Grabel: Ideology, Power and the Rise of Independent Monetary Institutions in Emerging Economies

I Grabel, “Ideology, Power, and the Rise of Independent Monetary Institutions in Emerging Economies,” Monetary Orders: Ambiguous Economics, Ubiquitous Politics (2003).

"Stated plainly, the effort to depoliticize financial policy via the creation of independent central banks and currency boards is ineluctably political" (26). The establishment of central bank independence in order to make monetary policy a-political was spurned on, so argues Grabel, by the power of the neo-classical theory of policy credibility. Grabel argues that this policy has been "elevated to a singular truth" and that it is unfalsifiable and must be taken on faith (26). Secondly, the policy-credibility theory overlooks and thus obscures potential different group interests that arise from distinct monetary policies; in other words, the theory is placed above and beyond the other social processes that may have distinct and differing opinions about policy recommendations.

Throughout the 1990s there was a move towards more central bank independence (CBI). Grabel argues that the goals of these newly independent banks were relatively well understood and standardized. However, the increasing independence also caused an increase in currency boards, which do not enjoy the same level of agreed upon practices. At their most basic level, currency boards issue local currency backed by reserve currency and fix exchange rates between local and foreign currency. "Currency boards complement the operations of independent central banks by providing an additional means by which the private sector can be assured that monetary management will proceed undisturbed by political pressures. Indeed, the credibility of currency boards is seen to exceed that of independent central banks because currency boards have the single responsibility of maintaining exchange rate fixity, while central banks...have a broad range of responsibilities. Currency boards help fill the 'credibility deficit' that confronts even independent central banks in countries where these institutions are new or where they have a poor track record" (28).

The issue of policy credibility became much more important after neo-liberal economic policies throughout the developing world were not universally successful throughout the 1970s and 80s. It was argued that the reason that some of these policies failed was because people acting in the markets did not believe that they were going to be followed through upon, or did not understand them to have the necessary credibility to be successful. This brought about a process of making monetary institutions independent so that the policy decisions that were made were given more credibility, as they were not going to be tampered with by political pressures.

"Against the new-classical economic explanation for the rise of independent central banks and currency boards, I argue that political factors chiefly explain the emergence of these institutions. Specifically, the creation of monetary and exchange rate institutions that are independent of elected governments stems from the widespread acceptance of the ideological aspects of the theory of policy credibility and from the exercise of political and economic power by influential actors" (35).

The ideological foundations of the policy credibility theory are two-fold: first, it is not falsifiable and secondly, the policy is solely reliant on faith in the power of neo-classical economic theory.

The remainder of the chapter explores how the role of ideology interacts with political power in order to justify the creation and establishment of central banks and currency boards that attempt to break the linkage between politics and economics.