Advancing Enterprise transcript, 2 December 2005

Opening

Rt Hon Gordon Brown MP: …2005 has seen the doubling of oil prices, the threat of the recurrence of global inflation, and the shift of almost 1 million manufacturing jobs from Europe, Japan and America to Asia, the outsourcing of many services, and I think the starting point of this conference today is that each of us, companies, governments, individuals, are having to respond to the scale, the speed and the scope of a transformed global economy, and it's my privilege to thank all businesses represented here today for your leadership of the economy in these challenging times, for your resilience and your resolve, for your courage to change, and for your determination at all times to do what is best for enterprise and best for Britain, and this conference today is to discuss some of the issues as we look ahead. I may say that the highlight of this conference is not the speech at the beginning, but the sessions that you will have during the course of the day, the next one to be led by Sir John Bond and Financial Services, and then at the end of the afternoon, we'll have the privilege of hearing, in probably his last speech to an international audience as chairman of the Federal Reserve, Alan Greenspan. It will also be a pleasure for us to give to Alan Greenspan today the freedom of the City of London. To be awarded this honour, he had to pledge to us that he would give allegiance to Her Majesty the Queen, something that no American has been very willing to do for more than 200 years. We said that in return he was to be given permission as a Freeman of the City of London to take his sheep across London Bridge, which I suspect is about the only thing that could move quickly across London Bridge in these congested times. He has also got the privilege, as a Freeman of the City of London to offer dinner to 300 invited guests in the Lord Mayor's headquarters, so maybe some of us will be invited at some stage by Sir Alan to celebrate his new honour. Now let me also welcome distinguished guests here today from every continent, joining a dialogue which I believe with the sessions that we have on financial services, on education, on innovation, on enterprise and on trade, will lead to a consensus and in time I believe to a shared economic purpose that can make globalisation work best for Britain. In visiting, as I've done, over the last year many of our trading partners internationally, and companies large and small domestically, and I see many of the companies represented here today, I know that our country's future depends on us working together, and this, our third Enterprise Conference, is a concrete expression of the partnership we seek. I believe that we have tried to listen and to learn from the debate at the two previous conferences, attempted to forge a shared agenda as a result of that, and acted to take that forward. You told us at our first conference that if we are to confront the challenges of globalisation, we needed to tackle the issue of regulation, so earlier this year we've accepted in full the recommendations of two reports to cut red tape, the Hampton and Arculus Reports. You told us if we are to lead in the hi-tec value added industries of the future, our ambition must be to work in partnership with companies and universities to make us world-class in science, hence the 10-year framework for science which sets out a step change for research and development in the UK, and I want to say more about this today, and you told us if we are to attract the best companies, and for our existing companies to be world-class, we can never settle for being second-best but instead have to be world leaders in education and skills. So today's conference matters because what you think and tell us will continue to be critical in ensuring we focus on the right issues and pursue the right long-term goals, and like all of you here today, I want a Britain that is a leader in the world's fastest-growing, most wealth-creating sectors, at the cutting edge of global advance, capital markets and financial services, science and innovation, creativity and enterprise, skills and education. More than ever, of course, as we've discovered in one of the most challenging years for the global economy we've seen, the foundation for economic growth must be the maintenance of economic stability. We know now that in a global economy, investment flows to the stable economies and away from the volatile, so when I present my pre-budget report on Monday, I will show how Britain has taken and will continue to take long-term decisions on monetary and fiscal policy that move us from having been in the past one of the stop-go economies of the world, to being one of the most stable. Under our monetary and fiscal regime, we will maintain low inflation, low public debt and a long-term commitment to strong fiscal discipline, and nothing we do will endanger that position. It's upon that foundation of stability that I believe Britain can become the location of choice and the place to do business. Take financial services and capital markets. Today Britain exports twice as much in business services as we import, and four times as much in financial services, and I want to congratulate businesses here on their drive and their global competitiveness, and the innovation which has made the City of London alongside New York the leading financial centre of the world. London, the world's largest foreign exchange market, the largest foreign equity market, the largest bond market, London's success born not out of serving only a large domestic economy but of winning the lion's share of international business, and I want us to build on the advantages that we have: your talent for innovation; the critical mass of skills now in London; our openness to the world including our deepening links with China and India; a unique combination of language, time zone and a legal system that makes English law the law of international contracts; and now the determination of the Financial Services Authority to extend their risk-based approach of financial regulation that is both a light touch and a limited touch. These are all strengths that we wish to develop as we become the preferred market-place not just for European companies but also for growing Indian, Chinese and other countries' companies, and the multinational headquarters of choice. Now, to meet our next ambition, to become world leaders in science, we cannot rest upon a heritage of scientific invention and achievement. We must build upon it and at all times look to convert scientific genius into commercial success. Today again, a higher share of our growth is now delivered by science-based innovations than in any other industrial nation including the United States. Britain has a higher share of inward investment in research and development than any of our major competitors, and our 10-year framework for science, a partnership between government and business, is already leading to 2½ billions of new science investment. Just as the Victorians built great entrepreneurial cities, so too for a new age business and government are developing science and technology cities where universities, research institutes and high-tec companies are coming together to create clusters of creative activity, and British universities already lead the world in medical research, pioneering some of the most remarkable medical breakthroughs of the past century, from the discovery of the Y chromosome to DNA profiling to the mapping of a third of the human gnome. British pharmaceutical and British biomedical companies already lead the world also in applying research, contributing nearly 4 billions to our exports each year, and our National Health Service has, over the last 50 years, pioneered also some of the great medical breakthroughs: the world's first ever test-tube baby; magnetic resonance imaging, the MRI that allows early detection and treatment of potentially life-threatening diseases; and then the first combined liver and bone marrow transplant. But how much stronger will we, Britain, become? From what I can announce today, thanks to the work of Sir David Cooksey, who deserves our congratulations, a strengthened clinical research partnership that links universities, our pharmaceutical and biomedical companies, and our NHS. In advance of Patricia Hewitt announcing the new research and development strategy for the NHS in January, I can say today that we are establishing a new National Institute for Health Research in the NHS. It will comprise around 10 major centres of excellence, initially 250 clinical academic fellowships, 100 clinical lectureships a year, a new IT network will make the unparalleled database of the NHS available to improve all our understanding of health, so that in future we believe Britain will be the premier location for developing new drugs and treatments, and testing and tracking them, and as a result of this new partnership, our major pharmaceutical and biomedical companies are today announcing that they expect to make further investment in medical research and development in Britain of up to £500 million, rising over time to an additional £1 billion. Now, Britain should also be the number one centre for genetic and stem cell research, building on our world-leading regulatory regime, and I can also announce we are taking forward new public-private partnerships to invest in pre-commercial aspects of stem cell research, and to co-ordinate future research in this area. In support of this, the medical research council is announcing today an extra 50 millions including 40 millions for basic stem cell research and clinical trials, and nearly 10 millions for consolidating the UK's path-breaking stem cell bank. Because of the importance that we attach to a strong and clear regime of intellectual property law to the location and development of companies in our country, I'm also asking Andrew Gowers, who's the former editor of the Financial Times to consult with business and advise us of any updating of the Intellectual Property Law that is necessary. Now, our inventiveness ranges beyond science and medicine. Today the dynamism of British business is leading the world in many of the most modern and creative industries, creative industries from digital electronics and communications to film, design and fashion, once only 1% of our GDP, now constitute 8% of London's GDP. In the last eight years, Britain's knowledge-intensive sector has grown twice as fast as the overall economy, highlighting, I believe, the extraordinary creative talent that Britain possesses, and the opportunity now is to build on this extraordinary promise and ensure Britain becomes world leaders in creative industries. And the challenge, of course, is not just to encourage creative industries, but to encourage all industries to be more creative. Today, Sir George Cox is publishing his report on creative industries in Britain, and we will take forward his recommendations. Sir Terence Conran and Lord Foster have agreed to work with him, the London Development Agency, and creative industry and business leaders, to develop a new Creativity and Innovation Centre in London, as a national hub of international stature that will be a showcase for Britain design, and at the same time we will create a network of design centres across the country, a centre in every region, that will also nurture emerging talent. Now, at each stage, we must maximise our flexibility and minimise the barriers from over-regulation to under-investment that have held British business and enterprise back. On planning, we should make our planning laws more flexible and more responsive, and I will say something about that in my pre-budget report. On competition, we will maintain the stability of the new competition regime. On tax, we will continue to ensure to provide rewards for success and incentives for investment. On regulation, we will apply our risk-based approach across the board. We will review European regulations, and I call on Europe to apply a competitiveness test to existing as well as proposed new rules. And on transport, where we know we are all still paying the price of decades of under-investment, we are doubling investment, and we will work with you on the basis of the Eddington Review of long-term needs to agree future transport priorities, and agree how the public and private sectors can work together to deliver them. But to become world leaders in any sector, we must be world leaders in education. All of us know that as global restructuring moves mass production to other areas, Britain's future success will depend on and be founded upon the highest levels of skills. Britain is today undertaking the first stage of an audit of Britain's skills' needs right up to 2020, and I thank Lord Leach who is here this morning for this work, and after the publication of the interim report this next week, a national debate will lead to decisions about our vocational training goals for the future. I want business to join this debate and today Terry Leahy will lead a discussion of our education priorities, and at all times, whether it be in our schools or our colleges or our universities, I assure you that we will insist that investment must be matched by reform.

Now, I turn finally to trade. For Britain, the pioneer in the 19th century of free trade, the English Channel has never been a moat but a highway for commerce. The oceans around us, never cutting British enterprise off, but have provided the route to markets in every continent of the world, and we have always stood as a nation against protectionism and in favour of open trade. In the next few days, an opportunity presents itself, which may not come again fully for 10 or even 20 years, the negotiations on world trade in this round in Hong Kong. In our view, this trade round could bring wide-scale benefits to all economics, developed and developing, and contribute to the economic reform agenda round the world. As recently acknowledged by the Secretary General of the WTO, Pascal Lamy, at the heart of this discussion is the future of agricultural protectionism. On that, Britain has long argued that we need to have a long-term view of agricultural policy in our own countries. The paper which Margaret Beckett and I have published today will contribute to that debate underway, on how to achieve a sustainable future for agriculture and helps those who ask what the UK government means when it calls for further Common Agricultural Policy reform, and it's because we believe that through reform there can be progress on trade, we continue to argue for an ambitious and balanced outcome to the Hong Kong meetings. Countries that are now being urged to move on services and non-market access may be prepared to make progress if there is willingness to take steps on agriculture, and it is this we must discuss internationally in the next few days.

So for Britain and our long-term future, the foundation is stability, the priority to encourage enterprise, invest in science, research, the creative industries, to maximise flexibility, and to continue to open up trade, at every point building the best educated, most highly-skilled workforce in the world. Beyond this conference today, I want to continue to work with you and to encourage business to define what is needed for Britain to become more competitive and more enterprising, and I invite you to help us do this over the course of the next year and years, and if we work together, then I believe we shall prove that Britain is made for globalisation and indeed globalisation is made for Britain. Thank you.

The City and Financial Markets (Panel 1)

Sir John Bond: I mean, first I think we're here to celebrate what is a success story for Britain. It doesn't matter what aspect you look at of international financial services, I believe that London in six out of eight major categories is in a leading position in the world. It's a place where Britain punches above her weight around the world, and this is something to be proud of in my belief. It's been this way on and off for a very long time. Many of the great names in London, Schroder's, Lazard's, Hambro's, Warburg's, have come from abroad. Today it's no surprises at all that I'm the only Brit on the panel, where I'm surrounded by people who were born outside this country. I think there's an important distinction between an international financial centre and a domestic financial centre. A domestic financial centre by and large reflects the strength of the underlying economy. An international financial centre means people from other countries find it easier to transact business here in London for a variety of different reasons than perhaps they do in their own country. You can refer to it, I've seen it referred to as the Wimbledon of financial services, where we stage one of the great tennis tournaments in the world but relatively few of the players are British, but it still contributes, I believe, to the exchequer, because I think the prize money gets taxed here in Britain. I'm not absolutely sure of that. So with those few introductory remarks, and you know, the emphasis on the fact that it's funds under management that really create a financial centre, and Britain is the third largest fund management centre after the United States and Japan, and these funds come from diverse sources. They can be pensions, they can be mutual funds, it can be private banking, it's hedge funds, it's private equity, it's life insurance, and this pool of capital is what drives the engine of London and contributes £11 billion to the balance of payments, and grows I think faster than the underlying economy and the productivity is consistently improving, so there's enough by way of introduction from me. I'll turn it over to the people and ask them why they find London a good place to do business.

Klaus-Peter Műller: First of all I believe many Brits do not appreciate it enough but you do speak the right language and you were raised with it so, occasionally you seem to be forgetting about this particular advantage. No, what makes London so attractive and what is it all about, London, first of all you are one of two global financial centres, and secondly you are the only one that we have in Europe. The City relies on a vast pool of talent that is unsurpassed in any other European region. You have some of the finest academic training opportunities, i.e. first-class universities here, and John, as you have mentioned, one of the big advantages of course is as well that some of the best of class firms are either residing in London or do have major representation here in the City, so if you add all this up, then we should, irrespective of nationalities, the Europeans should be proud that we have London in such good shape, and I'm personally very much convinced that with the increasing needs to provide for your pension fund systems and some of the continental European countries will receive substantially higher inflow of money, so that our kind of lagging behind on the pension fund volume is from my point of view something that will be reviewed or will be viewed differently over the next 10 to 15 years. So London is a great place.

Scott Kapnick: You know, I'm not British but I've spent 12 years in Europe and 7 here in the UK, and most recently three back in New York, and it really is interesting to me now, coming back to Europe, to, sometimes you don't realise how good things are when you're sitting right here, but this really is, London and the UK is really well-positioned in the world to continue to grow and develop as the financial centre or, you know, one of many, but really I can't emphasise enough how positive I am as an American for what has been done here, and the opportunity going forward. I think that the interesting thing for this conference and for the government going forward, the government has not been complacent here over the last several years, and these businesses, as you mentioned, these businesses are mobile and can move around, so you have to continue to have a very competitive framework in terms of labour, tax, some of the things that we talked about here in the opening remarks, labour, tax and regulatory reform, and I think that over the last several years, that's been done and needs to continue to really be pushed to stay competitive around the world. And then lastly it's, you mentioned the fund business is very important and has been very important. For us in financial services, I think it is very important to capture the flows, and the transatlantic flows have been very large and very positive, and hugely important to the development, so as New York and the US have built up, that has helped London and London has helped New York, and I think the big issue for the future, and was also talked a little bit, as China and India and Russia and the Middle East build up, I think it's critical to try to capture those flows while helping those businesses and markets grow up, but capture the flows and there's some complexity around that we can talk about, but I think London's as well positioned as anyone, and really has a regulatory framework and what people have done here that I think even can take a leadership role vis-à-vis the Americans in terms of the world on some of this.

Professor Peter Forstmoser: Well, as London is certainly the leading transaction place for insurance risks, it's the place where the business is done, which is then maybe often transferred to other places, so it's no wonder that I think about 50% of the capacity is controlled by foreign companies. Now, why is it so? Well, first I think a large market always attaches other business because it gives you great chances, but for us maybe one of the most important assets is the scale we find here. I mean, if you are looking for accountants, for actuaries, for lawyers, loss adjusters, arbitrators, you name it, you just find them here, and this is extremely important for international business, so I think it's a good model to have the workplaces here, highly qualified workplaces, and then maybe transfer the business to other places. For us also extremely important is the financial sector at large, proximity to the banks. I mean, if you look at the buzzword of today, which is securitisation, definitely we have to be very close to the banks. Challenges, I think the FSA, our regulatory body, has done a tremendous job in keeping high standards of regulation, but there might be a risk that sometimes they overdo it a little bit. It's maybe sometimes a bit cumbersome to come to the conclusion. I know that the FSA is fully aware of this issue and definitely, I mean, the flip side is that the standards are so high and this is definitely a necessary basis for international business, but I don't know whether it's always necessary to be a super equivalent to what is required in the EU in other places.

Sir John Bond: Let's talk about the euro for a second. The euro has been I think a tremendous technical success. It's created a huge pool of money. How do you think London has fared staying outside the euro zone?

Klaus-Peter Műller: Amazingly well actually. I would have assumed that London would suffer a little bit more from having abstained, but all things being equal, London has adjusted quickly to the situation, and from my point of view there does not seem to be any discriminatory effects to Britain due to the fact that the country has not yet joined the EU. From, the European perspective, of course, you know what we are saying. We have stopped begging you but the door is open.

Sir John Bond: Scott, there's a large dollar pool of funds that are traded here in London, and some of them I think were helped on their way in the 60's by the Interest Equalisation Tax, perhaps by re q a little ahead of that, but do you see this pool expanding?

Scott Kapnick: I think that particularly where we see it expanding is in some of the areas where the credit derivative markets, some of the markets where London is taking a leadership role, the currency markets, and I also do believe that as some of the emerging markets, particularly China, Russia, India, you know, some of the dollar-based assets I think given time zones, given the positive operating environment, I think that will expand here as those markets expand.

Sir John Bond: Have you got any thoughts on the regulatory environment, picking up on Peter's remarks and coming from, dare I say it, one of the most complex regulatory environments in the world?

Scott Kapnick: Well, yes exactly. I would also compliment the FSA and compliment the regulators here for trying to have a balanced view, to setting high standards but have a balanced view, and again, as I say, without going too far and, you know, there's been a lot of talk about how the US may have over-reacted, and I do think that now this country has a leadership role in the world in terms of driving high standards but in a balanced, risk-base way, and occasionally, yes, there are things that need to be reviewed and go off track, but I really do think that sitting here right today, this is as strong a regulatory market or regime as there is in the world right now.

Sir John Bond: I must say as I travel internationally, I find more people wanting to copy the FSA than anything else around the world, and I think that's a tremendous compliment to the FSA.
I think the unification of regulation, not having it done by ... (inaudible) has been a huge step forward.

Scott Kapnick: I think the other thing, Sir John, the sort of watching for incremental changes, you know, across a lot of different things, if you let that erode, and that can be on a regulatory front or on a tax front, that's really something that's got to be managed and watched on a constant basis.

Sir John Bond: As a reinsurance market, Peter, I think it's one of the top international reinsurance markets in the world, if not the top, is that right?

Professor Peter Forstmoser: Yes, I think it's about 15% of the global market share. It's maybe more for the industrial insurance with regard to aviation and marine, I think it's close to 50 or even more per cent so it's really a huge, huge market, and it's the place you have to be.

Sir John Bond: What about this phenomenon of concentration of financial services in a world where technology would allow you to do the work wherever you want? In fact people still seem to want to huddle together and in a sunny sort of way, the technology enables you to save costs by doing more things centrally, and at the moment it tends to concentrate financial services than disperse them. Is this something you, Scott, you see happening in future?

Scott Kapnick: Yeah. I mean, it's actually interesting, you've got a couple of themes pushing for concentration and for aggregation if you look at, you know, just us and London, we've probably tripled in the last 15 years our employment and become, I think the business, I was looking at it, our European business today is about twice, 2½ times the size of our entire firm 15 years ago, and so I mean, if you just look at that, I think that yes, it will be concentration. On the other hand, as I was talking about operating costs, some of the out-sourcing or in-sourcing allowing people to stay competitive by dispersing to lower cost labour is very important, and I think we've all seen that, and I don't think that's a trend that can be reversed. I also think that, given some of the issues with, whether it's avian flu or, you know, some of the issues that we've all been facing over the last couple of years, we've also spent a lot of time trying to use technology to have central but also allow people to spread out and do, you know, so that you can disperse your people and allow them to keep working, so there's some trends going the other way but technology's allowing that as well.

Sir John Bond: Do you think we market London as an international financial centre well? I think, you know, lots of people are out there individually marketing it. Do you think we tell the world enough about London as an international financial centre, Klaus-Peter?

Klaus-Peter Műller: John, probably it's never enough if you're in a marketing position for a place like London, but this conference today is just one example more that you do market and that you do marketing on an international scale, so from my point of view, London is pretty much on top of things as far as putting itself into a proper position is concerned. Sometimes I would wish a bit more self-confidence. I remember the discussions when the ECB went to Frankfurt, and I just kept reminding our British colleagues, 'You employ more people in the financial service industry, the City of London, than Frankfurt counts inhabitants, so would you please walk straight and not be so easily unsecured if something goes to another place. That's one point. A second point is, you asked before, John, about physical contact. My bank is using more conference calls and more video conferences than ever in its history. Now, if I view that, then I should say, 'OK, so we pay less for airline tickets and hotel bills.' That is not true. The minute that something gets really important, people tell me quite convincingly, 'We have to go there, I have to see the guy, I have to meet him or her face to face,' and even though it is not cost-sensitive, I tell you, I appreciate that, the human touch and the desire to meet somebody also in a physical dimension, that we still preserve this makes our business a bit more human than it otherwise would be, and it's benefiting certainly it's benefiting London, not necessarily our travelling expenses, you know the hotel prices as well as we do, but it's certainly, it has made London probably one of the world's biggest meeting places.

Sir John Bond: I think perhaps the Achilles heel of any business or any, you know, thing like an international financial centre is complacency. I mean, if we were thinking about the possible things that might reduce London's position in any way, what do you think those might be?

Scott Kapnick: I think complacency is exactly the thing you have to fear, and I think that most importantly you need to make sure that you don't over-regulate and I think people talked about that, you don't over-regulate from a financial services standpoint, and you stay competitive from a labour standpoint, and that's obviously as the world's opened up, that poses certain problems that require then education and require the government to take an active role in re-educating and retooling those who get displaced, but you have to stay competitive, and then obviously the tax regime is very important. I mean, I sat in Germany for many years and watched the competitive dynamics from a tax standpoint both in France and Germany versus London, and I think those are the really key ones, and then really also, you know, don't get complacent on world trade and opening up, you know, some of the comments earlier, 'the Doha Round, critical' to 'Don't get complacent on this stuff or things won't be as good as they are.'

Sir John Bond: What do you think from an insurance perspective, Peter, are there areas that we need to be on our guard?

Professor Peter Forstmoser: Yeah, I think I already mentioned it. I think it's really the issue of maybe sometimes having a bureaucracy which is a bit slow, but I mean, if I compared the pros and the cons, I mean, the pros enormously outweigh the cons in every aspect. I mean, we really like to do business here. We also like it from a cultural standpoint, atmospheric standpoint. The Gherkin was already mentioned and that was for us really a great experience, you know, to be able to build within the City of London such an avant-gardistic building, and at the end, everybody was in agreement, it took some time, that's OK, raised also the quality of the building, but at the end even the Heritage Foundation was on our inauguration, so that was a great experience and we like to be here.

Sir John Bond: I think planning permission has moved on in a dramatic way in London, and that's all to the good. Do you think you can plan the future of a financial centre, or do you think you have to let it evolve and just go with the flow? How much does it evolve, how much can you strategically plan the future of an international financial centre. If we assume that we want what we've got to grow bigger, should we be having a get-together with government regulators, our clients and the practitioners and trying to think about it, or do you think go with the flow is the recipe?

Scot Kapnick: Yeah, well, I mean, it's a little bit interesting going back to your marketing question. You know, there have been a lot of places in my career that I've seen, you know, most notably when I was in Germany in the early 90's, tried to market and plan, and the New York situation where they were trying to attract foreign companies to come there, and they tried to plan that, they tried to market it, but they didn't get the basic operating environment right in all situations so it ended up that while they had the best intentions, the marketing and the planning didn't work out. I think what is most important is to focus on the operating environment that people are operating, and what are the critical things that you can do to help, whether it's insurance, banking, investment banking, financial services, what do those firms need to continue to strengthen their operating environment, and obviously then you have to have strong regulatory environment as well, certainly in this environment, and then when people do something wrong, they have to be, you know, very strongly dealt with. So those are the things I think. I think it's hard to plan, I think you've got to stay flexible and stay constantly focused on what's going, you know, what's happening in the world.

Sir John Bond: Do you think we benchmark ourselves internationally enough to make sure we're competitive? We've seen Dublin come up as a funds administration centre. I actually share Scott's view, it's very hard to plan these sort of things. To start with, a lot of them depend on what happens elsewhere in the world. Do we monitor enough what's happening elsewhere in the world, do you think, to make sure that we stay really competitive?

Klaus-Peter Műller: I think so, yes. I believe that the government job in this particular situation is to provide for a framework, and it's our job, the managers, our customers, our consumers who need to fill out the framework that is provided for us. What has helped London a great deal is the speed with which also governmental institutions reacted to new instruments. We had minimum reserves that kept Germany behind for decades, and nobody, you know, really touched it and reformed it, at least not early enough. There are so many things that are provided for by London because this city is acting speedier, faster, more progressively, more openly to new developments than most of the other centres, regional centres that we do have in Europe, and that certainly includes, much to my regret also the city where I'm coming from, Frankfurt, and so what would I recommend to London? London is different from New York, depending much more in internationality due to the lack of a strong domestic market, at least if I compare it with the United States, and that means you have to stay more open-minded, you have to stay more liberal, and since both of my colleagues have addressed the regulatory question, I believe that the one-source supervision that the FSA is providing has been correctly commended here by my two colleagues. What we have to prevent regulators from is the so-called 120% rule, and the two countries that are outstanding for this, it's Britain and it's Germany. If 100% is good for everybody, then we need 120, so that is something that we have to safeguard against, that mark-up. There's a tendency to that. Otherwise, my appeal to the City of London, the problems we know, its transportation, its cost of living, from my point of view they are clearly out-balanced by advantages of the City. It will need to be open-minded, it will need to continue to be the international gate into Europe, as long as London is paying enough attention to this, including the academic training, the pool of tenants, and making sure that that continues, for as long as this is the case, I believe London is a hard place to beat.

Sir John Bond: Let's talk about the pool of funds. I mean, if we'd been here 10 years ago, I don't think hedge funds would have been quite as prominent as they are today, or private equity would have been low. I mean, what's the future in the pool of funds? It's constantly changing. Do you see new areas where London should be focusing on getting itself prepared?

Scott Kapnick: Well, I mean, it's interesting, roughly there's about a trillion dollars in hedge fund assets today, to they'd have grown up really in the last several years, and we continue to see that growing and being an opportunity. I do think that poses certain issues for regulatory issues and planning issues. I think the biggest pool will continue for the near future to be the transatlantic fund flow, and I do think that's an area where, you know, given some of the things that have happened in the geopolitical area, you know, we can't get complacent on that, and maximising the pool of funds associated with that, I do think that, as I said earlier, the Middle East, China, India, Russia, you know, you can see it in those fund flows and the opportunities associated. The Indian stock market and the Russian stock market, I think, I was looking, are up about 150% each in the last two years, so those market caps have really expanded and that's expanded the pool associated with those markets and as they're opening, they're creating more opportunity for people to look to invest, and I think the same, you know, China has had a little bit of an issue with Asia and how that's working, but I think the Middle East is an area that's going to, you're going to see that grow and then you're going to see the impact of that on London itself, both in terms of people here and growth and opportunity.

Sir John Bond: Peter, your fine company manages huge flows of money. You do that from Switzerland, you do it from here, you do it from both? How do you see that evolving in the future?

Professor Peter Forstmoser: But first I wanted to add to the 20% group Switzerland stake. Actually we have 3 or 4 centres where we try to manage the funds. We need that also because apart from knowing the markets, we also have to closely monitor regulation because we are not that free in our management. We are quite limited and of course for us the goal is to have as liberal as possible a way of managing and this is done from London, New York, Zurich and a bit Hong Kong.

Sir John Bond: Which is the biggest of those centres for you?

Professor Peter Forstmoser: Maybe New York.

Sir John Bond: Interesting, interesting. Klaus-Peter, funds management big for your fine institution? It must be.

Klaus-Peter Műller: Basically it's London, Dublin and Frankfurt, to a lesser extent New York.

Sir John Bond: And the funds administration side, I mean, the back office side of London as an international financial centre provides a huge amount of jobs and has to be efficient, has to be meticulous. You're doing that by and large here or are you moving some of it off-shore? How is it working for you?

Scott Kapnick: Well, we're definitely doing both, I would say. As I said, we've expanded a lot here. We've actually expanded. We have some areas of England and Ireland where we have people as well doing back office functions and then in Bangalore I think everyone, or India, parts of India, I think that trend is moving. I think we have gone from, you know, nobody to, you know, 600 people and there'll probably 1000 people, so that's going to continue and services, but actually there are many areas around the world now where you're moving them away from traditional centres. I think that will continue to happen to the outskirts of London or around the UK, but we're definitely still adding here.

Sir John Bond: Let's think about what London might look like in 10 years' time, 20 years' time, if you wish. How do you see London evolving as an international financial centre?

Klaus-Peter Műller: I would wish that London by such time would have also been accepted as the financial centre by the Central Eastern European countries, reaching certainly into Russia. If I think in terms of 10 and 20 years, that's a point. We have that forgotten continent of Africa that also offers more chances to London than it does to New York, so if we go in steps of decades, then I would like to include regions in the world that are not jumping to our minds today, so these two regions, Central Eastern Europe, the Balkan countries, a country like Turkey is certainly to be counted among those, but then reaching into the not-so-traditional areas of Africa. I would like those countries to focus more on London than on New York simply from a European point of view, and I believe that this is a big chance for London, and if I had anything to say in terms of marketing, I certainly would make sure that the marketing ambitions of London would be directed to those areas in particular, and otherwise I believe that London should preserve its qualities and it will continue. I believe it has more chances to grow and to close the gap to New York, and I'm not trying to start a dog race here, but I believe that the chances to close up somewhat to New York are much bigger than the risk that the gap will widen.

Sir John Bond: So you see more internationality rather than less in the future.

Klaus-Peter Műller: Yes. If the City reacts properly, and I have no doubt that it will, if the City reacts properly, it chances to pick up some more volume, and again I would like to come back to the pension funds scenario, I do see assets under management increasing in Europe more rapidly than in the United States for the given reasons that I touched upon before, so the chances for London, from my point of view, are quite positive and, not to say excellent for the next 10 and 20 years to further develop and to become even more important as one of the, one of two leading world financial centres.

Sir John Bond: Peter, from your perspective, from the insurance and particularly reinsurance industry?

Professor Peter Forstmoser: Actually I could imagine that London will be the place of the European stock exchange. I mean, already now I feel that the Swiss stock exchange has a very close co-operation with London. The big SMI companies, the shares are traded here, and I could well imagine that this tendency goes on because it's a place with an excellent infrastructure, with excellent skills, so it has the best chances to attract the business.

Sir John Bond: Yeah, I think you're right, there are over 30 stock exchanges in Europe at the moment, and that's more likely to grow smaller than larger I hope. Scott, the future of London.

Scott Kapnick: The future of London, look I think, I think diversity has been a real key and the willingness to embrace diversity has been a key here, and it's going to, as these key markets around the world continue to grow, I was reading the paper, you know, something like one in 15 of houses over a certain level now are sold to Russians or, you know, in this country. I think that's going to continue. I really don't think people estimate how big these international markets and the flows can be, and if you can replicate the transatlantic flow that London captures with Asia, the Middle East, Russia, some of these emerging markets, it is going to, I think it actually really will rival New York and it will push, you know, possibly even further as things just depending on how this growth develops, but 10 years from now, it is going to be even more diverse of a place to do business than it is now.

Sir John Bond: And in terms of foreign exchange, I'm not quite sure whether the world's getting more currencies or less currencies, but you've certainly got two huge blocks in the US and euro. I think London accounts for over 30% of the trading of the world's foreign exchange. Do we see more currencies as, you know, new nation states are born, or do we see more currency blocks? What does anybody think about that in the future?

Scott Kapnick: I think the world, there's no doubt, you asked about the euro, the interdependency of the world now compared to 10 years ago, and the interdependency of these economies, whether or not they have a single currency, the interdependencies of these currencies is very high, and so I actually think you'll be continuing to drive that convergence if things go in that direction and world trade continues to expand. I don't see any way to not continue to drive the convergence.

Klaus-Peter Műller: John, I believe that the question of more currencies is less relevant than the question of more volume. There certainly will be more volume between the dollar and the euro, and whether or not we have another, what do I know, 5 or 10 new currencies, it's not going to make any major difference, but I believe that the trading volume is clearly on the increase and so as far as foreign exchange is concerned, it will be, 10 years from now it will be even more focused on two currencies, on the euro on one side and the US dollar on the other side.

Innovation and Creativity (Panel 2)

Sir Robin Saxby: Good morning, ladies and gentlemen. I haven't been Jeremy Paxman before, so this is a new experience for me, and we've sort of just met each other and we've just been chatting, and what we thought we'd do is just have a bit of a chat with you really. You will notice in the programme, there are seven questions which I discussed with the Treasury and surprisingly they agreed with my proposal and even printed the printing mistakes, so that's pretty good. The other thing I'd like, just to be clear, I'm not the Chief Executive of ARM Holdings. My resumé actually has the correct title, I'm the Chairman, I stopped being Chief Executive about 4½ years ago and our Chief Executive would be a bit upset if he thought I was the Chief Executive. His name is Warren East. What I thought we'd do is just talk a bit about ourselves in the context of wealth creation and innovation, and particularly in my case on technology, and just have a discussion. I allocated a couple of questions each to each of the panel members and one question to myself, because there are actually 7 questions, and we're going to talk about those inside a context. Then we'll talk amongst ourselves, we'll each talk for a few minutes, then we'll talk amongst ourselves and then we'll open it to you.

So, if I start with myself, I've always believed in wealth creation from technology. The Sun newspaper after ARM went public printed Ex-TV repair man makes multi-million fortune, and the reason why, and I had a radio and TV repair business when I was 13, and I got into electronics when I was 8. Somebody gave me a kit, I took it to school and the school teachers were really worried in the optional lectures that I was going to kill myself, but I said, 'Don't be stupid, it's got batteries.' So I think if you follow your passions, it kind of helps. Now, engineering in particular takes a long time and it's difficult and some things might be for faster money like perhaps finance or gambling, so they're some of the characteristics. All I've done in my life is really followed my hobby. My final year essay was on colour television theory and practice, then I got into designing colour television receivers, then I got into micro-chips because they needed them. Then I created a global licensing chip company, so that's my story. If you look at ARM, I'll just talk about that a little bit. I had worked for large companies like Motorola Semiconductors for many, many years, and I'd also been President of the US company, so I was pretty embraced in the chip industry and I knew what happened, and the basic change in the chip industry was as follows. In the old days, everybody did everything. You designed the transistors, you designed the physical layout, you designed the manufacturing equipment, you did everything yourself. It was very, very vertically integrated. But because of advancing technology, the world has become a lot more complex, so now you're looking at a billion transistors on a chip. When I designed my first chips, they contained 50 transistors and I knew each transistor personally, so the world has changed, it's increasingly complex, coupled with, if you look at your Apple I-pod or your mobile phone or whatever it is that you use every day and take for granted, you've got an amazing amount of technology support. Your Global Positioning System works because of the satellites that were put up there. Usually there's a capital investment behind the technology. So when we started ARM, we had 12 engineers and myself in a barn in Cambridge at the end of 1990, and I said, 'We're going to be the global wrist slap,' that everybody thought we were crazy 'cos we had £1.75 million. Companies like Motorola, Intel, Sharpe's, Sony TI, Texas & Son were all huge competitors, how could we compete with them, and basically we said, 'We're good at microprocessor architecture, that's our strength. We've more architects. We cannot compete on manufacturing, we don't have the money, we couldn't make the capital investment,' so we invented a licensing business model in order to turn our global competitors, our enemies if you like, into our friends, and now all of those companies are our licensees and this year there'll be 1.7 billion ARM chips shipped, and by the way, please put your hand up if you've got a mobile phone. Good. Thank you very much. You've all contributed to our revenue, because on about every phone, we get 8 cents of royalty so please buy more at Dixon's, get a lot of shopping, I-pods, please carry on doing that. So we invented this model which basically says, 'We will license everybody, we'll turn our enemies into our friends. We have an absolutely global business so more than 99% of our business comes from outside of the UK, and we've managed to be successful.' Two messages. One, think beyond the impossible and then back off a bit to reality. You need vision, you need passion, you need a lot of hard work.

Now, my other sort of topic on my questions now, that's the bit about me, that I think is an opportunity, is the following. If you look at business or academia or government, they run in three parallel universes. We as business people are very driven, and if we're public, by quarterly earnings, that takes the attention, it's the customers that pay the rent, so who cares about government or to some extent who cares about universities. We do care about universities because mainly it's a source of people. We do a bit of collaborative research in some but it's a bit ad hoc and it's not a key part of our strategy apart from getting people. Government, you know, consults us and obviously the tax regime matters and the climate and infrastructure matters, we talk to them a bit and I think if we can just do a little bit more of collaboration between the three domains, on some major projects, it can make a huge difference, and that really comes back to the way government procures, 'cos it does spend a lot of money and it's got huge purchasing power. If we could do what I would call 'strategic procurement' which says, 'Here's a problem and an opportunity for Britain. How can we put the best team together to solve that problem?' By collaborating between universities, business and industry and I almost don't care what the project is, that I think could make a difference. It's got to be serious and it's got to be on the top priority list for the university community, for the government and for business, because if it's not on the top priority, it doesn't happen. That's all from me for now.

Alan Gilbert: Thank you very much. I'm in one of the global enterprises par excellence in the world. I was Vice-Chancellor of the University of Melbourne in Australia before I came to Britain to help make the merger of UMIST and the old Victoria University of Manchester work, and the new university has been in existence for a little over a year now, and it's a highly ambitious project. The university actually draws its students from perhaps 140 countries. Its staff is also highly international, and universities are enterprises that I think exist to do three things. One, it's frankly vocational, to produce a new generation of professional, highly skilled, knowledge workers for many of the industries represented here, so there's a major primary utilitarian commitment to produce the upper echelons of the skilled workforce of the knowledge economy. The second function is to be world-class research institutions, to produce much of the intellectual property that will translate, and obviously there's a major issue about how it's translated, which will translate into the creativity, the innovation that drive so much of the economy. But there is a third element, and there's a third mission element of universities, and it is to be civilising institutions, to produce tolerant, liberal, informed citizens of the kind of stable, advanced civil societies that the world is going to need desperately in the future if we are going to get through the next 100 or 150 years or so, and there's a real danger, I think, that if universities fail to be successful at those first two missions as vocational, professional schools, as research institutions, there will I think be a failure of universities to fulfil what could in the end be their most important mission, that third mission as essentially civilising institutions that produce broadly and liberally educated citizens of the world. So one of the reasons we engage so seriously in intellectual property creation and its transfer into the wealth-creating industries is because that's desperately important now if universities are going to have the credibility and the reach to be genuinely international institutions. I just want to make, in responding to two of the questions that have been asked in the paper, to start with three what I take to be self-evident truths and to make three points, one about creativity, one about intellectual property and the other about collaboration. The first of these things that I think are self-evidently true is that global business environments are far more complex than local or regional market-places ever were. The second is that in intensely competitive innovation-driven global business environments, minimising time to market is imperative for success, and the third is that if you are engaged in global market situations, global reach is crucial, and those who try to serve us a local or regional segment of a global market will be overrun by those who have genuinely global reach and capability.

Now, what do those three self-evidently true statements imply for innovation and creativity? The first of them, about the complexity of the global market-place, entails a parallel truth about the contemporary nature of creativity. There are always individual exceptions, of course, but the overwhelmingly accurate 20th century reality is that creativity is now the work of many minds involving collaboration across many specialities. We still want brilliant individuals, but the fact remains that winning innovation depends more and more on bringing together unique combinations of expertise, technologies, business models and policy options.

The second of those truths about competition and speed to market, entails I believe a truth about the nature of intellectual property. Success depends on using IP not as if it were a capital asset to be protected, maintained and tightly controlled, and more and more on regarding IP as working capital to be invested, spread and exploited in partnership with others. Ensuring that IP is not limited to zero some game applications or thinking seems to me to be vital, and have implications for how universities behave. The first of those two self-evident truths about market complexity and the competitive imperative of speed to market, combined with the third, the point about the need for global reach, to lead to an implication about collaboration between competitors. In particular networks of collaboration between entities which are otherwise in fierce competition, has turned out to be the most dynamic of business process innovations in the global economy. On the idea of collaboration of competitors, let me offer briefly one left-field example, but one which at least has for me the virtue of immediacy. As President of the new University of Manchester, I've been involved over the past year in the most ambitious recruiting enterprise that I've ever been associated with, as we attempt to repatriate and/or otherwise attract world leading teams of researchers, typically headed by Nobel laureates or their equivalent, to the UK. We started out thinking that this would be a nakedly competitive matter of offering inducements including US-style financial packages, the resources to build critical mass concentrations of world-class people, laboratories, research infrastructure and so on. We've ended up, even though those packages are vital, we've ended up being much more collaborative. We announced two days ago the first of these Nobel laureates who were coming to the University of Manchester, and it was a much more collaborative enterprise which led to that announcement. We now discuss ways of creating cross-jurisdictional research enterprises with US institutions, in which people, ideas and funding can be accessed and leveraged in ways that greatly expand the potential of the collaboration beyond what any single competitor or any single jurisdiction could achieve acting alone.

So to summarise, the key challenges to advancing enterprise in 2005 are dealing with global scale, competitive intensity, and the imperative of speed to market in innovative ways, and that typically is the environment in which innovation now takes place, and my take-home message is that successful innovation depends more and more, one, on bringing together creative multi-skilled, multi-disciplinary teams, able to operate across national and regional boundaries; two, on using IP as the currency of innovation to motivate creators and facilitate collaboration between competitors; and three, on the discipline to search relentlessly for global products, solutions and markets, and not parochial ones. Thank you.

Professor Ian Wilmut: My career, of course, has all been concerned with biological research, particularly with gametes and embryos. Some of you may know that I've recently moved to the University of Edinburgh where my ambition is to be involved in developing the applications with embryo stem cells, other stem cells in fact. Because my way of life's probably rather different from that of most people in the room, I'd like to make three points by referring to things that have happened in the last 50 or so years, actual specific examples. The first point is that you can't tell the outcome of scientific research, and sometimes you can get very pleasant surprises. Roslin Institute initially was an animal breeding institute and it was concerned to work with genetically identical cattle, twins. Now, of course, as well as having identical twins, you have non-identical twins, and sometimes it's very difficult to tell whether non-identicals are identical or not, and it was a real management problem, and the then director, in a conversation in a bar, a lot of progress is made in the bar, said to Peter Medawar, later to be a Nobel laureate, could he help distinguish between the two types of twins, and he said, 'Yes, that's not a problem. If you take a piece of skin from one animal and graft it on to the other, if they're genetically identical, it will survive. If they're not, it will be thrown off.' So they did that. We happened to have a farm in Staffordshire, Medawar at that time was at Birmingham. He went and actually did the experiment, and his prediction was false. Virtually all of the skin grafts came off. Sorry, wrong way round, virtually all of the skin grafts took, and the reason is that twin pregnancies in cattle, there is a blending of the circulation to some extent, and so what it showed was that if two differently animals exchanged circulation at certain points, they became tolerant of tissues from the other member of the pair, and this was a very early, this is 50 years or so ago, this was a very early demonstration of what we now regard as tolerance, and it lead to Peter Medawar going away and thinking about how you could develop that concept and use it for organ transplantation, something for which he got the Nobel Prize, but a completely fortuitous observation opening a door. What I think this means is that we have to have basic research asking very fundamental questions, because the deeper the question you're asking, the more likely it is that you'll come across something like that as well as the thing that you're looking for.

The second point is that you can never tell how new knowledge will be used, and I'm going to enter into the territory of the chairman, but take us back a long time to just after the Second World War when a senior executive in one of the big computer companies was heard to say that he couldn't see a need for more than four computers in the world ever. Now, at that time of course they were the size of a modest room and had lots of valves and so on, completely different from the things which have emerged now, but I think the same generalisation applies to any new development, that it takes time for us to see how new knowledge will best be used. That does apply to our cloning technology for example.

And the third point is that it takes time for new developments to come through. You can look back, 150 years in this case, to the time when people first understood the idea of vaccination to prevent infectious disease. We're still now developing totally new approaches to vaccination because of molecular biology, things that weren't even dreamt of at that time.

So what implications are there for the area of stem cell research for example? Well, I think the first thing is that it will take time. There may be some applications within five years, but others will take 10, 20, probably 50 years before it really comes to its first fruition, and what this means is that it's probably important that there is a combined effort to address this problem, involving both government, companies and what you would think of as academia, the research councils, and it's particularly appropriate perhaps that a report has been issued today announcing just that sort of collaboration, and funding specifically to support clinical and pre-clinical research, because I think all of the evidence from the history of science is that with that sort of modern technology, it is necessary to have that sort of co-operation and a long-term investment in order to bring things through to fruition.

Sir Terence Conran: My career has been in design. I started off as a student at Central School in London when London was an utterly, completely dismal, grey, rationed place. I got offered a job by an architect after I'd done 18 months at the Central, and he had quite a lot of work in the Festival of Britain, and I worked for him as a very junior designer, but I found the Festival of Britain, and I don't suppose there's anybody here in this room old enough to actually have been to it, but it was an extraordinary moment for Britain. As I said, London was war-torn. On the South Bank opened this place full of lightness, brightness, cheer, interesting architecture, huge amount of energy, and it was the starting of change in the life-style of Britain. Unfortunately we young designers discovered that when the Festival opened, there was no work for us, because all the factories were still churning out the same old thing that they'd always churned out because there was such a demand for it, so why change, and very soon my architect employer said, 'Terence, I'm terribly sorry but I can't pay you £4 10s. a week any longer as I've got no work.' So I went off and opened a little workshop and started to make furniture by myself, and gradually, it's a long story but gradually over the 50's, I had started employing people, opened two factories in London, moved out to a new town in Thetford with a brand new factory and started making a lot of furniture, mainly for the commercial market, mainly for the conference market, mainly specified by architects, not really for the domestic market, but having this new factory, suddenly I realised that I could now make domestic furniture, designed it as pack-flat, yes, blame me for pack-flat furniture. We started it in the UK, and exhibited it, got about 80 different retailers around to see it, placed a few orders, and we went to see them about six months after they'd had the furniture and came back absolutely deeply depressed that there was no chance whatsoever that in those environments, with their philosophy of retailing, was our modern furniture going to sell. So before just giving it all up and going back to our contract market, commercial market, we said, 'Oh, let's open a shop and see if we can do it in a different sort of way, with our enthusiasm and passion,' so we opened in 1964 Habitat and knew nothing about retailing, but we had a great desire to make it work, and so we thought, 'Well, together with our furniture, we should also sell all the other things that you need to make a home within a certain style,' china and glass, cooking equipment enormously influenced by the passion for food that Elizabeth David engendered with her books, and of course when people saw it all together, particularly at that moment in what was I think called 'Swinging London' at that time, there was an awful lot of publicity for it because we were doing something new, and we gradually learnt how to be retailers and built eventually quite a huge business from this. In the process of doing this, I made some money, having never had any money before in my life, suddenly Habitat became an international company and we launched ourselves on the Stock Market, and that was the moment that I was able to do something that I'd always dreamed about doing, which was educating people, particularly children, in the importance of design in their lives. It was quite interesting when we had the financiers sitting up here, 'Oh, you know, why do you like being in London?' All sorts of reasons given but not one of them said, 'Oh, it's the quality of life in London,' and I know that that is particularly the case, you know, knowing quite a lot of people in the financial world, 'Why aren't you living in Frankfurt?' 'Oh, I don't want to live in Frankfurt,' you know, when you're the sort of money they're making in the City, you choose the place you want to live, and the quality of life in this country was very, very important indeed, and so I thought, I set up the Design Museum which I first did as the Boilerhouse Project in the V & A. I set up the Design Museum to help educate well, really everybody but starting with schoolchildren because, of course, design had got into the national curriculum at that time, and then going through schoolchildren to students and hopefully industrialists as well about the importance of design in our society, which is absolutely fundamental, the creative energy that produces everything that we have around us, you know. I sometimes say to people, 'Everything that has ever been made in this world since the beginning of time by man and woman has been to some extent designed, some sort of decision has been made.' Unfortunately we can't call it intelligent design now because it means something rather different, so you know, I have to call it 'thoughtful design', and this has, also this happy day today with your report, it's also the day that George Cox's review which the Treasury commissioned on The Future of Creativity in Business and says building on the UK's strengths, this is an extremely important report, the Treasury has welcomed it, as I understand. The Chancellor referred to it in his speech just now and it seems that Norman Foster and I are going to join George Cox to look at ways of building a national centre for design, creativity, and most importantly innovation. I also happen to be a provost at a university, The Royal College of Art in this case, and one of the most exciting things that they have done recently or should I say, we have done recently is to put alongside our work that we do on the design side a particular area, a department which works with Imperial College on innovation. There was an extraordinarily interesting exhibition there a few months ago on the innovative ideas, and it's very interesting to me that designers are fantastically good at innovatory thought, and very often they pull the scientists or go and ask the scientists to develop things alongside them, but the original thinking very frequently actually comes from the designer, because the designer, of course, is the person, his job or her job is to touch everybody and understand how they live, how they might like to live in the future.

Sir Robin Saxby: My personal observation is, here we are in very diverse worlds, but actually I think we have a lot in common.

Professor Ian Wilmut: I was absolutely surprised. There was no collusion and you and I said some very similar things about taking things forward.

Sir Robin Saxby: And I think it's the passion, it's the drive, I think it's also energy, you know, success is 90% perspiration, 10% inspiration, it really is, and it's determination. I think all of us in business, or academia probably in your research, are pushing boundaries. There are some very tough days that you have to wake up and say, 'Can I go on?' I think that's one of the factors.

A personal perspective on branding and globalisation

Bernard Arnault: Good afternoon, ladies and gentlemen. I think I could have continued on creativity but I will say a few words about globalisation and branding from my perspective. Today we are told the world is getting smaller: global capital flows, the internet, cable media and international air travel have shrunk time and space, but all too frequently modern man is ignoring and forgetting the lessons of history, I think. In truth we have been here before. Globalisation is not a peculiar product of the late 20th century. I think it is a process through which global economies and societies periodically move. One of the greatest errors of globalisation swept the world during the late 18th century. The demands of international warfare as well as a commercial energy of public trading companies such as the English, French and Dutch East India Companies accelerated political, economic and cultural exchange. Events in Calcutta, Boston or Indo-China directly affected the markets in Amsterdam, Paris and London. The old mercantilist model of protectionism was breaking down. The celebrated Scottish economist Adam Smith quite rightly argued in the wealth of nations that protectionism was no route to raising living standards, rather free commerce was a path to prosperity as well as peace between nations. This remains valid today, as we face another era of globalisation. We must embrace that with enthusiasm to inspire the broader progress of mankind, and with it, then as now, cultural respect, public education, free trade and an ethic of global citizenship. As a citizen of France myself, and a businessman of the world, my perspective is inevitably bifocal, and I have to admit that the caricature of France as a nation of inveterate protectionists resolutely set against globalisation is widely believed. This is very wide of the mark. When it comes to the market in luxury goods, the market in which my company LVMH Moet Hennessy Louis Vuitton operates, France is part of a single European market of 25 countries, who external tariff barriers are generally low, and since these tariffs are set at a European level, they are by definition no higher for France than they are for Britain, Germany, or for that matter, ultra free market of Estonia. National income statistics bear witness to this openness. Imports account for nearly a quarter of the French economy, a slightly higher share than in Britain, and over twice as much as in the United States. It might surprise some people to know that the French are as keen on e-bay, Amazon and Google as everyone else. In total the stock of foreign direct investment in France comes to nearly $600 billion, less than in Britain but not by much, and I think it has got to be good news that many large French companies are headed by executives who are not themselves French: Carlos Ghosn, for instance, at Renault, while one of our leading politicians and most likely the next president is the son of a Hungarian immigrant, and for my own part, I successfully brought in Mark Jacobs, an American, as a chief designer at Louis Vuitton, and John Galliano, a British citizen, to revitalise Christian Dior. In short, although many French politicians and French people may, just may, be instinctively sceptical of globalisation, and although the French state is more interventionist than most, in practice France, like its European counterparts, is open for business with the rest of the world. In fact France could even be considered as being part of the biggest beneficiaries of globalisation. France is the fifth biggest exporter of goods in the world, and the fourth biggest exporter of commercial services, and while Britain is widely considered a success story of globalisation, and rightly so, France, with a similar size population and economy, actually exports more than Britain does. The number of big globally successful companies and brands that France boasts is truly remarkable: Hachette Filipacchi, the world's biggest magazine publishers; in retailing, Carrefour is number two only to Walmart; in pharmaceuticals, Sanofi-Aventis is a world number three; Publicis is the world's fourth biggest advertising agency; Accord is the largest hotel group in Europe, and the world's fourth largest. I could go on, Total in oil, Axa in insurance, BNP-Paribas and Société Générale in banking. To tell you the truth, it pleases me a great deal that the French companies are so successful within the global market-place, and I am particularly proud that LVMH has succeeded in becoming the world's leading luxury goods producer, and yet all of us at LVMH know that there can be no grounds for complacency. The challenge of global competition is real and increasing. If we are to continue to prosper, we must remain one step ahead of competition. One of the biggest fears about globalisation for the citizens of today is that it is a headlong race to lower living standards. Their theory goes that our advanced economies with their higher wages and standards cannot hope to win, yet is not this the exact opposite of what Adam Smith taught us some 200 year ago? In fact globalisation I think is a race to the top, where we can only prosper by continually raising our game. To put it bluntly, China does not want to drag us down to where it is now. I think it wants to catch up with us and maybe at one point overtake us. We should welcome the challenge, not only because it can spur us on to greater things, but also because the rising prosperity of China and other developing countries provides us with exciting new opportunities. LVHM success is emblematic I think of this race to the top. We are continually improving our products and forever reinventing ourselves. We have achieved and will maintain, I hope, our leading position at the top of the value chain only thanks to the creativity of our designers, the quality of our products, the skill of our management teams, and the savoir-faire applied to marketing our brands. It is only because our products are of exceptionally high quality that they can command a premium price in an increasingly competitive global market, and that exceptionally high quality in turn is dependent on having an extremely skilled workforce, which is why we still make most of our products here in Europe and why our workforce continues to deserve premium wages. As long as we continue to raise our game and as long as our workforce remains the best in the world, we have nothing to fear and much to gain from global competition. LVMH already has 15,000 boutiques in 63 countries, we employ 60,000 people at more than 50 brands. Our sales last year totalled €12 billion. What's more, our aim is to double the size and profitability, if we can, over the next five years, because we have taken time to invest for the long term in the brands and the markets. Interestingly, China accounts for an increasing share of our sales. We now have already 13 stores in China for our Louis Vuitton brand alone. Our biggest store in the Asia-Pacific region meanwhile is in Shanghai, and we expect our new flagship in Paris, on the Champs Elysées to be a hit with the growing number of Chinese tourists. This example illustrates a simple truth: the Chinese spend the profits that they earn selling us T-shirts and televisions and other things on Western products, so they make us better off twice over. First, I think, by cutting the cost of our products, of our imports, second by increasing the demand for exports we produce, and dare I say it, the terms of trade are pretty favourable in our direction. You have to sell a great deal of cheap T-shirts in order to be able to afford some Louis Vuitton luggage.

I would like to conclude this very brief speech with a strong call for leadership and courage at the World Trade Organisation Summit in Hong Kong. The promise of freer world trade in agriculture, manufactured goods and commercial services could boost the world economy by $300 billion a year in the medium term. The benefits in the long run could be far greater as increased competition spurs faster productivity growth. Prime Minister Blair has been vocal in rallying support for the Doha Round, and I have to admit he is absolutely right. I cannot deny that I say this out of self-interest, because freer world trade will be good for LVMH, but also because I passionately believe that it is indispensable for our future prosperity and for the hopes of billions of people in developing countries who aspire to a better life. Chancellor Brown said that 2005 is a make-or-break year for development, an opportunity to make a breakthrough on that relief and development, on tackling disease, and on delivering the Doha development round on trade. I could not agree more. This agenda is too important for us to fail. Thank you very much.

Entrepreneurial Culture (Panel 3)

Stelios Haji-Ioannou: The first question is whether entrepreneurship or enterprising culture, and I know we've been using the terms interchangeably. Perhaps they're not exactly the same thing, but entrepreneur for me is someone who takes risk whilst, you know, big organisations can be enterprising, can take more risk but it doesn't actually come out of their own pocket, if they get it wrong, so there is a difference. So the question is, can you teach that? I mean, the government assured me they put £60 million into the education system to teach entrepreneurship. Now, is this going to improve things? Can you really take schoolchildren and teach them how to become entrepreneurs, or some of them are destined to be because they're risk-takers and the others are going to become just business people. Second proposition: if education itself won't do it, how about role models. We talked about the phenomenon of celebrity entrepreneurs. Is it good or bad for the economy, for society, for business? I have often admitted that I started Easyjet because I met Richard Branson, not because I read the Harvard Business School case on South West Airlines, which I did. It was a very long read and a very elaborate read, but in reality the reason I gave up, you know, a comfortable life-style in Greece and came to London, Luton out of all places, to start Easyjet, was because I got inspired by another airline owner. So I think role models are very important and we have a few to talk about it here, a few such role models. Third point: attitudes to failure, and let's qualify, we're talking about non-fraudulent business failure. So let's leave aside the possibility of people doing something wrong. I said entrepreneurship is about taking risk. If you don't occasionally produce losses or fail, you're not taking enough risk, it's as simple as that. Any venture capitalist will tell you that if 100% of your portfolio companies are surviving, you're not investing in enough companies. So it's understood in other sectors and other countries. I think in this country and more so in this continent, in Europe, we're behind on that. We still feel it's a stigma, and with Sir Alan's permission, I'll mention an example with the equivalent Apprentice style in America where Donald Trump has a company in Chapter 11, and yet he's widely recognised on American network television as an expert on business, and he write books about how to become a millionaire. I don't think it would have been allowed in this country, so you know, thank God Amstrad is in good financial health but I think we have had examples of people getting into business trouble and then losing, if you like, their credibility in society and their ability to start again. And fourth point, and I'll be very brief because we have two excellent representatives of that case, we need to become a more all-inclusive society when it comes to business, and I think Britain is way ahead of Europe, possibly only behind America in that respect. You've got to allow women to start businesses, and I believe the statistics, America is ahead of Britain on that, so more and more women should be encouraged to start businesses, because it's good, it's good for everybody. You can't exclude half your workforce, for God's sake. And the other thing is, you have to allow people who were not born in this country, and we have three fine examples. None of the three of us were born in this country.

Gita Patel: I'm a chartered accountant by profession. I was a senior banker for the NatWest group and recently started a company called Stargate Capital to focus on fund management, to review the early stage sector, to look at the inefficiencies within those sectors, and see what emerging opportunities come out of that, and it was as a result of that that we set up the Trapezia Fund which is actually aimed at investing in companies in which women have an influential role. One of the things with the early stage market is that if we were to take out some of the easy, you know, easy wins within that market, what you could do is, you could actually make the availability of getting equity much easier for the entrepreneur because what we find is that the entrepreneur spends half his time looking for bank debt and the other half looking for equity, and in the meantime someone else has come along and the business is dead. So what we really need to do is we need to accelerate the process and we need to work together with providers of finance, and then what we need to do is we need to support the sector in terms of nurturing, mentoring, opening doors, etc, and that was basically the basis of my thinking on Trapezia.

Karan Bilimoria: I've just flown in from Hyderabad this morning where I was actually born, and when I came here as a 19-year-old from India, for my higher education, it was made very clear to me by my family and friends in India, 'Look, if you ever decide to stay on and work in Britain, you'll never get to the top, because you'll never be allowed to get to the top, because there's a glass ceiling and as a foreigner, you won't be allowed to.' And I would say 25, 30 years ago they were absolutely right, but I've actually seen in front of my own eyes the transformation in this country over the last two decades, where I believe this country's become a true meritocracy, and I believe there's opportunity for everyone, and the best example of that is entrepreneurship, and there is no way that I could have, you know, as an immigrant, started a business with £20,000 of student debt to pay off, in my 20's, in the most competitive beer market in the world, against giants. I mean, Stella Artois was founded in the 14th century. Cobra Beer was founded just over 14 years ago, and I started brewing in Bangalore and then like Stelios, I liked Bedfordshire so I brewed Cobra in Bedford as well. Born in Bangalore, brewed in Bedford, and for three years exported from Bedford back to Bangalore, and we now brew in five countries around the world, so I really believe this country has been transformed.

Sir Alan Sugar: You're right, I was born in this country but some people would call Hackney not this country actually, but that's another story. Gita, a question often asked to me and one which perhaps you can answer is that you say that people with a seed of an idea, with a proposal, should be able to obtain funding, I think that's what you were saying, but you know, how do you differentiate between someone who's just sat down with a PC and run a spread-sheet and got a fancy Microsoft presentation and the seed of an idea, to someone that's really something. Doesn't it need to be, the person, the venture capitalist or whatever, do they themselves not have to be prepared to take a risk, because it's the most often asked question to me by people who say, 'Look, I can't get any money,' and I keep saying to them, 'Well, yeah, course you can't. I mean, banks are not charities,' so perhaps you can answer the question for me.

Stelios Haji-Ioannou: How will you choose the companies you're going to invest in?

Gita Patel: Well, one of the things you look at is, does the company have a compelling product? Is there a compelling gap in the market, is that the right solution for it because things like …

Sir Alan Sugar: Sorry to interrupt, but when the fellow from Google came along with his seed of an idea, there was no book that you could look into, market research on search engines, because it didn't exist, OK?

Gita Patel: Absolutely. When I'm sitting opposite somebody else and I wish I could swap places with them because I wish it was my idea to make a lot of money, then that gives me a gut feeling to say, 'Hey, this is what I want.'

Sir Alan Sugar: OK, no, no, fair enough, fair enough.

Karan Bilimoria: But the point you've raised, I mean, I was asked by somebody, an American who's been seconded to the Treasury to, you know, look at the comparison, one of the things you're talking about between America and Britain, and he said, 'In your wish list, if there was one important thing that would really help you when you'd started …' The most difficult thing for me in the early days was raising money. All you got were just no, no, no, no, nobody believed in you.

Stelios Haji-Ioannou: Is there a more efficient system than the one we have now?

Karan Bilimoria: Well, schemes like the government's Small Firms' Loan Guarantee Scheme, where the government guarantees 85% of the loan is a fantastic idea. The problem is, the banks, you try and get one of those loans from the banks. They're the biggest obstacle, and it's a great scheme, and you know, it is all about, a business angel put in £50,000 into Cobra Beer in 1993 in return for 5% of the equity of the company. What an investment. He took that risk and he's got the reward now.

Stelios Haji-Ioannou: That actually happened.

Karan Bilimoria: Yeah.

Tim Campbell: You sometimes have people who go to, like when we speak at schools, they're like, 'Well, I'm going to start this business tomorrow,' with no concept that they have to save something themselves, to show that they're enthusiastic themselves, to put their own money into the venture. They're just waiting for a free hand-out somewhere.

Sir Alan Sugar: Yeah, there's too much of that.

Tim Campbell: They have to be a bit, in terms of where you're starting from, you probably had something that you were ready to put down and say, 'I'm prepared to risk something myself.'

Sir Alan Sugar: What Gita says is there needs to be a panel somewhere within government that dishes out this money, or within banks, that has to say what she said just now, 'I fancy this idea.'

Stelios Haji-Ioannou: Or should we allow a free market to decide where to invest then?

Gita Patel: Can I get back to that? I think the problem we have in this country is that if you look at the British Asian community, 95% are men. You've got 48% of the personal wealth in this country belonging to women. Where is their money in the early stage sector? I don't understand why that ratio is what it is. It's just 5% women are business angels. Now, if you look at the banks, you mentioned the Small Loans Guarantee Scheme. What I would like to see is banks being challenged on not why they accept say, you know, letting 75% of the applications go through, I want to know why they haven't let the other 25% through, and have they given any advice on what these companies ought to be doing so they can come back? In other words, is the door shut or is the door open for a later time when the companies have gone and done X, Y, Z.

Sir Alan Sugar: Who is qualified within a bank to appraise a good deal? This is the point because the answer would be, 'What are they doing sitting in a bloody bank?' you know, I mean, the thing is, that is the problem. Banks are very safe organisations.

Stelios Haji-Ioannou: But isn't that where private equity comes in, in the sense that, you know, if you really want to invest in risky propositions, you need to come from a different class of money, different asset class, and private equity firms that have, you know, slightly more enterprising and clever people, because they make more money out of it, are the ones who invest in risky propositions, and they go for 30% return rather than 5% return.

Karan Bilimoria: Stelios, if I had gone down private equity, I wouldn't have 72% of Cobra Beer today, and at the stage when this business angel put in 5%, £50,000, 5%, I got a government Small Firms' Loan Guarantee Scheme for £200,000, the bank manager gave this. Grant Thornton advisers had lined up a private equity investment who wanted 33% of the company at that time.

Stelios Haji-Ioannou: There is a market. I mean, people will adjust on the demands and how much they value a company and, you know, it will come down.

Sir Alan Sugar: The other end of the spectrum, which I always find is unfair, is it seems to me that the banks, I mean, Philip Green for example takes a proposition to a bank and doesn't ask for £50,000. He asks for a billion pounds to cover something and they charge a £10 million just hello fee to come along and take 10% of the equity because what's in it for them is one day there may be £100 million deal, and I think there what you've got is a culture within the banks that say, 'Well, I don't want to mess around really with these small things. I want Philip coming in all day long.'

Stelios Haji-Ioannou: They're companies in their own right, and they need to look after their shareholders' funds, so …

Gita Patel: But the ... (inaudible) capital organisations are doing exactly the same thing.

Education and Skills (Panel 4)

Chairman: Everybody agrees this is the absolute key to productivity both nationally and internationally, and it is the area where Britain clearly needs to compete.

Sir Terry Leahy: Well, good afternoon and obviously today's conference covers a range of issues that are critically important to the future of Britain. Looking at the programme, enterprise, innovation, trade, liberalisation, nurturing entrepreneurs, but central to them all is people, and central to that is the ability of our people and the skills that they're taught. Obviously in a global market we need to evaluate our skills against those of other countries. That comparison is sometimes frightening. I've just returned from a trip to India, visiting our new service centre in Bangalore, and in that one service centre, we employ something like 800 science graduates. Similarly four years ago, at Imperial College in the UK, there were just 60 Chinese undergraduates in chemistry and engineering, and I'm told that this year there will be 1,000 Chinese undergraduates there. Now, there's a lot in the papers at the moment, even this morning, about the problems of education and training, and we clearly face some big challenges. But we also need to remember that discussions like this one have their limits. Our sense of priorities and answers are shaped by our own experience and prejudices, and the future of course always turns out differently. I'm sure everybody are at least aware of, if they don't actually remember, Harold Wilson's famous speech 40 years ago, when he spoke, that the country 'was going to be forged in the white heat of a new scientist revolution,' and that phrase sparked a lot of public imagination at the time. In fact the vision turned out to be pretty side of the mark. Its emphasis on central planning and state driven technology and government-run enterprises proved to be the wrong prescription, and in fact today when people think about that famous speech, they think it was of a failed vision of the future. It's interesting though, if you actually read the speech, buried away in there was a passage that attracted no publicity but remains as fresh and relevant today as it should have been back in 1962. What he said was that for his vision of Britain to succeed, we needed to unlock all the latent and undeveloped energies and skills of our people. Maybe it was that that should have had the priority at the time rather than the state controlled technology companies. So unlocking those skills is always vital economically, but of course it's much more than just economics. I know from my own experience in Tesco, we've taken 3,000 people off the long-term unemployed and we've trained them, given them special training in our business, and it's not just the jobs we've given them, of course, at the end of it, it's their self-esteem, it's the respect of their families and their neighbours, and it's difficult to put a price on that. I think the challenge for us is clear. We've got some great success stories in Britain, but 17 million of our adults have below Level 1 numeracy, and 6 million have below Level 1 literacy, but even this is only part of the picture. It's not just about reading and writing, it's about equipping people with the skills businesses need today, the ability to give good service, the ability to communicate, to lead teams, to get the best out of each other and out of technology, skills that are difficult to impart but are at the heart of every successful business. One thing that I've learnt from our business as it's become international in Asia and in Europe is that in fact no country thinks they've got all the answers to education and training, so there isn't a blueprint that we can import. We're going to have to work this out for ourselves, and we're lucky to have a very strong panel here hopefully to make a small contribution to that discussion. So if we begin the discussion, gentlemen, I suppose it's got to start with the widely acknowledged gap in basic skills. We've got a very poor record in the UK on basic skills. Steve, I mean, what do you think has gone wrong? Your career is in education, when 17 million adults are unable to mark down prices in a sale, and 6 million can't produce a document from a standard template.

Steve Sinnott: Well, I thought it was interesting, Terry, that you started off by, or contained within what I think was a fascinating introduction, some of the considerations from Harold Wilson. I campaigned for Harold Wilson in the 60's. We both know that particular area of the world and it's not true that I gave you elocution lessons, by the way, Terry. But what was contained within the vision of Harold Wilson there was an expansion of opportunities for youngsters. I think that was a good speech, and if we look over a long period, the whole of the post-war period was an interesting development of opportunities, of an expansion of people being involved in education, and of I think tremendous number of success stories, certainly during the 60's and the 70's. Many of those improvements are identified in my view with the improvements in our education system with comprehensive education. But we have had a persistent problem in the English education system, partly British but mostly the English part of our education system, and that's tackling this issue of those from the most challenging, the most disadvantaged backgrounds, them not doing as well in education as they should. Can I start with some good news? The good news is that the situation is changing, and if we take the last few years, the area that has improved most in our education world is the area that is served by the youngsters who go to schools which have the most free school meals. The biggest improvements in literacy and numeracy, and they're quite staggering, are in the area where we have the most challenging backgrounds. Now, we want to extend that, and there'll be no teacher, no teacher who will be satisfied until we really do make some improvements here.

Sir Terry Leahy: The rates of progress is in the toughest areas, is it?

Steve Sinnott: The rates of progress is in the toughest areas and so it should be.

Sir Terry Leahy: So some good improvement, but the actual absolute record's not good, Rod, is it? I mean, for a modern economy to have such a large part of the population, the stock of schools if you like, with such low qualifications is a problem.

Sir Rod Eddington: I think it's a challenge for business, Terry, and it's interesting, as I go round the country looking at transport infrastructure as part of the work I'm currently doing, when you talk to people, particularly in areas like the Black Country, about the challenges, they talk on the one hand quite rightly about, 'There are vacancies over here and jobs over there' and 'Does the transport system allow the people who are unemployed to get to where the jobs are?' But the other thing they very quickly come to is, 'Do they have the skills to do that job?' and although engineering and manufacturing's a critical part of our economy, the bottom line is that most people in this country are employed in the services sector now, and if they don't have the numeracy and literacy skills that equips them to do their jobs properly, then it's very difficult to get going, and if they get going, it's quite difficult to get up the ladder, and it's in many of these businesses where increasingly, as you sort of inferred in your opening comments, in a global competition, so we are competing against science graduates from India, and we are competing against engineering graduates from China, and in that world, the skill set of our people is the difference between winning and losing.

Steve Sinnott: What I've learnt in sort of reviewing this is of course teaching these people those skills, is most inexpensive when they're young, so you've got to start early. Teaching people the same skills gets more and more expensive as they get older. What can we do about the stock of people who are past the education stage but still don't have these skills?

Sir Terry Leahy: With adults, what can we do?

Steve Sinnott: Well, I think there's some success stories here too, I think, Terry, and one of the things with an old colleague from the TUC, and one of the really important ways I think we've tackled this in relation to adults is that there's a new development of union learning representatives, and there is success stories in companies of all sizes in terms of what some of the union learning reps have been able to do. For an adult who has difficulty in reading or in doing basic mathematics and arithmetic, admitting that you have these difficulties is really, really something, something difficult to do, a youngster growing up in a household with parents who have those difficulties, there are issues there too, I hope we come on to them. But one of the things the Trade Union Movement is able to do is to create a situation in which somebody feels freer to admit they have their problems, and one of the things I'm pleased with is that there are employers, I hope there's some of them here, who've created opportunities for their adults, their workers, the people who should be part of their skills base, of them improving some of those basic skills.

Sir Terry Leahy: So you think it's getting a bit better. There are even more possibilities for adults to be educated.

Steve Sinnott: Well, I hope what we do is ensure that there are opportunities for business to find ways in which they can work with people who are reluctant to come forward and admit they have those deficiencies, and I believe that there's some good schemes there and they're delighted to share those experiences and delighted to share good practice with colleagues in the room.

James Dyson: Of course one of the problems is that the old apprentice scheme has been abolished. Now, of course originally that was for 16-year-olds, instead of going to university, but there's no reason why that shouldn't be for adults as well, so older people could do some sort of apprentice scheme with a company and go to night-school or have day-release, so I think that we be a very good thing to introduce.

Sir Terry Leahy: I think us ensuring that there's a proper access to apprenticeships, but not the old style one which was often gender-stereotypical, not the old one which gave people a point of access at 16 and if you missed it, you no longer had that opportunity.

James Dyson: Mind you, it's worth remembering that Margaret Beckett was an apprentice in metallurgy.

Steve Sinott: She was, and look where it's got her, so she's done very well for herself. And she uses a nice Dyson too, I'm told, around the house, or her husband does, yeah.

Sir Terry Leahy: And there are now modern apprenticeships I know, 'cos Tesco is involved and they're trying to sort of capture some of the opportunities that existed in the old schemes but for the modern service sector.

Steve Sinott: And they're important and I think again, I want to try and identify achievements and success, and the modern apprenticeships, giving them an access to a wider age group of people, giving them access to a wider range of people, but there's still issues to do with the access of them, to boys and girls, young men and young women, there is still too much stereotyping in terms of their access, yeah.

Sir Terry Leahy: Let's look at the problem though from another perspective in terms of what's actually taught in the education system, even beyond basic skills, when you get into higher levels of education. I mean, obviously English has become the business language today around the world, but the second language is going to be Mandarin, it's a huge continental economy on the rise, yet in our schools the number of teachers of French and German outnumber Mandarin by more than 10 to 1. There seems to be a big imbalance there in terms of what the economy is going to need and what's being taught, and James, I know you're very worried that there's actually an absolute decline in the number of people taking the sciences, if I'm right.

James Dyson: Well, I mean, I'm still trying to find a country where I can speak the Latin and Ancient Greek I did at A-level, but I have to say, the French I did at O-level has been very useful, but I think, yes, we must learn languages, that's very important, particularly as 70% of our trade used to be with Europe, so naturally French and German are the obvious languages to speak, but that's all changing so fast now that Mandarin and Russian are really the languages we ought to be learning as well. But I think when we speak these languages, we've got o be able to speak at technologists. I mean, technology and engineering are so important in the modern world, so having language skills is important, but having physicists and scientists and chemists, educating them, having many of them, is becoming so important and it's quite frightening when you see in higher education that I think it's 20,000 children pass out every year from universities in media studies, and 3,000 pass out with physics. There are 200,000 engineers coming out of Chinese universities every year and only 20,000 out of British universities, so you can we've jolly well got to make engineering, technology and science a much more important and valued subject at school and a much more important and valued career.

Steve Sinott: And what would be important is to ensure that those people identify the teaching profession as something that they wish to enter, and one of the problems we've had in the past in particular with scientists is that teaching has not been seen to be something which has been attractive to them. Too often the teaching profession has been knocked, so why would you go to into a profession that is not seen to be as successful as it should be? Why should you go into a teaching profession where you're in schools where the equipment has not been as good as it should be, in order for you to undertake and to be satisfied with your teaching, so in relation to science and engineers, that's been a significant problem.

Sir Terry Leahy: Is there a shortage of good science teachers, good maths teachers?

Steve Sinott: Certainly. If you look at the statistics, they will show you that we have quite a satisfactory number of science graduates coming into schools, but they're biologists, and although we want biologists, there is a real issue to do with us not attracting enough chemists and enough physicists into schools, and we've got to make teaching attractive for those people to come into the schools.

Sir Terry Leahy: You know, if it's football, you just pay more for a better footballer. Why don't you just pay more for a better science teacher, why doesn't the market, if you like, provide the answer?

Steve Sinnott: Well, because what we want to do is get all teachers to get their wages up. I'm General Secretary of the National Union of Teachers, and so we want to lever it up but it's … The market will to some extent do that and there are some flexibilities within the pay system to enable physicists and chemists to come into teaching, and I hope that we can solve that particular problem. I didn't want us to gloss over James's point, which is in relation to languages, because if we want to identify an area which is not a success story for us at the moment, it certainly is to do with languages, let alone Mandarin. I mean, there is a decline taking place in the number of French and German graduates in our schools, and one of the things we've done which I think is short-sighted is to take away the compulsory nature of French and German, or of a language being there as part of the National Curriculum at Key State 4. I think that is an error, I think it's a real error when we're looking at the way in which persistently within our culture, we're very lazy to do with languages because we rely on everybody else learning English. We've got to tackle that one and I hope that's one of the lessons that comes out of today's conference.

Sir Terry Leahy: Are we sleepwalking into a problem with science, Rod?

Sir Rod Eddington: I think we are.

Sir Terry Leahy: It's just happening to us and we're not noticing it 'cos it's happening over a slow period of time?

Sir Rod Eddington: That's right, and it's sort of slow burn and you often don't notice change when it's slow burn . I mean, I was educated initially as an engineering science graduate and one of the reasons why there are not enough people going into the teaching profession in physics and chemistry is there are not enough chemistry and physics graduates coming out of university. I mean, it goes back I think. I think one of the things I think companies do, smart companies, is they recruit people with the right attitude for their business and they train them for the skills, so whatever game you're in, you want people who are going to be able to, if you're in the Customer Service business, people with the right attitude, and you then teach them about retail or about the hotel business or about the airline business, but that implies they have the capacity to learn, so if they're going into manufacturing, they'd better come armed with a skill set that's necessary. If they're going into Customer Service, then they'd better come armed with communication skills, literacy skills, numeracy skills, and I think we don't prepare people at school and university often in the right way to make a go in what is the real world, and the real world is really competitive, and I mean, at the end of the day, the American economy is still the strongest economy in the world, and if you look at what they're doing, as well as what India and China are doing, I think the gap's getting bigger, and that's a problem.

Sir Terry Leahy: I want to come back to the sort of life skills in a moment, but just, you've mentioned America. The other part of this whole discussion is the role that the world-class universities have as magnets for skills, and the tremendous disproportionate effect they have skills within the economy. You've heard the story of Stanford spawns something like 20,000 businesses I believe, one university. I think Chicago provided a third of all the Nobel Prize winning economists. We've got two. I mean, how big a need is there for us to create more world-class educational institutions?

James Dyson: I think it's incredibly important and we're just not producing enough science graduates. I mean, technology and engineering are the way forward. Clearly the Chinese economy, the Korean economy, and just let me say, the Japanese economy has been built on technology. One of our competitors, Samsung, announced today they're recruiting 30,000 new people for their R & D Department, I mean, 30,000 engineers. This is a huge number. We've only got 20,000 engineers coming out from British universities. We've got to have bigger universities and we've got to have universities with much bigger science departments. We're not walking into it slowly, we're falling headlong into an abyss.

Sir Rod Eddington: You asked the question about creating world-class universities. I think the challenge in the UK is that we've got some world-class universities, and unless we're careful, we'll let them diminish, and I think increasingly there's a global market for the best graduates from universities to go from undergraduate to graduate programmes, so that if you are a smart young undergraduate with a good honours degree in physics or chemistry or anything for that matter, then you'll probably find that if you look to America, you find the best research programmes, the best funded research programmes, world-class research facilities, world-class teaching facilities, and I think we'll increasingly see our best and brightest who traditionally would have gone to our best universities, and there are quite a few of them in this country, we'll find them going elsewhere because we allow our universities locally to be diminished a little bit year by year.

Steve Sinott: I think on at least on one survey, 18 out of 20 world-class universities are in the United States.

Sir Rod Eddington: They are, and the interesting thing is, there are very, very few in Europe, and two or three of the top 20 are in Europe but will those three still be there in 15 years' time?

Sir Terry Leahy: Let's move on to pick up the point that you made earlier which is people are taught a lot in schools and in higher education, but not necessarily what business needs in terms of social skills, life skills, the ability to communicate, the ability to work with teams, the ability to give service, ability to, the adaptability around new technology. I mean, is the National Curriculum a straitjacket now? What explains this mismatch between the skills you clearly need in a modern business and what's coming out of the educational …

Steve Sinnott: Well, to some extent it's an interesting day to do this because what we've had published today are league tables governing the performance of youngsters in England, in the primary education, and what we do there in those league tables is identify a fairly narrow range of skills and give publicity to them and in such a way because of the high stakes nature of that testing and of the league tables, excuse the way in which I think naturally some of the schools would undertake the type of work they do with youngsters. And similar processes take place, I think, at secondary level, so we have this insistence, this I think over-emphasis on the written examination and qualifications, and for us not to look in at the wider range of skills and attitudes and abilities that schools can undertake with youngsters. It's a very individualised process of examinations and qualifications, and what we need to do is to take up, I think, some of the initiatives that the government wishes to take up, developing from the old record of achievements which created a profile of youngsters, and the government wishes to develop it in its 14-19 ... (inaudible) it is currently doing, where we identify for youngsters in their pupil profile a whole range of skills, attitudes, knowledge and abilities, but they've got to be valued by, I think, by industry and commerce, so when we produce these, when we do these pupil profiles in schools, they have to be done in such a way that they have some status by employers, that that status is recognised and that status is properly articulated to youngsters, properly articulated I think to the schools, and I think in that way we'll find an additional way in which we can promote the type of things that we've been talking about within schools.

James Dyson: The trouble is, what schools are trying to do is produce people to go to university and get double firsts at university. That's what we seem to value in this country. What we don't seem to value is the hard slogger, the people who, you know, will spend their life working to make something successful, and I mean, there is one, the one hope I think, it's the Design & Technology course in schools, which does teach people to work as groups, and it teaches you to be creative. There's no other subject at school which teaches you to be creative, and that's a terribly important thing in the modern world, particularly when everybody else is as clever as we are, the only way we can be a bit cleverer and win is by being creative, by being different, and you can teach creativity, you can absolutely teach creativity and Design & Technology is a wonderful course in which to do it.

Steve Sinnott: I hope all good teachers are teaching creativity. I hope that the teacher who is teaching English Literature or teaching English Language is doing it in such a way that they're encouraging creativity.

James Dyson: Every teacher I had stamped it out.

Steve Sinott: Well, you should have gone to a good comprehensive school, I think, James. I think what good teaching is about is about creating, is about creativity and is about finding ways in which you can bring the best out of youngsters. Our education system, the idea that our education system is about teaching people just to get a double first at Oxford or Cambridge, I wish it were so, because too often what I did as a teacher and what other teachers will tell you, we're trying to raise the aspirations of youngsters. Sometimes in the past when I was teaching, it was trying to raise the aspirations of youngsters to think about getting a job.

Sir Terry Leahy: Even to finish their schooling in some of the places that you taught.

Steve Sinott: Certainly, I taught, it's in my biography, I taught in Toxteth in Liverpool, and you know, I can tell you a story of trying to deal with issues to do with budgeting, looking at it across the country, and also looking at how you would deal with budgeting as a family using that as an example, and I asked a youngster, 'When you leave school, how much would you give to the family and how much …' and this youngster replied, 'When I leave school, and when I get my giro,' and the expectation of that youngster's life was that he would leave school and be unemployed, that was his expectations, so for us in terms of explaining some of the problems of youngsters and of adults now, of them not having the skills level we want, there is a real relationship between low aspirations. In some families we're talking about generation to generation, and that's something we've all got to tackle.

Sir Rod Eddington: Just if I can on that, I think there is an issue here which is that at schools, one of the things we do is train people to pass exams, and intellect matters I think, there's no doubt about that, but if you think about most businesses, the things they value, as you said, are the life skills, the ability to communicate, ability to work in teams, and you don't, sometimes you don't learn those things, often you don't learn those things in the classroom. You learn them in the playground, you learn them on the sporting field or in the orchestra or the debating club or the theatre group, so I think it was a great shame that sporting fields were sold off in many schools in this country, and once you turn them into housing estates, you can't turn them back.

Sir Terry Leahy: Not to supermarkets, Rod.

Sir Rod Eddington: No. The more supermarkets, the better, Terry. But, you know, I think this is a real issue for us, because do we teach the life skills, and you don't just get them at school, you get them in, as I say, in the playground and in the home, and if people don't have those skills, particularly in servicing, if you can't communicate and work in a team, it's basically going to come unstuck.

Sir Terry Leahy: Why doesn't business ask for is, Rod? If it's important and it's not coming out, why doesn't business sit down with education and say, 'These are the skills we need.'

Sir Rod Eddington: I think that's a failing on businesses' part. My first response to that sort of instinct initially is to say, 'Are we asking government to do something that we as business should do?' and I think there's actually a real responsibility on business, when you find people in your workforce who don't have the skills they need, the life skills they need, to put some investment into training them, and I think actually it's something like 30% of people in their sort of 20's and early 30's are in some form of education programme at the moment, a lot of it part-time admittedly, and I think that sort of addresses the issue of people who are realising that they don't have the skills, and giving them the courage to own up to that reality is a critical piece, so I think business has some responsibility but I fear it's not just business, there's a broader issue here.

Sir Terry Leahy: Well, haven't we got a responsibility to demand it of government, demand it of the educational institutions, that these are the skills that make the successful businesses and they have the skills that need to come out.

Steve Sinnott: Yeah. Well, I think in one of the propositions, the way it describes different responsibilities, sometimes it says 'business' and sometimes it says 'government'. Now, in some of them I want to delete the word 'government' and say 'education', insert education, because it's our responsibility, but too often what business doesn't understand, I think, are some of the constraints on education and too often education doesn't understand, I think, some of the demands of business, so I wanted to come here and make an offer, and my offer to colleagues on the platform and colleagues around the room is, National Union of Teachers, we will host a summit of business leaders and education leaders and let's see if we can start that process.

Sir Terry Leahy: You'll get them face to face.

Steve Sinnott: Face to face, let's start a process or enhance a process of a better understanding of business.

Sir Terry Leahy: If you don't ask, you don't get. I mean, it seems to be an important part of this. What about, we've spoken a lot about what education doesn't deliver. What about what business doesn't deliver? If you need skills, isn't it the job of business to go out and get it?

Sir Rod Eddington: I think it is. As I said, I think you recruit for attitude and you train for skills. The presumption is that the people who come to you are equipped with the necessary prerequisites to be taught, whether it's to be taught as a production engineer or someone who works on board an aeroplane or in the hospitality game, and I think business increasingly is recognising that actually education is a lifelong journey, and by the way, Terry, I think there are some individual responsibilities here. I mean, at the end of the day, there's a great book called Whose Career is it Anyway? i.e. it's yours, your career's going to be more important to you than anybody else probably, Mum and Dad apart, and if you don't find ways to invest in it off your own back, if you don't have the initiative to do that, you can't sit in your home or in your office and expect someone to sort of ladle large helpings of education, so I think people have got to take the initiative to go out and get it, but equally business has got to create an environment where it's an ongoing process, and I fear too often, and I think we've all seen this sometimes in our own businesses, that when times get tough, one of the first things that tends to get turned off is the ongoing investment in people, the development of the workforce.

Sir Terry Leahy: Because our record is not great. I mean, I know these comparisons are difficult to do but the record of training by British businesses is not great. Why do you think that is?

James Dyson: Well, possibly because they don't think very long-term. I mean, I think British businesses, well, they're known for being short-termist, partly because bankers demand their money back quickly, and partly because …

Sir Terry Leahy: It's the bankers' fault, James.

James Dyson: Partly the bankers' fault but I mean, you see it all the time, you know, if someone doesn't turn round a company in a couple of years, they're a failure. Well, you know, it takes 10 years to turn a company round properly, you know, to invest in new products and invest in the right people. And I think the other thing is that of course we're training people all the time. It might not be a formal training, but we have 400 research engineers and every time we sit down and do a project, we're training each other, so it is a continuous process. It might not get a qualification at the end of it but, by God, they're very good engineers.

Steve Sinott: I mean, just pressing it again the benefits of training seem to be remarkable. On one measure a 5% increase in a number of your staff trained improves the firm's productivity by 4% just by increasing the amount of training. Isn't it such a natural thing? Why aren't all firms doing it all the time?

Sir Rod Eddington: Well, not only do I think it improves productivity but it builds loyalty as well. I mean, the organisations which reinvest in their people inevitably have strong attachments with their workforce, and why aren't they doing it all the time? Often because your best people, the people who you can least afford to lose from the day-to-day running of your business are the people whose development you need to care about most. Equally, you know, if you build into your budget that everyone's going to have five days a year in some for of training and development programme, from the most junior to the most senior, by definition you've got to have a much bigger workforce, and I think we don't take a long-term view, as James said, again, one of the things I admire about American organisations and the American culture is that mid-career education is quite a common thing. I think in Australia and Britain, too often we think, 'Well, we go to school and maybe we go on to some form of tertiary education, let's say university, but when we've graduated, that's it.' Now, certainly what I learned as an undergraduate in the late 60's and the early 70's has long since been consigned to the intellectual rust belt, really, and so if you don't reinvest in people, I mean, most people are doing jobs today that weren't invented the day they were born, in many cases weren't invented when they were in the education process, so by definition you've got to keep re-equipping people.

Steve Sinnott: How would business react to the trade union movement, negotiating with the employer and to negotiate an entitlement, an entitlement on the part of all employees to professional development, to training expressed in time or expressed in the form of some money that could be spent on professional development, how would they react to that type of thing, or what would be the impact in terms of recruitment if employers expressed to potential employees, 'Here is what you would get if you came here. Here is an entitlement, here is …'

Sir Terry Leahy: I expect that would be very beneficial. I think businesses who feel they've got a good record in training, being clear about it should attract people. Before we move on to questions, I wanted to ask you this about the individual. Why doesn't the individual value training more? I mean, all the statistics say it increases your wages, your employability, why doesn't the individual, you've taught so many around, why don't they value it more?

Steve Sinnott: I think it's a problem of aspiration still across our country. I think that is a real issue, so that long tail of people in the country who never had access to training or their families have never had proper access to lifelong learning in the way in which Rod was describing, I think that has had a real damaging impact on our society and indeed in our economy, and I think that's one of the things that we should really look at together, raising people's aspirations and doing that through education, through training and through professional development.

James Dyson: We get a number of people at about the age of 29 or 30 wanting to take a year off to travel round the world, in this country, whereas in America they do an MBA, and when they get their MBA, they get their salary doubled. You have to pay an MBA in America twice, exactly twice what you pay without an MBA, so it's an attitude here I think.

Trade and Openness (Panel 5)

Martin Wolf: This is a subject, the subject of trade and trade negotiations, which I suspect, you know, the immediate response of business people is, trade is a good thing, we're in favour of it, in general, except when it involves serious competition from somebody abroad who's obviously unfair, but the WTO is incredibly complicated, very remote, bureaucratic structure which we don't understand. We think it's successful and we sort of think it's important, but we really don't want to bother about it. I suspect that's probably the attitude of many people here, and so what we're going to try and do in the next 45 minutes is to persuade you that it is really important, it is the underlying structure of the whole world economic system, it has been the most successful international economic organisation, in my view, in fact I would argue the most successful international organisation two corps of the last half century, and in a week or so we're going to have a very, very important ministerial whose outcome may well determine whether this important round, I think important round, will actually succeed or not. So that's the background for this discussion, and we have two immensely qualified participants to discuss it. But let me just start, if I may, with Peter who, as you probably know, was the very first Director General of the WTO, and the last Director General of the GATT, and who I think personally more, because I followed this very closely at the time, more than any other single man was responsible for the success of the Uruguay Round, which was the last great round, indeed the most important round in some ways the trading system's ever had, so let me just start with you, Peter, and ask you why should we believe that the Doha Round matters? Would it really be at all significant if it failed, everybody went home and said, 'Well, that's how it is, we're going to leave it as it is because we can't take it any further,' and if it is important, what is the significance of the Hong Kong Round?

Peter Sutherland: Difficult question. I think first of all that you have to look at global trading in a period of time which has really been a crucial change in the whole world attitude to liberalisation. After the collapse of the Iron Curtain, we had for the first time probably in history the opportunity of creating a global economy where everybody at least in principle subscribed to the basic dynamic of competition and efficiency and innovation coming from opening rather than closing down markets and maintaining protectionism, and with the flow that came from that, we've seen enormous changes, most notably for an example in the integration increasingly of China and India, just to take two cases in the global trading system, and the creation of the WTO was in many ways evidence of this changing attitude, because an organisation which started with 23 members in the 40's is now a membership of 148, so the whole world is subscribing to basic principles of liberalised trade in goods and services, something which I should say the United Kingdom has been the most unambiguous and consistent supporter of in the world, in my experience throughout that period, and I think that this has provided us with a great opportunity, but it's also creating all sorts of sense of threat. In many ways, for an example the French referendum on the European Constitution was at least partially influenced by distorted views about the effects of globalisation and indeed enlargement of the European Union which is part of the same general process of opening up, and who's to say that it wouldn't have had a similar result in some other countries, because people are focused upon those who seem, or declare themselves to be losers rather than the vast majority who are undoubtedly winners. The last 10 years, 375 million people, according to the World Bank, have been brought out of abject poverty because of liberalised trade. There are all sorts of statistics and analyses of this phenomenon, all of which point in the same direction, that it has been an enormous success. It's also an enormous success in political terms because economic liberalisation almost invariably leads over time to political liberalisation as well. And we have this great opportunity at an inflection point in history to maintain this dynamic, but we also have the potential, which I think is very real and not scare mongering, of reverting into a more protectionist environment, most likely to be galvanised by the transatlantic partners where there are pressures for protectionism both in the United States and in the Europe Union, resisted currently and hopefully on an ongoing basis but nonetheless at risk. The Doha development round I think was unfortunately described as a development round because it created an impression, particularly amongst developing countries, that it was all take and no give. In fact many of the failures of the global trading system are the result, in my opinion, of the developed economies not pushing hard enough for liberalisation amongst developing countries, and that remains a problem in some of the biggest of them. Incidentally, a very large number of the 148 countries, all but 24 of them, declared themselves to be developing countries. Many of them, in my view, should be categorised somewhere else, but that's another story.

Let me finally come to this rather long discourse, let me come to the Doha Development Round. The Doha Development Round has, as we all know, a meeting which is shortly to take place in Hong Kong. It may seem to many of you to be just part of a sequence of meetings which always seem to be associated with high political drama, and sometimes fall-out: Cancun, Seattle, it goes right back into the Uruguay Round which I was involved in, Montreal, Brussels, dreadful debacles. In my opinion, bringing 148 ministers together is in itself a debacle, and the likelihood of them ever agreeing on anything is pretty remote, and in fact in concluding the Uruguay Round, we made a promise that we'd never have a ministerial meeting. We would simply do the negotiations in Brussels and bring the ministers, with due respect, to a very fine one, to Marrakech for the celebration, and that was rather a better way of doing it, so if you've a lot of issues out there still pending, and you meet, as they're about to do in Hong Kong, without a substantive agreement largely delineated, you're probably in difficulty, and that's where they are today. There's been an enormous focus on the European Union in this, and there's certainly an enormous issue on agriculture in the European Union. I think that the focus here has been slightly excessive on the European Union. I think putting people in corners and pointing fingers at this particular point of time, should be done with a certain degree of caution, because it's more likely to be counter-productive than productive, and there are many people in the corner, very few saints and a hell of a lot of sinners in world trade. The Norwegians, the Swiss, the South Koreans, the Japanese, the Indians, I could go on, list after list, of people who have very high tariff rates for an example for agricultural products, so there are a lot of culpable players, but there's no doubt that the main dynamic to make Hong Kong a success would have to come from further movement from the European Union, but let's at least accept in an argument on the issue that they've already significantly moved, they broken payments from production, they've agreed to the principle of eliminating export subsidies, so there is movement there. But it looks as if at the moment there isn't enough, and there certainly isn't enough movement in my view from the developing countries. Some of the major developing countries, Brazil, India and China, have a major responsibility in this round too, and if you don't get the sort of balance that provokes and promotes the concessions on the other side, you'll never get an agreement. Pascal Lamy, director general, is a very good guy. Why is it important incidentally that Hong Kong succeed? Well, the US Congress is balanced very much at a knife-edge between those who would seek to limit and perhaps exclude global trade deals, and those who would wish to have them? Fast track which is a power to negotiate where the result will be that Congress can either say yes or no rather than cherry-pick on an agreement, will expire unless this Doha Round is finished within a short period of time, and the real difficulty is that we are in a very serious situation at the moment. If it were to fail, my fear is that it will fuel protectionism, we won't have apocalypse now, but we will have a dangerous situation where we will get more regionalism, more bilateralism, and more fracturing of the single world that many of us believe is crucial for our prosperity and particularly for the prosperity of the poor.

Martin Wolf: I've had the privilege of knowing Peter for about 15 years, and this is an absolutely characteristic performance. I have listed about 5 or 6 questions of which I asked one and he's already answered all six. So you've had all your answers. Rodrigo, I'd like to turn also to you particularly from your perspective in your present job and your involvement with developing countries. How would you place this round? What is its significance to the world, how important from your perspective is a success? What would happen in fact if it were to fail?

Rodrigo de Rato: Well, I think that as Peter has said, trade liberalisation and increase of trade is one of the key reasons of the last 30, 40 years of economic growth and success in the world, and we are right now living in a very benign, if you want to say it, even good environment with the world economy, that has been able to go through important shocks like the price of oil and others that show that things have improved in the world. What are at stake in Hong Kong? Well, at stake in Hong Kong is that at this moment we consolidate a multilateral system of trade in which the rules are shared by all the world economy, and the conflicts are resolved by rules, or we stop that process that in my opinion has been extremely successful for the world at large, and we get into two different alternatives. One is bilateral agreements that have proliferated around the world in a very substantial manner, and the other is trade management that we have already seen in the last two agreements between the European Union and China, and the United States and China. Those alternatives to multilateral system are not only second best clearly but have drawbacks, important drawbacks. About two weeks or three weeks ago, there was a meeting of the APEC countries in Asia, and the private sector of Asia, the business sector of Asia, told the politicians that bilateral agreements are becoming so complex and so different between each other, they are making life for businessmen very complicated, because the rules of one bilateral agreement are never exactly the same as the rules of another, so the capacity of the world economy to integrate is not being maximised by bilateral agreements but to the contrary, and if we continue that road, we will end up with such a complicated system of trade that business will pay a heavy price, because things will be different in each of the agreements. The other is trade management. It's really surprising that the two biggest economies in the world, that is the European Union and the United States, who have benefited tremendously by trade and who will benefit very importantly by trade, are trying to go back to a system in which trade is managed by different degrees of political pressures. As the European Union has proven, that is very difficult today because of the integration of the economies, and it was very surprising that the European Union had to renegotiate his whole agreement with China only 30 days after signing the first one, because the negotiators didn't realise what was the implications for the true real economy of Europe, of stopping a lot of Chinese products at the frontier. So really things are at stake. I don't agree so much with Peter on the question of development. I was in Doha, I was in, well, you were in the successful places. I was in Seattle, I was in Cancun and I was in Doha. Of the three, Doha was a success, the other two were not exactly successes.

Martin Wolf: Everything went to hell when Peter left.

Rodrigo de Rato: Well, maybe that was true.

Martin Wolf: Almost.

Rodrigo de Rato: But I was in Doha. I don't agree that the component of development was wrong. I think it was an important message that trade, it's a very important instrument for growth, and growth is very important for development, and also that developed economies were willing to accept negotiations on trade that were not based on equal efforts but in which development will play a role. That said, I think that Peter is right in putting the light on the need of emerging economies to open themselves. The question of trade liberalisation cannot be just the opening of the markets in the European Union, the United States and Japan. That is a necessity, that is needed, but the opening of other economies is also needed, and some of the strategies we are seeing in these days regarding Hong Kong, for instance of the African countries, in our opinion are not realising the true trade-offs that are at stake. The question is not for instance for Africa to get all it is trying to base on preferentials. The question is for Africa to really embark in an openness in all of its markets too among themselves. It's surprising that you go to countries like Morocco, Algeria and Tunisia, and they only trade among themselves 2%. All their trade is to Europe, and of course anybody who wants to make business in Morocco, Algeria and Tunisia might think that it will be better to base its operation in Barcelona or in Marseille than to do it in Algiers or in Marrakech. So intra-regional trade is a very powerful instrument for development, and this round should make emerging economies and even low-income economies open themselves to the new opportunities of trade, not only with the developed countries but also among themselves.

Martin Wolf: Let me just follow a little bit more on the role of developing countries. As you pointed out, 124 members of the WTO call themselves developing countries, but it's also the case in fact that well over 80% of all world imports are generated by just 20 economies, if you count the European Union as one and exclude internal trade, so all the other 128 or so are really neither here nor there almost. Now, among those 20 countries which are significant are a number of countries we call developing. China, of course, is now the world's third largest importer and it's not terribly difficult to imagine it's becoming the biggest within a decade. You've mentioned India, Brazil, there are a number of other emerging economies, Indonesia, Russia's categorisation is interesting, which are really significant. Now, don't we really need to differentiate very carefully, at the level of global negotiations, between those countries that really have markets to offer which have relatively sophisticated economies which we are really interested in selling into on the one hand, and a very large number of very small, very poor countries which probably should liberalise, that's certainly the view I take, but from a global trade negotiation point of view, it doesn't really matter what they do, and that differentiation doesn't seem to be happening.

Peter Sutherland: Well, coming back to the point about calling it a development round, I'm absolutely in favour of the main focus of this round being development, and I'm absolutely strongly in favour of the proposition that free trade and opening trade, liberalising trade is very important for development, so to exclude countries merely because they're less than relevant would be to consign them to remaining economic backwaters forever. In 1955, Egypt's GDP per capita was the same as that of South Korea. Today, Korea's is seven or eight times higher. India for decades sheltered behind a degree of protectionism which was massively damaging for India, and the developed world allowed that to happen simply on the basis, 'Who cares? We are largely trading with each other, who cares?' I think that there is a moral obligation in the development round, but the moral obligation is not simply to lower our tariffs but also to bring about the liberalisation in the developing economies that is necessary for their economies. If cronyism, protectionism, the maintenance of national monopolies in banking, in telecoms, everything else, provides an unsafe and less than effective infrastructure in developing countries, you're excluding them from the rest of the world. I think we've done that for a long time. For a long time it was done basically on political friendships, on the East-West equation. If they were in the GATT, they were allowed in effect not to liberalise simply because that was politically convenient. I don't think that that's the way we should look at the development round, so I'm looking at the development round not merely on the basis that we have moral obligations and things like our Common Agricultural Policy and reducing tariffs and so on, but also that we have an obligation and the system has an obligation to deliver the liberalisation that will provide for the growth that is already evidence. Those who have liberalised, and again there have been studies by the World Bank and the IMF on this, have developed five times faster in the last 10 years than those who didn't, in the developing world, so it's not that we're exacting a price from the developing world, we're providing, if we provide the impetus, we're providing an opportunity for growth and development, and that's the whole point, so that's why I don't think we can exclude and say they're irrelevant. I think that that would be a sort of mistaken paternalism which would be ultimately very damaging.

Martin Wolf: Let me just turn to the final question before we turn to the floor. I'd just like to turn to you since you have had the privilege of being a very senior minister in an important country in Europe. Why do we find it so hard in developed countries, and let's focus on Europe because we are all Europeans and we are in Europe, why does Europe find it so hard to agree to liberalise, to make, to go further in liberalisation when, as it were, we all know, you've just been passionately arguing, both of you, about exactly this, it's in the benefits, it's to the benefit of the liberalising countries. Why are the politics still so difficult in promoting the liberal cause, and do you feel among other things, since we are in this audience, that business is completely failing to play its part in balancing, you know, the Trade Justice Movement which I wrote about a week ago, which is arguing, of course, that the more protection developing countries have, the better off they're going to be. So what are the politics in a developed country like Spain or Britain which make it so difficult to push liberalisation from our end?

Rodrigo de Rato: Well, I think that if you speak about Europe, I think Europe of course has a special responsibility regarding this round, Europe and the United States and Japan, but talking about Europe is clearly, and Europe has to be really pro-active in liberalising, probably the most important part of the European contribution will be agricultural. The European consumer is paying a very heavy price on that respect, and the role of Europe in the world is being damaged by that. That said, we have also to say, as Peter has put on the table, that Europe has made substantial offers in this negotiation, and the negotiation, I don't have to tell all these people who negotiate every day, is a negotiation. Right now I really think that all their offers have to be put on the table regarding all their issues. This is not an agricultural round. It's a trade liberalisation round, questions of manufacture, services, market access, the respect of property, intellectual property, all those issues are also in this negotiation, and those issues should be put on the table too. Big emerging economies as you mention one of them, China, are becoming in terms of trade, not any more emerging economies, although in terms of per capita income and on the premise they are, in terms of trade they are not. So in that respect I think that the responsibility of Europe is not alone, others have responsibility. The debate in Europe about liberalisation goes much further than only on trade. I think that in Europe right now there is a political debate that has been going on for years, but maybe around the referendum and other issues it has become even more acute. In that respect, I want to say that first of all Europe is not unique. When things are liberalised in Europe, things work better. Not many among us, I didn't know this till they told me that in Washington, realise that in the last ten years, the Europeans have created as many jobs as the Americans, so the changes in the labour market in Europe have been successful. The question is to continue, and last time I used this argument in Washington, somebody told me, 'Yeah, but that was in the public sector of Europe.' Europe has created more private sector jobs than the United States in the last ten years. The question is that we're coming from a different base and the participation of people in the labour market is different, so liberalisation in Europe works. Europe has a home-grown strategy. You have countries with very low unemployment in Europe: UK, Ireland, you have countries like Spain that has reduced, that's probably one of the countries that has reduced more quickly unemployment in the last ten years, so things can change in Europe. That theory that liberalisation doesn't pay politically, in my own experience I think it's wrong. What is doesn't pay politically is unemployment and lack of growth, and this rotation of governments we see in Europe is a consequence of not liberalising. Voters are sacking governments that don't perform, and I think many politicians in Europe have to realise that if they want to get re-elected, especially if they want to get re-elected in government, they have to provide their constituencies, their voters with changes that produce results, and I am a firm believer that European governments that produce results will win elections and European governments who send the message that nothing has a solution will lose the elections.

Martin Wolf: This reminds me a very famous remark by an American economist called Oaken who, because there are always lags between policy changes and performance, he said that an economist lag is a politician's nightmare, and unfortunately I think there is evidence exactly as you say, but unless politicians liberalise very early in their term, by the time the election comes round, it's too early, doesn't show up, and we've seen that of course in this country, if we think of the reform experience of the last 20, 25 years.

Keynote

Rt. Hon Gordon Brown MP: It's now a particular pleasure for me to welcome today, and to welcome on behalf of myself and Mervyn King, the Governor of the Bank of England, and the Lord Mayor of London who are with us on the stage, the man acknowledged to be the world's greatest economic leader of our generation, Dr. Alan Greenspan, Chairman of the Federal Reserve of the United States, and I'm particularly pleased to be able to welcome Sir Alan today in the company of so many successful entrepreneurs and policy-makers, all of whom have benefited from the financial stability of which he is the key architect. I think everybody knows that Alan Greenspan has served his country and served the world with distinction, as Chairman of the Federal Reserve for a historic four terms for 18 years, the longest and I say not only the most successful tenure in history but one truly admirable for his vision, his wisdom and his strength in both good times and testing times. I believe Sir Alan is the first central banker to be a household name across all continents of the world, and he is in London remarkably to attend his 55th G7 Finance Ministers' and Central Bank Governors' meetings. I've had the pleasure of welcoming Alan Greenspan before. I welcomed him to deliver the Adam Smith lecture in my home town of Kirkcaldy, the birthplace of Adam Smith. Three years ago, Dr. Greenspan travelled to Balmoral to meet the Queen and receive his honorary knighthood in recognition of his outstanding contribution to the global economy. I remember at the time I said to one of his officials in the Federal Reserve that he might in future address Dr. Greenspan as 'sir' and he said, 'When did we call him anything other than sir?' The history books say that Alan Greenspan, having first been a professional musician, drifted into economics by accident, because during breaks when he was touring with Henry Jerome's swing band as a teenager, he would go into the library to read books, and that his choice to read economics was completely by chance. If he'd turned left instead of right when he went into these libraries, he may have ended up as a Nobel prize-winning physicist instead. He's become known for the unique and successful way that he's handled not just the economy but the press. I understand that when on one occasion he saw The New York Times reporting his comments as, 'Greenspan sees chance of recession,' and then The Washington Post saying the opposite, 'Recession is unlikely, Greenspan concludes,' he was delighted at his success at achieving what he called constructive ambiguity. It was on a day such as that that he used that memorable phrase, 'If I seem unduly clear to you, you have misunderstood what I said.'

Now, Alan, we could not let this event pass without offering you a token of our great esteem and gratitude. As you know, the special relationship between Britain and America is strong. Over the centuries, as you know also, it has had to survive and surmount big challenges, so from, the royal collection of major historical documents, I want to give Sir Alan items that mark some of the turning-points in this special relationship. The first I would like to give him, and I think Mervyn King has it there, is the handwritten copy of the Stamp Act of 1765, which sparked the split between Britain and her colonies in America, and eventually led to independence. It shows indeed that stamp duty can be an explosive tax. And I want to give Alan Greenspan, on behalf of Mervyn and myself also something that has come from the Bank of England's records, the hand-written record of the dividend paid by the Bank of England to George and Martha Washington of their share of a bond raised by the Bank of England, which was to fund the costs of keeping British forces in America. I may say that because it was a partly paid bond, while the Bank originally started by financing George Washington, George Washington ended up, even during the difficult conflict, having to finance the Bank. Now, the history books tell us that Benjamin Franklin would have settled the conflict in return for a few seats in parliament. If George III and Lord North had accepted this, I am sure that in a few weeks' time, Mervyn King would have been taking over from Sir Alan Greenspan as Governor of the Bank of England. Mervyn, I wonder if you can give Alan these two presents in recognition of his service.

Mervyn King: Alan, thanks for everything you've done for the UK.

Rt. Hon Gordon Brown MP: In a few minutes' time, the Lord Mayor of London will give, in recognition of Alan's services, the Freedom of the City of London, but Mervyn and I would like to finish with a present from the Bank and the Treasury. We know, Alan, you already own an edition of Adam Smith's Wealth of Nations, one of the earliest editions of that. It's with great pleasure that we complete the series, giving you one of the earliest editions of the other book by Adam Smith, The Theory of Moral Sentiments, and Mervyn has it to give you. And to hold that book, let me give you a final present from the UK, a red dispatch box, the box used often as a Budget box. I know people here would prefer that you were holding it aloft rather than me. We are privileged to have you with us. Please accept these presents that are presents symbolising the United Kingdom with our best wishes to you and your wife Andrea in your retirement, and please address us now. Thank you, Alan.

Dr. Alan Greenspan: I guess I must conclude that this is all for the purpose of seeing if the Declaration of Independence of 1776 could be rescinded. I suspect that if the Stamp Act could be presumed to have been incorrectly reported, that we would still be colonies of the United Kingdom? The Chancellor is never mistaken and never says anything lightly, so I take that comment to be an official governmental position.

What I'd like to go this afternoon is discuss what is becoming a rather critical issue with respect to discussions on international finance, very specifically the yawning current account deficit that we in the United States have harboured for quite a number of years. In November 2003, I noted that we saw little evidence of stress in funding the US current account deficit, even though the real exchange rate for the dollar on net had declined more than 10% since early 2002. Inflation and inflation premiums embedded in long-term interest rates, the typical symptoms of a weak currency appeared subdued, and the vast international savings transfer to finance US investment had occurred without measurable disruption to international financial markets. Two years later, little has changed except that our current account deficit has grown still larger. Most policy-makers marvel at the seeming ease with which the United States continues to finance its current account deficit. Of course deficits that accumulate ever increasing net external debt with its attendant rise in servicing costs, cannot persist indefinitely. At some point, foreign investors will baulk at a growing concentration of claims against US residents, even if the rates of return on investment in the United States remain competitively high and will begin to alter their portfolios. In addition, efforts by US residents to address their domestic imbalances will presumably contribute to a move away from current account imbalance. In all instances, a current account balance essentially results from a wide-ranging, interactive process that involves the production and allocation of goods, services and incomes among the residents of a country and those of the rest of the world. The outcome of the process is reflected in the full array of domestic and international product and asset prices including interest rates. The array of bilateral exchange rates between the dollar and foreign currencies appears to be particularly important to the current account balance, although of course exchange rates like all other prices, are determined interactively and simultaneously. As I note later, to the extent that an economy harbours elements of inflexibility, so that prices and quantities are slow to respond to new developments, the process of current account adjustment besides affecting prices of goods and financial assets, is also more likely to adversely affect the levels of output and employment as well. The rise of the US current account deficit over the past decade appears to have coincided with a pronounced new phase of globalisation that is characterised by a major acceleration in US productivity growth, and a decline in what economists call home bias. In brief, home bias is the parochial tendency of persons, though faced with comparable or superior foreign opportunities to invest domestic savings in the home country. The decline in home bias is reflected in savers increasingly reaching across national borders to invest in foreign assets. The rise in US productivity growth attracted much of those savings towards investments in the United States. The greater rates of productivity growth in the United States compared with still subdued rates abroad, have apparently engendered corresponding differences in risk-adjusted expected rates of return, and hence in the demand for US-based assets.

Home bias implies that lower risk compensation is required for geographically proximate investment opportunities. When investors are familiar with the environment, they perceive less risk than they do for objectively comparable investment opportunities in far distant, less familiar environments. Home bias was very much in evidence for a half-century following World War 2. Domestic saving was directed predominantly toward domestic investment. Because the difference between a nation's domestic saving and domestic investment is the near algebraic equivalent of that nation's current account balance, external imbalances were small. However, starting in the 1990's, home bias began to decline discernibly, the consequence of a dismantling of restrictions on capital flows and the advance of information and communications technologies that has effectively shrunk the time and distance that separate markets around the world. The vast improvement in theses technologies have broadened investors' vision to the point that foreign investment appears less risky than it did in earlier times. Accordingly the weighted correlation between national savings rates and domestic investment rates for countries representing four-fifth of world gross domestic product declined from a co-efficient of around 0.97 in 1992 where it had hovered since 1970, to an estimated low of 0.68 last year. To be sure, international trade has been expanding as a share of world GDP since the end of World War 2, yet through the mid-1990's, the expansion was largely a grossing up of individual countries' exports and imports. Only in the past decade has expanding trade been associated with the emergence of ever larger US trade and current account deficits, matched by a corresponding widening of the aggregate external surpluses of many of our trading partners, most recently including China and the OPEC countries.

Indeed, the increasing dispersion of current account balances is closely tied to the shrinking degree of correlation of countries' sharers of saving and investment. Obviously if domestic saving exactly equals domestic investment for every country, all current accounts would be in balance and the dispersion of such balances would be zero. Thus current account imbalances require the correlation between domestic saving and investment, which reflects the ex-post degree of home bias to be less than 1.0. Home bias, of course, is only one of several factors that determine how much a nation actually saves and what part of that saving or of foreign saving is attracted to fund domestic investment. Aside from the ex anti average inclination of global investors towards home bias, the difference between domestic saving and domestic investment, that is current account balance, is determined by the anticipated rate of return on foreign investments relative to domestic investments, as well as the underlying propensity to save of one nation relative to that of other nations. Indeed, all of these factors working simultaneously determine the extent to which domestic savers reach beyond their borders on net, to on net invest in foreign assets, and thereby facilitate current account surpluses and the financing of other countries' current account deficits.

This afternoon I should like to raise the hypothesis that the reason the historically large US current account deficit has not been placing persistent pressure on the exchange rate of the US dollar at least to date, is that the deficit is a reflection of a far broader and longstanding financial development in the United States and elsewhere. An ever growing proportion of US households, non financial businesses and governments, both national and local, fund their capital investment from external sources rather than for example households' self-finance or corporations' internal funds. Early on, almost all of that financing originated with US financial institutions and the debt of US residents to foreigners was small. The up trend in unconsolidated deficits of individual US economic entity as relative to GDP has been evident for decades, possibly even emerging during the 19th century. For most of that period, those deficits were almost fully matched by surpluses of other US economic entities. What is special about the past decade is that the decline in home bias, along with the rise in US productivity growth, and the rise in the dollar, has engendered a large increase by US residents in purchases of goods and services from foreign producers. The increased purchases have been willingly financed by foreign investors with implications that are not as yet clear. Typically, current account balances, saving and investment are measured for a specific geographic area bounded by sovereign borders. We were to measure current account balances of much smaller geographic divisions, such as American states or Canadian provinces, or of much larger groupings of nations, such as South America or Asia, the trend in these measures and their seeming implications could be quite different than those extracted from the conventional national measures of current account balance. The choice of appropriate geographical units for measurement depends on what we are trying to ascertain. I presume that in most instances, we seek to judge the degree of economic stress that could augur significantly adverse economic outcomes. To make the best judgement in this case would require current account measures obtained at the level of detail at which economic decisions are made: individual households, businesses and governments. That level is where stress is experienced and hence where actions that maybe stabilise economies could originate. Debts usually represent individual obligations that are not guaranteed by other parties. Consolidated national balance sheets by aggregating together net debtors and net creditors, accordingly can mask individual stress as well as individual strength. Indeed, measures of stress of the most narrowly defined economic units would be unambiguously the most informative if we lived in a world where sovereign or other borders did not affect transactions in goods, services or assets. Of course national borders do matter, and continue to have some economic significance, an issue to which I shall shortly return.

The process of growing trade and financing imbalances has been developing within the borders of the United States for some time. The dispersion of unconsolidated current account balances of individual economic units relative to nominal GDP may be expected to exhibit similar trends to the dispersion of saving investment imbalances among the seven consolidated non-financial sectors measured in US macro economic statistics: households, corporations, non-farm non-corporate businesses, farms, state and local governments, the federal government and the rest of the world. This measure exhibits a rise over the past half-century in the absolute sum of surpluses and deficits, that is one-and-a-quarter percentage points per year faster than the rise of nominal GDP. The increase in the dispersion of the balances of unconsolidated economic units was presumably even greater. Indeed, in a more detailed calculation, employing more than 5,000 non-financial US corporations, the absolute value of surpluses and deficits as a ratio to a proxy for corporate value added, exhibits an average annual increase of 3½ per cent per year. The apparent increase in the dispersion of the imbalances of the economic entities within our national borders appears to have flattened out over the past decade according to calculations using the balances of the six domestic sectors. The continued expansion of a dispersion of the balances relative to GDP of individual households, non-financial business and governments during the past decade is arguably related to the shift in trade and financing from within the borders of the United States to cross border trade and finance. In simple terms, some US domestic businesses previously purchasing components from domestic suppliers switched to foreign suppliers. These companies generally viewed domestic and foreign suppliers as competitive in the same way that they viewed domestic suppliers as competing with each other. Moving from a domestic to a foreign source altered international balance book-keeping, but arguably not economic stress. Such transactions may of course take into account exchange rates in the adjustment process similar to the manner in which prices of purchased components presumably are taken into account when one domestic supplier is substituted for another.

Implicit in a widening dispersion of current account surpluses and deficits of individual economic entities, is the expectation of increasing cumulative deficits for some, and hence a possible rise in debt as a share of their income. Unconsolidated debt of private non-financial US entities as a ratio to GDP has indeed risen, at nearly 3% per year on average, over the past half-century. From, 1900 to 1939, non-financial private debt rose almost 1% faster per year on average than GDP. The debt to GDP ratio fell in the wake of the inflation of World War 2 and its aftermath, which inflated away the real burden of debt. The up drift in the ratio, however, shortly resumed. As I noted earlier, the trend towards intra-country dispersion is likely occurring not only in the United States but in other countries as well. The existence of this trend is suggested by the rise in unconsolidated non-financial debt of the major industrial economies excluding the United States over the past three decades, which has exceeded the growth of GDP by 1.6 percentage points annually. The apparent increase in the dispersion of surpluses and deficits of US economic entities over the past half-century and more is likely an extension of the growing specialisation of the economy and the financial system within the United States. I suspect data would confirm similar trends among many of the other developed economies as well. Increasing specialisation goes back to the beginnings of the Industrial Revolution. Movement away from economic self-sufficiency of individuals and nations arose from the division of labour, a process that continually sub-divides tasks, creating ever deeper levels of specialisation and improved productivity. Such specialisation of course fosters trade. Trade especially inter-temporal trade, that is the trade of goods and services today in exchange for goods and services at some future date, tends to give rise to a range of surpluses and deficits across individuals and non-financial business, and in all likelihood those imbalances have been increasing faster than income. As a result, the dispersion of such imbalances relative to incomes or national product can be expected to increase as the scope of trade expands from within regions, then nationwide and finally across national borders. That surpluses and deficits of residents of the United States have indeed been rising relative to incomes over the past century is indicated by a similar rise in assets of financial intermediaries relative to the total of non-financial assets and to nominal GDP. It is these financial institutions that have largely intermediated the surpluses and deficits of US residents and hence the size of these institutions can act as an alternative proxy for such surpluses and deficits. Indeed, one can argue, it has been the need to intermediate the surpluses and deficits that has driven the development of our formidable financial system over the generations. Since 1946, assets of US financial intermediaries even excluding the outsize growth in mortgage pools has risen 1.8% per year relative to nominal GDP. From 1896, the earliest date of comprehensive data on bank assets to 1941, assets of banks by far the predominant financial intermediaries in those years rose by 0.6% per year relative to GDP. The increase in the ratio of deficits of individual economic entities to GDP, as I noted earlier, is reflected in an ever-rising ratio of unconsolidated levels of debt to GDP. Facilitating the ability of residents of the United States and presumably other economies to accumulate this debt with limited stress has been the rising ratio with a market value of non-financial assets to GDP. The rise in those asset values in the United States reflects in part an increasing ratio of real capital assets to real GDP, which has helped to support the rise in US productivity.

Hard data documenting these global developments at the appropriate micro level are regrettably sparse, yet anecdotal, circumstantial and some statistical evidence is suggestive that the historically large current account deficit of the United States may be part of a broader set of rising unconsolidated deficits and accumulated debt that is arguably more secular than cyclical. The secular up drift in deficits and debt doubtless has been gradual. However, the component of those broad measures that captures the share of net foreign financing of the balances of individual unconsolidated US economic entities, that is our current account deficit, has increased from negligible in the early 1990's to more than 6% of our GDP today. The acceleration of US productivity, which dates from the mid-1990's, was an important factor in this process. Accordingly, it is tempting to conclude that the US current account deficit is essentially a by-product of long-term secular forces, and thus is largely benign. After all, we do seem to have been able to finance our international current account deficit with relative ease in recent years. But does the apparent continued rise in the deficits of US individual households and non-financial busies themselves reflect a growing economic strain? We at the Fed do not think so. And does it matter how those deficits of individual economic entities are being financed? Specifically, does the recent growing proportion of these deficits being financed net by foreigners matter? If current decisions were made without regard to currency or cross-border risks, then one could argue that current account imbalances were of no particular economic significance, and the accumulation of debt would have few implications beyond the solvency of the debtors themselves. Whether the debt was owed to domestic of foreign lenders would be of little significance, but national borders apparently do matter. Debt service payments on foreign loans, for example, ultimately must be funded disproportionately from exports of tradable goods and services, whereas domestic debt has a broader base from which it can be services. Moreover, the market adjustment process seems to be less effective across borders than domestically. Prices of identical goods at nearby locations but across borders, for example, have been shown to differ significantly even when denominated in the same currency. Thus cross-border current account imbalances have implications for the market adjustment process and the degree of economic stress that are likely greater than those for domestic imbalances. Cross-border legal and currency risks are important additions to normal domestic risks. But how significant are those differences? Globalisation is changing many of our economic guide-posts. It is probably reasonable to assume that the worldwide dispersion of the balance of unconsolidated economic entities as a share of global GDP noted earlier, will continue to rise as increasing specialisation in the division of labour spread globally. Whether the dispersion of world current account balances continues to increase as well is more an open question. Such an increase would imply a problematic further decline in ex anti home bias. Even in that event, eventually the US current account deficit would likely move back towards balance. Regrettably we do not as yet have a firm grasp of the implications of cross-border financial imbalances. If we did, our forecasting record on the international adjustment process would have been better in recent years. I presume that with time we will learn. In the interim, whatever the significance in possible negative implications of the current account deficit maintaining economic flexibility, as I stressed before, may be the moist effective initiative to counter such risks. Whether by intention of by happenstance, many if not most governments in recent decades have been relying more and more on the forces of the market-place and reducing their intervention in market outcomes. We appear to be revisiting Adam Smith's notion that the more flexible an economy, the greater its ability to self-correct after inevitable often unanticipated disturbances. That greater tendency towards self-correction has made the cyclical stability of an economy less dependent on the actions of macro-economic policy makers whose responses often haves come too late or have been misguided. Being able to rely on markets to do the heavy lifting of adjustment is an exceptionally valuable policy asset. The impressive performance of the US economy over the past couple of decades despite shocks that in the past would have surely produced marked economic disruption, offers clear evidence of the benefits of increased market flexibility. In the United Kingdom as well, a quarter century of progress towards dismantling controls and increasing reliance on market forces evidently has resulted in a stronger and more flexible economy. Although the business cycle has not disappeared, flexibility has made the United States and the United Kingdom and much of the remainder of the global economy much more resilient to shocks and more stable during the past couple of decades. Nonetheless, the piling up of dollar claims against US residents is already leading to concerns about concentration risk. Although foreign investors have not as yet significantly slowed their financing of US capital investments, since early 2002 we have observed a decline in the value of the dollar and a reduction in the share of dollars in global cross-border portfolios.

If the currently disturbing drift towards protectionism is contained, and markets remain sufficiently flexible, changing terms of trade, interest rates, asset prices and exchange rates will cause US saving to rise, produces the need for foreign finance and reversing the trend of the past decade toward increasing reliance on it. If, however, the pernicious drift towards fiscal instability in the United States and elsewhere is not arrested and is compounded by a protectionist reversal of globalisation, the adjustment process could be quite painful for the world economy.

Thank you very much, it's been a pleasure being with you this afternoon.

Chairman: Dr. Greenspan, thank you for that listed exposition of the explanation for the US trade deficit and for that excellent endorsement of free trade, fiscal stability and flexibility. I'd now like to introduce the Lord Mayor of the City of London, Alderman David Brewer, who we are honoured to have here to present Dr. Greenspan with the Freedom of the City.

Presentation

Alderman David Brewer: Ladies and gentlemen, thank you for that introduction. Mr. Chairman Greenspan, as the 678th Lord Mayor of London, I have the singular honour to perform this afternoon to present you with a certificate making you a Freeman of the City of London. Freemen of the City of London virtually invented global trade. They ratified it at Magna Carta in 1215, and since that time have been committed to the stability, prosperity and piece which global trade brings. I hardly need to say that becoming a Freeman of the City of London is not to be taken lightly. I fear traffic will no longer let you drive a flock of sheep over London Bridge, but whenever you want to put up overnight at the Mansion House, or give a dinner for 300 of your best friends, please let me know. And if you want to start trading as a financial advisor in the Square Mile, you will be most welcome. I think you will find our single agency light touch regulation much to your liking. Who would have thought that in those dark days of 1915, when the United Kingdom lost its financial supremacy, it would regain it in less than a century, and regain it in a large part because of the post-war financial stability of which you, sir, are a key architect, a stability which allowed others to come alongside and to prosper, and who would have thought that in the middle of the financial ups and downs of the most powerful nation on earth, the personality and intelligence of one man would steady the ship, reassuring both the media and the politicians. Now, at long last, the City of London can thank you by honouring you in this distinctive way. This afternoon, therefore, may I thank the Chancellor of the Exchequer for suggesting that you might be a candidate for the Freedom, and thank the City's Chairman of Policy and Resources, Michael Snyder, for joining me in proposing you. Above all, I want to thank you for so graciously accepting our gift. We are glad to greet you as a fellow freeman, free to trade, free to inspire, free to enlighten. Traditionally our newest Freeman is hailed as our 'youngest' Freeman. Thus on behalf of the City of London, may we all wish you the happiest of future, youngest Freeman, Alan Greenspan. Thank you very much. It's been a very great pleasure, thank you. Hope it will be a memorable day. Thank you very much indeed.

Dr. Alan Greenspan: Chancellor, Lord Mayor, this is an extraordinary honour and I must admit that perhaps London may be the only city that has the history and capability of bestowing such a privilege. I must, however, acknowledge I am slightly disappointed. I did bring my flock of sheep along in the hopes that I could shepherd them across London Bridge, and I cannot hide the fact that I am indeed deeply disappointed, but I am honoured nonetheless and I look forward to availing myself of the obvious many privileges of this honour. Thank you again.