Central banks, traditionally considered harmless technocratic institutions, have come under intense public scrutiny since the 2008 financial crisis. From US President Donald Trump’s attacks on the Federal Reserve and British politicians’ criticism of Bank of England Governor Mark Carney’s stance on Brexit, to controversies around the case brought to the German constitutional court over European Central Bank quantitative easing, these criticisms have so far been directed from politicians to central banks, and related to the latter’s policies, rather than their operations.
A distinct set of tensions is unfolding between Mexican President Andrés López Obrador and the country’s central bank. These follow the president’s decision to cut his salary to $69,500 from around $160,000 as part of a broader governmental austerity drive. This indirectly affects other top civil servants, including Banco de México officials, as Mexico’s constitution stipulates no public official can earn more than the president. Earlier this month the central bank sought clarification from the Supreme Court on the article’s application following the presidential salary cut. They highlighted the central bank’s independence, which is also stipulated in the constitution. Banxico’s challenge came after the board expressed concerns at its December rate meeting, and follows similar actions from Cofece, Mexico’s federal competition authority, also an autonomous institution, and the Supreme Court itself.
The Supreme Court is expected to give guidance over the coming months, but some effects are already being felt. According to a senior Banxico official, around 200 central bank staff (almost 10% of its headcount) have taken voluntary retirement since the new government took office. Many of these came from the bank’s highly-qualified and higher-paid ranks.
Mexico is not alone in experiencing controversy around central bankers’ salaries amid increased calls for greater transparency and accountability. The global norm tends to be for central bankers’ salaries to be higher than those of equivalent political posts, be it in the finance ministry or executive offices. Governors’ salaries – including in Mexico – are usually made public and included in central bank annual reports. Most of the eight central bank governors interviewed so far by the OMFIF Foundation as part of the research project ‘Money Rules: An inquiry into the transparency, accountability and independence of central banks’, including Norway and Belgium, reported being paid more than the head of state, president or prime minister, and more than the finance minister. For others, like Switzerland, where the bank council determines the salaries of board members, a comparison between politicians’ and central bankers’ salaries is more problematic due to differences in their respective pension systems.
However, attracting and retaining highly-qualified individuals can still be difficult for central banks. In Norway, although salaries are higher at the central bank than at the finance ministry, they are not competitive with the private sector. According to a senior official, a ‘central bank needs to have very highly-qualified staff that should have the same qualities as the staff of the institutions that it supervises’.
Competitive compensation is key to attracting highly-qualified staff who are expected to execute complex tasks like managing foreign exchange reserves. Banxico’s reserves management department, which includes around 30 staff, manages $177bn of foreign exchange reserves. Some people worry a change in approach that does not ensure that central bank staff salaries are competitive with the private sector will lead to a further exodus of talented professionals. The risk is that these positions will be filled with more partisan staffers, undermining the analytical rigour and independence that have characterised Mexico’s central bank.
This week, Banxico welcomed two new economists to its five-member board: Jonathan Heath and Gerardo Esquivel. Heath has a private sector background while Esquivel’s in in international organisations, and both have experience in academia. Their appointments break with past practice, when usually three or four members would have risen to the board following a career in the central bank. This is the first time the majority of the board has never worked for the central bank.
Danae Kyriakopoulou is Chief Economist and Head of Research at OMFIF.