UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 592-ii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

TRADE AND INDUSTRY COMMITTEE

EUROPE MOVES EAST:

THE IMPACT OF THE 'NEW' EU MEMBER STATES ON UK BUSINESS

Tuesday 12 June 2007

MR PETER DODD, MR JONATHAN PORTES and MR KEN TIMMINS

Evidence heard in Public Questions 48 - 131

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Trade and Industry Committee

on Tuesday 12 June 2007

Members present

Peter Luff, in the Chair

Roger Berry

Mr Peter Bone

Mr Michael Clapham

Mr Lindsay Hoyle

Mark Hunter

Miss Julie Kirkbride

Judy Mallaber

Rob Marris

Mr Mike Weir

Mr Anthony Wright

________________

Memorandum submitted by Department of Trade and Industry

Examination of Witnesses

Witnesses: Mr Peter Dodd, Director, International Economics, Department of Trade and Industry, Mr Jonathan Portes, Chief Economist, Work, Department of Work and Pensions, and Mr Ken Timmins, Director, Developed Market, UK Trade and Investment, gave evidence.

Q48 Chairman: Gentlemen, welcome to the second evidence session of this Committee's inquiry into the consequences of the eastern enlargement of the European Union. I understand you are a triumvirate and there is no primus inter pares among you, so I have already emphasised that it does not need everybody to answer each question. Can I, as I always do, begin by asking you to introduce yourselves, perhaps in alphabetical order?

Mr Dodd: My name is Peter Dodd. I am the Director of International Economics in the European World Trade Team at the Department of Trade and Industry.

Mr Portes: I am Jonathan Portes. I am the Chief Economist for Work at the Department for Work and Pensions.

Mr Timmins: I am Ken Timmins. I am Director, Developed Markets in UK Trade and Investment.

Q49 Chairman: Mr Timmins, we have seen you before us in the past but the two gentlemen you are with, welcome to you for the first time. Can I say that I appreciate the fact that the two departments were prepared to come together. It is certainly very helpful because the issues for this Committee do touch very much on the issues of Work and Pensions and the memorandum from the Department of Trade and Industry was very helpful so we are grateful for that. Was there any input from DWP into that memorandum?

Mr Portes: Yes.

Q50 Chairman: It was interestingly written. I was particularly struck by paragraph 32, "The large influx of Polish workers represents the greatest wave of arrivals from a single country since the flight of the Huguenots who came to Britain from France in the 17^th century". That is the kind of context I certainly appreciate as the Chairman, so thank you very much. Can I begin with a very broad brush question and then we will delve down into the details when my colleagues ask their questions later on, and I appreciate that with some of those questions more than one of you may want to join in. It is quite clear that you believe very significant benefits have flowed from the enlargement of the European Union to both the A8 and the A2 accession states. Just to give colour to this discussion and get a sense of your priorities can I invite you to say what in your judgment are the most important benefits to flow both to the UK and to those accession states, not theses on the subject, just the headline answers?

Mr Dodd: In terms of the benefits to the accession countries, access to the European market and integration into the western European economy has been a huge prize for the accession countries through a very long and difficult process of transition. I think it is well worth emphasising just how far these economies have changed in what is a relatively short period of time and without full access to the European market and the wider benefits of membership of the European Union that would have been a much slower and more difficult process. The way in which that shows itself is in a dramatic increase in economic activity, re-orientation towards new markets, away from those which broke down in the east to new ones in the west, a great deal of inward investment and effectively building not quite economies from scratch but in many cases very dramatically different from those of only 30 years ago.

Mr Portes: On the labour market side, clearly, as laid out in the memorandum, the UK economy has benefited quite significantly from the influx of typically medium skilled workers who are prepared to work flexibly to fill gaps in the UK labour market. They have contributed to increased output. That has obviously benefited not only the individuals who have come from the accession countries but also their countries in terms of the remittances, the money they send back, which has gone into developing their own countries, but also over the longer term because many of those workers have already returned to their own countries with improved skills and improved earnings potential, and more of them will return in the future and that two-way migration I think is beneficial both for the UK labour market but also ultimately for the labour markets in the countries concerned.

Q51 Chairman: Mr Timmins, is there anything in particular you want to add?

Mr Timmins: I think Peter has covered it from the UK TI point of view. I would only add that there are clearly increased opportunities for UK companies through these markets which are growing and these are opportunities in terms of both direct trade and investment.

Q52 Chairman: Can I ask Mr Portes a question which intrigues me? We were in Lithuania recently. We heard that at least 10% of the population, possibly a good deal higher, even as high as 20%, are now living in the British Isles, and typically these are people who are quite highly skilled doing low skilled jobs because the wage rates are higher in the UK than they are in Lithuania. In terms of economic efficiency that is not very clever, is it, for the whole European economy?

Mr Portes: Not as a long term state of affairs, no, but I think it is highly improbable that it will be a long term state of affairs. The relatively highly skilled people who have come here in my view over time are not going to continue to work in seasonal agriculture or bar work, just as the Australians, Canadians and New Zealanders who come here and work in similar jobs do not spend their lives doing that. Typically, migrants of that sort will either return to their home countries with improved skills, better English and all the rest of it, to contribute to the development of their country or a proportion of them will stay in this country, not working in those same jobs but progressing up the occupational ladder in this country. I do not think that is likely to be a long term issue for efficiency purposes either for the UK or for Lithuania. I think Lithuania will in time benefit quite significantly from the return of many of those people.

Q53 Chairman: Are there any significant economic downsides to the expansion we have seen in the European Union as far as you are concerned?

Mr Portes: I do not think there are any significant economic downsides on the labour market side for the UK. Obviously, there are some people who come here and find that they do not fit into the UK labour market for one reason or another and end up either not working or working in jobs that they are really not suited for so they have a bad time and maybe their employers have a bad time, but obviously when you have a large number of people that is inevitable. Overall I do not see any significant labour market downside for the UK. For the accession countries the concern that you raise in the case of Lithuania and which has been raised with me by some of my Polish economist colleagues is that it is clearly a real issue. It would be unfortunate for those countries if they continued a permanent outward migration of skilled workers with no return migration and a corresponding deskilling in their own economies. My judgment is that that has not occurred yet and, as I said in my previous answer, is not likely to occur over the medium and long term. It is clearly something they should be worried about. The answer is that they should ensure over time that their labour markets are sufficiently flexible and their industries sufficiently dynamic to absorb skilled workers locally, and I think over time, for the reasons that Peter outlined about the immense strides that they have already made, that is likely to happen.

Q54 Chairman: Gentlemen, are there any downsides you would like to highlight?

Mr Dodd: Something which is certainly a challenge for some of the more eastern economies' flow of labour, and particularly eastern Poland is one area that has commented on this, is having quite a problem in retaining skilled workers. However, there has been a quite a large degree of inward migration from countries further east and some countries such as Moldova and Ukraine have found some difficulties themselves in some of their workers moving to central Europe to take on higher paid jobs, leaving particular difficulties at home. I think Moldova is probably one country which has felt this particular hardship.

Q55 Chairman: The issue which is often discussed in the UK is the consequence on UK employment of bringing in cheap labour to this market and also the loss of jobs particularly to manufacture elsewhere. Slovakia I see from evidence is now the world's largest producer of cars per capita, which is quite a statistic as well. What would you say to that concern we often hear expressed about the impact on the UK?

Mr Dodd: Starting with cars, it is quite striking that the changes which have happened in the UK manufacturing sector over a rather longer period than that in which these countries have been part of the EU is fundamentally much more to do with globalisation and changes in the way that production is put together rather than necessarily lifting jobs out of the UK and dropping them into central Europe. In many cases the kinds of supply chains which are involved in producing products like cars involve different elements from many different countries being put together all over the world. Slovakia has been quite specialist in car manufacture and it is quite striking to see that western European car manufacturers have chosen to use it as a base within the EU. There are still some EU restrictions on car imports, which perhaps explains why quite a large number of cars are still made in the EU rather than there being greater imports from outside the Union. In terms of the evidence of the impact on the UK economy, I think the striking thing is that it has not been a zero sum game at all. It is certainly not a matter that the UK economy has shrunk and countries of central and eastern Europe have grown at our expense. It is absolutely the opposite of that. The growth which has happened over this time, particularly the employment growth in central and eastern Europe, is in areas where the UK is not particularly specialist any more. They are doing things which primarily we do not do.

Q56 Mr Hoyle: I think the Chairman is absolutely right to touch on the question of cars, but just to stretch a little bit more on that, would it not be fair to say that we are now seeing the sun setting on UK manufacturing as people have moved? You say we are no longer a specialist. The reason we are no longer specialist is that it has already moved to the former Eastern Bloc and new countries are taking up jobs and Hungary is a good example, whereas if you use Malta on the other hand what we have seen is adverts in Malta, "Come to the UK. Come and work in care homes". At the same time we are seeing our traditional manufacturing moving east. Do you not think that it is now happening that the sun is setting, or not?

Mr Dodd: I certainly do not think the sun is setting on manufacturing as a whole. I think the kind of manufacturing activities which UK firms are highly successful in are not necessarily identical to those which employed the majority of people in manufacturing 20 years ago. For example, in some sectors we are doing particularly well in design of product development in specific reaches of production, which sounds like a bad thing but in an increasingly globalised world where you have disaggregation of production to all kinds of different places it is very rare for any country to make all of anything any more and for the greatest prosperity of the UK I think it is only right that we are focusing on those areas which add value, require high skills and as a result are able to generate good wages. We are certainly never going to be the cheapest, and if we try to be the cheapest, particularly in relatively low-skilled jobs, that simply is not sustainable at the levels of income which we would want UK citizens to have.

Mr Hoyle: I totally agree we should not do it on cheapness. If we look at the strongest currencies and some of the highest wages, which are in Japan and Germany which have continued with a very strong manufacturing base, the problem we have is that ours is disappearing as we get wealthier and stronger.

Rob Marris: Is it not true that manufacturing output is in fact up over the last ten years?

Q57 Chairman: I think it is important to put on the record that one of reports highlighted that manufacturing growth has been an average of 1.2% in real terms and in Europe we have only had that for the last 20 years. It is very important that we put that fact on the record.

Mr Dodd: There has been a very dramatic process of change and with that change we tend only to see the downside in terms of where something is no longer done in the UK, but there has been an enormous growth in new jobs, the kinds of jobs which did not necessarily exist or jobs which have been installed into a much wider range of markets than was ever possible. Talking about Japan and Germany, for example, whilst they are both very large manufacturing powers, their major companies are active in globalisation in the same way that companies from anywhere else in the world are.

Q58 Mr Clapham: My question is to Mr Timmins. Last week we took evidence from the Engineering Employers' Federation and one of the things they noted was that some of the smaller companies are going even further east. Two countries that they referred to were Russia and Turkey and I just wonder if UK TI are doing anything to assist those companies that are looking to locate further eastwards.

Mr Timmins: Are you talking about companies investing in those markets as opposed to trading directly or both?

Q59 Mr Clapham: It would be investing and relocating.

Mr Timmins: Both those countries, Russia and Turkey, fall within our group of emerging markets within UK TI, where there is quite a lot of attention being paid to support for British companies, whether as investors or exporters, and quite a lot of the issues in those small companies revolve around market access and particular barriers to them, and therefore quite a lot of the focus of our UK TI activity in relation to those emerging markets is identifying those barriers and working to remove them. That is specific to those emerging markets but, of course, the whole panoply of UK TI services and support of British companies, whether it is providing tailored reports on the individual markets, that is, tailored to the company's needs and products, or whether it is providing support for the companies to visit the markets, is available for those markets as for others.

Q60 Roger Berry: It is notoriously difficult to predict the impact of enlargement on an organisation like the EU which, of course, has not prevented lots of us trying to do it, including, of course, DTI in its 2004 report. Where did you get it wrong in your predictions and why?

Mr Dodd: I think the expectation of growth in central and eastern Europe was probably rather lower in our study than has been the case in the last few years. I think there are quite a lot of issues around the sustainability of that growth in certain markets in the same way as the achievement of EU accession in some countries has enabled the taking off of the tight discipline that was needed in some economies to achieve that, with, however, the benefit of much faster domestic growth, growth in consumption, making it a happier place to live if you are a citizen of that country enjoying the extra consumption, so we probably underestimated that. The work within the DTI did not specifically focus on the impact of western European labour markets. That is obviously something the DWP were leading on.

Q61 Roger Berry: Just remind me, DWP, how good were your predictions about migration flows?

Mr Portes: We did not make any formal predictions because we commissioned an external report which did a review of the evidence using the methodology that had previously been used, which came up with the numbers which at the time many people thought were rather low and certainly turned out to be extremely low, so we did not make a formal prediction but I am certainly prepared to say that if you had forced me to pin down the number beforehand it would have been significantly lower than the number we have seen in terms of migrants from the east. Why did we get it wrong? The answer is that I know of no serious econometric models which predict migration flows very well. It is just a very difficult thing to model economically because it depends on people's individual decisions which it is very difficult to predict in this context. That is one reason we got it wrong. What things did we not take sufficient account of? Possibly the historical links, particularly with Poland, the generally good relationship between the UK and Poland - we probably should have taken a little bit more account of the fact that that would make Poles think that the UK was a nice place to come. We knew that the consequences of other countries, particularly Germany, closing their labour markets, at least in legal terms, to eastern Europeans, would mean there would be some diversion to us but we did not know how big it was and it turned out to be quite significant. Finally, on the good side, as it were, we did not know just how attractive the flexibility of the British labour market would be to the eastern Europeans and how well our labour market would respond to them and how well they would respond to our labour market, and it turned out to be a match well made, but we did not know that in advance and I do not think we could have predicted that it would have worked as well as it has in terms of employers being keen to offer jobs to migrants and them being keen to take them up. That in turn feeds on itself to some extent because there is word of mouth. People who come here say the UK is a good place to come. There are jobs, most employers treat you reasonably well and the pay is okay, or at least from the point of view of these workers it is attractive, so all that fed on itself to some extent and we certainly did not anticipate all of that, and frankly I think it would have been difficult to do so.

Q62 Mr Bone: Are you seriously telling us that the Government did not estimate what the migration figure would be, and if you had done that estimate all the experts would have been wrong? What is the point of having a department that is supposed to make trade when it has not even investigated it? Are you really saying that?

Mr Portes: It has never been and is certainly not the responsibility of the DTI to forecast on migration, nor indeed of the DWP. The research I referred to was commissioned by the Home Office with some input from us but it has never been the case that the Government, any government that I am aware of, has made forecasts of overall migration flows, either in total or from a particular country, for the reasons that I set out.

Q63 Chairman: But surely the regional spatial strategy has used flows of inward migration for their authority?

Mr Portes: That is true. The Government Actuary's Department makes quasi-independent estimates of overall nett migration (not gross migration) but it does not say, "There are going to be 20,000 people from Poland coming this year". It will say, "For the purposes of making the planning assumptions you are saying these are the stylised assumptions we should make", and those have been made by GAD and used by ONS for some considerable time, but the Government does not make formal forecasts of, say, the impact of migration flows such as was the case when we opened our labour market to the accession countries.

Miss Kirkbride: The migration from the former Eastern Bloc has been huge and it has been largely at the lower end of the labour market because of easy access, because of the flexibility and all those things, even though some of the migrants coming here are much more skilled. What evidence does your department have to suggest, whether or not this is the case, that that inflow of migration from the eastern European Bloc has displaced the lower end of the labour market in the UK and what is happening to those young people who might otherwise have done the jobs that these migrants are now doing?

Q64 Chairman: Can I just tease out one point from your evidence? In the evidence we got from the department it alternates between "no evidence" of such an effect and "little evidence" of such an effect. Both claims are made, so there must be some evidence that it has been happening.

Mr Portes: You will have to point me to where it says "little evidence". Our position is set out in paragraph 42, "There is no discernible statistical evidence that A8 migrants have contributed ...".

Q65 Chairman: It is in the summary box on page 4, above paragraph 20, "There is little discernible evidence of adverse effects on claimant unemployment".

Mr Portes: That should be "no", I think, or at least "no statistical evidence". Let me explain. The position is that we have done quite a lot of statistical analysis, including the department's published working paper on the impact of eastern European accession on the UK labour market, so we looked at whether there was any correlation between the geographical areas where A8 migrants had settled before according to working groups and the changes in claimant unemployment in those areas, which is the standard statistical method used in the analysis of immigration to see whether it has any impact on the labour market, and we found no statistical evidence of any relationship, and other people have looked at the set using the same type of methodologies and found ostensibly the same thing. We can see no evidence that there has been any displacement of British workers by the influx of workers from the eastern European countries.

Q66 Judy Mallaber: Can I turn to Mr Dodd's last answer, talking about growth rates? As has been said, the growth rates in the A8/A2 countries have been impressive, although in your evidence you point out that that followed a period of some contraction in many of those countries, but you did say that there were question marks over its sustainability. Can you expand on that? Is that growth sustainable and what are the question marks?

Mr Dodd: I think the situation varies very substantially between countries, primarily, the basis being what kinds of policies over a whole range of things - government spending, taxation, interest rate policy, a whole range of factors, and the degree to which maybe short-term political interests outweigh long term economic management. It is quite striking that organisations which watch this quite carefully, like the World Bank and the OECD, look at similar countries in rather more fragile economic positions than others. As a group I think it is well worth emphasising that they are not in a very bad state at all. This is about degrees of variation around what is achievable in the long term. If you, as it were, take out a great deal of consumption from the economy in the short-term you are going to have to pay it back at some stage. The economy is capable of growing at maybe 4% or 5% but appears to be growing at 7% or 8%. It is simply not feasible for that to continue and there has to be some process of adjustment to get back to a sustainable position.

Q67 Judy Mallaber: Can you make any assessment between which countries you feel are most likely to sustain their growth rates and which are not?

Mr Dodd: It is probably worthwhile referring to the organisations that do the deepest research, people like the World Bank, in that the DTI does not comment on the economic performance of individual countries. The World Bank is putting forward Latvia, Estonia and Bulgaria as countries where their current account deficit is so large as to be something which needs to be addressed in the fairly near future to avoid them having a painful process of stabilisation at some stage.

Q68 Judy Mallaber: How far do you think the sustainability of their growth rates depends on other issues like energy security, what Russia does and so on?

Mr Dodd: The underlying sustainable long term rate of growth that they can achieve is driven by a whole range of factors. Clearly, access to reliable energy supplies is one very important element of that. Their relations with near neighbours is a very significant factor. If you have a large neighbour next door that is trying very hard to prevent you from enjoying your success and if you still trade quite heavily with them it is bound to have an impact upon them. In terms of the overall range of economic variables which determine their growth rate it does vary quite a lot from country to country but fundamentally all the countries in Europe need to have the same things, which are a highly skilled labour force, high degrees of innovation, good capital markets which enable people to have access to macro-economic stability so that if people invest they do not perceive the risks of investment to be too great to do so. The recipe for success I think is pretty much identical wherever you happen to be in the world and some of the particular risk factors for central and eastern Europe are common but they also have some which are specific to each individual country.

Q69 Judy Mallaber: Can you identify if there are countries which have particularly good prospects in terms of future growth that might be the ones that in terms of our trade and investment we should be particularly focusing on?

Mr Dodd: I think it is worth emphasising that on a global scale they are all quite small markets. Poland is obviously a much larger economy than the others but each of these countries is relatively small and as a result I do not see that they are going to be very major markets for the UK. They will be useful markets but it is well worth putting them in pecking order and as places where a company might want to go and invest they may not necessarily be at the top of that list. Their very long term growth prospects are quite good and not necessarily the highest in the world.

Q70 Mr Wright: Just continuing on those lines of the growth and opportunities there, in the evidence it suggests that growth in French and German export markets to central and eastern Europe has been more than double that of UK exports whilst the proportion of UK foreign direct investment going into A8 and A2 is the smallest of any EU15 country. Has the UK missed out in central and eastern Europe relative to its competitors, do you think?

Mr Dodd: When looking back at the evidence before coming to see you today what we did was look at the kind of things which the countries of central and eastern Europe buy from us and are buying from the Germans, the French and the Italians. There is certainly a higher proportion of the goods which those countries are buying which Germany and France tend to have more of a specialisation in than we do. The UK currently tends to have a greater advantage in selling services which are successful in some markets but not necessarily huge in all markets all the time, so, looking at the kinds of things that the Czech Republic, Hungary and Poland are buying in the largest quantities, they tend to be transport related goods from Germany in particular.

Q71 Mr Wright: Do you not see that there is a missed opportunity there and that there are views held within industry itself that there appears to be a reluctance by some manufacturers to take that risk? One of the comments from the Black Country Chairman of Commerce was, "UK businesses tend to be more reactive than proactive in foreign markets. We are one step behind our competitors in the new EU markets and this misbalance must be addressed".

Mr Dodd: I think when firms are making investment decisions there is quite a complicated mixture of assessments of risks and rewards going on where things like market size and ease of doing business are key factors. Many UK firms, I suspect, look at many of the economies of central and eastern Europe and feel that the combination of small markets is not necessarily the easiest place to do business through a combination of language issues and administrative barriers which may lead them to feel that it is not their top priority. If you look at the UK patterns of trade compared to some other countries it is quite striking that our trade with the English-speaking world tends to be rather larger than that of the other EU Member States so many UK firms might find it easier to do business with people who are further away geographically and in terms of deciding where their natural expansion is I do not think they are necessarily going for geographical proximity when choosing.

Q72 Mr Wright: We have found evidence from other parts of the world, India and South America, for instance, that there tends to be this reluctance and that we are always one or two steps behind other areas when there is significant investment, whether it is in India or whether it is in South America, and obviously within Europe itself, which is the evidence session we have got today. It seems that wherever we go we always appear to be in manufacturing terms in exports that one step behind. Is it UK TI, is it the Department of Trade and Industry? What is the basic manufacturing sector? Is it the fact that we do not appear to want to take an element of risk or have we had our fingers burned in the past? What are the obstacles?

Mr Dodd: Many UK firms are highly successful in operating in many markets and, for example, in countries like India, and you mentioned Latin America as well, our energy sector companies are highly active, and with service sector firms, banking and so on, there is an awful lot of presence in many of these markets and the UK is the world's second largest outward investor. It is certainly not that the UK is not taking any advantage of international markets. Where we are doing it I think there is a sectoral concentration. For example, those firms from the UK who are the most successful in central and eastern Europe may not necessarily be in the manufacturing sector; they may be doing other things. In services and on the retail side UK firms are now quite active. It may be more of a reflection of the slightly different composition of the UK economy than that UK firms are any less good at operating in international markets.

Mr Timmins: I agree with all of that. Relative to our performance in these markets, British companies are doing rather well in these countries in terms of their export performance at the moment, and it is growing and I think that is something that is very commendable. If you look at a market like Poland, which is the largest market amongst the group for British companies, Poland's economy is half the size of Russia's and yet our exports to Poland are double those to Russia. The Polish economy is a fraction of the size of China's, yet our exports to Poland are on a par with those to China. These are quite interesting statistics about the performance of British companies and if you look at the investment area across these markets I think we are in third place in Poland, fifth place somewhere else. That is the order of our performance in these markets. The other point is that if there is a perception of lack of performance it is not always because there is lack of awareness. We all need to remember, and to some degree we keep frequently in our minds in UK TI, that companies do make conscious judgments based on knowledge that we and others provide about the opportunities and markets, and, of course, companies in terms of their capabilities, in terms of their capacity, are not always able to realise opportunities in every market around the world, so there is an element of judgment in all of this.

Q73 Chairman: We were told that in Lithuania that UK TI was having quite a lot of success in matching up smaller UK service companies with Lithuanian partners, often working through their RDAs. Are you aware of that as a frequent activity in UK TI and new Member States?

Mr Timmins: I am not aware of that but I would not necessarily be aware of it, frankly, because those are the sorts of activities that our commercial teams engage in much more directly with business than we do in headquarters. It is not something that is particularly prominent across all these markets. That may be something which is particular to Lithuania.

Chairman: Especially as we also saw Marks and Spencer going home to Lithuania at last. Mr Marks was Lithuanian and so has come home.

Q74 Mark Hunter: I want to move us into the area of bureaucracy, the red tape, which, of course, we often hear from the business community is a major impediment. This question is directly largely at Peter and I suppose Ken could come in as well on it, but in your evidence to the Committee the DTI specifically refer to "cumbersome bureaucracy, inefficient and opaque judicial processes". Just how far do you think this is a problem for business in the UK, dealing with the new Member States, and does it vary much from country to country? If the answer to the last part of the question is yes, who are the good guys and who are the bad guys, so to speak?

Mr Dodd: I am sure they are all good guys. There is a huge amount of variation, not just from country to country but also in how different kinds of firms are treated. If you are a huge multinational making a multi-million dollar investment you are likely, I suspect, to be treated quite well, whereas if you are a small firm butting up against the local town council or something you will have not necessarily had the same degree of emphasis or attention on the need to generate an attractive environment for international business. Things can be quite difficult in some countries. The thing which business is most concerned about is uncertainty. Many firms are incredibly good at operating in quite difficult environments so long as they are clear what the rules of the game are and they can factor that into their costs. There are many countries where the legal situation on paper now looks fantastic; it looks as good as anywhere else in the world, but on the ground I suspect there are still cases in several countries where on a day-to-day basis getting issues resolve either with local bureaucracy or through the courts is much slower than we would like. As to which countries are doing least well in this, I suspect that it is those which are least far along the process of transition, so it is those who have been doing it for the shortest time, so I suspect those to the south and east are probably the ones where the difficulties are greatest.

Q75 Mark Hunter: Do you think even with those countries there is discernible progress being made yet or is it too early to say?

Mr Dodd: I think there has been a great deal of progress from where they were five to ten years ago. However, there are still people with difficulties in some markets and in some niches of some markets it is much tougher than in others.

Q76 Mark Hunter: Do you give advice directly to companies, and I am thinking particularly of small and medium sized businesses perhaps who are looking for investment opportunities in some of the countries that we are not naming specifically? Would your organisation be able to say to them, "You need to be aware of X, Y and Z"?

Mr Dodd: That is where UK TI comes in.

Mr Timmins: Yes, very directly, and it is more than that. It is more than giving advice. It is giving practical help to those companies. I was looking at the statistics and I found that over the past year our posts have actually helped around 200 companies which were having local difficulties or difficulties with a whole range of matters in the market.

Q77 Mark Hunter: Are they solely in the SME sector?

Mr Timmins: It can be a mix of companies - SMEs, mid-sized companies and, of course, even the larger companies that are investors in these countries.

Q78 Mark Hunter: Your colleague was saying the larger ones do not usually need the help because obviously they are a more attractive proposition.

Mr Timmins: I think you will find that the larger ones in some respects in some markets do need help. We have a very large retail company which is well established in several of these markets and there have been occasions when they have needed support from our commercial team. Quite often at that level or at the level at which the entry needs to be made into the authorities it is given by the ambassador, so there is quite a lot of that work going on, and, of course, for every issue that arises and every engagement with a government or a local government about a barrier or an obstacle clearly lessons are learned and we would expect it would then be easier for the next company that comes along and wishes to do similar things.

Q79 Mark Hunter: Do you think the whole issue about the bureaucracy though is overstated? Is it used more as an excuse, shall we say, rather than a proper reason in your opinion?

Mr Timmins: I do not think it is. Our experience is that there is considerable awareness of the opportunities in these markets and that is reflected in our growing exports and growing interest in these markets as investors, so companies are, I would say, fairly open-minded about these markets. The difficulties arise for them when they begin to engage in a serious way and that is when they need our support, but I do not think they necessarily as a general rule start off thinking, "These are difficult places and I do not wish to go there".

Q80 Chairman: I just want to question you on the legal system if I may. I have a constituency company which had an extremely bad experience in Hungary, not within the official legal system but effectively with a bogus case which was being progressed, and it had a lot of help from our post and the department, and they were very grateful for the help. It was not just that it was inefficient; it seemed that it was weighted very much against the foreigner. Is that a problem you have seen elsewhere in the new states, or is this experience an unfortunate one-off in Hungary?

Mr Timmins: I am personally not aware of it as a general problem.

Mr Dodd: One observation is that perhaps some of the countries of central Europe are not necessarily as outward-looking and as globalised as much of western Europe is.

Mr Timmins: I would say that we can have that sort of problem amongst the EU 15.

Q81 Miss Kirkbride: The report has identified "frictional" issues between the new states and the implementation of the single market. Can you set out what are the best examples of those frictional issues and how big a problem it has been?

Mr Dodd: It is worth emphasising just what a massive change in governmental and legal systems and ways of operating an economy, ways of operating bits of government has been involved in joining the EU. The acquis is a massive undertaking and for even the wealthiest and most sophisticated economy to take it on board would be a huge undertaking. It is inevitable that there have been some cases where the ways in which things have been done before and the ways that the EU wants them done are very different. In most cases some of those might seem quite strange to a UK audience. It is about liberalisation to join the EU, so about having rather less in the way of regulation and taking out unnecessary regulation in many cases. The experience again differs enormously depending what governments were like prior to getting into the accession process. Some of the Baltic economies complained vigorously about having to take on huge amounts of unnecessary bureaucracy that was spoiling their free markets. Other countries complained that this removed huge amounts of legitimate state power to decide how things should be done, so the experience is I think very different, but there is a common theme that this is simply a massive change in the way that things are done and as a result it is inevitable that there are pains along the way. Also, there is an issue that you can implement rules quite easily in terms of statute but in terms of changing mentalities and the ways that people react and use those rules can be slow and therefore the process may not be wholly successful.

Q82 Miss Kirkbride: Have those new accession countries succeeded in doing the bureaucratic element? How far have they still got to go before they get to the rest of us?

Mr Dodd: I think the headline will be completely successful. The process of embedding the detail and, more fundamentally, the hearts and minds process in some cases has quite a long way to go. I think for some countries membership of the EU was the objective rather than taking on board a different way of doing things and I think that is a much slower process.

Q83 Miss Kirkbride: What about the Services Directive, which is particularly important to the UK economy? How far have they successfully implemented that?

Mr Dodd: It is a good question how far has anybody successfully implemented the Services Directive. It is very early days. The Services Directive is nothing like as dramatic a piece of legislation as we hoped it was going to be, so even full implementation of the directive is a fairly modest affair, unfortunately. There is an awful lot more liberalisation in the service sector that we should be trying to achieve across the whole European market.

Q84 Miss Kirkbride: And will we find allies in our new European countries?

Mr Dodd: Some allies in several countries which do not understand at all the mindset behind it. There is great diversity of opinion on it.

Q85 Chairman: Just out of interest, and I am surprise Mr Bone did not spot this, I notice figure 17 shows the saints and sinners of infringement cases in the European Union. Italy is the leading sinner, well ahead of the field, Spain then, France, Greece, and Germany are number five, interestingly, and I am surprised at that, but the saints are Estonia, Slovenia, Lithuania, Latvia. In your evidence you say this may be because we have not had enough time to bring up infringement cases yet, or are they genuinely following the rules better than the older EU 15?

Mr Dodd: They are also very small countries.

Q86 Chairman: Fewer opportunities to be a sinner?

Mr Dodd: Yes, but, to be fair, there are some countries towards the right hand edge of that diagram which very much believe heart and soul in the full market.

Q87 Chairman: We should have an adjusted one by population or economy size, which would be more accurate.

Mr Dodd: We can give you that if you like.

Chairman: Italy still would not do very even then, would it? No, I thought not.

Q88 Mr Bone: Can I just get it right that the central and eastern European states have had a high and sustained growth rate and we probably export more to them than we do to India and China?

Mr Timmins: I am not looking at these collectively. We export about £7.5 billion worth of goods and services to the 8 plus 2. If I just use the example I used previously of Poland, our exports to Poland are about £2.8 billion, which is around the same as we export to China.

Q89 Mr Bone: I think the answer there was yes, we do export more to the A8/A2 than we do to India and China. One of the great successes of the European Union has been to bring in the former Communist countries to an economic free trade area and to encourage democracy, so why is your department concentrating on the sexy things like India and China and not concentrating on these markets which we should be encouraging? They should be listed as emerging markets. Have you not got it completely wrong?

Mr Timmins: I think that is probably one for me in UK TI. There are a number of issues here. First of all, I need to say that we do a great deal and expend a considerable amount of resource in supporting our companies in these markets. I counted up the number of people we have in our commercial teams in these posts and the number came to 104. That is 104 people across these markets, including ambassadors, who are working to support British business, and, just by way of comparison, if I look at the numbers of people we have in the US, we have about 113 people in the US where our exports are £30 billion a year, so in terms of how we deploy resource I think we are taking account of demand and interest in these markets. That is the first point. The second point is that each of these markets in terms of the prospects for British business, in terms of their growth, in terms of the size of their economies, is different and each has to be looked at individually. There is quite a significant difference between these markets and the emerging markets that we have determined in UK TI and the one significant difference is that in the emerging markets a lot of what we need to do is really around market access and regulation and breaking down barriers. That is a major component of why we designated these markets as emerging because that is a major area of work. There are clearly issues in the 8 plus 2 which are similar but on a much smaller scale and, of course, one would expect that the EU regulatory framework would over time ensure that these barriers no longer existed, so this is not exactly apples and apples. There is an apples and pears connotation here. The last point I would make on that question is that there is an issue here of resources as well. For UK TI this is not a zero sum game. What it means is that if we designate markets as emerging we need to make sure that the resources we put in are commensurate with what we seek to achieve in those markets, and that means we have to take resources from elsewhere, so we have rob Peter to pay Paul, if you like. There is an issue therefore in that we have to be careful in terms of looking at the opportunity, looking at the potential and making sure our resources are equal to the task, and I think for the present and looking ahead we have got our deployment of resources right for those markets.

Q90 Mr Bone: Are you saying then that it is almost because they are part of the EU and because you think that is going to work that you are not putting resources in there?

Mr Timmins: No.

Q91 Mr Bone: That seemed to be part of your answer.

Mr Timmins: I think I am saying that, having assessed demand for our services in these markets and having understood the potential of these markets, we are confident that the level of resources that I indicated is quite satisfactory in order to be able to deal with British businesses' aspirations towards those markets.

Mr Bone: You see these then as individual countries, not as a group of ten extra countries which have a huge market? The final point that I do not think you addressed was that it is very glamorous to go to China and India to develop trade. It is not quite the same thing to go to Lithuania to do it. Is there anything in that?

Mark Hunter: Oh, I do not know about that.

Q92 Mr Bone: Sorry, as the department might see it. Is there nothing in that? China is the big thing. Everybody is talking about China. Nobody is really talking about eastern Europe.

Mr Timmins: There may be something in that. We do, of course, provide support to companies that wish to visit Lithuania, as they may wish to visit China, and we do a great deal to create awareness of what the opportunities are in these markets through our website, through our support for companies visiting the markets and by a whole range of other means. It is quite interesting that in the last 12 or 15 months we have produced 55 sector reports for the 8 plus 2 which have been available to British business. That is opportunities across a whole clutch of sectors in those markets. I think that is quite a good story.

Q93 Roger Berry: Mr Timmins, you talked about robbing Peter to pay Paul. Are the new Member States Peter or Paul?

Mr Timmins: The new Member States would be Paul.

Q94 Roger Berry: Really?

Mr Timmins: If we were taking money. If we were taking resources from elsewhere in the network in order to support them we would be robbing Peter. We would be robbing other markets to pay them.

Q95 Roger Berry: If that were the case that would be true. My question is, what is true? We have heard that UK representation, for example, UK TI but I might also add the British Council, in the new Member States is being reduced. Have we been misinformed?

Mr Timmins: I am aware that the British Council have been looking at restructuring across these states and I do not know what the outcome of that is.

Q96 Roger Berry: What about UK TI?

Mr Timmins: In terms of UK TI, if we go back to the spending review 2004, in the intervening period we have removed six posts from our commercial teams across those markets but, as I say, we have 104 people still engaged in supporting British business in those markets, which is quite a significant resource.

Q97 Roger Berry: I accept the absolute number argument as one argument, but clearly you have confirmed that we are talking about Peter here and not Paul. I just wondered what the rationale for that was. Is there evidence that if you take one post away from the new Member States and allocate it to a India or China that is better for British business?

Mr Timmins: I think it is horses for courses, frankly. In the Chinas and the Indias of this world the task in some respects is different from the task in the 8 plus 2. What I mean by that is that the task in the 8 plus 2 has quite a lot of what I would call day-to-day support for companies. It is about market knowledge advice, how to do business, how to go about things. It is the sort of support and advice that can very readily be given by our local staff in these places, and very professionally too, I might say, in those markets. We have some of the best local staff in the overseas network in the 8 plus 2 and that is reflected in their performance in support of British business. In the Chinas and Indias, because there is work to be done on what I would call political lobbying for commercial purposes, that is, gaining entry into the ministries and tackling some of the major access issues, there is a sense in which that is best done by our UK-based staff.

Q98 Roger Berry: UK-based staff?

Mr Timmins: When I say "UK-based" I mean our diplomats. We call them UK-based as opposed to locally engaged. They are not based in the UK.

Q99 Chairman: They are UK staff employed overseas.

Mr Timmins: Indeed, so there is a difference in the way that we use and deploy staff in different types of market.

Q100 Roger Berry: I appreciate that. What I am trying to get my head round is that at the margin, okay, you either allocate resources at the margin to new Member States of the European Union or you allocate them to India or to China or Brazil or whatever. Given that you have admitted that we are reducing posts in relation to new Member States - and I have no idea whether this is good for British business or not, whether it is a better allocation of resources to shift those posts somewhere else - my question is, what evidence does UK TI have that this shift is good for British business?

Mr Timmins: We have a whole set of performance indicators for each of our posts in terms of the contribution they make to delivering our high level objectives. These are indicators that are set and monitored and evaluated and we take into account demand from business in those markets, so we have a growing suite of what I will call performance management information which allows us to make those sorts of judgments. I will just make one other point here about resources in the emerging markets. It is not always a question of the numbers of people that you have in a particular place in terms of how that benefits British business. It can very often, of course, be about their professionalism and their knowledge but it can also be about how they work in support of British business. What I mean by that is that we are looking at different ways of working within parts of the overseas network. For example, in the Baltic States we have recently appointed a manager for the Baltic States based in Tallinn who will take an overview of the three countries on behalf of British business so that there is, let us say, a presentation to British business of the opportunities covering the three states which would be, we think, more attractive to them than the individual posts presenting opportunities in their own markets, and that is creating awareness for British companies of opportunities on a larger scale. Our expectation is that that will be more attractive to companies and will draw them into looking rather more carefully at some of these very small markets than they have done up until now.

Q101 Roger Berry: Just out of interest, why Tallinn and not Vilnius?

Mr Timmins: There are always issues around these sorts of things about communications, about transport links, about costs, and the decision we took in this particular case was that our regional manager would be best placed in Tallinn.

Q102 Roger Berry: Was that because there happened to be money available in Tallinn that was not available elsewhere?

Mr Timmins: No. It was a conscious decision taking into account a range of factors, such as those I have mentioned, that we should have someone in Tallinn, and indeed he has just taken up post and I think is going to be a very credible addition to our resources there.

Chairman: We will move on to a different area of questioning, one we have already touched on before. Mr Clapham?

Q103 Mr Clapham: Given some of the evidence that is both in the DTI brief as well as evidence that has been collected over the period since the accession of the first A8, the evidence does appear to be a little mixed because, on the one hand, some suggest that there has been a restriction perhaps on inflation but, on the other hand, the view is that there has been no statistical impact. I do note, Mr Portes, you are drawing our attention to paragraph 42. What assessment has the British Government made of the impact on the labour market?

Mr Portes: The main assessment is contained in the DWP working paper that I referred to earlier written by myself with an outside academic, an econometrician specialist, which concluded that there was no statistical evidence to there being any impact at all on claimant unemployment. We did that at the time because there was a particular concern. At that point claimant unemployment was rising and there were some anecdotal assertions being made to A8 accession. Based on our overall analysis of the labour market, our view was that claimant unemployment was rising at that point for other reasons and it would, in due course, reverse itself. It had little or nothing to do with the influx from the accession countries, but we wanted to subject that to proper rigorous analysis. We did so and we did, indeed, find no statistical evidence that there was any association whatsoever between the then rising claimant unemployment and the inflow of migrants from eastern European countries. Indeed, subsequently, as you know, claimant unemployment has turned around and is currently falling quite steadily, despite the fact that the migrants are still coming in at roughly the same rate, so we regard that as subsequent supporting evidence to suggest there really is not much of a connection. That is our assessment in terms of the impact on claimant unemployment, so we do not see any evidence that migrant workers are displacing British workers from jobs. In terms of wage growth, I would say the evidence is less conclusive. We do not have any evidence that there has been any particular impact on wage growth. Wage growth has been quite steady and stable overall for the last few years and there is no observable pattern. If you look at the sectors where migrants from the new countries have gone, wage growth has not been particularly slow in those sectors. If you look at the local authorities where migrants have registered to work, again wage growth has not been particularly slow in those local authorities and, so far, we do not have any reason to believe that it has had any significant impact on wage inflation. There is a general perception and some people, including the Bank of England, have said that their perception is that it has, overall, had some dampening effect but we have not been able to find that in the data and the analysis we have done.

Q104 Mr Clapham: The numbers that have come are quite significant. The worker registration register shows, for example, 600,000 and in terms of sectors the majority is going into the agricultural sector, whereas it is 27% into manufacturing. In terms of the direction that people coming into the country have indicated, is there any way in which we are able to track them? For example, people who come to agriculture, are we sure that they remain in agriculture or is there any evidence that they leave agriculture to fill gaps, for example, in construction?

Mr Portes: The answer to the first question is no, that is the worker registration scheme typically asks them to say where they are going to be working when they start and they are not required legally to re-register or to tell us if they subsequently move to another sector. Is there any anecdotal evidence that they have moved? The answer is I am not aware of any consistent patterns. I am sure that quite a lot of them do move from sector to sector, it would be very surprising if they did not. A lot of the jobs that they are taking are likely to be temporary, so it would be surprising if there was not some movement. Our data is not sufficiently fine-grained to answer that question, though, in any statistical sense. You may well know it, but I do emphasise, whenever we talk about the 600,000-odd figure, it is very important to note that those are gross figures, they do not represent the number of A8 nationals who are living here at any one time because a considerable number have gone back. A lot of them say that they will go back and if we look at the Labour Force Survey data, which is not perfect but is a much better source for looking at the number at any one time, it suggests that the number currently resident is very much less than 600,000.

Q105 Mr Clapham: I take that on board. Could we say what the average stay is? Are there statistics that would say what average time a worker from eastern Europe would stay?

Mr Portes: We know that 55% roughly, about 50%, say when they come in - we ask them, although this has no legal force, it is just asking them what they say - that they are here only for a few months, that is what they say, so we know that. We also know that if you look at the Labour Force Survey data it says that there are about 330,000 people from the A8 countries currently resident, which would suggest that maybe half of those who come are still here and half have gone back, but the Labour Force Survey is only a survey and it probably undercounts to some extent because it does not pick up communal establishments fully. That is probably an underestimate. I do not think that it is wildly out of line to suggest that about half of those who come are still here and half have gone back, but I would not want to be any more precise than that given the data sources we have available.

Q106 Mr Clapham: Last week when we had the Engineering Employers Federation, what they said was there was not any evidence, for example, that the influx of labour was causing casualisation of labour in manufacturing, but we get a different story coming from the unions in construction. The unions in construction argue that there has been casualisation and many of the people, for example - this is their argument - that come in to work in agriculture find their way into construction and it is impacting negatively on wages in construction. Is there any evidence, again that you have looked at, with regards to construction which would suggest that is correct or that, indeed, it is different?

Mr Portes: The overall statistical evidence does not particularly support that so. For example, if you look at the Annual Survey of Hours and Earnings, which is DTI's very thorough main survey on how long people work and their earnings, in 2004‑05 wage growth in construction was 3%, slightly above the overall average of 2%. If you look at 2005‑06 wage growth in construction was 4.3%, which is as close as needs be to the national average of 4.1% in ASHE. The survey is not perfect, we are never going to pick up everything, there might be some localised impact but if there was a really big impact, a really big effect, it would be very surprising not to see it in the major national survey of hours and earnings which we have that looks at these things which is ASHE. As I say, I would not want to argue with people, like the trade unions who have a much better knowledge of what is happening on the ground, that there are localised, local level or side level effects, that is quite possible but, overall, there is no real evidence in the data that is happening.

Q107 Mr Clapham: Could I ask, people are coming over and we know where they are going to work from the worker registration. In those areas where most people are working, do we ensure that, for example, information is available in their own language? Particularly, I am thinking in terms of health and safety because in construction, again, we know that there was quite an increase in the number of fatalities last year, including five migrant labourers.

Mr Portes: I think that this is quite a significant issue which the Health and Safety Executive are well aware of and have been doing quite a lot of work on and, to some extent, in partnership with the unions, and it is something to be taken seriously. I am not personally familiar with what exactly the requirements are on the extent to which you need to post health and safety notices in different languages, for example, but certainly workers in these industries are subject to exactly the same health and safety requirements as UK workers and they need to be aware of the rules, the regulations and what they can and cannot do. If that means they need to understand them in their own language, then that should be happening, and I know that the HSE is well aware of the issues there.

Q108 Chairman: Could I pursue a couple of points flowing from that. First of all, I was interested in your written evidence to us. You highlighted construction as one sector where wage deflation might be a factor. You say that the CITE Construction Skills Draft Annual Report says that: "Overall wage increase in the industry might be kept within reasonable limits by immigration", that is paragraph 41 in your evidence. Your oral evidence seems to have slightly contradicted your written evidence. I can accept you are putting forward anecdotes in your written evidence. Paragraph 41 of your written evidence to us.

Mr Portes: I think that is what the construction industry trades board has said, it is not something that has come out of our own analysis and data.

Q109 Chairman: Your statistics are quite impressive but there are quite high levels of demand in the construction business in the UK, it is maybe keeping things down rather than rising faster.

Mr Portes: That is precisely the point I was going to make. If what we are seeing in the data is that in the construction industry wage growth is similar to that of the economy as a whole but demand is very high, because there are lots of big projects around, maybe the influx of labour is helping fill gaps without allowing inflation take-up. That is certainly a possibility, I cannot show that is the case but that is certainly not ----

Q110 Chairman: A parallel inquiry this Committee is doing at present is into construction, so we made a site visit to a London hospital where we were told that roughly half the people working on the site are eastern European, which suggests there is a strong impact on the market, or at least their removal might have a very strong impact.

Mr Portes: It certainly suggests that their removal would have a strong impact on the market, but that is true of migration, I think, generally. Clearly, if you were to go into any London hospital and ask the hospital administrator, "What would happen if you took out all the nursing staff of South Asian or Filipino origin?" You would, again, see there would be a very considerable impact.

Chairman: My colleagues want to come in with supplementaries, I know, so let me do that and I will come back to my questions just to see if they want to ask the same things.

Q111 Miss Kirkbride: Just going back to claimant count, I have slightly lost track of how it all works because I know the system has changed so much, but what about the NEETs? Are they different from Jobseeker's and, in which case, what does the evidence show about NEETs?

Mr Portes: The NEETs are typically not claiming Jobseeker's Allowance, they are not on the claimant count, so the evidence I referred to before does not relate directly to them. However, we have not done as thorough a statistical investigation for the NEETs because the geographical level data is good because they are not on the claimant count, we have different data measures, but we have looked again at the geographical pattern of NEETs compared with the geographical pattern of where migrants work. Once again, there is no discernible correlation, it does not seem to be that there are more NEETs or the number of NEETs is increasing in the areas where migrant workers are coming. Indeed, just by looking at London, for example, you see quite a strong variation between adjacent London boroughs in the number of NEETs which, I think, suggests to us that what is going on with the NEETs - and, as you know, we recognise there is a very significant issue there with the Department of Education and we are working on it quite carefully - is not primarily a question of lack of labour market opportunities for NEETs. It is a question of their NEETs engagement with the education, skills and skill system that enables them to progress into the labour market in the first place.

Q112 Miss Kirkbride: When my constituents say, "They're taking our jobs", et cetera, economically can you then explain why we have had a very significant influx of immigration into the UK, modest but not incredible growth, and this has not impacted the domestic population's job opportunities?

Mr Portes: Yes, they are very much the classic lump of labour fallacy, there are not a limited number of jobs to go around. The number of jobs in the economy is primarily determined by - and certainly the number of jobs for natives - natives' willingness to work, their motivation to work, the skills and capabilities they have to work and the barriers that they may face in terms of their knowledge, skills or other barriers, such as childcare or caring responsibilities. Of course, the bread and butter business of my department is to help people, British residents, be successful in the labour market by improving their motivation, enabling them to overcome their barriers and working in partnership with other government departments, like DfES, to ensure that they acquire the skills they need to succeed in the labour market. If we can do all of that successfully and that is, of course, a very big "if", because they are all very demanding tasks, then our British natives and residents will be successful in the labour market despite the fact that there are immigrants here, and the number of jobs will go up. If we fail on those important tasks, then keeping immigrants out will not help us. It is exactly the same as would a 35‑hour week or compulsory retirement at 50 do anything for our people who are currently out of the labour market? The answer is no, it would not, it might even make matters worse.

Q113 Mr Weir: I was interested in the point that Mr Portes made earlier about the figure he quoted or the gross figures of people coming into the country. I represent an area where there is a lot of agriculture and a lot of semi‑skilled workers. What I find is, though there are some immigrants who are now settling in the area - there is a long history of ties with Poland for example - very many of the people who come to work in my area are, in fact, students who come for a relatively small time to earn money and go back to their own countries to help them pay for their education. Do you keep figures as to how many people coming in are, in fact, in this category and not really immigrants as such but temporary workers?

Mr Portes: The answer is, as I said before, we do not have reliable figures. We ask people how long they are planning to stay and they tell us if they want to, but we do not hold them to that. There is no legal requirement on them to answer it truthfully and there is certainly no requirement on them, if they say they want to stay for three months, they are perfectly legally entitled to stay for longer if they so wish. We have what is effectively survey evidence which, as I said, suggests that about half of them say they are likely to go back quite soon and by comparing the different data sources, the workers' registration scheme and the Labour Force Survey, we can guess that perhaps half have gone back but, as I said before, I would not want to pin myself or the Department down to a much more precise estimate than that. We will not know for a while I think and a lot of people do not know when they come whether they are going to stay. Some of them may know that they are going to stay for three months, but some of them may think three months, maybe six months, maybe longer, and they will take those decisions as they come to it.

Q114 Mr Weir: Is it not an important statistic when talking about immigration into this country because the headline figures give perhaps a very much different and, if you like, scarier story than, in fact, is the truth?

Mr Portes: I agree and, although, as I said before, I do make the point every time I discuss the figures that they are gross not nett and the nett figures ----

Q115 Mr Weir: That does not necessarily get across in sections of the media.

Mr Portes: It does not necessarily get in sections of the media and I think that, perhaps, looking back, we did not realise that is how it would have been presented and that, I think, is unfortunate.

Q116 Chairman: Will the census provide an opportunity to provide some more up-to-date information?

Mr Portes: Absolutely, yes. The census will provide a much more accurate and in‑depth look at this. Of course, it will still only be a snapshot and five years later we will all be again in the same position talking about some other change in the population but the census will provide ----

Q117 Chairman: As long as it is better conducted than the last census was. Could I ask one question about paragraph 39 of your written evidence to us. "There is some evidence that labour movement from the A8 has been associated with an arrest in the decline of business sectors in the UK", and you cite farm products. I want to ask specifically about farm products which are of interest to me and my constituency. Are there any other business sectors which have had their decline arrested by EU immigrant labour? It is an interesting point, that is why I was fascinated by it.

Mr Portes: It is an interesting point and I am not sure of the source of this. I do not know whether Peter does.

Mr Dodd: The evidence on this is largely anecdotal. Certainly, agriculture seems to be the most striking with both labour coming in for harvesting but also into food processing as well. There is a certain amount of evidence that crops which previously were not economic to plant in the kind of quantities which are now being planted, like strawberries for example, are booming as a result of the availability of large numbers of people prepared to undertake the very tough work required to harvest.

Chairman: I think it is best not to engage in a long discussion with you because the rest of my Committee will lose its patience, but in my constituency we are seeing quite the opposite. We are seeing the eastern European enlargement has had a devastating effect on horticulture, because the old SAWS scheme - the Seasonal Agricultural Workers Scheme - is no longer available. People from eastern Europe come in, spend a week or two, get the National Insurance numbers, and then move on out of farming. The ones who come in are not agricultural students, they are less talented people, and actually we have found that, ironically, in Worcestershire the enlargement of the eastern European Union has a very bad impact on horticulture. I might send you a copy of the letter I sent to the Secretary of State for Environment, Food and Rural Affairs on this subject. It has been very useful, but actually now the system has changed and we find the wrong kind of people are using it as an entry into other careers. I must not labour that point; I think the Committee might have its patience tried. I do not want to have a long discussion about that. Mr Marris.

Rob Marris: What I was going to ask I think has been covered in terms of exploitation.

Chairman: Yes, I think we ought, perhaps specifically, to ask it for the record if you do not mind.

Rob Marris: It is what we have been talking about in terms of the effect of wage rates and health and safety which Mr Portes was talking about and so on, as to what steps are being taken and what progress is being made to ensure there is not what one might call, perhaps somewhat emotively, "super-exploitation" of migrant workers in the UK who come from the A8 countries.

Q118 Chairman: There is a Gangmasters Licensing Authority dealing with farming, but there is some concern about the hospitality sector and the construction sector.

Mr Portes: Yes, this is a DTI point, of course, because the DTI is responsible for enforcement of the minimum wage legislation. A lot of this relates to abuses and there was a BBC investigation into this a few weeks ago which found some cases of fairly clear abuses of the provisions around the minimum wage, particularly relating to deductions for rent and so on, and clearly there is some of that. I think our perception is that overall it is not big enough to impact the labour market as a whole, but that does not mean it is not wholly deplorable and illegal where it happens.

Q119 Rob Marris: Your sense is that it covers a fairly small proportion of the migrant labour market?

Mr Portes: Yes, that is right, and that is what our data and some independent research show but do you want to say anything?

Mr Dodd: I think certainly one point worth making is that, as migrant labour coming in from the accession countries is legal and part of the system, they are much less likely to be abused in that way than illegal labour who would have no recourse whatsoever to the authorities and actually would be hiding from the authorities. Having a large influx of, as it were, legal labour is probably having quite a positive impact in terms of displacing illegal labour.

Q120 Rob Marris: Which takes us back to the point made earlier about translating stuff into Polish, Lithuanian or whatever. That is continuing, is it, so that those legal migrant labourers are aware of their rights?

Mr Dodd: I would have to refer that to the HSE.

Chairman: Could you? It is quite an important subject, we would appreciate a little more.

Mr Weir: Many of the local authorities are running projects.

Q121 Chairman: I think what Mr Weir just said is quite important, a lot of local authorities, particularly I know in my area, are seeking to draw workers' attention to the rights they enjoy under British legislation, under European legislation.

Mr Portes: It is not just health and safety, it is in particular the minimum wage and I think where there have been some clear abuses around deductions for the provision of accommodation.

Rob Marris: I think it is helpful having both of you here because it comes between the two departments: health and safety is DWP and the minimum wage is DTI.

Chairman: That is the first thing we have asked you for additionally so far. I would attach some importance to that.

Q122 Mr Wright: On that particular point, although it is on the low side in terms of numbers that may well be affected by unscrupulous employers, some of them from eastern Europe themselves, who are employing their fellow countrymen to come and work over here, they exploit them by deducting this money. Is the danger not that it then becomes a profitable business but more so if we turn a blind eye, we do not put effort into trying to tweak these people and it can actually grow? Also I came across just last year a situation where they were bringing over people from eastern Europe to work on an as‑and‑when contract and they were just providing two days' work for one week and a day the next week. Of course, these people were left high and dry with no funds, no ability to get any benefits whatsoever and they had to rely on friends to bail them out of the situation. That to me seems to be a very serious impact we might find in future.

Mr Portes: Yes. Certainly, when I said I did not think it was widespread or affecting a majority of workers, that does not mean we do not take it seriously and, as you say, we would not want to see it happen and certainly we would not want to see it grow. I think there is quite a bit of fairly rigorous enforcement action which people particularly on the minimum wage side would want to take in this area.

Q123 Mr Weir: I bring back the question of returnees which we discussed earlier to some degree. When we were in Lithuania we were told of several instances of people returning from the UK and spawning successful business links between the two countries. In Scotland we are very interested in having links with newly independent north European states, but could you tell us what efforts are being made to take advantage of the culture and economic links resulting from migration to the UK? He is looking at you, Mr Timmins!

Mr Timmins: I am not aware that in UK TI we have specifically addressed that point. I might plead that it is early days, but we certainly have not, as far as I am aware, looked at that.

Q124 Mr Weir: Given the level of immigration of people coming to work here, they are returning and the fact that we are all one market, is it not something that should perhaps be pursued more? Business investment is a two‑way street after all.

Mr Timmins: It is indeed. It may be something that we ought to look at.

Q125 Mr Weir: We also got some evidence that there is a perception at least that some of the immigrant workers, both here and, indeed, in their home countries, are more skilled and have a better work ethic than UK nationals. Has the Government made any review of how widespread this assessment is?

Mr Portes: I do not think we would have made any review in those terms. As I said before, I think what we and the Department for Education and Skills regard as being our main business is to ensure that the British resident workforce has the skills, aptitudes and abilities to get jobs. There are some very big policy issues and questions around that and, in particular, the challenges that were identified by the Leach Report on the skills of the British workforce and what we need to do to make Britain a world leader in skills in ten or 20 years. There are some very demanding challenges and we are going to do our best to step up to them. I do not personally think that comparing our skills with those of immigrant workers is particularly enlightening. We need to do what we need to do, regardless of whether migrants come or do not come. If British workers do not have the skills they need to get jobs and compete in a global economy, then it will be very bad for the country. Correspondingly, if we can provide them with the skills and aptitudes they need, then we will do very well and that is the case regardless of the level of immigration.

Q126 Chairman: I would love to pursue that at a much greater length. It is a fascinating question but we got in difficulty once before with the questioning process, and I am very sensitive. We had a lot of evidence from the business sectors supporting those kinds of claims, particularly the British Chamber of Commerce, that young graduates from accession countries have greater practical experience than those coming from UK universities and, therefore, are more employable as far as they are concerned, so I think there is a lot to be learned from that. Three quick last questions from me, speculative questions on the future. First of all, we have heard that some low-cost producers who were originally out-sourced to Eastern Europe are looking further beyond all that is in Europe. How much have you seen of that happening and how successful do you believe these attempts will be to move to the non-EU countries in the east?

Mr Dodd: I think global sourcing decisions may involve in some cases moving to lower wage economies in Eastern Europe.

Q127 Chairman: Ukraine, Kazakhstan?

Mr Dodd: Possibly. However, in terms of the attractiveness of those countries relative to competitors much further away from the EU, I think there is a series of calculations that firms would take into account, of which distance is one element but it is not necessarily the defining factor. Whilst there is a huge potential pool of labour in countries like the Ukraine, Russia and Turkey, it is not automatic if they are priced out of central Europe that jobs will go there, they may go much further afield.

Q128 Chairman: How serious is the challenge from those countries beyond the EU borders to the east?

Mr Dodd: In terms of that overall assessment that the firm makes when arriving at a competitiveness decision, I think there are several factors which they would like to see improving in those countries before they become attractive places to invest in substantial amounts.

Q129 Chairman: I think I know what your answer to this question is but I ought to ask it, it is an important one. There will be, probably, further enlargements of Europe at some stage in the future, what lessons have we learnt from these enlargements that should apply to those enlargements?

Mr Dodd: Separating out the impact on the countries themselves from the impact on the UK labour market, which I will ask Jonathan to address in a moment, I think perhaps those countries which have found the accession process most difficult are those which have undertaken it quite quickly and who started along the road towards accession later and maybe had less time to absorb some of the elements of the acquis. It is a very difficult thing to do to change how things are done within the economy to that degree, and we can under-estimate it because politically it is incredibly attractive to get countries in quickly; economically it is a difficult and painful process for them to become, as it were, similar, homogeneous with countries in western Europe.

Mr Portes: On the labour market, I think we have probably learnt, as I said before, that it goes two directions. Making predictions of the likely influx of migrants is even more difficult than we thought at the time on the one hand but, on the other hand, counter-balancing that, the flexibility of the UK labour market is such that it can respond to quite significant influxes quite well and without any significant negative impacts that we can see, so that should give us confidence in future expansions.

Q130 Chairman: Just two final quite short answers to two short questions. English language, quite an important factor in making people come here to support the labour market rather than other Member States? Yes?

Mr Portes: Yes.

Q131 Chairman: Finally, are we seeing the development in the European Union of a labour market that is as flexible as the United States of America originally enjoyed and has played quite a big part in controlling inflation and boosting employment and growth in that country? It is not a political United States I am talking about, that would be very dangerous, are we seeing an economic United States of Europe?

Mr Portes: No is the short answer. There is huge variation in the functioning, flexibility and level of regulation in labour markets across Europe on a number of dimensions. I think our labour market is, for example, more flexible than the French labour market in general but whether you say that our labour market is more flexible or less than the Danish depends on how you look at it. There are various dimensions in which we differ. While there is quite a significant degree of labour mobility around Europe, as this latest experience has shown, I do not think it would be sensible to describe it as a single labour market in the same way as the US is with comparable levels of regulation. There is too much heterogeneity at the moment and I do not see, for both legal and cultural reasons, that will change in the short term.

Chairman: Gentlemen, that has been a very interesting session. I am very grateful to you for your thoughtful answers to our questions. I think you promised one additional piece of information but if anything else does come to mind we will get more of your excellent evidence. Thank you very much indeed.