BIS looks far above the heads of politicians
Tuesday 14 June 1994
The report is, arguably, the most thoughtful, intelligent and humane analysis of these issues that exists. It is written from the viewpoint of central bankers of course, but that distances it both from the political debate and from current market concerns.
Of particular interest this year is the concluding section, signed by the bank's new general manager, Andrew Crockett. Mr Crockett was, until recently, the executive director in charge of the international side at the Bank of England, but he is not a typical Bank man. Much of his career was at the International Monetary Fund in Washington and he has written widely on international finance.
The conclusion discusses some good news (inflation), some bad news (unemployment), the implications of competition from newly industrialised economies and from former communist ones, and the stability of financial markets in the face of growing international capital movements.
On inflation, it acknowledges that the intellectual argument in favour of low inflation has been won: while public support for preserving price stability cannot be taken for granted, there is growing evidence that countries that have low inflation in general grow faster than those that do not. The apparent trade-off between inflation and growth - that countries can grow faster if they allow a little more inflation - only works in the short term.
But central banks need to keep convincing people of this point. They also need to convince markets of their priorities, as the bond markets will put their own interpretation on central bank policies if those priorities are not credible.
In unemployment, the intellectual battle has yet to be won. The consensus view in Europe is still to see employment legislation designed to keep people in jobs and social security payments designed to help the unemployed as great social achievements. People do not yet see that employment legislation has turned against those without jobs and that 'what was supposed to soften the effects of temporary unemployment too often tends to prolong it'.
What should be done about this? The BIS acknowledges that it will be difficult to bring about a change in attitudes to labour market regulation: 'There seems little alternative to a patient explanation of economic cause and effect as a means of preparing public attitudes for the change in present arrangements that are essential if lasting progress is to be made in tackling the evil of unemployment.'
Maybe that is too gloomy an assessment. It has been very interesting to see the way in which the OECD paper on unemployment was received last week. Its main message - that labour rigidities kill jobs - is the same as that of the BIS. Changing public opinion will be a slow process, but at least a start is being made.
On the new industrial countries of East Asia and the progress of Eastern Europe, the response of the BIS is conventional: conveying the idea that the spread of industrialisation does not destroy jobs in the West and that competition from these countries is not 'unfair', is 'another challenge to political leadership'.
Perhaps the most interesting part of the analysis is the final section, in which the BIS looks at the implications of the growing power of international capital markets. There are two elements here: internationalisation and innovation. The more international the markets are, the greater the extent to which events in one are transferred to another. Thus big mood swings, such as the fall in bond prices this year, affect all countries.
The more innovative they are, the less effective the traditional weapon of central banks - the changes in short-term interest rates. The BIS says that central banks retain the freedom to fix such rates, but the availability of new financial instruments may change the response of the markets to such changes. The practical point is that the cost of credit is determined more by market expectations than by central banks.
The BIS does not quite acknowledge this, but the development of derivatives has had the effect of significantly reducing central bank power. That power has shifted to investors, which may in fact be no bad thing.
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