The Politics of Central Bank Independence
Sylvia Maxfield sets out to explain in Chapters 2-4 in Gatekeepers of
Growth that central bank independence for developing and developed
countries is not so much a function of legal directives in the form of
constitutional or statutory law, but instead is increasingly an
expression of the concerns of national and international financial
considerations. Her article complements Zysman’s discussion of the role
of the state in the financial system, although he limits his discussion
to the influence of the state on economic factors such as the creation
of money, interest rate and regulations in general activities of the
banking system. There is extensive scholarship addressing this point as
researchers debunk, amend and endorse the findings of others regarding
the influence of sectoral groups. Maxfield says that what is apparent,
however, is that developing countries show more variation in central
bank independence than in central bank law. The need to seek
international creditworthiness is one parameter that helps explain why
central bank autonomy is promoted by politicians and governments in some
countries and not others. “Politicians seek creditworthiness in the
eyes of international investors to improve the quantity and price of
financial resources offered to their country” (p37). But what becomes
the role of the central bank when a country’s debt to export ratio is
low, there are favorable interest rates on foreign loans, and there is
no special effort required of the government to attract foreign
investment? This might indicate a low value placed on competition for
creditworthiness and the central bank may end up the domestic tool of
political competition, as in the case of South Korea which Maxfield
discusses in Chapter 7.
Even before central bank legislation became law in S. Korea in the
early 1950’s, bank officials and those in the Ministry of Finance were
at odds with each other over how much authority the central bank would
actually have in creating and implementing policy. The law stipulated
bank independence and the primary goal of maintaining price stability
over full employment (Maxfield says that the latter sectoral group
desires decreased central bank performance). However, between
1956-1962, six presidents of Bank of Korea were either forced to resign
or were fired because they protested the mishandling of bank funds by
the Liberal Party government. The government was regularly using or
requesting to use bank funds to finance political campaign financing.
In 1962 an amendment to the banking law formalized the central bank’s
political weakness, and its operating status remained more or less the
same until 1987. This behavior by the South Korean government
illustrates one of Maxfield’s scenarios for the creation of a central
bank, namely that a central bank can provide finance for government
means.
The international financial backdrop to this constant warring between
central bank officials and government finance ministry officials
concerns the level of foreign investment. Foreign investment steadily
increased from 1963-1989 with minor fluctuations in loan amount, and
steady increase in FDI with moderate fluctuations from year to year.
The Korean politcal leadership was able to discount the role of economic
policy in attracting capital because it had a strong export economy and
it could borrow easily from foreign sources. Maxfield suggests that
South Korea may continue in its low prioritization of the need for
central bank authority, especially in light of a failed 1987-88 attempt
by Bank of Korea to provide a statutory basis for increased central bank
independence. She suggests that the 1987-88 bank independence movement
failed because of the ability of the semi-authoritarian regime to
effectively counter the movement, but she doesn’t offer further comment
on the effect of regime type on the indenpendence movement.
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