Will the UK retain its global financial role and withstand the threat from China?

22 07 2009
imagesThe Government remains confident in the UK’s position as a major international financial centre over the medium- to long-term 


This statement of belief is contained within the document Reforming Financial Markets which outlines the government’s response to the financial crisis. It is clear from this and elsewhere that whatever desire there may be to rebalance the UK economy towards ‘more engineering and less financial engineering’ in Mandelson’s words, there is still a widespread hope that the financial services sector can get its dynamism back.

It is easy to see why the government hopes that this will be the case. The financial services sector contributed directly to the boom of the past ten years through the growth of jobs in that sector and the prosperity it brought , particularly to London and the south east. It also paid a large part in financing the growth of public spending during that time. The decline of financial services is now contributing to the decline in tax income and adding pressure to the crisis in funding the public sector.

Creating an alternative dynamo for the UK economy outside financial services would require a level of effort from the ruling elite in the UK which seems way beyond its current capacity. Better to cross their fingers and hope for business as usual.

Financial services in the UK have a lot going for them and there is a strong historical incumbency factor which works where markets are concerned. However there are two main reasons to question the continued dependence of the UK on finance. The first is whether the financial services market in the west can recover full stop. There are still strong reasons to believe that the global financial crisis is far from over.

The second relates to the aspirations of China. As Martin Wolf has pointed out, China is historically unique as a developing world power in that it is simultaneously the world’s most dynamic growing manufacturing power as well as the fastest growing exporter of capital. It is this combination which has created the global imbalances which lie at the heart of the current crisis.

China has now set itself the task of turning Shanghai into the leading global financial centre by 2020. As the article cited makes clear, there are still major obstacles in the way of doing this. However, one has to be very optimistic to hope that the future dynamism of the UK economy depends upon outperforming the Chinese in this area.




3 responses

22 07 2009
Johny Morris

Glad to see that we are shifting the debate around to a realistic discussion of where the dynamism lies in our economy right now. I’m all for rebalancing the economy and creating a greater spread of productive capacity the better to weather the rises and falls of particular industries I just don’t see it happening in a time frame that will pull us out of this recession. But as to your point on China I guess I have three comments to make

First and foremost, of course there is a risk that someone else will come along and steal our leading position. That’s what capitalism and competing markets is all about. As Bill Gates pointed out (in a slightly different context) capitalism is like a game of pinball – the best you do is win the right to stay on the machine.

You are always competing against imitators and innovators. And you can loose. That’s the meaning of risk. This blog has bemoaned the lack of risk taking in our society but, hey the crisis in finance at the moment wasn’t caused by a lack of entrepreneurial spirit in the City! We need to do more of it and continue to hone our skills to stay in the game.

Second, I’m no expert on China, but historically markets thrive best under liberal democratic regimes, where the rule of law is paramount and there is a lack of direction from the centre. And that does not appear to be the case in China. Are they really prepared for the thrill ride of an economic experience like the one we’ve been experiencing? Or will the dead hand of central control take over (check out the sentences recently handed out to the poor guys on the wrong side of the Rio Tinto negotiations. Hardly an encouragement to independent decision making).

Finally capitalist economics is not a zero sum game. China can grow industries, even financial industries, which increase the global productive capacity but that does not have to be at the expense of its trading partners. Indeed it can be mutually beneficial (in terms of economic growth). The bigger issue is how we address the imbalance of trade between China and the USA / UK. That is the underlying crisis in the system right now. It doesn’t matter if that imbalance is addressed through goods or services, but addressed it must be.

4 08 2009

As an American, it sure seems like China will (if it isn’t already) the global financial center. Britain may remain an important center for the EU market, if it adopts the euro, of course. But all it can hope for is some provincial status. With only 1% of the world’s population, Britain is simply not in a position to be a significant global leader any longer. It just doesn’t have the resources, the capital, the population, or the creative drive to take a leadership role. Look at the fiasco happening in Afghanistan because the British government can’t accept that it’s simply not a major military power any more, and doesn’t have anywhere near the resources and money to engage in imperialism any longer.

One of the major problems is, as Johny points out, “historically markets thrive best under liberal democratic regimes, where the rule of law is paramount and there is a lack of direction from the centre.” But Britain isn’t a democracy; it’s a monarchy, where the prime minister exercises the powers of the monarch. It has some democratic processes, but it’s simply not up to 21st standards for democracies, and it won’t be able to compete with the real democracies.

6 08 2009
Terrence Foley

Who cares if you’re an American Mike?

All this hot air about capital flows and goods was issued about Japan and Germany in the 70’s and 80’s, only then you all thought;

surplus in manufactured goods = good
deficit in manufactured goods = bad.

Being developed nations their per capita exports are between 10 and 15 times that of China. That is to say, China is much more sensitive to any down turn, as recent events have shown.
A lot of industry moved to China can be moved out overnight.

Contracts for the design, construction and equipping of railway systems, hospitals, power stations and factories are not nearly so sensitive to cancellation, and are therefore more dependable (and considerably more lucrative). These are what the Germans do. As well as the high tech end of shipbuilding (turbines). These cannot be moved overnight.

The Chinese communist party may think sending a few rockets up into space fools the Chinese populace into thinking that they’re part of a hi-tech nation, but they’ve fifty years catch up to do. Rocket science isn’t all it’s cracked up to be. Cheap chips have seen to that.

China has little room for manoeuvre domestically and internationally, and its influence over world events is correspondingly limited.

Forget the forecasts and extrapolations, China is nowhere near the GDP of the West. If cash stops flowing out of China, the USA will survive.

A real point of interest in the world economy is growing co-operation on the ground between countries like Iran, India and China, a process in which the West has no direct influence, other than to devise new international laws to act as brake on these countries.

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