Monday, April 03, 2006

Who would be a Third World Central Banker?

Monday morning quarterbacks have the easiest jobs in the world. Good Central Bankers don’t make spectacular headlines but surely they have one of the most difficult jobs in the world. ‘Bad’ Central Bankers make the job harder for themselves and the Monday morning quarterbacks generally write the headlines.
Being a Central Banker is not like thinking five moves ahead in chess, its more like steering a ship that is in a constant state of metamorphosis - you angle the rudder now not knowing what you’re your speed will be in five minutes time and the effect of your course correction wont be evident for more than five minutes – its hard to see the obstacles and sometimes your instruments don’t work as expected. You often have to plug leaks and worry about what is below the surface. Listed in your hold is the entire financial well being of your country and least of all that is at risk is your professional reputation.
Global financial markets make the job even harder. A crisis is now unfolding in Iceland and much has been made by commentators of the ‘carry-trade’.

Iceland has had high returns, high interest rates and it is possible for financial operators of all shapes and sizes to borrow money where it is cheap – Japan or Switzerland - and put it into places like Iceland where they will get a much higher return. Of course they leverage the size of this trade to increase the returns and this increases the temperature and sensitivity of the money. Give it time and it accumulates – the longer you watch financial markets the more you come to love rivers. Rivers pay absolute respect to the path of least resistance. If the source of the capital becomes more expensive the net gain narrows – resistance rears its head and the course is changing. Recently high-return Dubai’s stock exchange suffered an experience that can be described as violent vomiting combined with close-door-panic. Iceland’s stock market and currency are now suffering the same. The currency has fallen 10%. Last week the Central Bank increased rates by 0.75% - quite a dramatic move intended to support the currency, the lifeblood of the economy. I’m not familiar with David Oddsson, Chairman of Central Bank of Iceland but he has probably looked at his clock during one of the many recent sleepless nights, made a quick calculation and wondered if he could get put through to the world’s most employable brain - the recently retired Alan Greenspan - in order to get a little friendly help.
If you are forced into a corner global speculators will pulverise you quicker than you can say 'Check-mate' and then no matter what you do the levee breaks.

Larry Summers said “Global capital markets pose the same kinds of problems that jet planes do. They are faster, more comfortable, and they get you where you are going better. But the crashes are much more spectacular.”
If you think its difficult being the Central Banker of a small developed economy of 300,000 people in Iceland imagine how much more difficult it would be in South America or Sub-Saharan Africa. For them the potential pitfalls are the same but your backbone; regulation, independence and fiscal discipline can be much more wobbly. The list of these man made disasters is stunning. Countries that have experienced a crisis that has destroyed more than 10% of their GDP include; Spain (1977), Israel (1977), Japan (1991), Finland (1991) and South Korea (1997) and they are not exactly novices at this game. Look at those that have suffered a crisis that has destroy between 7% and 10% of GDP and you will see Norway (1987), Australia (1989) and New Zealand (1987). Norway! Iceland is joining some impressive company there. It is obviously a jungle out there and if you are a small time player at the more susceptible end of this territory it would be great to be able to learn from a man-made miracle to negotiate the treacherous seas. The good news there is one but who or what is this oracle? Ireland? not really, the IMF? Ha!, Greenspan himself? not even he has that great a track record. It is Botswana.

If there has ever been an economic miracle it is Botswana. In 1965 it was the third poorest country in the world – it then underwent a thirty year growth period when average growth was 7.7%. You should never mix economics and sport but that is kind of like getting promoted thirty years in a row without ever going wobbling – it is the best growth rate of modern times par none – the Celtic Tiger, China or even Hong Kong can not touch it. Mrs Mohohlo is the Governoress of the Bank of Botswana and it is the vintage Rolls Royce of global economies, it might not be the biggest or the fastest but the engine is sound and the paint job is pristine. Even the Swiss would be green with envy.
How did they do it? Pretty simple they diversified their economy and didn’t rock the boat. They got advice from the IMF and World Bank but crucially they didn’t take money from them (that has been the kiss of death for many emerging economies) – so it was free advice that they weren’t forced to follow. They didn’t try juggling more than they could handle and they didn’t tinker too much. Sure they have massive diamond reserves but so has Sierra Leone and South Africa, Saudi Arabia has oil and the Congo has gold; all of those countries can be seen to have been cursed by such resources. Botswana has been a peaceful parliamentary democracy since 1965, its governing institutions are strong and it has got the basics right. The most shocking thing about all of this sustainable development is that it wasn’t achieved at the detriment of anyone else; in short it could be easily argued that any African economy could have done the same – Africa doesn’t have to be poor. The model is there.


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