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Management Strategy of a central Bank in a Developing country

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1972
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Rudolf Kroc

Most managers of central banks, especially in developing countries, think of their institutions as being well-managed. In arriving at this judgment, they apply the simple criterion that so far, it has been able to carry out the functions for which it was created. From this narrow point of view, it is difficult to fault their judgment.

However, if the performance of these managers is viewed from the vantage point of optimal efficiency in attaining the aims of the central bank in the long run, and in accomplishing its various functions continuously and effectively, the judgment may be quite different. Modern society, in which all developing countries aspire to participate, requires that innovative ideas receive attention. Central banks, like other institutions, must be open to innovative ideas; their ability to consider and to implement new ideas, instead of relying only on imitative behavior, will be an important factor influencing their performance.

Organizational Structure

Suppose that a new chief executive is appointed with far-reaching powers to institute or to reform a central bank in a developing country. What should be his organizational aims?

The effectiveness of the organization in a commercial enterprise is usually measured by its profits, and, perhaps, its sales. The most important measure of a central bank’s effectiveness is the service that it renders to the national economy. It is difficult to appraise this merit except as it is reflected by the confidence that the general public, official and financial institutions, the government itself, and to some extent foreign countries and institutions have in the central monetary establishment.

Each central bank’s legislation describes differently the function of the central bank, its relations with the government, its policymaking, and its principal administrative authority. The interrelation and sequence of these four factors will have to be taken into account when designing an organizational structure. Despite the wide differences in legislation, the major functions of central banks have generally been quite similar. These usually include currency issue, foreign relations, research, and loans and credits. In addition, there are administrative and other services.

A basic principle of organization should be that the grouping of functions assigned to each subordinate executive, as shown in an organization chart, is logical. Because of differences in legislation and other conditions, the most logical grouping will vary from country to country. However, the manager will know that every subordinate box on his chart signifies the delegation of duties and functions. This involves delegating authority for accomplishing the tasks assigned to the organizational units and simultaneously exacting from the heads of these units the responsibility for the units’ accomplishments. The head of each organizational unit is then in a position to create a setup which will enable his unit to accomplish its objective. Being unable to do the job alone, he will have to hire staff and organize it so that individuals operating in groups will perform effectively and efficiently. If he succeeds in providing interesting and rewarding work for these individuals, while striving to achieve the goals and objectives that have been assigned to him, he will have largely fulfilled his task as manager.

The creation of organizational units is not an end in itself but rather a method of arranging the central bank’s activities so as to facilitate the accomplishment of its objectives. One basic principle concerns the type of coordination the chief executive wishes to achieve. He has to decide which matters are to be referred immediately to him, which organizational units are to report to him directly, and what the channels of communication will be between him and different organizational units, on the one hand, and between various organizational units on the other. It is particularly important to determine the extent of each executive’s authority; whether it permits him to make final decisions, and, if so, on what subjects, or whether his authority is merely to approve, the final decision being reserved for some higher authority such as the chief executive. The joint approval of two department heads may be required for certain decisions, but whatever the arrangement, it is of the utmost importance that responsibilities as well as authority are defined in the clearest possible terms.

The allocation of authority to the heads of organizational units must be coordinated, so that these units become a smoothly working entity. Without proper harmonization it would become difficult, if not impossible, to accomplish the objectives of the enterprise.

Another basic principle of organizing a central bank is that the chief executive must be able to keep current policy under constant surveillance, to revise it at any time when changing conditions require an adaptation, and to consider and eventually propose to the government any modification that appears called for. This indicates that, as a minimum, the chief executive should organize an independent research unit. This unit should be equipped with the human, technical, and material resources to obtain the facts and to make meaningful analyses of them. In this way the chief executive will have the means of forming his opinion on relevant economic matters. The reports and advisory opinions formulated by the research unit should be accessible to all department heads who are involved in a particular subject.

The chief executive and his collaborators might also consider creating in the central bank a separate unit whose task would be to advise and inform the leadership of all relevant matters. Such a unit would correspond to the staff element in a military formation; it would be charged with the preparation of regular and occasional meetings and of ensuring that all the relevant information was gathered and distributed to all participants in time. If any preliminary discussions between organizational units should be required, the staff unit would arrange for these meetings. This staff unit should not, however, assume any leadership role even in such preliminary meetings; otherwise, it might easily develop and establish itself as a predecision-making body—which often gives trouble when the decisionmaking proper is undertaken. The staff unit can play a very useful role in seeing that decisions taken are carried out properly and in good time; that information to be provided occasionally or regularly is received in good form and on time; that decisions which are to be taken, in particular decisions by the chief executive himself, are not unnecessarily delayed; and that subjects and ideas that arise in various discussions or meetings are pursued further as may be appropriate. Such an organizational unit would greatly facilitate the accomplishment of the chief executive’s leadership task provided that its duty, function, competence, and authority are laid down in precise and unequivocal terms.

The Executive

Most executives have reached their position in the enterprise through a combination of technical ability and skill, seniority, and the conviction of their superiors that they have the qualities it takes to exercise leadership. One of the facts of life is that tribal or political affiliation often count very heavily among these latter qualities; one can only hope that the weight given to such factors is minimized.

In developing countries there is often a wide spread in the educational level of executives. It normally suffices that the head of an organizational unit charged mainly with repetitive tasks—such as cashier’s operations, operation of accounts held with the central bank, administrative services, and often accounting— be technically competent without having attained a higher degree of formal education. On the other hand, the head of the organizational unit charged with research, credit, and foreign exchange problems, some of which contain scientific elements, should be university graduates. To these latter, the chief executive will turn for collaboration when he has to formulate central bank policy on monetary matters or when he is asked by the government to render advice or furnish reports. A person without higher formal education may of course have gained, through experience and his own efforts, a sufficiently wide vision and knowledge to contribute to the formulation of monetary policy, but in developing countries this will generally be the exception rather than the rule. The chief executive thus often faces a difficult and delicate situation. Since university graduates in developing countries are usually much younger than their counterparts who rose through the rank and file, the latter are superior in experience but usually lack the scientific methodology and broad educational background essential for successful upper-level managers.

Technical competence will certainly be a necessary and important criterion in the selection of the top executives by their chief. However, technical ability and experience, although important, constitute only a small part of the total qualifications of a good executive. He must also have organizing ability; the ability to lead, guide, and direct people; sound judgment; initiative; the willingness to accept responsibilities; and the ability to make decisions, give orders, and make these orders effective. There are very few born leaders, and some persons may be incapable of ever holding positions of command. However, most people can acquire or improve the necessary abilities through proper training.

Supervisory jobs, even within an institution such as a central bank, vary considerably in terms of personal characteristics required for success. This means that a careful selection is needed for each supervisory job. To make a good selection, the chief executive has to know what qualities are required for a given position, to what degree each is essential, what combination of qualities is acceptable, and how to identify the required qualities.

When selecting his colleagues the chief executive should appraise the following qualifications:

Intelligence. He will consider the person’s mental capacity, his aptitude for resolving new problems, his speed of thought, his observation of relationships, his comprehension, and his memory.

Intellectual Curiosity. The person must be interested in the function of managing, in finding the reasons for success in certain activities and failure in others; he must endeavor to keep informed and up to date not only on relevant facts but on all happenings concerning his profession. He must be willing to keep on learning and he must have the ability to evaluate facts and events. He must show initiative. He must be resourceful and ingenious, that is, have fresh, original, practical ways of doing things.

Integrity. The moral principles of the person considered for selection must be beyond reproach, and his personal standards must be high. He should be open and straightforward in his dealings both with superiors and subordinates.

Ability to Communicate. The candidate must be capable of transmitting ideas in written reports, letters, and oral discussions, and through the interchange of thoughts to bring about mutual understanding and confidence.

Decisiveness. The ability to decide upon a course of action and to adhere to it resolutely should enter into any appraisal of fitness.

Cooperation. This involves a good attitude toward assignments, colleagues, and the bank, including the ability and willingness to work with and for others toward the best interest of all concerned.

Ability to Teach. The candidate must be able to introduce each subordinate to the work that is assigned to him and to explain to him the importance of his assignment and relationship of his work to other work performed in the organizational unit. He must follow the performance of the subordinate and suggest corrections and improvements.

Organizing Ability. The question to be answered is how well the candidate plans what to do, how to do it, when to do it, and who is to do it, and to what extent the work is arranged so that it can be performed with dispatch and efficiency.

Ability to Lead. The ability to lead depends on the success of grouping people who perform. essentially separate activities so that they will be inspired to lend their willing cooperation, and on guiding them to work together toward a common objective.

Ability to Command and Supervise. Orders given by the executive must be made effective and their execution must be supervised. Control requires verification that everything is done in conformity with the plan adopted, the instructions issued, and the principles established.

Advisors

In order to supplement the technical competence of their staff, including top staff, central banks in developing countries have had recourse to advisors from central banks in developed countries. It has been customary to select advisors for their technical ability in the field in which they are experienced. In spite of the undoubted technical capability of most advisors, the result of these selections has often been disappointing. In many instances, the superior technical qualities of the foreign advisor gave the local executive, who was to receive technical advice, a kind of inferiority complex; the local executive thus preferred to let the advisor act on his own rather than as a consultant. In many instances, a close relationship between the local executive and the foreign advisor never developed, and there was even less contact between the foreign advisor and the subordinate staff. As a consequence, the whole organizational unit performed quite well during the foreign advisor’s presence but it learned very little; its technical capacity, including that of its executive officer, gained even less. At the end of the technical advisor’s assignment, he had to be replaced by another.

In these circumstances, it seems preferable to put more emphasis on the teaching ability of the advisor and his capacity to communicate with others. Advisors must be prepared to work in quasi-anonymity but nonetheless have the courage to point out deficiencies to the executive with whom they are assigned to work; they must be able to express their thoughts clearly in writing as well as orally and without hurting the feelings of that executive or his subordinates. To find this type of advisor puts considerable strain on the institution which is asked to provide it. On the other hand, not even the greatest pedagogue can achieve results without the cooperation of those who are to be instructed. It will be up to the chief executive, once a successful program has been developed and the proper advisor or advisors selected, to convey his own conviction to his subordinates and to ensure through appropriate supervision that advantage is taken of the opportunities offered. Nothing will be more effective in this respect than the personal interest the chief executive devotes to the successful accomplishment of the program.

Training Abroad

Another method widely used by central banks in developing countries to improve the technical competence of their staff is to send some of them abroad as participants in various training courses or as trainees with another central bank, usually in a developed country. Because of the language problem, a limited number of developed countries are able to provide this type of assistance.

Training abroad has proved to be extremely important because it has greatly enhanced the technical competence of the trainees who were able to profit from the experience and knowledge of their teachers and instructors, and because it has enabled individuals to communicate more easily and to establish permanent associations with other individuals and with institutions. In addition, it has permitted the foreigner to observe, and in some instances to absorb, some of the culture in his host country, at the same time permitting him to reveal and diffuse some of his own cultural background. The best results have been achieved when a systematic schedule has been worked out by competent officials before the trainees’ arrival and when the schedule has been kept under close scrutiny and surveillance.

Managerial Development Analysis and Program

The elaboration of a program for the development of future managers should have high priority for the chief executive in any central bank, notably for the manager in a developing country.

He will have a program with these general objectives:

  • 1. To fill all managerial positions with capable executives.

  • 2. To have a reserve of managerial talent ready to step in when a vacancy occurs.

  • 3. To improve the managerial skills of existing and prospective executives.

Although any program for executive manpower planning will have to be suited to the individual needs of each central bank, there are some basic concepts providing valuable experience and information in the entire field of executive development. A general outline of the program might be as follows:

  • 1. Organization chart. It must show the lines of responsibility and authority of each executive and specify the supervisors to whom subordinates report. It must provide a complete understanding of the internal relationships of various organizational units and their subdivisions.

  • 2. Job descriptions. They must, as a minimum, indicate the function, duties, responsibilities, and authority of the job holder and his relationship within the organization and outside. They should also enumerate the requirements of the personal, mental, performance, and supervisory characteristics of the job.

  • 3. Appraisals. The performance of the individual executive must be appraised, preferably by a team comprising persons of equal or superior rank in the central bank; the reports may be made periodically but the observation on which they are based must be continuous. This will provide a valuable inventory of managerial skills. The participation of the chief executive in the final stage of the appraisal procedure is indispensable. The appraisal goals should be specified and reflected in the report, which each member should sign.

  • 4. Replacement schedules and list of candidates. Executive positions may be expected to become open due to various reasons, such as retirement, resignation, and termination. The inventory of appraisals will permit the selection of candidates and aid in their preparation for the job.

It would be utterly unrealistic to assume that the chief executive of any central bank can spare the time to accomplish all the tasks involved in developing managers. He will need expert assistance, particularly in analyzing the organization from the point of view of structure as well as of staffing and in devising and implementing the executive development program. It is most unlikely that he will find this assistance within his own organization; therefore, he will probably have to turn to outside help.

The principal purpose of training is to give the candidate the opportunity to develop those skills which the execution of the managerial function requires. There is no need to have a formal executive training program except for specific shortcomings, for instance, in psychology or sociology. It may, in fact, be preferable to operate on a largely informal basis. This can be achieved by the creation of a special consultant’s position filled by someone who would function very much like a coach with a sports team. The coach would provide a continuous analysis of the performance of those that are entrusted to his care, but on an individual basis; he would mostly watch unobtrusively from the sideline, so to speak. He would make certain that the lessons are learned by face-to-face counseling, giving guidance on the points where weakness exists. This involves defining precisely, and not in generalities, such weakness, and elaborating a program that will enable the individual to overcome it. In selecting this type of coach, the chief executive will have to enlist outside help, usually from the International Monetary Fund or from other central banks. In certain aspects of the program, he might turn to management consultants.

It would perhaps be too sanguine to expect the top executive to prove his interest in the program not only by knowing its content but also by demonstrating his own willingness to learn. He is almost sure to feel that since he has reached his position without a comprehensive philosophy of management, training for him would be superfluous. However, greater knowledge of management principles and awareness of their significance might help him advance the present situation. Although management is still a practical art, it cannot any longer be exercised through native intelligence and experience alone. To satisfy present-day needs, knowledge must be organized and it must be used for the improvement of practice.

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