To understand the key policy implications, simply note that the first half of the present century will settle the disputes about the degree to which America will be challenged by China or India as the world’s pre-eminent economic power.
One thing is certain. The strongest economic power of the first half of the 21st century will not be Britain. So where does Britain fit in this new emerging global economic order? What is its decisive advantage?
It is the degree to which Britain, with London as its advanced guard, has opened itself to the globalisation of both capital and labour. In an era of globalisation, to be the most global is to hold a trump card. Britain can never again be the world’s most powerful economy. But it has sufficient economic weight to guarantee itself, if it places itself with the grain of growing globalisation, an entirely enviable quality of life for its inhabitants as well as prosperity for its companies.
If it turns its back on globalisation the world will not notice for long. But we, our children and our grandchildren will do, as Britain’s economy is slowly marginalised — with all the negative results for our quality of life and economic well-being.
Misleading stories about immigration are all too common in some parts of the red top press. “Tabloids can seriously damage your wealth” could be their health warning given the need to fund the future pensions of Britain’s ageing population, staff its essential services, and meet its skills needs.
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In London every sector of the economy, from the lowest to the highest paid, has benefited from the globalisation of labour. Its health, education and construction sectors would shudder to a halt without it. The City welcomes employees from America, eastern Europe, “old” continental Europe and the Pacific Rim. Many office blocks in the Square Mile have more than 50 nationalities working in them.
Rational economic reflection on the globalisation of labour is unlikely to become a key selling point of the tabloids. But perhaps more surprising is that the serious media seem to misunderstand the globalisation of capital.
As the world’s financial institutions and investment companies have flocked to London so have companies seeking capital. International flotations are rising at a faster rate in London than in any rival market. Up to May this year 42 listings on the main market and the Alternative Investment Market (AIM) have raised £4.3 billion. In 2005 93 listings raised £6.7 billion, the year before 49 listings generated £1.9 billion.
London accounted for 70% of western Europe’s floats last year — 80% of these being AIM listings. British businesses have been joined by a growing number of companies from overseas, most recently from emerging eastern European markets. Some 120 international companies joined AIM last year, representing 23% of new listings.
The London market boasts listings from a rich variety of companies so it is no longer a barometer of just Britain’s economic performance. It is increasing its edge as the world’s most globalised market.
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The recent tussle for ownership of BAA, the airports operator, also sparked misplaced alarmist headlines. The money paid for British firms can be used to expand other British companies or buy foreign assets — the net wealth of the country is not reduced one jot by such a takeover but is merely shifted to different companies. Overseas investors already have holdings in all big British companies. BAE’s largest investors are foreign, as are Glaxo Smith Kline’s; O2 is in Spanish hands, as is Abbey National. Dubai bought P&O.
London is now benefiting from a recent example of how not to run a modern globalised economy. This is the arrival of the “Sox refugees” — American companies seeking to list in London to avoid the onerous provisions of the Sarbanes- Oxley (Sox) act introduced into American law in the wake of Enron. Given how much Britain is a beneficiary of this process, it is important to stress that shifts in foreign corporate governance are likely to happen more quickly if we engage with companies, rather than isolate them, and that governance is a legitimate factor in assessing the market value of companies.
Recently we have seen pressure for the City to take a less market-based approach to the flotation of foreign companies in London. This is a dangerous trend. Investors should be allowed to price political and other risks into their overall valuations and back their judgment (or not) with investment capital. Vulnerable pensioners require protection from insurance swindlers but mature financial markets should be allowed to determine their own trade-off between risk and profit. It is up to those markets to decide what discount they wish to give to companies listing from China, Russia and India.
The modern prosperity of the City of London was secured 30 years ago when tax changes in America drove finance offshore to create London’s dominance of the eurobond business.
The continuing rise of the Chinese, Russian and Indian economies is of global economic significance. We want their companies listed in London. Those who wish to keep them out for whatever reason, rather than allow the world’s most mature financial markets to make their own judgments, will harm the economic interests of our country.
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The challenges we must confront
THE CITY may have enabled Britons to hum Land of Hope and Glory again without blushing, but London faces challenges that could scupper its new dominance before we have even relearnt the words, writes Louise Armitstead.
In recent weeks the shine has come off one of the biggest attractions — the London Stock Exchange — with the agreement to merge the New York Stock Exchange with Euronext to create the first transatlantic exchange. London could now be outgunned by its Paris-based rival. And if being jilted by its favourite partner wasn’t bad enough, the London exchange faces the prospect of being taken over by America’s Nasdaq. Members of the exchange are already nervous about being exposed to regulation by Washington’s increasingly draconian Securities and Exchange Commission — they especially fear the Sarbanes-Oxley act. The flood of London listings is expected to abate until the regulatory position is clearer.
Politicians have been quick to say we must retain the City’s ‘light touch’ regulatory regime but Westminster is doing nothing to help. Red tape, tax, anti-terror provisions and crumbling infrastructure make London ever less attractive to both domestic and foreign companies.
Britain’s 30% rate of corporation tax might have been attractive when it was introduced in 1997 but now — particularly next to Ireland’s 12.5% rate — it is starting to look uncompetitive. Similarly, Britain’s tax revenue as a percentage of national income has traditionally been low — in 1996 it was 34%, the 12th lowest among the 30 OECD countries, but by next year this will climb to 38.5% or 19th place.
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Doug Godden, head of economic analysis at the CBI, the employers’ organisation, said: ‘The increase of red tape has meant that Britain has started to lose its competitive edge in recent years. For example, last week the minimum holiday time was raised from 20 to 28 days. This adds to the cost of employment. It has crept up with other regulations such as the minimum wage, the working-time directive and the agency directive. Many regulations come from Europe but lots are generated by Westminster too.’
Meanwhile, London’s crumbling transport system makes the capital increasing uncomfortable and inconvenient. The overhaul of the archaic Tube and train networks can no longer be postponed but will cause yet more havoc.
And looming above all this is the threat of terrorism, which could yet be the ultimate deal-breaker for London.