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I am genuinely delighted to be with you all this evening - for
three reasons.
First, is the huge pleasure of being once again in Cornwall. I
have to tell you that whenever my wife and I come down here - and
for the time being that's not as often as we'd like - we have a
wonderful sense of relaxation. We often say that Cornwall smiles
across the Tamar.
The second reason for being delighted to be here is that it gives
me the opportunity to meet so many of the local community and to
learn about the progress of your campaign "In pursuit of
excellence". And the third reason is that it gives me the
opportunity to explain to you what the Bank of England is trying to
do, and how that can contribute to what you yourselves are working
to achieve.
Let me begin with what we at the Bank are trying to do.
Most people know that the Bank these days has independent
responsibility for the operation of monetary policy. That means,
essentially responsibility for setting short term interest rates. We
do this with the explicit objective - set by the Government - of
achieving consistently low inflation, defined precisely as an
inflation rate of 2½ % a year - on a measure of retail prices known
as RPIX (ie… the familiar RPI less the effect of changes in mortgage
interest payments). In terms of the standard European Union measure
of retail price inflation this is equivalent to an inflation rate of
some 1½ - 1¾ %.
Now many people assume that because our immediate objective is
defined in terms of a low inflation target - we, and the Government,
see consistently low inflation as an end in itself. But the reality
is that none of us sees low inflation as an end in itself. We see it
as a necessary means to the end of sustainable, (and I emphasise the
word "sustainable") growth of output and employment and higher
living standards in this country - which are, of course, what all of
us are ultimately trying to achieve.
Let me try and explain.
Cutting through a lot of complication, inflation - a rising
general price level - is essentially a result of overall demand in
the economy outstripping the structural, supply-side, capacity of
the economy as a whole to meet that demand. It is in fact a symptom
of imbalance between overall demand and supply. So what in fact we
are trying to do in aiming for consistently low inflation is to keep
overall demand continuously broadly in line with supply-side
capacity - not letting it run ahead of supply giving rise to
increasing inflation, but not letting it fall short of supply
either, which would put unwanted downward pressure on prices. So we
are in fact using inflation essentially as a measure - a barometer
if you like - of our success or failure in maintaining stability -
or balance between demand and supply in the economy as a whole - in
this much wider sense.
This represents a significant change in the approach to the
macro-economic policy that was in effect pursued for much of the
earlier post-war period in this country. All too often in the past
both overall fiscal policy and monetary policy were used to pump up
aggregate demand without sufficient regard to the supply-side
constraints. What essentially we were trying to do then was to
squeeze out a bit more growth and employment even at the expense of
a bit more inflation. You all know the result - eventually inflation
got out of hand and the economy had to be brought to a juddering
halt. The go-stop policy cycle simply aggravated the boom-bust
business cycle. That had painful social as well as economic
consequences in the short run. But it equally had damaging longer
run consequences, engendering a corrosive short-termism in both
personal and business behaviour as we all tried to grab what we
could during the upswing while the going was good. Worse even than
that, the situation threatened to become explosive as the rate of
inflation increased from cyclical peak to cyclical peak and the rate
of unemployment rose from cyclical trough to cyclical trough.
Now we've learned from that experience. We've learned that there
really is no trade-off between higher growth and employment on the
one hand and higher inflation on the other except in the short term.
We've learned the importance of sustained overall fiscal discipline
into the medium and longer term if an excessive burden is not to be
put on monetary policy. We've learned to direct monetary policy to
shorter term stabilisation of demand relative to supply. And we've
learned, finally, that it is the supply side of the economy that
determines the underlying rate of growth that can be sustained. All
of that is now common ground across a very broad part of the
political spectrum in this country; and it is common ground across
much of the rest of the world.
There were initially many who argued that low inflation could
only be achieved and maintained at the expense of slow growth and
high unemployment. Indeed there are still those who remain to be
convinced. So let me give you some facts.
Since we first adopted an inflation target in this country
towards the end of 1992, inflation on the target measure has
averaged 2.7% the longest period of sustained low inflation
certainly since the Second World War. Yet we are now in our 30 th
successive quarter of continuous output growth since the upturn
began, that's already the longest period of sustained
quarter-by-quarter growth since the Quarterly National Accounts
began in 1955. Output growth over this period has averaged 2¾% a
year - which is ¼-½% above most people's estimate of the underlying
trend rate of growth. Employment in the UK as a whole is at an
all-time high. And the rate of unemployment is lower than it has
been for very nearly 20 years. And that's also true for most of the
individual regions of the country, including the South West, where
the employment rate is in fact significantly higher, and the
unemployment rate significantly lower on the latest data than the
overall UK average. And it is almost certainly true here in Cornwall
where, consistent data do not go back beyond the early 80s but
where, on a seasonally adjusted basis, unemployment has fallen year
by year since 1992, to below 5% in October, for the first time since
this particular data series began. On this evidence I think it is
more plausible to argue that the stability reflected in sustained
low inflation has contributed to growth and employment than that it
has been at the expense of growth and employment.
I am not suggesting, Mr Chairman, that we are in reach of
Nirvana! I am acutely conscious of the fact that within this overall
picture there are some sectors of the economy - pretty much the
whole of agriculture, large parts of manufacturing industry, and
some services sectors, including tourism, that have been, and indeed
still are, under severe pressure. I am acutely conscious, too, of
the effects of this pressure on some regions of the United Kingdom
that are especially dependent upon those sectors. Their problems
have been aggravated in many cases by the strength of our exchange
rate. This strength has not been against the dollar -we've been
really remarkably stable against the dollar in the past few years.
Sterling has been strong first against the Eurozone currencies,
reflecting the relative weakness until recently of the Eurozone
economies; and it was subsequently affected by the collapse of both
the currencies and domestic demand in many emerging countries as a
result of the global financial and economic turmoil that threatened
to engulf us all over the past couple of years.
We are only too well aware of these factors, which have had the
effect of dampening overall demand and overall cost and price
pressures in the UK. And we have, of course, taken them into account
in reaching our monetary policy decisions over this period,
effectively aiming to compensate for external weakness by
stimulating domestic demand. Our dilemma has been that we could not
have gone further in this direction and attempted to shelter
particular internationally-exposed sectors, or regions, without the
risk of destabilising the whole of the economy.
As it is we have been able to avoid the recession which was
almost universally predicted in this country a year ago. World
demand is now clearly recovering, including a pick up in the
Eurozone, which may help to restore a better equilibrium in foreign
exchange markets. And provided the strong growth of domestic demand
now moderates somewhat, the broad prospect for the UK economy over
the next couple of years is one of continuing relatively strong
growth overall with continuing relatively low inflation. The
uncertainties - and there are of course always uncertainties - are
by and large matters of degree, affecting the precise relationship
between demand pressure and its impact on costs and prices. They
relate to just how strongly the economy will grow and just how low
inflation will remain - rather than to the overall picture.
I hope you would at least agree that the overall economic
prospect I have described is an encouraging background to what you
are trying to do down here in Cornwall. It is in fact the best help
we can give through monetary policy. We operate, as I say on the
demand side of the economy, and we can, and hopefully will keep
aggregate demand, nationally, growing broadly in line with the
growth in our supply-side capacity. We can't frankly do much
directly - with one exception that I will come on to in a moment -
to affect the supply side. But by maintaining stability in this
sense, sustaining low inflation by moderating rather than by
aggravating the inevitable ups and downs of the business cycle, we
can create an environment which encourages more rational,
longer-term, decision-making throughout the economy, based upon real
factors, rather than speculative, nominal, factors; and that can
contribute to improvement of the supply-side indirectly.
Let me now turn to the supply side of the economy - and begin
with the one area where the Bank can play a role, and that is by
helping to improve the effectiveness of the provision of finance,
particularly to the small and medium-sized business sectors of the
economy, the SME sector, which I know is of particular importance
here in Cornwall.
Defined as businesses employing less than 250 people, the
extraordinarily diverse SME sector comprises some 3.7 million
individual enterprises in the UK, operating in every sector of
economic activity from handicraft to the highest technology
companies, with business objectives ranging from maintaining a
particular lifestyle to becoming the next generation of global
company. Between them SMEs account for over 60% of both employment
and output. And within the sector some 3 1/2 million
micro-businesses, those employing up to 10 people, account for about
30% of total employment and 25% of total output. I believe that in
Cornwall SMEs account for over 80% of employment.
But the importance of the sector lies not just in its size or its
contribution to employment. It lies too in its particular capacity
for specialisation, and its related ability to respond innovatively,
quickly and sensitively to the needs of the marketplace. And that
adaptability and flexibility is crucially important not just to the
individual business, but to the strength of the economy as a whole
in today's world of continuous, rapid, change.
At the time of the recession at the beginning of the 1990s there
was a serious breakdown of communication and confidence between very
many SMEs and their main finance providers, notably the commercial
banks. The borrowers complained bitterly that the banks cut back on
their loans just when they needed their support most; while the
banks for their part, suffered very large losses on loans that they
were unable to recover. The real culprit of course was the
exaggerated boom/bust cycle for which we, the authorities, must bear
responsibility. But whatever the history there was a clear need to
restore a better relationship between the two sides.
The Bank's part in this process has been essentially to organise
a more effective dialogue. Since 1992 we have held regular
consultations with the SME community, through their various
representative organisations and through direct contact - both from
London and through our regional agents all around the UK. We have
had regular consultations on SME financing, too, with the individual
banks. And then we've brought the two sides together, with some key
academic experts for an annual symposium.
That process has enabled us to monitor the relationship between
borrowers and lenders. It was not of course to be expected that
things would improve dramatically overnight. Given the huge
diversity and complexity of the SME sector, what we were looking for
was incremental progress across a broad front rather than some kind
of single solution. And that indeed is what we have seen.
The banks have devoted considerable efforts to understanding the
different financing needs of their SME customers, helping to reduce
their own lending risks in the process. This is reflected, for
example, in a fall in the proportion of SME finance accounted for by
traditional bank borrowing (from 61% in 1987-90 to 47% by 1995-97);
it is reflected too in a shift away from short-term lending towards
term finance, which now accounts for just over 70% of the total; and
34% of this term lending is now at fixed rates of interest, compared
with 28% in 1996. There is less emphasis on collateral and more on
the progress of the business. And leasing and receivables financing
has risen (from 22% in 1987-90 to 33% in 1995-97).
As the banks' understanding of the needs of their customers has
improved, so too the SME community has developed a better
understanding of the banks' need for up-to-date financial
information and early warning if things start to go wrong. At our
last symposium in January this year, the British Chamber of
Commerce, for example, reported on research showing that 87% of
their respondents now find their bank to be supportive. And the
Forum of Private Business reported that its aggregate bank
performance index had improved by about 10 percentage points since
1992 - and they found that SMEs which had developed a more
participative relationship with their banks, including a better
two-way information flow, were benefiting from lower charges and
collateral requirements.
Overall, Chairman, it was clear last January - and remember that
almost everyone was fearful of recession at that time - that both
the banks and the SMEs were much more comfortable in their
relationships and felt much less vulnerable to an economic downturn
if that were to occur. We will, of course, continue to maintain this
dialogue and look for continuing improvement; and in this connection
I know that John Beverly, who has recently moved to become the
Bank's Agent for the South West; and who is here this evening, will
be interested to learn of your experience. But on the whole things
seem to be much better than they were. We are now extending our
effort in relation to debt financing to exploring particular
problems, for example, in relation to start-up and early-stage
finance for disadvantaged groups in low income communities, and in
relation to ethnic minority businesses.
We will, as I say, continue to work away at improving access to
debt financing, but increasingly over the past 2-3 years attention
has focussed - as perhaps I should say refocused because it is a
very long-standing issue - on the different question of access to
equity financing.
Many, particularly family-owned, businesses are in fact reluctant
to take in external equity, because they prefer to maintain
independence or are not looking to expand. But it is very important
for the economy as a whole that we should nevertheless provide
effective mechanisms to enable companies that do need it to have
access to equity, especially because these companies typically
include the younger, growth-oriented businesses, not least those in
the high-tech sectors.
Here, too, the questions are as varied and diverse as the SME
sector itself. They include everything from the development of
"business angel" networks at one end, through more formal venture
capital provision, to the respective roles of private and public
equity at the other. Again, we are not looking for a single magic
solution. We need to continue to explore right across the spectrum
the role of the businesses themselves in providing accessible
information to potential investors. We need to explore the role of
investors, ranging from private, often local, investors to the large
professional investment fund managers and their actuaries and
trustees. And we need to explore the role of intermediaries,
including financial advisers but also trading networks and
exchanges. Many aspects of this subject are already being - or have
indeed already been - examined by the Government, the Bank and
private sector financial bodies working together with
representatives of SMEs, and it will be a main focus of the Bank's
next annual report on SME finance to be published early next year.
In general, there is no doubt that the importance of the SME
sector to the supply side of the economy is now much more widely
appreciated and it has moved up the policy agenda - not only in the
context of the provision of SME finance but more broadly. To the
extent that we can strengthen the supply side in this way it will
make for a more robust economy and make our monetary policy job on
the demand side that much easier. It would also be particularly good
for Cornwall.
But the need for strengthening the supply side of the economy is
not, of course, just a matter of improving access to SME finance. So
let me conclude with a few general remarks on improving the supply
side - with particular reference to Cornwall.
A major impetus for improving the structural, supply-side,
capacity of the economy as a whole, of course, comes from Government
policy. This includes everything from policies to promote domestic
and international competition. It includes privatisation - to bring
market pressures to bear on improving the efficiency of commercial
activities previously undertaken within the public sector. It
includes every aspect of budgetary policy - from expenditure on
education and training, or business support, for example, to welfare
reform affecting incentives to work, or tax policies affecting the
cost of employment or incentives to enterprise. It includes
regulatory policies and the associated costs of compliance. It
includes labour market policies and so on almost endlessly. I'm
happy to say that these are decisions for politicians who often have
to make extraordinarily difficult judgments to reconcile perceived
conflicts between social and economic objectives. But we have in
fact in this country made considerable progress on supply-side
reform in recent years - which helps to explain why we have been
able to sustain the economic expansion and growth of employment for
so long without more inflationary pressure.
Closer to home, SWERDA published its Economic Strategy at the end
of last month, setting challenging objectives to improve business
competitiveness, to address social and economic imbalance and to
improve regional cohesion. It identifies the key "strategic drivers"
as: innovation and technology, skills and learning; the regional
environment; and partnership. And, of course, you will now benefit,
too, from Objective One status within the European Union and the
associated flow of funds which will start next year.
But ultimately what you achieve in improving the supply-side of
the Cornish economy, and in raising income levels, depends above all
upon you yourselves. And I have been deeply impressed by all that I
have heard and read about your collective efforts in this respect.
You have deep-rooted traditions and you have experienced the
long-term decline of important local industries over a long period.
The temptation against that background particularly is to look back
to the past - to try to hold on to what you have had. But everything
that I see - in the Objective One program document, in the
publications of the "In pursuit of excellence Cornwall" partnership,
in the "Agenda" document put out by the Federation of Small Business
in Cornwall, in the regeneration project for Camborne, Pool and
Redruth led by John Rose and Business in the Community - to take
just a few examples - everything I see clearly puts the emphasis on
looking forward to new challenges and new opportunities. It puts
emphasis, too, on co-operation - between business and the community,
between business and education, and between the private and the
public sectors. These approaches it seems to me are the foundations
for success.
They can help you to build upon your comparative advantages -
above all the character and inventiveness of the Cornish people and
the attractions of Cornwall as a place to live and as place to
visit. They can help you to overcome the skills shortages you have
suffered from in the past - by focussing particularly on education.
I think of the Combined Universities in Cornwall project, the
Camborne School of Mines, the Falmouth College of Arts, or the Duchy
of Cornwall Education Awards. And education in turn can help you to
overcome the disadvantage of peripherality - to take advantage of
the new technology - which, as Ian Vallance, Chairman of BT,
suggests in the Green Book, means that "distance is no longer a
business problem". Much is already underway in Cornwall - and
there's a real sense of excitement and enthusiasm. And when I see
Dun and Bradstreet earlier this year putting you up to 3rd place
(from 18th) in the list of counties ranked by the proportion of
profitable businesses, behind only Renfrewshire and West Lothian -
though I'm not quite sure what it means - it can only suggest that
you are already well on the road to success!
Mr Chairman, with the prospect of a stable macro-economic
environment, with national and regional policies encouraging
supply-side flexibility, with this clear evidence of your own
determination to up-rate the Cornish economy I have no doubt that
you have a prosperous future ahead as we move into the next
millennium. I only look forward to the time when I will be able to
share that future with you. |
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