eBusiness Weekly
Taking Stock
Kudzanai Sharara
Why give the power to decide interest rates to a committee? This is the first question former deputy governor of the Bank of England Mervyn King sought to answer in a speech he delivered to the Society of Business Economists, at the Royal College of Pathologists, London, May 22, 2002. The event was to mark five years after the Monetary Policy Committee (MPC) was introduced and given the mandate to set interest rates in the United Kingdom.
According to King then, the decision to introduce the MPC was widely regarded as the most important taken by the Labour Government when it came into power in 1997.
Commenting on why it was important to delegate monetary policy to a committee rather than an individual, King said just like in many other situations, “where expertise is crucial, groups of experts are often regarded as superior to individuals”.
“Really important people are treated by teams rather than a single doctor, and when legal decisions reach the highest level of appeal, it is to a panel of judges such as the Law Lords and the Supreme Court, not a single individual, to whom the case is referred,” said King.
Studies conducted by the Bank of England and also by Alan Blinder — a former Vice-Chairman of the Federal Reserve Board — and his colleague John Morgan, have also revealed that in terms of group decisions “the whole is different from — and generally better than — the sum of its parts”.
Amid criticism, by the Financial Times for example, that MPCs bear “a closer resemblance to a post graduate seminar than to a forum for strategic decision making”, King said; “it is precisely the exploration of alternative views about what is happening in the British economy, and the discussion of these views by the committee in a spirit of investigation not advocacy, that is central to the pooling of knowledge through which committees reach decisions that are superior to those taken by individuals.”
In other words, committees make better decisions than individuals.
It is against similar lenses, that we should probably view this week’s appointment of a Monetary Policy Committee by Finance and Economic Development Minister Mthuli Ncube, in accordance with Section 29B of the Reserve Bank of Zimbabwe Act.
Monetary policy decisions by central banks can have far-reaching implications for the economy, investors, savers and borrowers. And if seen to be taken by an individual, these decisions can cause a lot of heartburn.
Therefore, globally, many governments have solved this problem by appointing a committee.
First things first
The success of any central bank’s policies depends on the quality of its decisions, but for these decisions to be of the required quality, the structure of the committee will matter.
In the case of Zimbabwe, the MPC would be made up of central bank governor Dr John Mangudya, who will be the chair, and his two deputies, Jesimen Chipika and Dr Kupikile Mlambo.
Other members are SA-based actuary Marjorie Ngwenya, industrialist Kumbirai Katsande, banker Douglas Munatsi, Professor Theresa Moyo, economist Eddie Cross and economics professor Ashok Chakravarti. Nine members in total.
Another key determinant, for the success or failure of a committee, is whether its members genuinely want to take good decisions and leave no room for polarisation, group-think, or free-riding. Members need to independently gather, share and discuss information, on which the group decision will be based.
If every member of a committee exerts effort to become informed, the MPC can gather more information than individual decision-makers and naturally better information can lead to better decisions. Even if all committee members have identical information, they need not reach the same (individual) conclusion.
This is because members typically have different skills, different backgrounds, different abilities to process data, and to extract useful information. In other words, pooling knowledge leads to better forecasts and potentially better decisions.
In addition, committees provide an insurance against extreme preferences as well as insurance against strong individual preferences.
Having policy set by a group rather than by a single central banker keeps policy from going to extremes. Also, letting a committee decide — as opposed to having a single monetary decision maker — provides a certain protection for the Governor (and all other committee members), who otherwise might be subject to substantial personal pressure. This protection helps to promote independence and facilitates frank discussion of opinions.
Things to guard against
There is, however, one caveat: If group members are “too independent”, the monetary committee may run the danger of speaking with too many voices when communicating externally. The monetary committee should thus be individualistic enough to reap the benefits of diversity, yet collegial and disciplined enough to project a clear and transparent message.
