House of COMMONS









Tuesday 11 July 2006



Evidence heard in Public Questions 52 - 138





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Oral Evidence

Taken before the Treasury Committee

on Tuesday 11 July 2006

Members present

Mr John McFall, in the Chair

Mr Colin Breed

Mr Michael Fallon

Mr David Gauke

Ms Sally Keeble

Mr Andrew Love

Kerry McCarthy

Mr George Mudie

Mr Brooks Newmark

John Thurso

Mr Mark Todd


Witness: Mr Martin Wolf, Associate Editor and Chief Economics Commentator, Financial Times, and author of Why Globalisation Works, gave evidence.

Q52 Chairman: Mr Wolf, good morning and welcome to our inquiry into globalisation. We really appreciate you taking the time to come and chat to us on this because I do not know if everyone in the Committee has but a number of us have read your book Why Globalisation Works, and we have also followed your columns very assiduously in the Financial Times and your latest one on energy.

Mr Wolf: One more to do today. Another one.

Q53 Chairman: Very good. Could you identify yourself for the shorthand writer, please?

Mr Wolf: Yes. I am Martin Wolf; I am the Chief Economics Commentator for the Financial Times.

Q54 Chairman: Maybe I can start with asking the question, what is globalisation, in your eyes? What would you identify as the most important threat and most important opportunity for the UK arising from this phenomenon of globalisation?

Mr Wolf: Those are two quite distinct questions. First of all, I define globalisation, since I am an economist, as fundamentally an economic process with, of course, very wide and fundamental political and social consequences - and indeed cultural consequences. I do not consider those trivial, but I focus on the economic aspects. I regard it as, in essence, a process of economic integration across quite a wide range of markets, trade in goods and services, mobility of capital and, also, increasingly, of labour, and it is driven by two distinct but inter-related processes. The first is a set of policy changes, namely liberalisation of economies, particularly at the border, but that is often very difficult to distinguish from what we often think of as domestic liberalisation. Often the process of domestic liberalisation, for instance of financial markets, almost automatically has international implications. The second process driving it is technological change; changes, essentially, in the costs of transport and communications. So that is how I define globalisation. It is economic integration across a whole range of markets driven by two processes. In the last 20-25 years we have seen a global policy revolution - that is quite clear. A very wide range of countries, of which this is but one - and very far from the most important - have liberalised domestically and internationally, including the world's largest countries in Asia, and in addition we have seen important changes in technology in the last 25 years pretty well exclusively in the area of communications technology. As I have pointed out many times, if you compare what is often called the second globalisation, the present era, with the first globalisation (1870 to 1914, very roughly, or perhaps the middle of the 19th Century to 1914) that was an era in which both transport revolutions and communications revolutions were very important, but if anything the transport revolution was more important than the communications revolution. Our era is the opposite; we have not seen any marked technological change in transport in the last 30 years, we are rather living off the technological changes in transport of the previous period in the 20th Century. As I like to remark, the last really fundamental breakthrough in transport technology occurred in 1903, if I leave aside the rocket. Obviously, a great deal of technological innovation. What does it mean for the UK in terms of opportunities and threats? Well, the opportunities are fundamentally the normal opportunities for the gains from trade. Broadly defined, this country has for a very, very long time been a large trading entity. In fact, in some measures its openness to trade is no greater than it was 100 years ago, although that is difficult to define precisely and, of course, it has changed a great deal. It has always lived off trade and the gains from trade are, in some ways, more substantial than ever before. The threats are, broadly defined, three: difficulties of adjustment to very large changes; losers domestically (there are gainers and losers in a society affected by large changes of this kind) and, finally, the possibility that the changes in the rest of the world will bring about a transformation of our external environment particularly technically our terms of trade, the prices at which we can trade, our exportables relative to our importables, which make us poorer. It is perfectly possible that a globalisation process which is beneficial for the world as a whole can make particular countries worse off if it so happens that their particular exports (the things they are good at exporting) become much cheaper in the world and the things they import become much more expensive. I think it is pretty easy to see examples of countries that have suffered from that. As it happens, the evidence for the UK is reasonably clear that we have had a rather large, in terms of trade, gain in the last ten years or so (in fact, remarkably large in terms of trade gains - quite striking), so at that level, in terms of the global opportunities, we are almost certainly better off. However, it would be possible to imagine situations emerging in globalisation in which we are in aggregate worse off, which does not mean we would be better off more closed, it just means that world opportunities have got worse for us because we have got more competitors who are driving down the prices of our exports and our imports are getting more expensive. There could well be a continued rise in energy prices as we become a net importer. So that is, briefly, my answer to your question.

Q55 Chairman: I am coming on to the issue of protectionism but, before that, (maybe in part you have answered it) looking at the longer term, do you envisage a reversal of the current phase of globalisation perhaps at some stage 20 years out or so? If so, what could trigger that reverse?

Mr Wolf: As you will know if you have looked at my book, I discuss that at length. I think it is perfectly possible to imagine a reversal of this process. I regard it as being in very insignificant measure at the outcome of policy choices. I do not regard globalisation as a predetermined result of technological forces. As I note in the book, the technology available for us to trade globally has been improving; the costs of transport and communication have been falling actually throughout human history and certainly throughout the last couple of centuries. Nonetheless, there was a long period, roughly between 1914 and 1950 when economic integration went into reverse, and that was the result of political and policy catastrophes. The breakdown in international relations (two world wars is a pretty good example of that) and, of course, the great depression in between which led pretty well all the world towards more or less autarkic policies, including of course then the British Empire - the imperial preference system. So in asking what could reverse this, I do not see any reason to suppose that the technology opportunities will be transformed dramatically in the next 20 years; they are more likely to improve than not, unless you think there is going to be an absolutely stupendous increase in energy prices in the next 20 years. I do not find that very plausible, for reasons I have discussed recently, as you note. So the changes would have to be political and policy changes, and the most likely ones are the same as before - a return to massive worldwide protectionism of a type we saw in the Thirties. That, I think, would have to be triggered, almost certainly, by a great depression of some kind. I regard that as a very low probability event - very low probability event - but it is not zero because policy-makers can make huge errors (we saw that in the Thirties) and, of course, a real breakdown in global relationships. The most obvious dangers are either a major international conflict situation or a real perception that terrorism has become such a serious threat that it is no longer possible to allow either the freedom of movement of people or even more the freedom of movement of goods in the way we are used to. One of the obvious examples I have given is what would happen to world trade if (I cannot estimate the probabilities or possibilities of this) a significant nuclear device were let off in a container in a major port. I know people are concerned about this and a lot of security is going into this, but millions and millions of containers move around the world all the time; it is part of the world trading system, and if such an event were to occur security could be tightened so dramatically as to amount to a seizure of trade. Of these I find the latter, the terrorist threat, more plausible than a true breakdown in global international relations. If you compare our period with the pre-1914 era which led, obviously, to the First World War, though there are obviously important rivalries on the world scene and an important shift in the balance of power with the rise of China, above all, it does not seem to me very plausible in our present era (for a whole host of reasons) that we are going to see a repeat of the 1914 catastrophe, but obviously one cannot rule this out. My general conclusion, then, is that it is possible to imagine political changes leading to a reversal, but on balance I think it is not probable. It is possible but not probable. It is more reasonable to assume than not that the process we have seen of the last 20, 25 years is going to continue.

Q56 Mr Breed: I suppose the question that everyone will be asking when they start to get into it, both individually and as their company, is: "Am I going to be a winner or a loser?" Who do you think are going to be the main gainers and the main losers in the UK?

Mr Wolf: On companies I am not sure. I think a lot of the companies that were vulnerable to this process in the UK have gone. The industries that were most vulnerable to what is effectively, from an economic point of view, a huge labour supply shock - we had this huge increase in the effective world labour supply of cheap labour, cheap hard work - a lot of the companies most affected by that in the standard textiles and clothing, metal bashing sectors have already gone. They have gone because of earlier waves of competition not so very different, in essence, to what is happening now. In terms of people it is pretty clear from all the evidence we have that this is in practice leading to what theory suggested it would lead, namely, a shift in opportunities towards the highly skilled and cerebral knowledge workers, the people with valuable skills in the world market economy, and is negative for unskilled labour and, particularly, for any semi-skilled labour which is still dependent on working in tradable goods and services. So, in terms of our internal situation, there is this shift which, in my view, is probably being aggravated somewhat by immigration.

Q57 Mr Breed: You will be aware that the European Commission has proposed this globalisation adjustment fund, to sort of directly help those people which they believe are going to be affected by globalisation. How useful do you think a fund, as a mechanism to redistribute the wealth from globalisation winners to losers, might be? Do you think the sorts of figures we are talking about are anything like enough?

Mr Wolf: I have always taken the view that funds of this kind are completely useless in the European context. There is a long history to the debate on this (n fact, I have been involved in the debate on this for about 30 years) which goes down to the comparison between the US and European countries. The US has a minimal welfare state, a minimal set of adjustment policies and a big political problem specifically focused on trade. Therefore, the US has historically, and the Democrats particularly, supported trade adjustment programmes to deal with their political problems associated with trade in the absence of any more general welfare support. My view in the European context, and I think that continues to be true here, is that whenever you look at these things it is impossible to separate out (and I discuss this at great length) the effects of trade changes from other changes that are causing adjustment problems. All the evidence we have suggests that even now productivity changes and technology changes are as, if not more, important, and it is not ultimately important for individuals whether they are losing their jobs because of technological change or because of trade, and finding out which it is is very difficult. So I have always believed that the right thing to do is to have general policies which deal with the general problems people have in response to economic change more broadly and unfortunate events. That is the efficient way of dealing with this because we cannot separate out the effect of particular things like this. The trick, which I think this Government has focused on as a major priority (and I think rightly as a priority) is to design a state support system, broadly defined a welfare system, that achieves the aim of helping to adjust and supporting the incomes of relatively unskilled people in an efficient way. That is what we should be doing and I do not think I would change the policies I would want to do just because globalisation has increased a bit compared to other sources of change. Where the change is from is much less important than that we have systems designed to cope with change more broadly.

Q58 Mr Breed: You indicated early on that you thought the losers might be those that are in the sort of lower skilled activities. How do you think globalisation can affect what you might call low income families? Are they going to be significantly worse off both in real and relative terms?

Mr Wolf: In general, a lot of low income families in this country, I think, are still not in work, so it is not relevant for them. A lot of low income families are gainers to the extent that there has been a collapse in world prices for a lot of the things they consume, particularly the sorts of things that countries like China produce and export. So I think it is quite difficult to make a general argument that all low income families are either worse off or better off as a result. I do think the evidence is consistent; we have had a marked dispersion in wage outcomes in this country and the same thing has happened in most relatively free market countries. The countries that have not allowed this to happen have had generated structural unemployment problems which suggests to me the same thing is happening. So, in general, one would expect opportunities for unskilled labour to deteriorate, although I think a lot of the deterioration for these people has already happened because I think a lot of the loss of these jobs has already happened. Increasingly, we are going to find, and indeed are finding, that most relatively unskilled people are working in truly non-tradable sectors and there the competition will no longer be relevant to them. That is I think probably where we are going to end up.

Q59 Mr Mudie: Just following on from that, if you did not have China and India coming through with these populations the present government, I presume, would hope to skill these individuals up that are not at work and have them working in semi-skilled or even skilled areas. Does globalisation not mean a real threat to that sort of scenario? I thought you were very pessimistic; I thought you were actually suggesting: "They are not in work, so they are never going to be in work so do they matter?"

Mr Wolf: No, I was not trying to suggest that. I think that if you think about the sorts of jobs that will be generated for relatively less skilled people in our country at wages we think are reasonable, which are obviously very much higher than the wages at which people are prepared to work in China or in India, I do not think that is going to occur in labour-intensive, tradable goods, which is the most obvious sector. I do not think that is a very plausible scenario unless we are prepared further to increase (and probably massively to increase) direct or indirect wage subsidisation, which we are of course doing very substantially already through the tax credit system. So I tend to think that the future for people in this category is, as I argue, going to be in the supply of those services which remain, essentially, non-tradable. There are a very large number of them if you start thinking about them in construction, in domestic services - plumbing and all that sort of thing - and in services like hospitals and so forth. That is probably, in practice, where most of the relatively unskilled are going to end up working, if you look towards the future. We are going to be exporting skilled, labour-intensive products and services. That is clearly what we are specialising in. That is not going to be absorbing a large number of unskilled people - it is just a matter of reality.

Q60 Mr Mudie: If you asked a lad in the street he would say one of the areas they worry about is call centres. In my constituency, for example, call centres are a very, very good avenue for white males, for example, who used to go into the tailoring trade immediately they left school. Call centres, with a training beforehand, they fit into very quickly. We saw in India the Prudential's call centre, staffed with graduates doing the job in which we give an avenue for these unskilled youngsters to actually get a decent wage. They are disappearing.

Mr Wolf: I think that is going to happen. In this case, protecting (we are going to come to protection) an economy against things that go down a 'phone line is basically impossible. Your point is linked to a more fundamental point which I think is very important, which is that one of the consequences of the technological revolution is the collapse in the cost of telecommunications. When I went to India first in 1970 you could not call it; it was impossible to call it. Now there is no problem. This has obviously led to much greater tradability of a large part of services than ever before. That is a very big revolution. The point about tradable services, i.e. things that go down wires, is they are really impossible to protect. I agree your description is a correct description of a genuine problem. These are not businesses that are going to survive unless the people here can add value which people in India cannot add.

Q61 Mr Mudie: That brings me to - although I was not aware of it but, thanks to the advisers I am now - the law of comparative advantage. Do you think the Indians and the Chinese know about this law? Will they stick to various things and leave a wee bit of trade for us? I was pessimistic about that. The number of graduates they are turning out, they are going very quickly up the skill trail.

Mr Wolf: I would like to point out that the law of comparative advantage was put forward by a distinguished Member of this House, David Ricardo.

Q62 Mr Mudie: Was he a Tory?

Mr Wolf: He would have been a Liberal, although he was in Parliament at the beginning of the 19th Century before the Liberals emerged. I am sure you know the history. He was a stockbroker, I have to say, and he was probably one of the greatest economists who ever lived. Anyway, the theory of comparative advantage suggests, very broadly, that countries export in order to import. That seems pretty logical. I have written one column about this which you can probably dig out somewhere - I cannot remember the exact date - which made the point that countries do export in order to import and as long as they continue to export in order to import, by definition, they are creating opportunities. China, at the moment, is exporting more than it imports. I think this is a very foolish policy but that, really, relates to China's macro-economic and exchange rate policies, which I suspect goes beyond your terms of reference. India imports more than it exports, so there is no doubt that it is generating large net imports. That is true of most developing countries. Of course, whether what they import will be things we produce is a question of whether we are able to compete. Broadly speaking, these countries import and continue to import in enormous quantities relatively skill-intensive goods and services, which is why Germany has re-emerged as the world's largest exporter (it is important to remember that, because it produces so much of the capital goods these countries want) and of course they import raw materials. As long as we are competitive producers in the former category we should be perfectly well positioned to survive. So we have to continue to upgrade very rapidly. Just to stress the point, at the point at which they are cheaper than us in producing everything they will cease to export because there is no point in their exporting.

Q63 Mr Mudie: What struck us was that only a third of the Indian labour force is used; two-thirds, 650 million, are almost sitting on the sidelines. A lot of it is in rural farming but they are desperately under-employed in terms of productivity. China similarly. Will the law still work if you have those vast reservoirs of labour that will, at some stage, want to work? In India they are flooding into the cities, as you say, and so in China, they want to be part of it. Do you think that would affect the law?

Mr Wolf: Exactly the same logic will hold in the sense that this will lead to bigger economies; it will certainly lead to more exports, though not as much as you would expect. China exports an extraordinarily large quantity already in relationship to its economic size - rather weirdly so. So I do not expect the growth to be so large. The same property will hold in the sense that the incomes these people earn will be spent; they may try to spend them initially domestically but unless the economy saves a very large part of its income more than it invests (in other words, has a larger income than it spends, which is inconceivable for such poor countries in the long run) the countries will spend what they earn, and as long as they spend what they earn they will import what they export - by definition. So they will be generating import opportunities along with their exports. This is the fundamental proposition of trade. It is always held. However, of course, one of the consequences of what you describe is we will become a smaller part of the world economy and, almost certainly, in the process we will become more specialised, but that is not really that new. You could have made a very similar argument (in fact, I would not be surprised if in 1900 Joseph Chamberlain also was making a protectionist case at this time) about the rise of the United States and Germany, and somehow we survived.

Q64 Mr Fallon: The Chancellor gave evidence to us in May, very encouraging evidence, that the Government, or he, was determined to try to resist protectionist ideas . How credible do you think that is in practice, for example, on the example that Mr Mudie gave, if Prudential's back office function can be transferred to India? Is it likely that this Chancellor would agree to transferring public service back office function, for example, to India - some of the agencies that are not working very well, like the Child Support Agency or the Rural Payments Agency? Would they allow a significant stake to be taken in aerospace or our energy industries?

Mr Wolf: You are asking me to make a political judgment, which I am not competent to make. I have no idea whether the Government would contemplate this. In general, if you look at government policies around the world they tend to be, for the very reasons you have indicated, quite consistent left or right, more protectionist than the private sector because they are not subject to the same market pressures and they are subject, as you have pointed out, to very strong political pressures. There is, actually, in the case you indicated - and this is a very important point - possibly reasons why you would limit the extent to which you want to offshore. The fundamental problems we have seen in many of these complicated systems (and, by the way, this is also occurring in the private sector) is there are very complicated and difficult management problems involved in all major processing activities, and the ones you describe are particularly complex and difficult. We have found them almost impossible, if not impossible, to manage domestically where it is much easier to know what is going on and to control what is happening. Controlling these things at great distance for very complicated processes which involve a lot of discretion is extremely difficult, so I think it is important not to exaggerate the extent to which all these activities will go abroad even in the case of the private sector. It is easier to move things which are completely standard; absolutely standard processing activities can be moved offshore. Things that involve a great deal of discretion, judgment and so forth are much more difficult to do, and as we have seen the CSA is obviously a classic example. The general answer I would give to you is governments are reluctant to do this for perfectly obvious reasons, and some of the reasons why they are reluctant to do this are not bad ones; these are really difficult things to do well at all and doing them well at a distance of 8,000 or 9,000 miles with all the communication difficulties can be very hard.

Q65 Mr Fallon: On ownership? How credible is it for the Government, on the one hand, to say resist protectionist ideas but then, also, resist, for example, a future bid for a part of a British energy company?

Mr Wolf: My only answer to that is that as far as I can see there are not many countries in the world - I cannot think, offhand, of any - which have been more willing under governments of different persuasion to accept foreign ownership of companies. So I have no particular reason to suppose, given that we have already handed over - to take an obvious example, when the privatisation of electricity and water occurred I think few people expected foreign companies to own as much of these industries as they have ended up owning. We now have a foreign company about to own British Airports. I do not think protectionism in terms of foreign ownership is a huge problem in this country.

Q66 Mr Fallon: Finally, do you think successive British governments are actually wining the case in the European Union against protectionism? Do you think we are making progress or not?

Mr Wolf: I think we are neither winning nor losing. I do not really know how the new EU is going to play out because the new 10 are a rather unpredictable element in this. As we have seen very clearly recently in Poland and Slovakia, their politics is still very volatile because they are still very much in this post-transition phase. In the original EU of 15 there has been a balance of forces on protection which has been fairly stable for quite a long time, with a coalition in favour of liberalisation, in my view, roughly equal in weight to the coalition against. The result in the EU has been I would not say paralysis but an inability to do anything decisive in either direction. I am talking about external liberalisation. By and large the Commission remains, in my view, predominantly an instrument of liberalisation internally (we can debate that in detail), but in terms of the external side the balance of forces is very even. There are very important countries which are quite liberal, which are our natural allies and there are very important countries that are not. We have not changed this, but Britain is the biggest and most important liberal country which has been consistently liberal; Germany has oscillated on this and, therefore, if its voice were on the other side that would make a big difference.

Q67 Kerry McCarthy: The title of today's session is: "Globalisation: its impact on the real economy". What do you understand by the term "the real economy"? Do you think it is a useful definition to use?

Mr Wolf: It is a very standard economic term. I do not know whether it is useful. I think it is just a label for what is really important about the economy, which is that it is designed to separate it from the purely monetary aspects of the economy. To focus on what do we mean by "the real economy" we mean jobs, we mean incomes, levels of activity and the levels of welfare that the economy provides. Those are the real things - goods, services and jobs. So that does seem to me a very appropriate focus for a discussion of the impact of globalisation.

Q68 Kerry McCarthy: I just ask because some people use it, I think, particularly within the trade union movement, to refer to manufacturing in particular.

Mr Wolf: That is based on a fallacy that is about 250 years old. We have had a long debate - actually, Adam Smith himself encouraged this fallacy (not, I think, intentionally) - and there is a long-standing view of the physiocrats (we are not going to go into the history of economics) that the only real things are things that produce things that drop on your foot. For anybody who thinks about this carefully, that amounts to saying that if somebody does a heart operation that saves your life that is not a real economic good. It is a real good but it is quite obviously something of immense value in every respect, and this applies to many other services. So I do not think that "real" does mean physical.

Q69 Kerry McCarthy: In terms of Britain's future as a country with a manufacturing industrial sector, how do you see globalisation impacting on that? Do you think there are areas in which we can still maintain a comparative advantage, or is the battle lost?

Mr Wolf: Clearly the manufacturing sector in the UK has undergone staggering structural changes in the last 30 years - many of them incredibly painful. There has been an enormous reduction in the labour force in manufacturing. I cannot remember exact figures but I do not think it is much more than 15 or 16% of the labour force now, and it has more than halved in the last 20 years or so. The output of manufacturing seems to be quite stagnant; it is not shrinking but it is not growing. The interesting thing about this is that, so far as I can see, the dominant impact on our manufacturing sector has not, interestingly, been our trade with developing countries but our trade with other developed countries. We do seem, for reasons which I do not fully understand but there is a long history in this, to have had a rather weak competitiveness comparative advantage in manufacturing vis-à-vis other important industrial nations. One result of this is a lot of our companies have ended up being owned by companies based in those nations - the car industry is a very good example. Can we change that fundamentally? I would have thought it is going to be, from where we are, very difficult to imagine we will change it fundamentally. I would guess the manufacturing sector (and this is no more than a guess) will continue to grow a little but more slowly than GDP, as it has done now, for a very, very long time. We will specialise in things which do use relatively skilled labour resources which we have combined with foreign capital and technology. That is basically what we have been doing in large part in manufacturing for the last 20 years or so, and I expect that to continue.

Q70 Kerry McCarthy: At the moment the low-skill, low-tech jobs are going to places like China and India. Will there not come a point when the high skill jobs in those sectors start to go there as well?

Mr Wolf: Again, it is a question of where the competitors come from. In the case, for instance, of the motor vehicle industry the most obvious threats to us, I would have thought, are the shifts of assembly from here to Central and Eastern Europe rather than to China or India. I find such moves are perfectly plausible. I cannot predict it. It is true by definition, we can only sustain a manufacturing base here (it is a completely open system) if our productivity is sufficiently much higher than that in low-wage countries. As I say, Germany is the world's largest exporter of manufactures; it is true its value-added in manufacturing has declined but its growth in exports has gone up dramatically. This is true even though Germany is the highest wage country, so far as I know, in the world. So it is clearly not a crippling handicap to have very high wages but it only will work if productivity overall, which includes design and all the other things, matches the cost.

Q71 Mr Love: Can I just pursue the question you have jut answered. Peugeot Citröen are in the process of moving their manufacturing to Hungary from this country. Logically, from what you have just said, most other mass car manufacturers will be attracted towards an Eastern European bid. What would be the things that would stop Honda, Nissan and the other manufacturers moving their production to Eastern Europe?

Mr Wolf: I think we have to separate (this is not very helpful in a way) the sum cost element from the marginal investment. I actually think it is very unlikely that the next investments made by any of these companies will be in countries like ours; their next investments are going to be in lower wage countries. That is quite different from deciding to close down existing plants and existing production facilities in which they have invested a great deal to establish the plant, which is different I understand (and I am not an expert in this) from the Peugeot Citröen situation. The Japanese transplants in this country are extremely productive enterprises started from scratch with first rate quality output, and as long as that remains the case I would have thought they are very likely to want to maintain those plants and to sustain their investment. I would have thought substantial new investments by any of these companies will not occur in this country, and it seems to me almost inconceivable that the car industry's total employment will not tend to shrink over time.

Q72 Mr Love: Can I move on to the role of corporate tax. There is a lot of discussion about how we can use the corporate tax regime to attract companies to locate in this country. Many people say well, much more important factors are skill levels, location, language and transport infrastructure. How do you see corporate tax? Has it a role and how important is it?

Mr Wolf: It is a hugely controversial question. I would certainly agree with the second part of what you said. Particularly for anybody who is coming to the UK in the service sector, which is of course a very big part of our employment and attraction to inward investment, financial services and so forth, people are coming here predominantly for the reasons you outlined. The quality of our people, our infrastructure, the net work effects they have from being with other big firms are all very powerful reasons for being here and I would be more worried about the transport system of London, as it were, than the corporation tax for many of these things. Just on the corporation tax, speaking purely as an economist, it is quite difficult to be clear why the corporation tax should be that important because most analysis of the corporation tax suggests it is not paid by corporations anyway; it has shifted, back or forward, and so it is an indirect sales tax or it is an indirect employment tax, and if that is the case it is not clear why it should worry companies. Even that is slightly too simple, but I take the first approximation. However, companies themselves may not see it that way, and they may think that this matters more than actually it really does because they do not understand the incidence of the tax upon themselves (which is possible), and therefore they may be attracted. The obvious example is given - and it is the most important example open to us - of Ireland; that the low tax regime of Ireland has been an immensely important source of attraction for the massive FDI in Ireland. I cannot say that is obviously wrong; the empirical evidence is not strong enough either way. So it may be the case that a large cut in the corporation tax would lead to very substantial inflows of capital. Of course, it would also leave the Treasury with a fairly sizeable problem and they would have to raise taxes elsewhere. It is only when we know where else they are raising taxes that we would know the overall effect of this on the levels of activity in the economy. Just as a matter of pure theory, the corporation tax does not make much sense, but that is another completely different issue in tax theory, and I will not go into that.

Q73 Mr Love: There is a confusing picture here because, of course, if you look at transport infrastructure or skills they require taxation - a lot of companies are quite happy with taxation because they think it will improve the other factors that they are interested in. I am interested because we have a whole industry in this country, as you know, that devotes itself to corporate tax competition; that we ought to compete with other, especially European countries but others as well. Recognising that most of international companies are very sophisticated in the way that they play taxation between different countries to minimise or optimise their overall level of taxation they pay, does tax competition really exist?

Mr Wolf: I have a whole chapter to discuss this issue.

Q74 Mr Love: I need to read your book!

Mr Wolf: The first argument is just to stress your point. It is absolutely clear corporations only go to places which are reasonably satisfactory in the sense that they have a range of services provided in those places, many of which are public. As I say, the lowest corporation tax you can possibly imagine is in Somalia, for fairly obvious reasons - it does not have a government and people do not invest there. Second, some very major western corporations have remained based, very successfully, in very high tax regimes, notably the Nordic countries - and Germany, by the way, too. Third, the reason they do this is because it is more difficult than people think for whole, big corporations to move around the world - it is not impossible but it is not that easy - and because of the very point I made that the tax incidence of the corporation tax is really quite obscure and is not clear that in the end the corporation pays it. So I think it is very, very important to avoid being too simple about this. It is, however, true, as a general proposition, which has to be assessed very carefully in particular cases, that in a regime when certain factors of production - capital and labour - are relatively mobile taxing them becomes more difficult. If you like, competition does become relevant to some degree. The way I put it - and there are lots of other issues - is you have to satisfy highly paid people and corporations that the location-specifics - i.e. the services they get in a particular place - here are adequate to compensate them for whatever tax burden they pay; that the bundle, as a whole, is a satisfactory one from their point of view. Provided it is, the evidence is not consistent with a collapsing tax base or with a massive outflow of corporate capital from major western countries to other countries with slightly lower tax regimes. I think it is often greatly exaggerated.

Q75 Mr Love: Can I look at the other side of that equation? There has been a whole debate about R&D tax credits. The Government has ramped them up over recent years because of those pressures, but we are still being told that we are not really competitive compared to - the Germans are always mentioned in this regard. What is your view about where we are with R&D tax credits and do they make a specific difference? Does research and development take place that would not take place without them?

Mr Wolf: There is a logical argument for R&D tax credits; there are externalities involved. Whether the particular structure we have in the UK is desirable I honestly doubt. There are huge problems in making these work because of defining what R&D is and distinguishing it from other activities. By the way, one of the costs of the German system, as they would admit, is that they have got a very leaky, porous and very inefficient corporate tax structure. I tend to think stick with a very simple system with minimal deductions and credits and a low rate. It is as much prejudice as anything else. I do not think there is any strong argument either way on this one. The OECD's latest report on the UK has a lot of discussion of this if you want to look at it.

Q76 Mr Gauke: Can I return to a couple of the issues that Michael Fallon raised with you? First of all, outsourcing in the public sector. I note what you say about some of the management difficulties, but, as you have heard, we were in India recently and we saw some very impressive businesses and some very impressive employees. These businesses were frequently telling us: "We are getting a lot of work from the private sector in the UK but hardly anything from the public sector". Do you think there is a missed opportunity here for British taxpayers and those to whom public services are being provided?

Mr Wolf: I have no problem personally with the idea of the British Government outsourcing processes of this kind if it can reduce substantially the costs for the same quality, and lower taxes or spend on something else as a result.

Q77 Mr Gauke: The reason why it is not happening is presumably the reason you mentioned earlier, market pressures do not exist but political pressures do?

Mr Wolf: In essence. It is very difficult for governments (it is no way unique to this country) to do things, for exactly the same reason that every country has tried to preserve its own defence industry.

Q78 Mr Gauke: Do you think it makes it difficult for politicians to lecture the British public and the private sector about the benefits of globalisation when it is reluctant to embrace it in its own management policies?

Mr Wolf: I do not want to say anything unkind about politicians, but I would not have thought it is difficult in the least. I do not expect perfect consistency from any human beings, including even our political masters.

Q79 Mr Gauke: Can I return to the second issue that Mr Fallon raised, which was the EU. Last week we heard from Brian Sanderson who is Head of Asia Taskforce for the Government, saying that with regard to India the movement by the EU into entering into trade agreements has been "glacial" - I think was the word he used. Do you think, given the consensus for free trade that exists in this country with regard to countries like India, the EU is substantially holding us back?

Mr Wolf: Yes. I am a bit interested in what has happened here. There is a history here which is very interesting and ironical. When we went into the EU a set of policies emerged for, essentially, special concessional trade with developing countries which were associated with us through the Commonwealth. As the French had already had, this has gone through a number of forms - Lomaid (?) and so forth - and South Asia was very deliberately excluded. It was very deliberately excluded because it was seen as being, potentially, really quite seriously competitive. I think that is the essential reason. So the decision was made at that very early stage to put particularly India (obviously far and away the most important of these countries) outside the preferential trading network. Since then, until recently, India was not a very important trading entity; its trade was very small, it was very closed and nobody devoted much thought to India, really, until the last 10 years or so. Now the EU, as a whole, has to rethink entirely its trade policies towards the sub-continent. I think it would be fair to say that the EU's policies on trade with major new partners outside the WTO framework (where we are, of course, clearly a problem) have been very difficult to understand. We have pushed very hard, for example, for a trade agreement with Mercosaur - I do not really understand why that is so important. We do not seem to be very interested in this with India, I do not think we are doing - I may be wrong on this - anything with China substantial. I think, basically, from a strategic point of view, the EU has no trade policy now.

Q80 Mr Gauke: Do you think, on the specific issue of trade, avoiding the larger issues, that the UK would benefit if it had its own trade policy as opposed to being part of an EU trade policy which you describe as being non-existent?

Mr Wolf: You are asking me whether the UK should leave the EU. It is not possible to separate, obviously, the question you have raised from whether the UK should leave the EU because we cannot be part of the EU and have a separate trade policy, by definition, since it is a customs union. So the only way you could answer that question is, one, what would our trade policy be outside the EU? I am assuming your assumption is it would be free trade. I think you are an optimist. However, let us assume that were the case. Then the second part of the question is what will be the trade policy of the existing EU members towards us if we left? Would it remain as liberal as now or become more illiberal? What would be the losses of that? I presume it would become more illiberal but I do not know how much more - we really do not know. So that is unknowable. The third is what, if any, additional market-opening opportunities do we gain by virtue of being part of the EU itself? I think the answer to the latter is "very little". The net effect of all these things is that it is possible that if we went outside the EU we would end up better off - it is not inconceivable, but it is certainly not certain. Making that analysis rests on working out what would happen in a hypothetical situation which is really hypothetical. I have always taken the view, by the way, and this is very long-standing, that ultimately EU membership is a political decision, and the people who take the view that the economics are absolutely obvious on either side are just wrong.

Q81 Ms Keeble: You have argued that with globalisation you get a separation out, really, of the low-skill, low-wage jobs being abroad and the UK having more of the high-skill, high-value jobs. PWC has argued that with globalisation we are likely to see a glut of high-skill, high-value professionals and, in fact, the wages of that sector in the UK will be eroded as well. In a sense they are two different models, and I just wondered if you would comment on which you think is accurate.

Mr Wolf: If you work through the entire set of processes which involve an increase in the world income, output and demand, the net effect, it seems to me, of the incorporation of countries which are enormously relatively abundant in low-skilled labour is towards an increasing of the net demand for somewhat high-skilled labour. So I expect their propositions to turn out to be wrong in general. It might be true for specific sectors. It is important to remember that Chinese highly skilled professionals are not going to replace ours tomorrow because of language, quite apart from other things. India is the obvious competitor, and it is important to remember - really important to remember - that India suffers from very serious labour shortages at the skilled end - really serious labour shortages at the skilled end - because that is what it means to be a developing country. Their IT industry has run in, as I am sure you were told, to very serious shortages in which demand is growing much faster than supply and real wages are being driven up very rapidly; really high-skilled people in India - the sort of people who are competing with people in cities - are paid a lot of money. So I think the fear that we are going to lose all our highly skilled jobs is exaggerated. It is true, however, that even by developed country standards a lot of our highly skilled professionals seem to be paid extraordinarily large sums, and it is an interesting question whether that is sustainable in the long run. So there may be excesses even so, but I just do not believe that India is going to displace all this.

Q82 Ms Keeble: the other issue which relates to that is job security, particularly as people who are perhaps in the more threatened sectors here either see jobs going abroad or, alternatively, they see, with the increasing mobility of labour, low-wage people coming here and displacing them. What is your view about that? What do you think the Government should do in relation to either protecting people's employability or dealing with the insecurity issues?

Mr Wolf: The general insecurity issues are, in my view, best dealt with through welfare state mechanisms (we have already discussed that in a way). The employability issues, I think, we have gone over; it is obvious training is crucial. There is a lot of evidence that (and my wife is the expert on education in our family) the level and quality of basic education is incredibly important and needs a lot of improvement. My own view, which is somewhat "unorthodox", heterodox, if you like, (as I have already indicated earlier I have written some columns on this) is I do think we have imposed an extraordinarily powerful, as it were, double whammy on the unskilled in our country by combining our openness to trade with an extraordinarily rapid increase in the net immigration into this country, much of which is also unskilled. That, I think, is putting a lot of pressure on the labour market at the low-wage end. Since I think a lot of the future employment of the unskilled is going to be in labour intensive services, I think we should do a proper economic analysis, which we have not done at all, of immigration policy. Anyway, those are the areas in which we can look at it.

Q83 Ms Keeble: Do you think it is these kinds of pressures that produce the more protectionist policies that we have seen in Europe? You made a very bold statement about the EU having no trade policy ----

Mr Wolf: I did not say that. I said it had no trade strategy, which I think is a different thing. It has a trade policy.

Q84 Ms Keeble: We shall look at the interpretation. If you would like to expand that, it would be very helpful because obviously if we are moving into a globalised world then the EU, as one of our trading partners, has got to sort itself out. It might be very helpful to have some pointers that you might put there.

Mr Wolf: I think, basically, what we have got at the external side on the EU is a set of fairly defensive reactions, shown in the WTO negotiations, shown in the attitudes towards what we should do with free trade agreements with regions beyond our immediate hinterland. Essentially, it seems to me, the EU has fallen into a defensive mode in trade policy. I do not regard that as a strategy, I regard that as a response when you cannot make up your mind what to do. I do not think they know what they want to do.

Q85 Ms Keeble: What do you think they should do?

Mr Wolf: My own personal view of the best trade strategy for a region like the EU is to try and move towards the freest possible trade with countries that are prepared to move in the same direction. So my personal preference is for the launching of the notion of what I call a global free trade area, because I think the WTO process is finished - I am being really quite radical - and I would basically say that we are happy to sign a proper free trade agreement with any country or group of countries which is willing to sign on to free trade with us. I would be happy to start with the United States.

Q86 John Thurso: In your article on 28 June you said: "... the deep-seated link between economic development and energy consumption ..." (you made that link), and you went on, at the end, to say: "anybody who thinks it will be easy to reduce global energy consumption is simply dreaming". Against that backdrop, and given that the UK has relatively few natural resources, particularly in the energy field, what do you think will be the impact of that on the UK in the globalisation process? Secondly, at a world level, is lack of resources or competition for resources the buffer against which globalisation could be slowed?

Mr Wolf: Yes, I did not discuss that earlier for which I apologise. One of the things I have learned from previous experience is that forecasting energy prices is a real mug's game because I was in the World Bank in the 1970s and I remember all the forecasts of what was going to happen to energy prices and they were all wrong, not merely in magnitude but in sign. I am certainly not going to say it is impossible that energy prices - which are clearly the most important - will fall again, particularly following the very big increases we have seen recently because they tend to generate, ultimately, very large adjustments in economies which are unpredictable. There is a long-run relationship between energy intensity, energy use and development, but it is clear also if you look at the technology possibilities that rich countries are very good at growing without increasing their energy input, and even developing countries could always certainly pursue less energy-intensive paths than they have in the past. It is perfectly possible to imagine a growing world economy in which energy use grows, but it does not grow anything like as rapidly as the world economy; in fact, that is pretty plausible, most forecasts suggest that. Leaving aside global warming questions altogether, in that sort of scenario, my reading of the evidence is there will be enough energy without pushing prices on any sustainable basis above current levels and quite possibly leaving them significantly lower than current levels. The general background, I think, will be energy prices, which are significantly higher than between 1986 and 2000-01 but not consistently at present levels, I am talking about the next 20 years. In that context, I do not see any reason for a resource war, but it is not impossible.

Q87 John Thurso: What about security of supply?

Mr Wolf: As I argued last week, the best source of security is diversity. Britain still has quite a lot of energy resources including coal, of course, which it is argued is a very important resource, and provided you have reasonable diversity of supply and the market mechanism continues to operate - and I cannot see any reason why it will not because there are so many different producing companies which have an interest in selling their oil at the highest world price, you are not going to start selling it to anybody at lower than the world price, so the market will continue to operate - I find it very difficult to imagine there will be a serious disruption. It is worth remembering that even in the case of the boycott in 1974, there were actually no physical shortages, it was a panic. I think we can be pretty well relaxed about it provided we have a reasonable diversity of sources and world markets continue to operate, and I do not think there is any great chance that they will not.

Q88 John Thurso: Turning to commodities, in your book you wrote about a hypothetical scenario in which commodity prices doubled as a consequence of Chinese demand and you described that as "an extreme assumption". Given what has happened subsequently broadly over two years, would you say that is still an extreme assumption?

Mr Wolf: If you look at the real prices of commodities as a whole outside oil, and oil is a very important case, they have not come anywhere close to doubling. Industrial raw materials have but food products have not. If you look at the sub-standard industries of all commodity prices ex oil, they have not come close to doubling, but it is important to remember also the distinction between the short and long-run processes. In the long run, outside oil, I think there is a really clear, massive investment in commodity production gain. It is important to remember that for about 20 to 25 years there was really next to no production investment in the major industrial raw materials because the markets were dead, people thought they were absolutely over, any of the metals, and this was indeed a source of despair. It was why developing countries were doing so badly because they had these terrible times of trade collapses. I expect now large investments, and the large investments will lead to large increases in supply (and, therefore, I think) - nobody is suggesting there is a shortage of iron or copper - and the major effects of China will be, in my view, more volume not higher prices, or even more volume but no higher prices and for a lot of developing countries this will be a very good thing.

Q89 John Thurso: Can I touch on another aspect you mentioned in your book which was you argued that in theory environmental taxation does not lead to pollution-intensive output moving abroad, which is often a theory that is put forward, but rather interestingly you observe that industries would shift to less polluting technologies. Have you any examples of this happening in practice and do you see that as being a continuing trend?

Mr Wolf: I have not looked at this, but what we know is we have had a massive tightening of environmental regulations on the major process industries in the developed world as a whole and the environmental regulations are just like a tax, they are the same thing: they involve imposing a cost, you can convert any regulation to a tax notionally. All these industries have become significantly more efficient in the use of resources and significantly less environmentally polluting, there is no doubt at all about that. Just think of what has happened to chemical plants, petrochemicals or any of these major industries in the last 30 years, there is a lot of evidence that they have not all upped sticks and moved to developing countries. The main reason for them is, it turns out, that the cost of managing the process efficiently from this point of view is very small because it tends to be associated with very considerable improvements in productive efficiency. The two things have tended to go together, reducing pollution tends to go with being considerably more efficient from a productive point of view and wage costs are, for these industries, pretty well irrelevant. It is simply not true that the entire major processing petrochemical and all the rest of the industries have moved out of the developed world for this reason. Quite a bit of it is moving towards the producers of the feedstock and to the Gulf region for example, but that is for completely different reasons. It happens to be cheaper to use the essentially free feedstock that these countries have, the gas that was previously flared, than to use the stuff we have here. I think you can see regulations of tax and the evidence is pretty clear, in fact there is a lot of evidence which I think I remember I signed, that if anything the opposite has happened.

Q90 John Thurso: If regulation and tax are roughly the same thing, if a government chose to quite deliberately raise green taxation in order to achieve that shift, would you feel that it would not have a negative impact?

Mr Wolf: If we imagine our imposing massive carbon tax in the UK, which was not followed by any other developed country, I would expect production to shift to other developed countries, but what I am saying is if the developed countries, as a whole, move in this direction, I do not think all these plants will go to India, that is the point I am making. Yes, I tend to the view that a climate change policy for one country does not make much sense.

Q91 Mr Newmark: A brief question to follow up from the Chairman's original question on the definition of globalisation. I met with Professor Bhagwati just over a year ago, and both you and Professor Bhagwati seem to focus on economics as the main driver. I guess the argument I posed to him, which I am now going to pose to you, is that globalisation is beyond economics. You can look at whether it is communications with the internet or what you can do with the internet is a global phenomenon, there is not necessarily anything to do with economics per se. You can educate people in Africa, in other perhaps more remote places through the internet as a global phenomenon. Healthcare is another example: you could be at Boston General and you could work on an operation through global satellite and help somebody to do an operation, again, in a remote area. You have got transportation, the phenomenon of people getting diseases in one part of the world, and somebody who has got SARS hops on a plane and brings that disease to somewhere like Canada. You have got terrorism, a global phenomenon, in which people can move about readily, they can communicate through the internet. None of this has really anything to do with economics, per se. Finally, you have got the English language which has become a global language now. I am curious as to what analysis you might have done as to looking at globalisation as something that is beyond pure economics?

Mr Wolf: Since we are running out of time, I am going to be very brief. I try to write about things I think I know about. I am an economist, so I write about economics. I do not wish to argue that all aspects of these changes are uniquely economic though I think the economic processes, as I have described them, are the dominant driving forces. Most, but not all, of the things you list I think I would argue are economic processes. To me, healthcare is an industry; you may not think it is an industry but I think it is an industry. Education is an industry, as far as I am concerned, mainly provided by the public sector but it is still an industry. The English language, domination of, is a product of the English language as a dominant commercial medium. The reason the English language has become the world's language is that quite simply it has been the language of the world's two dominant commercial powers of the last two centuries and for no other reason. I would not accept, at least not in a simple way, that the phenomena you have listed are not economic at all.

Q92 Mr Newmark: I said they were beyond economics.

Mr Wolf: Almost everything is beyond economics. I am certainly not denying there are lots of things going on in the world now linked with, above all, communications technologies which are changing societies in ways that go beyond economics. I define globalisation as an economic process because it is what I think is manageable. I think it is very difficult to say interesting and useful things about the aspects you mention but people have tried, Tony Giddens most notably. I accept there are things beyond it, but at the core this is an economic phenomenon and most of the other things you list, at least, have important economic aspects.

Q93 Chairman: While the Committee has been looking at globalisation, it has taken it further than economics. Can I ask you two very short questions, hopefully, for the end. On increased capital flows, now this globalised world is in search of better returns, and that has been a key aspect of globalisation. Would taxing international financial transactions be one way of targeting the winners and the losers of globalisation?

Mr Wolf: Are you thinking of something like the Tobin tax, a tax on turnover in foreign currency markets? The problem with this proposal is that it is a proposal that has been looking for rationale and there have been many different rationales given for it. If the aim is to tax capital - which is I think a perfectly legitimate aim, the owners of capital should be taxed - the taxation on the transactions in capital markets are not an efficient way of doing this. The best ways are through global exchange of information, as indeed the Treasury has been pursuing it, and the maintenance of a tax regime which continues to tax capital. I believe that the taxation of capital is not as difficult as many suppose - that is linked to the earlier questions - and it is about designing a reasonably efficient global tax regime at national levels, but I do think it is important. That is a very important point, it is absolutely clear that we do need quite a high level of global tax co‑operation among tax authorities worldwide; there is a perfectly legitimate question about tax havens. I think that the argument for a global tax co‑operation, maybe a global tax organisation of some kind, is quite similar to that for a trade regime and that is a development that I loathe. I tend to think these on transaction taxes on capital will not do much good and they have been argued for so many different reasons that by now it has become almost impossible to separate them out.

Q94 Chairman: The Chancellor has set his face against that in evidence to our Committee in the past, the Tobin tax.

Mr Wolf: I have written a little bit about the Tobin tax. As I said, it is a policy looking for a rationale.

Q95 Chairman: We are meeting some TUC representatives after this, and in their paper to us they suggested that employers should be obliged to provide training for their employees rather than relying on the voluntary approach that exists presently. Do you think there should be a mandatory requirement on companies to provide it and, if so, what types of training should be mandatory?

Mr Wolf: The question of how you should provide training optimally and what the division is between government, the individual and the employer strikes me as really quite hard. The problems that have always existed in the past with employer-provided training is a lot of employers are not very good trainers. Their interests are quite narrow and not necessarily those of the workers - again, as I say, my wife knows vastly more about this than I do - and employers are not necessarily better at estimating what the future demand for skills is going to be than the workers themselves; indeed, often they are going to get this very seriously wrong. In addition, it would be particularly difficult for any small and medium-sized businesses to provide adequate training - it is not impossible to get round that - which means I think, in practice, it will fall on the larger companies. You could ask yourself, "Well, do you really want to make the cost of labour more expensive to larger companies than to small and medium ones?" I am not providing a definitive answer to this, but I have always wondered whether in the sort of labour market we now operate in with the constant changes in demands, we are far away from the world in which somebody could be an apprentice at the age of 15 and get a skill which would then work for the next 40 years. We do not have those sorts of stable employment relationships, so in the present situation I have no dogmatic opposition to it, I am just not persuaded it would work very well. I think on the question of how employment should be provided: training should be provided, what is appropriate for it and who should pay for it in the mixture between the state, the individual and the employer to me is open. Some relationship involving all three is not unreasonable.

Q96 Chairman: Mr Wolf, can I thank you very much for your attendance this morning. For those of us who have read your book, it has added value to the meeting this morning; for those of us who have not, I think it is a great encouragement for them to take away.

Mr Wolf: I always like the additional royalties! Thank you very much. I look forward to reading your report.


Memoranda submitted by The Trades Union Congress, Amicus

and the Public and Commercial Services Union


Examination of Witnesses


Witnesses: Mr Richard Exell, Senior Policy Officer, Trades Union Congress, Mr Simon Dubbins, Head of International, Amicus, and Mr Nick Clark, Policy Officer, Public and Commercial Services Union, gave evidence.


Q97 Chairman: Good morning and welcome to this inquiry on globalisation. Our apologies for being a little bit late, but it was quite a fascinating discourse that we had with Mr Wolf. Can I ask you to introduce yourselves for the shorthand writer, please?

Mr Clark: I am Nick Clark. I am a policy officer in the General Secretary's department at the PCS.

Mr Dubbins: I am Simon Dubbins, Director of International from Amicus.

Mr Exell: Richard Exell, Senior Policy Officer at the Trades Union Congress.

Q98 Chairman: You do not all need to answer every question because we are looking to finish at about 12 o'clock. Can I maybe start by talking about the issue of winners and losers. Do you think globalisation is inevitable, and what are the most important threats and opportunities from globalisation?

Mr Exell: I think perhaps I should take a lead on that question as it is the central theme of our written comments. Globalisation is not inevitable, but the current prices of communications make it a very likely continuing theme of the world economy. One of our clear conclusions has been that there are hundreds of thousands of British jobs that depend upon international trade and investment, so globalisation has a positive side as well as a negative side. There are workers who lose out as well as workers who gain from it. Overall, the balance is positive, so it ought to be possible for those of us who gain, either through cheaper goods that we are buying in the shops or through increased opportunities for the firms we work for, to pay to compensate the people who are at risk of losing. At the moment that is not being done on a fair basis. We could not claim really that Jobseekers Allowance, for instance, for people who lose their jobs is a fair form of provision. We do think that if we are going to avoid calls for protectionism in this country, we do need a widely-accepted system of compensation for people who lose out.

Q99 Mr Mudie: Pricewaterhouse reckon that low and medium-skilled workers in tradeable sectors would lose low and medium-skilled workers in non-tradeable sectors open to migrant labour and also mass-market manufacturers. That seems a fair number of people and a very vulnerable set of people set to lose?

Mr Exell: You can see my theory might indicate that. There is not much evidence though to show that is happening as a general pattern of events; there are specific instances. There are specific manufacturing companies, in particular, where you can point to workers who have plainly lost their jobs because of international competition or outsourcing, but the evidence does not really, and should not, show that has been the norm.

Q100 Mr Mudie: The TUC seem to be calling for government help to offset the difficult effects. Community development funds, earnings insurance schemes and the globalisation adjustment fund, could you just tell the Committee about those? Certainly, the first two are things you have suggested; the others European.

Mr Exell: Yes. The earnings insurance scheme is more in the nature of an interesting idea that we would like to look into further rather than a well-developed plan, but certainly the globalisation development fund is one that we have welcomed, as has the European TUC. The difficulty is that the level it is set at at the moment, €500 million, I think works out at about €1 a year per head of population in the European Union. It is not a fantastically generous skill, so we would like to see the UK Government investing more in it. An example of the sort of approach that we would like to see came up recently in Denmark. Denmark has a textiles industry which has come under the same sorts of pressures as we have had. We have lost tens of thousands of textile jobs in this country. The Danish response to it was really interesting. There the employers, the unions and the municipal, regional and national governments all got together on a plan to cope with the competitive pressures, so instead of just closing down the company, they had a plan for upgrading the skills of workers who were going to go lose their jobs, of moving to more value-added production for the company itself though with fewer workers, and with public subsidies to enable the company to upgrade and for the workers who are going to lose their jobs to upgrade their skills. The end result of all of that was, instead of global competition being a threat to all the workers concerned, that everyone ended up with a better job than they had had before. For that, you need the sort of institutional strength that Denmark has got including, in particular, well-developed traditions of social partnership, collective bargaining and trades unionism.

Q101 Ms Keeble: This might be practical for the Amicus rep to answer this. When we went to India recently, we saw some examples of outsourcing some of the functions of the financial services industry. I wondered how concerned your union would be about what might be seen to be a "race to the bottom" in terms of labour standards for companies that outsource in developing countries?

Mr Dubbins: I think we are obviously very concerned about the way it is being done at the moment for a number of reasons. We have witnessed thousands and thousands of jobs of our members being transferred, particularly to India as you mentioned there. While we would understand part of globalisation, redistribution of wealth and economic growth are going to entail some of that, what we are particularly concerned about are a couple of factors. One is the fact that sometimes the savings that the companies envisage have apparently not always come through, and we sometimes see the repatriation of those jobs; the other issue is the loss of skills that go with that as well. More importantly we have managed to get globalisation agreements with a couple of companies, such as Axa, Lloyds and Barclays, that have engaged in those activities. Those have tended to deal with re-training though and no compulsory redundancies and so on, so it is the issues at this end. What we are much more focused on now is trying to get a commitment from those companies that they will respect trade union rights, the rights to organise and the right to bargain collectively in those countries because if there is going to be a transfer of work, what we need to make sure is that the people taking up those jobs are at least entitled to have proper working conditions and healthy and safe environments.

Q102 Ms Keeble: That work in getting the international level playing field is very important, but would you accept that, first, it can mean then in some instances, because they cannot frankly provide cheaper labour rates, that undermines the ability of developing countries to attract jobs and, secondly, it can also lead then to jobs being outsourced to countries and by companies which are prepared to support decent labour standards and, therefore, you get a much more dramatic erosion of workers' rights and protection?

Mr Dubbins: I do not think we are naїve enough to think that we will have equality of wages in the short run or anything like that in those countries.

Q103 Ms Keeble: No, it is protection.

Mr Dubbins: Yes, it is much more about making sure that those basic ILO standards and trade union rights and so on are adhered to and respected. That is very much the case in a number of developing countries where there are obviously not those safeguards in place and where unions are not fully developed. It is also the case in other countries, such as the United States, where basic labour standards are also not observed or respected.

Q104 Ms Keeble: I was going to ask you about that because would you not accept that one of the reasons why the UK has been quite successful in competing in the globalised world is that we have had more flexible labour markets? How do you regard the balance between protecting some traditional practices and ensuring we can be competitive? Where do you think the balance should be struck in the interest of securing our long-term economic benefit?

Mr Dubbins: I think you need to be careful with the argument and be sensible in that respect in competing globally and so on. I think in manufacturing, coming back to that debate that was being discussed earlier, we have not been very successful in investing long-term and protecting our position there, whereas countries with much more regulated labour markets, such as Germany or the Nordic countries, have had a far slower erosion and, as Martin Wolf was saying, they have been very successful in attracting long-term investment. I think there tends to be a rather naïve assumption sometimes, and it is very much based on the dominant neo-liberal agenda at the moment that flexiblisation, deregulating labour markets and making labour very vulnerable is the way to maintain competitive advantages, and I do not think that is borne out in reality.

Q105 Ms Keeble: When I say "successful", I mean we have got 71% employment in the UK. We are the only EU country which is above the Lisbon target, I think I am right in saying. It is about how do you strike a balance between being able to compete and ensuring that you respect standards in a globalised economy?

Mr Dubbins: I think, again, with those figures you also need to take into account things such as fixed-term contracts and part-time work which in the UK are far higher than in other countries and the protections in comparison with European countries have not been there. I think we obviously need to have the basic ILO standards, the real minimums that need to be applied everywhere which are a healthy and safe working environment, the right to form unions and the right to bargain collectively and see how things develop on that basis. I think the other side of it that is missing is very much often seen that the labour market regulation is negative, something which is a barrier to further employment and yet, historically, that has not really been shown to be the case. Highly regulated markets, like Austria and the Nordic countries, have had very low unemployment. Social partnership involvement in the long-term planning of the economy has produced a lot of good and a lot of benefit, but it is often forgotten at the moment.

Mr Exell: It is important to remember the assumption that Britain leads Europe on dealing with the globalised world is mistaken. We lead Europe on imports per head of population, we account for a sixth of EU imports, but we only account for an eighth of EU exports. We do well to match German standards of export performance.

Q106 Mr Love: Can I take us back to a couple of questions ago. I have been reading Joseph Stiglitz's book on globalisation and his basic pitch is if we are to maintain political support for globalisation - and there has to be redistribution from those who are benefiting from globalisation to those who do not benefit - a number of options have been put forward: Tobin tax, a lot of people think is unrealisable, if I can put it that way, at a European level. I think George mentioned the globalisation adjustment fund, but that is pretty small beer. When Richard talked about the situation in Denmark, he talked about the institutional strength of the Nordic companies, accepting that in this country we do not have a tradition of institutional strength. What do each of you think are the best practical ways in which we can redistribute from the benefits of globalisation to ensure we keep the political support for it in this country? Let us start with you, Richard, since you want to talk about institutional strengths and weaknesses.

Mr Exell: One of the reasons that we are interested in the idea of re-adjustment insurance is it would be a way for companies that benefit from globalisation to compensate those of their employees who lose out. It is an idea that has been developed by some American economists and for about 4 or 5% of the gains to a company from globalisation it could invest in insurance for each of its workers to be invested in re-training as their skills become in need of updating or upgrading. One of the advantages of this is that when someone gets a new job, they then have a pot that they can take on to their next employer. Certainly, we would see companies which gain from global trade as being one of the vehicles which should be paying towards the cost of adjustment, but all of us gain from it to some extent. When you see steam irons for a fiver in Tesco, that is the rest of us gaining to some extent. The old idea which has always underlain the welfare state of society's duty to pay to help people who face redundancy is still relevant here. At the moment our welfare state and, in particular, our social security benefits are at such a low level that it is not providing anything that could be seen as a fair compensation for people who lose out.

Mr Dubbins: On the structural fund, again I would echo what Richard said. I think it is a welcome development that and I really think long-term, even broader than Europe, there is room to have some sort of fund like that to make sure the losers are also compensated and there is some re-distribution there. I think again that fits very much into that broader agenda - Make Poverty History, the whole aid-trade debt debate - but the reality is we have got a lack of adequate infrastructure at the global level which is aimed at redistributing wealth and making sure that we are combating poverty and tackling the adverse effects of globalisation. I was interested to hear Martin Wolf again saying that something like the Tobin tax or at least a tax on finance and speculation is not something which is impossible. I am not sure we have really explored to the fullest extent we can the possibility of moving in that direction. I am not sure if you are aware as well that the ILO recently produced a report, A Social Dimension to Globalisation, and I think there are a number of issues in there that would be useful to look at as ideas we can take forward about trying to make sure there is a more equitable distribution.

Q107 Mr Love: Anything to add, Nick? Do not repeat the same.

Mr Clark: No, I certainly will not. We need also not get seduced by the idea that the sole beneficiaries are corporations. There is an awful lot of very wealthy individuals who have made their money out of global trade and I think we need to look at levels of income tax, personal income taxation as a realistic definitive. We also need to be clear that the benefits, such as they are, even in developing countries, are very unevenly spread. If you look at somewhere like Bangalore, where a lot of the IT industries are based and where a lot of call centres are based, just down the road in that state farmers are so crippled with debt because of global commodity markets, they are committing suicide at record rates. I think we have to talk not just about the damage done by global trade under the current circumstances to people in this country but also to people in the developing world as well.

Q108 Mr Love: Martin Wolf poured, in my view, some cold water on the levy which, as I would I understand it, is a policy of each of you sitting there. If I am reading between the lines, he suggested that since it is likely in the future people will have to change jobs on a regular basis and re-skill regularly, it may not be quite appropriate for the employer to take on as much responsibility as the levy would suggest. I wonder what your response to that would be and how you think we can ensure that the levels of skills training is carried out in order to respond to the changes that globalisation is producing. Richard, perhaps you could comment?

Mr Exell: One very brief point on the levy is that employers' opposition is, to a large extent, misguided from the point of view of their own self-interests. If you look at America's advantage in terms of global competitiveness, there is a strong body of evidence to suggest that where America does well in skills utilisation is in the specifics of linking individual skills to the company context. Now, you can only do that when a large and important bit of the training is being done by the company itself. That gives the company the opportunity to make sure that its workers' skills are relevant to the way in which the company is developing. A levy, by focusing companies' minds on how best to make use of training that they have got to pay for, would be a tremendous opportunity for getting British industry to develop some of that sort of advantage that American companies have got at the moment.

Q109 Mr Love: Can I shift us on to manufacturing. Again, Martin Wolf seemed to be suggesting that mass manufacturing, looking specifically at the motor car industry, may well have reached its zenith in future investment by the major automotive companies which shift, he suggested, mainly to Eastern Europe. Perhaps I will start with Amicus because I know you have major interests in the car industry. What is your view about what the future holds for the motor industry and for mass manufacturing, and how we can ensure that Britain remains in that particular marketplace?

Mr Dubbins: We just produced a document which we lobbied MPs with as well about the graveyard of the UK motor industry and the closures that have been going on in recent years, such as Jaguar and Peugeot now more recently, General Motors is in problems in Ellesmere Port. The total output, as I understand it, of numbers employed has remained fairly constant there, but what we have certainly seen with Peugeot, for example, is relocation towards the East. There seems to be more and more incentive to do that on the basis though of increasing profit levels. The plant at Ryton, for example, as I understand it, makes millions of profit per year. The incentive to relocate to Eastern Europe is going to push that profit margin even further. If that is the case, it is not really boding particularly well for the future if the incentive will be to relocate to maximise profits. The other side of that, the aerospace industry, for example ----

Q110 Mr Love: Before you go on to that, let me ask, what do you say to the argument that a lot of people use that the production of a car in Eastern Europe will be mainly to satisfy the new emerging market that will develop in Eastern Europe for car purchase and that, overall, Britain will not lose out because we are expanding the marketplace for those cars even though we are moving production to Eastern Europe?

Mr Dubbins: I am not really sure that is the case. Certainly, we had a conference a couple of months ago with the European Metal Workers Federation, and the indication we are getting from a lot of the companies is that there will be further rationalisation of their production centres, some of them are talking about having perhaps one or two major production centres on each continent. Okay, there might be an extent to which they can satisfy a growing demand in those countries, but certainly I think if the production is concentrating, as was indicated earlier, it is likely to be shifting towards those low‑wage countries where the returns on that are going to be much more. The question the companies and the broader society have got to keep asking is: "If you shift production away, to then feed that back into developed markets, who is going to have the money to keep buying those products if we are moving towards service-sector jobs which are considerably lower paid?"

Q111 Mr Love: How do we stall that process without cancelling the benefits of globalisation, Richard?

Mr Exell: The answer has got to be in making sure that Britain is in a position to move up the value chain. At the moment we have got a tendency to concentrate on low-value added, low-skills input, cutting down on the costs of inputs including labour as a competitive model, that is the labour element of success. We need to upgrade to a high-road approach, high investment, high wages, high skills plus compensating the individuals who lose out as we change the mix of production that we have got in this country. That is a very short version of a complicated argument.

Q112 Mr Newmark: I just have a brief question for Simon because it seems that the argument you are giving is the main motive for a company shifting from, let us say, the UK to Eastern Europe is a profit motive. I am trying to understand what is wrong, from your perspective, with a profit motive other than your particular angle where you clearly see job losses here. From the manufacturer's standpoint, if the quality of the goods being produced is just as good here, but they can produce it in an economy which has a lower wage structure, I am curious as to why the company is at fault for making that rational, economic decision.

Mr Dubbins: I think it pretty much depends on whether you think the companies have got some sort of broader social responsibility as well, or if they exist simply to maximise their profits and that is the end of the story. The reality I would argue there is okay, they are moving production to increase profits from £10 to £20 million out of a particular plant, and yet the social responsibility, the taxes that would help retrain them and so on are no longer in the place where they are leaving the workforce unemployed there. We have seen also the situation with Jaguar - I think it is in the TUC report - most of the people who have found work again have found it with considerably lower wage rates. We have got to ask ourselves is globalisation here to serve the companies or populations?

Q113 Mr Newmark: To serve the consumer, the consumer wants cheaper and cheaper goods.

Mr Dubbins: As I was making the point a moment ago, if we keep moving production in that way, we will have nobody left on wages to be able buy those sorts of products.

Mr Newmark: People shift to the service sector from manufacturing which is what has been going on in this country.

Chairman: An ideological rift here.

Q114 Mr Gauke: May I ask Mr Clark about the issue of outsourcing the public sector, and I know you were present for the first hearing we had, but I will make the same point again. We saw some very impressive companies in India which were doing lot of work with private sector companies in the UK: reducing costs for those companies, improving, therefore, shareholder returns and reducing costs for consumers. Why can the same principle not be applied to the public sector?

Mr Clark: The interesting distinction between government and private companies is that private companies do not have to ask anyone about what they are doing or to be accountable to anyone but their shareholders. I think if you ask most consumers about where they wanted their call centres, they would pretty soon say, "We do not want them in India", for a variety of reasons, one of them being is they think it is less to do with the service to them. Anyone who has spent 20 minutes on the line listening to a recorded message would say the same, they do not think that the way call centres are being set up has their interests at heart, but, of course, the boards of directors, as long as everyone else is doing the same, are immune from public opinion whereas a government is not.

Q115 Mr Gauke: I would argue to the contrary, that companies have to be accountable to their customers because if customers do not like it, they will go elsewhere. There is a bank that runs its marketing campaign on that point, so there are commercial pressures there that make companies more accountable. There are huge savings that appear to be made by outsourcing.

Mr Clark: Presumably, this is information you have had from the companies who provide the outsourcing?

Q116 Mr Gauke: On the basis that the private sector goes out there.

Mr Clark: They are not going to tell you it costs more, are they?

Q117 Mr Gauke: They are not going to do it if it costs more.

Mr Clark: They may very well do on occasion. The system is not perfect; they get their fingers burned, they sometimes come back as a result of very bad experiences. There is a broader social context for it as well, that a lot of people are not particularly happy about it. To be honest, it is very hard to find, for example, a privatised energy company which has not got call centres remote from where you are, sometimes it might be in the UK, sometimes it might be in Europe and sometimes it might be elsewhere, but the option of not having a call centre no longer exists. You cannot go to a gas showroom and get anything done, you cannot go to an electricity board, those options do not exist and I think if you ask people they would say it should. It is rather like the arguments about what you are offered on the shelves of supermarkets is driven by customer demand. I do not think anyone really believes that.

Q118 Mr Newmark: The market will shift. If you look at banks, the banks are doing exactly that, they are going back on the high street from having been so remote because the consumer is driving that demand. Banks are shifting.

Mr Clark: That tends to suggest that the idea of going to call centres in the Far East was not a good one and those issues were driven by cost considerations.

Q119 Mr Gauke: The point I am trying to make is the private sector - and we heard Martin Wolf make the case - has to respond to market pressures whereas the public sector responds to political pressures.

Mr Clark: Democratic pressures, you could call them.

Q120 Mr Gauke: One could call them that, yes. What I am putting to you is that if it were left to market pressures or if it were about getting the best return for the taxpayer and, indeed, the person to whom services were being provided, we would make much greater use of outsourcing than we currently do in the public sector.

Mr Clark: It depends what the considerations are. If the market was such a good provider, it would be providing health, it would be providing housing for the homeless and we would not have to have a welfare state, but the market does not provide everything that is socially necessary.

Q121 Mr Gauke: I am not disagreeing with that, but where there are areas where the market cannot provide, does it still not make sense to you to provide those services in as efficient a manner as possible? What we have seen in visiting outsourcing centres in India is very often - not always but very often - the most efficient way of providing services, whether they be public or private services, is by making use of the competitive and comparative advantages which exist in places like India.

Mr Clark: I certainly remain to be convinced that is demonstrable for an awful lot of the work that has already been put there, but in terms of a lot of public service work which relies on contact with individuals, we already have a problem. For example, a pensioner cannot go and speak to somebody face-to-face about their pension because everything has been put to a call centre. Removing that call centre even further, as Martin Wolf - who is an exponent of the market, he is not a defender of social provision in a way that we are - would say, it gets too complex and difficult to manage. If there are problems already, which there certainly are in areas like the DWP and the Pensions Service, with job cuts in the UK, meaning the service cannot be provided to people, they cannot go and see someone, they have to make a phone call, now you are saying the phone call will be fielded by somebody on the other side of the world where the management problems are even greater, where the political accountability is even less because someone stands somewhere to make some money out of it, I think the political repercussions and hostility to that are perfectly justified. I think bringing more democracy into the operation of the market would be a good thing rather than less.

Q122 Mr Gauke: Do you think in five or ten years, more or less in the public sector will be outsourced overseas?

Mr Clark: It depends how successful we are in campaigning and fighting against it.

Q123 Mr Gauke: How successful do you think you are going to be?

Mr Clark: We are very optimistic.

Q124 John Thurso: That was fascinating. I think I am with you if the evidence of my constituents is anything to go by, where the service has dropped dramatically with the removal of face-to-face contact. However, what I want to ask about is resources and raw materials. In your submission, you noted that you would support energy self-reliance in the UK, perhaps it is an auspicious day to be asking you about this. Given that UK-produced energy is said by some to be relatively expensive compared with that produced by countries that have natural resources, how do you see that impacting on growth in the UK?

Mr Exell: It would be a mistake to assume that Britain lacks energy resources. We are built on coal and surrounded by oil and gas. We have got a tremendous opportunity in this country in the immediate future. Clean coal is in many ways the energy of the future. Developing the ability to scrub the exhausts from coal‑fired power stations will not take the lead-in that nuclear power stations will take. China is building a coal-fired power station every week and is beginning to be really concerned about the costs of pollution. Countries that develop clean coal technology - and we have got the opportunity to do that - are going to be at the head not only of leading to a richer, cleaner world but a tremendous commercial opportunity at the same time. If we invest now in this country in clean coal technology, we can promote jobs in Britain, reduce global warming and help developing countries to industrialise in a sustainable manner. It is a tremendous opportunity for this country.

Q125 Mr Gauke: And continue to develop our own economies.

Mr Exell: Yes.

Q126 John Thurso: How much do you think that security of supply is an issue, given that we will not have the gas very shortly, we will be net importers if we go down the gas route?

Mr Exell: I think if you were asking this question in Ukraine, you would get a very clear answer to that question and certainly there are risks to having a preponderance of one's own energy coming from abroad. Especially in this country, when we have got so many opportunities for people developing our own energy resources, it is something that we should put on the scales when we are making our judgments.

Q127 John Thurso: Is this one of those areas where the market is not a particularly good way of deciding because we have long-term decisions to make, long-term investments to make, whether they be a baseload of new civil nuclear, whether they be a much stronger investment in renewal or whether they be a serious investment in clean coal, these are government decisions rather than market decisions?

Mr Exell: Yes, and also talking about "the market" is not always the best way of thinking about things. Markets vary from one another according to the circumstances in which they are established and the rules by which they are run. The Government, in turn, in energy can make a huge difference, so there would still be a market but the outcomes of it will vary tremendously. Markets are never neutral any more than governments are.

Q128 John Thurso: What business wants, I always find, is security and stability, and if they have got that, the rest is rather peripheral.

Mr Exell: Exactly.

Q129 John Thurso: Martin Wolf was arguing that in theory environmental taxation does not lead to pollution-intensive output moving abroad.

Mr Exell: He did say providing that was done on a concerted basis. That is an important proviso.

Q130 John Thurso: Can I ask for your views on that, because there is tremendous pressure growing, I think, for political consensus to see more regulation, more greening.

Mr Exell: I think my colleagues have done quite a bit of thinking on this.

Mr Clark: There are a lot of arguments about how you are most effective in dealing with things like emissions and pollution, but certainly currently governments are moving in the wrong direction in reducing enforcement and regulation. I think, certainly from our point of view, the consequences of the push towards less regulation and inspection are already showing up in health and safety and it is the same with the environment. In terms of energy, issues like carbon taxation and so on are tinkering at the edges; there needs to be a shift in policy. If, for example, renewables got a tenth of the subsidy that are being deployed to nuclear, we would see a huge increase in the quality and reduction in the cost of investment in renewable energy. Certainly I would echo Richard's points about clean coal technology. Unfortunately, our energy policy has not been driven by economics. We did move to gas from coal because gas was cheaper because gas did not have the miners.

Q131 John Thurso: Amicus, I assume, would quite like to see some new civil nuclear.

Mr Dubbins: We certainly have been arguing that there needs to be a balanced energy policy. We have members in the nuclear industry, yes, and they obviously argue that there should be a clear political lead on the nuclear question, but we have also stressed the balanced policy and it comes back to what you were saying about security of supply being very important. I think the other issue just mentioned there, coal seems to be coming back as an energy supply of the future and we would certainly support that as well. It is a shame that we went so far closing it down in the first place, so we are in a difficult situation to use that again in the future, but that is the situation we are in. Certainly, we have said a balanced policy in which nuclear and renewables have a part to play. I think the broader question about security of supply has obviously got to be looked at in terms of global politics as well and what is going on in that particular arena.

Q132 Ms Keeble: You have talked quite a lot about what you would like to see happen in other countries in terms of regulation and so on. What you have not made absolutely clear is whether you regard it as partly a CSR obligation, which would be imposed by UK companies by this country's government, or how far you also see it as being a matter of the kind of work that goes on to get developing countries to improve governance of their countries and deal with some of the public service issues and regulation and how far you also see it as making some of the international machinery work effectively. Just a brief thing on that because CSR by UK companies is a drop in the ocean.

Mr Dubbins: CSR is unfortunately very poorly developed. The biggest problem there as well has been the lack of a proper leading enforceable framework. I understand in India for listed companies they are at the point of imposing that with proper social auditing. When it was discussed at the European level, we were very much in favour of there being a legal framework for CSR which included the social partners and proper three-line auditing, which included the social aspects. Unfortunately, that was opposed lock, stock and barrel by certain governments. In a broader context, we have been arguing for a level playing field particularly within the European Union on social and labour rights, and the UK is usually vastly inferior compared with some of our continental colleagues, and that should be then the platform through which and within which we push for better standards globally. That includes within the ILO, within the broader machinery of the UN and it would endorse entirely moves towards better governance in developing countries, but I think if we are being honest about this, we really have to ask ourselves why is there a governance problem in some of these developing countries. I do not think the IMF and some G8 countries are absolutely innocent of the situation that exists there. For example, in Tanzania where we were involved with encouraging water privatisation which then led to quite serious incidents of unrest in that country, they have now moved back towards public ownership. I fail to see how that sort of agenda fits into the picture of proper governance and development.

Q133 Ms Keeble: When I say "governance", I mean in terms of regulation of labour. I was thinking of China in particular and some of the labour conditions there, for example in the boot and shoe industry. It was meant to be a small question.

Mr Exell: One of the arguments that we frequently hear is that it is somehow imperialistic or chauvinistic for us to insist on core labour standards across the world. The people who have made the opposite point to us most strongly are trades unions in developing countries which are very often in an analogous position to us, indeed, with their governments and their employers. They say they are continuously getting employers saying to them, "If you negotiate for better pay for your members, we are not going to be able to compete with China", and governments saying, and they legislate for basic health and safety at work, "We will not get the investment that will go to China". Core labour standards would be good for British workers but they would be even better for workers in developing countries.

Q134 Mr Love: A short question. I wanted to go into this whole taxation issue. You probably heard Martin Wolf's comments in relation to corporate taxes. I wonder what your view is in relation to that? There is also a lot of discussion which we are having that inequality is increasing partly as a result of globalisation. How should we respond to the increasing inequality in society? Is there a way in which new forms of taxation could address some of these issues?

Mr Clark: We have got some old forms of taxation which could address the issue, quite honestly. There is a real problem with the general consensus that there is an actual cap on income tax at 40% for the highest paid which is bizarre as far as I can see, particularly since National Insurance does not extend beyond a certain level, 41% is the maximum rate, that is low. It is very interesting to hear Martin Wolf say that he does not regard corporate tax as crucial as the lobbyists do. In terms of decision making, of course any company worth their salt is going to pay a lobbyist to say, "We should pay less tax", and one of the arguments they are going to use is, "We will not come to you". I think it is probably right that it is a much less significant decider of where to locate. I think there is also some scope for leadership in saying the downward trend in corporate taxation is not particularly good for social cohesion but nor is the ceiling on income tax.

Q135 Mr Newmark: Although there is evidence that the lower the tax goes, the more the tax take seems to increase, but I will not get into a philosophical debate with you on that. Simon, I agree with your point on coal, but the problem was when the price of oil went down to ten bucks a share, it made it uneconomic to produce the deep-mined coal we had in this country, but now that it is over $50 a gallon, I am curious from Richard's standpoint - and I agree with you, we need to encourage carbon sequestration for 200 years of coal - what do you think the Government should be doing to encourage us to harness that technology or should the Government be doing nothing?

Mr Exell: My understanding is that the industry is saying that what is needed at the moment is some technical changes on regulation of the industry, which I am not expert enough to go into, plus some pump-priming, especially support for research and development, and the same planning relaxation that is being proposed for the nuclear industry also for other forms of energy. I am not an energy specialist, those headlines are the limits of my knowledge.

Mr Newmark: I know of your enthusiasm for it, so I wondered if you had any thoughts.

Q136 Chairman: Martin Wolf has had a few good articles in the Financial Times, one today, and they are pretty good in terms of energy and the issue of consumption. Maybe a last question from me. Are trades unions and workers too sceptical about the benefits of globalisation, and how do your organisations attempt to educate people around the opportunities?

Mr Exell: The first thing about trades unions is that our first job is to protect our members against threats. We are temperamentally more inclined to recognise problems.

Q137 Chairman: So the glass is half empty all the time?

Mr Exell: To some extent. We would not be doing our job if we did not notice when the glass is half empty, but we are also keen to make sure that we never throw out the baby with the bathwater, to use another cliché, because at the same time as protecting members from threats from globalisation it is also important to protect the interests of the members who benefit from it. As I said right at the start, there are hundreds of thousands of jobs that depend on global trade investment, so we must never put them at risk because of concerns about people who might lose their jobs or see their terms and conditions worsen.

Mr Clark: In educational terms, the problem with the £5 steam iron is it may be made by slave labour in China and that is not in our interests as workers here or, indeed, trade union workers anywhere in the world to tolerate that, there are points where you say, "Actually, it is not all about cost".

Q138 Chairman: Simon, do you want a final word?

Mr Dubbins: I think it has been touched on there. It is very difficult, particularly when Amicus has got large manufacturing sectors, to look at globalisation in a particularly positive light. Having said that, we are not of the view that we are opposing it lock, stock and barrel. What we have consistently argued about is having some sort of social dimension to globalisation and that globalisation can help lift developing countries and people out of poverty, but it is essential it is done with that key element of being socially regulated and controlled in a manner that brings benefits to the bulk of the population.

Chairman: Your evidence has been very helpful to us. It is good to get that dimension, there are a few barriers to go yet, but building on Martin Wolf and yourself, we will take a break over the summer and then come back to you on it. Thanks very much.