What Works: Success in Stressful Times. Hamish McRae
The biggest single impetus transforming the UK from having a per capita income towards the bottom of the European league table in the early 1980s to one close to the top by the early 2000s has been the strength of its financial services industry. That dominance brings problems, of which more in a moment, but it has brought prosperity to millions.
There is a list of features about London that goes beyond finance: more visitors through its airports than any other city in the world; more international telephone calls; the largest non-national professional community on the planet; more book titles published than anywhere else. According to United Nations data16 the UK exports more cultural products and services than any other country including the USA.
There are, of course, many other elements of the economy, especially education, communications and culture. But the City has been the engine driving it all along.
•Become a magnet for skills •Develop an open attitude to talent •Appreciate the power of the market
3. WHAT COULD GO WRONG?
In 2008 the engine faltered. The world had a classic financial market crash, leading to a serious global economic recession, one that may eventually turn out to be deeper than any since the Second World War. Writing at the end of 2009, it was still not possible to judge the extent to which London-based institutions contributed to the collapse. The blame game had some way to run. Pointing out that, as far as UK institutions were concerned, the most serious problems occurred in banks that were headquartered elsewhere, particularly in Edinburgh and the north of England, cut little ice. The financial breakdown originated in the USA rather than the UK or continental Europe but financial institutions everywhere found themselves under the cosh. It is true, too, that there have always been crashes and there always will be crashes in the future. But inevitably and understandably the reputation of the City was seriously damaged, just as it was by previous disasters, including the dot-com bust and the subsequent collapse in share prices. And while all financial centres that were involved in international business suffered, the London economy and financial services in particular took a huge blow.
Markets recover; confidence returns; growth resumes. It is too early to make any firm judgements but to me the damage of 2008/9 both to the world economy and specifically to the City feels very like the damage during the 1970s. The world then was racked by runaway inflation and experienced what was its most serious post-war recession to date. The key difference, aside from the fact that inflation is under control, is the world economy is vastly more global than it was forty years earlier.
That leads to what seems to be an even bigger issue than the fallout from the 2008/9 recession. It is what happens to globalization. A number of things trouble me here. One is rising inequality. As a rule, globalization of the world economy decreases inequalities between countries but increases inequalities within them. Perhaps the most important consequence of the present burst of globalization is the rise of China and India from developing to some sort of developed status. Rising inequality is most evident in these countries as some people get left behind, but it is also a feature of the US economy and of the London one. This creates strains and injustices that must be tackled.
It may be that in trying to cope with these strains, a British government makes the same mistake as US administrations have done, bringing in legislation, taxation or regulation that has the effect of shifting business elsewhere. There will in any case be some rebalancing of international finance, with Asian centres taking on a larger role. As China moves towards becoming the world’s largest economy, is it almost inevitable a Chinese city will become the principal financial centre of the region. The main issue would seem to be whether it is Hong Kong or Shanghai. That will depend as much on the willingness of the authorities to permit such a development as the acumen with which both cities are run. Tokyo is the prime example of a domestic financial centre that has not developed significant international business because the Japanese authorities have maintained a regulatory environment that has deterred international participation.
Beyond this, however, we have to accept that as financial power shifts east so, too, will the value system of international finance. Global capitalism will no longer march principally to the beat of the West. For Europeans and North Americans this will be disturbing-far more disturbing than late twentieth-century concerns as to whether the ‘Anglo’ or the ‘continental’ or the Japanese versions of capitalism were the most effective. We are not used to a world where financial power is located in China and India rather than Europe and North America. Despite the size of the Japanese economy, its financial model has had little influence on the rest of the planet. And, for the moment, the financial services industry of China remains primitive by global standards. But it will become both larger and more influential as China moves closer to becoming the world’s largest economy. My own view is to welcome that, but, of course, this process will create strains.
That leads to a wider concern-of something happening to the world economy that undermines the fundamental role of international trade and finance. The shift from an ever-more global economy to one where international trade and investment fall back a bit, for example, could easily trigger protectionism-restrictions on the movement of capital and maybe goods and services. That happened in the 1930s.17 Were it to happen again, London, as the most dependent city on international business, would suffer most. However, what happens to the City, or indeed to the UK economy, is less important than what happens to the world.
Put bluntly, were anything to go wrong with globalization-and it has had a pretty severe blow-that would herald a most dangerous period not just for the world economy but for humankind. At some stage in the first half of the twenty-first century, the world will probably cease to become more global. International trade and investment will stop growing faster than world output. We may go back to protectionism and a collapse of world trade, as happened in the 1930s; though maybe we will move to more of a plateau rather than falling backwards. But it is not hard to hear the voices against globalization, calling for protection from cheap imports from China and India, or resenting the shift of power away from Europe and towards Asia. Were the general economic downturn also to be associated with widespread conflict, such as happened in 1914, that would be even worse.
This hardly bears thinking about. My point is simply that no one should assume the present burst of global prosperity, which involves more of the world’s population than ever before, will continue for ever. It will not. With luck, thoughtful political leadership and a sensitive attitude within the financial services industry, the threats to world prosperity will be averted. But there will be nail-biting years ahead. This future will be shaped in part by a handful of politicians in the various world capitals, but also, maybe to a rather greater extent, by the myriad anonymous players in the world’s business and financial community.
Arguably, at the beginning of the twenty-first century, the City of London has become the focal point for this community. It is a gigantic responsibility to carry. In the years running up to the First World War it was widely believed that war was impossible because the world economy was so interdependent. It was unthinkable that countries that depended on each other for their prosperity and had invested so substantially in each other could throw that progress away. Countries were by definition national but finance was international. Yet the financial markets failed to discipline the European politicians into cooperation. The world was allowed the slither into the First World War. The markets failed to educate the politicians on the economic disaster (let alone the human catastrophe) that nationalistic policies might provoke. Now we face similar dangers, at least potentially. Yet the markets have themselves misbehaved, or more specifically some of the protagonists in those markets, including some in London, have failed. Their moral authority is under challenge, and understandably so.
Maybe it is too much to ask when the future is so uncertain, but I still think the question is worth putting: who on balance over the years are likely to be better custodians of global prosperity, politicians or financial markets? I think, comparing their records over the past couple of centuries and notwithstanding the disaster of 2008/9, it is no contest. That is why I respect the City. It is why I believe it has much to teach the world. It