Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 213 - 219)

THURSDAY 2 NOVEMBER 2006

MR PETER OPPENHEIMER, MR JENS THOLSTRUP AND MR JOHN HAWKSWORTH

  Q213  Chairman: Good morning and welcome to our inquiry on globalisation. We are hoping to cover this first session in 45 minutes, so you do not all need to answer the same question. Whoever is best placed to answer the question can be decided amongst yourselves. In terms of globalisation, may I start? Looking at the current phase of globalisation compared with other phases, what evidence is there that globalisation has increased in the past 50 years? If we project ahead 50 years, what changes are needed in the UK economy if we are to remain competitive so that globalisation does not turn into a threat but an opportunity for us?

  Mr Hawksworth: I think the evidence is obvious in terms of the fact that both trade flows and particularly foreign direct investment have grown much faster than GDP over that period and also the fact that a broader range of economies are now important in the world—China, India, Brazil and so on—and they are taking an increasing share of global GDP and global trade. It is no longer a world economy that is dominated by the OECD economies. The evidence of it is fairly clear from the basic statistics. In terms of the issue about the UK competing, then clearly we say in our report, and I expect others would say, that this is potentially a good thing. We get the benefit of potentially cheaper imports and also the benefit of new markets. In fact the ageing OECD economies are only likely to maintain their rate of growth if they if they can exploit China, India and so on. That just means that we can specialise more in our areas of strength, which will be business and financial services; for example, certain niche areas of manufacturing and things like that.

  Mr Tholstrup: I agree with what John has said. The one area where I think Britain is somewhat lagging behind in terms of its stance on globalisation is in the area of education and training. Most of the international surveys that come out show that Britain is performing pretty well on most measures to associate itself with globalisation. The one metric where they are consistently below their peers is in the area of education and training. That is obviously a very broad area, but I think that is a particularly important area in terms of future competitiveness.

  Mr Oppenheimer: May I add to John's comments on evidence of globalisation? I think there are two other matters to consider. One of them is the opening up of capital markets and the decline of capital controls around the world, an increase in cross-border investment flows, but also in cross-border capital flows that has resulted from that. In my mind, another driver of globalisation is the extraordinary changes in technology that we have seen, particularly over the last 10 years, which has accelerated this process because it has worked hand-in-hand with the regulatory changes that have taken place, and also the huge growth in activity in some of the emerging economies, which are beginning to embrace and utilise these technologies.

  Q214  Chairman: Some of us will come back to the issue of technology, but, in a word, is the drive for increased technology a plus for us in globalisation?

  Mr Oppenheimer: You mean for the UK in particular. As Jens has said, an important factor moving forward is the level of education in the country and the ability to take advantage and be at the forefront of technological change. If we are looking at comparative advantages globally, the UK has really got to focus on higher value-added areas of development. That is going to require being at the forefront of technological change.

  Q215  Chairman: I know this is a complex subject. The Stern Review has been put out this week. I see, at the heart of that, the issue is taxation and environmental taxes. Will that jeopardise our advance in globalisation or can we massage it so that it could be a plus for us?

  Mr Hawksworth: I am not sure that taxation is the only instrument. I think what is important is that there is a price put on carbon so that people are reflecting the true value of that. Whether you do that through taxation or through some global trading scheme, I am inclined to think that politically a global trading scheme may be easier to get people like the US, China and India on board with that than trying to agree a single global carbon tax, which even the EU was not able to do in the 1990s. While taxation may play a role, also establishing a global carbon market where everyone can participate, backed obviously by some political commitment that the level of carbon emissions globally needs to come down and that needs to be shared fairly, is the best way to send the price signals. In some cases, taxation might support that, as might regulation towards energy efficiency and so on. I think that globalisation in terms of carbon trading could be quite a positive thing in terms of trying to resolve these types of issues.

  Q216  Chairman: Is there any merit in the Chancellor's assertion that this could create 100,000 jobs and the City could do good work here?

  Mr Hawksworth: I think the City of London has become a trading centre for carbon. Just like in many other areas, we are at the forefront of that. The other Europeans, some of the people from North America, even the Chinese, are quite interested in coming and doing business in London. That is another potential strength that the City of London could have.

  Mr Tholstrup: The other element, which has not necessarily been given quite as much focus as the two mentioned so far, has been the development of what is called clean technologies—carbon capture, et cetera. There is enormous scope to develop those in this country and to be able to export them. That obviously would be a bonus towards globalisation and Britain's role in that.

  Chairman: We visited China last year and a point made to us was whether British industry is responding to that and is as alert as it should be, but that is another matter. That issue was certainly raised with us.

  Q217  Mr Gauke: May I ask about the future of globalisation, if you like, on the basis that globalisation consists of both technological advances but also changes in policy, which have liberalised trade and capital and what have you. To what extent do you think future economic growth which follows from globalisation is dependent upon further liberalisation in these areas?

  Mr Oppenheimer: From my perspective, I think it is essential. One of the potential risks to globalisation is regulatory controls that are put in for political reasons or whatever other motivation. That could be a considerable constraint moving forward. One of the many drivers to globalisation over the last decade in particular has been the willingness of governments to accept and embrace it as a positive and to recognise the positive impact it can have on the growth and inflation trade-offs, but any impediment to that, through regulation or other means, would clearly constrain the potential for further growth and inflation trade-off benefits.

  Mr Hawksworth: I would broadly agree with that. Obviously there is a concern about protectionist responses, let us say by the US and Europe to China. We have seen little bits and pieces of that in certain areas, like clothing, footwear and so on. Probably that in itself is to be expected and is not a big problem, but if there was to be an actual move backwards into protectionism, perhaps because special interest groups would lose out in some of the countries like the US and Europe, obviously understandably we would want to try to protect our interests. That would be to the long-term disbenefit of everybody. It is only by opening up that countries like China and India have moved forward over the last 15 to 25 years. I think if we were to close our trade barriers that would be a very unfortunate development.

  Mr Tholstrup: It is also worth reflecting on the competitive element of regulation in the sense that regulation imposed in one jurisdiction can cause capital and labour to migrate rather rapidly. We have seen the impact of Sarbannes Oxley in the United States in terms of capital raising in the US and how the UK and the London Stock Exchange in particular have benefited from what was deemed to be a very heavy-handed piece of regulation that affected the corporate sector. I think the competitive element of regulation is something that has to be reflected on, particularly since companies are able to move their location, their domicile, very rapidly, and indeed have threatened to do so on a number of occasions when policies or regulation are imposed that they do not find to their advantage.

  Mr Hawksworth: Having said that, of course, there are other objectives to regulation than just economics. There may be social and political reasons why, nevertheless, you want a regulation, and there are some regulations on things like intellectual property rights protection that most businesses would welcome and would see as a potential benefit. One has to present a balanced picture.

  Q218  Mr Gauke: Can I ask Mr Oppenheimer about the issue that you mentioned a moment ago about the trade-off between growth and inflation, and you have written as to how globalisation has affected that. Is it your view that controlling inflation, as a consequence of globalisation, has become easier in recent years, or would you go so far as to say, as some have argued, that low inflation has been caused in recent years by the Chinese economy, and what have you?

  Mr Oppenheimer: There is a number of factors that have helped bring inflation and inflation policy down over the last decade or two, the last decade in particular. I think globalisation has certainly been one of those factors and the huge growth and influence of China and India in particular have also been an important factor. If you look at the period since 2000, China, India, Brazil and Russia together have contributed almost as much growth to the global economy as the US has done. It is by contributing so much to the global economy, and much of that growth is on exports of cheap products, that you help to keep inflation down. It is clearly the case that lower tradable goods prices have been a consequence of increased globalisation, but I do not think that is the only cause. There are many other factors. Significant increases in technology, for example, are another important reason, I think, that inflation has come down. Certainly I would see globalisation as being one of the important factors that has led to more control of inflation, less volatile inflation, over recent years. There is a question as to how far that process can proceed, given that eventually a part of the globalisation story is that countries like China, India and others begin to develop their own domestic demand engines of growth, rather than purely focusing on cheap exports. As they do that, and potentially their exchange rates appreciate, you might find that the dis-inflationary impact of exports from these countries begins to moderate.

  Q219  Mr Gauke: Do you not share the view of the Governor of the Bank of England, which he made in a speech a couple of weeks ago, that inflation remains essentially one to do with domestic conditions and the key to it is having a stable monetary policy that is based upon UK domestic conditions? The environment may have changed and the level of interest rate you need may change, but essentially that remains true?

  Mr Oppenheimer: The others may want to comment on this. Clearly, central bank policies have had a lot to do with lower and more stable inflation, but is no accident that you have had lower and more stable inflation everywhere in the world, so it not uniquely a reflection of best management of any particular central bank. Having more open central banks, more open policy, more independent central banks, which has tended also to be a growing global trend, has been an important factor, but not the only one.


 
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