Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 20 - 39)

TUESDAY 13 JUNE 2006

MS BRIDGET ROSEWELL AND MR STEPHEN KING

  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 power stations.

  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 the past.

  Q24  Angela Eagle: A sort of protectionist response?

  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 else.

  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 true?

  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, basically.

  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 flexible.

  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 cost goods?

  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 competitors anyway.

  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.


 
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