Jim Lindley & Mohammed Malley
October 13, 1998
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. 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. 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. Making the
transition 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 increasing
bank autonomy 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 signaling. Certainly, there were many motivated
towards attaining an independent central bank, but prior to actual reform,
Pinochet wielded an enormous amount of political power. However, the voters
overturned the continuation 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 controlling the institution,
and hamstrung its efforts for economic reforms.
Relevance of Maxfield and Boylan to the class:
While Maxfield and Boylan differ on a number of theoretical points, the
discussion between them provides important insights that are relevant to the
broader themes of this course on the political economy of globalization and
financial liberalization. The authors raises a number of questions that
could be fruitfully pursued in the analyses of the effects of globalization
on the economies and politics of specific countries.
A primary question involves the role that the central bank plays in the
economy of the country under study. What exactly the central bank does
differs greatly in different countries. The central banks in the
Anglo-American and German models for example are much more independent than
they are in the French/Japanese model where they have less autonomy and
their role in the economy is more circumscribed. This underscores the
existence of varieties of capitalism, all of which are consistent with
economic success and political democracy. Despite these differences,
globalization has had an impact in increasing the role and independence of
the central bank in both France and Japan in the 1990s. This being the case
it is even more important to analyze the effect globalization has had on the
central banks of middle-income developing countries.
The amount that central banks can legally lend to the government and the
manner by which the central bank governor and board members are appointed as
well as the length and nature of their terms and the legal conditions under
which they can be removed are all important indicators of the independence
of the banks. As Maxfield points out, however, it is often difficult to
measure the actual independence of central banks from their governments
since legislation alone does not always reveal actual independent
decision-making capabilities. Maxfield does provide a number of tools to
better understand true central bank independence. Perhaps the most
important tool may be a close analysis of the policies pursued by such
banks. The extent to which these policies deviate from expected norms
predicted by economic fundamentals could be seen as a measure of political
interference. This is obviously tricky since different economists may
expect different norms but it is still a useful way of analyzing central
bank policies. First of all, does the government make excessive demands for
financing that the central bank can not deny? It is also important to note
the consistency of certain policies over time, which may or may not indicate
independence—depending on what those policies are. Major inconsistencies
likely have political causes that more likely than not are aimed at
influencing electoral outcomes or, in non-democratic countries, balancing
competing economic groupings against each other. Consistent monetary
policies and goals can either signal a truly autonomous bank or the fact
that the bank panders to certain politically influential sectors. For
example, a consistently loose monetary policy could be a function of the
strength of labor. Maxfield also points out that central bank autonomy
should not only be seen as independence from the government but also from
capture by the commercial banking sector. Another important thing to look
at is the extent to which monetary and financial policies are coordinated.
Maxfield makes a strong argument for explaining increasing levels of central
bank independence as a function of the globalization of financial markets.
This also raises a number of questions that can be pursued on the individual
country level. Have bank policies actually improved conditions for
international equity investment? In what ways? If they have not, and such
investment is needed in the country, what political considerations can
explain the policy? All of these questions and avenues of research are
important for this course and both Maxfield and Boyle will prove to be
valuable resources in coming to a better understanding of the broader themes
we have been looking at.
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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