Government response
The Government welcome the former Trade and Industry
Select Committee's (TISC) report into the impact of the new EU
Member States on UK business. In particular, we are pleased to
note that the Committee's findings are very much in line with
the evidence submitted to the Committee by the Government and
broadly supportive of Government policy on the trade and investment
relationship with the A8/A2.
The Government's response to each of the Committee's
conclusions and recommend-ations is as follows:
MIGRATION
1. Worker Registration Scheme data are not a net
measure of A8 migration nor are they a measure of the number of
A8 nationals currently living in the UK. It is therefore a matter
of serious concern to us that the Department of Work and Pensions
has no better statistical source from which to gauge the impact
of A8 migration to the UK. (Paragraph 9)
2. The lack of accurate or adequate information
on the number of A8/A2 nationals working in the UK or from which
countries they come is a matter of concern because of the consequences
for wide areas of public policy. The available evidence suggests
that Poles are the largest population, followed by Lithuanians
and Slovaks. We recommend that, at the very least, the next census
contain specific questions to ensure that more accurate data are
available to enable the Government and the new Statistics Board
fully to gauge the penetration of A8/A2 nationals in the labour
market. We also recommend that the Government give urgent consideration
to how it can improve the information it collects on A8/A2 immigration
before the next census. (Paragraph 14)
3. The Government notes the concerns expressed by
the Committee over the coverage of migration statistics. We are
working to improve the available figures on all migration, including
A2 and A8. The Inter-Departmental Task Force on Migration Statistics
recommended that the 2011 Census should include questions that
identify short and long-term migrants. The Office of National
Statistics (ONS) is working with other interested departments
to identify all the information needs of relevant policy departments
from the census. More details of the recommendations of the Inter-departmental
Task Force on Migration Statistics and the ONS implementation
are detailed below in paragraph 11.
IMPACTS OF IMMIGRATION
4. Our witnesses told us that the A8/A2 nationals
who come to the UK to work tend to be the 'best and the brightest'
and that their skills and work ethic are the major reasons why
employers find them attractive employees. It is clear from the
evidence we received that A8/A2 migration has helped plug skills
gaps as well as alleviating labour shortages in certain sectors
of the economy. (Paragraph 18)
5. The Committee noted the British Chambers of Commerce
survey into employers' reasons for engaging migrants workers that
found that the majority of employers employed migrants to fill
gaps in the workforce arising from skills or experience needed.
The Government has conducted its own research into employers'
motivations for using migrant workers in earlier years[1].
This research found that the overwhelming majority of employers
across sectors and regions started to recruit migrant workers
because they could not get sufficient applications from UK workers
for low-skilled jobs. Employers also reported that UK workers
sometimes proved less reliable than migrant workers in some sectors.
Other employers stated that they recruited migrant workers because
of difficulties in recruiting UK nationals with the skills required.
6. Further work is underway to identify likely pressure
points in the labour force, by sector and by region, where skills
shortages may develop. The Migration Advisory Committee will also
be considering where skills shortages in the UK labour market
may sensibly be filled by managed migration, including from the
A2 countries.
7. We note that A8/A2 migrants tend to find work
in the UK for which they are overqualified. This could be said
to have a negative impact on the economic efficiency of Europe
as a whole—their home countries are losing skills and the
UK is not maximising its advantage from them. Nonetheless there
is some evidence that A8/A2 nationals who remain in the UK are
starting to move into the higher-paid, more-skilled jobs for which
they are better suited. Whilst we welcome this, it has caused
labour shortages in agricultural industries that had previously
relied on Central and Eastern European workers entering the UK
through the Seasonal Agricultural Workers Scheme (SAWS). We find
it remarkable in these circumstances that the Government is proposing
to allow only Bulgarian and Romanian nationals to apply through
SAWS. (Paragraph 21)
8. The Government notes that there is some evidence
that suggests that those from the A8 working in the UK move from
low-skilled jobs into more highly-skilled jobs over time. This
progression may reflect an initial period of work in a role for
which the individual migrant may be overqualified in order to
improve English language skills, or to complete a course of study
before moving into more highly skilled work. If this is the case,
it is likely that there will be a pool of A8 or A2 migrants willing
to work in low-skilled roles as a stepping stone to more highly-skilled
roles in due course.
9. The Government announced on 30 October 2007 that
it would be retaining the current restrictions on migrant workers
from Bulgaria and Romania. Therefore, in 2008 applications to
the existing Seasonal Agricultural Workers Scheme (SAWS) will
be accepted only from Romania and Bulgaria - meaning a potential
increase from 6,500 A2 migrant workers through this scheme this
year to 16,250 next year. Nevertheless, the overall number of
migrants coming to the UK through SAWS is unchanged. In 2007,
the full allocation of SAWS places was taken up. Whilst the Government
notes the concern from some parties that the decision to restrict
SAWS to the A2 may lead to labour shortages, the Government believes
that the supply of migrants from the A2 will increase to fill
the number of SAWS places available. The Government will continue
to monitor the uptake of SAWS places and the Migration Advisory
Committee has been asked to review, if required, the Government's
assessment of the demand for and desirability of low-skilled schemes
for Romanians and Bulgarians to work in construction, social care
and hospitality.
10. The evidence on whether A8/A2 migration has
slowed wage growth in the UK economy is mixed. The Government
suggests that it has had no discernable impact. Other studies
suggest there may have been a slowing of wage inflation through
an overall increase in the labour supply. The Low Pay Commission's
report into migration in general concluded that a small decrease
in wage growth at the lowest levels was more than compensated
for by modest increases at higher levels of pay. What the studies
that have found an impact agree on is that such impacts are small
in the context of the whole economy. We do not rule out more significant
impacts in relation to specific sectors and we will be returning
to this issue during our forthcoming inquiry into the construction
industry. (Paragraph 26)
11. As the Committee recognises, evidence to date
shows that migration from the new EU Member States has been broadly
beneficial to the economy and there has been no discernible effect
on levels of unemployment, or on levels of wage growth. Some sectors
of the economy and some regions continue to experience skills
and/or labour shortages which impact on UK competitiveness and
productivity as well as quality of public services. There appears
to be very little evidence of reduced wage growth in the whole
economy or across the main industrial sectors since Accession.
In May 2006, two years after the accession of A8 countries, the
average earnings index excluding bonuses was up 3.9% on the year,
the same as in May 2005.
12. Concerns have been raised that employers may
be less inclined to pursue recruitment strategies aimed at the
long-term unemployed due to the presence of skilled Central and
Eastern European alternatives. Nonetheless, we have seen no evidence
to suggest that immigration from the A8/A2 countries since their
accession has increased claimant unemployment in the UK. (Paragraph
29)
13. Whilst there has been no increase in claimant
unemployment, the level of vacancies has been around or over 600,000
since records began in 2001; in September there were over 660,000
vacancies. Anecdotal evidence suggests that migrant workers are
either taking jobs for which there are no available British workers
with the skills required, or jobs that British workers do not
wish to take because of the nature of the work.
14. The Government recognises that our challenge
is to do everything we can to help people take advantage of the
opportunities that are out there and move into work. DWP's Welfare
Reform Green Paper: 'In work, better off: next steps to full
employment' sets out our proposals for moving further towards
our aspiration of 80% employment. They will concentrate on helping
the most disadvantaged individuals and families. Tackling inactivity,
particularly amongst those on benefits, remains their top priority.
15. Over the next three years Local Employment Partnerships
(LEPs) will help over 250,000 disadvantaged people into work.
Jobcentre Plus met its target for 100 employers committed to LEPs
by end September, and has surpassed its target of 200 by end December,
with well over 250 employers committed.
OVERALL IMPACT
16. Migration from the A8 since 2004 has benefited
UK business, chiefly by filling gaps in the labour market. The
Government's decision to open the UK labour market to A8 nationals
has been beneficial from a labour market perspective because it
has allowed workers to move flexibly between sectors following
employer demand. Nonetheless, the Government should be aware that
this has created shortages of seasonal labour in agriculture,
which had previously relied on labour from restricted migration
schemes. (Paragraph 31)
17. We believe it is too soon to make a judgement
on the decision to introduce restrictions on Bulgarian and Romanian
nationals—but we note that countries in the A8 experiencing
labour shortages are using labour from the A2 to plug those gaps.
(Paragraph 32)
18. The Government has decided to maintain the restrictions
on the labour market access of migrants coming to the UK from
Romania and Bulgaria (the A2) until at least the end of 2008.
The UK had previously decided to limit access to its labour market
following accession of Bulgaria and Romania on 1 January 2007.
19. These arrangements have been reviewed taking
account of the needs of the UK labour market, the wider and social
impact of the migration of accession state nationals and the positions
adopted by other EU countries (as that affects possibility of
alternative destinations to the UK labour market). We have looked
for evidence of the benefits and impacts of A8 and A2 migration,
which we have used to inform this decision.
20. It is still too early to tell the full impact
of accession migration on the UK. While initial evidence shows
a clear positive contribution to the economy, there are some reports
of pressures in other related areas, including public services.
In this context, we will continue our prudent approach to labour
market access as we monitor the medium to long-term effects of
accession migration.
EXPLOITATIVE EMPLOYMENT
21. Migrants from the A8/A2 countries should
be clear that, as European Union citizens, they are entitled to
the same protection in terms of the minimum wage, employment conditions,
union membership and health and safety as a UK citizen. We encourage
the Government to work closely with the A8/A2 nations to ensure
that new and potential arrivals are made aware of their rights
at the earliest possible opportunity. (Paragraph 36)
22. We are also aware that migrant workers may face
difficulties in understanding and asserting their rights. We have
offered to work with the governments of all the new Member States,
to prepare bi-lingual "know before you go" leaflets,
giving advice on questions to ask before leaving the country and
on legal protections offered to workers including agency workers.
23. It is particularly important to reach workers
in the host country before they leave as it is often much harder
to help workers, who may not speak English and have no accommodation
arranged, once they arrive.
24. To date we have produced leaflets in partnership
with the Polish and Lithuanian Governments[2].
These followed a similar leaflet we produced in partnership with
the Portuguese Government, and benefited from input from the TUC,
the CBI and other stakeholders. These have been distributed widely
in both the workers' home country and the UK. In Poland, for example,
they have been publicised on television and our Embassy and the
Polish authorities have worked hard to distribute them via job
centres, recruitment fairs and other channels.
25. We have also produced a basic, one-page 'Working
in the UK: Know your rights and where to get help and advice'
leaflet, available in Bulgarian, English, Latvian,
Lithuanian, Polish, Romanian and Slovakian[3].
Workers registering under the Worker Registration Scheme are sent
information about their employment rights.
26. We note that, whilst the Gangmaster Licensing
Authority has helped address the problem of exploitative employment
by intermediaries in the agricultural sector, there are no similar
arrangements in other sectors where intermediaries play a large
part in recruitment. We recommend that the Government give urgent
consideration to extending the Gangmaster Licensing Authority's
remit. (Paragraph 37)
27. The Government would not in fact agree with the
Committee that there are no similar arrangements in other sectors
where intermediaries play a part in recruitment - in fact the
Gangmaster Licensing Authority (GLA) licensing standards are very
predominantly based on pre-dating legislation governing employment
agencies (ie the Employment Agencies Act and the Conduct of Employment
Agencies and Employment Businesses Regulations 2003).
28. These regulations govern the conduct of all employment
agencies outside those sectors covered by the GLA and are enforced
by the Employment Agency Standards Inspectorate (EAS) in the Department
for Business, Enterprise and Regulatory Reform. The Inspectorate
follows up every complaint it receives which indicates a possible
breach of employment agency legislation, and undertakes spot checks
in those sectors where, on a risk-based analysis, it considers
that breaches of the legislation are likely to occur.
29. While most agencies are compliant with the law
and the bulk of those who are not agree swiftly to correct their
procedures and put matters right, the Inspectorate also has powers
to prosecute where an agency refuses to comply and can also seek
prohibition of persons considered unsuitable to operate an agency.
During 2007, the EAS successfully prosecuted two agencies and
prohibition orders were made against 5 individuals.
30. Every complaint received by the EAS Inspectorate
is treated in confidence and the identities of complainants would
only be given to the agency if the persons making those complaints
gave their written permission. There is a dedicated EAS Helpline,
which provides advice to workers, agencies, employers and other
interested parties on the legislation and work of the Inspectorate.
The helpline number is 0845 955 5105. BERR would advise anyone
who has a problem with an agency in any sector covered by the
EAS to contact the Helpline.
31. Following a consultation exercise last year on
measures to protect vulnerable agency workers, Amendment Regulations
to the Conduct of Employment Agencies and Employment Businesses
Regulations 2003 were made last December. These are practical
steps intended to address key abuses affecting vulnerable agency
workers and will come into force on 6 April. We are also proposing
measures in the current Employment Bill to increase penalties
for offences against the Employment Agencies Act 1973 and to improve
investigative and enforcement powers for the Inspectorate.
32. These additional rights will be backed by additional
resources for enforcement. In September 2007, John Hutton announced
plans to double the number of inspectors in the Employment Agency
Standards Inspectorate and recruitment processes are in train.
This will enable the Inspectorate to investigate a greater
proportion of agencies in sectors where there is perceived to
be a higher risk of breaches of the legislation.
33. The Government has no plans to extend the GLA's
remit or to reintroduce a licensing regime for employment agencies
outside the GLA-regulated sectors. The previous licensing arrangements
governing all employment agencies, which were removed in 1995,
did not provide an effective system. Only a small percentage
(about 0.1%) of new applicants or licence renewals were rejected.
Moreover, the then DTI Inspectors found many breaches of the legislation
amongst those with licences. Replacement powers to apply for
a prohibition order against those individuals the EAS considered
unsuitable to operate as an agency were introduced when the licensing
powers were repealed. Under a prohibition order a person can
be prevented from operating as an agency for up to 10 years.
34. Although past experience has suggested that licensing
is not effective, there was evidence of particularly widespread
abuse in the agricultural sector and a cross-sector consensus
(by labour providers, labour users and worker representatives)
in favour of the introduction of licensing in the food processing
and agricultural sectors. Given such a consensus, the UK Government
has introduced licensing in agriculture, the processing of food,
fish and shellfish and the gathering of shellfish as these are
the sectors where the problem of illegal gangmasters is greatest.
No such consensus exists outside these sectors.
35. The EAS and the GLA already work closely together
to share information that might be of mutual interest and benefit.
Moreover, the Government's Vulnerable Workers Enforcement Forum
is currently considering how existing employment-related enforcement
arrangements across the board can be made more effective through
closer co-operation, information sharing and facilitating complaints
from vulnerable workers.
LONG-TERM IMPACTS
36. There is not enough data to make an accurate
prediction of the numbers of A8/A2 nationals who will be living
in the UK in the medium to long term; UK business cannot take
this supply of skilled, willing labour for granted. Although A8/A2
labour has eased labour shortages in a number of sectors, it is
not a long-term solution to those problems. We recommend that
the Office for National Statistics and its successor body investigate
the returnee rate among A8/A2 nationals and that Government and
business work together to ensure that a skills and labour vacuum
is not left behind when, and if, the flow of A8/A2 nationals to
the UK slows or reverses. (Paragraph 42)
37. The Government recognises that migration flows
are likely to change over time, not least as the economies of
the new accession countries grow and living standards in those
countries improve. Migration has an important role to play in
a flexible labour market in meeting short-term demand for labour
and/or for particular skills. It cannot, however, replace the
Government's ongoing commitment to develop the skills of the UK
workforce. The recent publication 'Opportunity, Employment
and Progression: making skills work' sets out how the Government
will meet the challenge of increasing skills across the UK population
and make further progress on getting people into sustainable work
and to progress in work, through the creation of an integrated
employment and skills system. This system will build on the success
of Welfare to Work and ensures that all have the skills not only
to survive, but to prosper in today's global labour market.
38. The National Statistician established an Inter-departmental
Task Force on Migration Statistics that reported in December 2006[4].
The task force recommended:
- Obtaining more information about migrants as
they enter or leave the country;
- Obtaining more comprehensive and timely information
about migrants living in this country;
- Using linkages between statistical studies to
obtain better information relating migrants' intentions at entry
to the UK to subsequent events, such as employment, having a child
and when they leave the country;
- Providing more timely, robust key indicators
of migrant numbers, and;
- Bringing together all the statistics collected
across Government on migration and migrants in a single UK-wide
report, as there is currently no single official source.
39. The Office of National Statistics has estimated
that the cost of implementing the Task Force's recommendations
is £48 million. Work is underway to implement these recommendations,
with key priorities being:
- Enhancing port surveys, including maximising
the use of e-borders and landing cards to gain more comprehensive
coverage of migrants as they enter and leave the UK;
- Developing a communal establishments module for
household surveys, as a large proportion of migrants live in communal
households and are not interviewed currently;
- Making best use of the information generated
by the new Points Based System for migration from outside the
European Economic Area;
- Developing coverage, access to and linkage of
key administrative sources to allow for improved estimates of
where migrants are in the country;
- Producing local authority estimates of short-term
migrants and other key migrant indicators, including impacts,
and;
- Engaging a migration expert group on key proposals
and findings.
40. The presence of large numbers of A8 nationals
in the UK and the goodwill generated in those countries by the
opening of the UK labour market offer excellent opportunities
for better business links between these countries and the UK,
especially when, and if, those migrants begin to return home.
Government and business need to develop strategies to maximise
the UK competitive advantage gained from these returnees by, for
example, ensuring effective British chambers of commerce are supported
in these countries, developing cultural links and targeting UKTI
resources. This is a significant and potentially highly beneficial
long-term consequence of migration to which insufficient public
policy attention has been given; greater attention should be paid
to it if the advantages to the UK are to be maximised. (Paragraph
43)
41. The Government agrees that migration to the UK
offers strong opportunities for developing UK trade. Research
commissioned by the Department for International Development has
found that migration creates trade bridges between communities
of origin and host communities. Recent migration from the newly
acceded member states offers the opportunity for UK businesses
to develop their trade with economies likely to grow significantly
over coming years. More broadly, enlargement is a benefit to the
UK far beyond simply labour. Access to new and growing markets
has benefited UK consumers and businesses. UK exports to the eight
east European new member states totalled £6.4 billion in
2005, up 151% since 1995. Exports to Romania and Bulgaria were
just over £1 billion in 2005, up 250% over the same period.
42. The UK Trade and Investment (UKTI) Five-Year
Strategy, 'Prosperity in a Changing World'[5]
sets out plans to target advanced economies on behalf of innovative
and R&D-intensive UK companies and for high-value inward investment,
and to support inexperienced exporters in taking their first steps
in internationalising their businesses. At the same time, UKTI
will focus a greater proportion of its resources on the emerging
markets that will be major sources of both trade and FDI in the
future. UKTI's overseas network resource will reinforce UKTI's
focus on China and India and achieve a step change in the UK's
profile in Brazil, Indonesia, Mexico, Russia, Saudi Arabia, South
Africa, Turkey and UAE.
43. UKTI supports British businesses seeking to export
to the A8 countries through a network of International Trade Teams
based in the nine Regional Development Agencies. As the economies
of the recently-acceded countries develop and investment in their
infrastructure continues, there will be increased opportunities
for UK businesses to sell their expertise into these growing markets.
In Romania, for example, UKTI is supporting a sector visit by
British Water in March to investigate export opportunities in
the water and wastewater sector.
EU FUNDING
44. The significant influx of EU money into the
A8/A2 during the 2007-2013 funding period will provide excellent
opportunities for UK companies—particularly in the fields
of construction and financing. The ministers and officials we
met during our visits indicated that they were determined to achieve
the best value possible and would welcome British involvement
in the resulting investment. We hope that the British government
and business look seriously at the new opportunities that will
arise from these developments. (Paragraph 47)
45. The
Committee correctly identifies that the excellent opportunities
made available for UK companies across a wide spectrum of activities
through European funding in the A8/A2 countries. Funding being
provided to these Member States is specifically aimed at increasing
their economic development and UK companies should be looking
to maximise the opportunities that their increased wealth will
bring.
LABOUR MARKET
46. Our witnesses cited the labour market as one
of the major attractions of the A8 as investment locations due
to the strong work ethic and technical skills of the workforce
combined with relatively low labour costs. The evidence we received
suggest that it is no longer accurate to describe the A8 as 'low-cost
economies'. Although average labour costs remain just over a quarter
of those in the EU15, genuinely low-cost, low-skill production
is already heading further east, to the A2, Ukraine and China
where wage rates are much lower. Employers in the A8/A2 countries
repeatedly stressed to us that skills, not wages, were the major
reason for their presence in the A8/A2 countries. This was further
reinforced by government officials and ministers from the countries
we visited, who accepted that their countries could not compete
on cost with China, India or other emerging economies. (Paragraph
55)
47. Evidence shows that the A8 economies are continuing
to grow strongly and that this is leading to increases in wage
rates. The Government agrees that on wage costs alone, emerging
economies such as China, India and other Asian countries have
a strong competitive advantage. However, decisions on where to
base production are based not only on wage costs, but also on
wider labour market, economic and regulatory issues.
48. The EU has agreed the Lisbon Strategy for EU
economic reform to improve the competitiveness of European economies,
enabling the EU to meet the challenges of globalisation and helping
businesses to thrive and employment levels to increase.
49. The success of the EU's economy is crucial for
the UK because Europe is our most important market. Although
evidence suggests that the recent economic upturn in Europe is
largely cyclical, there are indications to suggest that the
Lisbon Strategy has also been a contributing factor. Nonetheless,
the EU is still not living up to its potential, which is why we
need to reinvigorate the economic reform agenda.
50. One of the major economic challenges facing
the A8/A2 at present is a growing labour shortage in the areas
most attractive to overseas investment. Foreign investment is
often concentrated around the major cities, increasing demand
for labour on areas with relatively small populations. Rather
than move to the cities to meet this demand many A8/A2 nationals—and
especially the most skilled—are choosing to move to Western
Europe, in effect putting employers based in Bratislava, Vilnius
or Warsaw in direct competition for labour with employers in London
or Dublin as well as local rivals. In some areas and sectors—for
example the Lithuanian construction industry or the highest levels
of company management—we were told that this is pushing
wage costs up towards Western European levels. The people we spoke
to during our visits emphasised that these shortages were a real
problem for new companies seeking to move into well established
sectors. (Paragraph 56)
51. The Government recognises that the accession
of the new member states to the European Union has led to significant
migration within the EU as a result of the free movement of workers.
This has had an impact on some of the accession countries in particular
sectors. To alleviate some of the most acute labour shortages
experienced by accession countries, some are putting in place
schemes to encourage migrant workers to return. It is anticipated
that much of the current migration flow will be temporary, with
migrant workers returning to their countries of origin.
52. In fact, 57% of those registering with the Worker
Register Scheme have indicated on their application form in the
twelve months ending September 2007 that they intended to stay
in the UK for less than three months (though extra care should
be taken when such data as the applicants' intentions can change).
Increasing employment rates and salary levels will help to attract
migrants back to their home countries.
53. The Government is aware of concerns expressed
about labour shortages in A8 countries; however, these labour
shortages are caused not only by emigration to Western Europe,
but also by strong rates of economic growth in some of the A8
countries, relatively flat population growth and investment in
infrastructure. We note concern, for example, around labour shortages
in the Polish construction industry caused by a combination of
emigration to the UK and other Western European countries, and
by major infrastructure projects for the World Expo and European
football championships to be held in Poland in 2012.
TRANSPARENCY AND CORRUPTION
54. We commend the work being done by UK embassies
in the A8/A2 countries, for example in Hungary, to combat corruption.
We recommend that the UK continues to be active through its embassies
to assist national governments in building upon the improvements
of the last ten years and further reducing corruption (Paragraph
57).
55. Through the work of our Embassies, we clearly
recognise the importance of combating corruption in the A8/A2
countries. We will also continue to work through established
structures in international fora such as the OECD, United Nations,
the Council of Europe and enforcement agencies in support of efforts
to reduce corruption.
EASE OF DOING BUSINESS
56. As with any overseas market, the A8/A2 countries
present a range of challenges to UK investors and exporters. Our
witnesses raised concerns about complex, unfamiliar and slow administrative
and legal procedures in many of the A8/A2 countries—although
we note that similar concerns are also raised about some well-established
EU15 countries. Nonetheless, we believe that in terms of high-growth
economies worldwide the A8/A2 countries present relatively few
barriers to entry and relatively few risks. Their relative nearness
to the UK, membership of the European Union and open economies
are key competitive advantages for the A8/A2 countries in dealing
with UK business. (Paragraph 62).
57. Whilst there have been problems in the A8/A2
countries with overly bureaucratic systems, inconsistent application
of legislation and inefficient legal processes, progress has been
made on addressing some of these problems and we agree that there
no significant barriers to trade and investment.
SIZE OF MARKET
58. Although the A8/A2 countries are relatively
small when compared to the major emerging economies—both
in terms of population and GDP—we were reminded that when
these countries joined the European Union their combined economy
was the size of the Netherlands; now Poland alone has a larger
economy than that of the Netherlands and it buys £2.8 billion
a year worth of UK exports—around the same as China. (Paragraph
65)
59. As mentioned in the evidence provided by the
Department of Trade and Industry to TISC earlier this year (Figure
1 - updated here below), growth rates for each of the A8/A2 have
been well above the EU15 average growth over 1997-2006.
Figure 1: Real GDP growth rates (%)
| Country
| 1997 | 1998
| 1999 | 2000
| 2001 | 2002
| 2003 | 2004
| 2005 | 2006
| Average (97-06) |
| EU 15 | 2.6
| 2.9 | 3.0
| 3.8 | 1.9
| 1.1 | 1.2
| 2.3 | 1.6
| 2.8 | 2.3
|
| Bulgaria | -5.4
| 4.0 | 2.3
| 5.4 | 4.1
| 4.5 | 5.0
| 6.6 | 6.2
| 6.1 | 3.9
|
| Czech Rep | -0.7
| -0.8 | 1.3
| 3.6 | 2.5
| 1.9 | 3.6
| 4.5 | 6.4
| 6.4 | 2.9
|
| Estonia | 11.1
| 4.4 | 0.3
| 10.8 | 7.7
| 8.0 | 7.2
| 8.3 | 10.2
| 11.2 | 7.9
|
| Latvia | 8.4
| 4.7 | 3.3
| 6.9 | 8.0
| 6.5 | 7.2
| 8.7 | 10.6
| 11.9 | 7.6
|
| Lithuania | 8.5
| 7.5 | -1.5
| 4.1 | 6.6
| 6.9 | 10.3
| 7.3 | 7.9
| 7.7 | 6.5
|
| Hungary | 4.6
| 4.9 | 4.2
| 5.2 | 4.1
| 4.4 | 4.2
| 4.8 | 4.1
| 3.9 | 4.4
|
| Poland | 7.1
| 5.0 | 4.5
| 4.3 | 1.2
| 1.4 | 3.9
| 5.3 | 3.6
| 6.1 | 4.2
|
| Romania | n/a
| n/a | -1.2
| 2.1 | 5.7
| 5.1 | 5.2
| 8.5 | 4.1
| 7.7 | 4.7[6]
|
| Slovenia | 4.8
| 3.9 | 5.4
| 4.1 | 3.1
| 3.7 | 2.8
| 4.4 | 4.1
| 5.7 | 4.2
|
| Slovakia | 5.7
| 4.4 | 0.0
| 1.4 | 3.4
| 4.8 | 4.8
| 5.2 | 6.6
| 8.5 | 4.5
|
Source: Eurostat
60. However, given the low levels of per capita GDP in these less
mature economies, this growth rate would be expected to moderate
in the long run as these countries reach income levels similar
to the rest of Europe.
61. However, as set out in Figure 2 below (an updated version
of that previously provided as part of evidence submitted to TISC
in March this year), despite significant improvement in GDP per
capita for each country over the last 10 years - measured in purchasing
power standards - their levels remain well below the EU average.
Figure 2: GDP per capita in Purchasing Power Standards (EU-27
= 100)
| Country | 1997
| 1998 | 1999
| 2000 | 2001
| 2002 | 2003
| 2004 | 2005
| 2006 |
| EU 15 | 115.4
| 115.4 | 115.3
| 115.2 | 114.8
| 114.2 | 113.7
| 113.1 | 112.8
| 112.1 |
| Bulgaria | 26.5
| 27.0 | 27.0
| 27.9 | 29.4
| 31.1 | 32.6
| 33.6 | 35.2
| 37.1 |
| Czech Rep | 73.2
| 70.7 | 69.8
| 68.7 | 70.6
| 70.8 | 73.8
| 76.1 | 77.0
| 79.3 |
| Estonia | 41.2
| 42.3 | 41.6
| 44.8 | 46.3
| 50.1 | 54.6
| 57.0 | 62.8
| 67.9 |
| Latvia | 34.7
| 35.7 | 36.2
| 36.9 | 38.9
| 41.4 | 43.5
| 45.5 | 50.2
| 55.8 |
| Lithuania | 38.3
| 40.3 | 38.9
| 39.4 | 41.6
| 44.2 | 49.2
| 51.1 | 53.8
| 57.7 |
| Hungary | 51.7
| 52.9 | 53.7
| 56.3 | 59.1
| 61.7 | 63.6
| 63.9 | 64.8
| 65.3 |
| Poland | 47.0
| 48.0 | 48.8
| 48.5 | 47.8
| 48.5 | 49.1
| 50.8 | 51.0
| 52.9 |
| Romania | n/a
| n/a | 26.1
| 26.0 | 27.6
| 29.4 | 31.5
| 33.6 | 34.4
| 37.6 |
| Slovenia | 75.9
| 76.9 | 78.8
| 78.9 | 79.0
| 81.3 | 82.5
| 85.0 | 86.6
| 88.8 |
| Slovakia | 51.5
| 52.2 | 50.7
| 50.3 | 52.5
| 54.3 | 55.7
| 57.0 | 60.4
| 63.6 |
Source: Eurostat
62. It is important to put this growth into a wider perspective,
as even compared to other major European economies these countries
are not yet of significant size. For example, the economies of
the A8/A2 are now collectively around one-third of the size of
the UK economy and are therefore quite small on a global scale.
63. The reference in the report to Poland's economy being larger
than that of the Netherlands appears to be based on the World
Development Indicators database[7],
which currently (as of data from 14 September 2007) place Poland
(at 22nd) two places below the Netherlands (at 20th).
This comparison is based on a PPP (Purchasing Power Parity) measure,
which may present a slightly misleading picture - for example,
data on GDP per capita (comparable to that presented in Figure
2 above[8]) for the Netherlands
in 2006 is 132.2, which is significantly above Poland's level
of 52.9.
64. Nevertheless, the UK's combined exports to the A8/A2 currently
outstrip UK exports to either India or China and therefore they
are - and will continue to be - important trade partners for the
UK in the future.
THE FUTURE
65. British government and business should be aware that the
more forward-thinking A8/A2 countries are actively targeting high-value-added
sectors such as biotechnology, ICT and pharmaceuticals and are
seeking to attract research and development and other innovative
investments—for example Samsung's and Kia's investments
in Slovakia or GlaxoSmithKline's vaccine research facilities in
Hungary. This is both a significant opportunity for partnership—making
use of the skills bases, newly built facilities and dynamism of
these countries and the new opportunities that come with a developing
market—and a potential competitive challenge for UK business
in the longer term. UK policy makers need to recognise that in
attempting to build an innovation-driven economy, our potential
partners and competitors are not limited to the USA, France and
Germany; the A8/A2 countries are increasingly becoming home to
facilities of a very high level of sophistication and technical
know how. (Paragraph 69)
66. The scope for working in partnership with these countries
to help them develop high value-added sectors, and at the same
time realise opportunities for UK companies, is well understood.
Through partnering with UK firms, overseas companies can gain
access to world-class, leading edge technologies, processes and
innovation. It is part of UKTI's strategy to help R&D intensive
UK companies penetrate overseas markets.
UK TRADE AND INVESTMENT WITH THE A8/A2 COUNTRIES
67. It is regrettable that the UK retail banking sector has
failed to establish a presence in the A8/A2 markets (Paragraph
79).
68. Several British Banks are showing an interest in the Polish
market and one, HSBC, has established a presence in the market.
The takeover of ABN Amro by a consortium headed by the Royal Bank
of Scotland (RBS) gives RBS a presence in Romania.
69. In view of the evidence we received in this inquiry stressing
the importance of being well informed and investing early in rapidly
developing economies, we propose to conduct an inquiry into the
future of trade and investment relations with Turkey. (Paragraph
80)
70. The Government will be submitting evidence to the Committee's
inquiry into the future of trade and investment relations with
Turkey.
71. During our inquiry we came to the conclusion that a major
reason for the relative lack of UK investment and trade with the
A8/A2 was an 'iron curtain in the mind' of UK businesses. We were
particularly concerned to hear from the British Chambers of Commerce
that many UK businesses lack the confidence to invest in emerging
markets. Awareness of developments in Central and Eastern Europe
appears to be lagging behind reality. This raises the question
as to whether an organisation such as UKTI should entirely follow
the priorities of business, or whether it should be more active
in promoting areas where UK business may be missing out and educating
them about the vibrancy, high skills and ambitions of many of
these economies. (Paragraph 81)
72. The A8/A2 countries are clearly important to UK businesses
seeking to grow through overseas trade and UKTI fully recognises
the importance of ensuring that businesses are aware of their
potential. Across the ten markets, UKTI has over 100 experienced
commercial officers who continually raise awareness of the markets
within the UK business community and of trade and investment opportunities.
This is done generally through UKTI's website; and through the
provision of reports on sectors of opportunity in each market.
As part of the annual business planning round, industry sectors
are made aware of sectoral areas of opportunity in individual
markets as presented by UKTI's trade teams overseas. More specifically,
trade officers regularly visit the UK and spread knowledge of
markets and opportunities in their contacts with companies and
multipliers. They also provide market reports tailored to the
prospects for the products and services of individual companies
to help businesses address market opportunities. In sum total,
all of this effort is designed to build companies' confidence
and capability to compete and trade successfully in the markets.
73. As with our previous inquiries into trade and investment
opportunities in Mercosur, China and India we heard that other
countries make more frequent use of Ministerial visits for trade
promotion purposes. We believe that British ministers—especially
those in trade promotion roles—should follow the example
of our competitors and travel abroad more frequently to promote
the UK interest. To assist in this, firm agreements should be
established between government and opposition to ensure that ministers
on trade missions should not have to return to the House to vote,
other than in the most exceptional circumstances. In this context
we welcome the current Minister for Trade Promotion and Investment's
announced intention to spend more time undertaking such overseas
visits as a step in the right direction. We note, however, that
many of our competitors more regularly use much more senior ministers,
including prime ministers and presidents to lead trade missions
and assist in the negotiation of major deals than is the tradition
for British ministers. (Paragraph 82)
74. The Prime Minister's recent visit to China and India with
a delegation of senior business people is a good example of our
use of high level visits in support of our commercial objectives
in overseas markets. £10 billion worth of contracts in the
pipeline were announced during the India leg. The Minister for
Trade and Investment's programme of overseas visits, in particular,
is extensive in the number of visits and their country coverage
and other Ministers are well focused on the value of overseas
visits in support of our commercial interests. The point
raised about Ministers on trade missions not having to return
to the house to vote, other than in the most exceptional circumstances
is a parliamentary issue and not for the Department to comment
on. UKTI is also working across Whitehall to ensure that, in their
scheduling and purpose, visits by Ministers in all departments
are able to give better support to the UK's commercial objectives
in overseas markets.
75. Since the publication of the TISC report, further proposals
have been made for Lord Jones to visit Hungary and Slovakia this
year (in addition to a visit to Poland in the autumn). As well
as Ministerial visits, the UK also benefits from the work of HRH
The Duke of York who has been the UK's Special Representative
for International Trade and Investment since 2001. As part of
this role, he undertakes an extensive programme of targeted engagements
both in the UK and overseas to promote the interests of UK business
and the UK as a whole. In this capacity, His Royal Highness has
visited several A8 countries in recent years.
TRADE PROMOTION
76. We are concerned that UKTI has adopted a one-size fits
all approach to European Member states - cutting back on resources
in the A8/A2 at a similar rate to the resources in the EU15.
The A8/A2 are in many ways more accessible markets, especially
for SMEs, than other rapidly growing economies. Nonetheless, the
lack of awareness of opportunities in these countries suggests
there is still a significant need for advice and assistance over
and above that which is required in more established markets.
Although "emerging markets" may not be the most appropriate
term for these economies, we think there is a good case for some,
or all, of the A8/A2 to receive priority attention from UKTI.
(Paragraph 83)
77. UKTI does not adopt a one size fits all approach to European
Member states or other parts of its overseas network. The level
of resource in each commercial section takes into account a mix
of factors including customer demand; ease or difficulty of doing
business; UKTI strategy priorities; and performance in delivering
results.
78. The accession states are clearly important to UK businesses
seeking to grow through overseas trade and UKTI recognises this
in resource deployed. By way of example, the three largest A8
markets combined (Czech Republic, Hungary and Poland) are comparable
to Sweden in the value of UK exports in 2006 yet UKTI deploys
four times the level of resource across these three markets as
it does in Sweden, in recognition of their growth potential and
demand for UKTI services. UKTI has as much resource in Poland
alone as in Austria, Belgium and Finland combined. It keeps its
network of resources fully under review to ensure they are deployed
effectively in supporting UK companies.
RELOCATION
79. The accession of the A8/A2 has led some companies to move
production and other business activities from the UK to these
countries. This has led to concern that UK jobs are being 'exported'
overseas. The evidence we received suggests that a degree of relocation
has been necessary to maintain UK companies' competitiveness in
the face of global competition and can be compensated for to some
extent by resulting gains in employment in higher value-added
areas of the same industry. Nonetheless, it is clear that some
sectors—such as IT and automotive—are experiencing
net reductions in their UK based workforce. We would welcome a
comprehensive study into the net effects on UK business and employment
of relocation overseas to inform public policy responses more
accurately. (Paragraph 89)
80. Although the A8/A2 have proved attractive locations for
UK companies looking to offshore some of their business activities,
the evidence we received suggests that the phenomenon itself was
not a direct consequence of these countries' accession to the
European Union. Rather, relocation overseas has been driven by
global competition from a variety of locations—including
the A8/A2 but also Asia and more widely. (Paragraph 90)
81. We welcome the Committee's interest in the impact of relocation
on the UK economy. Whilst there are problems with data, there
has been considerable analysis of the impact of relocation abroad.
As well as the studies mentioned in the Report, earlier analysis[9]
also found no consistent pattern between relocation overseas and
employment growth at broad sectoral levels in the UK or other
countries. Analysis by the ONS[10]
found that in the UK, even in the service occupations regarded
as most vulnerable to global sourcing - IT and contact centres
- employment rose more than twice as fast between 2001 and 2004
than it did for the economy as a whole (8.3% versus 3.8%).
82. On balance these studies suggest that the net impact of relocation
overseas on UK employment has been limited. The jobs lost directly
through relocation seem to be compensated for either by increased
growth through improved competitiveness, or through increased
opportunities elsewhere.
83. The impact of relocation overseas also needs to be considered
in the context of the overall UK labour market. Employment is
currently around record levels, with nearly 29 million people
in employment. Every month around 200,000 people join and leave
the UK unemployment claimant count. So the number of jobs relocated
overseas only amounts to a fraction of the turnover in national
employment.
84. The Department has published a research report[11]
providing new estimates of UK jobs gained and lost through trade.
This was launched at a BERR conference on 'Globalisation and the
Labour Market' held in London on 13 December. Its main findings
were:
- The number of jobs needed to produce imports
domestically relative to the number of jobs associated with exports
has risen significantly since the middle of the 1990s. However,
the paper did not try to estimate the impact on the UK labour
market of the potential absence of international trade as this
would have required much more extensive analysis of the wider
benefits of trade.
- UK imports tend to be more
labour intensive than UK exports. So, if UK trade was in balance,
0.4 million more jobs would have been required to produce imports
than exports in 2004. However, this wouldn't mean that employment
in the UK would necessarily increase by 0.4 million if the UK
were to give up the wider benefits of trade, since the cost of
these imports would generally be higher if produced in the UK.
As a consequence demand for products would fall, moderating any
increase in employment.
- Jobs created in the UK from trade were increasingly
higher quality and higher paying jobs. This reinforces the importance
of building the skills of UK workers.
85. The Department is actively considering a pilot
employer survey on the relocation of work in 2008-09. If this
survey proceeds, it would provide estimates of the extent of offshoring
in the UK.
CONCLUSIONS
86. We believe that the accession of the A8/A2
to the European Union has been beneficial to the UK economy and
business, chiefly through the plugging of gaps in the UK labour
market, but also through increased opportunities for exports and
investment. Longer-term opportunities from migrants returning
to their home countries after a period in the UK need to be thought
through and explored more systematically. (Paragraph 91)
87. The Government agrees; the accession of the A8/A2
to the EU has been strongly beneficial to the UK economy through
both migrant workers and the increased size of the European market.
Enlargement also offers opportunities to exploit the relationships
developed through migrant workers and work is ongoing to consider
how the UK can make the most of the opportunities that will arise.
88. We are concerned that many of the messages
we have heard from other rapidly growing economies—such
as Brazil or India—about UK business being slow to take
full advantage of opportunities in rapidly growing markets apply
equally to Central and Eastern Europe. Although we realise that
not every company should invest in every country we believe that
the Government should look seriously at what it can do to reduce
the 'fear factor' of investing outside UK businesses' comfort
zones. This is particularly true in the new member states, which
are relatively accessible to small and medium sized companies
and could provide a way for such companies to 'cut their teeth'
abroad. The opportunities in and challenges from these often highly
skilled and ambitious economies need to be better understood.
(Paragraph 92)
89. Prior to accession, UKTI supported a series of
business road shows around the UK to alert companies to the trade
and investment opportunities which accession would generate. Companies
did take note. Between 2002 and 2006, UK exports grew from £6.3
billion to £9.7 billion, an increase of around 54%. Last
year alone UKTI teams in the accession states delivered nearly
500 market reports tailored to the needs of individual companies
and produced 55 reports on sectors of opportunity to help companies
make appropriate decisions on whether the A8/A2 countries were
necessarily the right market for their products and services.
90. This inquiry has reiterated the importance
of improving the skills of the UK workforce if UK business wishes
to remain globally competitive. The accession of the A8/A2 has
eased the pressures generated by a shortage of skilled staff for
many companies, but this should not distract either government
or business from the longer-term task of improving the skills
profile of the domestic workforce. (Paragraph 93)
91. We recognise that for the economy to prosper
the UK has to have a skills base that meets current and future
needs. This is made all the more important by the fact that the
mobility of skilled workers has increased in recent years due
to the expansion of the knowledge economy, the progressive globalisation
of markets and companies, the growing demand for scarce skills,
and wider political and economic issues.
92. In 2004, Lord Leitch was asked by Government
to identify what the UK's optimal skills mix would need to be
in 2020 to enable the nation to maximise economic growth, productivity
and social inclusion, and to consider the policy implications
of achieving the level of change required. Lord Leitch's final
report was published in 2006 and the Government has accepted the
analysis and committed to achieving the ambitions for 2020. World
Class Skills: Implementing the Leitch Review of Skills in England,
published in December 2006 sets out how, working with our
partners, Government will deliver its ambition, building on the
existing Skills Strategy and Further Education reform programmes.
18 February 2008
1 Dench, J., Hurstfield, S., Hill, D. and Akroyd, K.
(April 2006) Employers' use of migrant labour, Main report,
Home Office Online Report Back
2
The Polish leaflet, for example, is available from http://www.berr.gov.uk/files/file27632.pdf Back
3
The English version of the document is available from http://www.berr.gov.uk/files/file37545.pdf Back
4
Report available from http://www.statistics.gov.uk/about/data/methodology/specific/population/future/imps/updates/downloads/TaskForceReport151206.pdf Back
5 The
UKTI Five-Year Strategy is available from http://www.uktradeinvest.gov.uk/ukti/fileDownload/UKTIStrategyJuly2006.pdf?cid=391741 Back
6
Average for Romania covers period 1999-2006 Back
7
http://siteresources.worldbank.org/DATASTATISTICS/Resources/GDP_PPP.pdf Back
8
Also taken from Eurostat Back
9
For example Amiti & Wei, (December 2005) "Service Offshoring,
Productivity, and Employment: Evidence from the United States",
International Monetary Fund Working Paper, and Amiti &
Wei (April 2005) "Fear of Outsourcing: Is it Justified?",
Economic Policy
issue, pp. 308-348. Back
10
Gawain Heckley, "Offshoring and the labour market: the IT
and call centre occupations considered", Labour Market
Trends, Office for National Statistics, September 2005. Back
11
Rebecca Riley, (December 2007) The Jobs Content of UK Trade
1995-2004, National Institute for Social and Economic Research,
for Globalsiation and Labour Market Conference, December 2007
Back
| 
