Maxfield & Boylan Articles: Autonomy of Central Banks
Chapter’s two through four of Sylvia Maxfield’s book, Gatekeeper’s of
Growth The International Political Economy of Central Banking in Developing
Countries, and Delia Boylan’s article " Preemptive Strike: Central Bank
Reform in Chile’s Transition from Authoritarian Rule," provide two
perspectives regarding the development of autonomous central banking
institutions in developing countries. Maxfield argues in her third chapter
that the actual independence of a middle-income developing country’s
central bank depends largely on the perception of it’s need for acceptable
creditworthiness by politicians. The theory postulates that politicians
attempt to show their country’s credit-worthiness through granting the
central bank some degree of autonomy in order to attract international
financial investment (35-36). Alternatively, Boylan argues that the
politicians in power may effectively grant a degree of autonomy to a
central bank only in order to "insulate" their own interests from the
impact of emerging democracy (444). Boylan effectively adds a caveat to
Maxfield's argument by showing through the example of Chile that
politicians may be motivated to attract international financial investment,
while at the same time attempt to leave a mark from the authoritarian
regime behind after transition to democracy.
The need to signal creditworthiness rests on a number of factors according
to Maxfield: need for balance of payments support, expected effectiveness
of signaling, and politician's tenure security. The desired result of such
signaling is that investors will view the nation with greater confidence
and thereby introduce greater financial resources into the nation.
Transitioning to a more autonomous central bank will have varying signaling
effects on the different types of international investment such as foreign
direct investment, equity shares, debts in the form of loans, and debt in
the form of bonds.
Boylan provides a counterpoint to the notion that creditworthiness will
spawn investment measures based on empirical evidence. Boylan states that
"developing countries face severe external constraints that make them
vulnerable to the whims of the international economy (445)." She continues
stating that if external economic factors, such as international
investment, were the only variable then all developing countries would have
autonomous central banking institutions. The situation differs from nation
to nation based on the perceived benefits, and in some situations autonomy
will be viewed with less enthusiasm when political leaders have vested
interests in keeping the central bank less autonomous. How can such
politicians truly be expected to reform a system that they are reaping
greater benefits from when it is less autonomous? Boylan further questions
the theory that there is cost free, and that there is a relationship
between central bank autonomy and low inflation rates.
The Chilean example further supports a divergence from Maxfield's model
dealing with the need for signalling. Certainly, there were many motivated
towards attaining an independent central bank, but prior to actual reform,
Pinochet weilded an enourmous amount of political power. However, the
voters overturned the contiunuation of Pinochet's authoritarian rule,
thereby leading Pinochet to press for the formation of an autonomous
central bank to be left as his mark for the forthcoming democratic Chile.
Truly, the transition from authoritarian rule to democracy was inevitable.
The Pinochet authoritarian regime embraced bank reform in order to make one
which would keep the incoming government from controling the institution,
and hamstrung its efforts for economic reforms.
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"There are going to be times when we can't wait for somebody. Now,
you're either on the bus or off the bus. If you're on the bus, and you get
left behind, then you'll find it again. If you're off the bus in the first
place - then it won't make a damn."
Ken Kesey
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James D. Lindley, Jr
MPAff Candidate - LBJ School of Public Affairs
MA Candidate - Center for Middle Eastern Studies
University of Texas at Austin