The United States is not the only country where the consensus on central bank independence is in trouble; central bankers across the formerly communist world are facing sustained political challenge as well. The difference in the formerly communist world is that central bank norms, practices and policies never fit as well in the institutional context of regimes in transition and the consensus spread only weakly outward from the central banks themselves. This is the argument Juliet Johnson makes in her brilliant book on the role that central bankers played in the transformation of the post-communist world.
Johnson starts by applying the literature on epistemic communities. All central bankers use the same models and speak in the same languages (English and economics), so it should be unsurprising that they interact better together than with politicians in the outside world. This is true particularly once the argument for central bank independence was adopted in the West and as communism introduced the virtues of market economics in the East.
Nevertheless, it would be a mistake to assume that modern, market-based central banking diffused by osmosis from West to East. On the contrary, the spread of norms and values required substantial investment – in training and seminars, but also in dinners, retreats, phone calls, and other forms of (almost constant) communication. It also relied on the establishment of the usual social conventions of hierarchy, reinforcement, persuasion, and sanction. Western central bankers convinced their counterparts in the countries of Central and Eastern Europe (stretching deep into Central Asia) that they were all part of the same club and that participation in this club is worth the effort both personally and professionally.
The central bankers were quick to latch onto this (for them) new normative consensus and then to bring it inside their own institutions. Since central banks are relatively hierarchical organizations, this internalization of norms took root relatively rapidly. The same norms spread less rapidly into the wider political context. Politicians in transition countries were willing to heed the advice of international experts and yet remained wary of many of the domestic consequences. Their acceptance was more reluctant than permissive.
This reluctance has proven important in the context of the recent crisis. Although central bankers have done much to improve economic governance, they also brought certain pathologies from West to East. The privileging of monetary policy over financial supervision is chief among them. The recent crisis revealed just how important that pathology is. Local politicians have been quick to show their frustration. Johnson highlights developments in Hungary and Russia. The results are still inconclusive.
Although politicians have forced central banks to adapt, they have not broken what Johnson describes as the ‘wormhole’ community that continues to link central bankers across countries. Indeed, there is some evidence that central bankers are taking up the reins of cross-national policy coordination. Whether that will be tolerated by national politicians remains to be seen.
Priests of Prosperity: How Central Bankers Transformed the Postcommunist World. By Juliet Johnson. Ithaca: Cornell University Press, 2016. Xviii + 292 pp.Follow @Erik_Jones_SAIS