GCC Central Banks - Research Paper Example

GCC Central Banks – Literature Review of Your 26 November, Contents Executive Summary 4 Introduction 5 Research Aims and Objectives 6 Research Methodology 6 Literature Review 7 Central Bank 7 Federation & The Central Bank 8 The Gulf Cooperation Council 8 Framework for a Central Bank for the GCC 9 Radical Approach: US Federal Approach 10 Evolutional/Gradualist Approach: The ECB Approach 12 Bibliography 13 Executive Summary This paper examines Introduction As a prerequisite for running a modern nation, every country creates and maintains a Central Bank that is used as a means of controlling government fiscal policy and public spending (Castellani & Debrun, 2013; Beetsma, et al., 2010; Perry, et al., 2012). A Central Bank is at the apex of controlling a country’s monetary and banking systems (Vaish, 2009). Therefore, every country in the world today has a Central Bank that provides a Central Bank that works to coordinate affairs of the country and the economy in order to attain important elements and aspects of economic growth. The Central Bank was common with the Imperialist Western countries that had Central Bank systems in the late 1800s (Perry, et al., 2012). This was fundamentally meant to ensure that the expansionist policy of these countries was met and these nations could fund their war efforts. However, after the Second World War, the Bretton-Woods System ensured that all the countries around the world had a Central Bank system that could enable the countries to achieve their goals and ends. Some countries have unitary systems and models whilst other countries are federated. The current international order is such that the international community recognizes various regional blocs. This includes various regional cooperation deals and associations that represent groups of countries. One of these regional groupings is the Gulf Cooperation Council (GCC). The GCC has the potential of becoming a federated entity that will become a major global power. The GCC has numerous similarities with the European Union which has a unified system of running a Central Bank. This report will involve a critical review and analysis of the options necessary for the attainment of results for the creation of a Central Bank for the GCC. Research Aims and Objectives The research aims at examining and reviewing the different options for the creation and maintaining a Central Bank for GCC countries. In order to attain this end, the following objectives will be explored; 1. A critical analysis of relevant literature for central bank functions and federation of central banks; 2. An evaluation of the features of the different federated Central Banks in the past; 3. An analysis of options for the creation of a federated Central Bank for GCC; 4. Presentation of Recommendations for the Creation and maintenance of a central bank for the GCC. Research Methodology This research will fundamentally involve the collection of data from secondary sources, as opposed to primary sources. This will involve the critique of information from books, journals, websites and other scholarly sources that will provide important guidelines about how a group of nations can form a central bank. The research approach will revolve around working from the known to the unknown. This implies that the study will commence from critiquing and analyzing important concepts and ideas that are relevant to the study. This will provide information about the Central Banks and the position of Central Banks created for federated nations. This will also include discussions on the GCC and its constituents. After a general literature review, the research will examine the case of two federated banking systems – the United States and the European Union. This will provide important clues and directions that will be used as a means for the critique of the important elements and aspects of the rest of the research. Finally, the study will analyze and review important arguments for and against a new Central Bank for the GCC. This will include important elements and aspects of the banks and it will culminate in the presentation of recommendations for a new Central Bank for the GCC. Literature Review This section of the study will analyze important concepts and ideas as they exist in secondary sources. This will discuss three main elements relevant to the study – Central Banks, Federation and the Central Bank and the GCC and its structure. Central Bank According to Vera Smith, a Central Bank is “is a single bank in a country that has either complete or residuary monopoly of note issue” (Vaish, 2009, p. 410). This definition therefore asserts that a Central Bank is defined by its function in a given country. This is about the right and the power to solely issue money and distribute it. Many authorities argue that the functional definition of the Central Bank as the issuer of notes and legal tender in the country comes with a power that enables the bank to regulate and control affairs in the country’s economic activities. The function of the Central Bank as a major controller of money gives rise to the duty of ensuring efficiency in payments (Santomero, et al., 2011). Therefore, the Central Bank plays the role of being the lender of last resort, as well as regulation and supervision of financial institutions in the country (Santomero, et al., 2011). The Central Bank comes into existence through legal provisions and this defines the scope of the coverage and activities of the bank (Mwenda, 2012). Therefore, the Central Bank is seen as an extension of the government and plays a role as an independent financial agency that plays some important and significant roles in implementing government rules and regulations. Federation & The Central Bank A Central Bank is an inseparable part of a country’s sovereignty. Therefore in situations where nations choose to go onto the path of federation, they will have to cede the right to a Central Bank to the sovereign authority that will be created by the new constitution (Sundaram & Wong, 2013; Silcock, 2010). Normally, a country seeking to promulgate a federal constitution will commence by creating agencies and other entities that will work together to commence discussions on the creation of a Central Bank that is an amalgamation of the individual Central Banks (De Brouwer & Wang, 2012). The fundamental discussions in such situations include sharing ideas on the successful integration of all economies, agreement on a common currency and the removal of financial and economic barriers that hinders the federation of Central Banks (Ross-Larson, 2012). Fundamental research indicates that there are two main approaches that can be put in place to adopt a new and a different Central Bank system that is a federation of the different Central Bank in a federated entity (Worrell, et al., 2014). In order to get a single Central Bank for a given sub-region, there is the need for the following ends to be met: 1. A single monetary policy; 2. A single decision-making body; 3. Interest rate planning and decisions on the basis of events in the entire region; 4. Agreement on keeping no supranational Central Bank (Rutledge, 2013). The Gulf Cooperation Council The Gulf Cooperation Council (GCC) was formed in 1981 and it had the fundamental goal of enhancing regional integration and interconnection between member states in all aspects of life (Ramady, 2013). This includes the use of various regulations and convergence frameworks to streamline various elements and aspects of the society in order to achieve results. The main aim was to transpose and apply various aspects of the UN Charter in the region by promoting cooperation amongst the GCC member states. The GCC on the other hand has a foundation for the attainment of many investment agreements including savings funds, reserve investment cooperation and development funds for the industrialization of the region (Momani & Legrenzi, 2013). Framework for a Central Bank for the GCC There seem to be two options available to a community like the GCC. These can be summed up as revolutionary measures and evolutionary measures. A revolutionary measure will involve abolishing all the supranational banks in the various states that form part of the GCC. This will culminate in the presentation of a completely new federated central bank that will be uncontested in any way or form. A second option is to use an evolutionary approach that will involve maintaining various supranational banks for the states and introducing a new system that will gradually take shape in the GCC. This will mean members states of the GCC will have their own central banks, but they will cede certain portions of their sovereignty to a GCC Central Bank. The GCC Central Bank will use an evolutionary approach that will mean that the members of the countries will have to comply with measures over time and eventually cede most of their competencies to the main Central Bank of the entire GCC. These two contexts can be critiqued by examining the case of the European Union and the United States. This can help to draw parallels that will give room for the transposition of the best methodology to the GCC and its entire members. Radical Approach: US Federal Approach The United States was guided by the Bill of Rights and the desire to create a federal system that will prevent the rich and powerful people from dominating the United States as it was in Britain, where the nobility was perceived to have enslaved the masses. Therefore, the United States did not have a lender of last resort until the early 1900s. However, the foundation of maintaining state power as a balance to federal power indicated that the groundwork was done for the United States to create a Central Bank through a legislative instrument and it was bound to be a federal-oriented bank. Therefore, in comparison with the GCC, the United States did not have states that already had Central Banks. This limits the use of the US Central Bank as an ideal and perfect model for the GCC. However, the need for a Central Bank formed the basis for the creation of the US Federal Bank and this comes with a lot of experiences and debates that the GCC could draw from. The Federal Reserve Act (1913) was to create a central bank that will lead to maximum employment, stable prices and moderate long-term interest rates (Meltzer, 2014). The American view of preventing the Federal Reserve System from being too powerful, there were numerous checks and balances that were put in place to ensure that the bank could operate appropriately (Wells, 2003). This includes: 1. The Board of Governors (Federal Reserve Board); 2. Federal Open Market Committee (All Board of Governor Members and 12 Regional Bank Presidents) 3. Regional Federal Reserve Banks (12 Regional Banks) (Friedman & Schwartz, 2013) This system is to ensure that there is massive deliberation and analysis of monetary issues and other technical matters before a decision is taken. This ensures that interests and desires that are before the banks are seriously evaluated before they are accepted. This means that the GCC Central Bank can use this approach. It must also be pointed out that the 12 regional Federal Banks are quasi-public because they are linked to local commercial banks who have the power and authority to contribute directly and seek their demands. However, the process is highly democratized in the United States and this is one approach that the GCC might want to consider in running their Central Bank. The US Federal Reserve Bank is also represented on the Federal Advisory Board which is influential in the US Federal Government. The US Federal Reserve Bank uses scientific methods to define and select the discount rate for the US and the distribution of loans and bailouts to selected banks (Meltzer, 2014). This implies that the United States’ Federal Reserve use scientific methods to selectively define policies that have a symbiotic relationship and influence with the US government’s policies and activities at every point in time. This therefore means that the US Federal Reserve Bank system brings together different competing ideas and concepts that are synthesized in order to present the best option for the United States’ financial matters and issues. They also define the kind of lending rates and bank reserves that must be put in place. The staff members all use scientific methods and approaches to conduct various forms of research for the bank (Friedman & Schwartz, 2013). This includes the conduct of critical studies on the field in order to identify important trends in the market. The use of over 500 economists and technical approaches and processes allows the American Federal Reserve to come up with important concepts and ideas that are put forward for evaluation and the provision of the best kind of policy for the US Federal Reserve. This is because there are numerous deliverables that are presented for FOMC meetings in order to guide decisions and ensure efficiency. The chairman of the Federal Reserve has the audience with Congress and the President. This is because the constitution demands it and through this, the chairman of the Federal Reserve can provide objective and non-partisan advice to the authorities in order to ensure that decisions are scientifically justified and they seek to provide the best of results for the United States. This means the Central Bank of the GCC ought to be Independent to avoid manipulation from any side of the political device. This is because the US Federal Reserve has Instrument Independence and Goal Independence which allows the Federal Reserve to remain objective. Evolutional/Gradualist Approach: The ECB Approach Arguments for the Central Bank Arguments Against the Cetnral Bank Recommended Objectives for the GCC Central Bank Amalgamation (ECB Model) Critical Checks and Balances (US Method) Less stressful demands on countries Quasi-public and active involvement of central banks (US Method) Representation on the US Federal advisory board The use of scientific method – link to the needs of politicians Seek synthesis Independence Conclusion Bibliography Beetsma, R. et al., 2010. Monetary Policy, Fiscal Policies and Labour Markets. 3rd ed. Cambridge: Cambridge University Press. Castellani, F. & Debrun, X., 2013. Central Bank Independence and the Design of Fiscal ..., Issues 2001-2205. 3rd ed. New York: International Monetary Fund Press. De Brouwer, G. & Wang, Y., 2012. Financial Governance in East Asia: Policy Dialogue, Surveillance and Cooperation. 5th ed. London: Routledge. Friedman, M. & Schwartz, A. J., 2013. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press. Meltzer, A. H., 2014. A History of the Federal Reserve, Volume 1: 1913-1951. 4th ed. Chicago, IL: University of Chicago Press. Momani, B. & Legrenzi, M., 2013. Shifting Geo-Economic Power of the Gulf: Oil, Finance and Institutions. 2nd ed. Surrey: Ashgate. Mwenda, K. K., 2012. Legal Aspects of Banking Regulation:. 4th ed. London: PULP. Perry, G., Serven, L. & Suescun, R., 2012. Fiscal Policy, Stabilization, and Growth: Prudence Or Abstinence?. 4th ed. New York: World Bank. Ramady, M. A., 2013. Political, Economic and Financial Country Risk. 3rd ed. New York: Springer. Ross-Larson, B. C., 2012. Assessing Regional Integration in Africa, Volume 1. New York: UN Press. Rutledge, E., 2013. 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