American President Barack Obama decided to reappoint Ben Bernanke as chairman of the Federal Reserve, the most powerful central bank in the world. Obama okayed the reappointment even though Bernanake is inclined towards the opponent Republican party. Though Bernanake was first appointed by George W Bush it did not make sense for Obama to deny Bernanke reappointment simply to appoint someone who would follow the same policies. Obama could have easily opted for another equally qualified economist allied to his party to replace Bernanke because America has several best research universities in the world, which produce extraordinarily talented minds. Bernanke is a great economist, whose work on monetary economics has been a crucial to handle the economic crisis, and he applied his academic insights forcefully in 2008 and early 2009, to help pull the world back from the brink. Obama would have looked utterly foolish to disregard his achievements purely out of political intentions.
Take a look at neighboring India. When it needed chief economic advisor in the Ministry of Finance, the post once held by the current prime minister of India, Manmohan Singh, the Congress-led government did not search for the candidate among its cadres. It went across the Atlantic to find the best possible mind and named Kaushik Basu, the chair of the Department of Economics at Cornell University, one of the top-rated universities in the US, as the advisor.
Back home our political parties have never understood the role of the central bank and never showed a bout of respect for the post of the governor and meritocracy. Neither have they realized how big difference the independence of the central bank and competency of its governor can make in the economy. An empirical research carried out by two professors, Robin Bade and Michael Parkin, of University of Western Ontario, Canada, proves that central banks which are independent of the central governments, both in policy-making and in the appointment of directors, deliver a lower rate of inflation than other central banks.
A few years back, when I shared about Dipendra Purush Dhakal being chosen to be the governor by the Nepali Congress government in my economics class at the University of New Hampshire, US, the room resounded with laughter. I did not mean to humiliate nor undermine Dhakal, who was a competent and professional secretary in his ministry—only that the post was completely unrelated to him. It was not only Dhakal; many chief-secretaries grabbed the post with the blessing of political parties.
The painful result is that the central bank has pathetically failed to play its role effectively. Consider its recent mistakes: Housing prices bubbled and stock prices overheated unnaturally, only to recede. But the NRB was completely unable to see the trouble building and failed to act timely. Doing empirical researches seems to be an alien concept for the NRB. If you browse the websites of central banks of South Asia, it is only Nepal and Bhutan which does not have properly done empirical research papers. Economy is a complex issue which requires analytical and abstract skills to understand it properly. So, empirical researches are at the heart of any economic argument. Worse, the central bank has even failed to execute its day-to-day operation like printing money leading to shortage of currency notes, and properly collecting data of the financial sectors. Only after financial institutions recklessly invested in the realty sector thus inflating the housing bubble, the central bank was able to find the data. It is alarming that over Rs 114 billion had already gone into the realty sector, almost one-fifth of the total banking deposit. Had we not politicized the central bank and developed it as a sound regulator, we would not have needed to execute financial sector reform program that has been estimated to cost around US$ 115 million. Unfortunately, even this costly project is not doing well.
The quality of monetary policy is pathetic and confusing. The targets of economic indicators like inflation are not made on the basis of scientific research and well-modeled forecasts, but on whim and without any substantiated logics and facts. It was heartening to see that Finance Minister Surendra Pandey realized poor performance of the central bank when he some time ago berated it in a public program for making absolutely wrong and careless forecast of the remittance.
The job of the central bank governor is perhaps the most technocratic of all policymakers. Heading the central bank requires a solid understanding of macroeconomic theory and empirics, and the central banker needs to complement rigorous and empirically-done economic analysis. If we are to drive the central bank professionally, an economics theoretician of international standing should be put at the helm. It is time we upgraded the minimum criteria for the governor. If we set just two criteria, a PhD in economics and publication of one or two empirical research papers on a peer-reviewed journals, the search for the governor becomes absolutely easy and free from politics. Anybody who can fulfill these two qualities, notwithstanding whichever party proposes the name, can be considered professional and qualified enough. This is the minimum requirement in the central banks across the world. The criteria of research paper will also help disallow many so-called economists from taking undue advantage. Without being able to understand empirical research, it is almost impossible to understand the complex and inter-weaving economic issues and run the central bank.
Of the three proposed candidates, Dr Yubraj Khatiwada and Rameshore Khanal seem equally competent, honest, and have almost similar sense of subjective judgment on economic issues. Though Khaitwada holds PhD in economics, I have not come across any of his published empirical research paper in a peer-reviewed journal. So, no matter who is chosen, Khanal and Khatiwada, both have the same level of competency and integrality and are the best available candidates in Nepal. Another competitor, Bir Bikram Rayamajhi, though having a long experience in the central bank, is nowhere close to competition because of his paucity of knowledge to understand practical functioning of economy, poor decision-making capacity and absence of any empirical knowledge of economics. His appointment will be a real setback not only for the central bank, but the whole economy. The poor people who are struggling to make both ends meet will also bear the brunt of wrong choice through higher inflation.
The central ban, one of our most important institutions has failed us. It is now time to reclaim it from stupid politics. Please pick a person who can maintain independence, credibility, transparency and accountability of the NRB—key ingredients of any central bank.
krish.regmi@unh.edu
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