Financial services could be the ace in Scotand's hand writes William Peakin
Mark Wilson, president and chief operating officer of American International Assurance, part of the insurance and financial services group AIG, was reflecting on the part of the world he calls home.
“I’ve lived in Asia for nine years, and even living in Asia, I think it’s easy to forget the scale of the region in which I live. And I think of it as taking a slice of the globe, a slice of Asia Pacific, with my home Hong Kong at its centre with seven million people. Go north from Hong Kong, Taiwan - 23 million people - over a bit to South Korea - 49 million people.
“North from Hong Kong again, go to China, the most populous nation on earth with 1.3 billion people. Southwest to India - 1.1 billion people - back over to the east to Vietnam - 86 million - south to Indonesia, the largest Muslim country on the earth with 235 million.
“If you have a look at just those countries,” he told investors and financial analysts who logged into a company webcast last month, “just the countries that AIG is present in Asia; that is three billion people, 46 per cent of the world’s total population, 26 per cent of the world’s total GDP and growing.”
Wilson alighted on one aspect of the company’s business, takaful, or Islamic insurance. It had just obtained the license to operate in Malaysia and is establishing a ‘takaful centre of excellence’ there as a base for expanding this strand of activity throughout the Asia Pacific region. The prospects were good, he said.
Just the week before, HSBC’s own Malaysian ‘centre of excellence’ was in the news; without warning, 164 of the bank’s staff based at Livingston were told their jobs were being transferred to the Far East. While relocation offshore has been a fact of working life for the past 20 years, until recently it was to do with cutting costs not a response to a growing market.
But as far back as 2004, the Asian markets had become more important to HSBC than most of the ‘mature’ economies, including Europe. “This trend [will] be continuing for some time, fuelled by the accelerated developments in China and India,” according to HSBC’s Asia-Pacific president Michael Smith.
Like AIG, the bank has anticipated the shifting balance: “Malaysia will be our home base to run Islamic banking and takaful business in other parts of the Asia-Pacific like Indonesia, Brunei and Bangladesh.” The opportunity was “huge”, he said, and could develop into the provision of services to Muslims in India, China and Europe.
Our economy, and our financial services sector, is feeling the effect of this trend and now the effect of a credit crunch as well. The Royal Bank of Scotland is laying off around 200 of its global banking and markets staff, most of them in London (the capital expects to lose 8,000 financial services jobs this year). HBOS has made 92 of its corporate banking staff in Edinburgh redundant and Aberdeen Asset Management said it was also looking to cut costs. Douglas Adams, an economist at the Ernst & Young Scottish Item Club, predicted that financial services firms in Scotland could lay off up to 5,000 workers over the next two years.
Against this backdrop, experts in international finance will meet in Edinburgh for the first Global Financial Services Week, Supported by Scotland’s Financial Services Advisory Board (FiSAB), the collaboration between the industry, unions, the Government, Scottish Enterprise and Universities Scotland.
Financial services accounts for about seven per cent of Scottish GDP and grew by over eight per cent during 2006. They supply around nine per cent of Scottish jobs, employing 108,000 directly. In 2006, the sector’s exports to foreign countries were estimated to be over £1.1bn, an increase of 7.5 per cent in nominal terms on the previous year. The sector now accounts for around six per cent of total international Scottish exports, and around 19 per cent of total international Scottish services exports. Government calculations suggest that financial service exports to the rest of the UK stood at £7.3bn in 2005, nearly 18 per cent of the Scottish total.
“Once you have a centre that is known for something it is very important to keep the critical mass,” said Ben Thomson, chairman of the investment bank Noble Group. “It’s very important we don’t lose some of our larger organisations and that we continue to give them an environment where they can be competitive. This week is about establishing and reinforcing in people’s minds that Scotland has a great financial services sector, that it has been the source of a lot of innovation and about how we can continue that and continue to attract new business and develop existing business.”
Thomson, a member of FiSAB and chairman of Reform Scotland, the think tank launched earlier this year, said that the week was a suggestion of the First Minister’s as a way of capitalising on work done over the past few years by FiSAB and Scottish Financial Enterprise to raise the profile of the sector. “It’s a great innovation and a good example of collaboration between the industry and politicians,” he said. “It’s the first one and I’m full of admiration for the people who have pulled it together.”
The week will also help focus the sector on the long-term. “If you are looking to set up and grow your financial business in Scotland, there are certain key things that you compete against. Financial services are much more moveable than they have ever been in the past. People are very happy to go and create large parts of their business in Ireland, Luxembourg, Switzerland, Gibraltar, Cyprus, the Channel Islands. Because a lot of earnings are from overseas, there really is this ability to decide where you want your headquarters.
“So what are the factors that make for attracting financial services into Scotland? You have got to have a financially literate workforce and Scotland is with its long tradition in the sector – strong on fund management, life insurance and, of course, banking. And now we’re attracting some new areas such as asset servicing. You have got to have an attractive environment in which to live to attract the quality of workforce you need. You need a good transport infrastructure with strong international links and I think more needs to be done to create the kind of hub that Amsterdam represents.”
Within Scotland, Thomson said it was vital for transport links between Glasgow and Edinburgh to be improved so that the central belt would be regarded by the industry worldwide as one centre.
“Then there is tax, which is a UK matter. And we are seeing some companies upping and leaving. It’s a UK issue but it only takes a small number for the message to be heard. There is regulation; making structures simple and easy to get off the ground, having a regulatory regime that is not over-burdensome but also gives confidence. And there is the need for a good support system, of lawyers, accountants and so on, which Scotland has.
“In looking at those different areas, Scotland definitely has some things that one would say are very attractive, but there are also some things that make us uncompetitive. And part of what our research is about at Reform Scotland is to look at how other people do things around the world to get, within what’s feasible, policies that are going to make Scotland more effective and which will allow the economy to grow.
“As an example of that, there have been 8,000 hedge funds created around the world – 2,500 in the UK – but only a few in Scotland. It has a mix to do with tax, regulation, the ability to be near an investment banking community and Scotland doesn’t have a very developed investment banking community. So it’s a business we’ve missed out on, in contrast to the life companies, the investment and unit trusts, where we have a disproportionately higher share, and now the asset serving side, with companies like Morgan Stanley, State Street and Citibank setting up which is very good news for Scotland.”
Thomson said that while the global downturn will no doubt be reflected in some of the week’s events, Scotland had demonstrated strength in its handling of the credit crunch. “In a way it’s comforting to know that the Scottish banks have to some extent led the way in going out and getting capital. Obviously the credit crunch has been a cause of stress on the economy and worries everyone, but getting that out in the open quickly and getting the capital provided is something that Scottish banks have done earlier than others and in a way, that demonstrates that level of Scottish experience and maturity.”
Professor John Kay, one of the Government’s economic advisers, has said that its target of matching UK growth by 2011 will depend as much on Scotland enduring the economic downturn more effectively than the UK as a whole than it will on a short-term transformation of Scotland’s productivity.
But long term, a small nation like Scotland has to base growth on clusters of internationally competitive industries in specialist areas. In Sweden and Finland, it is telecommunications; in Denmark, agri-business and pharmacology; and in Switzerland, speciality chemicals and precision engineering.
“Specialisation is what has enabled small states to become, through globalisation, the most prosperous states in the world. And that’s the way we need to think about an approach to the development of Scotland’s economic performance,” said Kay, one of the speakers at the Global Financial Services Conference on May 29 .
Despite the sector’s historic strength, and with it the combined might of other priority industries such as life sciences and tourism, the signs of them making an impression on the Government’s key targets of higher growth and higher productivity are at this stage hoped for rather than real.
According to Glasgow University’s centre for Public Policy for Regions (CPPR), more than half of its economic targets are on track to being delivered. But, after a year in office, higher growth and productivity are the two furthest away from being met. “The overall picture is mixed,” said Jo Armstrong, co-author of a CPPR analysis of the Government’s progress.
“Whilst the majority of targets appear to be on track, higher growth and productivity are two notable laggards. If the improvement in population growth comes about then this will help GDP growth but even then [the] targets [to raise growth to the UK level by 2011 and rank in the top quartile for productivity amongst our key trading partners by 2017] are likely to be difficult to achieve.”
In fact, we could be facing a long-term problem that is masked by concerns around the current but essentially short-term issues such as the credit crunch, faltering housing market and inflation.
According to Hamish McRae, the economist and associate editor of The Independent, we are accustomed to a world where natural resources are reasonably plentiful and cheap. We have been used to a growing workforce and steady gains in productivity. As a result, living standards have risen each year, with only occasional blips during global downturns.
In his newspaper column last week, he said: “We are now starting to see a different sort of downturn. We cannot assume that natural resources will be either plentiful or cheap, given the growth that is taking place in the developing world, particularly in China but also in India.
“We won’t have an increasing workforce for much longer - in Germany it is already shrinking - and that smaller workforce will have to support a growing number of pensioners. And while it should be possible to keep increasing productivity, it will be much harder to do so as the weight of our economies shifts from manufacturing to services.”
As workforce growth slows, productivity is affected and increases in living standards become less certain. No matter what happens in the short term – and McRae’s own view is that next year will be more of a problem than this one - we will have to spend a smaller proportion of our income, save more and retire later. “I don’t think we should assume that we will bounce out of this slowdown quickly. Things will not become nearly as bad as the 1970s but there will be a slog ahead.”
But McRae shares Ben Thomson’s view that current economic troubles should not overshadow the financial services week. He told Holyrood: “I would hope that the incipient global downturn is not going to take too much space of mind, even though from a practical point of view anyone in the business community is going to have to plan for it.
“I think there’s a long-term issue for the UK as a whole in terms of what sort of government do we want, how big it should be, how well we cope with the relentless though not yet serious pressure from an ageing population. The latter is a particular issue for Scotland, but things can turn around as they did in Ireland; if the economy turns, you can attract back a lot of your diaspora. So it’s partly demographics, partly to do with the size of the public sector and, again, Scotland has a particular issue here.
“You should not try to do things too quickly; if you do, you often do things badly. One of the problems that governments face is that they have to get elected and they inevitably reflect the interests of people who pay taxes and demand services. It’s harder for them to reflect the interests of children or the unborn. The temptation is to borrow and leave the unborn to pay it back.
“What really interests me is the natural competitiveness of the Scottish economy as the world continues to globalise. Even though I’m part Scottish, having been brought up in Ireland, I see it from outside and find it fascinating to think what, in a more global
world, is the position of an English-speaking country of five million people with a very strong brand, probably the strongest brand of any country in the world of its size.
“You can talk about the Swedish, or Norwegian or Irish model. But I think it’s probably more interesting to think in terms of the Scottish model which would be somewhat different from the UK and would have elements of Ireland and probably Scandinavia too. There is another consideration; you can plan but you also have to watch the markets and therefore I think there shouldn’t be a too rigid idea of how it should develop; one should just look at things that seem to work well and then reinforce them.
“If you look at one of the world’s fastest-growing industries, its financial services and Scotland has a disproportionately large financial services industry, including one of the world’s top ten banks
If you look at one of the world’s fastest-growing industries, its financial services and Scotland has a disproportionately large financial services industry, including one of the world’s top ten banks 
. It has a fund management industry which is extremely capable. The sector is having a downturn now but maybe this is a good time for building it up for when the next upturn comes. I think cultural exports are another great area; in the Edinburgh Festivals, you have something that’s three times the size of any festival anywhere in the world. That’s something you can work with.
“Inevitably, a lot of the debate within Scotland is quite introspective. It would be odd if it wasn’t and every country is like that. But I think that makes it all the more important to look at Scotland from the outside and think of it within whatever relationship it has with the UK. It will change; it has changed over the past 750 years, and will go on changing over the next 750 years.
“But within whatever relationship there is, it will be important to think of Scotland in a global context; what is it good at, what is it less good at, how it reinforces the things it’s good at and how does it set to work tackling the things it’s less good at. It’s partly an economic story - I’m seeing it through the eyes of a macro-economist - but other people with other specialities could, I think, apply the same global vision to their own areas of expertise. I think if they were to do that, most would be comforted and maybe even surprised by the significance of Scotland and the interesting hand of cards it has to play.”
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