|
Economists at the central bank ought to be told one
glaring fact. If they think their job is to maintain
price stability and view themselves as defenders of
the national currency, they have failed miserably on
both accounts.
They have failed to control inflation, a
macroeconomic problem which has persisted for an
unreasonably long period of time. They have failed
to keep sufficient balance of payments through their
monetary instruments and measures. As a result, the
stability and value of the Birr have been
jeopardized, putting into doubt the competence of
policymakers and their advisors at the central bank;
they have infused confusion into the public on their
very role as well as relevance.
It should be hardly surprising if the public raises
a question whether authorities at the central bank
have any clearly defined role to play in the
economy.
Are they simply acting as a mere untrustworthy
currency board that has no defined role and capacity
to act in times of economic turbulence, such as what
we have come to witness now or should we expect more
from them?
Of course, the role of central banks varies from
country to country. In economies that tend to favour
the Keynesian view, the role of central banks in an
economy remains limited, while the government plays
an active role through its fiscal policies. In
contrast, central banks have a bigger role in an
economy and enjoy expanded autonomy in exercising
their power in economies that favor the monetarist
approaches.
There are, indeed, those who use both. The merit of
using both policies in balanced proportion lies in
the fact that proper monetary policies help in
deterring the government from reckless inflationary
fiscal ventures. On the other hand, where fiscal
policies seem sensible to use, the government can
play its appropriate role. The combination requires
both the central bank and government to have
balanced and clearly defined roles in the economy.
This arrangement in turn helps to bolster government
credibility and accountability to the public.
Today, countries, particularly those in the
developed world, whose governments adopted a
monetary policy regime, have strong and in some
cases very powerful central banks whose influence in
the economy stretches to the extent of determining
the activities of some major markets. Central banks
in these countries have active roles in the economy
in two ways.
Through their exceptional expertise on the monetary
variables and a better understanding of the matrix
of the economy in such regimes, they actively assist
the politicians in setting economic goals and
targets during their terms in power. They are also
free to use any monetary instrument and measures
they deem necessary to affect the economy in line
with the set goals and targets.
Unlike governments before the Second World War,
which had but a single dominant economic policy
advisory that ultimately molded their policy regime,
today’s governments around the world are blessed
with more alternative policy advice. In this complex
global economic order of the 21st Century, it is
hardly possible to find a school of thought with a
dominant voice. There are many alternatives.
The choice is for the government to make and the
challenge is to keep a good balance of the available
policies and instruments to regulate the economy.
The fact that the Keynesian thought is old does not
mean that governments do not refer Keynesian books
today. In fact, governments around the world still
take a bite from it.
For instance, both of the recent American
administrations - the Bush and the incumbent - have
attempted and, are determined to rescue the present
economic crisis through Keynesian methods.
Prime Minister Meles Zenawi’s administration has the
right and authority to adopt policies and
development philosophies, which it believes are
right. Accordingly, it is currently pursuing an
economic policy that can be described as one that
encompasses the basic tenets of a free market
economy. The Prime Minister himself recently said
the country sits in the middle of a process that
builds lily-white capitalism.
It still deviates significantly from the ideals of
the free market economy, with a visible tendency
towards the Keynesianism. Never mind that his
administration prefers the brand ‘developmentalist
state’, which is often publicized by its PR
machinery.
A careful look at this administration’s policies,
its economic moves, goals and targets, and its
depressing attitude towards the autonomy of the
central bank, however, are highly debatable among
academicians in general and monetary economists in
particular. All seem to derive from the basic
development philosophies it adopted, which have much
resemblance to the Keynesian economic notions and
almost devoid of monetarist thinking.
The fact that the government’s main policy objective
is sustaining high economic growth with significant
reduction in poverty; and short run economic goals
targeting economic growth rate has undermined the
role the National Bank of Ethiopia (NBE) could have
played using monetary instruments.
For instance, the government massively employed
different Keynesian methods to control the not yet
subsided inflation. This is partly because if it
allowed the central bank to use monetary instruments
at its disposal to put the inflation under control,
independent of executive intervention, it would have
put a hold on the state’s appetite to spend more.
This shows that the central bank is not autonomous
enough and has become irrelevant in controlling
emerging economic instabilities.
The ideologies followed by the administration also
give little importance to the merits of having an
independent central bank in the functioning of the
economy.
What else could be more telling evidence than to
know that the Governor of the National Bank of
Ethiopia (NBE) is a member of the ruling EPRDF, thus
asks his chairman for policy direction at party
conventions? How is the Governor expected to be
tough on the administration’s adventurous public
spending that is inflationary?
Some economists might have the view that the
existing macroeconomic problems could have been
better handled through monetary measures rather than
through the tested and failed approach – the fiscal.
Still others might prefer to live with the problems
so long as they are unable to thwart the growth
trend and thus have no effect on the possible gains
from the growth. Yet, the administration might like
us to believe that the measures it took so far are a
success story. I seriously doubt this. |
