10 October 2002
Speech by the Chief Secretary to the Treasury, Paul Boateng MP, at the HSBC Global Investment Seminar
Introduction
Delighted to be here, to address such a large and distinguished audience, at what has become an important annual feature in the City's calendar.
You represent a financial services sector that generates fifty billions of wealth each year, provides work for over one million people and accounts for over five per cent of UK GDP. And, even in a most difficult year, thanks to you, London has maintained its position among the world's top financial centres; and our foreign exchange market here in London - with its daily turnover of more than five hundred billion dollars - has secured its position as the largest and most important in the world. We owe that to the enthusiasm and outlook in this room.
We are here today to discuss the global outlook - strategies for investment in an uncertain and interconnected world.
For much of society, for many of our citizens, globalisation is a new idea, unfamiliar and sometimes threatening. For the financial services industry, not least for a bank such as HSBC, it is an idea that is centuries old, a familiar linguistic currency.
It is part of the greatness of this City of London's history that as the world economy has opened up - and this nation has played no small part in opening it up - you have succeeded not by sheltering your share of a small protected national market but by striving for a greater and greater share of the growing global market. In your recent history here in the City, you have embraced technological innovation as an opportunity rather than a threat. In pace with globalisation and the new technology, you have transformed the skills of your workforces. Always outward looking --- for centuries part of a great trading empire -- you have taken globalisation in your stride, its risks and opportunities, and have become ever more international in your reach. And that of course is how it should be; how we all wish it to remain.
The management of risk is at the heart of the financial services industry. And in an increasingly open, increasingly integrated global economy, where British savings find a home in bonds, shares, and in currencies around the world, the management of risk - your business - is increasingly complex.
Economic outlook
The global economic recovery is proceeding, although at a slower pace than expected earlier this year. There has been a strong policy response from the international community, but downside risks and uncertainties remain. We must maintain our vigilance. We must avoid the twin temptations of undue pessimism on the one hand, and unacceptable complacency on the other.
At the autumn meetings in Washington, finance ministers and central bankers came together to agree a way forward. They knew, as we know, that these are testing times; but they were resolved, as we are resolved, to face the test with shared resolve and common purpose.
Across the world, each continent has a contribution to make:
a. In the United States, actions are underway to strengthen corporate governance, accounting and auditing;
b. In Europe, further reforms in labour and product markets are needed; and
c. In Japan, banking and corporate restructuring need to be vigorously pursued.
I visited Japan earlier this year, and met with the ministers and officials responsible for their programme of reform. I was impressed by their commitment to Prime Minister Koizumi's policy of 'structural reform without sanctuary?. The challenge now is to turn that public commitment into concrete actions.
Performance in emerging markets has been mixed. Growth across much of Asia has accelerated, but several countries in Latin America face deteriorating conditions. External developments, country specific vulnerabilities, and policy uncertainties are all part of the problem. Restoring market confidence has to be the key to the solution. And in that context we welcome the commitment of Brazil to sound policies and the steps taken by the Argentinian authorities to address its difficult economic situation.
Many developing countries have been adversely affected by global uncertainties, and by adverse movements in commodity prices. We all have a job to do - developing country governments, the international community, and the financial services industry, in enabling them to move toward what has been described as the Millennium Development Goals.
Now, more than ever, we are aware of our interdependence. We know that only by each and every country accepting its share of responsibility, and taking necessary action, can we secure economic growth and increasing prosperity - indivisible for the entire world.
Globalization, beginning in a human impulse, accelerated by advances in technology, is a process that has to be managed. Engagement with the world, not isolation, has to be the way forward - but the terms of that engagement have to be right and they have to be fair. We have reached, I believe, a critical point in the process of development - a point of decision for the private and for the public sector. It is not always a comfortable place to be. On the institutions of the EU, on corporate governance, on trade in services, and on crisis resolution, we have a unique opportunity, however, to set the standard for future generations. We simply cannot afford to botch it.
European single market
The financial services industry is a UK success story. Your institutions have helped maintain the position of the City at the centre of the world's financial markets. In the UK, we can do a lot to maintain and to strengthen that position. The Financial Services and Markets Act, and the Financial Services Authority, has furthered and formalized our tradition of proportionate, light touch regulation. And it is in many respects the envy of the world. As I have travelled the world, to Japan, South Africa, and many other countries, there is a real interest in what we are doing in that regard. But as a government concerned with the affairs of an international industry, we have to look beyond the boundaries of domestic regulation - and work to further our shared interests in the EU, the WTO, and beyond.
To ensure the UK financial services industry can operate effectively within Europe we are continuing to work with the EU - the European Parliament, and the Commission - to complete the single market in financial services.
Our aim is not to homogenize regulation - but to ensure the UK, and other member states, are able to exploit mutual recognition of core standards and greater regulatory co-operation throughout the EU.
The important set of - largely legislative measures - in the financial services action plan remain the focus of our efforts and there is enough there to keep us busy!
Legislation is of course only one instrument for achieving a single market based on mutual recognition. We all want to see the EU adopt a more balanced approach. But where legislation is being agreed, we must argue for it to be proportionate, flexible, responsive to market developments, and focused on the real barriers to the single market.
The lack of consultation on the Prospectus Directive and the Market Abuse Directive has, quite rightly, incensed informed observers across the industry. The results were clear: these directives quite simply did not reflect the way the markets actually worked. I am pleased to say that - in line with the new Lamfalussy arrangements - the Commission has since consulted more fully on the new Investment Services Directive. And that is progress.
However, we need now to ensure that this consultation and transparency continues, and that we use these opportunities to get our views taken on, right from the start.
For the financial services industry, lobbying on the Continent, as well as London, is a necessity. You have a critical role in ensuring that European legislators are listening to the views of a pan-European, indeed often international industry. You have so much to share and I would argue so much to teach.
I have already outlined what we are doing to ensure that industry has an input to the development of European legislation. We need and value your input into this process. Let me now take one step further and speak about the international stage and your role on that stage.
WTO
As you know, a new WTO trade round was launched at the Doha Ministerial meeting last November, breathing new life into the WTO and reinforcing its role as an institution working for both developed and developing countries. This was a welcome boost to global confidence: it is estimated that halving trade protection globally could raise world income by about US $400 billion per year.
At Doha WTO trade ministers established some key elements of the services negotiations. The Declaration set key dates for requests, offers, and the completion of the negotiations: initial requests to members to take liberalising commitments were due to be made by 30 June 2002. The European Community broadly met this deadline, as did many of the large developed countries; US, Japan, Canada, Australia, New Zealand, Switzerland; Korea; some Latin countries; Brazil, Mexico, Uruguay.
There is no need for me to expound to you the benefits of exporting or international trade. Nor do I have to rehearse the arguments in favour of liberalisation. They are well known to you. What I will stress is the need for continuing feedback from you on the matter of market access and national treatment barriers that you face in conducting business overseas. We have already had a great deal of input from industry on this - enabling us to ensure that UK industry's concerns are indeed reflected in the EC's requests. But we have more work to do in order to deepen the dialogue on trade in services: the better informed the EC's negotiators are about the barriers you face, the better equipped they will be to present your case.
Corporate governance
New opportunities to do business across borders, in an increasingly open and integrated market, bring with them, of course, new responsibilities.
We have all been shocked by the major corporate failures we have seen in the US at Enron and WorldCom. And the financial market impact has been felt throughout and around the world. It is therefore incumbent on Governments everywhere to be vigilant and take the necessary action where required.
Audit and accountancy standards in Britain are different from those in the United States: different and, as is now I think widely acknowledged, in many respects better. That, in part, is the result of changes made here following the UK's corporate scandals of the late 1980s.
But there is no room for complacency. The millions of people who invest in our companies - whether as individuals or through their pension funds - look to government to ensure our own financial reporting regime is as transparent and as effective as possible.
That is why we established a Co-ordinating Group on Audit and Accounting Issues in February, chaired by the Minister for Competition, Consumers and Markets, and the Financial Secretary, and comprising the principal regulators.
Their interim report, which Patricia Hewitt welcomed in a statement to the House in July, shows what we have to do to build on the strengths of the current system.
In a modern economy, in a market based on that economy, on its dynamism and its success, ensuring confidence in the accuracy of company accounts is not an optional extra - it is a basic requirement. Of course we must avoid a rush to regulation, and we must recognise the strengths of the existing system, but the status quo is not an option. Success will require action from everyone - including, of course, the financial services industry, and I would encourage you to engage with the reform process, and to give it the dynamism and success we want to see.
International economic governance
Countries, like companies, must operate in an open, transparent, and accountable manner, if they are to attract and, crucially, to retain, foreign investment.
The Chancellor has set out a package of proposals aimed at improving the operation of an increasingly integrated global economy. In pursuit of our shared objectives - stability, development, and prosperity - countries around the world should adopt a new rules based system of international economic governance.
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At the Monterrey Summit on Financing for Development, at the Commonwealth Finance Ministers Meeting here in the UK a few weeks ago, and at the autumn meetings in Washington, we have been pushing for the adoption of a Global New Deal, a new system founded on some basic principles:
a. Clear procedures - all countries, rich and poor, pursuing agreed codes and rules for fiscal and monetary transparency, and for corporate and social standards;
b. A new openness and transparency - with the IMF free from political influence in its surveillance of economies; and,
c. The adoption of clear and transparent procedures in economic decisions - presenting a full factual picture of the country's debt position and the health of the financial sector, combined with a willingness to be monitored.
Providing, for the markets, a flow of specific country by country information, can only improve investor confidence, increase stability, and reduce the problem of contagion.
In the UK, we seek to lead by example. The Chancellor has announced that we will participate in the reports on the observance of standards and codes modules covering accounting and auditing, corporate governance, insolvency, creditor rights. We will then have completed the full ROSC process - the first, I hope, of many countries to achieve this.
With financial instability, once again, threatening Latin America, there is an urgent need to press ahead with our programme of reform. Technical assistance and transitional help is available. I hope that other countries will become part of the wider moves towards enhanced transparency.
Transparency is an important first step, but there is a case for further reform, going the extra mile in our efforts to address the causes of financial instability, identifying problems early, and acting together to address crisis when they do occur.
We need to strengthen the surveillance process, to ensure it is fit for purpose, and enables us to identify risks and vulnerabilities early. And we need to reform the process so that the IMF is, and is seen to be, free from political influence.
Under this new framework, we can move from a system which allows crises to catch us unawares, and mitigates against their orderly resolution, to a system which in itself diminishes the probability of a crisis occurring, identifies vulnerabilities early, and puts in place a measured and orderly response when problems do occur.
A commitment to transparency, and to enhanced surveillance, by countries around the world, has in turn to be matched by a commensurate commitment, from the private sector, to engage as responsible partners in crisis resolution.
We need to resolve the obstacles that stand in the way of effective debt rescheduling. That means continuing our work on our international bankruptcy procedure and agreeing new standards for international best practice in sovereign debt contracts - with a strategy for encouraging their adoption worldwide.
Within that framework, we welcome the contribution being made by the private sector in developing the contractual approach. We believe the contractual and statutory approaches are complementary, and that they should be developed in parallel over the coming months. The agreement at the IMF's Annual Meeting last month to move towards specific proposals for a statutory mechanism was, I believe, an important step forward, and one that we need to build on.
Both of these mechanisms would help to create greater certainty about how crises will be managed and would minimise the potential for minority creditors to jeopardise a restructuring agreement. This must be in the interests of the vast majority of private investors, and so it would have a potentially beneficial impact on both the quantity and stability of capital flows to emerging markets. Dialogue has to be the way forward, and it is important that the private sector continues to work with the international community on this issue, to generate an outcome which is in all our interests.
Increasing investment in developing countries
With the autumn meetings, the Commonwealth Finance Ministers Meeting, and the World Summit on Sustainable Development still fresh in all our minds, I would like to end by saying a few words about the Millennium Development Goals I mentioned earlier. They are an expression of our aspirations for the developing world and for the future of the planet.
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Developing countries are adopting policies for stability - codes and standards in place, open to surveillance and monitoring, taking the high road on the fight against corruption. They are working hard, against the most difficult circumstances, to create the right climate for inward investment. We need to give recognition to that.
Recent estimates suggest that Africa needs to see 7 percent average annual economic growth if we are to meet our Millennium Development Goal of halving the poverty by 2015 - and that level of growth can only occur if the levels of investment are increased.
In 1900, according to a recent study at the University of California, developing countries in Africa, Latin American and Asia, accounted for some 33% of global liabilities. Today, that figure is only 11% - an all time low. The United Nations estimate that Africa has just 2.3% of the world's stock of Foreign Direct Investment.
Investors, quite rightly, avoid countries with a reputation for instability, for opacity, and for corruption. Investors, your institutions, should also be alive to the efforts in these countries to pursue policies for stability, for transparency in their public finances, and openness to surveillance. As the developing world works to create the right climate for inward investment, so too the investors of the developed world - above all you, the people I see here today who take these crucial decisions - need to recognise the opportunity this represents - and work to increase the flow of capital to countries struggling to throw off the oppressive shackles of debt, of poverty, illiteracy, and want.
For one thing is crystal clear: we should be in no doubt after those appalling events of September 11, those images burned forever in our minds, those images of vulnerability, that in this interconnected world, throwing off oppression in developing countries is the surest route to global security and mutual prosperity. At the end of the day, it is up to you to take the opportunities and make those judgments, that will make our world a safer and more prosperous place for us all.