BIEC Yearbook 1989–1990

Most trade and professional organisations have directories of their members. These provide the necessary core of factual information about the practitioners in a particular industry or section of an industry. But there is no single work of reference which spans all the service industries trading abroad. This Yearbook does just that; and its birth is probably overdue. It is hardly too much to say that the British economy, like most other advanced economies, has seen an enormous growth in service industries since the Second World War, and that their importance now predominates; but information about their activities, size and identity is insufficiently recorded. This Yearbook helps to fill that gap.

The Centre, which was established by the City institutions and associations in 1976, provides: a liaison point for the Cityan information and contacts source for the press and broadcasting mediaa channel for promoting the City’s relations with industrial management, trade unions and trade associationsa vehicle for liaison between the City and Parliament and Whitehalla servicing organisation for the educational sector by providing information and material relating to the financial sector of the City of LondonThe Centre is responsible for ensuring that the contribution made by the City to Britain’s economy and world trade is understood by as wide an audience as possible. In particular, the Centre seeks to encourage a greater awareness of the City’s role in British industry, trade, investment, savings, insurance, pensions and employment, and its contribution to the national interest as a major international financial centre.

It is one of Ihc oddities of British overseas trade that one of its most significant sectors remains almost completely anonymous. Month by month, wc revive accounts of imports and exports of manufactures and other ‘visible’ products. Too often they have made depressing reading with the contraction of Britain’s manufacturing base and with the dramatic growth in imports, particularly from the fast-growing economies of newly industrialised countries of the Far East and from a number of our partners in the European community.

Ten years have passed since the abolition of exchange controls in 1979. This article assesses the consequences of that decision on invisible exports and in particular on interest payments, profits, and dividends (IPD). The controls did not on the whole affect investment income directly, but affected profits, dividends and interest payments through their effects on UK overseas investment.

The Montreal meeting of trade ministers, held early in December 1988 to review progress half-way through the four-year Uruguay Round of GATT (General Agreement on Tariffs and Trade) trade negotiations, stalled over the inflexible stance of the US and EC on subsidies to food producers. This put in jeopardy the negotiations on an agreement for international trade in services, which is a new feature in this Round.

Paradoxes abound in the uncertain art of economics, and most are immediately obvious. Some, however, go curiously unnoticed. One of the most striking is that between Britain and Germany.

You may think that in choosing today’s subject, I have shown a rashness which you would not look for in a commercial banker — still less, in one who has previously been a central banker.

The coincidence of a precipitous slide in world equity markets, which began recently with the first anniversary of London’s ‘Big Bang’, makes this scarcely the ideal moment for a dispassionate verdict on the liberalisation of London’s financial markets. In another sense, however, it is an advantage to have our new trading systems tested by these unprecedented conditions; at least we already know they are capable of withstanding this incredibly severe test.

It is appropriate to start with some remarks about the City of London itself and its place in our economy. Britain is a small country not greatly endowed with raw materials and natural resources. Our climate does not permit us to grow any tropical or semi-tropical products. Therefore it has always been necessary for us to import a good proportion both of our foodstuffs and of the raw materials required for our industry. For that reason Britain has only in very occasional years achieved a surplus on balance of trade in goods, despite the enormous growth in industrial production following the Industrial Revolution about 200 years ago. On the other hand we have achieved a surplus on trade in services (the invisibles) in every single year since records were first kept in 1794. The importance of this statement for the achievement of economic growth is obvious.

I have been asked to give a supervisory view of the current international financial scene as seen from London. Perhaps I might also be allowed to give a view with my Basle hat on.

It is an honour for me to address such a distinguished audience. To speak in Bombay on securities is a rash enterprise. With a Stock Exchange over one hundred years old, now I understand linked electronically with the other major Indian Stock Exchanges, and several thousand quoted shares, I am sure that there are those in the audience who know more about certain parts of my subject than I do. I am not a budliwalla or even a taravniwalla. As long ago as 1899 one of my fellow countrymen declared that ‘India being the original home of options, a native broker would give a few points to the brokers of other nations in the manipulation of puts and calls’. Luckily the same man declared that ‘a Bombay native broker is a very useful member of society whose virtues are not sufficiently recognised.... With rare exceptions he is honest to the backbone and pays up for his own misfortunes or the defaults of his customers to the last pie’. Well, you may say, what has the British Invisible Exports Council to add to that?

The last few years have been very exciting ones in which to work for a merchant bank, and particularly I suggest if it has been a merchant bank based in London. This is because we do not have in London the statutory dividing line between investment banking and commercial banking that exists in Tokyo and New York, although it is under pressure in both centres, and London has consolidated its lead as the leading international financial centre.

Securitisation and globalisation are two expressions which have been used with an ever increasing frequency over the last few years. The events of the recent weeks have certainly demonstrated that the latter, globalisation, is at a very advanced stage. The stock market collapse sparked off on Wall Street, went around the world several times, sucking down share prices on all the major capital markets. Interestingly enough, not only equities were affected. Other securities like bonds, notes and short-term paper were equally affected, although positively. Securities have become interlinked not only globally, but also by product, through the process of securitisation.

The title of my talk carries within it an assumption. As it is an assumption which I do not share I think I had better begin by talking about the way in which the long-term credit markets in London have evolved, for it is only by understanding how we have arrived at the present situation that one can make useful predictions about the future.

In 1982 at the first BIEC mission to India, one of the speakers prefaced his comments by telling the story of the two men standing by a freshly dug grave in a Yorkshire cemetery. One man turned to his friend and read the inscription on the gravestone: ‘Here lies John Smith, banker and philanthropist’ and then added: ‘things must be tough, when they bury two men in one grave!’

Reflecting the strategies adopted by Mrs Thatcher in the United Kingdom, Mr Reagan in the United States, and also Mr Gandhi in India, we are now living in an era that has made the private sector fashionable again. In the advanced, as well as in the developing world, there is a new impetus to involve the private sector in the conception, implementation and operation of large publicly orientated projects, in order to benefit from the entrepreneurial drive of the business community and the efficiency of commercially-operated companies.

During the last few years many borrowers have been tempted by the low interest rates offered by ‘hard’ currencies such as Yen, Deutschmarks and Swiss Francs. What is often ignored is that, during the same period, the policy of the world’s major central banks to allow their currencies to float against each other in response to market forces has resulted in a scenario of volatile and often violently fluctuating exchange rates. However, during this period certain trends have been apparent and were not entirely unexpected. Typically, the relatively strong, low interest rate currencies such as Yen and Deutschmarks have strengthened against the relatively soft, high interest rate currencies such as the US Dollar and Sterling.

Before entering into the text of my talk, may I first put my industry into context.

To set out some parameters within which to consider the subject we must first examine some of the background to countertrade.

It is a great pleasure to be back in Moscow and I welcome this opportunity of bringing you up to date about the current changes in the London Gold Market. Many bullion dealers in London have enjoyed a good relationship with the Bank for Foreign Trade and it is therefore very appropriate that, on their behalf, I shall try to explain to you why I believe that London will become an even better market-place in the future. We should always remember that the market-place is not only of interest to the dealers themselves; a good marketplace is also of great benefit to both the consumers and producers of gold — the latter of course very much including the USSR, the second largest producer in the world.

It is both a pleasure and a privilege to be in your great city and to have the opportunity to talk to such a distinguished audience about one of the more important sectors of London’s financial services industry. After insurance, banking and pension funds, commodity traders and export houses are the largest contributor to the invisible earnings of the UK financial services sector.

It is almost exactly two years since I had the pleasure and honour to lead a mission from the British Invisible Exports Council to a similar meeting here in Milan. I am delighted to be here again and to be speaking again under the Chairmanship of my friend Piero Bassetti.

I am very glad to have this opportunity to visit the Netherlands and to speak to this conference in the tercentenary year of the accession to the English throne of William of Orange in 1688. Not only did that year mark the final outbreak of peace between our two countries — if not the end of healthy commercial rivalry — but it was during the reign of William and Mary that the Bank of England was founded. The Bank was in part modelled on the great Dutch banking houses of the seventeenth century; and many other great British banks drew on the experience and support of Dutch bankers as the City of London developed over the centuries.

I would like to concentrate on three aspects of the effects of the Single Market on banking: 1.Effect on major corporate customers. To a large extent for the multinationals, there is already a single market in banking, not only in the EEC but in the world. The marketing of banking, treasury, capital markets and securities products and the blending of different instruments is already on a global basis. Therefore in one sense a dramatic change can not be expected from 1992 and it is common to hear bankers taking this line. However, I suspect that the changes may well be greater than we currently imagine — and not always to the benefit of the banker: (a)We have already experienced the move away from straight banking products to securitisation and although this has undoubtedly experienced a slight setback following the October 1987 crash, it is difficult to imagine that this is not a long-term sea change. An EEC single market in securities will give a very considerable fillip to this. We would all admit that the securities industries of Europe are at present very much less homogeneous than the international banking ones, both in respect of currency and instruments. The disappearance of all controls on capital movements will give a very considerable stimulus to our inventive national securities markets and I believe that we will see further substantial increase in the securitisation, affecting not only the multinationals but also increasingly the middle corporates. That is not to say that the banks are not likely also to be highly inventive and to be able to offer a far wider range of banking products and currencies and multi-option facilities, but the rates, which are already fine, are likely to be finer.(b)While equally I doubt if any of us expect to see the disappearance of national currencies by 1992, it is difficult to believe that we will not see an increasing convergence both within the EMS and in increasing use of the ECU. Equally in time we would expect to see increasingly convergence of interest rates. Given the amount of time that most corporate customers expect to spend on minimisation of interest and exchange risk and the importance of these products for banking profits, it is a fair assumption that the corporate customer is going over time to see greater stability and the banks less opportunity for profit in these markets.(c)What I find more difficult to envisage is the effect on the use of eurocurrency as opposed to national lending and deposit instruments. Given the fact that the former to a large extent arose as a result of imperfections in national markets, the disappearance of such imperfections can be expected to have a reverse movement. But here again it is certain that that will not happen overnight.

It means achieving a central market in securities in Europe, where all the supply and demand for a security at any given moment can interact to ensure the optimum liquidity and depth of market — in other words the greatest possible marketability at the best possible price.

An expanding market and rising employment characterise the arts in Britain. In 1984 they contributed 1.28 per cent of GDP in terms of value added and occupied fourth place in the table of invisible earners; only banking, travel, and shipping brought in more from overseas customers.

Now we know what we have believed for some time — the arts are big business and contribute significantly to overseas earnings. In his report for the Policy Studies Institute, The Economic Importance of the Arts in Britain, John Myerscough demonstrates that the arts are Britain’s fourth largest invisible exports earner. At £4 billion a year, the ‘invisible’ arts are ahead of highly ‘visible’ motor-cars.

The UK current account of the balance of payments with the rest of the world has moved from surplus to deficit since 1985 and this has focused attention not only on the possible economic implications but also on the quality of the data on which the current account statistics are based. For example, the House of Commons Treasury and Civil Service Select Committee has been very critical of their quality, one member suggesting that a health warning should be attached to the statistics because of their inaccuracy. This article concentrates on the data problems associated with the compilation of the account, but by way of introduction describes the broad framework of the current account, puts them in perspective and examines the data for some recent years.

Reproduced by permission of the Controller of Her Majesty’s Stationery Office.

In 1976 the then Committee on Invisible Exports, now the British Invisible Exports Council, commissioned Economists Advisory Group Limited (EAG) to undertake a study of the available statistical information on world invisible trade with a view to identifying the most promising markets for UK invisibles. Their report was presented in April 1977, and is referred to here as, ‘the 1977 study’.

The Queen’s Awards for Export Achievement is designed to encourage and recognise outstanding achievement in exports. It differs from a personal honour in that it is given to a ‘unit’ as a whole — management and employees working as a team. There is strong competition for these Awards and the Queen grants them annually (announced on her birthday 21 April) on the advice of the Prime Minister who is assisted by an Advisory Committee. This includes representatives of industry and commerce, trade unions and the engineering institutions.

One of the main tasks of our embassies and consulates is to help Britain’s firms win orders abroad.

The Export Initiative provides practical help, advice and support for exporters. This section explains what we can do to help at each stage of your export business.

A recent MORI poll revealed that more than 60 per cent of British executives cannot speak a foreign language well enough to do business abroad. The universities can help.

British companies are risking billions of pounds of earnings from abroad because they fail to insure their services and invisible exports, warns the Export Credit Guarantee Department (ECGD), the UK’s leading credit insurer.

Tourism is the biggest growth industry in Britain today. Approximately 1.4 million people are employed in the tourism sector, with 50,000 new jobs being created annually. Overseas tourism to Britain is the nation’s third largest foreign currency earner, with figures approaching £6.2 billion in the last year.