By Tom Pattinson
The economist Lord O’Neill spoke at a breakfast briefing for CBBC Premium members last month. Known for coining the term BRIC – representing the collection of emerging economies of Brazil, Russia, India and China – Lord O’Neill is also a former chairman of Goldman Sachs Asset Management and was a former Conservative minister as the Commercial Secretary to the Treasury under David Cameron. He is Vice Chair of the Northern Powerhouse Partnership and holds the position of Chair at policy institute, Chatham House. Lord O’Neill also led a government review on anti-microbial resistance in 2016 that highlighted the dangers around the overuse of antibiotics and the urgency of discovering alternatives.
During the briefing, Lord O’Neill discussed the US-China trade dispute, which he argued is more threatening for the consumer dominated US market than ‘New China’ – whose rising middle class will continue to present new opportunities. However, he was fearful that there is no immediate end in sight and perhaps only a major US recession would cause America to re-think its fiscal model.
China, he said, is experiencing a series of growing pains in areas such as international relations, tourism and the outflow of students, and these need to be managed both sensibly and sustainably in order to have a positive rather than negative impact on China’s global standing.
A challenge for UK-China relations is, he says, to ensure that the UK is not caught between the US and China as President Trump tries to encourage an ‘Us or Them’ mentality. The UK needs to keep in mind that China and the US make up around 80 percent of global GDP and a post-Brexit Britain will need to continue to trade heavily with both nations.
He argues that the UK needs to ensure that it capitalises on the work done during the Cameron-Osborne era that led to the UK become the first major global economy to sign up the AIIB.
Furthermore, traditional western capitalism, says Lord O’Neill, no longer works as it once did. In China, they understand the Western Economic Model and it’s one they don’t want to adopt. China, he says, has dealt with monetary and fiscal challenges better than many other countries. Giving as an example of how their centrally managed fiscal policies have worked well, Lord O’Neill highlights how no other country has stopped a house price bubble bursting three times since 2010.
Much of recent growth in the US has been tech-led he argues, however, Lord O’Neill questions the actual long term economic value of certain technologies, and the conventional wisdom that emphasises Artificial Intelligence. The last decade has seen productivity collapse, he says. AI is not always useful to our lives; it should be a brilliant boost to productivity, he says, but the theory that it will destroy all our jobs is overstated.
China on the other hand, has seen infrastructure-led growth mainly from State Owned Enterprises and the government’s long-term planning. Twenty-year state plans versus quarterly profit reports produce very different results, he argues.
Lord O’Neill also talked about Britain’s future role in the world, and how a mental shift is needed to capitalise on our strengths as we reposition for the future. Here Tom Pattinson follows up on some of the points that came up during the briefing.
TP: During the discussion, you talked about the UK’s role as an intermediary between other nations – can you expand on that?
JN: It requires a degree of lateral thinking and boldness on behalf of the UK machine and by that I mean the civil service too. At its most radical, being free of the EU (and in 180 degree contrast to how many of how our populist leaders would currently opine) could the UK say: “We’re happy to abandon our independent seat at the IMF, our role in the G7?” Because, at our size in the world economy, we recognise we don’t warrant the seat that we had 60 years ago.
It would immediately send a message that the UK is serious about not only its own position in the world but about actually trying to make the world a better place. I can’t imagine any UK leader or group of leaders would do that but they could pursue that spirit. It’s honest and if the UK truly wants to have a global Britain role, which in theory aspects of leaving the EU do give, it creates that state of affairs.
Why not do it in a really rational, logical way? Not least because there are a number of other places in the world – China being easily the most important one – that desperately needs an experienced and independent set of people to help guide it.
TP: You could say therefore, that over the last century, Britain has gone from previously being a manufacturing nation, to currently being a service nation and in the future therefore a consultancy nation?
JN: That’s a nice way of putting it. The whole antibiotic resistance work I led translated in a visible and tangible way for me more than anything I’ve experienced. It showed the importance of global soft skills. Because Cameron decided to back this thing as being some kind of independent global review, it immediately lifted him to greater credibility.
Certainly, in terms of opening the world up to thinking about Britain’s role in health and disease prevention it would make some of those peers think the UK might be good at some of this health technology stuff. One of the biggest exports for us over the next 20 years could be things to do with health capability and deliverability including diagnostics and technology.
TP: As well as R&D what other industries might benefit from the UK as the consultant? Would it be services such as legal and accountancy, that kind of thing?
JN: Yes, I think service areas that aren’t tech driven. There is almost an obsession with what is the next tech development and how to benefit from it. If you happen to be the owner of the equity capital of that entity it seems to be quite good but it’s not obvious to me that the broader economic benefits have been, or are, as good as people think.
Whereas, as represented by some of the members of this entity [CBBC], if you could have the UK big four and health services providers and legal services providers. Surely one of China’s top priorities is how to make one country, two systems work better for both sides. And who is better placed to deliver that than some of these highly experienced firms? I am a big believer that this is the sort of path the UK needs to pursue.
TP: Are we therefore in a strong position to benefit from the challenges that China has with other countries – to act as negotiator or middle man?
JN: We are in a strong position with three very complex caveats. One is the fact that we were a colonial ruler of Hong Kong and that happens to be such a big challenge at the moment; China is very sensitive to both the actual and perceived stance of the UK on Hong Kong.
The second links to our own occasional obsession with liberal democracy – I see it in my role at Chatham House. There is a difference between representing the international rule of law and obsessively focusing on liberal democracy and we need to be careful about that. I observe British political leaders wanting to opine about how other country’s internal affairs should be run. Which in some ways is admirable but a lot of people in those countries might not care as much as we think they should.
It’s not clear to me that the majority of China’s 1.3 billion people are that upset about China’s political system. So, we have got to be careful about presuming they are and advising them. If they become passionate about ultimately wanting democracy in the way that we describe it, then it will end up happening but I don’t think we have a role in trying to influence that. And certainly, if we want to be regarded as important we shouldn’t pursue it.
And the third one – and one we’ve touched on – is that because of our past and because we have been such a historically global dominate nation – a lot of other western places, most obviously the US, naturally think of us as being their biggest alley. And they’re confused by it too. Look at the outrage in Washington about us becoming a member of AIIB. It’s always very black and white with the US, you’re either with us or against us.
TP: There was discussion about the traditional notion of Western economics and how that clashes with China’s state planned economics. How could or should we learn or take something from China’s economic model and how could that manifest in real terms? If you were to tell today’s leaders how we wanted to do a 20-year plan in the UK, how might that go about?
JN: You touched on one of the ways. I have thought about this a lot as I have observed China’s rise and how they’ve managed to pull it off, and because, coincidently, for 17 months I was the Treasury Minister in the UK, so my mandate included small box ticking for UK infrastructure. It would come through my office and I had to offer some judgement on it. Within a fortnight of starting I suggested to the chancellor that the UK needed to develop a 2050 vision of what its infrastructure should look like and somebody should be tasked with doing that. And he [George Osborne] sort of grabbed that – being the nature of how he is – he was really warm to that idea. But the system, partly because it meant a lot of hard work and who had the responsibility, tried to kill it.
Amusingly, the supposedly Independent National Infrastructure commission came up as a consequence of that. But they get bounced around by the political challenges of the day; in a democracy it’s seen as too politicised. Whether its HS2 or Heathrow or whatever – without that kind of ability to stand back, you just can’t do it in a democracy.
I said, if we’re serious about national rebalancing, why not forget Heathrow or Gatwick, why not build it at Birmingham international because then you could justify HS2 in a big way because on the plan, Birmingham International to Euston is 30 minutes. And whilst it went down with some of Cameron’s people and [then London mayor] Boris Johnson, the broader point was that nobody had seemingly thought of this kind of thing.
TP: Is that because everyone is focused on the two-year plan or four year cycles or Daily Mail headlines?
JN: Yes, yes, yes. And whether its energy infrastructure or major urban transport infrastructure, everything gets dragged into the current political cycle.
TP: Does that mean we are fundamentally screwed? Without changing or ending democracy as we know it, it’s very hard to compete with places like China?
JN: I don’t think we’re fundamentally screwed because Osborne opened up something with the infrastructure commission. I’d strongly recommend that the next government truly strengthens its independence and gives it a bigger voice because that’s what’s needed. Because the flip side of it is China obviously. Presumably China does end up wasting a lot of money on some of this stuff. So, the system – if you had a national infrastructure commission – which should be constantly updated for a 30 year future explaining: “this is what the UK needs”. It would then feed into the system that says: “this is what’s affordable and this is what we will prioritise.”
It would certainly mean we wouldn’t build it all – whereas you certainly think occasionally in China, it does try to build it all.
TP: Is this Infrastructure commission like parts of the FCO or security services where it is non-partisan and we can run with it for 10,20, 30 years?
JN: That’s what it should be. It’s young so I’m not sure it’s truly got its voice and identity but it should be the equivalent to the IFS but for infrastructure. The IFS has got a fantastic, powerful and credible voice and the infrastructure commission should be the same if not more.
TP: The Northern Power House has been a success on many metrics. What went right there and what can other parts of the country learn from that?
JN: Three things fortuitously went right. Relevant to the issues of democracy, Manchester had, and largely still has, a stable local political party environment. The Labour Party has dominated regional council politics for a long time and as part of that it grew a strong shared purpose and identity (that originated from the IRA bombing of the Arndale Centre) and it just grew and grew. And particularly when Howard Bernstein was there, with him and Richard Leese who is still the Central Manchester council leader and the deputy to the Mayor’s office. Under Richard and Howard and the group around them there was a strongly persuasive shared vision.
Secondly, you had someone appear on the scene as the Chancellor who was slightly unconventional and who bought into this notion of the Northern Powerhouse, or the agglomeration concept in particular about it – and Manchester just so happened to have been in the middle of the agglomerated area – so those two things were very fortuitous.
The first two things were, and still are, very powerful because aspects of the Northern Powerhouse legacy live on despite the fact that since Cameron went, no government has been really focused on it. Which partly relates to the third thing, which is purely coincidental in a way. The peaking of the London house price market four years ago (which ironically resulted in a couple of Osborne policies to dramatically raise top end stamp duty and the second tax on professional buy to let) kind of killed the top end of the London property market and killed the buy to let rental investment business in London but crucially it opened the door to the minds of many people in that world to taking it elsewhere.
Even though London house prices have been gently declining for four years, the north west is still showing the opposite. We see the beginnings of a mammoth reversal of regional wealth inequality and that’s helped fuel the Manchester thing.
TP: And China has been instrumental in this in terms of investment…
JN: And China loves it. I’ve jokingly said that many times but it’s true. China gets the Northern Powerhouse more than Whitehall. Because of course China has gone through the whole: “let’s shift growth from the coast into the centre and west,” so the idea that you do something like that in the UK – they get it. Whereas many people in the UK say that’s impossible to do. It’ll never work. The Chinese get it big time.
TP: There has been talk of state infrastructure funds from both UK parties in the run up to the General Election.
JN: It will be very interesting to see the manifestos published because both parties have made a lot of noise and it’s not without obvious intent. When the Chancellor and Shadow Chancellor launched their fiscal policies, the Chancellor was in Manchester and the Shadow Chancellor was in Liverpool. So, I think in the next government there will be more serious focus on this than there has been; and it may well be particularly the case under the Tories because they’ve been in office and thought about it more carefully. I think it is distinctly possible that some kind of regeneration or infrastructure fund will get some legs.
TP: The pound’s value has attracted Chinese investors buying discounted products. Will that continue?
JN: If you look at conventional valuation models, the pound is still cheap. Greed and fear in finance is constantly there, so to many people the idea of buying the pound and UK investments is obviously attractive just from a foreign exchange perspective. But, at the first sign of serious trouble, they panic. Because, one of the other things I’ve learnt in 30 odd years is that the trends are your friend. It might be cheap but we’ve gone down for an obvious purpose and if we don’t deal with the reasons why we’ve gone down, then it will end up going down again.
If we can’t do something about our productivity performance post-Brexit, then the long term trend of the pound, sadly, will be to continue to decline. And all these things are independent or autonomous so if we end up with a much more serious approach to infrastructure and we’re serious about doing something about inequality and productivity in the UK that will end up being more important in my view than leaving the EU.
If we succeed in dealing with the shock of leaving the EU, in time we will look back and regard the pound as an absolute steal. If we don’t then it’s just carrying on along the same lines as we’ve come.
TP: Moving on to something that we touched on earlier in the discussion, I don’t think the vast majority of the world recognise the climate crisis as the biggest global threat to the world economy,
JN: You’re probably right.
TP: I would argue that over the next 50 years the biggest economic threat that we will face is the climate crisis – what are your thoughts on that?
JN: As you’re aware I am heavily involved in the crusade about antibiotic resistance. And I would argue in terms of lives, that’s actually more clear than climate change. Climate change is so persuasive and probably got a bigger voice because it affects the environment but in terms of killing people, if we don’t do something about the obsession in overusing antibiotics and the lack of new ones, we will have 10 million people around the world dying by 2050. My point is, climate change is a big one but there are others such as antibiotic resistance, and I don’t think we are equipped for dealing with these things because they are classic market failures.
Business often thinks these kinds of issue are a failure of political leadership but they’re not. They’re economic market failures and we have to find, however tricky it is, some model where business is either forced or chooses to be part of a positive solution.
So, let me deal with the path to new antibiotics as I am more familiar with that than with climate change but it’s the same principle. One of the ideas we have suggested is that to incentivise pharmaceutical companies to treat this seriously there should be a billion dollar prize, which would cover the extensive period of uncertainty that the genuine cost of finding a new useful one would require, but – and here’s the key thing – instead of just assuming the government pay for that, why can’t the pharmaceutical industry collectively create the pot of money so that they self-reward so there is a shared incentive from within that industry to solving the problem? Individual pharmaceutical companies shudder at the thought of the cost and obligation but without them doing it, how can we solve the problem? I’d apply that same principle to climate change.
TP: This is where it goes back to where we started. China’s big pharma is minority if not majority owned by government; it has that ability to force companies to take action. This is the appeal for me in having state ownership in big business
JN: One of the reasons Corbyn appeared on the scene is what he superficially portrays has some resonance for this era. As you see in opinion polls, nationalising British rail transport is seen by a significant majority of British people as being perfectly sensible. It might not be right but particularly if you spend much time up north, it certainly seems so with all these different operations and different entities. All that means is when my train constantly doesn’t arrive on time there is no one that is taking accountability.
TP: And they’re still making profits. Generationally, young people are only going to choose brands that serve their purposes and bring benefits beyond just the economy
JN: Yes, exactly. And the rather beautiful thing about aspects of this, is that you can see it. I’ve got a 29 and a 32 year old and you can see it in their generation; they have a completely different set of morals.