Speech

British Competitiveness: Responding to the Rise of the Emerging Powers

Foreign Office Minister Jeremy Browne addressed the Global Strategy Forum on 24 April 2012.

This past year, we have been buffeted by international events: the Eurozone crisis, Libya, Syria, and tensions over Iran. These have captured our attention and required robust responses.

But today, I want to talk about developments, which - when the history of the 21st Century is written - will be those by which these times are most strongly defined. While we worry rightly about the waves of daily events, we must avoid failing to notice that the tide is also changing.

So today I want to explain why I believe that the world is transforming and that we will need to transform ourselves if we are not to be left behind. We have many advantages that will stand us in good stead. But we must beware of complacency. We have to change our mindset. We are not a prosperous, influential state by right. We need to work hard to be successful in the future. We need to compete. And we need to do so on the world stage.

When this coalition government came to power, we committed to re-orienting Britain’s foreign policy. We recognised that the global balance of power is fundamentally shifting - from West to East and from North to South.

Whereas some see this transformation as a threat, we realised that development in the Emerging Powers presents a huge opportunity - not only for the hundreds of millions of people who are being lifted out of poverty, but also for an economy like ours which was built on free trade, inventiveness and a spirit of adventure.

However, this would require us to recalibrate our focus. In the Foreign Office, we are shifting our network East and South. We are creating 50 new jobs in our embassy and consulates in China, 30 in India, and sending more diplomats to dynamic countries like Brazil and Indonesia. We are re-opening embassies in Madagascar, Kyrgyzstan, El Salvador and the Ivory Coast, opening a new consulate in Brazil and setting up new Trade Offices across India.

Britain’s diplomatic retreat from parts of the world like Latin America and South East Asia is over. And we have put prosperity at the heart of our activity. Ministers have travelled to every corner of the globe to promote Great Britain and all we have to offer.

My portfolio as a Minister in the Foreign Office covers the majority of the Emerging Powers: China, India and Brazil. But also other major growing forces on the world stage: Mexico, Indonesia, South Korea, Colombia.
The profound changes in the global order are difficult to discern from day-to-day. Incremental transformation is less spectacular than revolutionary transformation. But that does not mean that it is either slow or unspectacular. Anyone visiting the Emerging Powers has a sense that something dramatic is happening.

I have visited Tamil Nadu and Andhra Pradesh, the engine rooms of India, and seen for myself the dynamism and entrepreneurial spirit which has been driving double-digit growth. I have been to Shanghai and Guangzhou and Chengdu, the powerhouses of China’s transformation. I have seen how South Korea has gone from poverty to prosperity in less than two generations, and how Brazil has become the sixth biggest economy in the world.

We are by now familiar with comparisons of relative growth rates between Europe and many Emerging Powers. But we sometimes forget that thanks to the magic of compounded growth, variance in rates of economic progress magnifies over time.

Britain’s growth at present does not reflect our long term potential. But say we return to growth at 2.5%; our economy would double in size every 29 years.

Turkey, which according to the World Bank grew by 9% in 2010, would see its economy double in size in eight years. The Chinese economy, which grew by 10.4% would double in seven years. Singapore, 14.5% - less than six years.

It is not just economic growth that is making the world look a very different place. Demographic change is also having a huge impact. The world’s population recently passed the seven billion mark. According to the UN, we are likely to reach the eight billion mark by 2025.
Of those extra billion in the world, Asia will account for 600 million, Africa for 350 million and Europe will account for only 2 million.
And demographic changes are not just a guide to long term trends. Of all the people in the world entering the labour market over the next three years, one in four will be Indian.

So a revolution is underway. It is happening right now in front of our very eyes.

You might say, sitting comfortably in a great city in an established country: “So what?” No one expects the world to reach a static equilibrium. It has always changed in the past and we have done just fine.

True, but only because we have adapted. We have embraced change.

The case I make to you today is that we need to adapt to this new reality if we are to remain just fine.

We are going to have to reach out even more, beyond our traditional partners in order to make our way in the world. Already, international institutions are changing to reflect the shift in the global order.

A decade ago, the economic High Table accommodated eight heads of state - the G8. Seven of those eight were from North America and Europe.

2008 was the first G20 heads of government meeting. Some of those represented, the Australians and the European Union, are very familiar to us. But the diversity of the rest - Indonesia, South Korea, Brazil, Mexico, Saudi Arabia, Turkey, South Africa, India - requires Britain to forge stronger new alliances.

These are the countries with which we now increasingly deal economically and politically.

Over the next thirty years, the world economy is projected to grow from $60 trillion to $200 trillion. That is $140 trillion of new prosperity available to claim in a generation. The opportunities for trade are enormous. It is uncontroversial to suggest that we should seek to win as much of this prosperity as possible.

But to take advantage of it, we need to compete, and we need to engage. We need to build new links, new relationships and new partnerships.

Seeking opportunities in foreign lands to drive prosperity at home is not a new challenge for us. It is something that we have been doing for hundreds of years. Britain has long been a champion of free trade, we have long explored the world beyond our islands and we have long adapted to the changes.

That is how we got to our current position in the world. And while it is right to acknowledge the speed of development in the Emerging Powers, we should not forget the strong fundamental position which Britain enjoys.

We have less than one percent of the world’s population, but its seventh largest economy. Our language is the global language. We are the only country in the world with membership of the UN Security Council, NATO, the European Union and the Commonwealth. That is a remarkable network of alliances and influence.

Only the United States can rival Britain in terms of global thought leadership. We are home to four of the world’s top ten universities and claim the second highest number of Nobel Prize winners. Our inventions and ideas have shaped humanity.

And our global thinking reaches far beyond higher education. I would argue that with the Financial Times, the Economist and the BBC we have the most influential newspaper, the most influential current affairs periodical and the most influential broadcaster in the world.

That is not a result of luck or chance. London contains a richer array of academics, specialists, journalists, think tanks and NGOs than any other city.

It is the world’s financial capital, sitting in between the Americas and Asia, and able to do business with both over the course of the day.
Our capital boasts London Fashion Week, the Proms, Wimbledon tennis, Premiership football, the Royal Opera House, the British Museum, and of course the Olympics, where we are looking forward to showcasing the talents and energy that we have to offer.

The point is this: we are starting from a strong position. We have the expertise to exploit new opportunities and continue to compete on the global stage.

Britain kicked off the industrial revolution. We changed the world. But now, with the Emerging Powers revolution, the world is changing. And Britain needs to change with it, because past success is never a reliable guide to future performance.

When most people think about the opportunities provided by the Emerging Powers, they think trade. And they are right.

But the question is: are we positioned to take advantage of expanding markets abroad?

We can compare the composition of our exports with the composition of exports from three European countries to which we might most easily compare ourselves - France, Germany and Italy - the EU-3. If you scale each of these economies so that they match the UK’s economic size, and then take an average of the three, you get a useful benchmark.

Against this benchmark the EU-3 outperforms the UK in exporting goods by about 24%. Not only that, the EU-3 benchmark exports about twice as much as us to China and Brazil, more than twice as much to Turkey and almost three times as much to Russia.

Most of our exports go to ‘established markets’ - such as the European countries, America, Japan and Australia. That explains the now well-rehearsed fact that we export more to Ireland than we do to the BRICs - Brazil, Russia, India and China - combined. I am told that not actually true, but does hold if you remove Russia from the club.

But the point remains valid: Britain needs to increase its trade with fast-growing economies. Demand for exports like ours in the Emerging Powers is forecast to grow by far more over the next five years than in established markets.

In the Eurozone and the United States, this growth is likely to total about 40% and 30% respectively. In Brazil, growth is likely to be over 90%, in India 100%; China, over 120%, and in Russia, nearly 160%.

To answer whether our current reliance on established markets matters, we can go back to our EU-3 benchmark. If Britain maintains its current market share in the in all markets, in 2015 our exports will be worth about $975 billion.

But if we did at least as well as the benchmark EU-3 in all the Emerging Powers between now and 2015, our exports would be worth an extra $84 billion. That’s almost 4% of our GDP.

If we did at least as well in all the Emerging Powers and the A-12 European accession countries - the emerging Europe - our exports would be worth an extra $154 billion - almost 7% of GDP.

So, does it matter that we export more to Ireland than we do to China, India and Brazil combined? Yes, it does. It makes a difference to the prosperity and well-being of millions of British people.

I am not arguing that we should be turning away from our traditional partners. They are huge markets. And there is also massive scope for cooperation with them - as the European Project has shown.

In terms of exports, negotiating trade agreements with the collective weight of Europe can be hugely advantageous. Of course that will not only benefit Britain, but despite my previous benchmarking against the EU-3, prosperity is never a zero sum game.

It is estimated that if successful, negotiation of an EU-Japan Economic Partnership Agreement could benefit the UK by €5.8 billion per year.
So the EU can help us to take advantage of growth in Emerging Powers.

There are trade agreements on the table with India, Malaysia, Singapore, and many others. If all these deals were concluded, they could be worth €90 billion to Europe’s economy.

And remember, as a trading bloc, Europe is the largest in the world with an economy and a population bigger than the US. We benefit hugely from our membership of the Single Market.

But it is not complete yet. There are still restrictions in the digital and services markets that need to be addressed. And European regulation can be overbearing and burdensome to business.

At its best, the European Union can enhance the prosperity of all its citizens. At its most restrictive, it hampers our ability to compete with the fast-growing economies. That is why Britain is right to always argue for a confident, outward-looking, free-trading Europe.

Our membership of the EU makes Britain additionally attractive as a destination for inward investment. The UK is a springboard into the largest single market in the world. More overseas companies set up their European headquarters in the UK than anywhere else in Europe.

So we have causes for optimism, but not complacency. We cannot expect foreign companies to invest in the UK simply because of our access to Europe, or because their CEO was educated at the London School of Economics, or because of the lure of corporate hospitality at Arsenal.

We are competing with other countries for investment and we need to make the business climate in the UK as attractive as possible.

That is why the recent Budget was so focussed on increasing global competitiveness. This government is cutting corporation tax down to 22% by 2014 so that we will have the most competitive tax system for business of all the established major economies.

We are committed to personal tax rates that are globally competitive.

We are cutting income tax to increase the incentive to work for 23 million Britons.

And we are addressing the inadequacies of our physical infrastructure.

We are determined to ensure that we have some of the fastest broadband speeds in Europe. We are improving our train connections, upgrading the Underground, tackling motorway bottlenecks and refurbishing our airport terminals.

The government is reviewing our aviation needs and building a new high-speed rail connection between our great cities of London, Birmingham and Manchester.

Being globally competitive on both taxation and infrastructure is vital to Britain’s future prosperity.

So there are steps that we can take - and are taking - to make the UK an attractive place for investment. But these will not automatically make our businesses more successful abroad - more successful at selling things, making more successful investments themselves, and making more successful partnerships. What that requires is a mindset.

Britain achieved greatness by being outward looking, bold and inventive.

Our greatness was built on free trade, innovation, adventure and hard work.

We continue to benefit from our historical relationships with countries around the globe and we have a diverse and cosmopolitan population.

To succeed today and in the future, we must have the mindset which enabled Britain to succeed before. The world is different, but the benefits of being outward-looking, bold and inventive remain the same as ever. We will never prosper by becoming more inward-looking and parochial.

In a survey done by Chatham House and YouGov, polling suggested that the general public had little interest in the UK strengthening its relationship with the Emerging Powers.

Of those asked, only 18% thought we should strengthen relations with Brazil, 19% with India, and 20% with Russia. The number of people who thought that we should weaken our relations with Turkey and Indonesia outnumbered those who thought we should strengthen our relations with them by almost two to one.

But turning our backs on the world, just as globalisation becomes an everyday reality, would be a catastrophic historical mistake.

Let me put it this way. My guess is that most British people could not name the capital of Indonesia, and may not know that it is the 4th most populous country on Earth with a stable democracy, and yet on the high streets of Jakarta - the capital of Indonesia - you will find people shopping in Debenhams, Topman, Miss Selfridge, Karen Millen and Dorothy Perkins.

It is this engagement, and more of it, that is essential to our success. That is why our Prime Minister’s visit to Indonesia and other booming Asian economies earlier this month was so important and well-timed.
Last October there was a piece on the Times Higher Education website about another YouGov poll suggesting that one in ten British students had no interest in going overseas - to work, volunteer or even just to visit.

The most recent comment on the article read:

1 in 10 is fewer than I thought - I would have guessed something like 7 in 10. Who needs the world when there is Great Britain?

This attitude is reflected in the percentage of children learning foreign languages at school. In 2001, 75% of students at state comprehensives took a foreign language at GCSE. In 2010, only 40% did.

Perhaps if more young people learnt a foreign language then more than one in every fifty British students would study abroad - as is currently the case.

I want young people to grasp the exciting opportunities that exist in the world. I want us to be the most outward-looking country on the planet.
The competitiveness of our education and the opportunities for young people will be a key factor in determining Britain’s future success.
We have world famous universities, and some world famous schools. But our educational competitiveness has been falling and levels of educational failure in the country are unacceptable.

Being 20th in literacy and 22nd in numeracy in OECD world rankings of 15 year olds is an under-performance. We pride ourselves on our highly educated, high-skilled, dynamic workforce. But to be a knowledge economy, we have to be a highly knowledgeable country.

In the same OECD ranking, South Korea came out top of the table in both literacy and numeracy. Poland came above us in both fields too. So we should not be surprised that some people in our labour market are struggling to compete with immigrants from Europe.

The answer is not to pull up the drawbridge and pretend that we can isolate ourselves from the outside world. The answer is to raise our game.

We need to build strong foundations for the future by improving our education system - as our government is doing. We need to ensure that hard work is rewarded - as our government is doing. We need to make it easier to employ people - as our government is doing. We need to enable companies to flourish - as our government is doing.

And it is essential that Britain tackles its budget deficit and puts our economy on a sustainable footing.

Until we eliminate our deficit, our debt and the interest that we pay on it will continue to rise. We have seen the impact of runaway debt on some of our European neighbours. We spend more paying the interest on our government debts than we do on education.

So this coalition government remains adamant that our deficit must be reduced.

The changing economics of the world will also effect the world’s politics.

We will find ourselves interacting more and more with countries that do not currently hold all the same values as we do. We could come under increasing pressure to compromise our commitment to equality, our respect for human rights, our sanctification of the freedoms that allow each of us to pursue our own conceptions of the good.

But we will stay true to ourselves, not only because I believe that we have a moral obligation to uphold universal human rights, but because in the long run, liberal values will make the world a safer and more prosperous place.

At the recent BRICS summit, it was widely observed that the states spoke in terms of managing differences is as opposed to finding and protecting ‘common values’ which they considered Euro-centric.
But human rights are not just Western preoccupations. To be on the side of personal freedom is to be on the right side of history. The Arab Spring graphically illustrated that people from all corners of the globe aspire to the rights and freedoms that we espouse. They are universal.

As economies develop around the world, they will need the innovation, entrepreneurship and private sector growth that come from having individual freedoms protected by the rule of law. They will realise that economic growth can create societal tensions that require the pressure valves of civil and political rights.

Promoting and protecting human rights is not just true to our values. It is essential to ensuring that the new world order to which we are moving towards is safe and prosperous for us and our neighbours.

And it is not a challenge that we face alone. The EU can be a massive force for improving human rights standards across the globe. As well as being the world’s largest trading bloc, it is also the world’s largest aid donor. Collectively we have a powerful ability to be a force for good.

So, let me sum up. The world is going through profound change. Our success in the past was based on our ability to adapt. We are starting from a position of strength. But we must adapt again and do so comprehensively.

We must invest in our future - in our children’s education and in our physical infrastructure. We must create space for businesses to thrive and the incentives for people to work hard. We must compete with other major economies for investment from abroad. We must reinvigorate our outlook - recapturing the spirit of the great British explorers, intent on charting new waters and uncovering new opportunities.

But at the same time, we must stand by our values, our commitment to universal freedoms and human rights. These will underpin our long term security and prosperity.

Change is not optional. It is essential. Stagnation and complacency would be a recipe for decline. Only by embracing change will we be able to benefit from the rise of the Emerging Powers and secure our future prosperity.

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