Herramientas CASE

93 manufacturing industries and in its general sales. Such increases in investments also contributes to the growth of the finance sector through the borrowing, lending, liquidity and credit activities involved in investment. This growth in investment and the finance sector increases human capital development and economic growth. There is also an increase in employment especially in resource extractive industries, transportation and manufacturing industries. Human capital development is increased and developed with the training and education on the exploitation and management of natural resources, and in turn reduces poverty as trained people would be able to work and look for ways to alleviate poverty both at the micro and macro level. Poverty reduction is enhanced through all the channels effects (from fig 4) and also independently, especially the rural poor who are more reliant on agricultural resources.

In the UK, Natural resources are playing a vital role;

• The agricultural resources (food sector) alone contributed £97.1 billion or 7.4% to national Gross Value Added in 2012, and 3.6 million or 13% of national employment in Q3 2013. Total Factor Productivity in the food sector (excluding agriculture) stabilised in 2012 having risen gradually since 2002. The beverage industry is the largest manufacturing group with a GVA of £5.3 billion in 2012; Alcoholic beverages contributed £4.1 billion (77%) of the total beverages GVA in 2012. Also the total value of exports from this sector rose to £18.9 million in 2013 which was £6 million up from 2005 (DEFRA 2014).

• The Energy sector’s contribution to the UK economy in 2011, was estimated to be

£89bn (the total direct contribution of the Energy sector to the UK economy’s GDP in 2011 was £20.6bn; the direct and indirect contribution was approximately £86bn) (Ernst & Young, 2012). Also the Energy sector’s total employment impact to the national economy in 2011 amounted to 137,000 full time and part time jobs, an increase of almost 9,000 jobs compared to 2010. Direct employment grew from 83,000 to 137,000 between 2008 and 2011, with growth of 6% between 2010 and 2011 (Energy UK, 2012). The indirect employment benefit is over three times the direct benefit, bringing the total number of jobs supported by the sector to around 655,000. Capital investment in the Power & Gas sector was in excess of £10bn in 2011 (Energy UK, 2012). Between 2007 and 2011 £43bn was invested in the Power & Gas sector. The

94 total direct contribution of the sector to the UK economy in 2011 was £20.6bn (ONS 2014).

• The oil and gas sector provides a source of employment for over 400 thousand people across the UK (45% Scotland and 55% England, Wales and Northern Ireland) (Oil &

Gas UK Economic Report 2012), is Britain’s largest industrial investor and is investing more than ever before (£11.5 billion in 2012 and DECC forecasts investment of £14 billion in 2013) (DECC 2012), meets almost one half of the UK’s total primary energy needs, boosts the balance of payments by almost £50 billion a year, according to industry estimates, by reducing oil and gas imports, and by exporting goods around the world and has a strong domestic supply chain that has seen revenue growth each year since 2008, reaching £27 billion in 2011 (Ernst & Young 2012).

After examining the link between the availability of natural resources and the economy as a whole, the next section will examine the role of the most important part of the economy; the finance sector. The section will begin with an overview of the UK economy and then the role of the finance sector in an economy like that of the UK.

3.3. The UK Economy and Finance Sector

The UK has one of the most globalized economies, comprising the economies of England, Scotland, Wales and Northern Ireland. The economy of the UK, like any other economy comprises the primary sector (agriculture), the secondary sector (construction and production) and the tertiary sector (services) (ONS 2011). It was the 6^th largest economy worldwide in terms of GDP and 8^th in terms of the purchasing power parity in 2012. The British economy was boosted by North Sea oil and gas production and its reserves were valued at an estimated

£250 billion in 2007 and in 2012 the UK was the 10th-largest exporter in the world of produced goods (mainly automotive products) and the 6th-largest importer of natural resources especially natural gas (UK Gov 2013) .

The UK economy is presently recuperating from a recession arising from the financial crisis of 2007/08, and as of the first quarter of 2014, its GDP remains 0.6% below its pre-recession peak (ONS 2014) and fell further to 0.4% in the first quarter of 2016 (The Guardian 2016);

also the UK has experienced a deeper downturn than all of the G7 except Japan, and has equally

95 experienced a slower recovery than all but Italy. However, in 2013, the UK experienced its fastest growth since 2007; it is now the fastest growing major developed economy. It has also been suggested that the UK will become the 5th largest economy by 2016, suggesting fast growth in the UK economy throughout the forecast period. Government involvement in the British economy is primarily exercised by HM Treasury, headed by the Chancellor of the Exchequer, and the Department for Business, Innovation and Skills. Since 1979 management of the UK economy has followed a broadly laissez-faire approach. The Bank of England is the UK's central bank and its Monetary Policy Committee is responsible for setting interest rates.

The currency of the UK is the pound sterling, which is also the world's third-largest reserve currency after the US dollar and the euro. The UK is a member of the Commonwealth of Nations, the European Union, the G7, the G8, the G20, the International Monetary Fund, the Organization for Economic Co-operation and Development, the World Bank, the World Trade Organization and the United Nations.

The service sector dominates the UK economy, contributing around 78% of GDP, with the financial services industry particularly important (Cribb 2013) adding a gross value of

£125,363 million (9.4% of total value added) to the UK economy in 2011. The UK's exports of financial and business services make a significant positive contribution towards the country's balance of payments.

Theoretically, the finance service industry is a group of organizations, credit unions, banks, credit card companies, insurance companies, accountancy companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises that manage money and provide financial and economic services. The finance sector is the most important part of the economy especially highly developed economies like that of the UK, providing a link between organisations needing capital and those looking to invest. Though the number of organisations operating in the financial services industry is wide and varied there are two distinct sectors in financial services, the Wholesale and Retail sector. The wholesale sector comprises; international banking, bond markets, equity markets, foreign exchange, derivatives, fund management and insurance (major corporate and risk sharing insurance). The retail sector, on the other hand, includes; retail banking (commercial banks), pensions, investment services and financial planning/advice (CISI 2013).

96 The financial system is essentially important to the functioning of the economy as a whole;

how well it works is a key factor to how the rest of the economy functions (Baily & Elliott 2013). The financial sector rallies savings and distributes credit across space and time. It also provides not only payment services, but more importantly products which enable firms and households to cope with economic uncertainties by hedging, pooling, sharing, and pricing risks (Herring & Santomero 2006). An efficient financial sector reduces the cost and risk of producing and trading goods and services and thus makes an important contribution to raising standards of living. The role of the finance sector can be summarised, but not limited to the following;

• Credit provision; Credit boosts economic activity by giving businesses the opportunity to invest beyond their cash on hand, households to buy homes without having to save the full cost beforehand, and give governments the ability to sort out their spending by moderating the cyclical pattern of tax revenues and to invest in infrastructure projects.

Thus credit is critically important to a large economy like the UK, as difficulty in obtaining credit and lack of its availability could drive the economy into a recession (Laeven & Valencia 2012)

• Liquidity provision; Businesses and households need to be protected against unanticipated needs for cash. Banks (which are central to the financial system) are the leading direct providers of liquidity, both through offering demand deposits that can be withdrawn any time and by offering lines of credit. Investors are particular about liquidity because it affects their transaction costs of trading and the length of time it takes to execute each transaction (Diamond 2007).

• Risk management services; The finance sector helps businesses and households to pool their risks from exposures to financial market and commodity price risks. Much of this is provided by banks through derivatives transactions and by insurance companies (Mishkin 2012)

The growth of the financial sector and its contribution to economic growth in the UK is usually measured by the Gross value added (GVA) by the finance sector’s net consumption. The GVA is derived from measures of the activities of wide range of firms, at the retail and wholesale level, including retail banks, building societies, investment banks and hedge funds, and are

97 wider than the activities of financial services firms. Most measures of the size of financial services therefore also include, for example, bank branches in different areas of the country (Maer & Broughton 2012). Just before the financial crisis (1997-2008), the growth of the finance sector averaged 6% annually compared to the 3% average annual growth of the economy (GDP). From the beginning of 2009 onwards, the level of output in the sector fell sharply and continued to do so even as the rest of the economy recovered. By the end of 2010, output was 10% below its pre-crisis peak (Burgess 2013).

Within the financial sector, monetary financial institutions, banks and building societies in 2006 accounted for over 55% of value added. The other 45% was accounted for by insurance companies and pension funds (around 20%) and a range of other financial intermediaries and auxiliary companies (around 25%). Table 2 below shows the various components of the finance service industry and their contribution to GDP.

Table 2 Composition of the finance service industry (William et al., 2009; Burgess, 2013)

Financial Service

Pension funds Autonomous schemes 5% 0.4%

Activities auxiliary

The above table (2) illustrates that, in 2006, the financial service sector’s contribution to the economy was 7.7% of GDP, which increased to 10.8% in 2009, shrunk to 9.4% in 2011 and

98 further to 8.9% in 2012 (Maer & Broughton 2012; Langston 2012), there by indicating a decreasing growth rate in the finance sector.

Credit provision Liquidity Risk management

Fig 5; Major Role of the Finance sector to Economic growth