Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 80 - 96)

TUESDAY 11 JULY 2006

MR MARTIN WOLF

  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.





 
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