One of the most important structural
reform trends in emerging markets is growing
central bank credibility. This requires the central
bank to create a record of targeting and
This is harder than it sounds as it involves
a trade-of between the short term and long
term. Those acquainted with the history of
inflation-taming in the US will understand.
When Paul Volcker almost doubled interest
rates to 20 per cent in 1981 it brought inflation
down to 2.5 per cent by 1983, compared with
15 per cent just three years earlier. But what is
now widely seen as a success involved a
painful short-term trade off.
Similarly, some emerging market central
banks have made difficult decisions. Most
notably, those in Russia and India have
strengthened their credibility via inflation
financial stability concerns are finally beginning
to be addressed, as with the bank
recapitalisations in India.
In Brazil, the
government has reduced dependence on
subsidised credit and is encouraging more
borrowing through the main central bank rate. It
is true that these countries still have some way
to go to reform other areas of their economy,
including the quality of institutions, financial and
goods markets, and the relatively high level of
state intervention in the economy. But their
central banks should be commended.