Do you agree that the UK economy is now so dependent on the financial sector that government has lost the will or ability to influence its behaviour in the public interest?
The issues behind the Poll question are complex. Here are some facts and opinions that may help readers make up their own minds.
1. Changes in the UK economy - decline in manufacturing and technology and increasing dependence on the financial sector.
The UK economy has changed dramatically in the last few decades. The main trend has been a dramatic drop in the value of manufacturing and technology-based industries.
To illustrate the state of affairs, the value of Tesco, a large retailing company, is now twice that of all the technology companies quoted on the stock market.
Most commentators appear to be entirely sanguine about these changes, characterising them as being typical of a leading advanced economy.
- The decline in manufacturing industries has been far faster and more extensive than in other developed economies, including the US, where it is estimated that of the 29 industries dependent on advanced knowledge, 25 are in the manufacturing sector. Germany, France and Japan have a far higher proportion of their economies in technology and manufacturing industries. Germany is increasing its share of world trade, based on technology and manufacturing - Britain's share is rapidly declining, led by a dramatic fall in manufactured products.
- Despite the major decline in Manufacturing to 16% of national output and 13% of exports, the manufacturing sector still accounts for 83% of the value of UK exports. And whilst the value of exports by the Financial Services industries has grown, it has not kept pace with the plunge in the value of manufacturing exports. See below:
Balance of trade (red = deficit, black = surplus)
Manufactured goods Services Total 1982 1,879 3,198 5,077 1997 -12,342 14,106 1,764 2005 -67,304 23,036 -44,268
2. Growth in services - especially finance and investment banking
The decline in technology and manufacturing has been accompanies by growth in services industries - in particular in banking and financial services. The financial services industries are mainly composed of non-UK-owned investment banks, which use London as their base because:
- The City is a world centre of expertise in financial industries, with a considerable cluster of skills
- The UK financial markets are less heavily regulated than most others in developed economies, including the US, where the willingness to prosecute companies and individuals for transgressions is far higher and the much - maligned Sarbanes-Oxley legislation places very high requirements on companies to be transparent in their financial reporting.
- Thus the UK is felt by some to be becoming a 'flag of convenience' location for both banking and financial services companies and for foreign companies looking for sources of finance without much pressure to follow strict corporate governance regulations. This seems to particularly appeal to companies from Russia and the old Soviet bloc, where business practise and ethics are very dubious. It is a matter of opinion as to whether light regulation should be a source of competitive advantage for London.
The investment banking industry is unlike most others in that it is a generator of wealth in itself, but also exercises a very considerable direct and indirect influence on other industries. It does this through its roles as a financial intermediary between investors like pension funds, individual savers, insurance and mortgage holders and the companies and instruments into which investment funds flow.
The banking and finance sector is both good and bad for the UK economy -the central paradox.
Unlike technology-based manufacturing industries, which are entirely beneficial in the fact that they are based on research and advanced knowledge - sinews of a developed economy - banking and financial services represent a double-edged sword. Here's how:
London is a major international finance and banking centre. The international investment banks clustered in the City attract business from across the globe. London banks are able to borrow cheaply and lend dear - foreign companies are attracted to London by the availability of skills and capital. The expertise of banking and insurance companies earns more than £20 billions in revenues for the UK.
The same institutions that are such an asset on the international stage are throttling UK industry. The speculative and essentially short term nature of institutional investors, allied to a marked aversion to investing in complex technologies unless there are guarantees of returns, as in pharmaceuticals, which have governments as customers. The effect of this has been gross underinvestment in R&D and technology by UK companies, underperformance and wholesale disposal of UK science and technology companies to foreign competitors. At the 'seed-corn' end of the market it is also evident that investors are unwilling to place serious money in new technologies. What is called 'venture capital' in the UK is nothing of the sort - it is mainly buying established companies with the intent of stripping out assets and cash, loading them with debt and selling them after 3 to 5 years.
So the institutions that make London successful internationally are the same ones that have such a destructive effect at home. And the UK economy is much more vulnerable than most - in Far Eastern countries and Europe the influence of international investment banks is less - in the US, the non-financial economy is much larger in a huge domestic market. Also, the US government is capable of exercising more influence because banks cannot walk away from such a huge market.
So the UK is faced with two big dilemmas:
- The stronger the financial sector becomes, the more it will weaken other industrial sectors, especially those dependent on research and technology. Truly, we are witnessing the effect of the cuckoo in the nest.
- It is extremely difficult for government to praise the financial sector to the skies (as it does) for its international contribution and act to restrain the same foreign-owned institutions for their behaviour in the domestic market - and that task becomes more and more difficult as the dominance of the financial sector grows. And where government is powerless, so will regulators and prosecutors lack the steel that is demonstrated so much more effectively by their US counterparts.
It is already arguable that the power of investment banks to move huge swathes of capital around the world exceeds that of many governments to control their actions in the interests of their citizens. Some would support this and call it globalisation; others would call it undemocratic in the fact that it weakens the ability of elected governments to act in the interests of their electorates.
The UK domestic economy is becoming more and more susceptible to pressure from international banks as the investment banking and financial services industries become more dominant.
As the power of the financial services industries increases, the threat of moving resources and capital from London becomes more threatening to the overall UK economy. So, it is a matter of accepting the whole of the finance sector - 'like it or lump it', until better ways are found to provide investment capital for UK industry.
These facts seem to be accepted by UK governments, which appear already to have delegated the regulation of finance and industry to the markets.
This is not a happy or sustainable position if we wish to see dynamic science and knowledge- based industries in the UK - and a balanced economy providing high value skilled employment.