Examination of Witnesses (Questions 240
THURSDAY 2 NOVEMBER 2006
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
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
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
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 euroand 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 centreand 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
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
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 liveovercrowding,
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
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
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
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
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 distortionthe 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
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.