Column : Is a foreign governor better for RBI

Written by Madan Sabnavis | Updated: Dec 4 2012, 08:31am hrs
The appointment of Mark Carney as the Governor of the Bank of England is interesting for several reasons. This is the first time in the history of the bank that an outsider has been chosen on account of his profile being the best. But, getting in an external candidate for the job does raise certain issues, which would be more relevant when it comes to a country like India. Given that we have an external economic advisor, does a foreign central bank governor make sense

To begin with, the advantages of having a non-resident governor could be looked at. First, a governor of a central bank who has run the affairs of the bank successfully certainly qualifies for candidature. If the performance has been exemplary, one quite clearly qualifies for a set of countries that have similar structures, such as Canada and Englandboth developed countries. But the same may not hold true if a central banker from a developed country were to be considered for a country like ours where conditions are vastly different and priorities less aligned to those pursued in the West.

Second, the outsider can bring in a fresh way of thinking to central banking, especially when this sector is in a state of flux. Experiences from other central banks handling of crises-like situations are always helpful when drawing up strategies for the domestic central bank. The crises witnessed in the US and the euro regions provide sufficient case studies that have been seen through by central banks via different strategies. These are real life experiences and not just from the text book.

Third, any outside governor brings along a certain modicum of independence, which is good since they would be free from past baggage, which can help in running the central bank. Often, one gets bogged down by pressures by the government or industry houses, especially in developed economies, where policy can be guided by them. Therefore, a corollary is that if a country is looking for the best person to run a difficult role such as heading the central bank, it should not matter where the person comes from.

While surely there are advantages in having an outsider, there are a good number of reservations for such a selection, which holds true more in developing countries such as India, and could also hold true for some western economies. First, an outsider is an outsider and would not be aware of local conditions and would find it hard to reconcile the various brands of economics in practice across this group of countries. This makes adjustment to the environment, both within the organisation and outside, difficult. This holds more so in case the two geographies are vastly different, such as a developed and a developing country. An example here is the complex financial system like Indias, which has rigorous concepts such as priority sector norms and SLR, as well as NBFCs, cooperative banks, which makes coordination for an outsider more challenging.

This leads to the second point. There would be a tendency for the outsider to use models that are considered to be ideal and may not gel well with the local conditions. An example here is the pursuance of monetary policy that has to reconcile with fiscal goals that are quite different. Further, the financial systems are complex, and structured products, which were popular in the US though not so much in other countries, could be a puzzle for a central banker who has not dealt with them in his own regime.

Third, following from the second, in emerging markets in particular, the concept of an independent central bank is hard to pursue as there has to be harmonious working with fiscal policy. Asking the government to lower the fiscal deficit by reducing subsidies may make a lot of economic sense, but could be a difficult choice when development levels are low. A non-accommodative monetary policy would create frictions in working. In such situations, lasting an entire tenure would be difficult for a central banker, who could often be on the opposite side. Anecdotal experience shows that, finally, government power prevails and the governor has to accept or quit. The latter could be destabilising.

Fourth, from an ideological viewpoint, the post of a central banker is very crucial for any countrylike, say, the head of the defence sectorand should be led by a citizen. A foreigner could be appointed as an advisor for the experience brought along, but the governor surely should be domestic.

On balance, it may be argued that while the British case has a greater probability of succeeding, the same may not hold true for emerging markets, including India. Governors of RBI have generally had some exposure to working in the government, which is helpful as they are practical and know how policies function. Working of the two arms becomes easier when there is understanding. Having a very independent governor can be an issue, especially if there is intransigence in aligning with other government policies. One must remember that the monetary arm of the government, the central bank, cannot work in isolation as its job is to harmonise the financial sector with the requirements of the real sector, where growth takes place. The situation is akin to a corporate where all departments have to work together in harmony, and a person who is home-grown would have an advantage.

Further, whenever one speaks of having a foreign governor for the central bank, an option always exists where home-grown experts actually work in foreign organisations such as IMF, World Bank or Bank for International Settlements where there is exposure to global best practices, which is of essence today in banking, with the Basel norms virtually dictating the rules of the games for all banking systems. Therefore, there may be no real requirement to look outside; in-house certainly looks the better option.

The author is chief economist, CARE Ratings. Views are personal