The sacking of competent policymakers by politicians who should know better is financial sabotage
From Seoul to Chicago, a small army of analysts is scouring the globe for the location of the next financial crisis. These intrepid researchers might consider a far less scientific approach: monitoring which countries fire top economic policymakers.
Coincidence or not, there's an uncanny correlation between the sacking of officials and economic problems. Consider Malaysia in 1998, when the nation's finance minister, Anwar Ibrahim, was imprisoned. Many observers felt his crime was embracing Western-style, pro-market polices disliked by Malaysia's prime minister. What followed was the implementation of unpopular policies and a massive capital flight.
More recently, Argentina axed its central bank president, Pedro Pou. The news came just weeks before the nation's simmering financial crisis once again made headlines round the world. The government dumped him for not acting more forcefully to curtail money laundering. Investors felt politics was at play; Pou had publicly disagreed with the government's economic policies.
In May, Thailand sacked its central bank head, Chatumongkol Sonakul, for keeping short-term interest rates too low. The government felt his policies were sending investors elsewhere to seek higher returns. Yet Thailand's low-rate problem was news to IMF officials and global investors who felt the nation's fragile economy called for such a policy.
Soon after, the baht fell to 40-month lows versus the US dollar. Indonesia has also had some unsavoury run-ins with economic policymakers. Former president Abdurrahman Wahid ran afoul of the markets several months ago when he tried to curtail the central bank's independence. Jakarta's meddling exacerbated its rift with the IMF and spooked foreign investors. The move proved a harbinger of political and economic uncertainty that resulted in Wahid being dismissed.
What these scenarios have in common is that a competent economic official was removed under a cloud of controversy. Politicians then, having free rein, took steps that undermined international confidence in their economies. To varying degrees, each country fell prey to extreme volatility ' or outright crisis ' in the period after the sacking.
'I think this is an issue,' says Lara Rhame, a foreign exchange economist at New York-based Brown Brothers Harriman. 'Markets are learning that sometimes leaders either fire them to take over and have their way, or they want a scapegoat.'
Certainly, it's possible that the above-mentioned officials were following unsound policies and deserved pink slips. It's interesting how many of these events prove to be omens of bad things to come.
Equally intriguing is that, in many cases, markets were highly sceptical of governments' motives in removing officials investors believed to be positive forces in their economies.
Perhaps Anwar best personifies the phenomenon. In mid-1998, the 52-year old political star was deputy prime minister, finance minister and heir apparent to Malaysia's aging leader, Mahathir Mohamad. He was also a favourite of investors and Western policymakers; his free-market approach to opening the economy to the rest of the world prompted investors to pool capital into the country.
As the 1997-1998 Asian financial crisis scratched at Malaysia's door, Mahathir became impatient with Anwar's market-oriented views. Slowly but surely, Mahathir took back control of the economy. His first move was to appoint a close confidant, Daim Zainuddin, to a new cabinet position armed with far-reaching powers to oversee the economy. It sent shockwaves through markets from Kuala Lumpur to New York and scuttled Anwar's influence. Investors realised the 'adult' in Malaysia's power structure was being snuffed out.
At the height of the Asian crisis, Mahathir spooked investors by acting to protect Malaysian markets from foreign investors. He threatened to punish analysts who dared to circulate negative views on the economy and called for currency trading to be made illegal. He even blamed Jews for Malaysia's woes. Almost every time Mahathir spoke on the economy, the ringgit plunged.
As 1998 progressed and Mahathir called for changes in interest rate policy, capital controls and using State funds to bail out well-connected companies, Anwar resisted.
Through it all, Anwar was there to reassure investors that Mahathir was just blowing off steam. Anwar and Mahathir offered a kind of 'good cop, bad cop' dynamic that soothed markets. When Mahathir fired him, Anwar refused to go silently and spoke out against the government's policies in the weeks that followed. His supporters took to the streets and protested. Only then was Anwar arrested. He was charged with a creative mix of treason and sexual indecency.
The sacking of Anwar disturbed other policymakers. Robert Rubin, then Treasury secretary, had this to say at the time: 'From everything I've heard, read and know, I think it's an extremely troubling and disturbing situation, and I think the world is rightly very focused on what's happened there on what seems to be a deeply flawed and a deeply troubling process.' Argentina's move to dump central bank head Pou came with its own public relations flaps. The government charged that Pou failed to investigate money-laundering cases with sufficient vigour.
Funny, though, how Pou's dismissal came just as he was clashing with economy minister Domingo Cavallo over plans to overhaul the nation's fixed exchange rate with the dollar and relax bank reserve requirements. Since then, Argentina has again run afoul of credit rating agencies and it was downgraded last week.
Economic policymakers should be accountable. If they're hurting their economies, they should get axed. That's what happened in 1979 to then Federal Reserve chairman G. William Miller, who rocked markets with his efforts to lower unemployment and soften the dollar by printing money. With interest rates surging toward 20% and stocks plunging, President Jimmy Carter turned to a central banker the markets trusted, Paul Volcker.
For politicians to sack a competent official to have their way with the economy ' and in many cases make a mess of things ' is financial sabotage. Sometimes a finance minister or central banker isn't being dumped for doing the wrong things, but the right ones. 'Politicians being politicians, they know a replacement may be more lenient with government aims,' says Rodrigo Sacca, a Mexico City-based economist at Stone & McCarthy Research Associates.
If more fiscal spending, a bank bail out or two and lower rates will increase your approval numbers, do it, an elected official may think. And if some pesky, know-it-all economist stands in the way, fire him. Global investors don't take kindly to heavy-handed meddling in the economy.
Markets rely on independent-minded officials who champion sound financial policies and protect an economy from the whims of politicians. Take out that firewall, and investors grow weary. In this way, sacking your economic policymakers may cause more problems than it solves.
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