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Mr. Purchase: In regard to the borrowing of expertise, is it not also the case that many advanced western companies go to China and take that technology with them in order to make even bigger profits than they would make in the west?

Denzil Davies: Yes; technology, like capital, moves freely around the world today, and we cannot do much to stop it.

The reality is that we are now competing with a country that has advantages that we do not necessarily have. I agree that we cannot compete, if that is the right word, on health and safety. We read recently of a terrible mining disaster in China, and no one is suggesting that our health and safety rules should be diluted so that we can compete.

We cannot compete with China on wages either. However, we must recognise that the pressure from countries such as China is having an adverse effect on wages in some sectors of our manufacturing and service economies. The pressure might not be pushing wages down, but it is certainly preventing them from increasing, even though our rate of inflation is low at the moment.

We welcomed the recent announcement that the minimum wage would rise to £5.05 in September. Indeed, the Chancellor also welcomed the fact that there was going to be a minimum wage in Hong Kong, although I do not know what effect that will have on the Chinese economy. But it is certainly welcome that we have pushed up our minimum wage again. We should realise, however, that in some sectors of industry, certainly in some areas of manufacturing, the minimum wage is now being treated almost as an excuse by management under pressure not to increase wages much above that level. In other words, it is becoming not a floor but a ceiling in some manufacturing sectors such as the car component industries.

With global pressure keeping wages down in certain areas, what will happen to the working tax credit? We all welcomed the introduction of the working families tax credit, as it was then called, the child tax credit and the pension tax credit. The Chancellor has talked about the
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child tax credit and the pension tax credit, but he did not mention the working tax credit. If wages are going to be pushed down, however, the increase in wages will be less than the rate of inflation, and the cost of the working tax credit will increase.

The working tax credit is, in effect, a subsidy for those on low wages. It is an implied recognition that we cannot pay the kind of decent wages that should be paid to families to enable them to have a reasonable standard of living. So the Government, quite rightly, decided to subsidise their wages, because private industry cannot afford to compete with the foreign competition. I hope that we will be able to continue to pay the working tax credit at its present level, but the more wages are pushed down, the less likely it is that the Government will be able to fund it, unless we cut the level. That is a danger that we might have to face.

We are told that we must produce added-value goods. I am not quite sure what they are, but I suppose that they are goods of higher quality and greater sophistication that we can sell at a higher price on the world markets to increase the profit margins of our exporting firms. Let us hope that we can do so.

We used to talk about a high-wage, high-tech economy. I notice that the Chancellor said we must not be a low-wage, low-tech economy. I agree with him entirely, but why he put that in the negative I do not know. Whether "not low tech, not low wage" is equal to "high tech, high wage" I am not sure, but perhaps, even if we work hard, we will aspire to "high tech but not necessarily high wage", because these Chinese are clever too, Mr. Deputy Speaker. They can produce those high-tech goods for low wages. I am expressing the obvious, but at least we are beginning to believe that that is a problem we will have to face. That is a good start.

I had better be careful now, because I am going to talk about employment policies. Again, there will be a challenge to our employment policies. Recently, it was announced—we all welcome it—that there will be longer maternity leave. Over the last few years, we have created enlightened policies whereby people can work flexible hours, whether through part-time working or other measures designed to improve the work-life balance.

When such changes are introduced, I am not aware of there being a rigorous analysis of whether they are good for competitiveness and productivity. These are good policies; they are fashionable policies. Therefore, we do not really have to analyse them. It may be that that does not matter if the other countries in western Europe that we compete with—and, indeed, the United States—also have policies of more or less the same kind. There is an odd level playing field, so we do not have to examine these policies.

Again, China is different. If we are serious about competing, although we might not get there in the end, we must try to be more rigorous in our analysis of many of these extremely enlightened policies, which we want to keep, in light of the fact that we are competing with a country that does not have such policies and will not have them for a very long time.
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Mr. John Bercow (Buckingham) (Con): The right hon. Gentleman gives us China as an example of a country that does not have such policies. Will he concede that it is at least as valid to invoke the example of the United States, where the Regulatory Flexibility Act 1980 and the Small Business Regulatory Enforcement Fairness Act 1996 have an altogether different tinge from the heavily regulatory policies common in the European social model?

Denzil Davies: I am not dealing with regulations. I am talking about more fundamental policies involving flexible working, which exists in the United States, and part-time working. Those policies help with the work-life balance.

Mr. Bercow: I apologise to the right hon. Gentleman if I did not express myself sufficiently clearly. My point is that in the United States, for example, it is commonplace in a culture of expected entitlements, such as maternity leave, to make a distinction between, on the one hand, relatively small firms, which are the seed-corn of our current and future prosperity, and, on the other, much larger businesses, which can more readily accept and absorb the costs of such policies.

Denzil Davies: I am not as conversant with the position in America as is the hon. Gentleman. I am making a general point: if we are serious about competing, we should at least consider policies in light of this very vicious competition that we face now and are likely to face in future.

The Chancellor also mentioned—we have heard about it from others—the knowledge economy. Perhaps that is the same as high tech or value added. I do not know about these clichés. Clichés are not meant to be very precise, but I think I know what it means and I am not decrying it at all. To have a competitive knowledge economy, however, we need a high-quality education system, which I do not think we have achieved yet. I believe that over the past 20 years we have seen a diminution in the rigour and intellectual discipline required to create such a high-quality education system. We need much more rigour. Nor should we decry excellence—there is a tendency in our education system to do so, or to bracket it with elitism. We will need all the excellence that we can find if we are to compete with these wretchedly clever Chinese and Indians.

Those of us who remember how the Japanese manufacturing industry cut swathes through British and western manufacturing in the 1970s will remember the anecdotes, which I heard from managers and engineers from my constituency who went to Japan, about the attention to detail—which could be pedantic in some cases—self-discipline and rigour that went into the creation of the Japanese engineering and manufacturing miracle. All societies are different, and our society is not like Japan's. To create a knowledge economy, however, we need that rigour and intellectual discipline, which, I am sorry to say, does not seem to be present at the moment in parts of our education system.

Some people believe that we do not have to worry too much about the Chinese system because it will implode as a result of the contradiction between politics, driven by a Chinese version of Marxist-Leninism, and economics, which is a rough and ruthless form of
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capitalism. It is a bizarre kind of partnership, if there can be such a thing, between Karl Marx and Adam Smith. Perhaps it will implode—I do not know—but I suspect that if it does, the loser will be poor old Marx, and the winner will probably be Adam Smith.

Mr. Flight: Could I put it to the right hon. Gentleman that, rather than imploding, the next thing to happen will be that China's currency will be forced to appreciate dramatically, making it much less competitive? The alternative is for China to have more and more huge dollar balances.

Denzil Davies: All sorts of things could happen in relation to China—M4 could grow through the roof, public expenditure could be dreadful and currencies could implode. But given the size, force and energy of that country, even if Karl Marx disappears and some version of Confucius comes back, I suspect that Adam Smith, at least for some time, will go marching on in China.

As I have tried to say, the Chinese are clever, and they realise that there is a problem with that contradiction. They have come up with a slogan—I do not speak Chinese and cannot translate it myself—which is translated as, "Make the theory fit the facts." That sounds like something out of Gilbert and Sullivan, does it not? Well, the theory is communism, or some Chinese version of it, and the facts are brutal capitalism and the global capitalism in which they must compete. Up to now, they have done well in making the theory fit the facts.

In one of my last speeches in the House of Commons, may I suggest that we pinch the Chinese slogan and make the theory fit the facts? Let us examine some of the fashionable theories that we have enjoyed, rightly, over the past 20 years, as it is a mark of an advanced, civilised society that we should be able to put those theories into practice. Let us consider those in relation to trade, employment and education and, if we can, try to make them better fit the facts of global capitalism.

A few years ago, we never had to worry about globalisation or global capitalism, because the west owned them. It was our capital; it was our globalisation. But now we have lost control of it, or are losing control of it. There are new kids on the block, and they are growing up very fast. We are losing control of something that we thought we could control and fashion. At least we have made a start in recognising that there is a problem, and I commend the Chancellor for that.

4.5 pm

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