The Independant Deterrent
Now, I know that’s a bit unorthodox from a radical.
Save for “nationalistic” stuff, the largest weakness the Left post-1989 was Economics and economic policy. Perhaps that’s why social-democracy, which is more centrist –policy-wise-, was pursued in Europe and under Clinton. I still retain some reservation on how those governments were pushed into devising policies that were not at the best public interest, just for the sake of deficit reduction and inflation-embattling. Not that I am against those, but the Center-left parties didn’t actually explore the whole range of policies (did they lack the guts, or is it because of their electorate primary target? Or was it far beyond their I can’t tell…)
Anyway, what I wanted to talk about is the role the Central Bank should play in the Moroccan economic structure, as well as on the Financial Markets. It is not, so to speak, a ‘bread and butter’ issue (although, when you think about it, it is, in a sense) but I think, it should take place in the great Constitutional Change Morocco is in a dire need for.
To put it simply, the Central Bank (Bank Al Maghrib) should enjoy a total independence from the government body –namely, the Finance Office and the Treasury as well-. In ideal facts, the Governor is answerable only to the Parliament, which sets up a public committee, just like the Fed and the US Congress.
It might look simple, but it is not. Why do we need the Central Bank to be free from any interference from the Government’s departments? Well basically, the idea is that, even though the majority coalition/party has a mandate from the people, they are bound to go for the ‘eye-candy’ policies (tax breaks, expanding investment) that are all targeted to some sub-populations, which does not always square with other important variables, such as interest rates, inflation, and ultimately, unemployment and economic growth. I am not saying governments are usually irresponsible (I am not referring to the Moroccan case only) but when unconstrained, they tend to make a mess out of the economy when they have a full mandate (I don’t mean necessarily an absolute majority, but the institutional tools to achieve their objectives). In essence, an independent Central Bank eliminates the cheapest way for a government to finance its programs, i.e. by artificially creating money, monetary inflation as it were. Of course, it also eliminates a precious tool (interest rates or Dirham devaluation) when difficult conjecture allows for or even obliges the governments to do so, though the central bankers are usually aware of such fluctuations, and quit frankly, it is part of their job to forecast, anticipate and jugulate these cycles.
Another detail that could perhaps be of interest to the financial markets: a Central Bank free of any interference from the Ministry led by an independent-minded governor is a strong positive signal that once a policy stated, the Bank will not derive from it, and subsequently, they would act upon it as a token. Before I start explaining why, amid the constitutional reform so badly needed, a credible Central Bank is a plus; According to Blinder (2000), “the concept of credibility has become a central concern of the scholarly literature on monetary policy […]credibility matters in theory, and it is certainly believed to matter in practice— although empirical evidence on this point is hard to come by because credibility is not easy to measure”. The survey (Blinder gathered data from 84 Bankers members of the Bank Of International Settlements) started with a deliberate blurred definition of credibility, as it begun with the dictionary definition, i.e. “the ability to have one’s statements accepted as factual or one’s professed motives accepted as the true ones”. It seems the definitions Central Bankers fielded were heterogeneous, though not wholly contradictory; it evolved mainly around Long-term interest rates, as well as how anti-inflation policy is doing. In a more theoretical tone, Kyland & Prescott (1977), there’s a way in measuring credibility; it could be summed up in the following equations –that are assumed to hold true–
This is a modified version of the Phillips curve equation with inter-temporal expectations, π being the inflation rate, πe the expected inflation rate, u unemployment rate and z is a bundle of goods (supply commodities) [the rest are parameters relatively easy to compute with econometric techniques, plus a ‘noise’ error term ε]
Without going too much on detail, a credible bank is able to deliver a minimal difference between the expected and actual inflation rate. No Central Bank uses such target, but it is useful to see how good it does in dealing with inflation.
2). the second equation links unemployment rate deviation to interest rates r.
3. is a ‘trade-off’ function. L is the liquidity loss variable the Bank has to compensate (and under optimization rules, minimize); α measures the inflation aversion. The function is a tradeoff in the sense that the k parameter is the probability for the Banker to cheat and deliver an unexpected inflation -and therefore minimize the Liquidity loss artificially–. The equations are all linked, with the bottom line being the Liquidity loss compensation. It underlines the important effects interest rates have on unemployment and inflation. The effects are intertemporal and involve a great deal of expectations and projections, all of which are function –to an extent- of the Central Bank’s credibility and commitment to keep inflation low, and so the long-term interest rates.
This could of course provide a starting point of measuring how credible a Central Bank could be; In other terms: “a central bank’s pronouncements are credible only if it attains a higher level of expected utility by following through on its promises rather than reneging. In other words, duplicity is to be expected unless truthfulness is in the central bank’s self-interest. One way to induce the central bank to carry out its pledge to fight inflation is for the government to write an incentive-compatible contract for its central bank.” The author proposed an additional term to the equation 4 (as a penalty in case they cheated for ‘cheap’ compensation) but there’s another way to get it right; Furthermore, a credible Banker is such that his determination to stabilize long-term interest rates –and therefore inflation- is beyond reproach. The other important parameter (as it appears in the paper) was about ‘independence’, indeed, according to the finding, most Central Banks agreed strongly on this particular point, it ranked much better with respect to the next reason in line.
As for how it could be effectively measured, one could offer an estimation –thanks to econometrical techniques– of the α and k parameters (though data is quite incomplete in this area, I promise I will venture some sketches about it)
Before I move on, I sense the question is looming: ‘surely the Central Bank’s main concern should be about jobs, while it focuses in a rather obsessive way, on inflation’. That’s true. But then again, its up to the Finance and Employment offices to carry on effective policies –not involving inflation of course-. Actually, high or ‘concentrated’ inflation damages the common people more than any other class of society. It is amazing how a leftist government –or a left-leaning politician- feels more inclined to squash unemployment than fight-off inflation, while both are equally dangerous (well not so much, but both are harmful) There is indeed a tradeoff between both variables, but it all boils down to the long-term thinking most politicians (in Morocco anyway) lack. On a related topic, an independent Central Bank tends to go ‘technocratic’ and sometimes, biaised towards business and supply-side lobbies (thanks to their monetarist stance I should say…) Anyway I will come back on the various safeguards that could prevent it to do so, and instead, serve the common good (and not only the financial markets). This whole introduction on theory is to prove a point: a credible Bank has to be independent –in order to achieve its commitment to embattle inflation–
How are things in the real world, or shall we say, the Moroccan context?
The Central Bank (Bank Al Maghrib) has a long history, though with little if no power right from the start. A little bit of history perhaps: Bank Al Maghrib, formerly Bank Of Morocco, was instituted in June 1959 (A. Ibrahim Premiership and A. Bouabid as finance minister) by virtue of Dahir n° 1-59-233. In essence, the bank acts a great deal like a super-paymaster-enforcer for the finance minister, plus there’s the business of blurred relation between the Civil service (theoretically answerable to the government), the Bank and the Monarchy (that got hold of virtually everything). Of course, that’s 1959, many things changed since then.
The 2005 Dahir brought some new things (I can’t find it in the Government Secretary’s gazette, if anyone has got the link, thanks a lot), for instance, no Civil servant or private Bank representative could be member of the committee board and indeed, the Bank is from now on the guarantee of monetary stability as well as monitoring the markets. That’s a good start, but it fails to address the relationship with the government. The latter still appoints 2/3 of the board.
Another thing: the Governor is virtually answerable to anybody –only perhaps to the only empowering authority, i.e. the King-. The present state of BAM is quite interesting, as it’s a pure bureaucratic institution, theoretically close to the government but actually very autonomous. However, because only a Dahir gives or takes away its prerogatives, its independence is hindered by this opaque tie.
I’ve got this example to show that BAM is quite submissive, or rather, cannot prevent government actions, even when they are perceived to be harmful to the economy; In 2003, the Jettou government was in between two minds about devaluating the Dirham. The Bank, on the other hand, was adamant in its refusal (at the time, there was no real immediate benefit to do so, and in the long run, it makes the Balance of Payment deficit even worse.) Funnily enough, there was a time the Bank wasn’t even aware there was devaluation. The government caved in for a lobby, period.
There was another row late 2009, when the Governor A. Jouahri refused to consider another devaluation.
That’s why the Bank has to keep its independence and all its prerogatives (among which to contribute or not to devaluation) off the government, because it is not credible in its commitments (as they change their minds fairly easily) Of course, in a real answerable and democratic government, such amateurism wouldn’t take place, and the Finance minister would be well advised to stick to their plans (if they have any, but then again, it’s always a pleasure to see a left-leaning finance minister advocating for privatization, a joke, really)
How do we solve this then? I don’t mind the Governor being appointed by royal Dahir (after all, it’s all the same in the UK, or any modern democratic monarchy) but there should be clarification on what it is meant by ‘with the advise of the Prime Minister or the Finance Minister’ (because, hey, an advise is not binding nor compulsory to follow, especially from an ectoplasm like A. Fassi, while a decision to sanction actually is, especially when it is someone lie A. Ibrahim)
Of course, there must be first a constitutional reform, so that the Bank would be of constitutional, rather than administrative legitimacy. The same bank, on the other hand, has to be answerable to Parliament, as the governor should give evidence to a public select committee (MPs, academics and members of government) and defend their decisions.
Again, I know this is a quite far-fetched policy for a left-wing radical, but I believe the economy has to be initially stabilized –through interest rates, unemployment and inflation- and then we can get on with our objective of cooperatives, public ownership and free information/innovation policies. Well, someone had to do the blue-sky thinking, shall we?