Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)



  Q1  Chairman: Good morning and welcome to this the first evidence session of our inquiry into the globalisation phenomenon. Could you introduce yourselves, please, for the record?

  Ms Rosewell: I am Bridget Rosewell. I am here as Consultant Chief Economist of the GLA.

  Mr King: Stephen King, Group Chief Economist of HSBC.

  Q2  Chairman: Fine. First of all, can I thank you for the submissions you have made; they have been very, very helpful to us. Given this is the first formal session of our inquiry into globalisation, can I ask both of you what you would identify as the most important threat and opportunity for the UK arising from globalisation?

  Ms Rosewell: I think I would like to start with the opportunity part, which is, the integration of more economies, more activity, into the world economy offers opportunities of all kinds for innovation, for prosperity for the globe as well as for the UK. The obverse of that is the threat, that we fail to respond to that adequately, or respond by retreating into protectionism and trying to pretend it is not happening.

  Mr King: I have not got a great deal to add to that, actually. I think, from the opportunity point of view, any economist will argue that globalisation should imply a more efficient allocation of resources around the world, which means more output for given inputs; that should be a good thing for all concerned. As to the threat, I agree with Bridget on the issue of protectionism, which I think is a growing threat. The second thing I would mention, I think, is the issue of income and wealth inequality, not as much across countries, because I think you can argue reasonably that globalisation has improved living standards for many people around the world, but within countries: I think there is some evidence that suggests that inequality has increased over the course of the last few years, perhaps because of the effects of globalisation.

  Q3  Chairman: What does the term "globalisation" mean? There is no one, single definition for it, is there?

  Mr King: First of all, it has been going on for hundreds and hundreds of years. To suggest it is actually a new phenomenon, I think, basically is wrong. The story has been happening, whether it is the breakdown of city states, whether it is the combining of individual nations into, for example, the European Union, a whole series of changes have come through. I would say that the defining features of globalisation are, firstly, new technologies, they change the speed at which information flows around the world; and, secondly, I think, politics matters, particularly political rearrangement. It is difficult to describe the latest period of globalisation without reference to what has happened in the Soviet Union, Russia now, of course, but the Soviet Union previously, and also what has happened as far as China is concerned, over the last 20 years. Further, I think, philosophical views matter as well: the philosophical embracing of open markets has been critically important over the course of the last 20 years. The abolition of capital controls, the breakdown of trade tariffs, and so on and so forth, has been important, I think, in contributing to the latest phase of globalisation.

  Ms Rosewell: The word that I would use as sort of the key word in this process is `integration' and that can mean integration of markets, so that you can trade the same commodities in a variety of markets at the same time, or you can trade across the whole globe but in one place, as happens in commodity markets in some areas in London. Also it enables communication and has comparisons, for example, across a variety of marketplaces, and the integration of supply chains, and so on, as well. I do not think necessarily it is so much to do just with multinational companies. I notice that, I think, the chap who is Chief Executive of IBM, writing in the Financial Times yesterday, said he thought these were the key institutions in globalisation. I am not sure actually I agree with that, because much of the way that integration can happen does not rely upon co-ownership of the means of production, it can mean also ability to trade between independent entities, but it is that ability to trade and to have a clear exchange of goods and services which is the key bit to the concept.

  Mr King: I think also the issue of labour and capital migration has become very important over the course of the last 20 years. Obviously, trade itself is important but it is actually the ability of capital and labour to move around the world more easily than was the case in the past, most obviously when you look at the UK and the large number of migrant workers that have come through from Central and Eastern Europe over the course of the last two years. That is one feature of globalisation, which is really voluntary movement of labour from one part of the world to another part of the world, which does not involve anything to do with multinationals, for example.

  Q4  Chairman: You may be aware that as a subset of the globalisation inquiry we are looking into the IMF and we hope to produce our report before the recess in July. We have had evidence from quite a number of people, including the Chancellor and the Governor of the Bank of England, and reference has been made to the reformation of the IMF as an institution, and in your submission to us, Stephen, you mentioned that very point. How important is the IMF to sustaining a positive globalisation future, in terms of capital markets and global imbalances, and has that been the body to look at it?

  Mr King: In its current form, I would say it is not actually doing its job terribly well, and there are a number of reasons for that but probably the most obvious one is the lack of representation within the IMF of countries which are now playing a huge role within the globalisation process. For example, the shares of China, of India, are very small within the quota system and within the voting system of the IMF. I think those things will have to change if it is going to be seen to be credible in different parts of the world. At the moment, I would say that, whereas the IMF is seen to be credible mostly within the US and within Europe, I think the view of Asia is still relatively weak as far as the IMF is concerned. Asia still blames the IMF for the difficulties of the late 1990s and it is unlikely to change unless Asia itself feels it has bigger representation within that particular body. What I would say is that it is a body that can perform a very important role once it has been reformed, but it is not performing that role currently because I think the reform process has not really come through. I would add also that, as far as the functions it could perform, one crucial function, from my point of view, is to give us much better data about capital flows around the world, because it is an area where, quite frankly, most of us are pretty clueless as to what is happening, and yet if you were to say what is the defining feature of this latest period of globalisation it is almost certainly this huge increase in capital flows around the world.

  Ms Rosewell: I do not disagree with anything that Stephen has said and I would agree that the IMF at the moment does not have much credibility. I am not even sure it has that much credibility in the US or Europe, for that matter.

  Mr King: A comparative point, I think.

  Ms Rosewell: I think, alongside that, the other, if you like, institutional characteristics which are important are the way in which the various central banks work together, alongside, or with, or even separately from the IMF. It is clear that any process of globalisation or any process which is involving increases in capital flows, which we have seen, is likely to have some instabilities in it on some occasion. The ability of the central banks to manage that, I think, rests far more in the governors and the people managing those systems of banking security than it does with the IMF itself. I think that is actually more important, that those guys actually recognise that responsibility and are able to live up to it.

  Mr King: I think you could add that the IMF at least could play a kind of referee or umpire role around the world. When you think about the debate currently about currency misalignments and the criticism from the US about China and its policy on the Renminbi, it is difficult, I think, to see the US criticism as credible in the absence of an external referee, if you like. It is probably the case that the IMF could play some kind of external referee role, so long as it has proper representation amongst membership.

  Q5  Chairman: The comments which have been made to us, by the Chancellor, the Governor and others, are that the UK is embracing globalisation, and we are positive on the merits of globalisation but there is a view from some parts of Europe and America that protectionism could creep in. How sound is the UK view and how positive is it on globalisation, in other words, could you see a reversal in a few years to come, and what risk do we run of being one of the only open economies?

  Ms Rosewell: I am not sure that it is a risk to be the only open economy. There is, I suppose, a risk, the way that it is put, if you like, of selling the family silver, so that we are the open economy, people come in and buy our assets and we have got the money but somehow we are lost because we do not have these assets any more. On the other hand, we do have the money, in which case we ought to be able to reinvest in new activities, innovation, research and moving the whole economy forward. I would see that as actually part of that opportunity, and it is not clear to me that being one of the few or one of the most open economies is necessarily a bad thing to be. It is certainly bad for the world economy as a whole if it slips into protectionism and into `beggar my neighbour' policies; that is a risk for the world economy, and therefore we would be less well-off also, as a result, because the world would be less well-off. Would we be relatively better-off if we had jumped first into those protectionist policies, I am not at all convinced that is true, in fact I think probably it is wrong.

  Mr King: I think open economies in general tend to be more innovative, they tend to have, over the very long term, faster growth rates, they tend to have a situation where income levels rise more quickly. You can look back over history at differences between open economies and closed economies and you will find that the closed economies eventually suffer quite badly; it may not happen the first year, the fifth year or the tenth year, but over decades the closed economies will suffer. There are some very good examples of that through history. If you take an extreme example of China in the 15th century, it closed itself off from the rest of the world, stagnated for the next 600 years and has changed really over only the last 25 years or so. If you take the examples of economies which tended to close themselves off for the first half of the 20th century, again significant stagnation. You tend to have, at any particular point in time, a mixture of both open and closed economies, and the ones that are open typically do better over the long term than the ones that are closed.

  Q6  Chairman: A possible reversal of the positive view on globalisation; what do you see triggering that?

  Mr King: I think part of the issue is probably the income inequality story, that, for example, if you look at the US, the highest quintile of earners has seen substantial gains in income over the course of the last 20 or 30 years; clearly they have benefited from the impact of globalisation. If you look at the lowest quintile of earners in the US, their income has gone up but it has gone up very, very marginally. There has been a big increase in income inequality in the US over the last 20 or 30 years. Of course, it is difficult to pinpoint exactly how much of that is the result of globalisation and how much of it is other factors unique to the US, but it is something we have seen. It is also the case that in China the same issue has arisen. In China's case it is more to do with the fact that you have got huge numbers of people in poverty but, at the same time, you have also got rapid gains in income for an emerging middle class, so again you have got issues of income inequality and what that might mean for social stability over the medium term. I think those kinds of issues may be important as a potential threat to the globalisation process.

  Q7  Chairman: You did mention globalisation as a positive sum game, but there still may be both winners and losers, and can you envisage that with the UK and can you envisage it elsewhere in the longer term?

  Mr King: I think it is possible, and the issue here, I think, will come down to the number of unskilled workers that exist in the UK, which may be competing with a huge increase of unskilled workers elsewhere in the world. From the workers' point of view, there is some potential threat there. The situation is complicated because someone who is a worker, who finds that their wage is not rising quickly because of globalisation, nevertheless may find the efficiency with which resources are allocated globally means that, in real terms, there may be some element of gains to income. For example, if prices of washing machines or televisions were to come down as a result of globalisation then, under those circumstances, although their nominal wage had not increased very much, there may still be some benefit for them.

  Ms Rosewell: I do not think we should conflate the issues of inequality arising in some economies being the same thing as the issue of inequalities in others, so the phenomenon in the US is to do with education systems and a failure to keep pace with a reduction in old industries, which has got something to do with globalisation but not a huge amount. What is happening in China really is rather different, which is saying that you have got a whole load of the population staying still, effectively, they are still doing subsistence agriculture, or whatever, and you have got another group of people who are moving into a more and more capitalist economy. Those are rather different processes, with very different dynamics to them as well, and a lot depends on, and maybe this is similar in all of these cases, do you see an opportunity for yourself, as an individual, to escape state X and arrive in state Y; if you see yourself as being trapped then that is what produces instability, I think. If you see it as an opportunity that you have a chance to get into these better situations then you are much less likely to be bothered by it. Traditionally, and I think this is the issue in the US, everybody thought that they could escape, and maybe actually that has begun to change a bit, but that is a very different phenomenon, I think, from, say, views on inequalities and inequalities here or in the rest of Europe or in China. Although that certainly is an issue, which might make people think there are other ways of managing their economies, I do not think it is a sort of global effect, if you see what I mean, which arises from the process of globalisation itself, it is rather different.

  Q8  Ms Keeble: I want to ask a bit more about winners and losers. Stephen, you have been very clear about what you expect to happen in the UK, in terms of the opening up of some of the relative differences between rich and poor. Do you think that the UK should look at having some sort of globalisation adjustment fund, or should look at some sort of measure which would deal with that?

  Mr King: Gaps may open up. It is difficult to know how big a gap should be and what we do about it. The issue here ultimately is that you want to have an economy that can compete with the rest of the world and if you were to go down the route of having a fund which is paid for through, let us say, higher taxes or higher social security contributions, from both companies and individuals, it may actually reduce the UK's ability to attract capital from elsewhere in the world. It is not clear that you end up with a definite benefit that comes through from pursuing that particular policy. Among the key things which seem to be, I think, a sign of successful nations and how they cope with globalisation, first of all, is flexibility in markets, whereby if there is a change that comes through the market is able to adjust and the people within the market are also able to adjust to the new circumstances relatively swiftly. Secondly, probably the best way of dealing with the whole situation is, I sense, through education, that by having improvements in skill levels in the UK then, in effect, the UK can specialise in areas which are likely to generate higher incomes for people, relative to what otherwise would be the case. I think it is also right to stress that the UK, with its relatively flexible markets compared with what you see perhaps elsewhere in Europe, has actually come through this period of globalisation rather well, in some ways, in the sense that the unemployment rate is low both by historical standards and also by the standards of other countries within Europe. Thirdly, the adjustment that one might argue should take place through globalisation again has come through relatively well. One can look at the manufacturing share in GDP, which clearly is very, very low in the UK compared with elsewhere in Europe, but, on the other hand, you can also argue that the ability to shift out of manufacturing into services of one sort or another has actually contributed to the more competitive position of the UK, because basically we just do not have a comparative advantage in manufacturing areas.

  Q9  Ms Keeble: Bridget, you said you think that poverty in the UK with globalisation is completely different from poverty in China, which is, of course, the case. Would you not see there to be a need, as globalisation creates a much stronger middle class and affluent class in the emerging economies, for much more thought to be given to redistribution and preventing the sort of opening up of the gulf that currently we are seeing in both China and India?

  Ms Rosewell: I think that, as the process of globalisation occurs, in fact that is what will happen. These are long processes. If you think about the process by which the middle class emerged in the UK and became strong and powerful and established the linkages into other groups, these things take more than a decade, they take decades and decades, you are probably talking about 50 years. Also I am slightly kind of hesitant about offering nostrums to countries about which I know very little. My take on what you have just been talking about is much more from a London experience, where I think it illustrates and also perhaps challenges some of the things that Stephen was saying. London is a place which lost nearly a million manufacturing jobs and has replaced those, and more than replaced them, with service sector jobs. It is growing fast, it has high productivity, it has high wages, but also it has a high worklessness rate amongst particular groups, partly those are the groups who are attracted to London because of the opportunities and then they find it difficult to access those opportunities. Partly there are some cultural issues and partly, although there is a good premium for full-time work in London, there is a very poor one for part-time work in London. All of these are about incentives and opportunities and the ability to take advantage of those opportunities that exist. I think there is no doubt that the opportunities are there; what we have to do is make sure that people are equipped to take advantage of them, and more particularly want to take advantage of them. What we have seen, in trying to engage in policy to deal with worklessness and to bring people up the ladder of opportunity in jobs, is getting them onto those first steps and then enabling people to climb it as well. That also, I think, the education point, is very well made; without education at quite basic levels and then the ability to invest and to draw on that, it is extremely hard to get people out of some of those poverty traps.

  Q10  Ms Keeble: I have got a question about a couple of very interesting reports which you have probably seen recently. One is about what the Governor of the Bank of England was saying this morning about the impact of globalisation on the inflation rate and therefore on people's living standards. The other was IBM, talking about the need for companies to get more savvy so that they do not get the political backlash which currently they are getting from globalisation. I wonder, have you got comments on those?

  Mr King: As far as the Mervyn King comments are concerned, of course, he is absolutely right; a lot of the big shifts in relative prices around the world are events that are taking place outside of the UK, whether it be changes in energy prices, changes in other commodity prices, it is all happening outside and the UK does not have much of an influence on those kinds of developments. Where I think there is a puzzle is to what extent these relative prices changes matter for monetary policy. There is a bit of a complication here, because it may be, for example, that the rise in energy prices pushes up the price level of the UK, making us all worse off than otherwise would be the case. As long as the wage level does not rise, and effectively you have had the real wage cut that you require to deal with the new reality of higher energy prices, that in itself is not really a significant inflationary effect. The complication for a central bank is that it is not sure whether the rise in prices will or will not lead to a subsequent wage effect. In my view, the effect of globalisation will reduce the likelihood of a subsequent wage effect and therefore reduce the risk of a spiral upwards of inflation, but central banks just do not know that: at this stage, it is a very difficult thing to work out. As far as companies are concerned, and Bridget may want to say something about this, I think companies clearly have some difficulties in presenting their own view of what is going on, but I think that has always been true of companies because people regard them as being profit maximisers, or whatever, and therefore generally bad bunches of people, which I think probably is a little bit unfair, but certainly that is how people perceive them from time to time.

  Ms Rosewell: As I said earlier, I think that the process of globalisation is not just a process of multinational companies, and I thought it was quite interesting that IBM were seeing it in that rather narrow perspective; there is a much wider perspective, which is partly about the ability of emerging countries to create their own businesses, and on the whole they do that. It is clearly correct that in a media-dominated world the big companies and the international companies will need to, as you say, become more savvy and respond to that, and that is quite important. On the energy prices, I think the energy issues are quite interesting, because, after all, one of the reasons for the rise in energy prices is precisely the growth of these new economies and their impact on the world economy. That is one of the reasons why some of the collapse in general product prices that we have seen will also begin to tail off, because their input costs will also be rising, and their fuel prices will rise and also their wages will start to rise as they become more skilled and more established. Actually, part of this you could see, if you like, as the real equilibrating process within both the new emerging economies and indeed the more established economies, and that is a process that will continue.

  Q11  Mr Love: Can I take us on to the impact of globalisation on business. The Society of Motor Manufacturers tell us we have a thriving motor industry in this country, but Peugeot have announced recently that they are going to shift production from the West Midlands to Hungary, purportedly simply on the basis of cost. Do you think there is a continuing role for mass-market manufacturing in this country and how do we decide how we achieve that? To start with you, Stephen: no comparative advantage; tell us why?

  Mr King: I think it depends what you mean by mass-market manufacturing. The manufacturing process these days is one which starts in one country, goes to another country, goes to a third country and finishes in a fourth country. It is increasingly difficult to work out what specific element of a manufacturing process is British, what aspect is another country in Europe, what aspect is Chinese, because they are all, effectively, parts of the same process. I gave an example in my submission about BMW and the Mini, and the Mini is a British brand, it is assembled in the UK, therefore, if you like, it is a sign of success of British motor manufacturing. The latest version of the engines is made in France; when the whole thing is exported to the US it counts as a British export, engine included, even though the engine is actually manufactured in France. So what you are seeing really is a series of specialist areas within the manufacturing process, where there is actually assembly, design, R&D, taking place in different parts of the world. Clearly, if there is a major headline story of this kind which leads to job losses, it is something which is not pleasant, that is absolutely the case, but at the same, the idea that the UK has some sort of natural home for manufacturing which is not part of the global process is increasingly a mistake. This is true of other countries as well. When you think about probably the branded goods from Germany, many of those branded goods now are actually assembled in countries within Central and Eastern Europe; so it is not specific to the UK. We think of Germany as being a successful manufacturing nation but German companies are engaged in exactly the same kinds of issues.

  Q12  Mr Love: I do not want to get onto Germany because its export performance is somewhat better than ours. Bridget, you mentioned earlier one million jobs being lost in London and manufacturing almost disappearing. Are there niche markets, is there a comparative advantage in certain areas and where are they and how should we be supporting them?

  Ms Rosewell: I would say two things. One is that I think the whole thing about the mass-market production is also a concept which is beginning to fray at the edges, in that different markets are developing, different deliverables and different tweaks that you have for individual markets, and so on, let alone the way the supply chain itself gets chopped up into smaller pieces. It is the Dell idea, you order the particular computer and then it is assembled out of a whole variety of different components and that is your product according to your specification. The mass market idea itself, I think, is beginning to crumble, which means that the ability increasingly, in richer countries, to make that non-standard product and tailor that product potentially using a whole variety of different components, whether you have imported them or made them yourself, becomes very important. That is, if you like, a niche and it is a way that you can do manufacturing in the UK, which I think is very important, because you have to be close to the markets and understand your markets in order to be able to do that. To say that is a comparative advantage, however, does not easily say we must support this particular sector, and I think one of the mistakes that we make in this kind of policy is to say, "Ah, we must identify the growing sectors and then we will support the growing sectors." Actually, within any given sector, there will be firms which are doing very well and there will be firms which have got a bit of a lifestyle, and there are firms which are not doing terribly well. We are not very good at, if you like, the picking winners bit, in fact usually we are terrible at it, and what we should be doing therefore much more is creating an environment in which people can respond to those opportunities than saying "We must support a particular sect or sectors."

  Q13  Mr Love: I will not come back to you, but I was going to ask Stephen about picking winners, but I suspect we will get a similar answer on that so I will not press you on that issue. Let us go on to research and development, which I think both of you would agree is critically important to this. There is currently a tax incentive for research and development, yet business investment has not really increased in recent years; are we doing enough on the incentives and what more could we do to respond to that business investment, which we all know is critical?

  Ms Rosewell: We did manage to get some research and development incentives for a service firm, in my consultancy, and it was extremely hard work, I have to tell you, to get it past the Inland Revenue. I would not say that we made any decisions about doing the research because of the tax incentive. We made the decision to do the research because we thought that there might be some useful products and services that we could sell, probably to people like Stephen, as a result of doing that research, and when the incentive came along then you think, "Well, maybe we can get some tax back on this." I am not sure how far those prior decisions in companies are made on the basis of there being down the line a tax incentive to doing it. What I think you need is better institutional linkages which enable people to undertake it, have the right skills and linkages with universities, or whatever, which make it easy to get the stuff done that you want to get done, and where you think that the risk of whether it works or not is actually worth taking, which is that if you do well with whatever piece of research that you are going to put out there you will be able to reap the rewards of that. I think we might make a mistake in thinking that we need to target the incentives specifically at doing that research and development, because for most businesses it is what you can do with the research once you have done it that matters, not whether you get a tax break for it.

  Q14  Mr Love: The CBI said, "Give us a little more," in their submission to us, that if we boosted the tax credit that would do the trick. I assume that you agree with Bridget that perhaps that is not as critically important as other things. If I can ask you just to go on to the second point that Bridget was making about the links with academia and with research organisations, how critical is that and why are we so far behind some other countries?

  Mr King: I think certainly it is useful to have the links, but it is difficult to say, I think, how far we are behind other countries. For example, HSBC does not have a particularly strong link with economic areas in academia because we have our own economics teams, so there is an in-built area of research rather than an externalised area of research, but hopefully still providing the same kinds of services: that is a matter for debate, of course, but hopefully we are doing something which is similar. As far as overall investment is concerned, it is clear that this is not just a story about research and development, it is a story about other factors which have limited business investment in the UK in recent years. Of those, the ones I would mention would be, first of all, the excess investment of the late 1990s, there was a bubble, basically, in investment globally, which also included the UK. Secondly, the fact that a lot of UK companies have what they perceive to be an underfunded pension system means that money which in previous times would have been diverted into actual business investment is instead being channelled off into trying to rebuild pension funds. One of the features of not just the UK corporate sector but corporate sectors in the States, in Japan and Germany, is that all of them seem to be saving rather than spending. It is a very unusual situation currently, and it may be the result of the fact that in all cases pension funds appear to be underfunded, which has got very little to do with the issue, obviously, of R&D. What I am saying is that if there is a limit to R&D it may be because of other, broader stories rather than specifically issues about tax credits for R&D in the UK. A final point I would make is this. When you look at research and development around the world, there was a survey by the United Nations, towards the end of last year, which looked at prospective R&D investment around the world, and whereas in the past the usual country recipients of R&D from multinationals had been the usual suspects, the US, Europe, Japan, in the future the preferred nations were, apparently, the US, China and India. Of course, whether that proves to be true is another matter altogether, but certainly multinationals are thinking much more carefully about R&D investment in those parts of the world rather than in Europe.

  Q15  Mr Love: I am going to make the assumption that both of you agree that skills training is absolutely critical to our responding to globalisation. In the Leitch Review, he splits that up into basic, intermediate and higher-level education and makes some comments about the value added of each part. Can I have your comments on which of those you think has the biggest priority and how much it will add to businesses' competitiveness internationally?

  Ms Rosewell: It is hard to know where to start. There are two things. Firstly, education and training are not the same thing. Education, in the sense of what happens in schools and universities, is one key element, and making sure that we provide the right quality of both of those things. In my view, one of the important aspects of that is essentially continuing to raise the status, I think we have done a little bit in this direction, of both teachers and university teachers in the UK system, which has slipped over a whole generation. I interview graduates, and I am sure you do too, good students from British universities, who would not dream of becoming academics, although actually, in some ways, that is what they ought to be, because the pay scales are so terrible. That is an issue for the quality of our universities, and indeed the ability of universities to educate British students. The LSE has hardly any British students, for example, because it is much more profitable for them to educate foreign students. There are issues still about the quality and delivery of that basic education system. When it comes to training, I think that we have got to be a lot more careful about the way that we are doing that. We have tended to think that more training is good, and clearly, to some extent, more and more training must have some benefit, but I think that it is a bit like going on a course to learn a piece of software; if you do not then use that piece of software that training quickly deteriorates, and you go back to it in a couple of months' time and scratch your head and you cannot remember actually what it was that you learned and how to do it. Unless there is usability and it is related to the work that is being done and the opportunities that people have, and so on, it is very easy to waste a lot of resources on training. I would hesitate just to say more training is good. Training that is related to things that people are going to do is good, or things they are doing, is good, and other training can actually be counter-productive.

  Q16  Mr Fallon: Just to come back to this issue of winners and losers, does not the sheer size of the Chinese, and to some extent the Indian, economy rather undermine our faith in the laws of comparative advantage, that there is actually very little it would be worth their while importing?

  Mr King: There is certainly plenty that they are importing. If you look at China, it does not really have much in the way of raw materials, so clearly it is importing a lot of raw materials, and, in fact, China is now the biggest consumer in the world of metals and the second biggest consumer in the world, after the US, of energy. There is no doubt that it is a big consumer in that sense. I think also the laws of comparative advantage work in certain areas, for example, if we look at the story of Indian development versus Chinese development. India's development, famously now, has been much more on the services side, whereas China's development has been a much more typical manufacturing route, so there has been some specialisation. You can take that argument too far, but clearly there is some evidence to support that particular view. Between those two nations, yes, there are some specialisations taking place. The tricky issue here is really how do you treat the income levels of people in the industrialised world over the pre-China and pre-India period; do you regard them as the income levels that are associated with a completely free market, where everyone has access to capital, or is it the case that people within the industrialised world had almost like a monopoly access to global capital, which meant that they could earn economic rents above and beyond what a free market clearing price would be. If it is the latter then obviously the increase in labour supply from China and India, as it begins to compete for a place at the global table, if you like, will tend to give rise to downward pressure for the economic rent earners in the West for wages and profits, and so on and so forth. You are going to get a mixture of both effects coming through, but at the end of the day there is no doubt that the globalisation process, by leading to a more efficient allocation of capital, raises total output. There will be in the intervening period, in my view, some adjustment costs, as far as wages and profits, and so  on, are concerned, in some parts of the industrialised world.

  Q17  Mr Fallon: You referred to the comparison with the United States and the wealth and the mobility there. Is not one of the keys to the dynamism of the States and social mobility the whole issue of property rights; is not that now one of the blockages to real progress in China, that there does not seem to be any progress at all now on enfranchisement of the lower-income groups so that they can earn or take long leases on property, both commercial and domestic?

  Ms Rosewell: Yes, in the sense that clearly-defined property rights are one of the bases for being able to write a contract and being able to establish a trading relationship, and indeed one of the bases on which you can then say what your comparative advantages might be. A comparative advantage offer is about relativities, it is not about the absolute size. The US still trades, after all, even though it has got absolute advantages in many, many activities. Equally, of course, trade often happens in similar sorts of goods, so most trade is of things which are similar sorts of products in similar sorts of countries and yet, nonetheless, there is enough of a difference somewhere in that delivery for trade to be possible. Unless you can transfer the rights to that then, obviously, there is an issue. However, the mechanisms by which you establish those institutional structures have to be embedded in the history and institutions of the country in question, and the way that we have developed a particular set of ways of delivering on property rights may not be the route to getting to the same place that other countries choose. If you come from out of a Communist system, in which the property rights were indeed very clear, but are not individual, the transition that you might try to make between that situation and a more developed system, where property rights are clearer, and indeed the rural contract which is I think another element in it is clearer, might be a very different one, and embedded in that is the role of trust. After all, if every contract ends up in court you are on a hiding to nothing. Most contracts have to be win-win and everybody agrees, and "This is what we're going to do," and we do it, and it is not a problem. So the role of trust in all of that is just as possible, and you can have long-lived and effective relationships and implicit contracts which do not rely on formal property rights, and indeed I think that is many of the routes to development that are likely to happen in these countries.

  Mr King: In China's case, it is pretty clear that this issue of personal relationships, of building up relationships over time, is a cultural difference but it is something which is very, very important in establishing business relationships in China relative to what we would experience in the UK or in the US. I would also add that when you look at the China story, it has had this extraordinary pace of expansion for 25 years now without the properly defined property rights we expect to see in the UK or in the US, but it works in a slightly different way. First of all, it is probably closer to the traditional Asian model of growth, which is not one which typically we would see as being a textbook example that comes through from Western economies, for example. So you have got that particular issue that has come through. The second issue is that China has got absolutely enormous potential for catch-up, in the sense that it is starting from a position where it stagnated back in the 1400s and started growing in 1980, so, in terms of its ability to learn and catch up from others, it is an extraordinary transformation that is taking place. The final point I would make for China is that when you look at Chinese exports and imports, it is not a case of China doing something and the rest of the world suffering from it, if you like, it is the fact that, when you look at the percentages of  Chinese exports and imports, about 60%, or so, are accounted for by what you might describe as foreign invested companies, in other words, companies operating in China which are part-owned, completely owned or joint ventures with companies from Japan, Europe, the US. China's success story is partly an issue about Western capital or Japanese capital going into China and contributing to or combining with the low levels of domestic labour costs to give them much faster growth than otherwise would be the case.

  Q18  Angela Eagle: You were saying earlier about the threats and you mentioned income inequality and issues around that, but nobody mentioned environmental threats. We have alluded to it gradually, I think, a bit, talking about commodity prices. Would you like to revisit the issue of threat in globalisation and have some thoughts on environmental threat and sustainability of the kinds of levels of growth that we have got now in the world and how we can ensure that we do not just come to a grinding, terrible halt?

  Mr King: I hope not; that would be unfortunate.

  Q19  Angela Eagle: It would not be very enjoyable, would it?

  Mr King: No, it would not. The first thing I would emphasise is that the growth rates we are seeing currently in the global economy are actually not as big as they have been in the past. If you look back, for example, to the fifties and sixties, the growth rates we saw then were much, much faster than we are seeing today, because it was Europe and Japan that played a really big role in driving the global economy back then. Although China and India are important, their contributions to global growth are smaller now than was the case for Europe and Japan back then, so it is not as though we are seeing an incredibly rapid pace of expansion which is unusual by the standards of previous decades. Secondly, there is clearly a market versus a non-market issue here, which is that if you take the market implications of globalisation it does imply much greater economic output than was the case previously; if you do not price accordingly or do not do something about the environmental cost then clearly there will be a risk that builds over a period of time. I think it is also important to stress that countries like China will look at the environmental issue and recognise that they themselves are suffering.

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