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We may take the principle of central bank autonomy for granted but, in emerging markets in particular, we shouldn't. Autonomy is locked, it seems, in mortal combat with political legitimacy and accountability. The ultimate irony is that political legitimacy considerations rarely make for good economics and therefore often translate into bad governance, stunting economic growth and development in many developing countries.  

This tension reverberates in different forms, even in advanced industrial countries. We saw it in the hostile reactions from some quarters when the Bank of England and its governor, Mark Carney, weighed in on the Brexit debate.
 
In emerging and frontier markets, the tension is more often whether the decisions of central banks should be influenced by sovereign political authorities, rather than whether central bankers are right to speak out on political matters. We have seen this in the struggles for central bank independence in India (which saw the resignation of Reserve Bank of India governor Raghuram Rajan), Argentina (which led to the firing or resignation of some of its recent central bank governors, but also most recently to new legislation proposed by reformist president Mauricio Macri to give the Argentinian central bank statutory independence) and Brazil (where the subject of central bank independence became a political football in the 2014 presidential elections).  

We have seen it as well in recent erosions in the practice of the Central Bank of Nigeria's (CBN) statutory operational independence in the face of the crash in the international price of crude oil and the corresponding impact on the naira. This led the CBN to take exchange rate policy decisions that hurt the country's productivity and contributed to stagflation and recession.  

The argument in favour of central bank autonomy is well known – that monetary policy decisions ought to have a longer horizon, based on rational factors, and so should be independent of shortterm political pressures. But this precept, which has helped stabilise and grow the economies of several emerging and developing nations in the past two decades, still faces challenges that stem from a failure of governments to see how the enlightened national interest – and even their own political interests – are ultimately served by independent institutions such as central banks.  

This is really a reflection of the evolutionary stage of the democratic and governance culture of specific countries. In developing countries and emerging markets, political power is all too often centralised and personalised in authority figures in practice, even though legislation may stipulate different arrangements on paper. Strong institutions, into which state power is diffused, are thus absent.  

This is precisely why some countries are still "emerging" or "developing". Where institutions work, are strong and independent, countries can become "developed". In this latter case, the occasional tensions between political legitimacy and central bank autonomy are managed differently, to the benefit of the economy.
 
Central bank autonomy becomes most easily compromised when central banks step outside the remit of pure monetary policy. As in several industrialised countries, central banks in emerging markets are often also banking regulators, and many are responsible for promoting financial inclusion and managing payments systems. A further key responsibility is development finance, a role unique to developing countries because fiscal policy is often weak. This adds additional layers of complexity to the evolution of such institutions because it exposes developing-country central banks more directly to political interference.
 
Tackling the challenge  

How should these challenges be handled? First, central bankers in emerging markets and developing countries need to be extremely adroit in handling the subject of central bank independence. They must recognise the intellectual validity of political legitimacy and the tension it poses for central bank autonomy. There is, indeed, a real contradiction between the two ideas. That contradiction can best be managed not just by laws, but also by a recognition by political leaders of the enlightened self-interest central bank autonomy can serve for economic management.  

In political cultures that have not evolved to a genuine acceptance of such autonomy, a central bank governor must not see him or herself as operating in an parallel universe. This recognition must be combined with a firm, principled but respectful relationship with elected political authorities, in which open communication and mutual trust are developed, without surrendering the autonomy of a central bank. In the five years I served as a deputy governor of the Central Bank of Nigeria, the tensions occasioned by the statutory independence of the CBN, in a country that lacks a history of strong institutions, proved as great a challenge as monetary policy management and banking sector reform.  

Second, it is important that central banks in emerging markets avoid ‘mission creep'. They need to maintain mandate discipline and check the temptation to be perceived as the Hercules of national economies. This can happen when other economic managers, perhaps owing to resource constraints, abdicate their appropriate roles to central banks that in developing countries often have the best human resources in the public sector. Central banks tend to be inappropriately perceived as well-resourced bankers of last resort not just to the commercial banking system, but to the government as well.  

A potential consequence of failing to manage this risk, including the concomitant exposure to external political interference, is that such a central bank becomes not Hercules, but rather Sisyphus, who toils endlessly and unsuccessfully, rolling up the hill heavy stones, only to watch them roll back down again.  

The third task is to build competence. The consequence of error by central banks is high, and their decisions uniquely affect whole economies and all actors therein. When these decisions are seen as competent, well-considered and sure-footed, even if initially unpopular from a populist standpoint, they support the argument for central bank autonomy.
 
As central banks in emerging markets evolve in their roles, they must understand that the tension between political legitimacy is an ever-present one. That is why there must be effective avenues for the accountability of central banks to legislatures, but so too sovereign political authorities must recognise strong institutions are a major determinant of the wealth and poverty of nations.
 
Kingsley Chiedu Moghalu was Deputy Governor for Financial Stability at the Central Bank of Nigeria from 2009 to 2014. He is now a Senior Fellow at the Center for Emerging Market Enterprises at the Fletcher School of Law and Diplomacy at Tufts University, where he has served as Professor of Practice in International Business and Public Policy.

Republished with author's permission. First published in Central Banking.