KONGThat 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.
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
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.
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.
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.
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.
Central bankers are still mostly fighting
the last war.
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.
There is little evidence that lack of
central bank independence was a major reason for the Asian crisis.
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.
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.
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.
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.
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.