THE MONDAY INTERVIEW: A technocrat joins battle for greater independenc e
Howard Davies; The new deputy governor at Threadneedle Street tells the Independent of his ambitions for the Bank of England and the country
Monday 11 September 1995
It is a telling comment on the continuities of the British economy that Howard Davies, who long seemed destined for a job heading a top industrial company after his time at the Confederation of British Industry, is leaving to join the Bank of England as its deputy governor.
The loss to industry is real. Mr Davies has been one of the most successful directors-general of the CBI, combining a facility for public advocacy and inside influence. Not for nothing has he often been described as an unofficial member of John Major's Cabinet, successfully exploiting the Government's tilt towards a more pro-manufacturing stance after the Thatcher years. But, on balance, industry may gain more than it loses. As the Bank grows in influence, the value of a powerful ally where it matters should not be under-estimated.
As deputy governor, Mr Davies will liaise with Treasury permanent secretary, Sir Terry Burns, in the key stage just ahead of the monthly monetary meetings between Kenneth Clarke and Eddie George - which he will also attend. Virtually all parts of the Bank report initially to the deputy governor, whose relationship to the Governor Mr Davies likens to that of a chief operating officer to an executive chairman.
The closest thing to a self-made French technocrat Britain has produced, Mr Davies' career has spanned the commanding heights of Whitehall, with two stints at the Treasury, as well as a spell in the private sector when he worked for management consultants, McKin- sey. Before becoming director general of the CBI, he headed the Audit Commission, set up by the Government to improve local government efficiency.
Still only 44, Mr Davies, who was brought up in Manchester, combines a taste for informality - cycling to meetings and attending Manchester City football matches - with a hard-headed grasp of the nuts and bolts of administration.
At the Bank, he will take a particular interest in markets, something he followed at the Treasury in the late 1970s when his sparring partner at the Bank was none other than Mr George. And following his experience at the CBI, he will also pay attention to the vexed issue of industrial finance.
An advocate of a more independent central bank as "an insurance against the political manipulation of the economy", Mr Davies has argued in the past that the Government should set the inflation target, but the Bank should decide when to change interest rates. He stresses that "independence spans a spectrum", describing as plausible the approach toward a more independent Bank the Government has adopted. The crucial change in his opinion was the publication of the minutes introduced last year.
A fan of more transparency in government, Mr Davies defends this reform to the hilt, despite the recent knock to the Governor's authority in his unsuccessful and highly public bid to get higher interest rates this summer. "Open decision-making improves the quality of decisions precisely because they are challenged."
He brings a conviction that manufacturing matters, for the disproportionately high contribution it makes to trade and also because many of the fastest growing areas of the world have a huge appetite for manufactured goods. "We've been relatively poor at feeding that appetite," he adds.
Mr Davies is a critic of the reckless run-down of industry in the first term of the Thatcher government. This wasn't even the hollowing-out that worries the Germans and Japanese, he says, "it was collapse, it was bottling out". The speed of change had "left a whole generation excluded from the economy".
Today's manufacturing sector is, in his view, much less vulnerable. "There isn't the large, soft under-belly there was, although there remains too long a tail of under-performers."
The boom and bust of the past 15 years have also taken a toll. "There is still a somewhat defensive culture in many manufacturing companies in that they are run by people who have been through two recessions that were much deeper than they were told by the Government and the Treasury."
This had created a credibility gap and a relentless focus on reducing the break-even point rather than on increasing capacity. CBI surveys revealed again and again "a reluctance to invest because of nervousness about economic volatility".
There was no easy solution to this problem other than to demonstrate that the economy could be managed without running it into the buffers again. The Government was certainly much less unpopular now among industrialists than at the nadir of early 1990s, but "there remains a suspicion that they'll do it all again: cut taxes in the Budget and then we'll be on the way to another bust".
An alternative explanation of the reluctance of industry to invest highlights the role of the financial system. The charge is often made that the City drains companies for excessive dividends and is more interested in the hefty fees that come with takeovers than in acting as a long-term owner of industry.
Mr Davies points to "two malfunctions". The City is not well suited to working with smaller companies. At the same time, there is "an asymmetry between the market reaction to dividend rises and falls". The punishment attending the latter is much greater than the reward for the former. Linked to that is "a rather aggressive divide between income and growth stocks", often unwarranted by the activities of the companies.
Solutions? "I'm a bull of relationship investing," he says - the idea that institutions take a seat on the board and a say in strategy in return for a declaration that they will not sell the company. He also believes tax changes could be made to reduce the demand for hefty dividend payouts and that smaller companies could be helped by making the cost of raising equity allowable against tax.
Mr Davies will be a hard act to follow at the CBI. But for someone with his track record as a power-broker, his decision to leave makes eminent sense. The Bank is where the power will increasingly reside. His task is to help ensure that it is modernised so that it merits that greater influence - leaving finance less proud and industry more content.
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