How smart regulation creates growth

On Thursday I gave a speech to TheCityUK - the trade body for the UK's financial services industry - about the importance of smarter regulation in driving growth. You can read the whole speech here: https://www.kemibadenoch.org.uk/news/thecityuk-international-conference-speech-how-smart-regulation-creates-growth ?or an extract is below.

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One of the books that has most influenced my economic and political thinking is called ‘Why Nations Fail’ by Daron Acemoglu and James Robinson.

It gives a lot of historical and contemporary examples of what nations did right and wrong all around the world, that explains why they are the way they are today.?

And one of the most interesting points the book makes is that “England was unique among nations when it made the breakthrough to sustained economic growth” and “it is not a coincidence that the Industrial Revolution started in England a few decades following the Glorious Revolution of 1688”.

Since we are here at TheCityUK, the sections on the growth of the UK’s financial sector, are particularly relevant.?I’m not here to give a history lecture, but it is interesting how the authors describe how financial services in England exploded after the Glorious Revolution and the changes brought in.

Monarchy is bound by the rule of law, including repaying its debts and this certainty that’s given to business, as it was then, changes the economic game.

Interest required on the national debt fell, private lending surges, the stock market grows rapidly, financial services takes off, property rights become embedded and eventually we have more than a social and economic?revolution. We have an industrial one.

I skipped quite a lot in between that but I know you all know that this is true just as well as I do.

But these changes spread around the world, sometimes freely sometimes not, but eventually they do lift billions out of poverty and lead to unimagined wealth globally.

Wealth we still see today.

So it worries me when I hear people talk about the wealth and success of the UK as being down to colonialism or white imperialism or privilege or whatever.

It matters because if people genuinely believe that the UK only grew and developed into an advanced economy because of exploitation and oppression, then the solutions they will devise will make our growth and productivity problem.

It matters in other countries too because if developing nations do not understand how the West became rich, they cannot follow in its footsteps.

And it matters, when as your Trade Secretary I go to the World Trade Organization Conference negotiating on the UK’s behalf and some of my counterparts spend the entire time in meetings talking about colonialism, blame the West for their economic difficulties and make demands that would make all of us, not just in this country but around the world, poorer.

And it matters for you as financial and professional services companies. A lot of regulation is because people don’t like financial services in particular. I remember this even from when I was working in banking. They don’t like financial services, they don’t trust it, and they don’t believe that you create wealth.

I believe in the social value of financial services, in particular, because I know what it is like to grow up in place that doesn’t have that strong system, that doesn’t have the deep capital pools and doesn’t have access to finance, the liquidity and there’s no reliability. The reliability a stable financial sector brings for investment and growth to deliver infrastructure to make people’s lives better is phenomenal.

The understanding of where wealth comes from, of institutions and of culture matters when we consider our economic policies now.

We do well when we operate by certain principles. That bureaucracy is minimal. That Government should do a few things well, not intervene constantly and inconsistently.?

That rules are clear and simple. The rule of law should not be rule by lawyers.

These ideas paved the way for the greatest expansion of wealth the world has ever seen.

We perhaps have not stood up for these ideas as often or as much as we could.

There are always progressive reasons to add new complexity, new rules, new interventions. And there are an increasing number of people whose jobs consist of enforcing these new complex rules.

Of course, there must be a set of laws to prevent fraud. To allow enforcement of contracts between individuals and companies. And in financial services, to provide an adequate capital buffer in the case of wider macroeconomic difficulties.

But sometimes it feels as if in Western countries the balance has tipped too far in favour of the bureaucracy and against the individual consumer, entrepreneur and the innovator.

Let’s take financial services again. Andy Haldane pointed out that in 1980 the UK had one regulator for every 11,000 people in the financial sector. That went down to one in every 300 by 2013.

These changes are global. The share of workforce and revenue around compliance has risen steadily to about 10%, according to one estimate.

Regulation has moved from protection against fraud and systemic failure to everything from diversity to green finance.

This ever-rising tide of micromanagement will not necessarily make us, or the financial markets, stronger.