Choosing a New Governor of SBP
by
Dr. Abdus Samad
(Dr. Abdus Samad is the author of  Governance, Economic Policy and Reform in Pakistan, which has been published in English by Vanguard Books and in Urdu by Fiction House.)
    The time is now approaching for the appointment of a new governor for the State Bank of Pakistan (SBP).  Positioning for the new appointment is already begun. If rumors convey any information, the field is littered with the usual suspects–retirees from the civil service and their cousins the civil servants who went to the international financial institutions (IFI’s) and are now int eh process of retiring. Like the current governor these retirees represent the preservation of the status quo that has plagued mush of our history.
 
    Across the world, professionalization of organizations especially central banks has now been widely accepted. Pakistan is among the few exceptions. Perhaps, now is the time to adopt this emerging trend even in our country.  Economic reform movements in many countries have been led by highly professional economists who were appointed central bank governors and finance ministers.  After years of high inflation and declining economies, the political process finally recognized the need for professionalization of economic policymaking through credible appointments to key positions such as central bank governors.
In this article, I will survey very briefly the recent move to professionalize the central banks in all countries especially those that have seriously pursued reform. My fervent hope is that this will convince many readers to insist by any means possible for such professionalization in Pakistan too.

    Argentina experienced decades of high inflation and low growth. Repeated attempts through political deal-making had been tried with limited success. Finally, in 1992, government of President Menem appointed Domingo Cavallo as the minister of finance and Roque Fernandez as the Governor of the Central Bank. Cavallo has Ph.D. from Harvard and Fernandez has a Ph.. D from the prestigious University of Chicago. Both of them  had already established an international reputation as fine professional economists.  They also had many prestigious publications to their credit and had taught at many universities both at home and abroad.  They successfully turned the economy of Argentina around through bold economic policy.  Cavallo has since moved on but because of his stewardship of the economy earned a place among the ranks of the finance ministers’ Hall of Fame. Roque Fernandez has now taken over from him.

    Both Cavallo and Fernandez have professionalized the government and its key economic policy making institutions. The key players are young and highly professionally adept economists such as Pablo Guiodotti, Miguel Kiguel and Schmidt-Hebbel with Ph.D.’s from prestigious universities and strong research credentials. The tradition of routine appointments of good retired bureaucrats and favorite cousins to key economic policy appointments, is now gone forever, and has been successfully replaced by professional standards.

    Pedro Pau the new Governor of Argentina is also a Ph.. D from Chicago is also a well known economist who has served as director of research in Centre for monetary policy studies for Latin American and Director of Center for Macroeconomic Studies.  When Mexico had it crisis in 1994, the government again looked toward available high caliber economic leadership.  Guillermo Ortiz was appointed the finance minister. He has since moved to the governor of the central bank.  He has a Ph.D. in Economics from Stanford. Ortiz is a serious economist who has published and competed in economic research internationally.  Do not confuse him with the Ph.D.s from big name universities that we have who through aid-driven programs in development economics learnt little modern economics and never really displayed their knowledge of economics in international publications.
Chile which is perhaps the most advanced of Latin American economies and is cited as an example of a successfully run economy. In its attempts to modernize and develop, Chile also followed the path of professionalizing its institutions. Roberto Zahler the former governor of the central bank and Carlos Mossad the current governor both hold Ph.Ds from the University of Chicago. They have academic standing and name recognition among professional economists.

    When Israel was going through its economic difficulties with inflation and unemployment running high, it looked toward a renowned Harvard professor of economics. Professor Michael Bruno was the Governor of the Bank from 1986 to 1991. He had been a professor or economics at Harvard and had also headed the Economics Department of the Hebrew University of Jerusalem.  Widely published and esteemed as one of the world’s leading economists, he led Israel through its economic difficulties and rebuilt its central bank. Such was his standing in the profession that Bruno left the Bank of Israel to become the Chief Economist of the Bank.

    Bruno’s successor at the Bank of Israel was Jacob Frenkel another leading economist of the world.  He was previously Economic Counsellor and Director of Research at the International Monetary Fund. He held the chairs of International Economics at the University of Chicago and of the Economics of Peace at Tel Aviv University. He is a member of the G-7 Council, the Group of 30, the National Bureau of Economic Research, and is a fellow of the Econometric Society. He has served as advisor to the Bank of Israel, to the World Bank, and to other major research institutes in Israel and abroad. Professor Frenkel has been Governor of the Bank since 1991.

    Central Bank governors worldwide like to proclaim the academic and professional economist credentials of their governors.  For example, Governor Thiessen of Canada notes his Ph.D. from the London School of Economics and Governor Stals of South Africa notes his D. Comm in  1968 with a thesis on the international liquidity problem, his being awarded the "Euromoney " Central Banker of the Year Award, 1995.  Governor Gazi Erçel of Turkey notes that he has over 200 articles and research papers. Many of them are very proud of their teaching and research careers.  Governor Bimal Jalan of India notes that “An economist by profession. Dr. Jalan has held several administrative and advisory positions in the Government of India.”  He also lists several books that he has written in his introduction.  Governor Chol-Hwan Chon of Korea is noted for being the Dean, College of Economics and Management, Chungnam National University, the President, Society for Korean Economic Development and the author of several books on economics. Governor Sousa of Portugal has a Ph.D. in Business Management from The Wharton School, University of Pennsylvania, was a teacher at the Universidade Católica, and Head of the Management Department of the Faculdade de Ciências Humanas.

    Central Banking in this day and age is a complicated business that must be run professionally. Not only are central banks governors serious and competent professional economists, they are also staffed with many serious economists. They have to have very serious analytical capacity to deal with many important financial questions that they face.

     How can we not see this point when in our immediate memory is a serious policy blunder arising out of poor economic analysis and knowledge? Today even our Prime Minister admits that he was badly advised on the decision to freeze the foreign currency accounts and that it was an unwise decision (Dawn February 22, 1999). Had the central bank been developed to a point where it was professionally led and staffed, the analytical work that would have backed up such an important decision would have advised the prime minister well.  Without such analysis, knee-jerk decisions can be taken to the regret of nations and its citizenry.

    The importance of a credible appointment for the governor of a central bank cannot be overemphasized.  Financial markets notice and vote with their money on such appointments. Thus for example, the replacement of the South African Governor Stals with an unknown governor has generated some uncertainty in the system.  Raters of sovereign risk such as Moody’s and Standard and Poor’s note that part of their rating is the credibility of the Central bank governor in terms of his standing in the international markets. The stature of the governor also suggests his ability to deal with crises.  A good governor who knows finance and economics  will work with the markets keeping them fully informed and retaining their confidence.

    We have made more mistakes than a nation is entitled to.  God has been kind to us that a greater disaster has not befallen us.  But let us not enter the 21st century with thinking of the nineteenth.  A governor of a modern central bank is not a retiree.  Rather he should be a young and energetic builder who will have a reputation with world central bankers and markets. Let us give the retirees a good pension and all the respect while building our central bank for the new millennium so that our savings are forever protected.