Examination of Witnesses (Questions 320-339)
Mr John Cooke and Mr Roger Brown
1 JULY 2008
Q320 Lord Watson of Richmond: Do
you also describe, though, what has not worked? When you were
laying out just now the conditions for successful services—particularly
retail financial services—I was thinking of the development
of the equities market in China where people were clearly buying
vast number of shares without having the resource or the knowledge.
In your descriptive approach are you willing to warn?
Mr Cooke: Willing to warn?
Q321 Lord Watson of Richmond: Yes.
Mr Cooke: I think definitely, yes.
Q322 Lord Watson of Richmond: And
are your warnings heeded?
Mr Cooke: That is always much more difficult
to judge. Do you have a view on that, Roger?
Mr Brown: I think it is interesting to
look at the international institutions that do advise emerging
economies—the World Bank and the IMF. They clearly have
an important role to play and I think that lessons have been learned
in addition to the points that John made; we also need an effective
regulatory structure in those countries, before they liberalise
too far, as part of the sequencing process. Certainly for some
of the less developed countries you will find that organisations
like the Financial Services Authority do a fair amount of work
with local regulators, so I think they are playing a role as well.
But I think it is important not to underestimate the importance
of a sound regulatory structure.
Q323 Lord Watson of Richmond: Is
there real evidence now, after quite a long period of high volatility
in the financial markets, that that very volatility is making
particularly smaller and less well off countries more cautious?
Mr Brown: I think it is something that
will be on their radar screen; it would be strange if it was not.
My own feeling is that the benefits of liberalisation are becoming
increasingly apparent. I mentioned the recent World Bank study
and the other point I would make is I think that regulators and
politicians in those countries can take some reassurance from
the response to the troubles we have had in the financial markets.
In the banking system we have seen significant de-leveraging;
we have seen re-pricing of risk; we have seen strengthening of
balance sheets, and I think at the end of the day though it is
a very uncomfortable period this should put the international
financial system in a better place. As well, of course, as the
many initiatives of organisations like IOSCO, the Financial Stability
Forum, and in particular the Basel Committee.
Q324 Lord Watson of Richmond: So
stronger coming out of this than we were?
Mr Brown: We hope so, yes.
Mr Cooke: Just a factor to add to that
is that over the last decade or so some of the international regulatory
institutions are in a quite different place from where they were
10 years ago. For instance in the area of insurance, the International
Association of Insurance Supervisors is now a completely open
and multilateral body in which any country's supervisory authority
can take part. That is quite a strong instrument for not just
sharing best practice—that phrase that is always used—but
also for genuine debate in which supervisory authorities in emerging
markets are able to interact with colleagues in much more developed
ones and actually discuss methods that work best.
Lord Watson of Richmond: It is quite enjoyable to
be given an upside on the present situation—not many people
do!
Q325 Lord Haskins: Are you actually
saying that liberalisation of financial services adds to financial
stability or reduces instability, so that actually we should be
pressing on more vigorously because of the circumstances in which
we are now?
Mr Brown: I know that one of the studies
that John's research compendium referred to does examine that
question and John will probably know better but I think a brief
summary would be that liberalisation can cause more volatility
in the short term, but in the medium and the long term it reduces
volatility and there are some numbers there that give the extent
of that.
Q326 Lord Watson of Richmond: You
were saying earlier, Mr Cooke, that your approach is descriptive
rather than prescriptive. What organisations, either private or
public, are really in play to advise developing countries, particularly
weaker developing countries on the pace at which they should move?
Mr Cooke: There are quite a number—the
IMF: the World Bank: OECD has an outreach programme; the European
Commission does work in this area, particularly towards candidates
for accession to the EU; there are other bodies that do so. The
ways in which they work tend to vary; sometimes they second staff
to a country or a central bank and at other times they employ
private consultants to undertake a whole range of activities—workshops
for middle-ranking regulators to acquaint them with, say, European
practice.
Q327 Lord Watson of Richmond: Clearly
critical to this is if a meaningful dialogue is going to take
place then there have to be the people on the other end in a poor
and developing country who will fully be able to comprehend what
they are actually being told.
Mr Cooke: Yes.
Q328 Lord Watson of Richmond: How
do you ensure that that happens without, in effect, usurping the
decision-making process on the other side?
Mr Cooke: It is partly by ensuring knowledge-transfer
and I think for the least developed countries this is always difficult
because their resources are so limited. For developing but not
least developed countries there is certainly knowledge to be transferred
and an increasing number of recipients to transfer it to.
Q329 Lord Watson of Richmond: And
this is happening?
Mr Cooke: This is happening. Turning
to the other part of your question about usurping their own decision-taking,
I cannot think of an example where advisers—perhaps I am
on dangerous ground here—I do not think I can think of an
example where advisers have usurped local decision-taking. We
certainly would not wish, I think, for there to be any instruments
by which local decision-takers were forced into or had pressure
put on them to do things they did not wish to do.
Mr Brown: I think a lot of European regulators
and US regulators and central banks will often second someone
to developing countries and the idea basically is to help and
to say, "This is how we do it and this is why we do it."
It is a process of education. But I do not think that those secondees
or their masters would seek to usurp local decision making.
Q330 Lord Watson of Richmond: It
requires a certain cultural sensitivity?
Mr Brown: Quite right.
Q331 Lord Haskins: Mine is an apocalyptic
doomsday question, which I am not sure that I want to ask, but
the question is: is there a future for the WTO going forward in
the 21st century? This is against a background of, I can only
conclude, in the great depression of the 1930s the world moved
towards protectionism, with disastrous results, and one of the
great achievements was the creation of GATT and probably this
underpinned a huge amount of prosperity of the world in the last
60 years. Are we at a real crisis or is this just newspaper headlines
when we get American presidential candidates questioning a lot
of the fundamentals about global free trade, and French and German
Presidents making noises which are of this sort. Are we really
at a crisis that might make the whole WTO process irrelevant in
the 21st century, or is this just a blip?
Mr Brown: The mutterings we are hearing
on protectionism, dressed up in other words sometimes, are concerning.
As you say, we saw the result of what happened in the 1930s and
we hope that wiser counsels prevail. I think the UK is in a good
place on this; you find that the UK Government and the private
sector, certainly the City of London, lose no opportunity to talk
up the importance of free trade. With regard to the WTO, we certainly
think that the WTO does have an important role to play for all
sorts of reasons. At the same time we believe that there are complementary
channels, including the bilaterals and the international regulatory
dialogues, but even if the outcome of Doha is not as we would
wish we think it would be a mistake to give up on the multilateral
route because of the massive welfare gains it can bring.
Q332 Lord Haskins: There has been
a huge growth in multinational companies, particularly in financial
services, and I always remember Denis Healey many years ago saying
that governments were no longer going to be able to control the
financial flows, it was all going to be in the hands of these
great financial organisations, and he said that 20 years ago.
Is there any truth in that forecast? Is the current crisis a result
of big multinational companies moving their business around the
world in a reckless way that has got us into some of these difficulties
that protectionists might point to?
Mr Brown: My personal view would be no,
that that has not been the case. It will be interesting as we
see India and China growing and becoming—they are important
already—even more important on the world economic scene,
there will be more multinationals from those countries, and one
would hope that in that situation this would underline the mutual
interest in freer trade.
Q333 Lord Haskins: The fact that
Barclays now are quite happy to have a Chinese partner taking
up a big chunk of their equity, is that the world that we are
going to see in the future, that Chinese companies are going to
own big chunks of American banks, which I understand that the
American Government would be quite relaxed about because of the
crisis they are in at the present time?
Mr Brown: Certainly the various wealth
vehicles from Asia and elsewhere are taking stakes in European
and US companies and it is happening very much in the financial
sector, and I think that is recycling. That is good, it shows
that our markets are open and hopefully will encourage liberalisation
in other jurisdictions. Our members who have, for example, sovereign
wealth fund investors, say that they are extremely supportive
shareholders, and the UK authorities and the BBA in the debate
on sovereign wealth funds have always felt that it would be wrong
and self-defeating to impose arbitrary restrictions on them.
Q334 Lord Haskins: But you might
argue that, for example, an American bank with a lot of employees
in London would choose to fire the employees in London before
they would fire the employees in New York; is there any evidence
that that is happening?
Mr Brown: I think it would be a commercial
decision based on the balance of the business of the firm, to
be honest.
Mr Cooke: If I can just come back to
your doom-laden question about the future of the WTO and so on,
I think there are some definite questions about what the future
multilateral structure needs to look like. The answers that Roger
Brown has given illustrate the difficulty that any country has
in understanding what is happening to it in the global economy.
The GATT was largely built on the idea of individual countries
with jurisdictions out of which or into which goods flowed across
borders. I think what we are now seeing is a change. It is a good
thing that the WTO has grown in size; it is a good thing that
developing countries are participating so much more in the decisions
on trade than they were. But of course the increase in size of
the WTO has made the multilateral process much more unwieldy to
manage: and it is interesting that some of the biggest liberalisation
dividends that the WTO has produced have been from accessions—notably
the accession of China, which was the biggest liberalisation of
a big country ever, I would say, and the gains from that. So there
is to my mind a question what will be the future direction here?
Will the WTO become a very large institution binding in a great
many members and responsible for maintaining the rules-based system
rather than the instigator of major new liberalisation initiatives
through multilateral negotiations? I do not have an answer to
that but managing the process as the organisation has grown in
size is challenging.
Q335 Lord Haskins: Is it manageable?
Mr Cooke: Is it manageable? Yes, we do
not yet despair of the Doha Round. There are aspects to the WTO's
future management that perhaps will need attention. For instance,
the Secretariat has been very much the facilitator of whatever
the Member States wish to do in the WTO rather than an initiator
itself. It may be that as an organisation gets very big that is
no longer a possible balance and we will need some change.
Q336 Lord Watson of Richmond: There
is a fascinating comparison, is there not, for the development
of the European Union?
Mr Cooke: A Reform Treaty for the WTO?
Lord Watson of Richmond: Absolutely, yes.
Q337 Chairman: There are a couple
of questions that I am very much left with, having read your papers.
There are some sectors where if the present Doha Round collapses
it is very difficult to see how progress can be made. I have the
impression from your papers and from the tenor of your answers
that were the Doha Round not to turn out particularly promising
at a minimum level you are still very hopeful about the future
for liberalisation of financial services. Is this right or am
I putting words in your mouth?
Mr Cooke: Personally I feel that the
arguments for liberalising financial services as a key part of
the infrastructure for economic development, will remain—certainly
the arguments for developing financial services, and, as financial
services tend to be capital intensive, I think that will mean
liberalisation so that inward investment can be attracted from
richer markets to developing ones. But of course if Doha fails
one of the principal losses will be that agricultural reform—which,
whatever its deficiencies is already tied in to the various offers
from the EU and the United States—will come back off the
table. That of course could lead to a situation where, rightly
or wrongly, certain countries might say, "We failed to secure
any liberalisation of agriculture, so we will not liberalise our
financial services markets." In Ricardian terms I think that
is to cut off one's nose to spite one's face, but it is a possible
reaction.
Q338 Chairman: I suppose what I am
fishing for, there have been some suggestions in our evidence
that the Doha Round, whether a failure or a success, may be the
last time that people can tackle a multilateral negotiation with
152 countries, and that the way forward will have to be other
bilateral regional trade agreements. Do you share that view? Or
if the WTO did not exist how would financial services be doing
in terms of liberalisation? I have this feeling, particularly
in banking, that we may be talking about a special, rather different
sector from some others, either of services or indeed of goods
and agricultural.
Mr Brown: I think the fact that in financial
services so many of the barriers are regulatory and there are
both bilateral and multilateral debates on convergence and related
matters, and that in itself holds out some hope for financial
services making quite reasonable progress even in the absence
of a more general multilateral trade round.
Q339 Chairman: Largely, of course,
Mr Cooke's argument that if the agricultural round fails people
may be less inclined to liberalise financial services?
Mr Brown: That is quite possible; I would
agree.
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