Canny investment has given us an edge in the global economy

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The Independent Online
Last year the world's largest debtor, the United States, fell further into debt; and the world's largest creditor, Japan, piled up even more assets. That is the principal conclusion of the latest survey by the Bank of England, published in its Quarterly Bulletin, of the net asset positions of those two countries, plus those of Germany, France and the UK (see graph).

In one way this is unsurprising for it largely reflects the different current account positions of the two countries. The balance of payments has, by definition, to balance, so any large current account deficits have to be covered by corresponding capital account surpluses. Balance of payments statistics are notoriously unreliable, but no one doubts that the US has been running large deficits, while Japan has been running similarly large surpluses. It would be very odd if the US debts were not becoming ever deeper and Japan's assets ever greater.

But there are two wrinkles to this smooth, rational picture. The first is that the US debts are not increasing as fast as one might expect, given the size of the current account deficits, and the Japanese surplus on assets is not rising as fast either. Last year the US deficit was $156bn, but its indebtedness rose by only $136bn; Japan's current account surplus was $130bn but its net assets rose by only $78bn.

The other wrinkle is the UK, for we have been increasing our net assets despite running a current account deficit. Last year we were just in current account deficit, but managed to increase our net assets by $8bn.

There is a simple explanation for this, but one which leads to a complicated conclusion. The explanation is that changes in net assets are affected by changes in relative exchange rates and by the relative investment performance of the portfolios. Japan is the prime example here, for the net assets are only about half as large as they should be given its current account performance. Buy an office block in Los Angeles at the peak of the 1980s boom at Y300 to the dollar, see the capital value in dollar terms halve, and then translate back to yen at Y100 to the dollar and you have a catastrophic investment. It is not to denigrate the valuable investment which Japanese companies have made in overseas plants to say that, in general, Japan's surpluses have not been well handled.

The UK is the other extreme. As the graph demonstrates, we managed to build up substantial surpluses during the early 1980s, when, thanks to oil revenues, we ran sizeable current account surpluses. Then we blew it all in the grand splurge of the late 1980s boom. Now, despite still running deficits, we have managed to creep back to a modest surplus, $28bn at the end of last year, partly a function of sterling's depreciation, but partly canny investment.

The rise of UK earnings from foreign investments is charted on the right- hand side. In three years we have pulled up from bare balance to a surplus last year of more than pounds 10bn, though things have fallen off in the first part of this year. The main component - the big plus number - is the surplus on direct investment: the revenue from overseas plants owned by British companies, less what we pay to foreign companies for their plants here. Last year we received pounds 22bn and paid out only pounds 9.5 bn.

That is the explanation. Now for the conclusion. Think back about the ways in which countries thought of their competitive advantage 20 years ago. We would have talked in terms of our ability to make the most of our various export industries, and how we might counter the competition from overseas in our less successful ventures, such as motorcycle manufacture. If we were daringly modern, we might have included service industries such as finance and tourism in our tally.

But thinking of the world in national terms seems less and less relevant. Nowadays manufacturing technology crosses national boundaries in a matter of weeks, large companies have plants in every major market, multinationals own brand-named businesses that have nothing to do with the notional- nationality parent, and the shares are owned by people in other countries. Surely in those sorts of immensely international worlds running a successful economy is much more akin to running a portfolio than it is to managing a factory.

This is particularly relevant to the UK. We run a very open economy in that we have very little resistance to foreign ownership of our national brand-names. As a result of this open attitude, the stream of high-profile takeover bids for British assets, and the rash of Japanese plants established here, we tend to think of ourselves as being the recipients, even the victims, of this great swirl towards a more international economy.

If you look at the figures, we have managed to play our weak hand of cards sufficiently well to rebuild a modest stock of net assets, and our overseas investments are bringing in a solid running surplus each year.

It would be silly to push this argument too far. The world economy may be becoming more international, but national performance will still matter. Running a national economy successfully needs more than clever portfolio management skills. But there are, I think, two important messages in the figures.

The first is that the willingness of a country to save will become a more and more important contributor to national performance, for as a result of its inadequate savings even a country with the many human and technical assets of the US has plunged into debt.

The second is that an increasingly international economy gives great advantage to countries with a strong and internationally oriented financial sector. You have to earn a living in the first place, but once you have built up some wealth, you can gain great advantage from managing that wealth in a sensible way.

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