Is the Central Bank independent?
“The Governor is the creature of the Prime Minister”. So said Courtney Blackman, then Governor of the Central Bank of Barbados (CBB). It was late 1970s when I spoke with the Governor on the periphery of a conference of the Monetary Studies Programme, a joint effort of regional Central Banks and UWI’s Institute of Social and Economic Research. Conference proceedings focused on inflation, monetary policy and its capacity both to combat inflation’s scourge and influence economic activity.
I was a young researcher at my first ‘big’ conference as a participant, keenly interested in controversies surrounding the effectiveness of monetary policy as a mechanism to influence behaviour of economic actors. Presentations were diverse, precipitating lively discussion including ideas on desirable institutional development, discussion of policy initiatives, their success and failure.
Governor Blackman had recently been reading Schumacher’s Small is Beautiful and been much impressed by the idea of assigning value to environmental inputs, seeing economics not merely as financial issues and powerful ‘big’ technologies. The book’s subtitle is Economics as if People Mattered.
Given my deep interest in technological change, development and ecosystem analogy to economic systems, I was curious. He mentioned Schumacher more than once in his interventions during the proceedings, advocated independence for central banks and as if management had become his mantra, seemed to suggest every problem was solvable by ‘good management’.
So I really wanted to talk with him. When the chance arose, I asked how, why he’d come to these views. He didn’t really provide a comprehensive answer. He looked at my conference badge, saw ‘Wilberne Persaud’ and exclaimed “But you’re not an Indian”. “No, I’m what we call in Guyana a ‘dougla’,” I replied. Conversation continued.
He said I looked like someone he knew from Irvine Hall at UWI Mona. This was my brother. “So what’s he doing now, where’s he”? I told him he was a practicing psychiatrist in Manhattan. Our conversation continued along those lines until his queries were done. Finally we got to the issue of independence of central banks and their capacity to influence economic behaviours.
Central banks should manage the currency; regulate, guide or influence credit availability; determine money supply and/or interest rates in line with analysis and assessment of the demand for money and foreign exchange in their time path. Text books often say ‘keep the economy on an even keel’. To do this effectively, the central bank should be ‘independent’. What does this mean?
Simply put, policy decisions should be responses driven by the bank’s statutory objectives in predicting and confronting verifiable, real world facts about the economy – analysis of the statistical evidence coupled with informed judgment, sprinkled with relevant experience. Whereas politicians are elected and must eventually please their electorate, the CBB Governor is appointed and must take decisions on the facts and valid interpretations of them. No necessity to ‘please’ an electorate.
After lively discussion along these lines, I asked if, as Governor, one finds oneself in disagreement with the Minister of Finance or put stronger, in actual conflict, what does one do? That’s when I got the reply quoted at the beginning of my recollections. Recall, Governor Blackman’s Minister of Finance was Prime Minister Tom Adams. After briefly pausing, he provided the remedy. You request the Minister to issue an instruction in writing. He assured me this was protocol. Alternatively, the Governor always has the recourse of resignation.
The debacle of a private ‘firing’ followed by public row escalating to court proceedings between CBB’s Governor Worrell and Minister of Finance Sinckler was perhaps entirely avoidable. Opposition spokesman on economy and finance Clyde Mascoll suggests Barbados should emulate Jamaica and have a mechanism requiring parliamentary approval of debt ceiling increase. This is all well and good but not necessarily for the reasons some suggest.
Fact is, capitalism, even as it loathes transparency among private business interests, requires for smooth functioning, transparency of public policy thinking, formulation and implementation as it affects business activity. Mandating parliamentary debate on debt ceiling, a particular choice – for choice it is – usually facilitates airing of all these issues. It acts as strong rays of sunlight amidst foggy moisture creating a rainbow of colours, reflecting the propagation of contending views.
What we’ve had instead was a performance shedding little light on the true issues leading to the standoff – painting a picture of disarray. Perhaps Mascoll’s suggestion after all, is worthy of consideration.
(Wilberne Persaud is a consultant economist and op-ed columnist.