Don't cry for me Argentina
Don’t cry for me Argentina, could very well be refrain of Martin Redrado, the governor of the central bank of Argentina. He was dismissed by the President Cristina Fernandez a couple of days back, only for the courts to reinstate him and rule the President’s action unconstitutional.
At heart is the issue of the independence of the Central Bank. In many countries, including Argentina, the Central Bank is supposed to be independent of the government. This enables it to follow the right, and long term, stable monetary policy without political interference. Governments don’t like it as they like central banks to do what they want them to do.
The problem in Argentina is that Cristina Fernandez would like to use the reserves of the central bank to pay down the debt of the government. The central bank is refusing to do this. So she thought she could sack the governor and replace him with somebody more pliable. Its rebounded on her because of the court’s decision.
The problem is always the tension between fiscal irresponsibility of governments and the refusal of the central bank to support such profligacy. If you spend more than you can afford, you are bound to get into trouble. Its amazing how politicians (and economists) fail to grasp this simple truth - you cannot spend what you do not have.
Argentina’s position is a little special. It actually used to run a budget surplus, but its old sins of too much debt in the past has been the problem. It defaulted on a debt obligation in 2002 and hence is mostly shut out of credit markets. The surplus fell like a stone as commodity prices fell and the recession bit. Populist spending by the Fernandez government accentuated the problem and led to this crisis.
There are some lessons for both India and China. In both these countries the central bank is not independent. In China, such an independence is unthinkable of course. But it is conceivable that an independent bank would not have permitted the massive amount of bank lending that has taken place last year leading to huge bubbles in the property and the stock markets. In India, independence is possible and it would be good for the country to make the Reserve Bank of India independent. That way, neither the netas nor the babus can indulge in the irresponsible actions that they are known for. Its only the presence of 4 or 5 people in the Central government with an enormous sense of responsibility for the nation that disasters have been prevented in the past (remember the early 90s ?).
Monetary policy needs some understanding of economics. India has been blessed with some experts in economics in the government. But if you poll the 545 members of the Lok Sabha and ask them to spell the word economics (in any language), I am absolutely sure that more than two thirds will fail abysmally. Is monetary policy to be in the hands of the ignorant ? No way. Before we reach a disaster, make the RBI independent.
At heart is the issue of the independence of the Central Bank. In many countries, including Argentina, the Central Bank is supposed to be independent of the government. This enables it to follow the right, and long term, stable monetary policy without political interference. Governments don’t like it as they like central banks to do what they want them to do.
The problem in Argentina is that Cristina Fernandez would like to use the reserves of the central bank to pay down the debt of the government. The central bank is refusing to do this. So she thought she could sack the governor and replace him with somebody more pliable. Its rebounded on her because of the court’s decision.
The problem is always the tension between fiscal irresponsibility of governments and the refusal of the central bank to support such profligacy. If you spend more than you can afford, you are bound to get into trouble. Its amazing how politicians (and economists) fail to grasp this simple truth - you cannot spend what you do not have.
Argentina’s position is a little special. It actually used to run a budget surplus, but its old sins of too much debt in the past has been the problem. It defaulted on a debt obligation in 2002 and hence is mostly shut out of credit markets. The surplus fell like a stone as commodity prices fell and the recession bit. Populist spending by the Fernandez government accentuated the problem and led to this crisis.
There are some lessons for both India and China. In both these countries the central bank is not independent. In China, such an independence is unthinkable of course. But it is conceivable that an independent bank would not have permitted the massive amount of bank lending that has taken place last year leading to huge bubbles in the property and the stock markets. In India, independence is possible and it would be good for the country to make the Reserve Bank of India independent. That way, neither the netas nor the babus can indulge in the irresponsible actions that they are known for. Its only the presence of 4 or 5 people in the Central government with an enormous sense of responsibility for the nation that disasters have been prevented in the past (remember the early 90s ?).
Monetary policy needs some understanding of economics. India has been blessed with some experts in economics in the government. But if you poll the 545 members of the Lok Sabha and ask them to spell the word economics (in any language), I am absolutely sure that more than two thirds will fail abysmally. Is monetary policy to be in the hands of the ignorant ? No way. Before we reach a disaster, make the RBI independent.
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