Independence for Central Banks?It's Debatable
Philip Bowring International Herald Tribune
Friday, February 16, 2001
HONG KONG That central banks should be independent of governments has become a shibboleth. But experience in Asia, as elsewhere, suggests that central banking may be too important to be left to bankers. At the least there is now debate, and practices vary.
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In Indonesia a government impasse with the IMF over the issue is one reason for a delay in releasing new loans. The IMF wants to see the central bank taken out of the political arena, but the government attaches more importance to cleaning it up by removing Suharto-era incumbents.
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President Abdurrahman Wahid's obstinacy is much criticized by those who see central bank independence as a key part of what Asia needs. But many Indonesians ask why "reform" requires enhancing the position of a tarnished institution or removing a key organ of state from executive control or democratic oversight.
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Many of those in the international financial community critical of Indonesia's position are simultaneously assailing the now independent Bank of Japan for failing to stimulate money supply sufficiently. They argue, reasonably, that central bank buying of government debt is necessary to expand money supply so as to halt deflation and the decline in asset prices that explain Japan's weak domestic demand.
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Criticism of the Bank of Japan's obstinacy is now almost as strong inside Japan as among the foreign economists who have been advocating deliberately inflationary policies. It raises two questions. First, whether the "sound money" concepts so loved by central bankers are what is needed. And second, whether Japan has created a cross for itself by enhancing the central bank's independence. The governor gives the impression that it would be a loss of face to be seen to respond to criticisms, particularly from the Ministry of Finance.
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This need to demonstrate independence in the face of political and academic criticism also appears to have afflicted the European Central Bank, which continues to fret about inflation even while Europe abounds in spare capacity.
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Central bankers are still mostly fighting the last war.
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For sure, the inflation of the 1970s and '80s in the West was exacerbated by political influence over central banks. Now some politicians see the advantage of giving central banks more responsibility - they can also be made scapegoats for unpopular decisions. But that does not necessarily lead to better economic management.
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There is little evidence that lack of central bank independence was a major reason for the Asian crisis.
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Now the central bankers, with their natural tendency to place monetary policies at the center of economic management, may well be an obstacle to the looser fiscal policies that much of Asia needs to offset weaker exports to the United States.
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No one makes claims for central bank independence in such ordered administrations as Hong Kong, Singapore, China and Malaysia, and in South Korea and Taiwan past total subservience of the central bank has been only slightly reduced.
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There are of course occasions when enhanced statutory independence can be useful. The Philippine central bank governor, Rafael Buenaventura, managed to stay admirably aloof from the recent struggle for the presidency, conducting sensible policies in a difficult environment and being strongly criticized by both camps.
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On the other hand, in Thailand the central bank remains in theory subservient to the government but currently has a governor, Chatu Mongol Sonakul, who is not afraid to be seen at loggerheads with the Ministry of Finance.
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The United States may present the best compromise. As the Federal Reserve Board describes itself, it is "independent within the government." Alan Greenspan has to work with the administration and explain himself to Congress - hence his change of views on tax cuts and his reluctance to rein in credit growth. The Fed's broad remit, which includes growth, employment and credit access, is capable of varying emphasis, which may explain why Mr. Greenspan is not much worried about U.S. inflation although it is significantly higher than the inflation-obsessed ECB, let alone the Bank of Japan, allows itself. Chairman Greenspan makes mistakes, but they are not those imposed by a straitjacket view of government/central bank relations.

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