Gordon Brown – 2008 Speech to Business Leaders in London
The speech made by Gordon Brown, the then Prime Minister, at Imperial College in London on 27 October 2008.
Prime Minister:
I have got a special affinity with Imperial College because a very close member of my family was a professor here for many decades. I have seen the expansion of this college and how it leads the world in so many different fields, and funnily enough it was the first place that I applied for a job as a lecturer when I was leaving university in the 1970s. As you know I was a lecturer before I went into politics. Universities as you know stand for integrity, objectivity, impartiality, the disinterested pursuit of truth, the objective search for knowledge, all the qualities you have to leave behind when you go into politics.
I am particularly pleased to be here with a group of businessmen and women as well and with people who see it at the sharp end what is happening as the result of the credit crunch and all the other changes that are taking place and it does have our undivided attention, Yvette from the Treasury and Tony the Minister for Employment, how we can take people through these difficult times.
I had a letter a few days ago from someone in the Midlands who said because she was worried about a particular bank she hadn’t slept for four days until we made a decision that was a decision which made her feel more secure about her bank and that is why we are concerned to make sure that people understand both what we are doing and the things that can be done to take us through this global credit crunch. I am also pleased to see so many distinguished academics and economists here and it is new thinking, not the traditional thinking, not the old orthodoxies, that are going to take us through what I believe is the first crisis of the global age.
I recall that in the 1920s – and I was a Treasury Minister for 10 years and this can be seen in the library of the Treasury in Whitehall – that Keynes, the economist, put his great proposals that assumed that things would not return to normal without special action, and he put his proposals to the Treasury in the form of a document that was sent to the Treasury and you can see in the Treasury library that the Permanent Secretary of the Treasury at the time marked on this great and very foresightful document from Keynes only three words – Inflation, Extravagance, Bankruptcy – and that was the reaction to Keynes’ initial proposals.
We have got to have the new thinking that is necessary for the future. If the British Treasury treated Keynes badly when he had his new ideas, just think what happened to him when he went to the American Treasury. He went to meet the American financiers and the policy-makers of the day, arrived at the door of the Treasury and he was on his own and the Treasury Secretary said to him “Where is your lawyer?” and he said I haven’t brought my lawyer and he said “Well, who does your thinking for you?” Now, these were the reactions to new ideas in difficult times before. I believe we have got to be open to new ideas now. Why? Because we are in the first financial crisis of the global age – it is the first global financial crisis. We have also just come through what I would call the first resources crisis of the global age, with what has happened to oil, to commodities and to food and we are facing the restructuring of industry and services that is global in its nature, precisely because the global flow of capital, the global flow of labour, the global flow of goods and services is more open and should remain in my view as open as it has been is more open and meets the case as it has been in any time in our history.
And what has happened? We have seen in the last 10 years the benefits of globalisation which are cheaper consumer goods coming out of China and Asia. We have seen the benefits in low interest rates and we have had low interest rates for a long period of time over these last 10 years, but we are now seeing the difficulties that have got to be overcome on resources, on restructuring, on reform of the financial system if we are actually going to have a successful global economy that works for everyone and not just for a few. But if we are able to solve these problems – and this is my first message this morning – if we are able to solve these problems then I believe the prospects for Britain and for countries that have got dynamism and talent and are able to produce the new products and the new goods and services that the world wants, the prospects are very good indeed.
The world economy, whichever way we look at it, will double in the next 20 years. It will double in size, it will be double in opportunities, there will be double the opportunities for new businesses, for new ideas, for new inventions. There will be a huge consumer market coming out of Asia and from other countries in the world that are historically are producers and not consumers, there will be a burgeoning middle class, about a billion more people in middle class jobs with incomes to suit that and at the same time there will be opportunities for both countries that have the valued added products and services, that have the technology-driven goods, that have the custom-built and niche products and services that people want, and that is why I am confident that Britain with its stability, with its openness, with its global reach, with its history of science and innovation, represented by the success of this university, and with its investment that we are now making in education to the highest standards can be one of the great success stories of this global era but we have to solve the problems that we have got.
The first problem has been resources. You have seen over the last year – and this is the reason why people’s standard of living has run into difficulties – the price of petrol, the price of gas and electricity, the price of food, the price of all basic commodities has actually risen substantially and what has happened over the last year is we have had a sense in the marketplace that the long-term demand for oil particularly, but for commodities, because of the expansion of Asia in particular will outpace the supply of these goods and the price of oil has gone up substantially, it has become very volatile, and you know it has come down in the last few months as well as people have responded to what is actually going to happen to the world in the next year, but we have had the first crisis, if you like, of resources in this world economy and it is interesting that the two items that are the most protected – that is food and oil – have been at the centre of this threat to people’s standards of living. It is not that the global markets have been working too well, it is actually that they have not been working well enough and protectionism in food and cartels in oil, this has got to be changed if we are going to be successful in making a global economy work. But a global energy policy now looks very different from what it looked like two years ago. It is now about diversifying out of our dependence or the dictatorship of oil into nuclear, into renewable, into better ways of powering the car and into some way recycling the oil revenues that have been gained by the richest countries in the Arab States into developing new products based on non-oil sources of energy for the future, and that is the first big change that I believe is going to happen.
The second is in food where the supply of food has not been sufficient to meet the demand. Africa is in this ridiculous position where with 70% of the people on the land it is actually a net importer of food and does not have the wherewithal to increase its agricultural production. There are big decisions to be made about how we supply food to the world, how we deal with the protectionism that is at the heart of American and European policies, these are the things that have got to be dealt with if we are going to have a successful answer to the resources problems we face.
The second area is of course restructuring and what is happening at the moment, is a one million manufacturing jobs are moving from America, Europe and Japan every year to Asia, service jobs are now moving in large numbers as well. You have got a restructuring of the economy that is also an opportunity for countries like ours. I cannot promise people that we will be able to keep them in their last job if they become technologically redundant but we can promise people that we will help them into their next job and I believe that this restructuring that is taking place, you can see in America the protectionism that is arising from people’s fears about losing their job, you can see protectionism in other parts of the world because people are feeling genuinely insecure, but we have got to show people that if they get the skills that are necessary for the new economy, then we are in the position to be one of the great beneficiaries again.
And that is why today when we are announcing reform to the Incapacity Benefit, our emphasis is on people’s ability and not just their disability, and that is why instead of what happened in the 1980s when quite frankly people were put onto Incapacity Benefit simply to lower the numbers of people who were on Unemployment Benefit, we are reforming Incapacity Benefit at the right time so that people who have disabilities are given the training, the support and the employment opportunities that are necessary so that they can participate successfully in an economy that is far different to what it was 20 years and gives huge opportunities to people with partial disabilities or people who previously would not have been given the chance of jobs. So we will continue to make these changes to restructure the economy so that the opportunities are there with an intensification of our welfare reforms to give people the opportunity to move quickly from one job to another if that is what is necessary, to get the skills in their existing job so that they can hold down that job, to get the new skills that are necessary perhaps of in some cases people here starting a new business for the first time, with the help of the government.
Now then I come to the third problem of globalisation that we have still got to solve, and that is the global financial system. For many months people thought that we had a liquidity problem. Now people realise that we have something bigger than that, a structural problem that has got to be dealt with and we are basically talking about global financial flows that to some extent have been unsupervised and certainly undisclosed in other ways, global financial flows in a world where we simply have only national supervisors and national systems of regulation. It was always the case that as the global economy changed we would have to make changes in the way that we supervise the flows of global finance and the way we deal with some of the problems that arise when you have a global economy and not just a series of national or sheltered or protected economies or even regional economies like the European Union. But what we have had to do in the last few weeks is this.
First of all, in addition to the liquidity that we have provided to the financial system so that the banks can keep going, we decided in Britain, and I think other countries have agreed with this decision, that we had to recapitalise and strengthen our banks, but the write-offs that needed to take place had to be in the context of banks that were more strongly capitalised. And then of course the issue is not simply to recapitalise the banks, it is to get the banks doing what the banks should be doing and what is the job of the banks, and that is to make possible the flow of funds to small businesses, to home owners, and of course to ordinary families. And people need to have confidence, and they need to have the trust that banks are dealing with each other on a basis where everything is fair and above board and people know exactly what the position of each institution is, and that has been the confidence that has been lacking over the last period of time.
So our programme will be comprehensive in all ways. It is not simply liquidity and the restructuring of the banks. It is to enable banks to start lending again by whatever means are necessary, and we will continue to discuss that with them. And at the same time it is to reform the international financial system not just because we want to avoid the problems that have happened in the future, but because it is necessary for people to have confidence in the financial system now that they feel and are sure that the problems that have existed in that banking system have actually been dealt with at source. So that is why I say that the principles have got to be applied in practice to the detailed changes that we have got to make to the international financial system. The principles are of course in transparency and you cannot again have off-balance-sheet activities that are not disclosed sometimes even to the executive boards of the firms. That means transparency and consistency in standards internationally, accounting standards and other standards that reflect that there are international ways that are agreed for doing things. We need integrity, and we need to show that by removing the conflicts of interest that exist in the system at the moment, ratings agencies that are also advisers to firms did not do a proper job of rating products that sometimes were sub-prime mortgage products that ended up being rated as Triple A investment products.
Conflicts of interest also include the systems of remuneration. The systems of remuneration, were rewarding people too much for the short-term deal rather than the long-term success of the company, and I think that anybody who looks at the way an economy prospers it is by rewarding hard work, effort and enterprise and responsible risk-taking, not rewarding irresponsible risk-taking and excess. There has got to be responsibility as well. In other words the boards of companies have got to know and understand the risks and in some cases we have got to ensure that risks that are being passed on from one company to another, people have got to take responsibility when they pass that risk on for what they have done. That was one of the problems that we have seen recently.
We are going to have to look at some of the markets like the credits derivatives market which has essentially been an unsupervised and unregulated market for too long.
And then we need this international reform. We need an international monetary system where you have an early warning system, where you have a crisis prevention system, where you have proper surveillance of what is happening, where the systems that we have to build where local economies became national economies have now got to be built as national economies become part of global economies. And that for me is the challenge that we will have to start meeting when international leaders meet on 15 November 2008 to discuss the changes that are necessary in our system.
Now problems can arise from irresponsible and undisclosed lending and what we found is that because we are a global economy what can start in a sub-prime mortgage market in the deep South of the United States can end up affecting Hungary, Iceland and every European economy as it has been doing over the last few weeks. But we have also found that there are failings in our own institutions that have now got to be dealt with, and dealt with so that we can rebuild confidence in the system. I think we are at the beginnings of the new stage of the global economy. I think the speed of change is accelerating and not slowing down. I think the opportunities are immense for people with ideas and initiative and for people who show the hard work, and the energy and the enterprise that is necessary for success.
But I believe that there are problems that we have got to solve so that we can make that global economy work for everyone and I highlight these problems, and of course there are more things we can look at as far as the way the world economy is working, the imbalances that have grown up, but I would say the main the problems we have got to solve, and I would appreciate people’s views on this, are we have got to help people through this restructuring, and that is why reforms we make in welfare are very important to helping people get the jobs of the future. We have got to solve the resources problem, there has got to be a proper dialogue between consumers and producers in oil and energy, and we have got to diversify out of oil, and we have got to solve the problems of the financial system and that means taking very tough action indeed to root out any abuses.
I have said before that I was at a meeting in Washington a few months ago, and at that meeting there were demonstrators complaining about what the IMF and the World Bank were doing and they had this banner “World-Wide Campaign Against Globalisation” and you can see what they meant. They felt insecure about the prospects for globalisation. Not as bad as in France. There was an anti-globalisation campaign in 2006 that said “No to 2007″. But you can see why people are insecure, why people worry about the future.
We have taken measures to help small businesses, to ensure the supply of funds, to make sure we can draw on European money to stop the late payment by government departments so that there is now early payment. We have taken measures to help home-owners like [indistinct] unused, unlet or unsold properties on the market, like increasing the fund that is available both for mortgage lending and for social housing by the government and we are prepared to help people who are facing repossession, but we have also got to solve the basic problems that are essentially the problems on the transition to a new global age and I hope that we can build a new national unity that we – Britain – working with other countries can build the foundation for a successful economy, working as part of an open, global economy in the years to come, with our traditions as a country of openness and global reach we are well placed to do it, with our scientific genius and with the investment we are making in education we can be one of the great successes and I hope we can work together to achieve that.
Thank you very much.
Chairman:
How long have you got! You mentioned oil. Perhaps we could start with resources. Iain Conn has been an executive director at BT. What can we actually do to make the global oil market work more in the interests of all of the world and not just the monopoly producers?
Question:
I’m not sure whether I should stand, but probably that is easiest. I think first of all David to answer your question, I think the Prime Minister is right that we need the right regulatory frameworks to stimulate both more resources today, because the world needs them, but also to stimulate new technologies and their development and in that regard I have actually got a question for the Prime Minister. Clearly we have to balance the short term response to the financial crisis with the long term stimulation of industry and in energy probably the two most important things I see that are required is the long-term regulatory framework to stimulate investment and secondly the right framework to allow new energy technologies to compete with each other on a level playing field. These are just two of the long-term priorities for energy and I wondered if the Prime Minister could comment on as you are focussing on the short-term response to the financial crisis which we all applaud, what are the top priorities for you in making sure the long-term health of Britain’s ability to compete in industry is assured? Thank you.
Chairman:
We are going to try and take several questions before we get some answers. Perhaps in the light of that I could go to Richard Templer who is the Director of the Porter Institute for bio-fuels. Bio-fuels could help play into this energy but also risks taking land out of food production. Where in that nexus can we be helpful going forward?
Question:
I think there are some very interesting issues there that the Prime Minister mentioned in his speech about the amount of land available for food and other production. In fact if you look around Europe and closer to home the productivity for example of the old grain basket of the Soviet Union and its partners had a quarter of the level of productivity of the UK and there is a lot of land there. It seems to me that there opportunities that they would like out with the UK and that has particular challenges for us and for our invention. I think we need to be able to export those inventions and use them around the world and in particular I think the new European Union has opportunities for us.
If I could then ask a question, it was implicit in some of the things you said, and that is to do with climate change, that there has been a lot of discussion in the papers very recently about a Green New Deal. The renewable transport fuels obligation has started the ball rolling in terms of being of the value of CO2 emissions. I wonder where the government’s thinking is going in this respect and whether some of the opportunities will be in greening our economy?
Chairman:
I think I will take those two resource questions together and then we will move on and take questions in batches.
Prime Minister:
I’m very pleased to be asked about this because it allows me to point out that all the long-term decisions we need to make are being made at the moment or have been made over the last few months. The decision on nuclear, the decision to speed up and make more flexible our planning system, which has been a barrier to competitiveness and growth, a decision on infrastructure, whether they be the decisions on Crossrail in London, or the decisions on air transport, these are decisions we are making. We have doubled the science budget and so you may think at a time when we have to contract in certain areas as a result of what is happening to the economy, that would not be the first thing on our minds, but we have doubled the science budget because we believe that is absolutely crucial to the future, and our investment in education is continuing because we believe that that is the key to everything we do.
As far as Energy is concerned, I agree with you, you need a long-term policy so if you are reducing your dependence on oil, the first thing to recognise is that oil and gas are still going to be very important, so in the North Sea we are looking at ways we can get the three different possibilities in the North Sea moving forward that is west of Shetland, that is also these fields that have been invested in previously but we haven’t taken out all the oil that is there and new technology allows us to go back, and it is also the small fields in the North Sea which some people have left because they don’t think they are profitable enough, but actually they are worth doing.
But it also means we have made a decision to build new nuclear power stations. We have been one of the first countries in the world to start to do a rebuild programme for nuclear. 16 of the 27 European Union countries are now following us, so there is a nuclear investment about to take place, and I think three arguments are coming together on this. One is the climate change argument which requires us to reduce carbon emissions, secondly the energy security argument which is that we do not want to be dependent on unstable or potentially unfriendly countries and we do not want our sources of energy to be so dependent on foreign provision that we do not have the security that we want, and then affordability and because the price of oil has been both high and volatile these three things come together to make it imperative that we invest out of oil into all these other areas as well so we are extending our renewables programme, nuclear power is going up a lot, there is a lot of new investment announced today actually, new investment in powering the car in different ways: hybrid and electric and everything else, and I know that the car manufacturers are taking this very seriously.
So, even in these difficult times let me just say, the investment that is necessary for the future will continue. The long term decisions that require investment that have to be made are being made and will be upheld because that is the only way that we can benefit from what is as I have described the new global age. And that means that the responsible course of government is to invest at this time, to speed up economic activity and as economic activity rises and as tax revenues recover, then you would want Boeing to be a lower share of your national income. But the responsible course at the moment is to use the investments that are necessary and to continue them as well as to help people through difficult times and I think that is a very fundamental part of what we are doing.
That leads on to the Green New Deal. We have announced a series of jobs initiatives in the environment but this is a huge industry for the future. The market in environmental technologies and services where Britain can play a leading role is one that is going to expand dramatically over the next few years. And yes there are jobs in insulation and Tony is heading up a project to get more people to do that so that we can have more energy efficiency in people’s homes, but yes there is also a whole range of jobs in other areas as we move to new technologies and new services. We are pioneering, as Yvette did when she was Housing Minister, eco-towns. We are pioneering of course carbon-free homes and carbon-free buildings. These are the issues that we have got to address in the future and that requires both the investment and the sense that just as IT powered a huge number of jobs in the 1990s, the environment can be responsible for the creation of thousands, indeed potentially hundreds of thousands of jobs in the next years.
Question:
The issues at the Green Revolution actually provide some very good examples of the way in which we can capture some of the new technologies and therefore also the new jobs for the future. So for example if we can find [indistinct] way in terms of developing technology for carbon capture, the potential for that to apply to coal-fired power stations right across the world, that means that gives us an opportunity for an export for the future. Equally if we can find and lead the way in terms of new technology to cut carbon emissions from existing homes so a lot of new technology is being developed for new homes but what about technology for better improving insulation in existing homes again is something that could then drive jobs and … investment and exports right across the world as well. So I actually think there is a huge moral imperative for us in terms of cutting carbon emissions, but there is also a huge economic incentive for us as a nation as well, and we need to link those two things together.
Chairman:
Perhaps we could move on to the next set of topics which is to do with restructuring imposed on us by globalisation which has now got the beginnings of a recession superimposed on that. Could I hear from a couple of people who run small businesses maybe and about what it feels like and how they see it.
Question:
Prime Minister, distinguished guests. We manufacture general corrugated packaging and probably 50% of our business is in the designated food market supplying bread and produce. We have got a finger on the pulse and you get a very quick response. We are seeing at the moment volumes down from these people who are daily orders 25% down. We are finding that companies and I don’t want to be a downer because I share your vision of the future, we will come through this, but we are talking about the problems that we face now.
Customers that simply have not got the credit. People who haven’t put on stock. Friday a guy came to me. He owes us money for four months. He literally emptied out his pockets and I had to give him what he had the money for, otherwise he wouldn’t be able to sell his produce. That is the reality of where we are. How we get to the vision of your future which we all share and I am sure there will be lots of other stories, but that is where we are today. You are also seeing credit rating agencies starting to pull cover, and the critical thing is, and this is the one thing that we should crucially understand, over the next few weeks, coming up to this Christmas period, what is going to happen to the small businesses and the big ones when you do get that uplift pre-Christmas, because if they cannot fund the situation now then God help us all when we move forward. In a sense this customer didn’t have the money for 400 of these produce trays. When he needs a 1,000 what do we do? Thank you very much.
Question:
Kate Bingham you run a Venture Capital Fund for Bio-Sciences. What does it feel like in the business sector that is trying to create the new jobs as well as hang on to the existing ones?
Question:
I am a venture capitalist largely investing in biotech companies and while it seems slightly counter-intuitive to think that loss-making, non-credit bearing biotech companies are suffering, they will suffer in the future because we won’t be able to raise our money from our investors because it largely comes from pension funds who have seen public equity holdings collapse so that they are less able to give us money on the venture capital side. So what I would really like to understand from the government is what your plans are to help these small and medium size biotech companies and what ideas you have got, for example, to extend the R&D tax credit, other ideas with tax incentives because these companies are creating the sort of jobs that you want to continue to support – high-tech, skilled, very exportable in terms of skills and intellectual property – and yet we will suffer. I would love to hear what you say about that.
Chairman:
Perhaps I could talk to someone with a bigger business. Tony Douglas, you run O’Rourke which is a large construction company. You built Terminal Five, building the Olympic Stadium. Doing lots of things in the Gulf and all over the world. What is it like for a bigger business in this situation?
Question:
Prime Minister first of all I would like to say that I was upbeat about your opening address. I think it is a time where brave decisions have to be made and I can only speak in the context of our business and therefore would like to respond on the basis of two points that you made.
We are the largest privately owned construction company in the United Kingdom. We have seen in recent times that we have had to be prepared to be far more global in our approach. We are currently building a new city in Abu Dhabi which is 20 times the size of Canary Wharf and it has allowed us to take many medium-sized enterprises with us in our supply chain. We directly employ 31,000 people which is quite unique in our line of business. We are the biggest apprenticeship operator in the United Kingdom and we are proud that we employ more graduates than all our competitors put together. We have been growing 20% compound a year, year-on-year. The relevance of this however is it requires a brave pill on our behalf because to maintain that level of growth it is about taking those skills to faraway places, it is about continuing to invest and employ 20% more people every year and I guess the point in terms I would like to make is that the demand side of the equation and particularly in the home market around infrastructure a well-placed pound invested in government infrastructure projects allows companies such as ourselves to employ skills which are exportable, is the very best of what this country has to offer. It allows us to take it through the small and medium size supply chain, it allows us to export that competently overseas. And I guess the question that I have got is do you share first of all the confidence hopefully I am trying to bring to the debate and secondly the commitment to continue that focussed investment in the home market.
Prime Minister:
Absolutely and where you have British companies that are global companies, I believe you benefit from the global reach we have, our contacts in all the different continents and our willingness to support British industry. I am going to the Gulf very soon to support British industry to make sure that we get the best of the opportunities that are available globally. I think what we are saying really is there is no one measure. It is a comprehensive set of measures that are going to take us through these difficult times and when I heard the story from David about his people on the supply chain who didn’t have the money to buy his products, these are the questions we are trying to answer now every day. We knew there was a liquidity problem. Then we realised there was a structural problem in the banking system itself.
Now the problem, having recapitalised the banks, is to make sure that they are in a position to lend to small businesses and for mortgages and for the everyday work that people expect banks to do. So we will be bringing forward other measures where necessary to make sure that that lending, that support for cash-flow for small businesses is available. And every day we look at how the response to the measures we have taken is so that we can refine these measures where necessary. But we also know that this would be the wrong time to cut investment in training or education or in the infrastructure projects that are vital for our future.
Investment in energy saving and in other areas where it is going to make us stronger in the years to come and we know also that we have got to help people through difficult times. So when it comes to energy we have got to help pensioners with their winter fuel bills. We have had a tax cut for 22 million people (£120). We have frozen the Vehicle Excise duty. In other areas we have increased expenditure to allow people to stave off repossessions, so we do all these things but it is part of the comprehensive strategy where you start with what we have had to do with the banking system, you maintain the high levels of investment that you have got to prepare for the future, you help people fairly through difficult times and that means that your fiscal policy must support your monetary policy. And that is why, as part of this comprehensive approach, the responsible course of action is for borrowing for the investment that is necessary both now and for the longer term, with borrowing going to fall as a proportion of national income as the economy covers and as tax revenues rise again. And I believe it is in taking all these measures altogether that is going to make the difference. We were the first country to decide that recapitalisation of the banking system if essential – and we are also I think the first country that is recognising that a comprehensive approach, monetary policy, fiscal policy, direct action to help in the marketplace small businesses and the housing market, all these things are an essential way that we can come through this difficult time.
Chairman:
Perhaps I could have just a little afterthought on that. On banking you took a very, very big step which is increasingly being applauded around the world. Why has their monetary policy been so timid? Is it not the case that having taken a lot of brave fiscal action the best way to underpin them is to cut interest rates even harder because that will be one of the things that turns the economy round faster and make sure that the tax revenue comes through to you faster.
Prime Minister:
I think you have got to understand that the Bank of England is independent and makes its own decisions and it is not for me to tell the Bank of England that it is independent and that I have made independent what to do.
Chairman:
… the ability to override in a crisis.
Prime Minister:
What I think we have got to understand is that we have been dealing with two problems at once. We have been dealing with the shock to the system with these massive rises in oil prices. There was a trebling of oil prices. Food, as you know, has gone up. Bread has gone up, milk has gone up, eggs have gone up quite dramatically and I think in some cases people have registered a 50% increase in the price of some of these basic commodities.
So you have had these big commodity shocks that have been the cause of higher inflation while at the same time you have a credit crunch that is affecting activity in the economy, and people have been dealing first of all with the shock that has come from the commodities problems and that is why people have been reluctant to lower interest rates because they have seen the inflation coming through the system from oil, but I think you saw from what the Governor said a few days ago that he appreciates that the real difficulty that we face now is the impact of the credit crunch on the economy as a whole. And as I have said I think monetary policy with a cut in interest rates we have seen has a role to play. I think fiscal policy has got to support monetary policy at this time and it would be wrong for us not to invest, but I think the direction action that we are talking about as well to help the banking system to do the job it is supposed to do is something that is absolutely crucial to this also, and if I may say so we are going to need international action because you will not convince people that the financial system has been cleaned up in the way that they want it to be cleaned up unless there is an agreement to root out the problems in America and the rest of Europe as well as problems in Britain itself, and that is why I am so determined that we have the reform of the international financial system not so that we avoid the problems of the future, that is necessary to do so, but so that we can build confidence in the present.
Chairman:
Let us try and pursue that topic next and then we will get onto greater global opportunities in a minute.
Question:
This crisis has shown us short term boom and bust, but it has also happened in an international monetary system which has supported made this boom and bust necessary, but although we can not hope at changing the world in the conference in a few weeks time, we might hope that something is done to begin the process of fixing the international monetary system, and I wanted to ask you, Prime Minister, about what we might do about that.
In the world, as well as ourselves managing the economies by monetary policy, we have had Bretton Woods II in East Asia with fixed exchange rates, taking from us the wrong low interest rates for them which has led to boom there, inflation, commodity price inflation, asset price bubbles and now a crash we are beginning to see emerging markets needing IMF help, not just in East Asia but in Eastern Europe as well which may portend a further stage of the global spreading of this crisis. Things that not in three weeks time but over a period of two or three years of careful international work, like the careful work that led to Bretton Woods II, and the Bretton Woods system originally, we need to do for the IMF a number of things.
First of all strengthen IMF surveillance in the way Mervyn King has called for for years, which hasn’t happened. This will involve East Asian countries managing their economies well but it will also involve us, Australia, the US, the UK making fiscal tightness where necessary, it will involve having a system which polices global inflation co-operatively, having a new international reserve system that stops the US from being able to borrow limitlessly. It involves co-operation of the kind the Prime Minister talked about in regulatory moves for financial systems including when they are cross-border. Countries like Iceland are easy to deal with when the fiscal authorities are too small to manage. If it is Switzerland or somewhere larger it is much harder.
And finally we will require an IMF which really knows how to have enough money to deal with crises. Ten years ago the Asian crisis. Now we are going to see that again. So my question is not in three weeks time, but over the longer term, do we see any opportunity for Britain leading an international discussion that could reform the IMF in the way Britain did after the Second World War. This would involve bringing in emerging market economies in a world in which US power is shrinking and managing that process of international architecture we designed. Can we see ourselves doing this?
Chairman:
Thank you very much. Patricia Jackson you were partly involved in banking reform last time round over Basel II when you were at the Bank of England. It didn’t work out so well. Is that because we did it wrong because the world has changed, because we didn’t invest enough in executing it and what lessons do you think we should learn for trying to do it better next time?
Question:
Yes, I think that is a difficult one. It is quite easy to blame Basel II. I think actually it was arbitrage of Basel I. I think that the areas that Basel II did not cover, like liquidity and so on and remuneration and some of the incentives, have caused some of the difficulties. So I think going forward it needs to be a broader view of some of the incentive structures in the banks and it needs to be a more all encompassing review of all the risks so the trading book area wasn’t really brought fully within ….
Chairman:
By which institution is this to be done?
Question:
Well I think that too is difficult. National regulators have always had the key sway over the application of regulation in each country but as the Prime Minister pointed out actually, if you look at globalisation, how do you manage a FORTIS, how do you manage a cross-border group that has major impact on different countries so maybe we do need to go further in terms of both setting standards but also the application of standards across countries.
Chairman:
A very brief one from Marcus Miller.
Question:
One issue that has characterised the financial system has been the amount of debt there is around and on this note I feel that the Basel II neglected externalities. Greenspan has confessed that he did not realise the extent of interconnectedness in the system. Now it seems to me that the rescue that has been carried out so far successfully by the Treasury and the Bank of England has set a pattern but this needs to be followed through by having anti-cyclical reserve requirements in the future arrangements that follow Basel II. Would the Prime Minister not agree that one should be restructuring along these lines and this would surely need co-ordination across countries?
Prime Minister:
I think these are three very important questions because basically the world financial system that was developed after 1945 was for a world of protected and sheltered economies for essentially local competition and national, not global, flows of capital. So it is hardly surprising that the institutions – the International Monetary Fund, the World Bank and all the other banking institutions – that emerged after that were dealing with problems that are actually different from the problems we have to deal with today. So the case for reform is pretty obvious. You need international institutions that deal with the problems that arise from global flows of capital, global competition and the need for global financial supervision and you are not going to have an International Monetary Fund that deals with the balance of payments problems of individual countries in future so much as the need to have proper surveillance of what is happening to the world economy as a whole and see the connections of what is happening in different continents.
To be fair to us, we have been saying this for 10 years now, since the Asian crisis. We said that you had to create an international early warning system and a crisis prevention facility that enabled you – as a world really – to combat financial and economic crisis, whether they arose from the failure of a state like Korea going bankrupt in 1998 or from what happens in the private financial markets. We created what was called the Financial Stability Forum but it never had enough teeth. It is all the regulators coming together to look at problems and it has produced some very important recommendations, but it doesn’t have the teeth or the power to enforce some of its decisions or to get agreement on its decisions that they will be implemented at a national level, then you have an academic body in a sense that is not yielding the results that you want.
So we have now got to move quickly and it is in all the areas that we have been talking about in terms of issues about the management of the international economy, of the standards for financial institutions, to getting these agreements and I think the purpose of a meeting on 15 November is to set up the machinery by which these agreements can be reached and if it is called a new Bretton Woods so be it because there has got to be new types of international institutions dealing with the problems and I think out of this crisis people now realise that we have got to do these things and there is a willingness to do it, whereas after the Asian crisis, because it was Asia, because people thought that these were problems that were particular to these Asian economies, nobody saw the same need for the momentum that we were asking for to make the international reform.
So, yes, the 15 November meeting will be the start of things. We will be putting proposals right across the board. Many of them will in the end be dealt with by the banking regulators, but what are we trying to achieve? We are trying to achieve an early warning system for the world economy. That means preventing crisis, surveillance which is where I think the IMF should be doing its job as an international monetary fund. It should be more like an independent central bank in my view than a political committee, which is what it is at the moment, and throughout we have got to see how Europe and America particularly can work together, but we have got to involve China, India and all the emerging market economies because the world economy is changing before our eyes and the system that is just built on Europe and America will not survive the test of time. So big reforms, prosperity to be sustained has to be shared and that is really the theme of what we have got to move on in the next few weeks.
Chairman:
Last set of questions on what are the prospects for the UK economy once we have got all of this semi-sorted out and what do we have to do now.
David Gann you are the head of the largest innovation group in academia in Europe probably. What do we know about the knowledge economy and what prospects does the UK have of flourishing in the future knowledge economy?
Question:
Prime Minister first of all we welcome the investment that the government has given to science in this country over the last 10 years and it has put us in very good stead to compete in the next decade or two. I think the discussion so far has signalled something very clear that innovation in the new economic age is going to be very different from any of the models we have had in the past. The old R&D systems, the corporate R&D model are going to have to be reinvented and to do that we need a stable platform. If we overdose on the pain-relieving pills in the short term and destroy the momentum that we have built in this country to create talent and trade that talent internationally, then we will lose a big opportunity.
I think the big questions for us are how are we going to innovate in serves where those services are consumed in other parts of the world. How are we going to attract and recoup the royalties for those back in the UK. How are we going develop our systems and services in engineering, in health, in the environment and in energy that allow us to compete from here anywhere else in the world. I believe we have got the platforms for that in what are now world-class universities in this country connected into an eco-system of business here. We need to do much, much more and hold our nerve because it will take time to recoup and capture that value.
Chairman:
Ian Coleman, you are Head of Emerging Markets at Price Waterhouse Coopers. Perhaps you could say a little bit about the role of Asia and the tipping point and how you see that going and the fact that some day they might be out-sourcing to us. What do we have to do to stave that off?
Question:
I think this is an important area that the Prime Minister has commented on whilst he was Chancellor that the balance of economic power in the world is beginning to change and moving eastwards. I was in China last week meeting with their sovereign wealth funds and a number of state-owned enterprises and one of the things that I think is important is – I think it was Rabbie Burns who said something about the gift to see ourselves as others see us – and there was an overwhelming sense that people had beaten a path to the door of the Chinese businesses on the basis of their capital strength as a source of succour and ability to finance the ongoing growth of the western economies and there was a sense that they were a bit fed up with this and their perspective on the world was we have growth potential here of 8-10% a year domestically, we have an economic system which is predicated on strength in manufacturing, that needs to be fed, we need resources, and therefore there is an ongoing clamour for access to technology, R&D and so on but access to an end user consumer market of 50 million people off north-west Europe in a global context is not as compelling an argument as having 1.3 billion people domestically.
So I think that the question I would like to raise is in the context of international countries acting on self-interest, how will the flows of sovereign monies, most particularly embodied in the sovereign wealth funds, be managed in a way that creates stability for the international community as opposed to being an instrument of political influence which one might surmise they are in danger of becoming?
Chairman:
Thank you. I know we are beginning to run out of time, so I am going to call a halt there. I know lots more of you would have liked to have the opportunity to intervene. Gordon would you like to reply to the last two questions and then we will wrap it up.
Prime Minister:
Can I say first of all I agree with what has been said about the sovereign wealth funds but my own view of the sovereign wealth funds is that they want to operate commercially. They have been put into business not to gain political power through making decisions of a political nature but simply to get an adequate rate of return for investments that have been made either by the Chinese or by the Arab States and you can see over the last few months that the sovereign wealth funds have been buying into the major financial institutions and have actually been conducting some of the work that is the rescue of the financial institutions. My reading of them is that they could probably be worth about $12 trillion in the next few years depending on what happens to oil revenues. They are a massive source of wealth and power but they are being operated commercially in the main but they are a big means by which we can secure investment in some of the vital things that we want to do in the future and if as was suggested earlier technology transfer as part of this I think we could achieve a lot for Britain.
My idea is that the oil revenues that have been very high in the last two or three years should be recycled in part into non-oil energy sources. That gives the oil countries a hedge against what happens to the price of oil but it also gives us an interest, and all of us should have an interest, in a balanced and stable energy market not in the volatility of one particular price and I think consumers and producers of energy have got a lot more in common than is imagined because we both in the end want a stable energy policy but recognise that oil will be a very big part of it and that is why we have called this conference in December to bring things together.
The first question was about innovation and the knowledge economy and we have got to move ahead with that. I was actually thinking about Chinese consumers when you were talking as well because that is a huge market for the future. There are now more Bentleys sold in Beijing than in any other city in the world and there are branded products being sold from Britain into China and into some of the other countries that are developing fast that have a huge potential market and in some cases a huge market already.
We must continue our policies for innovation and science. It is the only way forward. If we are going to have the value-added products that matter for the future then we are going to have to invest in both the pure science and the applied science that is going to bring them about. And if you look at where the job creation is going to come in the future I think that just as in the 1930s the building of bridges and roads and transport were an important part of the way jobs were created in the 1930s I think the completion of our technological infrastructure here, our digital infrastructure and the beginnings of a far more environmentally friendly policy towards the use of our resources, these are big job creators for us as well. And that is what in the end makes me optimistic about the future that we have these great industries in Britain. Pharmaceuticals, we have IT, we have financial and business services, we have education itself, which is one of our major exports and may one day become one of our biggest exports and we have a range of modern manufacturing products that are available to sell to the rest of the world so we are actually in the high value added area of the future. We have made the transition to these and these are the products that are going to be valuable in the global economy if we invest properly for the future.
But I have got no doubt that today, both to reassure people and to make sure that families and businesses come through these difficult times, I should repeat at the end that the programme that I see for dealing with these problems is a comprehensive one. That yes monetary policy will make a difference and yes what we have done to recapitalise the banks will make a difference, but we have got to look at all areas where we can actually help move the economy forward and restore confidence particularly in the banking and financial system and that means not just recapitalisation but it means making sure that lending is resumed by the measures that we take, it means restoring confidence not just by national measures that we are prepared to take but by international measures that make people sure that we have rooted out the abuses that caused so many of the problems in the financial system, it means monetary policy as we have seen in the co-ordinated reduction in interest rates, but it also means fiscal policies supporting monetary policy and the right and responsible course is to invest now for the economic activity that we need and so that we do not fail to invest in what we require for our future.
And as the economy grows stronger and as tax revenues return then borrowing would fall as a share of national income. I have got no doubt it is a combination of these measures nationally and internationally that we need. So if we have restructured the banks in the last few weeks, we move on in the next few weeks to the comprehensive set of policies that are important to restoring economic activity but also I think the most important thing of all that there is trust and confidence that the banking system is doing the job for which it is intended.
Chairman:
Thank you very much indeed.
