Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 220 - 239)

THURSDAY 2 NOVEMBER 2006

MR PETER OPPENHEIMER, MR JENS THOLSTRUP AND MR JOHN HAWKSWORTH

  Q220  Angela Eagle: In a meeting recently with Professor Stiglitz, he said about globalisation that it needs to be understood, that will not lift all boats, that there will be losers from globalisation as well as winners and that those losers are likely to be those who are unskilled or on low wages within developed economies as well as developing and that the right response to this is to strengthen social safety nets. Do you think equity within societies that are developing is a problem? Do you worry about this or do you think it is just tough?

  Mr Tholstrup: I think it is of great concern but the indications are that inequalities have been increasing rather than the reverse. I think that is a potential risk for globalisation—social unrest caused by ever increasing inequalities and the disenfranchisement of those people who do not benefit from globalisation. At the moment, we have had a fairly benign macro-economic climate for some time but, with the potential onset of a major recession, some of those strains may become very apparent. I think it is of great concern.

  Q221  Angela Eagle: What is the City view?

  Mr Hawksworth: I would say it was a concern as well. In the UK context, clearly it does tend to push up the earnings of people at the top who can, if you like, franchise their brands across a bigger market. Obviously there is a case within countries for governments to try, if you like, to lean against the wind a bit on that by also trying both to boost education levels to people at a lover level or to boost their skills and improve various things like, in the UK, the tax credit system and other types of regime to boost the incomes of people at the bottom, to do things like better child care to help people into work, which is important to poverty among people like single parents and so on. As we have seen in the UK since 1997, a Labour government has had to sail quite hard against the wind on that in order to keep inequality more or less constant, broadly speaking, according to the IFFs and people like that who have looked at this. I do think that it is an issue and that governments have to respond to it. It is an issue in China as well because they have growing inequality between urban and rural populations.

  Q222  Angela Eagle: They are very worried about it.

  Mr Hawksworth: They are very worried about it. It is certainly a major potential downside that needs to be addressed.

  Q223  Angela Eagle: So active labour markets, strengthened and modernised welfare systems in order to try to spread, or at least prevent, the extension of inequality is a stabilising and good thing?

  Mr Hawksworth: Obviously how far you go down that road depends on the politics of the particular country. Some countries like Scandinavia may go further down the road than others like the US. Some such action does seem to be logical.

  Q224  Angela Eagle: What is the difference between that and regulation, which you were all talking about being a threat to globalisation in your answer to the last questions? How do we distinguish because there is this mantra that regulation is bad and yet we know we are going to have to have some kind of system and regulation to prevent catastrophic global warming. We know we are going to have some kind of regulation and welfare system to prevent catastrophic social imbalance. Can we have a dialogue that distinguishes between damaging regulation and regulation that is absolutely essential to keep societies stabilised instead of just this use of a word?

  Mr Tholstrup: I agree with the comments. I do not think there was a suggestion that regulation per se is bad thing. I think it is application of different kinds of regulation and particularly the sort of regulation which has negative consequences for a number of stakeholders. I think you are absolutely right that it covers a huge range of things. One of my fellow panellists mentioned that regulation does have a very important role in terms of protecting people and society. It is not a question of it being a negative but I think it is one of those issues which, applied incorrectly, can have very negative consequences for globalisation.

  Mr Hawksworth: By regulation, I was talking very much about things like trade barriers.

  Q225  Angela Eagle: That is different, is it not? Protectionism is different.

  Mr Hawksworth: I was certainly answering the question in the context of protectionism. I think regulation on things like the environment is a different issue.

  Q226  Angela Eagle: It is absolutely essential, I would have thought.

  Mr Hawksworth: Yes. That is a different type of issue.

  Q227  Angela Eagle: Do you worry about what is happening with the Doha Trade Round, given that you have raised trade? Obviously the recent failure has some implications. What is your analysis of what those are?

  Mr Oppenheimer: I think failure in the trade round is partly an impediment to the kind of globalisation that we are talking about. It is also an impediment to growth in the poorest countries, and that is the critical issue. It comes back to your point about where regulation is good and bad, where protectionism is good and bad. The factors that help to contribute to growth and growth in the poorest countries of the world, which are biggest beneficiaries of globalisation, after all, at the end of the day, is an important matter that we should embrace. At the same time, you need to have checks and balances and regulation to ensure that that growth does not impinge on the environment and promote social inequality because that is not going to be good ultimately for growth or society either.

  Q228  Angela Eagle: Do we need to strengthen the international institutions to try to bring that about and prevent these failures? Are there other redesigns, for example of the world trade system and the way it works, that you would like to see? We always have these huge, very difficult trade rounds. The last one went on eight years. This one is running into the sand and we now have the rise of potentially quite difficult bilateral deals.

  Mr Tholstrup: It illustrates the degree to which major economies defend the perception of their own interests at the expense of broader improvement in globalisation, so to speak. It does illustrate an underlying threat. This is the same set of issues and agendas which might drive the protectionist agenda if and when things get more difficult.

  Q229  Angela Eagle: Do any of you worry about the rise of the protest against corporations and their perceived dominance of the world, their self-interest in the way they behave, which is obviously a feature in places like early anti-globalisation demonstrations which began in Seattle and now continue whenever there is a world trade meeting?

  Mr Tholstrup: I think it is a concern and it is not just corporations; it is a wide range of institutions and that may have become a more prevalent feature, particularly, as we talked about, those people who do not benefit from globalisation when they lose their jobs and whose relative position will deteriorate. There is a range of institutions which they will be showing their displeasure at, and corporations are clearly one of them. Having said that, there are a number of corporations that have taken action to try to improve the way that they deal with their stakeholders in the widest possible sense. There is a number of examples of good corporate behaviour that are going on where evidence suggests that companies are thinking much more broadly about their wider role and how they engage with those NGOs and other stakeholders in society.

  Q230  Mr Newmark: John, your model indicates that India has the potential to be the fastest growing economy in the years up to 2050. To what extent does recent evidence of shortages of skilled labour in India suggest that has not reached its potential?

  Mr Hawksworth: It is a long-term thing. The reason why we are relatively optimistic about India is that, firstly, we think it has relatively favourable demographics compared to, say, China. It is important to say that when we are talking about India being the fastest growing, we are talking about growth in real terms of 5% or so.

  Q231  Mr Newmark: When you say the demographics are favourable, do you mean because a lot of them speak English, because there are more engineers there?

  Mr Hawksworth: I mean specifically because the working age population growth is projected to be about 1% per annum between now and 2050 in India, whereas it is something like minus 0.5% per annum projected for China, although that may change a bit as they adjust their one child policy. Secondly, if you look at the figures for India, although the educational level for many of the people is quite low, it has been increasing at quite a rapid rate, and rather faster than China, over the last 15 years on average, albeit from a low base. Over a period time, as the demand for skilled labour increases, I think they will probably respond to that. There is a number of constraints, not just on skilled infrastructure but also on infrastructure around energy, water and transport, which are potentially going to hold India back in the short term, as well as the fact that its government finances are still not the strongest in terms of running quite a large deficit. There are some transitional issues for India. We are not quite so optimistic in the short term that it will be China, but we think, looking longer term, once you get out to 2020 and beyond, it has the potential, if it can maintain growth-friendly policies, to actually be the strongest. It is also rather less dependent than China on simple capital accumulation for growth. China has been investing a huge amounts but I think that will run into diminishing marginal returns at some point. With India, I think they have been less dependent on this very rapid rate of capital accumulation.

  Q232  Mr Newmark: What difficulties will China encounter in sustaining its growth?

  Mr Hawksworth: One, the demographic transition: it has one of the fastest ageing populations in the world. Secondly, at this point they are currently investing 45% or so of GDP, and there is a danger, particularly if that capital is not allocated right and they do not have such well developed capital markets and banking systems to do that yet, then that could run into diminishing returns, as we have seen in some other places like Japan where they used to be high investors, but that did not always go the right places, and Korea as well. With many of these countries, you get to a certain point of growth and then it drops off. Also, they have been relying on imitation for a lot of their growth and they have to move to being innovators and actually leading the technology, and that is harder. Experience shows that as you catch up with the technological frontier, it becomes increasingly difficult to sustain very rapid growth rates. I think for all those reasons, China, in my view, would tend to slow possibly quite markedly on a 20 to 30 year horizon.

  Q233  Mr Newmark: That is assuming that India gets its infrastructure right.

  Mr Tholstrup: There is also China's issue of access to essential commodities and raw materials, which may well form blockages and bottlenecks in the economy in the period to come. Of course, the Chinese economy has had a greater emphasis on manufacturing than India, which has a greater emphasise on service, and that will hit China more seriously.

  Q234  Mr Newmark: Do you think the emphasis on manufacturing is a long-term weakness?

  Mr Tholstrup: It is obviously associated with a greater demand for raw materials to continue. It also is more reliant on infrastructure because physical goods have to be imported and exported to get to market, and so it is more susceptible to bottlenecks than a predominantly service economy, which is obviously the direction in which India is moving.

  Q235  Mr Newmark: Although in India still 80% of the population is still in agriculture, which is a big issue. They still have educational problems.

  Mr Tholstrup: I am talking about the direction in which they are moving.

  Q236  Mr Newmark: Which countries, other than India and China, have the potential to experience rapid increases in economic growth in the next decade due to their increasing integration into world markets?

  Mr Oppenheimer: Goldman Sachs has put a lot of emphasis on BRICs, so Brazil and Russia, as well as India and China, simply because, like India and China, they also have vast populations and the ability to harness resources, both human and physical, to generate very strong growth. In addition to that, there is a whole raft of emerging economies, which again, if they focus correctly and if they get the regulatory environment sufficiently set, can have extremely rapid growth as well, moving forwards. They are much smaller in terms of population, so their impact on the global economy would be less, but, in terms of growth rates, countries like Bangladesh, Egypt, Indonesia, Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey and Vietnam are all ones that we would be what we would describe as the next 11 potential countries that are embracing and benefiting from globalisation to generate very strong growth.

  Q237  Mr Newmark: I am just curious: does anybody have a view on the Gulf States? They have large oil deposits and they have tourism coming in: do you see them benefiting from globalisation, or is this going to be a one-off and in 50 years' time it will all be said?

  Mr Tholstrup: I think they are benefiting from globalisation. Obviously Saudi Arabia's accession to WTO is fairly significant in that context, and the other issue, which I think is important, is that lessons from the last oil price boom have been learnt. In other words, I think they are thinking much more about creating a productive economy outside the hydrocarbon sector. In the financial sector, for example, there has been huge development in the Middle East, particularly in the Gulf States, and obviously, with the benefit of the windfall of higher oil prices, they are able to build considerable infrastructure to support that kind of ambition. I think it is a growing trend and obviously it is very related to oil price. There is a number of geopolitical risks associated with that part of the world, but clearly the longer term trend is towards more integration into the global economy.

  Q238  Mr Newmark: Just as a brief supplemental, we went out to both Dubai and Bombay and it looks like they are both setting up two competing financial centres there and exchanges and so on. Do you see that as complementary or do you see that as competing with each other and who is likely to win out on that?

  Mr Tholstrup: I think there are more than two. In the Gulf region alone, we have Dubai, Bahrain, Qatar and Saudi Arabia all setting up financial centres and there is obviously an element of competition, intra-regional competition taking place. On the other hand, competition is a positive in that sense. We also have to look ahead and think about the potential for Gulf monetary union and the impact that that would have. Taken as a whole, the Gulf is becoming a very important and very fast-growing financial centre.

  Q239  Mr Newmark: What impact have trends in globalisation, such as greater openness of the Chinese and Indian economies, had on the African economies themselves, and how are the African economies going to benefit from this globalisation?

  Mr Tholstrup: Clearly, having China taking an active interest in, and participation in, Africa has some benefits. I think that there are a number of issues around that which we all need to consider. A lot of it is obviously based on exploitation of resources rather than creating a sustainable economic infrastructure in Africa. Clearly the issue we have already referred to in terms of the failure of the Doha Round and the inability to provide African countries with open access to our markets is obviously holding development back. There is a number of issues there, but clearly, certainly in the short run, the fact that China is taking an interest and is creating something of an element of competition—


 
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