The Great Debate UK

from UK News:

BAE, the SFO and time travel

Prosecute over bribes allegedly paid in far-flung lands years before you banned such practices?

That’s the bluff from Britain’s Serious Fraud Office and its biggest defence firm, BAE Systems, is having none of it.

The Lockheed scandal of the 1970s forced the United States to toughen its anti-bribery laws but the British quietly left their laws wide open for decades.

It worked a treat.

UK firms enjoyed a competitive advantage over U.S. rivals and were able to do battle in arms exports versus freewheeling rivals from France, Germany, Russia and beyond.

BAE is now Europe’s biggest defence company and has even cracked the Top 10 in sales to the Pentagon.

Britain’s economy has profited too, especially from the Al Yamamah arms-for-oil export pact with Saudi Arabia – at an estimated 43 billion pounds ($69 billion) by far the country’s biggest ever export deal.

from UK News:

Roger Bootle throws capitalism a life preserver

Problems sparked by the financial crisis have not gone away, but have been transferred to the public sector, economist Roger Bootle posits in his new book.In "The Trouble With Markets: Saving Capitalism from Itself" Bootle argues that in large measure, the underlying cause of the financial crisis was the result of an idea that markets work, and that governments do not."Despite the trillions of dollars lost, and despite the worries of millions of people, more than this -- much, much more -- is at stake," Bootle writes. "For this crisis has delivered the killer blow to an idea that has underpinned the structure of society, framed the political debate, and moulded international relations for decades."Bootle, director of Capital Economics and an economic advisor to business accountancy firm Deloitte, reflects on the pitfalls of the corporate system and puts forth his ideas on the future of capitalism.He discussed his book and his economic predictions with Reuters at his London office.

from The Great Debate:

Imagine when China runs a trade deficit

-- Wei Gu is a Reuters columnist. The opinions expressed are her own --

If current trends continue, China might swing to a trade deficit in the not-too-distant future. Given that China has enjoyed more than a decade of strong exports, this may sound a bit far-fetched. But even if it happens, this would not necessarily be something for the world to worry about.

Some economists have recently sounded alarm bells about the possibility of a Chinese trade deficit. They argue that if the Chinese current account surplus shrinks, it would leave Beijing with less spare cash to buy U.S. Treasury bonds. Then who would fund the U.S. budget deficit -- and, by implication, U.S. consumers?

Those worries are largely misplaced. First, it is unlikely to happen any time soon. In order for China to have a trade deficit next year, imports would have to outgrow -- or shrink less than -- exports by at least 23 percentage points.

In August, exports fell 23.4 percent while imports fell 17 percent. So while the trade surplus is diminishing, a deficit is not around the corner.

If China's trade surplus shrinks, it will most likely be caused by a contracting U.S. deficit, in which case Americans will be saving more and the U.S. will be less dependent on overseas investors to finance its government debt. That would be a sign that the long-overdue rebalancing of the global economy was beginning to take place.

It would not be so bad for the Chinese economy either, because China is a lot less dependent on exports than many people assume. Although exports have accounted for a whopping 50 percent of the economy in the past few years, the contribution of net exports to economic growth is actually much smaller, because a lot of what China sells abroad is low value-added assembly work.

What happened to bird flu?

- Bernard Murphy is investigations editor at Clinica World Medical Technology News. The opinions expressed are his own -

Bernard Murphy has been following the spread of avian and swine flu across the globe and is an expert in medical diagnostics and regulation. He explains how the threat of bird flu is still present and discusses the latest developments in diagnosing and combating the viruses and the threat they pose to the global economy.

Tiptoeing toward economic recovery after Lehman

- David Andrews is director of David Andrews Media, a financial public relations consultancy with high profile fund management and financial services clients based in the UK, Ireland, Cayman Islands, Cape Verde, Beijing, Europe and the U.S. The opinions expressed are his own. -

David is a former financial journalist best known for his weekly Daily Express and Conde Nast ‘Money Matters’ columns. Few will be lifting a glass to toast the first anniversary of the collapse of investment bank Lehman Brothers a year ago this week. With billions of dollars under management and thought to be invincible, the private bank was generally regarded as a potential gateway to the riches of Croessus for the ordained Masters of the Universe who prowled its Jackson Pollock-lined corridors.

But when the bank started to drown in the treacherous quagmire of its collateralized debt obligations (CDOs) – a type of structured asset-backed security whose value and payments are derived from a portfolio of fixed-income underlying assets – America’s Federal Reserve elected not to send in the cavalry.

The virtual overnight collapse of Lehman Brothers in September 2008 was the catalyst which brought the world economy to its knees with breathtaking rapidity. The bank was so huge, a massive juggernaut reversing and elbowing its way in so many different markets that when the U.S. government allowed it to go to the wall, it caused a convulsion among its many counter-parties, which in turn caused global credit markets to seize up. “Normal” banking activity virtually ground to a halt.

We were all in dreadful trouble.

Some commentators, notably Warren Buffett and the International Monetary Fund’s former chief economist Raghuram Rajan, sounded many alarms bells about the runaway train that was the growing appetite for CDOs and other highly complex, derivatives-based tools which delivered fabulous wealth to a few but subliminally spread a cancerous, critical risk throughout the global credit system and effectively precipitated the crunch that led to a near collapse in the UK and U.S. banking systems and onto worldwide recession.

from Commentaries:

Barroso’s EU vision lacks levers for change

Could the European Union be among the big losers of the global financial crisis?

Despite signs that recession in Europe may be bottoming out, the 27-nation bloc risks emerging from the turmoil with its economic growth potential stunted, its public finances shackled by mountains of debt, and its international influence weakened.

That is the backdrop to Jose Manuel Barroso's campaign for a second term as president of the executive European Commission.  In a manifesto sent to EU lawmakers last week, he warns that unless Europeans shape up to the challenge together, "Europe will become irrelevant".

The conservative former Portuguese prime minister is  seeking a confirmation vote in the European Parliament this month, so a degree of dramatisation is to be expected. But there is no hiding the setback the crisis has dealt to European integration. Barroso has rightly put economic recovery at the top of his agenda, but he lacks powerful levers to achieve his goals at a time when the knee-jerk response in Europe has often been to revert to national economic solutions.

The recent crisis showed that there remains a strong short-term temptation to roll back the single market when times are hard, he acknowledges in the 41-page document.

Barroso is too much of a politician to name names, but he was clearly referring to the way Britain pressured state-rescued banks to lend at home and France and Germany sought to protect domestic jobs when aiding car manufacturers. Those governments deny their moves are protectionist and cite their duty to spend taxpayers' money in the national interest. But such measures pose a threat to the principles of free movement of capital and labour and fair competition.

Barroso vows to be "an implacable defender" of the EU's single market and its competition and state aid rules -- the foundation stone of European prosperity. But he does not say how he can force governments that have rescued stricken banks to restructure and dispose of them in ways that avoid distorting the level playing field for business.

from Commentaries:

The mirage of U.S. healthcare

On healthcare, the White House is struggling with a political riptide that threatens to drag it into deep water.

Americans, as they contemplate change, have suffered a weakness of nerve. The main reason is that nearly two thirds of Americans are apparently happy with their healthcare coverage, for all its deficiencies. Repeated reassurances from President Obama that those who like the existing set-up will not be forced to change, have had little effect.

A change of tactics may be in order. The administration must do a better job of underlining the glaring defects of the existing system. The genius of the U.S. healthcare is in providing the illusion of value and security. For their own sake, Americans must be encouraged to set aside jingoistic claims about having the best care system in the world and look more honestly at its short-comings. Let's start with value. Most Americans are blissfully unaware that their healthcare system provides appallingly little value for their money. This is because when it comes to costs, they see only the tip of the iceberg. While companies typically pay about three-quarters of an employee's family premium -- on average $12,680 a year -- individuals ultimately bear the burden. In a free market, companies do not hand over to their workers more than they absolutely have to. Money spent on healthcare is carved out of take-home pay or other benefits.

"We pay for healthcare in considerably lower salaries," Uwe Reinhardt, a Princeton University economics professor, said in a telephone interview. "The system seduces people into thinking care is pretty cheap. We are kidding ourselves if we think that the shareholder pays."

One measure of this financial sacrifice is that employer premiums are now 17 percent of median household income -- up from 15 percent in 2003. From 1999 to 2008, family health insurance premiums rose by 119 percent.

With healthcare costs rising fast, it is small wonder that middle-class Americans have failed to wring real pay increases out of employers. The drag on pay will increase further, according to research by the Commonwealth Fund. The foundation estimates that without reform, the cost of premiums could double again by 2020 -- gobbling up still more take home pay.

The second big healthcare mirage is security. If the current downturn has demonstrated one thing, it is the fragility of an employer-based healthcare system. Lose your job -- as more than 6.5 million have in this downturn -- and your insurance can disappear with it. (COBRA provides only a temporary patch and can be expensive.)

Britain’s economy should learn to speak a little Chinese

- John Ross is visiting professor at Shanghai’s Jiao Tong University where he writes a blog on globalisation. The views expressed are his own. -

The success of China’s economic stimulus package has attracted increasing attention in Britain and internationally for two reasons. The first is simply its importance for the world economy. Second whether there are general lessons to be learned.

The impact of China’s economic programme can be seen in that it is likely the whole of world economic growth this year in net terms will be accounted for by China.

The sceptics on China’s stimulus package have been disproved by the facts. China’s GDP growth this year will be eight percent or slightly above. China’s GDP grew by 7.9 percent year-on-year in the second quarter and was accelerating –- the best private sector estimates are China’s economy grew at an annualised 13-15 percent in the second quarter. Urban investment increased 34 percent and as producer prices were dropping the real increase was probably around 40 percent. Retail sales increased 15 percent.

This is a stellar performance in conditions where most major world economies will shrink this year. Compared to these results talk of possible “green shoots” in other economies relates to minor improvements.

China’s economy is not large enough that its growth is able by itself to turn round the world economy. But it is sufficient to having a stabilising effect in East Asia with beneficial knock on consequences. Those wanting further detail on the scale of contribution of China’s growth to the world economy should read Professor Danny Quah, of the London School of Economics’, excellent recent paper on Asian growth.

But if the significance of the scale of the international impact of China’s economic performance is evident are there policy lessons which can be drawn by Britain?

Memo to banks – it’s not all about the money

- Peter Dixon is a guest columnist, the views expressed are his own. He is global financial economist at Commerzbank -

In the course of this week, we have received a mixed bag of first half results from all the big UK banks. On balance, earnings were slightly ahead of expectations, even for those banks which still registered big losses.

The broad conclusion which we can draw is that retail operations have endured a tough six months, thanks to rising default rates and higher loss provisions, but those banks with significant trading operations have been able to offset these problems due to a major improvement in global market conditions. Moreover, the results have reawakened public interest in the bonus culture and have raised many questions about where we go from  here.

The question of bonuses has become highly emotive in recent months. The standard argument used by opponents is that it is immoral for banks which have been propped up by public money to reward those who gamble in the casino of international finance – particularly since it is precisely such behaviour which brought the banks to their knees in the first place. Banks counter this criticism by arguing that good fee earners generate huge income for their company and should be rewarded commensurately.

But even if we accept this view, there is an issue of how big a share of earnings should be paid to the fee earner. The compensation model used in the finance sector today is based upon that of the old partnership system, when individuals’ wealth was at stake and they were paid for taking genuine risks. Most fee earners today are taking risks with shareholders money. From an economic perspective, shareholders should receive the bulk of the revenue in the form of dividends whilst bankers compensation should be treated as little other than a brokerage fee (unsurprisingly, that is not a popular view on the trading floor).

Whilst the structure of banking sector compensation is a major talking point, it pales into insignificance against the question of how UK banks will pay back the money pumped in by the government. Unfortunately, those banks which have accepted public funds are those which are primarily focused on the domestic market, and which are in no position to generate big profits from their trading operations. Following the principle that there is nothing to be gained by throwing good money after bad, this suggests that banks will be circumspect in their lending activities for the foreseeable future – precisely not what the government desires. Moreover, profitability will be restored more quickly if banks maintain high interest rate margins, which is another activity not in the best economic interests of the public.

Clearly, the restoration of banking profitability will be a long haul. But what is an appropriate rate of return for banks? After all, a bank is merely an intermediary which brings together those with excess savings with those who wish to borrow. In theory, a bank should not be more profitable than the activities which it is financing, since otherwise there is no incentive to engage in enterprise, and we should instead invest in banks. Of course, this is a logical inconsistency for if there were no lending activities taking place, banks would not be able to generate profit.

Government must act on bold promises to UK manufacturers

- Steve Radley is Director of Policy at EEF, Britain’s manufacturers’ organisation. The views expressed are his own.

This week the index of manufacturing activity in the UK moved into growth territory for the first time in more than a year. While that does not necessarily mean that the recession is over, it does suggest that we should be thinking a bit more about what sort of recovery we are likely to see and how well placed the UK is to meet it.

A common assumption is that a UK recovery will be export-led, taking advantage of a cheaper pound and the large stimulus packages which are likely to lift overseas markets such as China and United States out of the global recession faster than in this country. Looking longer-term, shared global challenges such as security, ageing populations and slowing climate change and adapting to it will create major opportunities for UK companies, particularly in manufacturing.

This raises questions as to how well equipped we are to take advantage of these opportunities. On the positive side, UK manufacturing has become much competitive in recent years with productivity gains outstripping most of our major competitors. A greater focus on innovation, design, niche products and service offerings has helped UK firms shift away from competing on price terns with lower wage cost countries. At the same time, though, we have been slow to take advantage of growth opportunities. Other European countries have made faster inroads into rapidly expanding Asian markets, while nations such as Germany, Denmark and Spain have stolen a march on us in the onshore wind industry, despite the substantial advantages our physical geography provides us.

There are some important lessons from this for manufacturers themselves and some steps that they will need to take. Companies will need to be more ambitious in exploiting the opportunities from a world economy set to double in size in the next 20 years and to develop a long-term strategy to achieve this. They will need to increase their focus on investing in the areas where they can best add value, whether this is in new equipment, research and development, skills or more likely a combination of them. And they need to be much more vocal in selling themselves to the highly skilled people they need to work for them and the government that they need to support them.

The government has signalled that it will be a more active player in this area. This is welcome news for business. It is not looking for government subsidies, for it to be protectionist or seek to create national champions. What it wants is a clear framework from government on where it sees the UK economy going, what are the major opportunities for this country and what it will do to help business realise them. The “New Industry, New Jobs” report launched in April was a good start in this respect and since then we have had a plethora of announcements, among others on Digital Britain, a Low Carbon Industrial Strategy and Advanced Manufacturing.

This evidence of a more active approach is welcome but what business needs now is more clarity on how the government will be taking things forward. To send clear signals to companies considering making long-term investments here, the government needs to spell out the criteria for making its own strategic investments. It also needs to be convinced that the government will work with it to clear away the obstacles to making and capitalising on these investments, be they skills, planning concerns, regulation or licensing issues or weaknesses in the supply chains. Business also needs to hear more about how government will use its vast procurement budget to stimulate innovation, particularly in growing markets. It has talked for some time about doing this but delivering on it will not be easy, particularly at a time when a recession, a looming spending squeeze and a pending election might encourage civil servants to baton down the hatches.