WillHutton

The Writing on The Wall: 

The Writing on The Wall Will Hutton Presentation to the ULI Paris Conference February 7th 2007

The Conventional Wisdom : 

The Conventional Wisdom Asia is where the action is – will overtake EU and challenge USA. The USA has embedded advantages in technology, entrepreneurship and global brands– but needs responsible political leadership that will tackle twin deficits and resist protectionism. The EU is a lost cause, mired in low growth, regulation and socialism. It is even “EuroArabia”, where combination of Muslim population growth and multiculturalism means it is heading towards crisis of identity.

Challenging the Conventional Wisdom: 

Challenging the Conventional Wisdom Asia has profound problems and limits to its growth potential. Risks of political instability in India and China, and even war, not priced into current expectations. Chinese model is unsustainable The USA’s position is also unsustainable, and there is little honest understanding of its problems – or readiness to deal with them. A car crash looms The EU’s position is sustainable and improving – and its assets are seriously underpriced.

China – The Writing on the Wall : 

China – The Writing on the Wall China is a system of Leninist Corporatism. It is not capitalism Party control pervasive Economy – 57 strategic pillars, SOEs dominate 1/3 of economy, only a fraction of quoted companies genuine PLCs. Private sector 15 % GDP Productivity dire. Innovation poor. Quality of graduates indifferent. No multinationals in top 500. No brands in top 100. One company in top 300 for R and D. 60% of Exports produced by foreigners: half patents

So why is it so good? : 

So why is it so good? Savings of 45% of GDP directed into investment spending by state banks for a generation 200 million cheap workers have migrated to cities Export growth of 25% per annum fuelled by up to 40% undervaluation of RMB

But it can’t hold : 

But it can’t hold Need to create 24 million jobs per year: 2005 11 million jobs Up to $1.4 trillion of non performing loans if growth slowdown or interest rate hike “Normal” monetary and fiscal policy impossible RMB must rise – US pressure and internal inflationary pressure Rural savings falling in proportion to industrial economy Imperative to move to “ normal” levels of spending, investing and saving with “ normal” levels of whole economy productivity growth

Capitalism is about the hard – and soft: 

Capitalism is about the hard – and soft To spend more and save less requires property rights, welfare protection, access to health and education To raise productivity means genuine autonomy for enterprise, genuine justification to shareholders, customers, unions and stakeholders To raise productivity means genuine pluralism, lack of group think, diversity of view, chance for experimentation To raise productivity means investment in capabilities.

China risks: 

China risks Inequality, strikes and social protests rising Crisis of ideology, purpose and morale in the party Need to accelerate reform programme, but that implies loss of political control Inflation prompted political change in past Nationalist temptation very real Don’t exclude invasion of Taiwan, tensions with Vietnam, India or Japan. Political turbulence between 2012 and 2020

And India? : 

And India? Privatisation, “soft” institutional infrastructure, global brands and companies, normal economic structure, better capital/output ratio BUT… Iliteracy and innumeracy Caste Chronic infrastructure Need for 30 million plus jobs per annum Conclusion: China and India will grow faster than world economy, but bumpy ride and many weaknesses.

The USA: 

The USA 55 of world’s top 100 brands American ICT, technological and university leadership Growing population and employment generation Productivity acceleration since 1995 Used globalisation to create new business model – manufacturing in Asia and Mexico, value added in USA Emergent Knowledge Economy

But….: 

But…. Tiny savings ratio – dependent on foreign savings, notably from China. Trade deficit still 7% of GDP Dollar adjustment still to come Fiscal adjustment still to come Huge consumer indebtedness – can’t be repeated over next decade Excess takeover ( 10% GDP) , excess rationalisation, excess hollowing out, excess executive pay Coalition for openness and Enlightenment soft infrastructure weakening. Deteriorating social infrastructure. Energy use. Blame foreigners.

Europe – a safe and growing haven?: 

Europe – a safe and growing haven? Germany critical. Double whammy 1992- 2004: euro and reunification Germany – fastest growth in industrial production in G7 2005 and 2006. Fastest reduction in unit labour costs and fastest growth in productivity World’s leading exporter - current account surplus 4% GDP Herz reforms working - Unemployment fallen 600,000 Budget deficit inside Maastricht criteria Low consumer indebtedness: scope for sustained consumer boom. The second German miracle?

The Rhineland/Nordic model works: 

The Rhineland/Nordic model works High competition in product markets: very open High commitment to business building: the “ classic” conception of the company Moderate take-over, hollowing out, moderate executive pay Commitment to innovation, R and D Commitment to education, with vocational education for bottom 60 per cent Understanding and implementation of Enlightenment infrastructure

But that can’t be right?: 

But that can’t be right? Social spending? The evidence is that social spending is good for growth in developed economies. Badly targeted social spending has malign effects… but Germans/Nordics know that Fifteen years of incremental reform beginning to have big cumulative impact Socialist labour markets? What matters is capacity to adjust wage costs to market conditions. Two routes to this destination as OECD now concedes

But that can’t be right? : 

But that can’t be right? But Europe is not capitalist? Competition in labour and product markets, price freedom and profit motive. What it does respect is the Enlightenment infrastructure – investing in capabilities, justification, and pluralism High taxation? Again little evidence that high taxation and low growth directly co-related. Many tax shelters for enterprise. Fiscal competition. Big government? Strip out social transfers, and EU public spending v.similar to US

There are problems.. : 

There are problems.. Low population growth Ageing population Italy Resistance to opening trade in services High fiscal deficits in France, Italy Resistance to migrant labour Still low consumption growth Over-regulated financial systems, high transaction costs in property

Europe has an emergent Knowledge Economy..: 

Europe has an emergent Knowledge Economy.. Very strong in UK Different character in Germany and Nordics France is stronger than it thinks Even Italy getting to grips with problems The EU system is about cross-learning and cross-fertilisation.

Knowledge economy across the OECD in 2002 share of knowledge based industries in gross value added (current OECD definition: high to medium tech manufacturing; financial services; telecommunications; business services; education and health services): 

Knowledge economy across the OECD in 2002 share of knowledge based industries in gross value added (current OECD definition: high to medium tech manufacturing; financial services; telecommunications; business services; education and health services)

Employment in knowledge based industries in 2005EU15 is share of total employment using Eurostat definitions (high to medium tech manufacturing, finance, business services, communications, health, education, cultural services, air and sea travel). US estimate is Work Foundation estimate for share of employees derived from US Bureau of Labor Statistics from similar industries.: 

Employment in knowledge based industries in 2005 EU15 is share of total employment using Eurostat definitions (high to medium tech manufacturing, finance, business services, communications, health, education, cultural services, air and sea travel). US estimate is Work Foundation estimate for share of employees derived from US Bureau of Labor Statistics from similar industries.

The European “Ideopolis”: 

The European “Ideopolis” The ideopolis as spatial, urban area where KE takes place London, Barcelona, Munich, Helsinki, La Coruna, Nice, Bologna as ideopolises Defined by numbers of knowledge workers, knowledge jobs and knowledge industries Role of university, hub airport, quality of built environment, multinational HQs, cultural industries and social inclusion. EU rapidly catching up US

Where are the threats to globalisation?: 

Where are the threats to globalisation? US Democratic party The American “ Squeezed Middle” 20 anti-China bills in Congress Chinese nationalism Japanese nationalism India’s long tradition of protection By these criteria.. Europe looks open.