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Affecting Independence Independence is a good thing – at least in terms of the human condition. Wars have been fought for it at one point or another in just about every country’s history Just cross the northeastern border and you’ll find people dying for it every day. Ideologies based on freedom – like democracy
and free trade – are also good, and not just for the spirit:
the people whose cultures adhere to them also tend to be the world’s
most prosperous. Just look at the mutual benefits accrued by the
markets of today’s freer, less regulated economies. Take, for example, central banks. Economy wonks and academics continue to argue as to whether the independence of a nation’s central bank is really in that nation’s best interest. Some even argue that the creation of a CB free of government control is inherently impossible. The question was raised in an essay published in 2001 in the Journal of Money, Credit and Banking, entitled “Is it possible that an independent central bank is impossible?” The writer refers to the case of the Australian Notes Issue Board, a pre-cursor to the modern central bank, which was established in 1920 “as a genuinely independent monetary authority.” The Board, however, was abolished four years later “as its policies antagonized interests upon which the government depended.” The episode, notes the writer, “illustrates the thesis that the possibility of a genuinely independent monetary authority is problematic.” Aside from notions of simply alienating the old money, there’s also the traditional argument that monetary and fiscal policy work best if they’re working together, i.e., if they’re both kept under the close supervision of the state. “If fiscal and monetary policy are not coordinated, if they are not working together as part of some overall strategy, then economic policy as a whole will not be as effective,” reads a 1998 essay on the pros and cons of a free European Central Bank in the European Journal. But there are also good arguments the other way. Countries with freer central banks have, in the last 50 years anyway, experienced lower inflation than countries whose monetary policies were dictated from above. Additionally, a free CB, having a longer-term horizon than most governments, can build up a reputation for sound monetary policy over time. The most oft-voiced criticism of Egypt’s economy, meanwhile, has been that the state’s economists lack just that: a sound monetary policy, which is a prerequisite both for a healthy private sector and a credible investment climate. One of the stated aims of the new Unified Banking Law, just approved by parliament’s economic committee, therefore, is to make the Central Bank of Egypt (CBE) a more independent body – not merely a conduit through which the executive branch controls the nation’s monetary system. Yet to listen to critics of the draft law – including private sector economists and political opposition figures – the new legislation would do no such thing. As CBE governor Mahmoud Abul-Eyoun himself said recently, “The law should create all the elements of an independent central bank.” In this case, it would appear that the promised independence is not necessarily the sum of all its parts. Granted, the CBE will henceforth be allowed full “operational freedom,” meaning it will be allowed to make rate adjustments as it sees fit. But it’s becoming increasingly obvious that, even after the law’s passage, monetary policy – be it pegged, managed or floated – will continue to be determined from on high. The CBE and proponents of the new law should simply
say what they mean, rather than try to sell the law as something
that it isn’t. After all, even the liberal economists of Europe
aren’t unanimous in the conviction that a free CB is always
for the best. Adam Morrow |
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