I know we're in a rainstorm and it's hard to believe the sun will come out again, but it will. But the benefits will only come to those individuals, companies and nations that have the wit and the balls to do something about it. Sir George Cox
Robin Bew of the Economist Intelligence Unit introduces four trends that will have an impact on the business world; the shift of power to emerging markets, ageing populations, the energy economy and availability of capital.
Tackling each subject in turn, former Design Council Chairman Sir George Cox outlines the business opportunities created by these trends.
Read the transcript below.
Robin Bew, Editorial Director and Chief Economist, Economist Intelligence Unit
We've heard a lot during the course of the last couple of days about how design and design thinking requires you to put aside your risk aversion and be experimental, and the organisers of this conference clearly have taken that to heart because they're clearly not suffering from risk aversion right now, because we're the only thing between you and lunch and this is a completely unscripted session, so I'm absolutely unclear about what is going to happen here. This is going to be like The Comedy Store improvisation session only hopefully slightly more useful takeaways.
The other thing which makes this a slightly more risky endeavour than perhaps you might see at Versailles is that Sir George has only just got off the plane from Darfur and he's promised to stand for the next 40 minutes or so while doing this, so if he disappears behind the lectern it’s just because he’s fallen asleep.
What we want to do over the course of the next 40 minutes or so – we're going to finish up at half past one – is to look at some of the big themes which we think are going to be shaping the world and particularly the business world over the course of the next decade or so, and some of those themes are issues that I discussed yesterday morning at the opening session of this conference where I was very keen to stress that we were going to experience a lot of change in the business environment, and that as a result of that strategising and building design into your strategy process was going to be vital if you were going to succeed.
Were going to look at some of those themes. Themes that I think a lot of businesses – certainly a lot of businesses that I work with– think of as threats, as problems. I'm going to talk about issues which, in many boardrooms today, people are sitting around discussing as if they are issues which are going to damage their business, hold back their top line growth, erode their profitability. I'm going to explain why these things are problems, worries, and then Sir George is going to explain why actually they're opportunities, and suggest ways in which some of the changes which we are currently experiencing around the world could actually be revenue and profitable opportunities for many of the businesses represented here in this room today.
These are the four key themes that we're going to focus on, and the first one there is the shift to emerging markets. Now what I mean by that is both an economic shift and actually a social and cultural shift as well. If you look what is going on here in Europe and you look at the US and I suspect though many of the businesses here today still generate the bulk of their revenue and the bulk of their profits in those markets, what we see are economies which are now relatively slow growing and expected to be relatively slow growing for some time.
We see countries which have far too much debt. Many businesses, many individuals carrying lots of debt, really focused on trying to pay that off. Many Governments of course carrying far too much debt as well and the threat of higher taxes, reduced public spending, less public sector demand feeding into those economies, and then when you look to the emerging world you see this growing middle class. You look to China. You look to India. You see this cohort of the population, a huge cohort with rising incomes, aspirations for consumer products increasing at a terrific pace. We saw the Tata Nano being displayed on the screen only earlier on this morning, and that’s a whole new market which is opening up there in India.
We see the strong internal demand dynamic, as economists would call it – what you might just call retail sales – and what we see is a market, an environment in which, far from being somewhere where goods are produced to be shipped off to America or shipped off to Europe, an environment where goods are produced and sold to locals who use those goods in their daily working lives, a completely different dynamic from the one perhaps we saw ten years ago.
We see very strong local businesses. So where maybe many of you out there think that when you go to China, when you go to India, when you go to Brazil a lot of the products that are on sale are made by firms and brands that you recognise, but that is just not the case. When you go to China and India and Brazil and other developing countries you see many strong local businesses with strong local brands which are doing much better commercially than perhaps Western brands are.
You see Governments which are much financially stronger than the ones that we see here in Western Europe. You see Governments that perhaps aren’t tested by the very high debt problems, that are able to intervene and spend public money to support industry and local businesses. And you see a complicated operating environment which local incumbents understand and could be successful in, but Western businesses often find very difficult and challenging.
So, on the basis of those trends, what we're seeing is this big shift in economic demand, economic focus, in the vibrancy of the global economy to developing markets in general – perhaps Asia in particular, but also to Latin America, to some extent to Eastern Europe – and that is perceived by many Western businesses as a tremendous threat to their business; a tremendous threat to their top line and their bottom line. And while they see that there may be opportunity, grasping that opportunity out there is incredibly difficult. So it sure is something that many of you are thinking about and worrying about, and Sir George is now going to explain – off the top of his head – how we can turn that into a business proposition, something that could actually drive our bottom line and top line performance, so Sir George, over to you.
Sir George Cox, Former Design Council Chairman
Thank you. That’s a hospital pass, isn’t it? Robin’s right, the world isn’t changing. It’s being reshaped. It’s being reshaped by powerful forces of which we're talking about just four here, and these forces aren’t discreet. They interact, and they interact in a way which makes the future unpredictable. Not more difficult to predict; unpredictable. You can see things that might happen. You can see trends, but we can't see the future.
When I was in the Institute of Directors we had our centenary in 2003 and we looked back and published a book, not of 100 years of the Institution – that’s as boring as anything –but 100 years of British business, and it’s a fascinating read. It’s called From Dynasties to Dotcoms, and over that period you could see companies grow, companies disappear, industries grow, industries disappear, and you could see so many organisations which had the world at their feet and didn’t recognise it because they didn’t see what was happening.
In retrospect it’s so obvious who should have taken advantage of an opportunity or seen the threat, and they didn’t. And the ability to stand back and see what's happening, recognise this, is enormously important to a business. And one thing you have to do in the current situation is recognise of all the changes taking place, the different forces, the pressures, what's permanent and what's cyclic.
Economic growth is cyclic. We may all think we've seen it. We haven’t. That same review that we did at the IoD, we looked back, and you know, we started that 100 years back in 1903 as the world’s richest nation, and yet by the time we got to 2003 the economy – the wealth of the nation – was six times larger. 600% larger. In other words we could have done everything we did in 1903 in the first, what, six weeks of the year and been as wealthy, and had the rest off if we wanted to stay the same.
It was predicted before this current economic crisis that the world’s economy would grow, would double in the first 20 years of this century. Now it’s been put back. It might be the first 25 or 30, but there'll be more economic growth in the coming years than we've ever experienced, and it’s driven not by Governments and Government decisions, it’s driven, I think, by two things. One is sheer enterprise at corporate level and individual level everywhere. It’s a human characteristic. People looking for opportunity, and if you know don’t look for it, somebody else is.
As Robin mentioned, I'm just back from Darfur with a humanitarian charity and I went to one of the displaced persons camps. Very desperate in many ways, but you go around, there's 100,000 people living in this camp in the desert, unable to go outside, but believe me, they're not sitting on their backsides. You see little enterprises going up everywhere. Little ways to make life a little bit more tolerable for themselves and everyone else. Enterprise is a human characteristic.
The other one is technology. Technology generates wealth in two ways. It makes things more efficient to produce, whether it’s food or a product, and it brings prices down. Things which would have measured as unattainable a few years back are everyday now. I know when I was in business back in the early '80s, the company I was with; I said can we get a colour printer? We looked at it, £80,000 was too much. Nowadays, you know, they give it for free if you promise to buy the ink. So those things move forward, whatever we do. So economic growth will return, but what’s happening is we are seeing a shift in the world.
The question is where does that wealth really get generated and who really benefits most from it? This economic shift is permanent. We are seeing the world reshaped in terms of economic and political power which goes with it. It was the reason behind the Cox Review that I did for the Chancellor of the Exchequer as he then was back in 2005, 2006, and the concern is this: We've always known that the developing nations – as we rather patronisingly call them – would take over many of the jobs in the world. They're much lower cost based and their lack of restrictions and regulations. They were going to take away all the lower skilled jobs because they can weave cloth and bash metal cheaper than we can, but that was fine because the advanced industrial nations like ourselves were going to keep all the high skilled jobs, the high value added jobs, the professional jobs, the high technology jobs. Which is a lovely scenario, and totally unrealistic.
Why should China which for 18 of the last 20 centuries been the most advanced nation in the world with regard to both technology and, you could argue, culture want to be the supplier of low grade labour to the rest of the world? It would make no sense. And we've heard this morning – I think Jonathan Sands mentioned it – when you go to such countries, the figures on what they're putting into education, research, indigenous design capability, building up a highly skilled workforce; very impressive statistics, but what really hits you is the attitude, the belief in tomorrow, the belief in the future, the long term view and the issue it gives us, and indeed I say the other nations of Europe and North America, is in such a world, how to earn a living.
There is nothing we can do cheaper than anyone else, and unless one takes advantage of one’s creative skills of which we have an abundance – and that’s not being jingoistic – unless we take advantage of skills and apply them more to our products and services and what we offer we end up a theme park. We show people around the town and the palace, period, and talk about the old times. It’s as stark as that. We have abundant creative skills. Abundant. It’s recognised around the world. Whether you talk about product design, you know, Johnny Ive designs the iPod, or you talk about architecture, fashion, many aspects of the media. Tremendous creative skills and we don’t make enough use of them.
That’s the challenge for us, and that was what was behind the Cox Review, so the world is going to generate enormous wealth over coming years. I know we're in a rainstorm and you can't believe the sun will come out again, but it will, but that wealth will only go... the benefits of it will only go to those individuals, companies, nations which have got the wit and the balls to do something about it, and that’s the challenge we face, and that’s true for companies.
Markets will be enormous and new. The question is, do you take advantage of them? And too often the major incumbents don’t take advantage of it. The major market occupiers miss the opportunity. It’s so clear. If I'd have sat here with you ten years ago and we’d have talked about the internet and I'd have explained what it did because I'd read about it and you hadn’t, then we could have had a brainstorm; what sort of things could you do with this? Well, one obvious one is auctions, and so who would take advantage of this? Sotheby’s? Christies? Phillips? No, eBay. And on the back of it you’ve had PayPal, a huge, huge opportunity. It was an opportunity for the auction houses and for things like stock exchanges and the financial institutions.
Transferring money with PayPal is so much easier than the old ways of doing it. We've had major opportunities which came along, and then, out of the blue it was obvious that they must come. But the major incumbents were too busy looking at existing business, their cost base etc, all the things we've heard about, and they miss it. Huge opportunities, so the message really is, unless one’s looking for these opportunities and you’ve got the... you're bold enough to do something about them you're going to be part of history.
Robin Bew, Editorial Director and Chief Economist, Economist Intelligence Unit
Okay, well talking about being part of history brings me to this second big challenge I think that we're going to face over the next ten years or so, and that’s something which is going on in Europe, and that’s the aging of the population that we see here in this part of the world, in the UK, but more broadly across the whole of Western Europe and indeed Eastern Europe as well.
If you look at what's happening, I mean, Sir George was talking about the possibility if we don’t sort ourselves out in this economy we may end up like a theme park or go around talking about the old days. Well, I guess the picture of Europe that I'm about to sketch out is one where a theme park perhaps would not be particularly popular. I think talking about the old days is a bit more realistic, because we're in an environment where we have a population demographic in Europe at the moment where the average age is rising very quickly. The dependency ratio is also rising very quickly, so the number of people who are working, who are able to pay taxes to support people who are not working is dropping away.
The number of people who will have to be earning and the amount of tax you would have to pay to support the National Health Service in this country, the pensions, that sort of thing, is becoming more and more burdensome, so supporting our Welfare State, supporting Healthcare will be a task which falls to a relatively small cohort, that the workforce is aging, so it becomes an imperative for businesses to find ways to engage with our older workers, and perhaps it’s been traditionally the case in the past. Consumer trends are switching as a result of all this.
As the population ages what you see is gradual changing in taste, gradual changing in shopping habits, and that of course impacting on many industries which make products to be sold in Europe, and recruitment patters are having to differ as well, and businesses are going to have to take on the challenge of adjusting to operating in an environment which is actually quite different from the baby boom boosted environment that we experienced over the last 20 years or so, to one in which the demographic of the consumer and the workforce looks very, very different. So, Sir George, how do you recommend that businesses go about taking on that particular challenge?
Sir George Cox, Former Design Council Chairman
Well, I'm very sensitive to this one, the aging issue. Each morning I... I picked up some time ago now one of these senior cards for rail travel, which is excellent. I mean, you actually get a third off. The embarrassment is when I turn up at my local station I get a ticket and there's usually a queue behind me, and I give the ticket to the man and I say, 'A travel card for the day please, London,' and the senior card thrown in, and he always says, 'Right, one travel card with a senile card thrown in!' – which the rest of the queue thinks is rather amusing.
A big shift here in demographics, and it changed the pattern of life. There was a time when we educated people, only a generation back, until they were sort of mid, late teens. I don't know, a few percent, one in 20 we let go in higher education. People would work then until they were 65 or 70, and then retire and do the decent thing. They’d pop off after just a few years to stop being a burden on everyone else.
Now we educate people into their 20s. People retire earlier and live much longer, and that’s a big issue, as you say, in terms of pensions, and we're in denial. We're just not facing up to it. We think the pension crisis is all to do with the Stock Exchange. Nothing at all. You cannot have people working for that portion of their life, putting so little away for later years or providing for education for the young and sustain a continuous standard. A big problem for society which we're not tackling.
A number of things which will come up here which I think do give great opportunities. Healthcare will change. At present we have a... not a National Health Service, we have a National Illness Service. You go to your doctor when you are ill, when something’s wrong. Increasingly it’s going to change into ensuring people lead healthy, active, high quality lives, and that’s a great opportunity. A great opportunity there.
I think it will also affect things, obviously, like fashion. I mean, my granddad, the clothes he had was his old clothes, you know? He didn’t sort of go out looking for fashion, and we have changed. I mean, my granddad, when he was my age he was old, you know? He’d grab his stick and shuffle down to the [unclear]. I'm not kidding myself, I go on down to the gym and if I don’t go I feel bad. We changed, and there's markets there to be spent upon.
I think of changed things, like you might think of universities. An awful lot of people in their 50s and 60s will go to university. That’s the time when you really are interested in all those subjects and will do it, and universities worry about falling numbers; who could afford to come. A huge market there, so there are great markets as the whole pattern of expenditure and what people want changes. Providing leisure facilities, education facilities, health support for this aging population is a great opportunity.
It’s also a good opportunity in terms of employing people, but that’s a wider issue.
Robin Bew, Editorial Director and Chief Economist, Economist Intelligence Unit
Has anyone here been to Japan? Quite a lot of people. To give you an example of innovation around population aging, there's a company in Japan which makes nappies. Unsurprisingly there's companies all over the world that make nappies. For those of you who know anything about Japan, their aging population issue actually happened much earlier than that in Europe. I mean, in fact we we're just about reaching the point, where the aging of the population is peaking in Japan at the moment, but one of the things that goes with an aging population is the birth rate becomes very low, and that happened in Japan, and if you're in the business of making nappies... anyone here in the business of making nappies? It’s a design conference.
That’s not a good thing for your business, so you might imagine that an aging population, if you're in the nappy business would wipe you out. But one of the trends that we saw in Japan, and particularly prevalent during the 1990s, was a lot of people, elderly people, particularly elderly women; their husbands died and they were living on their own, they started getting pets, but they found pets very difficult to cope with and one of the things they found difficult to cope with was the fact that the pets messed in the house because they didn’t go out very much, and so this nappy company that we actually did some work with moved sideways into nappies for pets. And the intellectual property that they were particularly proud of was they made a waterproof seal that could go around the tail. But as a result of that of course they prospered, so this is meant to be a conference about design and innovation and that’s a very good example – and a real one – of a company that faced a very difficult changing demographic that you might have assumed would ruin their business, and actually turned it into a profitable niche that they could expand into. And of course I'm sure they're going to be expanding into Europe unless someone who makes nappies over here does something about it.
Sir George Cox, Former Design Council Chairman
It relieved, Robin, by the way, I thought when you started talking about aging population you started on nappies, so I thought you were implying a problem that I don’t have.
Robin Bew, Editorial Director and Chief Economist, Economist Intelligence Unit
I would have done, but not with you on stage. We're going to move on to something much more straight-laced. Carbon pricing. We've talked a lot over the course of the last couple of days about sustainability in the environment, and the greening – or lack of greening, depending on what bit of the world that we're talking about – of society as being an important thing. And I mentioned yesterday that I felt that at some point we were going to have to see carbon pricing become a more serious force in terms of driving business decisions than has been the case up to now, and I genuinely do believe that this is something that we are going to see.
The European Union has a carbon pricing strategy. At the moment it doesn't really have any bite but we think that is going to change over the course of the next decade or so. Australia is in the process of passing something too, and ultimately I think you're going to see something rather similar in America. So we're likely, over the course of the next decade or so, to be in a situation where the price of hydrocarbons – so the energy forms that many of us would regard as traditional – is going to start to rise.
At the same time some of the innovation, including innovation business companies here in this room, is going to mean the green energy costs start to decline or continue to decline. But nonetheless – and someone, I think a questioner in the audience, pointed out yesterday – that it seems quite likely that for the foreseeable future green energy will be more expensive than the dirty polluting sort, and yet the dirty polluting sort is going to be quite heavily taxed, so as a result energy intensive activities are going to come under quite a bit of pressure, and we're going to see businesses under quite a serious financial imperative to economise on energy or perhaps to relocate to places where energy taxes are not so burdensome. So we're going to see competition for where you locate. We're going to see international competition for products perhaps made in countries where the energy standards are rather laxer, and of course we are already seeing quite significant change in public attitudes towards buying products which are made in ways which either are viewed as being green or perhaps not viewed as being green.
I think PACT was a very good example of how consumer trends and changing shifts in consumer attitudes actually can create whole new markets, but equally, of course, can damage incumbent businesses as trends start to shift. So this idea that energy will become more expensive, that energy efficiency will become a much bigger theme for companies, the international competition aspects of that floats out, and the way that consumer trend will change as a result all presents challenges to businesses. And Sir George is now going to explain how you can turn those to your advantage.
Sir George Cox, Former Design Council Chairman
We're still... I think although we talk about it, we haven’t really recognised this, one of the things that’s coming, it’s all too obvious but really hasn’t altered behaviour nationally, corporately, individually. We're awash with energy. The only issue with energy is the cost of accessing it. There are sources of energy in the world of all sorts are tremendous, and way beyond what we need. It’s a question of the price of accessing it and using it, and we waste in on a huge scale.
Go through London at night and, you know. I don’t know about you, but at home we turn radios off, but go through London at night and see the whole city lit up. And every major city is the same. I flew over Doha last night; the whole thing is brightly lit. Every major city is completely lit up all night. We just don’t recognise it yet, and the thing that’s going to change it is availability which will come about; the effect on price which will affect behaviour; but also society’s attitude. Society’s attitude is very powerful.
I mentioned, to just give you an example of how attitude changes and you don’t recognise it at the time, but it changes markets. When we had that 100 years at the IoD we had a conference celebrating 100 years. A big conference in the Albert Hall. We had one every year. What we did; we had a... between the speakers which included Margaret Thatcher, Buzz Aldrin, great people who had a big influence on life, and we had clips of previous conferences between the sessions, and that went back a few years.
You had things like Joel Ratner bringing his company down. You had Dick Clark talking about the end of apartheid. If you went back beyond that of course you didn’t have video clips, you took photos. But if you went back to the '50s and early '60s you couldn’t get a photo of anyone... a reasonable photo of anyone other than the first speaker of the day. Do you know why? The Albert Hall was full of smoke. Every delegate had a pipe or a cigar. Now you try lighting up in a theatre. I mean, the world would end. But that’s it, society’s attitudes changed, totally.
At the moment we haven’t changed out attitude to energy. With my car, I'm vacillating now between being embarrassed about it and being proud of it. It’s a green car, metallic green that is, with a 4.2 litre engine and I hardly use it, you know, it’s basically stuck outside the house. That’s going to have to change. We will get to a point where behaviour we find acceptable today, corporately or individually, will change. And at that point I think then we'll see the markets for energy efficient vehicles, devices, new sources then becoming more acceptable coming about. It represents again many, many, many opportunities as attitude changes, but you have to tune into the change attitude I think, and it’s only just starting.
Robin Bew, Editorial Director and Chief Economist, Economist Intelligence Unit
I think you have to be prepared. I mean, everyone remember Steve Evans yesterday? He’s the man with the skip and the brick. He also put up some slides about Toyota and I guess Toyota is interesting because of course at the moment it’s getting some terrible press. And you could think that they have been damaged, perhaps almost irretrievably, by the news that their cars don’t stop when you push on the brakes. But actually the slides that Steve put up about Toyota weren’t anything to do with that.
They were actually about Toyota’s energy consumption and the wastage rates in their plants and how they had managed over the course of the last decade or so to get to a situation where nothing from any of their factories, I think in the UK, was ending up in landfill anymore. And clearly that’s not the case for many other of the world’s major automotive producers, and if you think that this carbon pricing is going to be a real trend over the next decade or so, think what an advantage that must give a company like Toyota over other car companies that perhaps are not in that strong position and have all that work still to do. So I think it’s quite interesting, if you believe in these long run structural trends, to think about companies that perhaps today you might imagine perhaps are floundering or not heading in the right direction but actually structurally are well positioned to take advantage of some of these trends and profit from them. So I think that’s an interesting example of how the current news flow may distract our attention from the fact that perhaps, given this particular trend, Toyota’s well set up for a future where energy becomes more expensive.
Now the last thing I want to talk about is a lack of capital, and I mentioned this yesterday and it’s come up a couple of times during discussions and the Q&A. Because over the last decade or so capital has been pretty abundant. I mean, if you look specifically at the UK market – but actually this is generalised, it’s across certainly much of Europe and North America – getting hold of capital was very easy. In fact, as we now know retrospectively, far too easy, so for individuals borrowing became a very straightforward activity.
Back at the beginning of the decade, it you wanted a mortgage here in the UK it was viewed as prudent for a bank to give you a mortgage of about two and a half times your annual income. At the height of the boom it was easy to get a mortgage of six times your annual income, and for perhaps 110% of the value of the property you were about to buy. So capital for an individual’s perspective became abundant and you saw it in other forms of credit, consumer credit. I mean, of course we were all on the wrong end of a myriad of letters popping through the letterbox offering you new credit cards with enormous credit limits, and people took advantage of that so it was easy for individuals to get hold of cash, and for businesses too.
It was very easy to borrow. Banks were very, very willing to lend. Tremendous bank lending into the corporate sector, but also other forms of capital raising. You saw bond issuance rising very significantly. It was very cheap to issue new debt onto the international bond markets. It was very easy to raise equity, so we saw an enormous amount of share issuance going on as well and equity prices rising very quickly. It fuelled a whole number of trends; the takeover boom that we saw, the private equity buyout boom that we saw, all credit fuelled, and one of the issues that companies didn’t really ever have to worry about was where were they going to be able to borrow the money to do the things that they wanted to do.
Borrowing money was easy. Borrowing money was so easy that many businesses actually forget that they needed to have a business plan for the asset they were trying to buy. Borrowing money was actually very straightforward, but that has changed very, very significantly. If you look at the core of the financial sector; if you look at the banks, we all know that banks have been very, very greatly weakened. So banks no longer have the balance sheet that they once had, so their ability to lend s greatly weakened. And even if they wanted to lend, many private companies and many individuals don’t want to borrow anymore. They're constrained because they already have far too many debts, and of course leaning in over the top of all this is the Government in the form of the regulators who are pushing on the banks not to advance credit in the way that perhaps they were in the past, so it’s becoming much more difficult to borrow.
Of course, the one entity which is still borrowing a lot is the Government, so here in the UK, but also in Europe and America, you see the Government borrowing much more. And that of course makes it hard for anyone else who does want to borrow and to borrow as easily as perhaps they would like. It pushes up interest rates, or it will push up interest rates over the course of the next year or so. The public sector, what we call, crowds out people like us from the borrowing markets.
Equity market issuance, getting away share issues is going to become harder because profitability in the rich world is going to be under pressure. And yet at the same time, if you look to emerging markets, of you look to places like China or you look to places like India or you look to places like Brazil, for companies which are based there, what they find is that capital is actually abundant. It is not very difficult for them to get hold of money. These countries often run big trade surpluses, there's lots of liquidity sloshing around. So if they want to borrow, if they want to get cash to back their investment plans, that’s relatively straightforward. But for us here in the West, much more difficult.
That of course means that there needs to be a complete rethink about how we organise our strategies, because the cash that was there to mean that we could put into effect some of those grander plans simply won't be there anymore, and yet some of our competitors which are arising from China and India and everywhere else will have the funds to do some of the things that perhaps we would have wanted to do ten years ago. So that’s clearly a pressure, but is it also an opportunity? Probably not.
Sir George Cox, Former Design Council Chairman
It’s a big issue, but unlike the other three we discussed, Robin, this one is to some extent cyclic. I don’t say we'll go back to the era you’ve been talking about where I think money was thrown at you and thrown at people very unwisely. I don’t think we're going to go back to that, but at the same time I think we will see a freeing up of capital over time.
Many issues here, though, still aren’t fully recognised or understood or dealt with, for example the mortgage market. The most aggressive but most successful mortgage company was the first to go down, which was Northern Rock. Northern Rock was profitable and was actually well covered in terms of loan-to-book value, so it was secure lending. Lending it’s house has got to be as secure as any you can do, and for all the talk of the very high mortgages – so the loan-to-book value, about 60%. In other words the market could fall by 40% before Northern Rock wasn’t covered.
What brought them down was that they were funding the majority of their mortgages not by retail saving, people going in and putting money in, but by borrowing huge chunks of money on the world money markets, and why not? You're borrowing at a lower rate than you're lending at and you are rolling these over perhaps every three months, six months, two years – borrowing in billions at a time. And then because of the problem in America that market closed overnight and Northern Rock couldn’t pay the debts coming up, and that rolled on and we saw other companies brought down the same way and the crisis rolled.
Now that kind of funding of mortgages was funding about two thirds of all mortgage lending in this country. That’s been shut off and it hasn’t come back. And until it comes back – or until those sources are open again – we will have restriction on available mortgages, period, and that’s not addressed. And then you’ve got the Government saying to the banks, 'You're reckless lenders.' Fair enough. And then they turn around and said, 'But you're not lending to small businesses.'
Well, lending to small businesses at a time like this is pretty risky lending. You can't have it both ways, you know. Are banks there for social engineering, to do national good, or are they supposed to be cautious? So we still haven’t sorted out these issues and problems we've got. It will take time. And so what we see at the present is there's great risk aversion to lending and there's even more short termism as before, and short termism is a systemic problem we have here as well, so I think it will change but it won't change quickly.
It will change because, as I said earlier, economic activity will generate wealth and the money generated must go somewhere. So it will return, but not quickly. So in the meantime it gives smaller companies a lot of issues and problems in borrowing, and there's not a simple answer to that. There are answers in terms of how you fund things. For example, a company I headed up some time ago was a consulting research company. And assiduously in consulting and research we set up a programme where people paid by subscription to be kept up to date. That was terrific because the faster that grew the more cash you had. Thinking how one imaginatively funds the business from such sources I think is one avenue. Also the kind of things that David spoke about are a quite healthy outcome of this.
You know, there was a time when we threw money. We threw money thoughtlessly. Investment which I could argue for but was wrongly applied to things like health. We raised enormously. And the attitude would have been for instance you go back a few years; you’ve got a problem of cleanliness in hospitals? Get a few hundred more cleaners. No, it isn’t. It’s tackling the source of dirt. So there's some positive things coming out of this, it’s forcing people to rethink. I find this at the university environment. We have to rethink. When capital is freely available we waste it. So I think there are some healthy aspects to this too, but it is tough, and it’s tough for small businesses at present, and there's not an easy answer. Robin.
Robin Bew, Editorial Director and Chief Economist, Economist Intelligence Unit
I think, just to finish off, because we've explored these four issues; these are issues that I came up with which I thought might be big themes for everyone over the course of the next decade or so. It’s quite interesting to see which ones of these resonate with you so we have a vote on this, so if we could just put up the slide for the vote. There we are. Which one of those that we were talking about do you think is going to have the biggest impact on your business over the course of the next five years or so? So one for emerging markets, two for aging populations, three for the energy economy, and four for the availability of capital. Which one is going to be the biggest headache for you? So if we just start the timer and you can vote.
Emerging markets. Very good for my business, that’s what we advise on so I'm very pleased about that. I'm not going to go into the questions, but someone has texted in should we all go and live in China or India? I don’t know who that was. It’s an interesting way to address the challenges that we may be facing. I suspect that it’s not an option that is open to everyone, so for the rest of you, the ones that aren’t quite so footloose and fancy free, I wish you all the very best of luck with your design, strategising and innovation. And I hope that when we next get together, maybe next year, some of these challenges will look more addressable than perhaps they do at the moment.