Central banks as agents of development in developing countries

After the Second World War, there was a major transformation of central banking in the developing world. In many respects, these changes paralleled those in the developed world. But in developing countries, central banks were much more emphatically agents of economic development than in many rich countries.  As described by Arthur I. Bloomfield, the renowned monetary historian of the Federal Reserve Bank of New York, in 1957: "During the past decade there has been a marked proliferation and development of central banking facilities in the underdeveloped countries of the world, along with an increasing resort to the use of monetary policy as an instrument of economic control. Since 1945, central banks have been newly established and pre-existing ones thoroughly reorganised, in no less than some twenty-five underdeveloped countries.
"In other cases the powers of pre-existing central banks have been broadened. The recent growth of central banking in the economically backward areas has also reflected a desire on the part of the governments concerned to be able to pursue a monetary policy designed to promote more rapid economic development and to mitigate undue swings in national money incomes." (Bloomfield 1957: 190).
Bloomfield goes on to describe the functions, powers, and goals of these central banks. Many of the central banks, especially those established since 1945 with the help of Federal Reserve advisers are characterised by unusually wide and flexible powers. A large number of instruments of general and selective credit control, some of a novel character, are provided for. Powers are given to the central bank to engage in a wide range of credit operations with commercial banks and in some cases with other financial institutions…These and other powers were specifically provided in the hope of enabling the central banks…to pursue a more purposive and effective monetary possible than had been possible for most….that had been set up…during the twenties and thirties…[that] for the most part [had] been equipped with orthodox statutes and limited powers which permitted little scope for a monetary policy designed to promote economic development and internal stability … (ibid.: 191 [emphasis added]).
Somewhat surprisingly from the perspective of today's financial orthodoxy, the Federal Reserve Bank of New York helped to establish central banks in developing countries and encouraged them to have a broad range of monetary and credit powers, especially in contrast to the orthodoxy of the 1920s and 1930s. Of course, the Fed continued to be concerned about the importance of stabilisation, controlling excessive credit creation and maintaining moderate inflation. But [the central bank's] efforts need not, and in fact should not, stop here. The majority of central banks in underdeveloped countries have in actual practice adopted a variety of measures designed more effectively to promote the over-all development of their economies. Some of these measures are admittedly outside the traditional scope of central banking, but central banking in these countries should not necessarily be evaluated in terms of the standards and criteria applied in the more developed ones…the central bank can seek to influence the flow of bank credit and indeed of savings in directions more in keeping with development ends. (ibid. p. 197)
Bloomfield describes the same tools of credit manipulation described earlier with respect to Europe, Japan and even the United States: selective credit controls applied to the banking system, through help in establishing and supporting special credit institutions catering to specialised credit needs, and through influence over the lending policies of such institutions, it can help to some degree to re-channel real resources in desired directions, both between the public and private sector and within the private sector itself.
Writing about the same issue almost fifteen years later (in 1971), Andrew F. Brimmer, a member of the US Federal Reserve Board of Governors, looks back on the experience with 'developmental' central banking in the developing world: '...during the last ten years, a number of central banks concerned themselves with problems of economic development almost as much as they did with the traditional functions of central banking' (Brimmer 1971: 780).
By 1971, monetary officials, as represented even by a pro-Keynesian economist like Brimmer, had become more sceptical of the developmental role of central banks in developing countries. Brimmer and his associates describe a variety of techniques that central banks pursued in the 1960s. These included: providing capital to development institutions, such as industrial and agricultural development banks; extending credit to development banks and purchasing their securities; buying a small part of the equity of development banks; establishing a 'securities regulation fund' to create a market for the securities of various development finance institutions, by using the profits from the ordinary operations of the central bank; using differential discount rates to allocate credit to capital development projects; the establishment of portfolio ceilings on activities having a low priority; various types of reserve requirements, including differential reserve requirements to influence the allocation of credit; using import deposit requirements, (primarily intended to deal with balance of payments difficulties) to also influence the allocation of bank credit (Brimmer 1971).
Brimmer, on the whole, takes a somewhat negative view of the effectiveness of many of these techniques. The possible trade-off between developmental central bank policy and the maintenance of financial and macroeconomic stability is also a continuing concern.
Yet, despite these concerns, one sees, in retrospect, that support by the central bank of the government's policy for industrial development made a key contribution to the rise of many of the more successful developing countries in the late twentieth century. Alice Amsden in The Rise of 'the Rest' (2000) reports the role of medium and long-term financing, often supported by central banking mechanisms as just described, were key to the rise of these countries. The countries of the 'Rest', according to Amsden, acquired a manufacturing base in the years prior to the Second World War and then, after the war, industrialised rapidly and eventually moved into mid-level and even high-technology production. Among many other factors, Amsden stresses the important role of finance in the success of these countries, and especially the mobilisation and allocation of medium- and long-term finance for industrialisation.
The state's main agent for financing investment was the development bank. Sometimes, the whole banking sector in these countries was mobilised to direct long-term credit to targeted industries, thereby 'acting as a surrogate development bank'. Lending terms of development banks were almost always concessionary. The public finance behind development banking of the 'Rest' countries was often 'off-budget' and related to non-tax revenues. It derived from foreign sources, deposits in government-owned banks, post office savings accounts, and pension funds. Many central banks played a key role here as well. More specifically, central banks played an important role in accommodating the development-oriented policies of these governments. Most kept effective real interest rates low, even negative. They also used capital controls to insulate domestic markets from hot money flows that could lead to over-valued exchange rates and crises. Furthermore, central banks also played an important role in the 'off-budget' financing of a number of these countries using the techniques described by Bloomfield and Brimmer as mentioned above. These experiences were not all unqualified successes, of course. Still, in many cases, as part of a government policy, they helped underwrite significant economic development in many countries.
DEVELOPMENTAL  ROLE OF CENTRAL BANK OF BANGLADESH (1972-2015):    
After liberation of the country, the Bangladesh Central Bank was named as Bangladesh Bank taking overall assets and liabilities by creating a new ordinance. The newly-created central bank had to lead the daunting task of crafting the banking system for the revival of economic activities in the war-torn Bangladesh. One should recognise that the role of the new central bank of Bangladesh was different from the role and context of the formation European and North American central banks. Historical evidence indicates that most of the eighteenth and nineteenth century central banks were created to finance wars for the occupation of foreign countries or protecting sovereignty of the own territory. In the case of Bangladesh, the initial role of central bank was establishing a banking system in the newly-independent country which was destroyed by the Pakistani occupation army during the Bangladesh War of Liberation. The challenges were many in front of the new central bank. Amongst all, the Bangladesh Central Bank played the most crucial developmental role in prioritising and sequencing the economic activities to start and keep the economy running for realising the hopes and aspirations of the general mass based on the spirit of the liberation war, keeping alignment with the international monetary system, complying with the requirements of development partners, regional monetary system, foreign currency management, and foreign loan management.  
The Bangladesh Bank is playing the key role in the financial sector as well as the economy of the country. It is the banker to the government as well as to other banks. It formulates and implements monetary policy, manages foreign exchange reserve and is the authority to supervise and regulate other banks and non-bank financial institutions. The financial sector of Bangladesh has gone through a lot of reforms in the past two decades and central bank reform was a key element of the reform agenda.
The Bangladesh Bank has improved in certain areas and yet there are areas where more can be done. The bank plays a dual role in the economy. It supervises and regulates the country's banking sector where it has made significant improvements. On the other hand, it is yet to do a lot more in terms of autonomous formulation and implementation of monetary policy in coordination with the government.
Jamaluddin Ahmed PhD FCA, a former President of the Institute of Chartered Accountants of Bangladesh (2010) and General Secretary
of the Bangladesh Economic Association, is Chawirman,
Emerging Credit Rating Limited.
[email protected]