Gatekeepers of Growth

Gatekeepers of Growth: The International Political Economy of Central Banking in Developing Countries

Sylvia Maxfield
Copyright Date: 1997
Pages: 192
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  • Book Info
    Gatekeepers of Growth
    Book Description:

    Central banks can shape economic growth, affect income distribution, influence a country's foreign relations, and determine the extent of its democracy. While there is considerable literature on the political economy of central banking in OECD countries, this is the first book-length study focused on central banking in emerging market countries. Surveying the dramatic worldwide trend toward increased central bank independence in the 1990s, the book argues that global forces must be at work. These forces, the book contends, center on the character of international financial intermediation. Going beyond an explanation of central bank independence, Sylvia Maxfield posits a general framework for analyzing the impact of different types of international capital flows on the politics of economic policymaking in developing countries.

    The book suggests that central bank independence in emerging market countries does not spring from law but rather from politics. As long as politicians value them, central banks will enjoy independence. Central banks are most likely to be independent in developing countries when politicians desire international creditworthiness. Historical analyses of central banks in Brazil, Mexico, South Korea, and Thailand, and quantitative analyses of a larger sample of developing countries corroborate this investor signaling explanation of broad trends in central bank status.

    eISBN: 978-1-4008-2228-7
    Subjects: Business

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Acknowledgments
    (pp. ix-2)
  4. One Central Bank Independence: Why the Interest?
    (pp. 3-18)

    Countries ranging from Eritrea to Malta, France, Kazahkstan, New Zealand, England, and Chile have recently approved, or contemplated, new central bank legislation. Between 1990 and 1995 at least thirty countries, spanning five continents, legislated increases in the statutory independence of their central banks. This represents a rate of increase in central bank independence many times greater than in any other decade since World War II (see Table 1.1).

    Central banks shape monetary policy, affect exchange rates, and guard financial stability. They condition economic variables crucial to national development and growth. Central banks also play a role in determining the nature...

  5. Two The Political Sources of Central Bank Independence
    (pp. 19-34)

    The initial focus in literature on central banks was on the economic consequences of central bank independence. More recently the literature has begun to explore the political sources of central bank independence. We know that central bank independence affects economic performance to some extent, but when and why do government politicians give discretion to central banks? Under what circumstances do they honor and protect previous decisions to cede authority to central banks? Answers to these questions focus on (1) the political strength of different sectoral groups with varying preferences for employment and price stability, (2) the nature of political institutions...

  6. Three International Capital Flows and the Politics of Central Bank Independence
    (pp. 35-49)

    The wave of central bank reform during the 1990s in countries all over the globe lends credibility to the argument that global financial forces are at work.¹ This chapter sketches an argument suggesting that the financial pressures on politicians in middle-income developing countries shape their decisions regarding central bank independence in several specific ways. The 1990s witnessed a wave of increase in legal central bank independence because government leaders were trying to attract and retain capital. Put telescopically, the likelihood that politicians in middle-income developing countries will attempt to signal creditworthiness by increasing central bank independence is an increasing function...

  7. Four Central Bank Independence in the 1990s
    (pp. 50-70)

    This chapter surveys the remarkable global rise in central bank independence in the 1990s.¹ It also explores the extent to which cross-regional variation in this global trned corroborates the argument that politicians are more likely to cede discretion to central banks when the need and value of competing for international creditworthiness is high.

    Between 1990 and 1995 at least thirty countries, spanning five continents, legislated increases in the statutory independence of their central banks. A list of the countries increasing de jure central bank independence and, in some cases, measures of increase in legal independence (based on the 1992 coding...

  8. Five The Politics of Changing Central Bank Authority: Thailand
    (pp. 71-90)

    Approaching central bank authority from an international perspective suggests that, globally, changes in central bank authority should occur in broad temporal waves as international financial integration increases, as the relationship between supply and demand of international financial resources varies, and as predominant forms of international investment change. But as the cross-regional variation evident in Chapter 4 suggests, governing politicians’ views of the need to compete for capital are influenced by domestic as well as international factors, including national balance of payments constraints, national regulation of financial transactions, and national politicians’ tenure security. The perception of the need to compete for...

  9. Six The Politics of Changing Central Bank Authority: Mexico
    (pp. 91-106)

    As in the discussion of Thailand, the history of central bank politics in Mexico helps us to evaluate the importance of competing for international creditworthiness in our search for explanations of changing central bank authority. Again, the likelihood that the need for creditworthiness will lead politicians to increase central bank status changes with conditions in international financial markets, which alter the anticipated benefits of trying to increase creditworthiness via central bank independence; with politicians’ tenure security; with objective indications of balance of payments trouble and creditworthiness; and with the extent of national financial regulation.

    There are five turning points in...

  10. Seven The Politics of Changing Central Bank Authority: South Korea
    (pp. 107-120)

    The history of central banking in Korea is another case that aids our exploration of the extent to which variation in the need for international creditworthiness corresponds to change in central bank independence. Several factors stand out in evaluating Korea’s need for international capital and creditworthiness since World War II. First, as is evident in Table 7.2, trends in foreign borrowing in the 1950s are different from those in the other three countries examined. Foreign borrowing rises fairly steeply beginning in 1954 in Mexico and Brazil and in 1956 in Thailand; in constrast, foreign borrowing falls off in Korea in...

  11. Eight The Politics of Changing Central Bank Authority: Brazil
    (pp. 121-137)

    There are two identifiable turning points in Brazilian central banking history: 1964 and 1967. Lack of change in the 1970s and 1980s also requires explanation. In 1964, economic crisis and the need for international creditworthiness helped bring about both a military coup and the creation of an official central bank, after two decades of debate over the nature of official financial institutions. As Table 8.1 indicates, restoration of import coverage, growth of Euromarket lending, and export levels that lagged only modestly behind debt took away pressure to maintain international creditworthiness, and with rising debate in the military over economic policy,...

  12. Nine Conclusion
    (pp. 138-150)

    This concluding chapter revisits the country histories in light of alternative theories about the politics of central bank independence, presents quantitative evidence constituting an indirect test of the signaling model of central bank independence, and ends by evaluating these findings in light of questions about the desirability and feasibility of central bank independence.

    I have argued that in middle-income developing countries central bank indepenence corresponds to politicians’ preferences. Politicians favor sharing policy authority with central banks to the extent they give priority to building or protecting their nation’s attraction for creditors and investors. Competing arguments include those based on the...

  13. Notes
    (pp. 151-180)
  14. Index
    (pp. 181-187)