Is banker bashing fair and justified?
Those of you who have been involved with the City of London over the last few years must have some sympathy with Lord Salisbury's sentiments. No similar post-war period has been subjected to so much change and the results have not always been very comfortable.
Seismic global economic shifts, unprecedented and depressing volatility in the markets, major concerns about the banking industry itself and a tsunami of new regulations have combined to make for a very difficult ride. One of the biggest changes has been a significant reduction in the public reputation of the City as a whole.
But to tarnish a whole industry with the mistakes of a few is simply folly. Many of Britain's banks have played - and will continue to play - a critical role in maintaining global economic output. At its heart, banking is all about helping customers make payments and to be paid, to protect themselves against risks and to purchase things that would otherwise take years of savings. We must not lose sight of the many ways in which banks contribute powerfully to economic and social progress. Crucially, international banks enable trade and investment flows across international borders.
That brings me to my main point: the tendency of our politicians to measure the success of British business in global markets solely by reference to the trade figures measuring the export of goods. How often have we heard the Prime Minister visit an emerging economy and declare that he has agreed a target for doubling British exports over a given period of years? By exports, he means exports of goods.
How often have we heard journalists make snide remarks about the UK's alleged failure to penetrate overseas markets by contrasting our exports of goods to Ireland with those to, say China or India? How often do we hear critical comparisons made between the export performance of the UK with, say Germany?
I would argue that such comments betray a fundamental misunderstanding about the nature of Britain's engagement with other markets. Indeed, a fundamental misunderstanding about the process of globalisation.
Such comments take no account of the rise of globalised value chains. They are based on the old notion that trade is based on the idea that a product is produced in one factory, in one country - and then shipped to another country for consumption or use. The reality of cross-border commerce today is that intermediary goods and services have become central to how companies organise their cross-border business. Recent research by the OECD and WTO has sought to measure 'value added' rather than simple trade volumes and the pattern of global trade looks quite different.
Thus, the first, and obvious, error in such mercantilist description of the UK's export performance is that it takes no account of our exports of services. Whereas the UK has, for many years, run a deficit in trade in goods, we are the world's largest exporter of services. We run a massive surplus in services trade and much of that surplus arises from the activities of the financial services sector where our surplus is three times greater than that of the USA. In 2012, for example, we ran a deficit of £100bn in trade in goods, but nearly half of that was offset by the trade surplus of £47bn for financial services and £8.3bn for professional services. No assessment of our performance in overseas markets should exclude the critical importance of these services earnings by the City. Germany may be a great manufacturer, but its trade balance in financial services in 2011 was about 11% (£6.5bn) of ours. We handle 41% of all FX turnover in the world; Germany accounts for 2%. I do wish politicians and journalists would point this out when making their comparisons.
But recent research by the WTO and OECD on trade in value-added shows that even these current statistics on the services trade considerably understate the true importance of the services sector.
Based on gross terms, trade in services typically accounts for less than a quarter of total trade. But when account is taken of the value added to the production of goods, the services sector in the United Kingdom contributes over 60% of total exports. Targets based solely on gross exports of goods fail completely to reflect this reality that services' share of total added value in UK exports is the highest of any of the major developed countries.
But even taking account of trade in services on either measure, gross or value-added, does not tell the whole story. Trade figures, whether for goods or services, take no account of the predominant form of penetration of overseas markets and that is through foreign direct investment. Standard Chartered Bank (SCB) has been growing in its footprint in Asia, the Middle East and Africa at nearly 10% per year for the last decade; but only a fraction of that growth is going to be reflected in the trade figures. They only capture remittances of our profits back to London. They make no account of the extent to which we have built up our business by investing in growing overseas markets, both by organic reinvestment of earnings and by new acquisitions.
This is very important because, for most major British firms, the most significant feature of their growth overseas, particularly in the emerging markets, is that it is conducted, not through direct exports, but through direct investment. Whether you are a Unilever or a Shell or an HSBC or SCB, you do not tackle foreign markets by stuffing goods into containers at Felixstowe. Yet that it what the trade figures most frequently quoted by the politicians measure.
And we are very good at investing overseas. The UK is second only to the United States in the total volume of its FDI (Foreign Direct Investment) overseas. We greatly exceed the scale of the German, French or Japanese investments overseas. Just the profits on that investment stock remitted back to the UK in 2011 was worth £21bn, or more than a fifth of our deficit in trade in goods.
Why is this contribution not more widely recognised? It is partly a result of our poor statistical measurement of our economic activities overseas. A few years ago, the US Department of Commerce did a survey of the sales revenue generated by US affiliates who had invested abroad. They found that these sales were eight figures greater than direct exports from the USA. There is no reason to believe that the situation is not the same here in the UK.
So, when I hear those same politicians lament our export performance and call for a rebalancing of the UK economy, I often wonder whether they have really understood the contribution the City makes to our balance of payments.
And that contribution reflects an extraordinary underlying performance. Financial services account for 13% of UK GDP, but only 7% of employment. In terms of gross added value, the average output of a worker in British financial and professional services is worth close to £95,000. That compares with an average of £43,000 in other sectors of the economy. In other words, those in financial services work twice as hard to create twice the value. That is a performance that the banker bashers should ponder, and then celebrate.
The City's pre-eminence as the global financial centre cannot be taken for granted. It needs to fight to retain that position and it needs the support of our politicians and media. We do need to change to adjust to changing global conditions but also need to be proud of what we have already achieved.
Lord Salisbury was right. Change is not always advantageous, but it is almost always essential.
This article is based on a speech made by Sir Thomas Harris, Vice Chairman at Standard Chartered Bank, at the House of Lords.
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