Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 240 - 258)

THURSDAY 2 NOVEMBER 2006

MR PETER OPPENHEIMER, MR JENS THOLSTRUP AND MR JOHN HAWKSWORTH

  Q240  Mr Newmark: Are you effectively saying it is really a one-way street with the Chinese going in, taking out resources and nothing going back?

  Mr Tholstrup: That is the way it would appear at the moment. There is a risk of a backlash in that sense. The evidence suggests that it is going in that direction.

  Q241  Kerry McCarthy: How important are the UK's various alliances, for example its membership of the European Union, an issue in that it holds its own in terms of benefiting globalisation? Would you regard EU membership as the great concept of our global ambitions that prevents us from forging other alliances or is it actually a strength?

  Mr Hawksworth: It depends which area you are operating in, but generally those are still very important markets for us, and indeed we have benefited from our membership, for example, in terms of having a big inflow of people, which has boosted our workforce from central and eastern Europe and has helped and been another factor in keeping down inflation. That aspect of globalisation has been quite positive for us, and still are our most important export markets are elsewhere in the EU. I do not think being out of the EU would be pretty disastrous from an economic point of view per se. Obviously in things like world trade rounds or in the debate about climate change and how you respond to that, the UK alone is not big enough to have a big weight in those negotiations. Being part of the EU obviously gives us greater weight in those debates. Obviously it imposes certain constraints on us to agree a common line with other partners but I think it is potentially positive.

  Mr Oppenheimer: I agree with that.

  Mr Tholstrup: I think that is correct.

  Q242  Kerry McCarthy: In terms of the things that the Treasury has identified as the particular strengths we have in the UK, things like obviously the English language, our historic trading links with Commonwealth countries and former Commonwealth countries, our science base and creative industries, do you see that they will continue to give us a competitive advantage over the medium to long term?

  Mr Tholstrup: I go back to this issue of education. This is such an important issue and I am afraid I think it is an area where Britain is falling behind. Just taking the example of Oxford and Cambridge and some of the London Universities that are world leaders in their field and attract a huge amount of overseas interest and participation, but the under-funding of those universities threatens their future standing because, at the moment, it costs more to educate an EU student, including a UK student, than the funding that is provided. In the long run, that is simply not a sustainable financial model, but it is important and something that is at the heart of almost everything to do with the issues that the Chancellor mentioned and Britain's future role. Ultimately a country's success in Globalisation comes down to how good the education system is. In a world where you are competing against a global workforce, skills training, not just education that is provided in school and university sector but more broadly in terms of the skills and indeed developing the skills that employers are looking for? I think that is a problem area for Britain.

  Mr Hawksworth: One of the issues, maybe as a regional issue within the UK, is that I can see that the cluster of activities in business, financial services and creative industries around London and the South-East would remain very strong, but we also need to build up some strength in those industries in other parts of the country, otherwise growth becomes rather unbalanced and you get overheating problems in the south and problems of under-deployment of resources in the north and the Midlands and so on. Clearly manufacturing as a share of our GDP and our employment is going to continue to track downwards; that is just the reality and it is natural. I think there are certain regional development issues which are quite difficult but that do need to be thought about in terms of building centres of excellence in particular service based industries elsewhere.

  Q243  Kerry McCarthy: You mention the financial sector within the UK. Obviously there are going to be huge benefits as some of these emerging economies participate more in the global markets. Do you see that tailing off at some point? Will there be some sort of peak at which we have managed to exploit London's strengths as a financial centre and tap into those markets and build relationships with China and India and all those other countries, but then will there come a certain point where their own financial centres develop to such an extent that they stop bringing their business to the UK?

  Mr Oppenheimer: I do not think there is a necessary limit to the influence and importance that a financial centre here can have. It has natural benefits because of the time zone and historic relationships with other markets but also, if you think about it, it has been a centre of finance since the time of the Industrial Revolution. There have been waves of rapid growth in the global economy at other times when the global economy has not advanced at anything like the same rate and it has managed to keep its predominance. I think that should continue. Bear in mind that there are massive opportunities for UK companies and others in the developed countries to benefit from huge potential growth in demand in places like China, India and other countries, in time. To the extent that those companies will expand and need finance, the City I think should still be in a good position to be able to facilitate that.

  Mr Hawksworth: One thing that may happen is that entities like Chinese banks will become much bigger players in the City of London and we might see them taking over big institutions here and becoming big players in the markets. Particularly now that some of the big banks have floated and have been reformed and got rid of some of the earlier difficulties some of them had, in 10 or 20 years' time, some of the biggest banks in the world could be from China.

  Q244  Kerry McCarthy: They have got some way to go, though, in terms of catching up, say, with their regulatory systems before that?

  Mr Hawksworth: Yes, but that does not mean that they cannot become big players globally. Domestically, there is a long way to go in developing their capital markets certainly; they are not very well developed; they are a very banking-based system; and some of their banks have been state banks and have not necessarily been all that efficient. That is changing quite rapidly.

  Q245  Mr Love: How important is further economic integration within the European Union to London as the financial centre in Europe? I was going to go on and ask you about the euro in economic terms, but I will probably miss that out as being too political! Let me give you the inspiration behind that. London is considered to be a world city. It compares with New York and Tokyo. New York of course has the American economy behind it. Tokyo has the Japanese and perhaps the Chinese economy behind it. Britain has the British economy behind it and it needs Europe in order to stay up there. Is that true?

  Mr Tholstrup: You are talking about as a financial centre here?

  Q246  Mr Love: I am talking about it as the centre of the financial part of the European economy.

  Mr Tholstrup: I do not think it would be particularly significant compared to all the other factors. I think London owes its position as a financial centre to a number of factors. It is a cluster of expertise and it has maintained that position in a number of different ways. I do not think it is going to be hugely affected by greater integration or less integration in Europe, in my opinion.

  Q247  Mr Love: Would you both agree with that?

  Mr Oppenheimer: I think I would. There was a debate about this, for example surrounding the issue of Britain joining the euro and lots of people were worried if Britain were not to join the euro—and I am not saying whether it is a good or a bad thing but just the debate about that being a restriction on London as a financial centre—and it has not been a restriction. I think that the clusters of expertise and the ongoing weight of deregulation in the financial centre in the UK have helped to strengthen its lead, and also the extent to which the UK has been an open economy, both to trade and also to people. London as a financial centre has benefited massively from inflows of highly talented people from other countries, particularly in Europe. I think as long as we maintain that openness, then it will set us in good stead to continue to maintain that dominance.

  Q248  Mr Love: Continuing along this world city theme, I have mentioned the three that are considered at the moment to be world cities. What about Shanghai? What about Mumbai? Are we likely to see the emergence of other capitals to challenge the dominance of the so-called big three?

  Mr Hawksworth: I was in Shanghai earlier this year and it is an incredibly impressive place in terms of the speed at which it is moving. When you say `challenge the dominance', I am not sure that these big cities compete exactly. We are in a totally different time zone from Shanghai, for example, and so financially we are not going to compete with them as a centre. It is quite complementary. We have to have proper links with them. I do not see cities as competing with each other. I think sometimes people talk about nations competing with each other. No, they do not really do that; they trade with each other to their mutual benefit. I am not sure that I would see that as being a competition between Shanghai and London. There might be a competition between Shanghai and Hong Kong, for example, as to which is the financial centre there, but not between Shanghai and London, I do not think.

  Q249  Mr Love: The real question I was asking was this. You mentioned that Chinese banks may well come to dominate London, or may become much more of an important factor in the London equation, but they will have a choice between whether to invest in their own economy or whether to invest in New York.

  Mr Oppenheimer: I think it comes back to the points that Jens has made, and John as well, that the advantage that Britain has in the financial sector in London anyway comes from a number of factors, historical and others, and regulatory, but it does have a huge cluster of talent and culture in that area. If it is the case that Chinese banks come to take over banks here or list companies here, I think that is relevant to the comparative advantage of the financial centre. We have had waves of foreign investors coming in to take over British banks. Most of them have been taken over by European banks or American banks. We had a wave of takeovers of British banks by the Japanese in the 1980s. None of that has stopped London having a comparative advantage as a financial sector.

  Q250  Mr Love: There is a lot of comment about the increasing ownership of City institutions and the City generally by international capital, if I can call it that. Do you think there is any limitation to that? Do you think there is any genuine concern or should we be open to ownership from across the world?

  Mr Tholstrup: It has certainly been of benefit that we have been open so far. There is nothing to suggest that that trend could not or should not continue, or at least, if it does continue, that it will be detrimental to the importance of London as a financial centre. Obviously it is important to consider that all of these institutions are very global and they are very mobile. If the situation were to change and they felt that it would be an advantage for them to move their business elsewhere, they can do that very easily and would do that very easily. I do not think it is really an ownership question. I think it is more to do with the conditions under which they operate here.

  Q251  Mr Mudie: You accepted, in Angela's question, that inequalities would grow under the threats to globalisation. We have seen public feeling, in terms of outsourcing, in terms of labour coming in from eastern Europe. Do you say that we will just have to put up with this; the Government might take whatever minor action to smooth it out. Do you see globalisation as unstoppable and public opinion will not be able to do anything about it?

  Mr Tholstrup: Clearly, there is an element of the population that will feel that globalisation is not to their advantage. They will just see a deterioration potentially of the environment in which they live—overcrowding, more strain on the resources that they have access to. There will be an expression at the public opinion level which will manifest itself potentially in a change in policy and the risk of protectionism. I think that is a very real risk and danger, here and elsewhere, because I think there is a large part of the population that does not see the benefits and actually see the disadvantages in a very palpable sense. I think the media clearly has a role in portraying that.

  Q252  Mr Mudie: I was intrigued by an answer you gave to Kerry in terms of education and skill training. As we fail to get skill training across to large parts of the inner city, this will only be exacerbated and people will get even angrier.

  Mr Tholstrup: The gap will widen. That is a really important issue.

  Q253  Mr Mudie: The other threat is the current deficit in the US. One of the pieces of paper we received said that the corrections in the US deficit could pose a risk to economic stability. Could you say how you see it being corrected and its effect on world trade, globalisation if you like, and in the UK in particular? The real question is: do you see this as a feature of globalisation and are there any moves to ensure that this threat to stability can be handled a bit better?

  Mr Oppenheimer: It is a very big question and it is an important one. The size of the US deficit is a reflection of the global savings and investment imbalances which, in a very simple way, can be described as excess saving in large parts of the world, particularly countries like China and many of the emerging economies, and excess investment in the US or the lack of saving in the US. In terms of how it unwinds, there are various potential scenarios. One is that there could be a sharp decline in consumption in the US for some reason, triggered perhaps by falls in house prices or whatever, and that would force a recession in the US, pushing up savings but having quite dramatic impacts on the rest of the world. The other potential scenario, and there are many in between, is that you get what is often described as a soft landing in the US, a slow-down in the US economy, which gradually pushes up savings just at the time when other parts of the world, including Europe, but predominantly Asia, start to see an increase in its own domestic demand and a lack of savings. That soft landing type of outcome, obviously the preferable one, would be quite benign and quite helpful and I think would not be that disruptive for world growth or for the potential ongoing trends of globalisation. I do not know if that answers at least one part of your question.

  Q254  Mr Mudie: That gives a scenario for one part. Say it develops in the first part and it is damaging, is this going to be a feature and do you see any signs that steps are being taken in the financial world to say that we cannot live with this uncertainty on this scale?

  Mr Hawksworth: I think that one aspect of globalisation is that the world can live with bigger current account imbalances than it used to because capital can flow around. To some extent, this is a natural process of capital being allocated around the world better and it is not necessarily unhealthy. As Peter correctly says, there is a downside scenario. I do not think it is the most likely scenario but it might be a 20 or 30% scenario with a downside or something like that, about half of that.

  Q255  Mr Mudie: I did not say it was unhealthy. We are asking if it is sustainable. The view is that it is not sustainable in the long term, so there has to be a correction. If the correction is a hard one, it affects world trade. The question really is: is this going to be a feature of globalisation in open capital markets and have we just got to learn to live with this uncertainty?

  Mr Tholstrup: I think there is uncertainty. One thing to reflect on is that we have been dealing with US imbalances for quite a long period of time in a period during which, as many observers have said, this is not sustainable, and yet it is being sustained without a major impact. Obviously there are efforts to try to ensure that the exchange rates can act freely, and in particular freeing up the Chinese currency to reflect some of these imbalances. That is a longer term issue. Clearly there is a risk associated with this, as you have said, and that risk is there. It could manifest itself. At the moment, I do not think that is a very high probability.

  Mr Oppenheimer: In other periods of huge growth in world trade, for example during the industrial revolution, some countries, Britain in particular, did run huge imbalances. In that case, we had huge current account surpluses and few other countries did, rather than big deficits. It is interesting that in other periods of massive growth of world trade and technological change there were very large imbalances in the global economy. They manifested themselves in different ways as we are seeing today, but perhaps that is a reflection of globalisation, in a sense.

  Mr Hawksworth: I think that we have somewhat better macro-economic management in many countries now, and so people like the Federal Reserve, if there was a big negative shock in the US, they would be quite clear to reduce their interest rates; that would help to soften the blow there and it might make easier for other people to keep their interests rates a bit lower. I think there are some buffers in terms of quite effective macro-economic management which could produce some of these things. I think the IMF may also have an honest broker role to a certain extent as part of the negotiations that go on around exchange rates and gradually moving towards a higher real exchange in China, and so on.

  Q256  Chairman: Finally, can I ask you a question on the issue of labour mobility. Martin Wolf in his book says, and I quote: "These controls on migration create the world's biggest economic distortion—the discrepancy in reward to labour. The market for labour is certainly the world's most unintegrated. That is why critics of globalisation find the rewards to labour in poor countries shockingly unjust. But nobody seems to be suggesting the obvious answer: free migration." Joseph Stiglitz, in his evidence to this committee, spoke about the blue collar workers in the United States where they have not had relative pay increases for the past five years and that is a phenomenon affecting low skilled people. Maybe it is reflected in our debate in this country in terms of Romania and Bulgaria and whether we allow people in. Whilst it is ideal to have labour movement, is there merit in limiting that to a certain extent or will that play against the desire for economic growth in this country? I know it is a very complex question but it is a big political issue for us.

  Mr Tholstrup: It is clearly not practical to have totally free movement of labour because of the reductio ad absurdum. The population in this country would double and obviously it is just not sustainable for it so to do, so there has to be some kind of control over immigration. It is a question of what kind of control you impose. Free movement of labour with the current global economic inequalities is not a reasonable proposition so we are now just talking about what are the controls that are most effective and most equitable.

  Q257  Chairman: Would you be in favour of limited, controlled migration? You seem reluctant to answer that.

  Mr Hawksworth: I think it is more a political than an economic question.

  Q258  Chairman: Against declining populations of working age, it is a very important question.

  Mr Hawksworth: I certainly think we should continue to have a reasonable degree of migration and be quite open but that is not to say it should be uncontrolled. It should be something that does take some account of the skills level and the potential of people. That makes a certain sense, but it is clearly as much a political as an economic issue.

  Mr Oppenheimer: I agree with those comments. In general, from an economic perspective, having an open economy, particularly open to labour, is a very good thing. Britain has benefited from that. It does have social implications and environmental implications which is why in part it is a political issue. Also, we need to distinguish between income per head and income differentials. One of the things countries like Britain that have been open in terms of immigration have benefited from is a rising average level of income per head. Even though differentials may be increasing, there is a balance between those two issues as well. In terms of the overall economic impact on growth and immigration, I think it is a good thing.

  Chairman: I think you just underlined the complexity of it for us. We have environmental witnesses to follow yourselves. Can I thank you very much for your evidence? It has been very helpful to us.





 
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