Should central bank be run by economists or bankers?

The question as to who should be appointed as central bank governor is not as straightforward and simple as some have argued recently (For instance, Dr Muhammad Yaqub’s article titled “Why they fear an autonomous SBP” in a local newspaper. Globally, central bank governors have had mixed backgrounds. All central bank governors usually come with a mixture of experience from financial markets, academia and public sector/organisation etc. Thus, the debate on central bank performance revolves around with central bank independence rather than who should be appointed as central bank governor. Globally, over the past decades, there has been a trend towards increasing the independence of central banks as a way of improving long-term economic performance. However, while voluminous research has been conducted to define the relationship between central bank independence and economic performance, the results are ambiguous.

Advocates of central bank independence argue that a central bank which is too susceptible to political direction or pressure may encourage economic cycles, as politicians may be tempted to boost economic activity to the detriment of the long-term health of the economy and the country. The central bank independence is a relative concept. A central bank is supposed to be independent within the government and not independent of the government, implying better co-ordination of fiscal and monetary policies.

The literature on central bank independence has defined a number of types of independence. The ‘legal independence’ of the central bank is enshrined in law. Even defining degrees of legal independence has proven to be a challenge since legislation typically provides only a framework within which the government and the central bank work out their relationship. Under the ‘goal independence’ a central bank has the right to set its own policy goals, whether inflation targeting, control of the money supply, or maintaining a fixed exchange rate. While this type of independence is more common, many central banks prefer to announce their policy goals in partnership with the appropriate government departments. This enhances the transparency of the policy and helps to avoid situations where monetary and fiscal policy are in conflict; a policy combination that is clearly suboptimal. The most common form is ‘operational independence’ of central bank. Under this, a central bank has the mandate to determine the best way of achieving its policy goals, including the types of instruments used and the timing of their use. The term ‘management independence’ denotes that the central bank has the authority to run its own operations (appointing staff, setting budgets, and so on) without excessive involvement of the government. One of the most common statistical indicators used in the literature as a proxy for central bank independence is the “turn-over-rate” of central bank governors. If a government is in the habit of appointing and replacing the governor frequently, it clearly has the capacity to micro-manage the central bank through its choice of governors.

Judging by the foregoing, it is quite evident that SBP is currently afflicted with lack of independence assigned by the government at the levels as defined above. This, particularly, has been reflected in the high turnover rate of SBP governors in the recent past. The argument that SBP has been unable to fulfil its mandate as a result of the appointment of non-economists as governors and deputy governors is misleading and self contradictory. It is quite obvious that the last three SBP governors resigned while taking a fundamental position on principles with the successive governments and not due to acceptance of government demands or due to their banking background, as alleged by the writer. Therefore, no matter who is appointed as the governor SBP, the lack of independence and micro management by the government have undermined the central bank functioning and performance.

Now turning to the burning question of performance of economists who previously served in key positions in Pakistan including SBP governors and finance ministers. It is a well-known fact that they were mostly imported to promote the Washington Consensus to impose the set of prescriptions to impose neo colonialism). They were oblivious of the ground realties of Pakistan and failed to connect with its people and economy. They were fixated to serve the agenda of the International Financial Institutions and their promoters. No wonder, the economic mess that Pakistan is faced with, which is reflected in the economic imbalances and lack of equity in taxation and all public policies, owes much to the poor economic management perpetuated by these suitcase economists including Moin Qureshi, Dr Muhammad Yaqub, Shaukat Aziz (although he was not an economist!) and Dr Hafeez Sheikh. They returned to “serve” Pakistan only after their careers abroad faced a dead end. Their usual prescriptions for the economic issues included privatisation of the national assets to favour the private sector, elimination of subsidies targeting the poor and marginalized segments, and monetary tightening to curb inflation (without even knowing that monetary policy in Pakistan has failed to demonstrate its efficacy as majority of the population is unbanked and financially illiterate). The argument to place monetary economists as SBP governor put forward by Dr Muhammad Yaqub ignores the fact that in Pakistan the monetary policy transmission channels are under developed including the inflation expectations channel due to lack of basic understanding of monetary policy nuances amongst the common populace . Likewise, the planted finance ministers never taxed the rich and let the tax to GDP ratio reduce to a level where fiscal collapse is imminent and the country is in the clutches of IMF against the desire of the ruling PML-N government who sought public votes in the general election raising slogans to break the begging bowl. The usual prescription of these pseudo economists to check burgeoning fiscal deficits is indirect taxation leading to higher inflation and then punishing the common man and the productive sectors of the economy mainly the small businesses through monetary tightening. Sadly, these monetary economists vehemently argue in favour of monetary tightening rather than belt tightening by the rich. In fact, they never care about the welfare of the people of Pakistan. It is interesting that amongst the SBP governors, the two of them who had some success (Dr Ishrat Husain and Dr Shamshad Akhtar) were actually development economists and not the monetary economists. To conclude, the performance of any SBP governor or finance minister should be judged on the basis of their ability to understand the social and economic realities of the country and the competence to optimise welfare of the people through long-term vision and result-oriented policies.