Lessons from the Alan Greenspan legacy


February 21, 2006/vanguard




Three weeks ago, Alan Greenspan retired from the Federal Reserve Bank of the United States of America. The 71-   year-old economist served the bank (which is the equivalent of our  own central bank) as chairman for 18 years - from   1987 to 2006.

Greenspan served under four Presidents namely Ronald Reagan, George Bush, Bill Clinton and the current Bush. His   tenure witnessed major global development including the Gulf war in 1991, the fall of the Soviet Union, the Asian crises,   and the terrorist attack on the World Trade Centre and the concomitant war in Afghanistan and Iraq. Each of these   events affected global economy in one way or the other, especially the economy of the United States. However, the   country’s economy did not cring rather it grew. The economy experienced persistent growth throughout the Greenspan   years with only two mild recessions in 1991 and in 2001.

While many factors might have helped the United States achieve persistent economic growth during this period, many   believe that the skill and acumen of Greenspan was a key factor. Besides being the manager of the world’s largest   economy, the way and manner he responded to situations at home and abroad earned him the reputation of the most   powerful man in the world. Hence, the applause and ovation that greeted his retirement is understandable.

Of corse there are some argument about the factors that contributed to his success- some believe it was more of luck   than skill. For example, Paul Kasriel, chief economist at Norther Trust company, Chicago believe that the end of the   cold war combined with a related slow down in Federal spending, new technology that helped slow down costs and a   developing global economy all contributed to the economic success of the period. According to him Greenspan was in   the sweet spot of economic history and that he was dealt a nice hand to play with.

The fact however is that Greenspan achieved something. Notwithstanding the factors that might have contributed to his   achievements the general consensus is that he was successful as a central banker. This in effect makes the man a model   of some sort.

Someone whose tenure and achievements have a lot of lessons for other central bankers around the world.

While his achievements, usually referred to as the Greenspan Legacy are numerous, two are quite germane to Nigeria.

The first and probably the most important is termed, ‘tamed inflation’. Greenspan believe that whatever the situation,   local or global, inflation must be curtailed and kept at the barest minimum. Little wonder his tenure was characterised by   low inflation. As at the time he left office, inflation was just 3.4 per cent. In 1979 it was 13.3 per cent.

The success of Greenspan in this regard must have stemed from conviction and commitment to the primary function of a   central bank which is price and exchange rate stability. The man must have reasoned that, his tenure would be best   remembered for its achievement with inflation than any other thing. So whatever the situation, rather than give excuse for   the occurrence of high inflation he did whatever is necessary to curtail it. This is a big lesson for other central bankers.

If inflation is considered injurious to a developed economy, how much more to a developing economy like ours. Nigeria   has had its fair share of high inflation. It is so real that the common man do not need an economist to tell him what it is.   Since the SAP (Structural Adjustment Programme) era of the 1980s, the country has tasted all kinds of inflation, from   mild to severe and the galloping type. Between 1988 and 1991, inflation averaged 31.7 per cent, and between 1992 and   1995 it averaged 58 per cent. Since 1999 it  has been hovering between 25 per cent and 13 per cent. This of course is   despite the fact that single digit inflation is one of the goals of each successive administration. As at last year August   inflation was 26 per cent while it is believed it has dropped to 13 per cent in December. But it will surely gather steam   and rise in the course of the year.

The achievement of low inflation rate is a big challenge to the Central Bank of Nigeria (CBN). Yet it cannot but succeed   in this regard for this is its primary duty. Before the Sanusi era, the CBN was under the Ministry of Finance. This   arrangement sure hamstrung its independence. It could not perform its core function of price and exchange rate  stability.   The governor then just have to do the bidings of the government of the day, which in most cases have little regard for the   core functions of the bank. But the apex bank now has some measure of independence through the instrument autonomy,   hence it should wake up to this responsibility. It is true that the fiscal arrangement here and the huge informal sector   poses a serious challenge to achieving low inflation, these are however not enough reason why the Cbn should not   perform its core duty.

The situation only demands critical thinking that will produce innovative and effective measures.

Unfortunately, the CBN in recent times has been busy explaining to us why we have high inflation. However, if it sees the   attainment of price stability as a must, rather that blaming the shortage of food ( due to export to Niger Republic that is   experiencing a drought ) or the expansionary fiscal activities of the 774 local government, 36 state government and the   federal government,  or the huge amount of money outside the banks, its management would sit down and evolve a   framework, that recognises these factors, that would make double digit inflation history in Nigeria. At least now that we   have a professor of Economics as governor of the CBN, this should not be an impossible feat. It is good that the Soludo   administration has succeeded in the consolidation of the banking industry, it is time to channel his energy and ingenuity to   the task of price stability. The governor and his team should know that failure is failure notwithstanding the factors   responsible for it.  They should take a cue from Alan Greenspan.

Another aspect of the Greenspan legacy which is also important to our clime is the “transformation of the Federal   Reserve Bank from a secretive, poorly understood institution into one that communicates more effectively with the public   and investors”.  This engenders certainty and predictability. It helps investors, businesses and the public to take informed   decisions. It also enhances the effectiveness of the monetary policy of the central bank.

In terms of openness, the CBN is trying. At least it has a corporate affairs department where one can direct enquiries to.   It also has a website, never mind that most of the information there is obsolete. And the governor holds regular press   briefings. But it coud be more open, more transparent. First in this regard is provision of timely economic data. Since it is   the institution managing the economy it owes the public the duty of providing timely information on the state of the   economy.

Sometime ago, the CBN introduced the monthly economic report. But the report has always come too late, sometimes   four months after the month been reported.

Also overtime the report became diluted, with important data eliminated. For example, the monthly report used to   include government revenue and expenditure for the month. It no longer does. Its like the officials of the apex bank   believe that the public is not entitled to information, hence they consider release of data on the performance of the   economy or other data which can only be obtained from the bank as a privilege.

Of course they are wrong.

The public has a right to know, even on weekly basis, how the economy is faring and what to expect the following   weeks or year.

The CBN still conducts its affairs like a secret cult. a kind of   ‘the  public should not know, do not need to know’   orientation prevail among its officials. For example, last month the CBN closed its rediscount window. There was no   prior information as to why it was doing so and for how long it would do so. This occasioned a liquidity crises that   pushed interbank interest rate up to 140 per cent. Also last month, in the course of upgrading its system the apex bank   suffered collapse of its network. For two days it could not provide banks with statement of their account with it.

This occasioned a state of confusion in the industry with banks left to operate without a clear indication of the balance of their   account with the apex bank. Surprisingly, there was no prior notice that such hiccup might occur, and there was no   explanation or apology from any quarter. Its time the CBN realises that this kind of attitude is not good for it. It can only   increase public misunderstanding of its activities.

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