Examination of Witnesses (Questions 20
TUESDAY 13 JUNE 2006
Q20 Angela Eagle: They already are.
Mr King: I was in Beijing last
week and, I can tell you, it was pretty smelly and the skies were
brown rather than blue, which ideally is what you want to be seeing,
but clearly there is a big pollution problem in Beijing. I think
one of the difficulties here is that when it comes to reducing
emissions, for example, in China, India or elsewhere, they will
probably say, "Well, why us first; why not the US first,
because the US is rich and can afford to make those changes, where
actually we're poor?" When the other countries, for example,
Europe and the US, were poor, they were happy to pollute; they
are much less happy to pollute now. Countries like China and India
are poor and therefore do not want to see, if you like, major
environmental costs as a way of slowing the economies down. I
think the US has a critical role in this particular story.
Q21 Angela Eagle: True; but there
is an issue here of sheer size. If China is bringing a couple
of coal-fired power stations into being every two months, there
are issues for climate change and environmental sustainability
that are bigger than just the levels of growth might suggest.
You are rather pessimistic, if you think that China wants to do
that and have the kind of pollution and carbon emissions that
we had in the 19th century, or 18th century, on that scale. It
is not sustainable, is it, and they know that, by the way, they
are looking for the latest technology that is clean so they can
carry on growing without that threat?
Ms Rosewell: I think, the big
differences between the technologies that were available for power
generation and indeed the wasteful use of power in the 18th and
19th centuries, they are hugely different from what is available
now. I think, as the impetus to invest in clean technologies and
establish better scale of production of those technologies gets
ahead, they are probably poised at the moment, in those sorts
of places, if you look at some of the literature that is emerging
now, there is scope for continuing growth generally across the
rest of the globe. Even if there are bits of China which are going
down a less clean route, if you like, at this moment, if the rest
of the world is going down a much cleaner road then there is a
bit of a balance there, and, in any case, as those products become
cheaper, that is actually an advantage for the Chinese themselves.
My suspicion is that, in the end, they will not have to invest
in the kind of grid, for example, that we invested in here, because
the micro-generation of electricity is going to become much more
efficient and much easier, small wind turbines, and so on, will
really be going to take off, and those are precisely the sorts
of places where people will just get on and do it. They do not
require the scale of investment, they are much more micro; individual
communities can put up small wind farms without the big turbines
that we are seeing at the moment, and the whole thing will move
on in leaps and bounds. Maybe this is technological optimism,
and economists are often accused of being technologically
optimistic, particularly by environmentalists. I can remember
several rows in meetings. Nonetheless, I remain that kind of technological
optimist and I think that is exactly what we are seeing beginning
to develop. I think, pretty quickly, they will discover there
are much easier ways of generating power than building coal-fired
Q22 Angela Eagle: One of the other
threats that people often worry about when they think about globalisation
in the more advanced economies is this idea of a rush to the lowest
levels of corporate taxation which destroy the social infrastructure
which has been developed over years in the advanced economies.
There is a kind of bidding down of corporate tax. Do you worry
about that, do you think that is a threat; there is no obvious
sign of it happening, but people do worry about it?
Ms Rosewell: Exactly. I have no
evidence from people this has actually happened.
Mr King: I think it is a claim
that is made but does not seem to be based on any facts at all,
and the range of corporate tax rates across different countries,
I think, has no correlation whatsoever with capital inflows and
outflows or with growth rates. I think it is very difficult to
make the claim that really is happening.
Q23 Angela Eagle: I think also, while
I am in a `pointing out people's pessimisms' mood, offshoring
is another issue that people worry about, particularly organised
labour, but also the potential threat of it. Do you have anything
to say about offshoring? Stephen, obviously your company does
quite a bit of it. People generally see it as a threat to their
jobs and their own prosperity when they are in the sectors where
it happens. Have you any words of comfort for them and any thoughts
about what might begin to mitigate the consequences?
Ms Rosewell: I think one of the
issues around offshoring is that it is very easy to exaggerate
it, so that, some of the activities which people have thought
about offshoring, they have tried for a bit and then they have
actually brought it back closer to the market. In other words,
you need for many services to be dealing with people who actually
understand the issues that you are facing and the cultural context,
and so on. I think this fear can be exaggerated. In the sense
of their technical activities, or aspects of administration, and
so on, paper-pushing, if you like, which can be done more effectively
and more cheaply in other locations, essentially that lowers the
cost of that service to the customer in this country, and actually
that is a benefit. If it is alright to import your washing machine,
why is it not alright to import other things; and, after all,
that is entirely the basis on which we have reinvented ourselves
over centuries. To say that somehow this is the latest form of
new activity coming along which we must resist I think would be
a mistake equal to mistakes that we have made in this area in
Q24 Angela Eagle: A sort of protectionist
Ms Rosewell: Yes, exactly.
Mr King: Offshoring, I guess,
is a new way of describing historically a very common thing. I
guess it exists because we think of offshoring as being something
which involves work going to India or China, but actually, if
you think about the city states, back in the 14th or 15th century,
you had exactly the same thing. Offshoring in those days effectively
was taking business out of the city state itself and giving it
to the cottage industry that was in the woods just outside. It
is the same kind of principle of capital trying to move around
and businesses trying to move around to get the most efficient
allocation of resources. As far as HSBC is concerned, I am only
an internal economist there, rather than in policy, but HSBC is
such a big bank these days, it is difficult to know what you mean
by offshoring, in the sense that it has got operations everywhere.
Reducing operations in one particular area for a period of time
may be commensurate with building up operations in another particular
area in the same country at the same time. It is not clear what
the overall effect is, as Bridget was saying, because you end
up with lower costs of various imports, which means there is more
income around to spend on other kinds of goods and services, so
everyone is better off as a result of that.
Q25 Angela Eagle: What should be
the role of government in the latest globalised context that we
are in? We have talked briefly about whether it is any good picking
winners, and decided probably not. Clearly, governments have a
kind of strategic position and a possibility to have an overview
in their own particular contexts which might point an economy
in a more strategic way. Certainly in this country we are looking
at skills and we are looking at investment in scientific research,
trying to bolster the creative industries, so we are not picking
individual winners but looking at various sectors. Is that the
appropriate thing to do? What do you think that the correct response
would be for a government overseeing an economy, although not
controlling it, in this globalising context?
Ms Rosewell: I think there are
two prior things, before we think about the more domestic stuff,
which are the international aspects of this. One important thing
is trying to ensure that the world economy remains an open economy,
trying to support the Doha round, to the extent that we can, and
global institutions like the IMF. I think there is also a role
in ensuring that monetary authorities are appropriately tasked
with overseeing stability of financial arrangements and that the
payments institutions continue in a stable fashion. I am sure
there will be some crises along this road that will need to be
managed, but I think those are the prior things. If you turn to
how we facilitate the adjustments within the UK economy, I would
say that government, on the whole, is not very good at deciding
what those adjustments are; what government needs to do is set
the framework in which other people can get on and do it, and
that requires a good level of basic investment in infrastructure,
in education, in research and other institutions, of the kind
that, on the whole, government needs to do, setting the infrastructure
for it to be done, otherwise it leaves things just to stand. Apart
from that, I think that, although creative industries are a good
thing and helping a little bit along these roads is helpful, I
do not think that actually is going to make a big difference.
At the end of the day, it is enabling businesses just to get out
there and decide what they want to do which matters, and also
for people to get out there and decide what they want to do and
to be able to take advantage of opportunities that they see.
Mr King: I would agree with Bridget.
I have not got much more to add, other than to emphasise the international
role that governments should play, that what matters really are
the international rules by which you play the globalisation story.
It is always difficult to claim that the UK is uniquely placed
to help to make sure those rules are stuck to, but it seems to
me that currently the UK should be prodding the US and Europe
into actions which would be more beneficial to support globalisation
over the course of the next few years. I think the biggest threats
to UK livelihoods at the moment come really from external forces,
particularly this issue of growing protectionist pressures in
both the States and Europe. I think it is a very disturbing phenomenon.
Q26 Angela Eagle: Taking all that
into account, if the Government looks at our trade patterns and
sees that Europe is still our major trading partner, yet it looks
like the vast majority of world growth is going to take place
elsewhere, should it worry about that? Should it be facilitating
more lessons in Mandarin and the various Indian languages and
trying to do something about that, or should it just sit back
and do its duty with the Bretton Woods institutions and the Doha
round and somehow leave the invisible hand to make its own way?
Mr King: Personally, I would be
in favour of Mandarin lessons but I cannot really speak for anybody
Ms Rosewell: Mandarin, or Cantonese.
Mr King: Mandarin, I think, is
the official one, so that is the one, I suppose, which matters.
Ms Rosewell: Many of the business
communities speak Cantonese, do they not?
Mr King: Yes, Cantonese, that
is true. I think, Mandarin I would prefer. However, I would say
that I recall, 20 or 30 years ago, that Japanese was the popular
language. Of course, this is a very good example of where picking
winners did not really work out, because Japan, having grown so
quickly, eventually stagnated and became much less important as
an economic counterpart. There is a danger that China appears
to be fashionable and possibly will become a victim of fashion
in this particular area.
Q27 Mr Todd: Sticking on language
for a moment, does English maintain its position as being a significant
positive advantage for this country?
Ms Rosewell: Yes; of course.
Mr King: Yes.
Ms Rosewell: It is the language
combined with the openness and the willingness to allow people
to come to London, in particular, and set up and get their
own trading arrangements, financial arrangements, and so on.
Q28 Mr Todd: Just turning round the
second part of your answer, therefore another part of our competitive
advantage is the very significant resident population from India
and China and places of that kind.
Ms Rosewell: And everywhere else.
Q29 Mr Todd: Who are potential entrepreneurs
and bridge-builders with these growing economies; is that not
Ms Rosewell: Certainly it is one
of the things that we work on inside the GLA, to try to understand
those communities and to build links with the business side of
those communities to encourage inward investment in all directions,
Q30 Mr Todd: With the reach that
HSBC has, you must perceive these things quite clearly, of the
different communities in different countries, and that, in some
ways, historically closed economies, even though they may be open
now, have shut themselves off from many of these opportunities
by not having a large Indian-origin population within their jurisdiction?
Mr King: Exactly. I think there
is a broader issue than simply Indian population or Chinese population.
I think the way you put this, in economic terms, is that there
are lots of political reasons for immigration controls, but the
economic reason for immigration controls is really a protectionist
reason, that by trying to keep people out of a particular country
effectively you are trying to protect the rights, wages and perceived
benefits of the indigenous population. But in the same way that
restrictions on trade are damaging economically, restrictions
on migration, ultimately, will be damaging economically. If you
think about the great waves of migration that have taken place
and the benefits that societies have got from them, they are actually
pretty powerful stories. If you think about Europe after the Second
World War, the success of Germany, it was partly the immigrant
story, if you think in particular of the US in the late 19th century
or 20th century, huge waves of immigration, which undoubtedly
were part of the success of the US at that particular point in
time. If you close yourself off from immigration economically
then you are likely simply to be protecting the interests of the
current crop of workers, with the economy becoming more stagnant
as a result.
Q31 Mr Todd: Which suggests that
either policy-makers have not read their history or that policy-makers
are extremely apprehensive of selling what is, frankly, a very
consistent line of success to their population; which do you think
that is, or try one?
Ms Rosewell: It is probably a
bit of both.
Mr King: It is a bit of both.
Ms Rosewell: There is more to
life than economics, we would accept that, reluctantly.
Q32 Mr Todd: Yes, but successful
economics means a lot to most people. Just on the broader issue
of to what extent the British public perceive globalisation as
a good, do you think there is more that could be done, and what?
Ms Rosewell: Clearly, there are
aspects, such as immigration, which touch people's nerves, but
I think that, on the whole, the British public faces both ways
but actually it has got quite a good international orientation.
Most people, after all, have passports, most people travel, they
may then buy fish and chips when they get there, or whatever,
but we are actually quite open to foreign influences and have
been over a long time; look at our cuisine, for example, what
is British food, after all? I would not say that the British people
are against globalisation in a fundamental sense. Clearly, at
the same time, everybody, every individual
Q33 Mr Todd: To the extent that you
might say the French were?
Ms Rosewell: Yes; but every individual
will also have a bit of self-interest about the kind of community
they want to live in, or the security of their job, and the individual
and short-term point of view, while at the same time seeing it
as a bigger picture.
Q34 Mr Todd: Just turning that argument
around again, we discussed the differential impact of globalisation
on different skill levels in the economy, and it would appear
that inward economic migration is a major threat to those with
relatively low levels of skills and also that they are threatened
potentially by outsourcing, which has been discussed in other
questions. To what extent can we say there is any benefit for
those with relatively low skills in our own economy?
Mr King: I think we need to be
a little bit careful of that argument, because it seems to me
that if you take, for example, the large migration of workers
that are coming through from Central and Eastern Europe in recent
times, it is not as though the unemployment rate of the indigenous
population has gone up as a result of these people, in effect,
displacing work that would go through the indigenous population.
It is much more a case of, actually, the labour supply being more
Q35 Mr Todd: But their bargaining
strength has gone down?
Mr King: Yes, in some cases their
bargaining strength will have gone down, but I think the way I
would put it actually is that in the absence of this migration
the labour market would have been too tight, and because it was
too tight interest rates would have been higher than actually
they are today. For the broader population, the cost would probably
have been more inflationary pressures, higher interest rates and
a less flexible labour market than we have got, and we should
be thankful for that.
Q36 Mr Todd: The other aspect is
that inflation generally has been lower because of lower imported
Ms Rosewell: Indeed.
Mr King: Yes.
Q37 Mr Todd: From which they benefit,
as does everyone else?
Mr King: Yes.
Q38 John Thurso: I want to ask you
just a little bit about resources and globalisation. The UK will
be dependent increasingly, and already is to a certain extent,
upon imports of raw materials and particularly in energy. How
much of a threat do you think this is, first of all, to the UK's
ability to compete in the global economy?
Ms Rosewell: I think it is a threat
to the price that we might have to pay for some of these, and
we have seen this already over the gas interconnector and indeed
the issues around the Russian gas as well; so there are some issues
about price and the cost of those, but those apply not just to
us but to other people as well. In a sense, that is an issue for
developed economies. What I think therefore is at issue is the
extent of our willingness and ability to invest in alternative
sources of energy. I think, actually, in some way, we are quite
well placed, not so much on things like photovoltaic cells, for
example, because we do not have the sun, but in a number of the
other areas there is a lot of investment going on. There is a
lot of innovative stuff going on, which actually we are quite
good at, and I think that there are some quite interesting opportunities
that we might follow, even if we do not go down the nuclear route,
which obviously politically is rather difficult. There are some
vulnerabilities, but I do not think necessarily they apply just
to the UK, and therefore the relative competitive position of
the UK is probably in the same place as that of many of our European
Mr King: I think one issue for
the longer-term growth rate, or the medium-term growth rate, of
the UK is that if a large chunk of the capital stock, which we
had invested in recent years, was put in place on the assumption
of $30 a barrel of oil and you end up with 70, or 80, or 100,
if you argue that some of that capital stock is now being used
less efficiently than the plans were, which means therefore that
the productive potential growth rate of the UK might be lower,
as a consequence of that, than would have been the case previously,
I think that is an issue the Bank of England has to confront when
it comes to thinking about monetary policy, what is the speed
limit, if you like, on the growth rate and has that changed as
a result of significantly higher energy prices. The second thing
I would add is that clearly if you have got energy prices going
up, basically it is a series of terms of trade shocks, it is a
redistribution of income from energy-consuming nations to energy-producing
nations. That may imply issues about the adjustment of current
accounts, balance of payments position, of different countries,
so, for the energy-consuming nations, other things being equal,
they might end up with bigger current account deficits, while,
for the energy-producing nations, the Middle East, parts of Latin
America, Russia, you end up with bigger current account surpluses.
The question then for us really is what will those countries choose
to do with those current account surpluses, does the money end
up reinvested back into the UK, into Europe, into the States,
or does it get invested into their own domestic economies, and
what sorts of assets do these countries buy with their current
account surpluses. There is a series of unknowns there, in terms
of the way in which capital flows around the world, as a result
of these relative energy price shifts.
Q39 John Thurso: There is an assumption
in all of that, of course, that there is actually a sufficient
amount of resource to go round for the demand that will exist
across the whole world. If you believe in, and I am not saying
I do, peak oil and all of the other scenarios, and if you look
at the growth rates through to 2050 of India and China, there
is a perfectly feasible scenario that actually you get to a point
where you have got a shortage, so that there are not sufficient
raw commodities to meet world demand. At that point, it becomes
in the interest of each country, the hank we have got, actually
to hang on rather than export, to a certain extent, so that becomes
a security issue. Within that context, how much do you think that
is a threat to the pace and process of globalisation?
Ms Rosewell: We have looked at
some of the peak oil stuff, although not very recently, and my
understanding is that there is still quite a lot of uncertainty
as to how realistic any of those scenarios are, given the ability,
as price begins to rise, then to bring more supplies on stream.
After all, at one point, 20 or 30 years ago, it was the proposition
that it would never be worthwhile getting North Sea oil out of
the North Sea, because the prices would never make that possible,
and here we are, a generation later, still pumping. I am slightly
sceptical about all of these apocalyptic scenarios; however, it
is certainly possible that you could reach the point where there
was such a demand that there was some sort of cut-off and people
hung on to it. I just do not think that would be an abrupt event,
so it would be much more that there would be far more signals
along the way, to which markets themselves would be able to respond.
I may be entirely wrong, of course, but I do find it quite difficult
to believe in the apocalypse scenario.
Mr King: I suppose it depends
on the way you describe it, apocalypse, oil running out, or whether
the price becomes an excessive burden. I think it is more likely
to be the latter than the former.