Dictatorships and central bank transparency. How do autocrats benefit from central bank transparency?


Term Paper (Advanced seminar), 2015
17 Pages, Grade: 1.3

Excerpt

Content

1. Introduction – The Development of Central Bank Transparency and Institutions in Dictatorships

2. The Current Stage of Research

3. Theory and Hypotheses

4. Operationalisation and Measurement

5. Discussion and Conclusion

6. References

1. Introduction – The Development of Central Bank Transparency and Institutions in Dictatorships

Over the last decade, one could observe a rise in central bank transparency. Together with increased central bank independence, it has become one of the key features of monetary policy (Geraats 2009). According to the 1998 survey of 94 central banks by Fry et al. (2000), 74% of central banks consider transparency as a vital or important component of their monetary policy framework. Moreover, various studies have showed that central bank transparency is beneficial as it contributes to the well-being of a state, which could explain amongst others the worldwide increase. Unfortunately, most studies are limited to developed countries, of which the majority is ruled by democratic leaders. However, the researches of Dincer and Eichengreen (2007,2009, 2014) have shown that dictatorships experienced an increase in central bank transparency too. Even though the increase in transparency is much higher in developed democratic countries, the average score has risen for both kind of regimes. Belarus for example had an overall gain of 3.5 points from 1.5 in 1988 to 5 in 2005, with 0 meaning no central bank transparency and 15 meaning full one.[i] It is highly unlikely due to the repressive nature of autocracies that they would adopt central bank transparency whether they would not profit from it. So speaking, increased central bank transparency must also bring some economic benefits with it for autocrats.

Another remarkable phenomenon is “that the rise in central bank transparency in Latin America, in Eastern Europe and in Asian countries from Korea to the Philippines coincided with the third wave of democratization” (Dincer/Eichengreen 2007, 5).This can partially be explained by the fact that dictatorships have been struggling with their lack of transparency ever and anon, while democracies have been associated with a “culture of democracy”. However, even incountries that did not undergo a democratization process, the adoption of higher central bank transparency canbe beneficial to the regime. Over the last decades, dictators have adopted various “democratic” institutions to solve some of their problems as insufficient state legitimacy.Those include among others the holding of elections, the allowance of more than one party and the existence of a legislature. Especially the amount of dictatorships exclusive of a legislature has sunken drastically; only 19% are nowadays without (Svolik 2012, 36). The autocratic leaders tend to give up some power to stay in power; institutions are used to sustain their rule. Yet, the effect of central bank transparency and its contributing role to regime survival have not been considered in previous studies. Thus, my research question will be the following: how is central bank transparency bringing benefits to autocrats?

Nevertheless, there is huge variation across dictatorships with regard to the adoption of those democratic institutions. While some countries have adopted them, not all have; and we can see quite a few autocracies doing pretty well without any “democratic feature”.The same holds true for central banks: looking at the data of Dincer and Eichengreen (2009), the increase of central bank transparency differs extremely between dictatorships. While many of those only faced increases of half a point or one point as Libya or even no increase as Kuwait, others as China had major changes. It is further interesting to see that Thailand did not decrease its high level of transparency during the autocratic period in 2006 – 2007.[ii] This illustrates that an increase in transparency - or a higher level of it - might not be preferred by all types of dictatorships; the benefits of transparency and the need for it might be restricted to certain kinds of those. As Geerats (2001) argues, the desirability of transparency depends on the institutional framework. Therefore, a subordinate research question that has to be asked is: in w hich types of dictatorshipsis central bank transparency more likely to occur?

The answers to both research questions are therefore especially important, as almost no previous research has focused on central bank transparency in an autocratic setting. The major contribution of my research lies in the combination of the knowledge about central bank transparency and the use of institutions in dictatorships, making it possible to study the benefits of increased central bank transparency in totalitarian governments. Furthermore, the focus will be on the effect of this institution on both ruling elite, opposition and citizens, while previous research on “democratic” institutions often just focused on one of these groups.

This paper proceeds as follows: first, there will be a short literature review summarizing the current stage of research relevant for this paper. Second, my theory and hypotheses will be developed. I argue that increased central bank transparency prolongs a dictator’s survival in office as challenges to his rule are reduced and that transparency is more likely to occur in dictatorships with less reliance on natural resources. Third, I will outline my operationalisation and measurements; multiple linear regression is chosen for the analysis. As the analysis will not be part of this paper, I will conclude with a discussion focusing on the expected findings and implications for future research. I assume that my hypotheses are right and the increase in central bank transparency in dictatorships can be explained by its benefits.

2. The Current Stage of Research

As central bank transparency has increased over the last decade, so did also the literature on it. Huge part of this literature is assured of the benefits of transparency (Geraats 2002, Blinder/Wyplosz 2004, Crowe/Meade 2008, and Sibert 2009); two common views are that it increases the effectiveness of markets and democratic accountability (Dincer/Eichengreen 2009). Eijffinger and Geraats (2006, 5) argue that “transparency […] could lead to lower inflation and enhance the central bank’s reputation; it may give the central bank greater flexibility to stabilize economic shocks and reduce the volatility of output; [and] it reduces private sector uncertainty.” Demertzis and Hughes Hallett (2003) as well as Dincer and Eichengreen (2009) found out that increased central bank transparency reduces inflation volatility due to the decrease of uncertainty about future policy choices; Sibert’s (2009) analysis supports the finding of Eijffinger and Geraats (2006) – more transparency leads to the overall reduction of inflation. Moreover, Faust and Svensson (2001) show that higher transparency about control errors leads to less inflationary bias. This all leads among others to an increase in social welfare.It is generally assumed that “more information allows better analysis, and better monitoring and evaluation of events […], it allows economic andpolitical decision-makers to evaluate opportunities and manage risks better” (Islam 2003, 2). Following this logic, more information is always better. However, part of the literature demonstrates the shady side. In a second best environment, central bank transparency might be costly (Crowe/Meade 2008). Additional, Morris and Shin (2000) argue that better public information does not bring advantages if the public signal is noisy compared to private signals. Furthermore, it can reduce welfare “if shocks to output arelarge and stabilization policy is hamstrung” (Dincer/Eichengreen 2007, 8). Nevertheless, I will assume in this research that “increased transparency increase[s] the expected welfare of all central banks and societies” (Sibert 2009, 848). I can do so as “results are sensitive to what one assumes about the structure of the economy, the stochastic structure, the information environment, the timing of actions and decisions, and the institutional setting” (Dincer/Eichengreen 2007, 10). Furthermore, it is unlikely that a country would adopt higher central bank transparency if thiswereharmful to it; benefits should therefrom play at least a role for the central banks with hightransparency or an increase over the last decade.

So far, little attention has been drawn to the role of central bank transparency in dictatorships;overall, there exists little literature on the benefits of the use of economic institutions in an autocratic setting. One research focusing on the role of economic transparency for the survival of dictatorships is the one of Hollyer et al. (2015). They arguethat the disclosure of economic data about the government’s economic performance makes citizens able to mobilize and therefore destabilizes autocracies. However, their mechanism cannot be applied to this research for one major reasons: they assume that the data reveals the government’s underperformance, therefore not considering the economic benefits brought by central bank transparency and the improved economic wellbeing. Furthermore, central bank transparency mainly provides data on its own performance, which makes it not the same as data on the economic performance of the government. Out of this reason, I will focus my argumentation on the literature about the use of “democratic” institutions in dictatorships. As said in the introduction, more and more dictatorships have adopted those institutions over the last decades. Boix and Svolik (2013, 300) argue that by doing so, dictators“can facilitate power-sharing among the ruling elites.” Gandhi (2008) focuses on the role of “democratic” institutions for the co-optation of the opposition; her argument is that also autocrats are dependent on compliance and cooperation to stay in power, which can be achieved by the delegation tothose institutions.Overall, dictators have only one goal: to secure their own survival in power. As “the typical dictator does not stay in office much longer than an American president” (Svolik 2012, 44), dictators of the last decades have focused on the use of variousinstitutions to increase their tenure and stabilize their regime (Boix/Svolik 2013).As Schedler (2010, 76) has shown, “such institutions are […]likely to hold some instrumental value for authoritarian governments, helping them to exercise and to maintain power.”By decreasing the probability of popular uprisings, coup d’états and transition to democracy, dictators are less likely to leave office by non-constitutional exits (Svolik 2012), which helps them to hold longer onto their power. Therefore, these institutions are not actually democratic, they just adopt some democratic features to simulate participation and competition; “authoritarian delegation of power […] is never meant to sanction the autonomous exercise of power” (Schedler 2009, 331). Unfortunately, this strand of literature focuses only on the legislature, the judiciary, elections, the media, and civil society (Schedler 2010).

Novel is the idea that also economic institutions can be used in this way. According to my research, Corduneanu-Huci (2015) is one of the only who looks at the use of economic institutions for benefits in dictatorships. Her argument is, “allowing some degree of contestation and transparency on the fiscal contract in electoralauthoritarian regimes helps the executive identify distributive claims and co-opt theopposition” (Corduneanu-Huci 2015, abstract). Her results show that there is a legitimate claim behind the assumption that autocrats use economic institutions for their survival too.

3. Theory and Hypotheses

Before starting with the development of my theory and hypotheses, there is the need to define the most important concepts. Transparency of central banks “could be defined as the absence of asymmetric information between monetary policymakers and other economic agents” (Geraats 2002, 1). In the context of dictatorships, central banks have to be transparent to the opposition, the inner circle together with the dictator, and the other economic agents including the citizens. Following the definition of Svolik (2012), a regime is considered as autocratic if the executive and/or legislature are not elected in free and competitive elections. In the following, I will show how increased central bank transparency can contribute to a dictator’s prolonged survival in office.

As already stated before, central bank transparency is said to be bring economic benefits, which increase social welfare and the overall economic wellbeing of the state. The analysis of Sibert (2009, 847) shows that “all societies are better off with more transparency”, thus making those economic benefits independent of regime type.In addition, Dincer and Eichengreen (2007, 8) argue that “transparency may be welfare increasing if the central bank lacks credibility and market expectations and reactions provide disciplinepreventing excessive inflation.”Especially the lack of credibility and the need for discipline are present in autocracies, thus supporting Sibert’s (2009) finding.Admittedly, dictatorships are in general not interested in increasing social welfare, as they do not universally care about the wellbeing of their population. Furthermore, they might also not be interested in the overall economic wellbeing, as many dictators tend toensure their personal welfare through other means. As said before, their main concern is the own survival in power. However, economic shocks can be a challenge to a dictator’s rule: a widely accepted claim in comparative politics is that economic crisis tend to reform regimesdue to the government being overthrown (Gasiorowski 1995). Haggard and Kaufman (1997, 266f) argue, “economic crises undermine the "authoritarian bargains" forged between rulers and key socio-political constituents and expose rulers to defection from within the business sector and protest ‘from below’.” During an economic crisis, the dictatorship fails even more to provide fundamental services and there might be severe shortages of essential goods. This can mobilize the masses to engage in social protest and the overthrow of a dictator. Furthermore, an economic crisis might also increase the risk of coup d’états, as the military and civil servants are not getting paid (Collier/Hoeffler 2007). Hence, anincrease in central bank transparency might be helpful to survive in power as it lowers the chances of an economic crisis and therefore reduces the risk of popular uprisings and coup d’états. Furthermore, it lowers the need to manipulate elections, as a government with good economic performance is more likely to stay in office because it is re-elected(Islam 2003). Voters tend to vote for the incumbent when economic times are good but vote against it in case of bad economic performance. Moreover, election fraud can be costly for a dictator and may lead to him being unseated;therefore, he may be interested in keeping the level minimal. A good example for this is the Orange Revolution in Ukraine: election fraud was the straw that broke the camel’s neck, leading to mass protests and new elections (Beissinger 2011). Especially with the increase of election observer missions, manipulation has become more risky and dictators are better off by ensuring their re-election through other means.

Overall, dictatorships are faced with two challenges when it comes to the consolidation of their power: “first, as rulers who hold power without the legitimacy of having been chosen by their citizens, they must prevent attempts to undermine their legitimacy and usurp power […] second, autocrats also must solicit the cooperation of those they rule” (Gandhi 2008, xvii). Only if a dictator is able to eliminate both the threats from the inner circle and the opposition, a longer survival in power is guaranteed. For the ruling coalition, the main problem is one of commitment and monitoring: due to the lack of transparency, the inner circle cannot fully trust the dictator. This is because dictators “can exploit their privileged access to information […] and misrepresent the amount of available benefits to be shared” (Boix/Svolik 2013, 300). Out of this reason, “the allies may suspect that the dictator is reneging on the power-sharing agreement—even when he is not—and such suspicions may escalate into unnecessary rebellions” (Boix/Svolik2013, 300). Increasing central bank transparency can help to overcome thisby increasing the overalltransparency between the ruling elite and leader. This means that dictator and the inner circle are in possession of the same information and are further also aware of this, thus avoiding uncertainty and playing on the presence of private information (Geraats 2002). As a result, the dictator is unable to enrich himself at the expenses of others and is more likely to stick to the power-sharing agreement, which can avoid misperceptions and therefore reduces the risk of being removed by the ruling coalition. Keeping in mind that most dictators are removed from office by a coup d’état (Svolik 2012), eliminating this threat makes it easier for a dictator to establish his rule; “once established, the dictatoris no longer deterred by the threat of a coup” (Svolik 2009, 479), which almost certainly guarantees his survival in power. So ended Josef Stalinand Mao Zedong’s tenure by a natural death, and Fidel Castro resigned voluntary due to illness. All three had effectively eliminated any threats from the ruling coalition.

Nevertheless, a dictator must also eliminate challenges from the opposition, only avoiding economic crisis is for this purpose not enough. The dictator must further be able to control the opposition to avoid any transition to democracy. Also here, transparent central banks make a major contribution. By having a certain degree of transparency about central bank plans, the dictator can co-opt the opposition. The opposition gains limited power, as they are being able to hold the central bank accountable. Broz (2002, 862) has showed that “a formally independent central bank is not a credible commitment [in dictatorships] because the opacity of the political system makes it difficult to detect and punish governmental efforts to subvert the autonomy of the central bank.” Therefore, one can assume that central banks in dictatorships are never fully independent of the dictator and his allies. By this, the opposition further has a tool to hold the government accountable too. Geraats (2002, 25) identifies various mechanisms how this might work, which can also be applied to dictatorships: “political transparency […] provides a criterion for evaluation and identifies who is responsible; economic, procedural and policy transparency enable scrutiny of the motivation for policy actions and thereby ex ante accountability of policy. Operational transparency […] contributes to ex post accountability based on policy outcomes.” However, full decision-making control remains in the hand of the autocratic elite. This can be compared to the use of the legislature under King Mohammad V in Morocco: by offering the opposition to hold a limited stake in the system (“question ministers in the king’s government”), the king did not really limit his power but was able to keep the opposition easy (Gandhi 2008, 58). The same applies to transparent central banks: using manipulation,the opposition is less likely to challenge the dictator. Moreover, the increase in transparency increases the legitimacy of the central bank and by this of the government, which further decreases challenges to power by the opposition. Having some degree of openness reduces uncertainty,which leads to a greater acceptance of authority, making the political system more stable.

[...]


[i] Belarus has been classified as not democratic during this time-period by the Democracy Dictatorship Index of Cheibub et al. (2010).

[ii] Lybia, Kuwait and China have all been classified as not democratic for the whole time-period covered by Dincer and Eichengreen (2009) by the Democracy Dictatorship Index of Cheibub et al. (2010). Furthermore, Thailand has been classified as not democratic during 2006 and 2007 by this.

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Title
Dictatorships and central bank transparency. How do autocrats benefit from central bank transparency?
College
University of Mannheim
Grade
1.3
Author
Year
2015
Pages
17
Catalog Number
V337882
ISBN (eBook)
9783668273160
ISBN (Book)
9783668273177
File size
541 KB
Language
English
Tags
Central Bank Transparency, Dictatorships, Monetary Policy
Quote paper
Kathrin Baumann (Author), 2015, Dictatorships and central bank transparency. How do autocrats benefit from central bank transparency?, Munich, GRIN Verlag, https://www.grin.com/document/337882

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