Global Outlook: Choosing Central Bank Governors in a Changing World


Monday, November 11, 2013 / By Abimbola Hakeem Omotola

New wars can’t be fought with old or wrought weapons and the economic doctrines of the rather quiet past cannot be used to dictate actions in the present volatile high economic linkage world marked by deregulation, trade liberalization as well as influential financial markets.

Indeed, the old war in central banking used to be solely against inflation, for which irrepressible hawks were appointed to help fight. It was former Fed Chief, Paul Volcker who led this charge and whipped inflation into line in the United States, thus deepening belief within the central banking circle that the only business of central banks is to keep inflation in check.

Just before the turn of the new millennium however, the battleground changed, and with that, the nature of anchormen needed to fight the new war which requires robust and unconventional approaches to win. But what exactly is about the new millennium that have led to the adjustment of the priorities of central banks and made choosing a central bank governor a much tougher job?

The New Challenges
With the deregulation, trade liberalization and globalization movement gaining new grounds just before the turn of the millennium, the age that followed has been defined by high intra and inter capital, labour and trade flows, which have made macroeconomic managers now worry more about the threat of external shocks that now hang over every economy. It has led to an age of complex banking products and sophisticated financial structure that are increasingly more difficult to regulate. Many have even pointed out that the failure of central banks to provide quality oversight function on the new complex banking system and products is responsible for the 2008 global financial meltdown.

Growth has also been thinning in advanced economies since the turn of the new millennium and on the contrary, surging in developing economies. These has meant central bankers across both divides need to be thinking outside the box and develop more innovative and broader approaches to manage and protect their economies.

For central bankers in the advanced world, it has meant broader monetary policy instruments aimed at achieving broader goals which now include full employment, economic growth and financial markets stability. For those in the developing world, price stability still takes precedence since there is still a strong inflation risk due to the surging growth, though more attention is now paid to maintaining financial stability, stable exchange rate and foreign reserves as well as economic development. Quite an antithesis to what we used to have, central banks in the developing world are now targeting higher inflation and strong growth, while their contemporaries in the developing world are looking to curb inflation and make the recent positive growth transmit into development.

All these have led to the growing influence of central banks that now have more roles to play in the economy, making the office of a central bank governor a lot more important. The challenges politicians over the world now face is how to choose a central bank governor who can adapt to the changing times and pursue the country/region specific goals. The question hanging on the lips of many politicians the world over is; what does it take to be a central bank governor in the new millennium? We now take a look at some of the observed new phenomena that influence decisions on the choice of a central bank governor.

Academic Background and Career Experience
The new millennium has ushered in a new set of written and unwritten rules and guidelines politicians now consider when deciding who heads the central bank. Due to the new technicalities that have emerged in central banking, strong academic background in economics and/or finance with career experience in the academia, finance and/or policy making are the global minimum standard required of a central bank governor, as the appointment is no longer considered as any other political appointment that can be occupied by career politicians but professionals.

The incumbent and the last two Fed chiefs are economists by training, while Greenspan and Bernanke both had distinguished careers in the academia, Volcker opted for the policy making world after completing graduate studies in economics and public administration.

Janet Yellen, who was recently nominated to succeed Bernanke is an Emeritus Professor of economics with years of experience in the academia and policy making world. The last Fed chair not to come from the economists circle was Grease Williams who left office in 1979 after a torrid time in office characterised by high inflation and dirty boardroom politics. The board had to vote against him to raise policy rate when inflation skyrocketed. He was later to be known as one of the worst Fed chiefs ever, and till now, no one outside the economists circle has come close to occupying the seat.

Both Haruhiko Kuroda who heads the BoJ and Mario Draghi who governs the ECB are academics who left the classroom for policy making. Mark Carney who now heads the BoE studied economics up to PhD level and had a remarkable career in finance before joining the Canadian Central Bank. The same trend can be observed in Nigeria, where the immediate past CBN boss, Charles Soludo and the incumbent, Lamido Sanusi are both trained economists. Both also had experience in the academia though the later was to leave the classroom for corperate world. There are still few exceptions to the rule, prominent among which is the RBI governor, Raghuram Rajan who does not possess any degree in economics but has significant experience in policy making world, having served as IMF chief economist.

Policy Ideology and Ingenuity
Since growth turned sluggish in the advanced economies, their central banks have relied more on unconventional dovish monetary policy approaches. The trend in the advanced world is now to appoint dovish central bank governors who can deal better with the interlinked global financial structure and ensure financial stability. The two central bank governors appointed this year in the developed world; Mark Carney and Haruhiko Kuroda are both dovish. Janet Yellen is also expected to keep interest rate low if confirmed to take over from Bernanke.

Monetary policy environment in the developing world has however been less dovish since it has a much tougher battle to fight against inflation, currency depreciation and financial instability since growth turned remarkably impressive. They have however adopted unconventional methods to directly interfere in specific sectors and industries to encourage development.  Rather than lowering rates which could trigger inflation and depletion of foreign reserve, quantitative controls and selective allocation of credit at choice rates across production sectors, regions, or activities considered to be areas of priority are now made us of in the developing world. The CBN under Sanusi has been directing credit to some interest sectors such as aviation, power, micro, small and medium enterprises (MSME) and the agricultural sector.  Due to the CBN effort, lending to the agricultural sector has grown by more than 150% over four years. Some specialized development financial institutions which are largely owed by central banks and fiscal authorities are also being used to direct fund to choice sectors and industries. Examples are BNDES in Brazil, IIFC in India, NERFUND, NEXIM, BO1 and BOA, amongst others in Nigeria.

All these goes to say that central banks now have a more active role to play in the economy and in choosing central bank governors, candidates’ experience and ability to think outside the box on policy choices are considered important.

If the bar has been raised regarding the academic qualification and career exposure needed to be a central bank governor in the new millennium, prospective candidates now appear to have one less hurdle to cross, as nationality now appears to be carrying less weight. For the first time in 300 years, the English royal family appointed a non-Brit to govern the Bank of England. Larry Summers was also reportedly courted for long by the Israeli government to replace Stanley Fischer (who holds a US-Israeli dual citizenship) as head of the Israeli Central Bank though he turned down the offer. It is a new global phenomenon and it will be interesting to see if it will be embraced by more countries, bearing the fact that central banks are still considered in many countries to be national institutions exclusively meant to be managed by citizens’. But will this dogma continue to hold water after it has already been broken?

With central banks’ growing influence in the economy, the media now treats the governors like celebrity and candidates being considered to lead central banks now face intense media scrutiny. Mark Carney got the “rock star celebrity” treatment from the English press when he was nominated to head the Bank of England and we recently saw how the media was used to “force” Larry Summers to withdraw his candidacy in the Fed chair nomination race which later went to Janet Yellen who enjoyed positive reviews in the US media. We are also in an age where public office holders grant press conferences and interviews on issues which sometimes don’t even relate to the offices they hold.

Thus, a central bank governor in this media age must be able to shun media attention and make closely guarded statements which won’t be mis-interpreted in the media, since the words of a central bank governor carries so such weight now that it could easily roil financial markets and the local and/or global economy. The personality of a modern central bank governor is expected to be strong, disciplined and calm. He/she should also be able to take media praise and criticism with a pinch of salt and focus on making decisions that are in the best interest of the economy.

Having highlighted some of the new and old globally acceptable standards and factors considered when choosing who heads the central bank, we leave it to you, the readers to form opinions on who the cap fits most in the CBN governorship race. You can participate in the discussion by sending your contributions via

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