MAIN PAGE | SPEECHES & EDITORIALS | 1999 | TO HAVE AND HAVE NOT
PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | SPEECHES & EDITORIALS | 1999 | TO HAVE AND HAVE NOT
To Have and Have NotWealth Creation and Global Capitalism in the 21st CenturyJohn R.H. Bond Group Chairman, HSBC Holdings plc Wednesday, May 19, 1999 The Challenges of the Next Century for the Pacific Basin
Good Afternoon Ladies and Gentlemen. During this conference, you have heard speakers talking about technology, about emerging markets, about the role of government. This session is about globalisation, which is in ugly shorthand word for the complex interaction of all these concepts and ideas taken together Globalisation in the twentieth century has been enabled by the great revolutions in transportation and in the movement of information. One commentator recently defined globalisation as the integration of finance, markets, nation states and technologies to a degree never witnessed before — in a way that is enabling individuals, corporations and nation states to reach further, faster, deeper and cheaper than ever before. Globalisation means different things at different times to different people. To a banker the emphasis may be on the international movement of capital; for an educator it may be about long-distance learning through now delivery channels; for governments it may be about challenges to national sovereignty. The one thing almost every commentator does agree on is that globalisation is here to stay. Whatever globalisation consists of, we can expect more of it. Business is playing a major part in the process of globalisation. However there are more than 220 countries on our globe, so the word "globalisation" may be a misnomer. Many businesses are international, very few really span the globe. HSBC may be one of those few. HSBC Bank International Limited, our telephone banking service for expatriates, serves customers in over 190 countries. That compares to 185 countries belonging to the United Nations. I should add a caveat hem. We should not make the mistake of believing globalisation means unfettered large companies trampling all over the world. We must never lose sight of the fact that host nations have the power to define the laws and regulations to suit their domestic political needs. In the case of HSBC — we operate in 79 countries and territories — we respond to more than 220 regulators around the world, almost all nationally-based. Reports of the unregulated multinational operating above sovereign law are greatly exaggerated! We are on the threshold of the 21st century. The lesson of the 20th century for international capitalism — or globalisation — is that it succeeds only when there is a win-win situation. And that is when the recipients of capital benefit in a commensurate way with the suppliers of capital. That is the great challenge for capitalism in the 21st century. At the beginning of the 20th century, raw capitalism was in the ascendancy. This species of capitalism was based on land, agricultural wealth, natural and industrial resources, and the emerging industries that grew out of the industrial revolution. It was populated, in parts, by robber barons. It could oppress workers. It created great wealth, but it could also create discord. The resulting political reaction led to the rise of socialism and Marxism. The degree of intervention varied according to time and place. We saw dependencia — statism — in Latin America; socialism in Europe and Africa; and command economics in the old Eastern bloc. The common denominator was that many governments took on the task of wealth creation. It is only in the last two decades of this century that we have seen a widespread revival of capitalism. Why the revival? Because it is clear that while governments have immense attributes in providing services for their people, they are not natural creators of wealth. Markets stimulate human beings to economic activity in a way that governments cannot. The capitalism of the next century will be a very different species from that of the early part of this century. For capitalism to thrive, it has to be responsible. It can't be driven by the unbridled profit motive. Capitalism has to understand that there are three billion people living on less than two dollars a day, that two billion people have no power supply, 1.5 billion no access to clean water. And part of the function of capitalism is to raise people's standard of living. So what are the key ingredients for success in the 21st century in a globalising world? I can identify four factors which play a vital role. First human capital. Capital no longer means land, or mineral resources, or industrial plant. For a country, capital is human capital. Equally, for a company, capital is human capital. Without human capital, no other kind of capital can be productive. Getting the most out of human capital means giving people access to education, Education systems now compete on an international basis. They compete to provide each society with the educated workforce that is the ultimate determinant of its economic success. The second factor is access to capital. The case for globalisation is essentially this. You need capital to improve standards of living. If the poorer countries wait until their domestic savings generate surplus capital, it is going to take longer than their people will tolerate or anyone would wish. Therefore, there is a very good case for using capital from countries with surplus capital to kickstart developing economies. This can create a win-win situation. The countries with surplus capital are generally the more mature economies, with aging populations that need to invest for retirement. They can benefit from investing in what can be higher growth, albeit more volatile, markets. The third ingredient is quality of life. Quality of life is going to be a vital issue in the 21st century, because knowledge workers will be able to work wherever they want. And they will go where they see the best quality of life in the form of the environment, security, taxation, art, access to recreation, access to education. Countries and regions will need to compete in all these areas, to a greater degree than ever before. The fourth ingredient in successful capitalism is responsible capitalists. There is a huge responsibility on the shoulders of business leaders to show that they can practise capitalism with a conscience. We need to be honest here. Capitalism has not been an unqualified success. There have been and will be excesses. Take the hedge funds. In a country with 30 thousand dollars per capita income, this type of market speculation may well have a role. But it has no place in a country where the GNP per capita is a thousand dollars or less. Market forces are very powerful and, untrammelled, can be destructive. Let me look at the four key factors in a little more detail. First, education. In many parts of the world, government has been slow to recognise the importance of the teaching-profession, and the teaching profession has been very slow to realise that it is faced by international competition. There is an urgent need to make sure the curriculum taught reflects tomorrow's world, rather dun being a hangover of the world of yesterday. Axe we teaching our young the subjects that are going to enable them to prosper in a world where human capital is the key ingredient? Where do we need to look? Technology, business, economics, English, perhaps. Certainly a more practical slant than today. Students study for MBAs in finance and business — a qualification at postgraduate level. But why on earth don't more young people study them at the graduate level. It is as if business is a bolt-on skill, an afterthought. Ironically, in a world where education is paramount, there is a generation of people which needs to be educated in capitalism itself If you said that "Because your capital makes a 10 per cent return in Germany, you would want a 20 per cent return in Zambia", there are a host of people who would say, "that's exploitation, that's indecent". Of course, the reality is that capital will only go where the risk and reward match up. I can certainly see how difficult it is when you have generations of people who have been brought up with communist ideology to make the cultural change to capitalism. However, I am always surprised when I hear the same objections from people whose lifestyles have derived from the success of the capitalist model. I think this understanding of capitalism is a powerful competitive strength for many countries in Asia, where its strengths are well-understood. Education is internationally competitive because work is. In the next century, work and the jobs that go with it, will be ever more internationally mobile. HSBC spends nearly two billion dollars on information technology each year. We choose to have four main system development sites here in Hong Kong, in Canada, in the US and in the UK. They are in these locations because we can get the right quality staff at a competitive cost. But potentially they could be anywhere. It is perfectly conceivable that we could go to India, Taiwan or Argentina if they fitted our criteria. And technology is enabling new types of business to become internationally mobile. E-commerce is opening up the possibility of operating a business remotely from markets, in a way never possible before. Many of these jobs will be internationally competitive, and it is education that will decide which country wins the competition. Among emerging economics, those countries that have placed emphasis on primary and secondary education have tended to perform better than those who have not. The effects of improvements in basic education are far reaching for the individual. Societies that fail to provide basic education are doomed to stifle their peoples' potential. In sub-Saharan Africa, 40 million children receive no basic teaching, and spending in the region on each child is half of what it was twenty years ago. The outlook continues to deteriorate. In 2015, the number of children with no education at all will be around 75 million. Perhaps them is some hope in that in the next century, new technology will play a major role in the provision of education and its delivery through distance learning. Through the Internet and other channels, the cost of delivering some types of 'knowledge will drop sharply, with revolutionary effects. Literally, billions of people will have instant access to the sum of human knowledge for the cost of a PC and an online connection. For Asia, education will remain a key competitive strength. The investments made in primary and secondary education have produced great economic benefits for many Asian countries. And the education standards in many of those countries surpass those in OECD countries, according to comparative studies. This investment is not purely financial. Countries like Singapore and Korea produce excellent results while spending a comparatively low proportion of GNP on education. There arc cultural factors at work here. The economic effects of strong educational systems are obvious throughout Asia. And it is noticeable how in the recovery from the economic recession in Asia, it is the countries with good education systems that are emerging first. Education will continue to be a key Asian strength and as economies develop, we will see the increasing importance of tertiary education to the region, particularly in engineering and science. The second factor: access to capital. At a conference some years ago, I listened to the chairman of a major international bank ask the German central banker Karl-Otto Phl, "is there a shortage of capital in the world?" Karl-Otto didn't blink. He just said, "why do you think there are interest rates?". As long as there are interest rates, then by definition there is more demand for capital than there is supply. And countries will need to compete for it You need a financial mechanism — the international capital markets — for transferring surpluses of capital from- supplier countries to user countries. But — and it is a big but — in order to receive capital, them has to be a sound financial infrastructure — markets, banks, institutions — to receive it and reallocate it in an effective way. It's no good taking capital from America or Japan and giving it to country X, if country X then blows it on grandiose, useless schemes. It is an unhappy, but true, fact of life that you can't participate in globalisation until you've achieved a certain level of institutional framework in your own country, otherwise it leads to grief. As we have seen, tragically, in the HIPC countries — the Highly Indebted Poor Countries — who are burdened with a huge debt overhang from previous failed attempts to use inflows of capital. If globalisation means taking surplus savings from countries that can't use them, and kick-starting economic development in countries where people can't generate sufficient savings, then, prima facie, it's good. This places a burden on the supplier of capital, as well as the recipient, to behave responsibly, This excludes people in colourful braces in Western financial centres enriching themselves at the expense of the broad populace in a developing country. The third ingredient is quality of life. The corporate titans of this century were headquartered in New York, London, Tokyo. Today the Microsofts of this world are in the Pacific North-West, because that's where people want to live. Tomorrow we will see a shift in working patterns on an unprecedented scale. Countries that do not provide the requisite quality of life will see a hollowing out of their knowledge base. In Britain in the 1960s, there was much talk — and a good deal of action — about the "brain drain". Countries that do not provide a rewarding environment for their most productive people will see this on a grand scale. Like a magnet, quality of life provides opposing forces. People will move towards the positive and, where is no quality of life, they will move away. One of the major risks for the next century is that ever-growing inequality will lead to migration on a massive scale. Capitalism's role in the 21st century will be to get capital into the hands of those who desperately need it. You cannot have more than half the world living on less than two dollars a day and the rest with significant income. This is not sustainable. The same advances in communication and transport that make globalisation possible mean that, ultimately, if people see no chance, they will move. There will be some eight billion people on the planet in 25 years, some two billion more than today. The pressure on cities is going to be enormous. For instance, Jakarta's population may double to nearly 25 million, and, in total, almost 400 million people will live in megacities across Asia, triple the number today. The effects on the infrastructure will be profound, and we will need to address the problems that will result in terms of water supply, pollution, sanitation and so on. If not, we will see movement of people on a scale never seen before. The fourth ingredient for the success of globalisation is responsible capitalists. In whatever business, you operate, there will always be a profit that you should not make. There will always be a transaction you should not do with your customers. There will always be a burden you should not place on your colleagues. Those of us in business have a moral duty — call it enlightened self interest if you prefer — to help in the process of wealth creation and distribution. I guess you can argue that the arrival of an organisation like HSBC in Kazakhstan or Azerbaijan or Armenia, of itself, is a catalytic event because you can put in place, at the stroke of a pen, an important component of the institutional framework for financial investment. HSBC's experience and nowhere more than here in Hong Kong — where we were fortunate and privileged to play a part in the development of this vibrant, wonderful and successful city — our experience is that banks can and do make a real difference. They can act as a force for economic development, or they can act as a brake. At HS13C we aim to support businesses and let them realise their potential. And we will do that in emerging markets wherever we can find fertile conditions for growth. it is this creation and distribution of wealth that produces security for the old, help for the sick and support for the disadvantaged It is the creation of wealth that increases life expectancy, that improves access to water, to sanitation, to medical treatment. If globalisation provides these things, then it is a powerful force for good. The challenge for 21st century capitalism is to prove that it is the best ideology in absolute terms, rather than by comparison with old-style communism which it has roundly defeated. We need capitalism with a conscience. If it does not, it will be found wanting and will need to be revised. So, if international business leaders fail to recognise responsibilities that extend beyond pure short-term rewards for their shareholders, then the new century will see the invention of the successor to global capitalism. And those business leaders will have failed in their long-term duty to their shareholders. Much of what I have been talking about today boils down to one thing. Good government. You cannot have good public education systems, or develop the infrastructure necessary to use capital efficiently, or improve the quality of life, without good government. in fact these things are probably the scorecard against which you mark good government. There is no reason why global capitalism should not be a moral ideology. Winston Churchill, said that "Democracy is the worst form of government except all those other forms that have been tried from time to time". We might add a corollary that international — capitalism globalisation — is the worst form of economics except for all those other forms that have been tried from time to time. As we depart the twentieth century, we can see that the ideological battle between Western communism and capitalism has been fought and decided. We may debate the finer points of Anglo-Saxon capitalism against the Asian version, but there is a consensus, certainly strongly held here in Asia, that the market and liberalisation are the driving forces, whatever the political model. it is important hem to recognise that even in liberalising economies, there can be a greater or lesser degree of government intervention. Each society must set its own level and pace of liberalisation. The recent buffeting in Asia has clearly shown the inefficiencies of some of the state-directed investment completed within a market framework much as the fall of the Berlin Wall highlighted those same inefficiencies in a communist framework. Markets consist of participants and regulators. Business has the leading role to play in wealth creation. Governments' role is to see fair play and to debate the distribution of wealth. Deng Xiaoping said, "I have two choices. I can distribute poverty or I can distribute wealth". What he chose is clear. I should pay tribute here to the People's Republic of China in its 50th year, for its great achievements in doubling life expectancy in China in that time, and for removing over 200 million people from absolute poverty in the last twenty years. That China has achieved so much in two decades is a tribute to the quality of its leadership in managing the liberalising reforms started by Deng. When the history books come to be written, I believe that China's journey from a rural to an urban economy, and from a command economy to a market economy — will be seen as one of the great achievements of the latter part of the 20th century. The verdict on globalisation will be made at the end of the next century. I am by nature an optimist and believe that it will be seen to be a force for the good. In HSBC we certainly aim to make it a force for the good. The prospect of failure is chilling. The consequences could be movement of people and human misery on a vast scale. Globalisation offers the potential to avoid all this, to eradicate poverty, to improve the sum of human happiness. it is the responsibility of every one, of us here to ensure that when the history books of the 21 at century are written, the verdict on globalisation is that it did indeed produce the greatest good for the greatest number. |