worldwide growth in multinational operations, and the limited success of growing new businesses at scale, means that a proportion of the overall value generated in the Scottish economy – and crucially the profits made here – leaks out year on year.

With the rise of digital technologies, artificial intelligence and multi-national firms taking on an ever-higher share of global markets, the challenges of developing a robust local corporate base for any small country like Scotland are only likely to increase.

That is why it is important that the work of Scottish Enterprise, and initiatives like those led by Mark Logan to grow the technology business base in Scotland, are adequately supported.

Scotland’s national income, but also the underlying entrepreneurial and innovation environment, depends upon it.

Graeme Roy is professor of economics at the University of Glasgow’s Adam Smith Business School