: 1 111M141111 ,4 ___111111120f141 -- 11111ffignim How the City is making economic

nationalism obsolete

TIM CONGDON

Economic nationalism, one of the most powerful and destructive forces in the 20th century, is becoming obsolete. Trade and finance are so increasingly internation- al in character, and business strategy for large companies is so totally globalised, that the idea of the nation state is losing its relevance. Businessmen now regard fron- tiers between countries in much the same way as they regarded divisions between counties, states and provinces 50 years ago. Indeed, the time may come when the labelling of companies as 'American', `British' or 'Japanese' is as anachronistic as duo-decimal currency and operator diall- ing. The City of London is in the forefront of these developments, and has done more to aid the process of internationalisation than any other concentration of financial or business expertise. Many of its current problems can be interpreted as awkward turnings on the path to the global financial village.

Some of these statements may seem adventurous and even wild. But they are compelled by the pattern of evolution enjoyed by the world economy over the last 40 years. Before the second world war the world economy was highly fragmented, with a number of currency and trading blocs operating in independence from each other. In their international economic rela- tions members of these blocs acted bilaterally, discriminating in favour of each other and against non-members. The result was to reduce international trade and capital flows, and to reinforce political and military antagonisms.

After 1945 the architects of the post-war international economic order tried to de- sign a system which ended bilateralism and discrimination. The major supranational organisations — the International Monet- ary Fund, the World Bank and the General Agreement on Tariffs and Trade — were instead to promote the ideals of multi- lateralism and non-discrimination. These ideals would not only serve the interests of economic efficiency. It was much more important that, by fostering greater co- operation and interdependence between nations, they would make another world war inconceivable.

The adoption of the multilateral ideal had radical implications. In principle, countries were to treat all their trading partners in the same way and not give preferential market access to close political allies; they were to maintain the same payments arrangements (on old debts as well as new imports) with every other country and not obstruct payments to actual or potential military enemies; and within their own frontiers they were to give investment by foreigners the same legal rights as investment by their own citizens. Of course, in practice, there were all sorts of fudges, compromises and relapses. The world economy today is still tainted by many vestiges of bilateralism. The worst blemishes are to be found in petty and resentful so-called 'developing nations', but even the mighty, liberal-minded Un- ited States has import restrictions which apply specifically to Japan and no other country.

But such blatant discrimination is rare. There is no doubt that over the last 40 years the tendency of international econo- mic relations has been towards greater multilateralism. Largely as a result, world output has grown faster than ever before, and trade and international capital move- ments have grown faster than world out- put. The City of London has been one of the prime beneficiaries of this process. In the 1960s and 1970s its traditional business with the sterling area (one of the pre-war currency blocs) was superseded by a larger, more diverse and more profitable set of financial relationships with other coun- tries. The number of foreign banks repre- sented in London virtually doubled from 114 in 1967 to 201 in 1971 and then doubled again to 403 in 1980.

But it is the 1980s which have seen the most dramatic boom in the City's activities. One measure of this has been the rise in employment in foreign organisations. The number of staff employed by foreign banks and securities houses in London went up by 22,025 in the 12 years to 1980; it increased by slightly more, 22,701, in the following six years to 1986. AlthOugh there are several possible reasons for this accel- eration, it is clear that a burst of exchange liberalisation in 1979 and 1980 must have made an important contribution.

The United Kingdom scrapped exchange controls in 1979, Japan did so in 1980 and a number of other countries relaxed their restrictions in sympathy. Indeed, the sud- den availability of Japanese savings flows goes far to explain the Euromarkets' grea- ter appetite for bond issues in recent years. Without them the leap in new Eurobond issues from $25.6 billion in 1981 to $179.9 billion in 1986 could not have occurred. Since most of the business of issuing these securities and trading them is conducted in London, it is hardly surprising that so many people have had to be recruited into the City.

The Euromarkets are so large today that they channel more money from savers to companies and governments than any national financial market, including the American and Japanese. But the Euromar- kets are remarkable not only in scale. They are also revolutionary in concept. It is quite possible for ten or more national identities to be involved, in some way or other, in a single transaction. An Amer- ican company may issue a bond, denomin- ated in Australian dollars, which is lead- managed by a Japanese house employing (as well as Japanese) British, Swiss and Italian staff. The issue may be underwrit- ten by, among others, Spanish and Scan- dinavian banks and eventually sold to Middle Eastern and Far Eastern investors from places such as Kuwait, Abu Dhabi and Hong Kong. The issue may be subject to British law, although the borrowing is actually done in the name of a subsidiary of the American company registered in an island in the Caribbean.

There has never before been anything quite like this. The Euromarkets are so totally cosmopolitan in character and so uncompromisingly international in outlook that they 'belong' to no individual country. Most of the marketing, trading and legal work is done in London, but the Euromar- kets are not 'British'. Much of the money comes from Japan or is channelled via Switzerland, but it makes no sense to call the Euromarkets 'Japanese' or 'Swiss'. American companies are among the largest borrowers, but it is as inappropriate to regard the Euromarkets as 'American' now as it would have been to call them 'Latin American' at the peak of the boom in sovereign lending. Of course, this is not to deny that most of the organisations involved in the Euro- markets are still branded as 'American', `Japanese', 'British' or whatever. Indeed, one of the favourite pastimes of financial journalists since the Big Bang has been to conjecture which nation's securities houses and banks would be most successful in the increasingly competitive City environment. There are countless league tables ranking financial companies for their bookrunning, placing power, foreign exchange capabil- ity, ability to arrange swaps and so on. It is a convenient shorthand, when discussing the constant jostling for position, to be able to make statements like 'the Japanese are coming', 'the Americans still lead for quality of advice' and 'the British are maintaining market share'.

o, even in the highly cosmopolitan City of today, there are outlets for chauvinistic pride and rancour. Fortunately, the rivalry seen in contemporary financial markets is fairly harmless. After all, it is much better to worry about the relative capital adequa- cy and placing power of different countries' financial institutions than to count up their battleships and cruisers. But modern finan- cial nationalism is nationalism all the same.

The multilateral ideal has not yet been taken so far in international finance that banks and securities houses feel wholly immune to unfair official treatment outside their home territories. For example, although Japan has actually been more active than countries like Canada and Italy in opening its stock exchange to foreign brokers, the British Government last year put particular pressure on the Japanese authorities to permit the entry of British firms. The City, because of its position at the crossroads of international finance, has been eager to ensure that regulations and controls do not give an unjustified com- petitive advantage to financial institutions from one country. Most recently the Bank of England has been in the vanguard of attempts to establish a 'level playing field' for banks' capital adequacy in the main financial centres. There is an obvious parallel here between a uniform set of rules now being sought for international finan- cial competition and the principle of non- discrimination enshrined in the GATT and the IMF since 1946.

Progress on the harmonisation of regula- tory standards has been so rapid in the last few years that banks and securities houses may soon be subject to essentially similar rules in all the main centres. If so, financial business will become even more thorough- ly international than it already is. Indeed, there is the intriguing possibility that finan- cial organisations, like the Euromarkets in which they operate, will lose their national identities. They will cease to 'belong' to any particular country. This may seem an imaginative extrava- gance remote from the realities of the modern City. But several business orga- nisations have already demonstrated how easy it is to change nationality. The most obvious examples are shipping companies, with ships registered in countries operating flags of convenience and companies reg-

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istered in separate jurisdictions with low tax rates. The questions have to be asked, `How is the nationality of a bank or securities house defined?' and, 'How fixed and permanent is any particular national identification?'

The answers turn out to be surprisingly elusive. The most plausible criterion might appear to be ownership, in that a company owned by British people should presum- ably be under ultimate British control. But this is not decisive, since, in the modern world of free capital flows, foreign share- holders may build up their stake and put the British into a minority. The likelihood of this outcome has been increased by the tendency for large financial organisations to seek stock market quotations in several centres.

The nationality of the management pro- vides an alternative criterion, since man- agement determines the style and perso- nality of a company. But, again, there is nothing absolute about the national status of a management team. In successful orga- nisations competing in a global market place promotion has to be based on merit, not nationality. It is quite possible that financial services conglomerates which ori- ginally had American or British executives will over a period of time acquire such polyglot management structures that their loyalties are no longer to any one country. They will feel able to relocate headquar- ters, switch operations from country to country and change the geographical focus of a marketing effort, without any emo- tional wrench from abandoning 'home'.

Many of the financial organisations which have driven the City's growth in the last few years are well on the way to becoming stateless corporations of this kind. For the architects of the post-war order the emergence of stateless corpora- tions could be seen as fulfilling their most ambitious goals. As such organisations become more numerous and important, old rivalries based on nationality will be replaced by more specifically commercial tensions based on the contrasting intensity of regulation in different centres.

The idea of warfare between Britain and Germany, or the USA and Japan, is, of course, already preposterous. Over time military antagonism between nations will become literally absurd as the separateness of nations breaks down and eventually becomes meaningless. As part of this process, the post-war multilateral organisa- tions may have to assume more functions as impartial arbitrators of disputes. In- deed, it may not be too Panglossian to argue that the logical culmination of the effort to create a level playing field in banking may be the creation of a supra- national body, similar to the GATT and the IMF, to act as a worldwide regulatory body for financial services.

Tim Congdon is chief UK economist at Shearson Lehman Brothers