Central bankers and autonomy
A former deputy governor of the Bank of England offers a nuanced and contextual assessment of the ambit of autonomy for independent regulatory agencies, writes M S Sriram
The book Unelected Power came tome for review a while ago. It took quite sometime to read and intern ali se it before I could say something about it. Providentially this is also an appropriate time to write about the book, when the issue of autonomy of the Reserve Bank of India( RBI) is being discussed and tested. The issue is never settled and never will be, but it will always be tested, discussed and new rules will be drawn up as new discussions, events and controversies emerge.
Paul Tucker has been there and done it! Therefore, one would expect that his position would be in favour of greater autonomy for independent agencies. The position Tucker takes is very nuanced and contextual, however. He recognises the fact that the elected political class has an accountability framework both to parliament as well as to citizens through an electoral framework. Independent agencies, on the other hand, have the technical wherewithal to look at issues from an analytical frame and take independent decisions where the accountability framework is also more technical than political. Therefore, the legitimate question: How independent can independent agencies be and would their independence encroach on the larger public policy function of the state itself?
While most of the illustrations and arguments come from the prism of the central banking function—Tucker draws from his rich experience at the Bank of England and having interacted with and studied other central banks—he also brings in two significant institutions to get to the difficult question of autonomy and accountability. These are( a) the military and(b) the judiciary.
The military is an institution where elected representatives take a call on the desirability of an action keeping in mind larger geo-political considerations while the agency itself decides details of the strategy of strike and tactics. In a way, the lines of accountability and independence are somewhat clearly drawn and when they are breached— such as in a military coup— it is widely understood that the lines have been crossed. However, in the case of the judiciary and the central banker this line is fuzzy, causing Tucker to examine this lack of blueprint on “which public policy decisions should be made by politicians, technocrats, or judges”.
Tucker provides a 4x4 matrix to understand the reach and power of the administrative state to locate the complexity of the institutions working within that framework reproduced here.
From the matrix, some agencies have clearly defined functions and trigger situations. The central banker functions in all the slots and parallel ly with the state, and it is but natural that there are issues of turf and tensions. The political class will seek an accountability framework from the central banker, and it is complex to articulate an accountability hierarchy. The complexity of dealing with a central banker, such as the RBI, which is a full-service central bank, isth at it has multiple missions.
There has been much debate on whether there is an inherent conflict of interest in the same agency setting the monetary policy and also running a debt office with open market operations;foreign exchange and managing foreign exchange reserves and marketshould be in the same agency; and how the regulatory function should be structured in an increasingly complex world where banking is intertwined with capital markets, insurance and other aspects of the financial world.
Tucker has some interesting responses. While he offers no check-boxes or specific answers, he does have some design precepts looking at whether multiple missions given to an are intrinsic ally connected and whether having them under a single agency will deliver materially better results. There are also some design principles in dealing with the dilemma of examining the role as apart of understanding the “other side” through a confluence of interests or having the “other side” as a conflict of interests. It is in this context that the debate about an independent payments regulator should be see non merits of whether payments are intrinsic ally connected with banking regulation( as argued by the RBI) or whether separating the function would deliver materially better results. In the Indian context, there was a deeper conflict of RBI owning stakes in the State Bank of India, National Housing Bank, being the promoter of National Payments Corporation and soon, but over a period of time some of these have been disentangled.
Before we look at the Government versus Central Bank turf issues, it maybe useful to apply the design precepts Tucker provides to examine the conflict and confluence test on the current functions of the RBI and examine the issues on merit.
Ultimately, the question is about whether the power is being concentrated in a single agency and, if so, how one exercises checks and balances. The accountability framework emanates from these checks and balances. The larger point is that the state possibly has adequate checks and balances with the ultimate test being in getting voted out on a comprehensive evaluation of the performance. However, the limits of the independent agencies—which are necessary for providing stability and technical reasoning—are to be determined through a complex process of negotiations, re defining boundaries and re-articulating independence. In this context, while it is possible to see the boundaries of the armed forces, it is fuzzy with the judiciary—but the two sides are not intertwined. The most complex agency where it is difficult to draw a clear line is the central bank. No wonder that it is not a constitutional authority with insulation, but at the same time not completely subservient to political authority.
This book is detailed, bringing in arguments from law, politicalscience, economics, publicpolicy, philosophyand weaving in specific contemporary events. The book raises more questions than it answers. And any such book that opens up issues in such a lu cid manner should be classified as an important and“must read” book. Tucker goes to the root of the issue in a detached and philosophical way, thereby asking us to re visit our settled position son several matters. It certainly is not an easy book to read, but a delightful addition to the thought process on the continuing debate on how independent agencies—particularly the central bank— should be structured.