An independent Scotland within the EU would border checks of some nature. Ireland's experience shows it is clearly possible for a small country to succeed economically in a similar situation.
Scotland could establish deals with rUK independent of the EU because the single market is not complete: whereas most trade in goods is covered, very little progress has been made in respect of trade in services. Both rUK and Scotland are service-dominated economies. Hence there may be opportunities to agree sector-by-sector deals (e.g. some areas of banking, health, education) that would not threaten obligations that Scotland might have under EU treaties.
Similar consideration would apply to the movement of people between Scotland and rUK. Like Ireland, Scotland would likely prefer to be part of the Common Travel Area rather than join the Schengen zone to which most EU countries belong. This would mean there would be no need to show passports on crossing the border and given the volume of movement, this would save substantially on administrative costs.
How the establishment of an Anglo-Scottish border will affect Scottish GDP in the medium to long-term is impossible to predict. Frictions in trade are likely to restrict growth in the short-run, as we are about to observe when the UK leaves the EU. However, its existence will set up a new set of incentives for individuals and companies: whether these play in Scotland’s favour depends very much on the choices that the UK government is currently making in respect of the post-Brexit relationship between the UK and EU, and future policy choices that an independent Scottish government might make.
Under the scenario of an independent Scotland rejoining the EU, foreign investors might consider Scotland a desirable location given its unfettered access to EU markets, a well-educated English-speaking workforce, some trade integration with rUK in respect of services and good communications. But Scottish workers might be attracted to rUK if it offers better long-term income prospects. How these and other incentive effects might balance out is impossible to anticipate.
The closest analogue to these issues lies in the situation that Ireland now confronts in its relationship with the UK. Immediately post-independence, Ireland’s GDP per head was 56 per cent of that of the UK. In 2018, Irish gross national incomeper head was 43 per cent above the UK level. A report prepared for the Irish government suggested that Irish GDP might fall by up to 7 per cent if the UK opted for “no deal” with the EU. This would pose a serious problem for Ireland, but its GDP per head would obviously continue to be well above UK levels. It is clearly possible for a small country to succeed economically in a similar situation to that which would confront an independent Scotland within the EU and establishing a new border. But because it is possible does not mean it is inevitable. It would require both good fortune and skilful, occasionally tough, policymaking.