Select Committee on Treasury Fourteenth Report


5  IMPACT ON THE UNITED KINGDOM'S REAL ECONOMY

Some beneficial effects

EXPORT OPPORTUNITIES

29. We received evidence highlighting some of the beneficial effects of globalisation on the United Kingdom's economy. Mr Wolf pointed out that the United Kingdom had survived previous occasions when the emergence of new major economies such as Germany and the USA led to a reduction in the United Kingdom's share of the global economy. He argued that the United Kingdom could do so again, not least due to the export opportunities associated with the growth of China and India.[94] Sir George Cox, Chairman of the Design Council, also saw a potential cause for optimism arising from access to such "tremendous markets".[95] The United Kingdom's exports to China more than doubled between 2000 and 2005.[96]

INCREASED LEVELS OF FOREIGN INVESTMENT

30. The United Kingdom economy is very open to foreign investment and foreign ownership by international standards.[97] The United Kingdom hosts the world's second largest stock of foreign investment (after the USA) and attracted more foreign investment in 2005 than any other economy.[98] Globalisation, by increasing capital mobility, has led to a rise in the levels of foreign ownership in businesses located in the United Kingdom. Sir Martin Sorrell drew attention to the growth of Indian investment in the United Kingdom, citing the example of Tata's acquisition of what had formerly been British Steel.[99] During our visit to India we were told that Indian companies were using the United Kingdom as a base from which to expand into Europe, because of the close affinity between the United Kingdom and India, the common language, the similar legal systems in the two countries, the common ways of doing business and the United Kingdom's strong regulatory system. The EEF noted that "there are significant benefits from foreign ownership in terms of exposure to new management ideas, technology, developing new products and services".[100] Evidence highlights the competitive advantage United Kingdom businesses potentially enjoy in establishing business relationships with Indian partners. The Government should examine how this advantage may be retained and deepened.

LABOUR MOBILITY

31. As noted earlier, in a global context, labour mobility has not been a large factor in the current era of globalisation compared with some earlier eras.[101] However, labour mobility has been a significant factor in the case of the United Kingdom, particularly since 2004.[102] According to the Home Office, between May 2004 and June 2007, a cumulative total of 683,000 individuals from central and eastern Europe applied to register on the Workers Registration Scheme, although this does not indicate the number of long-term migrants from those countries into the United Kingdom because most of those applying intended to come for short periods.[103] Although inward migration raises a range of social, political and cultural implications, and has effects on public expenditure which we have referred to in another Report,[104] it has identifiable economic benefits. It increases the supply capacity of the economy.[105] The recent growth of the United Kingdom labour force partly attributed to net inward migration led the Government, in December 2006, to revise upwards its neutral estimate of trend output growth for the post-2006 period.[106] In addition, the ability to source workers from abroad has increased competitive pressures in the labour market, limiting the upward pressure on wages and thus helping to exert downward pressure on inflation.[107]

32. Inward migration of skilled workers also has the potential to benefit the skills profile of the labour market.[108] As the National Institute of Adult Continuing Education has observed:

    It is restrictive to think nationally about skills development when the economy and the labour market [are] becoming increasingly globalized.[109]

INCREASING PURCHASING POWER

33. Globalisation has also had a beneficial impact on the purchasing power of individuals in the United Kingdom because of the rise in availability of cheap imports from low-cost economies in recent years.[110] As Mr Stephen King put it:

    A worker, who finds that their wage is not rising because of globalisation, nevertheless may find that the efficiency with which resources are allocated globally means that, in real terms, there may be some element of gains to income. For examples, if prices of washing machines or televisions were to come down as a result of globalisation then, under those circumstances, although their nominal wage had not increased very much, there may still be some benefit for them.[111]

Potential adverse effects of globalisation

BUSINESS COMPETITION

34. The potential beneficial effects of imported goods for the purchasing power of individuals may, however, translate into adverse effects for domestic businesses that previously supplied such goods. The overall risks to businesses from globalisation were stated most starkly by Amicus:

In his Review on Creativity which was published by the Government in November 2005, Sir George Cox warned that the competitive threat facing businesses in the United Kingdom from emerging economies was strong and growing:

    there are few quiet backwaters or protected niches in this emerging world. Manufacturing has so far felt the brunt of the new competition but there is no reason to assume that whole swathes of the service industries won't also be affected.[113]

In evidence to us, Sir George argued that it was "unrealistic" to imagine that developing countries would progressively take over lower skilled jobs while leaving "all the high-skill, intellectually interesting jobs" in the United Kingdom.[114] He pointed out that no country would aspire to becoming "the world supplier of cheap labour", and China's history suggested that it was suited to a more dynamic role.[115] During our visit to India, we learned that many highly skilled and trained members of the workforce are currently employed in jobs that do not utilise their skills and education, reinforcing the suggestion from Sir George that globalisation has the potential to provide significantly enhanced competition in many highly-skilled areas which may hitherto have seen themselves as less susceptible to the effects of international competition.

35. The TUC warned that other countries had fared better than the United Kingdom in terms of increasing their exports and making the most of trading opportunities with China.[116] Sir Martin Sorrell was pessimistic about the United Kingdom's future prospects and considered that "it is going to be very difficult for the UK … to compete effectively" in the global market.[117] Sir George Cox was slightly more upbeat:

    We are not talking about a scenario of doom…The world is changing and we are sliding down the scale—but … there are terrific opportunities. As these countries develop, there are going to be tremendous markets. The world is going to generate enormous wealth over the next half century, much more than we have seen so far. The issue is: How much of a slice of it are we going to get?[118]

36. Earlier, we emphasised India's potential to serve as a powerhouse of the global economy in coming years.[119] In June 2006, the Trade and Industry Committee concluded that:

    the UK is not as engaged with India's markets as it should be. Despite our long history of commerce with India, UK companies are falling behind their major competitors, perhaps because UK companies tend to see India as a source of low-cost labour rather than an emerging market in its own right. The UK needs to be far more entrepreneurial in its approach to India if it is to take advantage of the huge opportunities this vast country has to offer our companies and institutions.[120]

In 2006, the United Kingdom's exports of goods and services to India were valued at £4,119 million. The value of such exports has only just doubled since 1996, despite the remarkable rate of liberalisation of the Indian economy over that decade.[121]

RELOCATION AND OFF-SHORING

37. The increased capacity for businesses to relocate could have repercussions on the stability of employment of workers within the United Kingdom. Where work is relocated abroad, former employees may not find work or may find work at lower rates of pay.[122] Particular concern has been expressed about off-shoring, which is a form of outsourcing, which involves arms-length or long distance purchase of inputs or services abroad, or the deployment of back office or other service functions in overseas locations. Advances in information technology have made it possible to move offshore more processes and services than in the past.[123] Some evidence stressed the indirect negative effects of off-shoring. The TUC argued that some employers might use the threat of off-shoring to keep wages low.[124] The Federation of Small Businesses argued that some small businesses faced losing their customers as a result of off-shoring. [125]

THE OVERALL LABOUR MARKET

38. Globalisation will have enduring effects on the labour market beyond the immediate impact on individual businesses and employees. Mr Wolf thought that much of the effect on low-skilled workers in tradable sectors had already been felt; there would continue to be opportunities for low skilled workers in non-tradable services such as domestic services and work in hospitals where international trade was not relevant.[126] Professor Sen also did not accept the simplified view that job losses were likely to be concentrated among relatively unskilled people in developed, rich countries such as the United Kingdom.[127] He felt that the future threat of competition posed to developed nations by some emerging economies such as India would be more likely to affect those in highly-skilled jobs than in low-skilled jobs, due to the bias in India's education system towards higher education.[128]

COSTS OF RESOURCES

39. Globalisation is exerting and will continue to exert upward pressure on the costs of natural resources and other commodities. China is already the world's largest user of steel, copper and iron ore and accounts for a significant proportion of the recent increase in world oil demand.[129] According to the Bank of England, "the tripling of oil prices since 2004, and the rise in commodity prices more generally, is in large part a reflection" of the growing role of the emerging economies.[130] This upward pressure is likely to intensify as those economies continue to grow and will affect domestic prices in the United Kingdom.

The overall effects

40. It is not straightforward to determine the overall effects of globalisation on the United Kingdom economy. Sir Martin Sorrell pointed to the difficulties of explaining the benefits of globalisation and why he considered that it was in the interests of workers even when the adverse effects were more tangible and direct than the benefits.[131] It is likely that some business failures and job losses will continue to be attributed to globalisation. The shift from manufacturing to services may continue, although, as Ms Bridget Rosewell of GLA Economics pointed out, referring to the example of London's economy, substantial shifts of this nature have already taken place.[132] Sir Martin, however, considered that many global businesses were increasingly concerned to achieve a mix of skills from across the world with less regard for national origin.[133]

41. Globalisation is having a profound effect on the United Kingdom economy and is likely to have a greater effect in coming years as the global economic landscape changes dramatically within a 10 to 20 year period. The economic impact of globalisation is likely to be felt unevenly across the economy, and not always in predictable ways. The notion that globalisation will have the greatest impact upon low-skilled employment is no longer appropriate. International competition will have a growing impact on highly-skilled areas of the labour market. Some low-skilled areas that are not tradable are unlikely to be greatly affected. The adverse effects of globalisation on individuals in the United Kingdom may in many cases be more tangible and immediate than the wider benefits for society and the economy as a whole. The policy challenges for the Government will relate to maximising the benefits of globalisation, and public understanding of those benefits, while seeking to minimise the adverse effects and ensuring that economic and social policies are suitably responsive in the face of such adverse effects. In particular, public policy needs to respond to the likely intensification of the impact of globalisation upon highly-skilled sectors of the labour market.


94   Q 63 Back

95   Q 155 Back

96   Long-term opportunities and challenges, para 4.11, p 49 Back

97   Q 65 Back

98   Long-term opportunities and challenges, para 4.16, p 51 Back

99   Q 322 Back

100   Q 147 Back

101   See paragraph 7. Back

102   Q 3 Back

103   Home Office, Accession Monitoring Report A8 Countries: May 2004-June 2007, p 5 Back

104   Treasury Committee, Sixth Report of Session 2006-07, The 2007 Comprehensive Spending Review: prospects and processes, HC 279, paras 40-42 Back

105   HC (2006-07) 299-II, Ev 9 Back

106   HC (2006-07) 115, para 20 Back

107   HC (2006-07) 299-II, Ev 9 Back

108   Long-term opportunities and challenges, para 4.31, p 57 Back

109   Education and Skills Committee, Ninth Report of Session 2006-07, Post-16 Skills, HC 333-II, Ev 363 Back

110   HC (2006-07) 299-II, Ev 7 Back

111   Q 7 Back

112   Ev 85 Back

113   Cox Review on Creativity: building on the UK's strengths, November 2005, p 3 Back

114   Q 141 Back

115   Ibid. Back

116   Ev 153 Back

117   Q 336 Back

118   Q 155 Back

119   See paragraph 28. Back

120   Trade and Industry Committee, Third Report of Session 2005-06, Trade and Investment Opportunities with India, HC 881-I, p 3 Back

121   Office for National Statistics, United Kingdom Balance of Payments: The Pink Book 2007, August 2007, Table 9.3, p 110 Back

122   Ev 156 Back

123   HC (2006-07) 299-II, Ev 7 Back

124   Ev 155 Back

125   Ev 113 Back

126   Qq 58-59 Back

127   Q 305 Back

128   Ibid. Back

129   Long-term global economic challenges, para 2.33, p 17 Back

130   HC (2006-07) 299-II, Ev 8 Back

131   Qq 328, 340 Back

132   Q 9 Back

133   Q 339 Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2007
Prepared 16 October 2007