Examination of Witnesses (Questions 213
THURSDAY 2 NOVEMBER 2006
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
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 worldChina, India, Brazil and
so onand 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
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
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
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 technologiescarbon 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
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
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.