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Britain’s place in the world

22 September 2011092011


By Richard Heald

A speech given at St. Georges House.

I am standing before you with a certain degree of trepidation.

Over 30 years ago I arrived late at my weekly tutorial in Brasenose College, in full rowing kit to be greeted with the refrain "the tide must have been going out"... It got worse while I was reading my poor offering for the week - on Administrative Law - my tutor got up and reached for a book from his book case and then followed my missive word for word with exaggerated but entirely justifiable distain.

It is therefore with no little fear that I stand before a very distinguished and learned group of individuals to deliver some thoughts on Britains's place in the world of trade and industry today.

In mitigation, I would say that these are considered observations of a "historian manqué" who has some 33 years of experience in dealing with international financial matters and who in his current role interacts with senior executives of UK and Indian businesses, large and small.

At that same time I am happy to accept whatever comments, clarification and criticisms you may wish to make.

I have interpreted my instructions as setting the exam question for your deliberations and as such have taken full liberty to express my own opinions, in the full expectation that I will be corrected, chastised and humbled this afternoon... but ultimately that I will learn.

The Changing World

So let us start. The world is changing around us... and I am not talking technologically. The geo-political and economic tectonic plates are moving.

The 21st Century belongs to the BRICS -and predominately India and China but also Brazil, Indonesia, Vietnam. While this is a seismic change for us in the West, let us accept that this is merely a restitution of the status quo ante the Industrial Revolution which started in Britain in the 18th Century.

Wealth in the year 1 AD: The size of each territory shows the GDP, adjusted for local purchasing power, of the equivalent territory in 1 AD. The Americas appear small, partly because fewer people lived there in year 1 AD. In simple terms, 40% of global GDP pre 1750 was represented by the activities of those areas which now occupy China and India.

Wealth in the year 1900: The effects of the industrial revolution have become apparent here - the United Kingdom has the highest estimated GDP per person. However, India shrunk The Economist this week has published figures predicting that in 2030 China (18.0%) will be the largest share of the world's GDP followed by the USA (10.1%) and India (6.3%).

Projected wealth in the year 2015: India seems set to come full circle from 2,000 years ago. By 2050 India's GDP will be equal to that of the US but not its per capita income (Goldman Sachs) Goldman Sachs 2003 [Global Economics Paper 134, BRIMCs] report famously predicted that China would be the world's largest economy by 2050 and that India would be the 3rd largest. This evolution is already happening. Japan was overtaken by China in 2010.

However the resulting impact will be more fundamental than even these headline numbers convey. The re-ordering of economic power by the year 2050 will be literally life changing for the vast majority of people on the planet and for the political, social and economic systems within which they inhabit.

The UK is not immune to these forces. I suspect that successive UK governments have not truly popularised this fact or have, indeed, appreciated or planned for the impact thereof on our domestic economies.

At the same time, I would argue that Britain - despite its relative decline in economic and trade terms over the past decades - is adjusting its position within that world and, moreover, despite evidence to the contrary, is increasingly positioned positively to benefit from the changes that are occurring around us.

Some of this is due to historical reasons and some of it is due to the service nature of our economy and our consequent positioning within the global supply chain.

No doubt this will be a matter of debate however I do find it encouraging that the BRIC reports project that the UK will become the largest economy in Europe by 2050 overtaking both France and Germany.

Where we are now...

There is always a tendency to knock our own economy but the UK remains a very significant player in world trade and a major beneficiary of investment flows.

The economy of the UK is the 6th largest in the world measured by nominal GDP and 7th by PPP. In Europe, we are the 3rd largest by nominal GDP after Germany and France and 2nd after Germany by PPP.

The UK is arguably one of the most globalised economies in the world.

Indeed, the UK is an interface to the global market, being the second largest exporter and fourth largest exporter of commercial services and the tenth largest exporter and sixth largest importer of merchandise.

The nature of our economy allows us to play an increasingly important part in the rapidly globalising world with a Service sector which dominates our economic activity at some 73% of GDP, a financial services sector centred in the City which is the leading financial centre in the world and a capital city in London which has the largest city GDP in Europe.

The UK is at the heart of the global supply chain. We import, add value and then export. The UK trade in services account has been in surplus every year since 1996 and this surplus has increased since 1990. Meanwhile the UK trade in goods account has been in deficit since 1983. However, the UK sells a lower volume of goods at higher price in key markets than its competitors. Moreover the UK sells high quality component parts to other countries, where final assembly takes place (vz UK exports wings and engines of the Airbus A380 to France for final assembly).

In a world where goods and products comprise elements and components which are sourced globally, the UK has established itself at the "upstream" end of that supply chain where the high value/ high margin opportunities exist.

This favourable positioning is underpinned by a relatively benign operating environment. To quote some statistics:-
• The UK is the best place to do business in the EU and the G8 (Doing Business 2011: World Bank)
• 13 days to set up a business, versus OECD average of 15days (World Bank)
• No 1 in Europe in the global digital economy index (Economic Intelligence Unit)

All of this results in the UK capturing a very significant slice of Foreign Direct Investment (FDI) flows.

How did we get here?

In large part, our current positioning is the result of the neo-liberal policies introduced during the 1980s and sustained over the past 30 years in varying degrees.

The UK's economic power in the nineteenth century was based on the first mover advantage that came with the implementation of the Industrial Revolution coupled with an increasingly extensive empire acting as a "captive" market for industrial and largely finished goods. Notwithstanding the rise of the United States, this period lasted certainly until the 1950s in which decade our annual rate of growth continued at some 2.9%. But it was during that period that a combination of increased competition from the United States, the increase in industrialisation in Europe (as well as the advent of the Common Market), rising power of UK organised labour unions and the break-up of Empire that our competitive position was eroded as our economic model became increasingly redundant.

The dismantling of this model was painful in personal and economic terms compounded by two recessions in 1980s and in the early 1990s but the evolution of the economy into what we recognise today co-incided with the rapid growth of globalisation and the creation of extended supply chains which exploit individual strengths and cost structures across boundaries as a key foundation of the world in which we live.

Serendipitously, our evolution into a broad service economy has co-incided at the precise time when the very technologies, skills and capabilities we have developed are in demand by the new developing economies and it is an opportunity which by and large we have grasped.

The development of our Innovation _ be it in Advanced Manufacturing, Healthcare, Remote Learning, Supply Chain Logistics, Infrastructure, Financial and Professional Services and Digital and Creative Industries are in significant demand across the world.

Examples

• Warwick Engineering - Jaguar Land Rover
• Nano car
• Godrej fridge
• IPod

I am flying to India tonight as my organisation is leading a delegation of 59 UK based skills companies on a mission to India. Yesterday we signed an MoU with West Bengal so that the UK skills industry can scope and execute an upgrade in capabilities in the state across a range of competencies. At the same time, we are signing a contract with an Indian company to train some 71,000 trainers over 5 years who will in turn train some 11.5million people over the same period.

But what are the challenges...

As we all know we live in a world of considerable economic uncertainty. I for one fail to see how we can emerge out of the current crisis without some form of sovereign default and some form of recapitalisation of the banking system.

I am concerned at the first signs of protectionism raising its head - in the form of a potential currency war.

The UK is particularly vulnerable to such events. Arguably no capitalist country has benefitted as much from the on-going period of globalisation than the UK. Our interdependence on the current global ecosystem means that UK PLC more than any other country needs to ensure that barriers to trade and investment are kept down.

Other countries may have greater volumes of exports but they are not as dependent on them. The US's economy is very internally focused, for instance. As such we are exposed to our more powerful colleagues whose motivations may be more domestically politically motivated.

While the failure/slow pace of the Doha Round is disappointing the slack has been taken up by a series of bilateral trade agreements and these form statements of intent to keep trade routes open. The EU India FTA agreement is an important part of this positive story.

We have to remain open and pragmatic in exploiting our intellectual property. ARM's philosophy of socialising its intellectual property so as to popularise its products is perhaps a way forward. While we should continue to encourage inward investment into our industries and research institutes, we should at the same time not resist exporting our innovation models into the developing world.

In practice, I believe that with our embedded knowledge and structures, we will continue to occupy the innovative high ground in terms of product, manufacturing and margins.

To do so we must remain open to long term capital inflows. A new model of car takes 5 years from conception to coming off the production line. Stability of investment within advanced engineering is a precious commodity and while we have a surplus of start-up and development capital, the financial pressures within the Stock Markets and the Venture Capital and Private Equity industries mean that, in the right circumstances, foreign capital should be welcomed.

We are subject to domestic headwinds. Our favourable operating environment is fragile. Globalisation is a double edged sword. Between 2010 and 2011 the UK attracted investments from 54 countries. But the US$1 trillion of retained FDI in the UK can be deployed elsewhere.

The Government must maintain its commitment to creating a favourable business friendly tax regime. The increasing Visa/ Border Agency issues with regard to business and overseas students are an increasing irritant for businessmen from overseas countries.

Ultimately what are the opportunities?

Despite these - and no doubt many more - potential issues, the medium and long term opportunities are very attractive. The developments which will occur over the next 40 years are too important to ignore.

The UK is uniquely placed in the global supply chain and current policies are helping us to position ourselves to benefit from this trend.

Let me conclude by quoting some statistics. The following are the Gross Domestic Product per capita (nominal) in 2010 compared to forecaste for 2050.

2010 2050
China
4,667
70,710
USA 14,435 38,514
India
1,346 37,668
UK 2,546 5,133

Thank you