- 20.1 Introduction
- 20.2 Knowledge, Translation and the International Policy Discourse
- 20.3 The International Discourse and Regional Convergence
- 20.4 The International Policy Discourse of Central Banking
- 20.5 The Worldwide Diffusion of Developmental Central Banking
- 20.6 Mutual Interdependence Between the Government and the BoI
- 20.7 Conclusions
20 Translation of Central Banking to Developing Countries in the Post-World War II Period: The Case of the Bank of Israel
During the post-World War II period (1946–1975), more central banks were established than in any other three consecutive decades before or after. Most of these were established in developing countries after they had become sovereign states.1 On the nominal level, it was a case of
The analysis of this phenomenon hinges upon several broader and fundamental questions. It raises questions concerning the encounter between
In this chapter, I attempt to explain the fact that a large number of developing countries adopted similar
20.2 Knowledge, Translation and the International Policy Discourse
Up to the present, most studies have described the process by which a large number of countries established central banks within the relatively short period of time following the Second World War as a case of temporal clustered policy reform Elkins and Simmons 2005 accompanied by convergence. Two causal mechanisms have been suggested to explain this process. First, the symbolic mechanism assumes that newly established countries
Both causal explanations suggest that developing countries established central banks according to the northern, that is, the
However, the divergence of
In order to identify these structural factors, it is necessary to abandon
Taking the point of view of the periphery implies that observers historicize and endogenize the processes by which bodies of knowledge are produced, institutionalized, standardized, codified, transferred and translated. Such an approach underlines the
This approach enables us to discern between cases of decoupling and cases of translation Djelic and Sahlin-Andersson 2008.
In this chapter, I argue that the establishment of the Bank of Israel (BoI) represents such a case of
What tipped the balance in favor of a central bank, I argue, was the government’s failure to solve a local problem in a closed policy domain: the problem associated with the allocation of credit. From 1950 onwards, the government made several attempts to employ selective credit controls. Up until 1953, most of these attempts had failed Bar-Yosef 1953; Bar-Yosef 1955; Bar-Yosef 1961. The supervisor of the banking system wrote, “the success of qualitative
20.3 The International Discourse and Regional Convergence
The question arises as to what the conditions were that facilitated Israeli
For a developing country to translate the
The literature of social learning has studied these aspects extensively. However, it has not given sufficient attention to the discursive international conditions that affect the capacity of countries to translate policies and knowledge. The likelihood that an
The structure of the international policy discourse is the variable that captures the extent to which the international community legitimizes (or delegitimizes) deviant policy models. A homogenous discourse that legitimizes a very narrow range of policy models and strongly delegitimizes deviant models creates strong incentives to
In the post-World War II period, as I show below, the international policy discourse of
20.4 The International Policy Discourse of Central Banking
During the interwar period, the Bank of London with the support of the League of Nations, the Bank of International Settlements and the Federal Reserves made attempts to restore the gold standard by globalizing it. It exerted pressure on the governments of developing countries to establish central banks that functioned according to the same principle as the British model in countries whose economies were radically different Drake 1989; Marcussen 2005. In hindsight and from a domestic point of view, these central banks failed Sen 1952.
The instruments of central banks were also redefined. The incentive to use new instruments came from below, from practitioners of
In developing countries the situation was different. Indeed, the shift from traditional to Keynesian
In the financial domain, governments in developing countries employed various types of developmental instruments such as mobilizing savings, providing credit to developmental institutions and nurturing domestic public sectors.
It should be pointed out that the selective credit policy was not an invention of developing countries. The Federal Reserve System (FED), for example, used credit control in a negative way, that is, it restricted the flow of credit to specific branches. France used selective
20.5 The Worldwide Diffusion of Developmental Central Banking
In Australia during World War II, selective practices were used. Initially, these were executed by a special governmental body, but later on, the Commonwealth Bank took charge of these
The large number of developing countries that adopted similar
20.5.1 American Experts
As an American expert, Bloomfield was able to
Bloomfield publicly defended the notion that there was a theoretical justification for the use of alternative policy measures in developing countries, or at least that there was no theoretical foundation to the claim that such measures are ineffective. Central banks in developing countries, he wrote in an article, used measures that were “admittedly outside the traditional scope of central banking.” Moreover, the deviation of these instruments from traditional central banking did not render them ineffective. “Central banking in these countries should not necessarily be evaluated in terms of the standards and criteria applied in the more developed ones.” As the practices of central banking in developing countries had not emerged from a fully-fledged theory, Bloomfield characterized them as “experimental.” He expressed the hope that “out of this experimentation will develop a theory of central banking policy appropriate to the economically backward countries” Bloomfield 1957, 204.
Contrary to the underlying assumption of the flat view of globalization which assumes the prevalance of a homogeneous international policy discourse leading to convergence, it is assumed here that the international policy discourse, in certain policy domains, can be heterogeneous. It may consist of more than one legitimate policy model and therefore its diffusion is likely to lead to divergence and regional convergence rather than
A heterogeneous structure of the policy discourse is the outcome of internal debates and disagreements within the international
20.5.2 South-to-South Policy Transfer
The structure of the international policy discourse was not only the product of epistemic communities located in the core countries:
The IMF and the World Bank were two nodal points in an international network that connected industrial and developing countries and they faciliated the exchange of knowledge. In this network, knowledge flowed in all directions, essentially, from north to south Barnett and Finnemore 2004. But the annual meetings of these organizations, however, also served as spaces in which ideas spread among developing countries who shared their experience with unique instruments such as preferential
20.5.3 Local Problem-Solving Through Translation
The structure of the international policy discourse and the
In 1953 the Minister of Agriculture managed to convince several commercial banks to cooperate with the government to create cheap long-term credit for
The Minister of Agriculture, the main figure involved in negotiations with the commercial banks regarding the allocation of credit, was also the one who urged the government to hasten the process of establishing a central bank. “We have to reach a decision whether the thing is important or not” he insisted,8 emphasizing that a central bank would be “an instrument of credit control.”9
The government reached a decision to hasten the process of establishing a central bank. It was in this context that establishing a central bank turned out to be a solution to the local problem of allocation of credit as well as a response to the external soft pressure to establish a central bank. A delegation was sent to negotiate with the IMF regarding conditions for Israel’s membership. The IMF promised that other than “persuasion” no restrictions or pressures would be exerted.10 At the end of the year the government nominated David Horowitz as governor of the Bank, and, one year later in December 1954, the BoI was officially inaugurated.
20.6 Mutual Interdependence Between the Government and the BoI
So far I have attempted to explain the considerations which, given the national goals and local economic conditions, led local
The principle of credible commitment and the concept of central bank independence were products of the codification and standardization of central banking practices in industrial countries. It was formulated under the assumption that a differentiation between states and markets and the protection of the latter from the intervention of the former was a necessary condition for sustainable economic growth.
However, during late
The strategies of rapid
The establishment of central banks, I argue, provided an opportunity for new states to fortify their administrative and
Developing countries lacked the resources that were required for purely local institutional
The translation of standardized policy models and institutions therefore enables local
This mechanism can explain the coupling between the institutional units of the central bank and the exercising of selective
The case of the BoI demonstrates this point. Its establishment contributed to the capacity of the state in several ways. Prior to the establishment of the BoI, monetary and supervisory powers were scattered among a number of different governmental bodies. In addition, five bodies were involved in managing the issues that later on were managed by the bank. The issue of money had to be approved by the finance committee and by parliament. The technical aspects of issuing money were taken care of by a special department within Bank Leumi (the issuance department). The supervision and regulation of the banking system was dealt with by a special department within the Ministry of Finance. With the establishment of the BoI, all these issues and powers moved to the
From the point of view of the state’s capacity to govern, such a
The authority of the BoI was derived largely from its role as mediator between the government and the two major international financial institutions, the IMF and the IBRD.
These features were pertinent to the case of Israel. According to the Central Bank Bill, one of the BoI’s roles was to act on behalf of the government as a member of the IMF and the IBRD.11 The BoI therefore maintained continuous contact with the IMF and the IBRD, which in turn supplied it with knowledge and expertise in various forms. The BoI’s governor also used IMF publications, which emphasised the main goal of the BoI—price stability—as an important condition of sustainable economic development in order to augment his own persuasive powers Horowitz 1975. The prestige of the international financial institutions was therefore conferred on the BoI and it increased its influence in the local arena.
The BoI’s persuasive power was further ameliorated by its capacity to generate economic data, knowledge, analyses and forecasts relating to the Israeli economy. This was necessary to identify problems, to formulate goals, to assemble policies and programs and to implement them, and in addition, it was essential to mobilize support for programs and to legitimize them. The research department of the BoI was the only source of
Due to its autonomous budget and unique terms of employment the BoI also provided an opportunity to improve the meritocratic recruitment of personnel. The budget was managed by the bank itself, as was the employees’ pay scale. The budgetary independence of a central bank is an index of its actual independence Cukierman et.al. 1992, 366, table 4. As it offered employment conditions that were unprecedented in the public sector, the BoI managed to attract high-quality staff, including the leading graduates from the Hebrew University’s Economic Department. This was one of Weber’s conditions for effective state power and autonomy (Evans and Rauch 1999, 751, Weber 2009, 241). As a result, the BoI nurtured an autonomous community of economic experts speaking one language, a phenomenon that enhanced its image of objectivity and professionalism.
With the establishment of the BoI, many powers that previously had been dispersed among several other authorities and institutions were transferred to the bank. The
The institutional unit of the central bank was thus imported and it provided further capacities for local
The post-World War II period was a unique period in terms of cross-country transfer of
The heterogeneity of the international system posed an unprecedented challenge to
The challenge was aggravated by the fact that it had not only theoretical but also practical implications. The policies that were formulated on the basis of
Similarly, in the
The sympathy that U.S. officials exhibited towards the
nationalist monetary goals of Southern governments often reflected their desire not to alienate key allies in the context of the Second World War and then the Cold War. It also helped them to gain influence in newly independent Southern Countries, particularity ex-British colonies. Helleiner 2003, 268
It is undeniable that the geopolitical conditions and the national interest of world leaders influenced, to a certain extent, the openness of experts to the idea that deviant models were effective in a heterogeneous world. However, the transmission mechanism between national interests and the international policy discourse is not that simple. If it were, we would expect that during the post-World War II period the dominant view among American experts would support deviant models of
It has already been established by various authors that globalization processes do not lead to a demise of the state Weiss 1998; Sassen 1999; Polillo and Guillén 2005 nor to
I would like to thank Stephen Bell and Simone Polillo for reading previous versions of this paper. I am also grateful to the members of the reading group Transfer and localizaton of knowledge at the Max Planck Institute for the History of Science, Malcolm Hyman, Anna Perlina, Albert Presas i Puig, Jürgen Renn, Margareta Tillberg and Milena Wazeck, for their comments.
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During the postwar period the number of central banks in the world almost tripled: from 49 in 1946, the number increased to 131 in 1975. Most of these were established in developing and post-colonial countries: 26 in sub-Saharan Africa, 18 in the Middle East and North Africa, 16 in Latin America, and 14 in East Asia and the Pacific. The rest were founded in South Asia and Europe. The dates of central bank inception are taken from Pringle 2002.
Minutes of Parliament Sessions, Israel Parliament Archive, 9 July 1952, 2601.
Minutes of Parliament Sessions, Israel Parliament Archive, 18 February 1952, 1340.
Some historians reject this view and claim that in practice both fiscal and monetary policies were subject to the requirements of Bretton Woods-pegged exchange rates. The latter view implies that even during the postwar period central banks were actually seeking price stability Capie et.al. 1994, 1–2, 25.
Reserve ratio is defined as the part of the banks’ deposits that are kept in their vaults as reserves. An increase (decrease) of the reserve ratio implies less (more) credit to the market. Central banks could control the supply of money by determining and changing the reserve ratio that commercial banks had to maintain.
Minutes of the Banking Committee, Israeli State Archive, 5617/2 Gimel, 23 August 1953, 26 January 1954, 14 April 1954.
Minutes of Government Meeting, Israel State Archive, 12 May 1954, 15.
Minutes of Government Meeting, Israel State Archive, 8 February 1953, 10–11.
Minutes of Government Meeting, Israel State Archive, 12 May 1954, 14.
Minutes of the Finance Committee, Israeli Parliament Archive, 1 November 1953, 6.
The Central Bank Bill, 1954, Article 71.