By Obadiah Mailafia
A FEW weeks ago, Minister of Finance, Kemi Adeosun, was in the news for strenuously pleading with the National Assembly to revoke the independence of our central bank as established under the CBN Act 2007. She is obviously among those who believe the apex bank has been arrogated too much powers for its own good.
Sadly, the seeming excesses of some former top leaderships of the institution haven’t helped matters. During the dark night of military rule, the Mint was kept working overtime to fill the pockets of corrupt tyrants. Some behaved like Charles Maurice de Talleyrand-Perigord, the vastly corrupt nineteenth century French statesman once reputed to be richer than the Treasury.
The policy dissonance between fiscal and monetary authorities in our country has become worrisome, in the context of high interest rates, multiple exchange rates, opacity in the capital markets and the sheer Levantinism. Nobody trusts former commercial bankers to undertake prudential regulation devoid of incestuous tendencies.
But is this enough reason to revoke the hard-won independence of the CBN?
The trend the world over has been for central banks to be granted greater autonomy from direct political control. Among the few exceptions is the People’s Bank of China, PBC, which remains under the absolute control of the Communist Party of China. Like many others, I am an admirer of Governor Zhou Xiaochuan, an eminent economist and technocrat. But the whole cognoscenti of international high finance know that his powers are wholly subordinate to those of the Chinese government. Autonomy is only a matter of degree, along a continuum in which is to be found the American Federal Reserve System, the Bank of England and the Swiss National Bank among others.
The debate about central bank independence has been a long and tempestuous one. In the eighteenth century, the founding-fathers of the American republic, barring Alexander Hamilton, were opposed to the very idea of a central bank. In the words of the fourth president, James Madison: “History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance.”
It was as late as 1913 that the Fed was created. The Sveriges Riksbank, the National Bank of Sweden, enjoys pride of place as the first central bank to have been established, as far back as 1668. The Bank of England emerged in 1694.
In modern times, most central banks – those of Europe at least – operated as subordinates of their national treasuries. The hyper-inflation of the 1960s and 1970s compelled national authorities to grant them autonomy in the expectation that it would tame the spectre of inflation. In 1997, under Chancellor Gordon Brown, the Blair labour government in Britain granted independence to the Bank of England. The European Central Bank, ECB, founded in 1998, operates independent of its member states. It was as late as 2013 that the Bank of Japan was granted autonomy from the almighty Ministry of Finance. The German hyperinflation of the 1920s and 1930s was a bitter lesson for the German people. The German Bundesbank remains the classic model of an independent central bank.
In a widely cited 1993 paper by Alberto Alesina and Lawrence Summers, empirical evidence shows that independent central banks are better at taming inflation than politically controlled ones. The arguments for an independent central bank centre on the fact that governments have been rather poor at making decisions on monetary policy; politicians being typically guided by short-term horizons rather than long, disinterested ones. The booms and busts of the economic cycle tend to coincide with the electoral cycle, as politicians seek to calibrate policies with a view to winning elections rather than safeguarding the long-term stability of the economy. Autonomy for central banks is therefore thought to be a critical factor in boosting policy credibility and anchoring inflation expectations.
If the logic seems unassailable, why then do we still have those who oppose central bank independence?
For one thing, we have to understand that central bank independence should not be a licence for empire-building. Central banks operate on the basis of delegated authority. Independence is always at the pleasure of parliament and can equally be withdrawn. Such enormous power by unelected officials cannot operate without being challenged. It is healthy for our democracy.
While inflation across the world has been tamed, central banks are also being blamed for the secular stagnation which in the most advanced industrial nations. Nobel laureate Joseph Stiglitz recently argued that central banks that are not fully independent – such as those of China, India and Brazil – perform far better in overall economic growth than fully independent ones. Central banks are sometimes secretive in their approach, often giving the impression that they care more for wealthy bankers than they do the welfare of the ordinary citizen. During the Great Recession, trillions of dollars were deployed to save the banks at the expense of taxpayers. People feel angry that their taxes were being used to subsidise wealthy bankers.
The truth is often in the Aristotelian middle. An independent central bank is one of the hallmarks of our global industrial civilisation. It is not a licence for irresponsibility. Where there are lapses, our duty is to reform the system, not throw away the baby with the bathwater.