Improving the Management of a Central Bank - A Case Study

Improving the Management of a Central Bank--A Case Study by John Mendzela

This paper examines the fundamental transformation of the management of
the the Reserve Bank of New Zealand (RBNZ) from 1988 to 1993. As part of
New Zealand's economic and public sector reform, its central bank moved from
vague and multiple objectives, subservience to the Government of the day,
and limited external scrutiny to a single explicit objective, operating
autonomy, and tight accountability. Internally, new management concepts
were systematically applied. Startling efficiency gains were achieved,
without significant changes in functions: for example, staff numbers and
real operating costs fell 43 percent. At the same time, effectiveness was
maintained or improved. Culturally, the RBNZ made an often painful shift
toward a business management approach.

The first section of the paper comments briefly on the increasing
accountability pressures facing central banks and the need for a response.
It notes that little information is currently available on the operating
costs of central banks.

The second section describes the RBNZ's organizational transformation
and analyzes the key features of the reform. It outlines the historical
starting point, the external environment of radical reform, how business
management concepts were applied over a five-year period, the efficiency
gains achieved, and evidence of enhanced effectiveness. The section also
considers the role special factors may have played. It notes that the
mechanisms employed by the RBNZ were neither new nor unusual and that they
would be available to other central banks. The reductions in operating
costs represented real efficiency gains, and, apart from motivation, no
major special factors operated.

A third section attempts to analyze the organizational transformation
process at the RBNZ. It identifies and describes the business concepts
applied at the RBNZ under three headings: how the institution was
reoriented, the management mechanisms used, and the internal impact of
change. The successes achieved and the limitations encountered in the
application of business concepts are briefly outlined.

Finally, the paper concludes that the RBNZ achieved major efficiency
gains without a loss of effectiveness by applying business management
concepts. The RBNZ's experience suggests that business management concepts
can, with minor limitations, be successfully applied in central banks to
increase efficiency. However, doing so challenges many historical central
banking practices, and has a substantial internal impact.