As the world economy’s structure continues to evolve unpredictably, the need for high quality research as an input into policy decisions grows. The heavy investment model used by the US central bank (Federal Reserve) has many virtues that the Gulf countries should consider emulating, as consultancies’ ability to act as a substitute is diminishing.
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At the top of the US central banking system lies the Federal Reserve Board. Its website proudly proclaims that it employs over 300 PhD economists as fulltime researchers. This is just the tip of the iceberg, as the different branches of the central banking system each have their own research teams staffed by talented quasi-academics. Their collective research output is astonishing.
Employing large, in-house teams of highly qualified researchers is not unique to the Federal Reserve; after all, the US State Department also has hundreds of researchers within its walls in DC. However, it is the structure in which the scholars work that enhances their effectiveness in the Federal Reserve.
Notably, they are expected to publish research in international, peer-reviewed journals in the same way that a university professor does. Promotions and pay raises explicitly depend on this. This is not an idle indulgence. The principals realize something that many of their peers in the Gulf do not.
If you want access to cutting-edge knowledge in a field, you need to go to the top academic conferences and engage the elite researchers. If you want an invitation to these conferences, and if you want these elites to give you the time of day, you yourself need to be a member of the club, which requires that you publish top quality research. Money will not get you very far; only your publications record will.
In addition to the expectation of publishing research, the Federal Reserve also equips its scholars with exceptional data so that they can produce the research. Moreover, it makes most of that data available publicly, so that its in-house scholars can engage the rest of the community.
Beyond this, the Federal Reserve has strong ties to the academic system that further enhance the quality of its research. Macroeconomists regularly go from the Federal Reserve research division to academic posts and vice versa, affording the bank access to a larger talent pool for hiring and collaboration.
These elements also allow the Federal Reserve to attract elite talent, rather than those who couldn’t cut it at academic institutions. There is also the bonus of avoiding grading, office hours, and the banal faculty meetings that typify campus life.
Crucially, this research then feeds into the complex decisions that the Federal Reserve makes. That is why it is essential that the upper echelons of the bank – including multiple board members – are highly accomplished research economists who can digest their colleagues’ advanced scholarly output.
The value of this system is most salient during unprecedented crises, such as the 2008 global financial crisis, and the COVID-19 pandemic. The Federal Reserve made many mistakes during these difficult times, but they made some good calls, too, as a direct result of having the best of the best on their team, producing research in real time. Moreover, post crisis, the speed at which lessons are learned is accelerated by having a talented research corps dedicated to the task.
The Gulf central banks would benefit considerably from following these practices. They do have in-house researchers, but they are few, and they are not required to publish peer-reviewed research and are certainly not rewarded for it. Moreover, there are tight restrictions on what they can publish, and which conferences they can attend; and much of their time is allocated to low-grade internal research memos.
As a result, they are intellectually isolated, and unable to be active contributors to the cutting-edge research community, save for some individual economists who try hard during their own free time. Their cause is further undermined by limited access to data. These factors combine to make working in a local central bank an unattractive option for a research economist in the region.
In some cases, the Gulf central banks’ principals are people with a background in professional finance, rather than academic economics. This limits the bank’s ability to absorb any high-quality research that is produced, since they literally don’t understand it.
If the world economy is undergoing upheaval, then the Gulf economy is an even more precarious situation that requires high quality research to understand. Unfortunately for the Gulf central banks, the scholarly output of the Federal Reserve’s elite research corps is often of no value to their efforts since the Gulf economy’s structure is so different to that of the US. The need for homegrown researchers studying the local economy to inform central banking decisions is particularly acute within the GCC.
Under these circumstances, it is tempting to splash the cash on a brand-name consultancy. Such organizations are extremely ill-equipped to perform the duties of an in-house research team at a central bank, especially during uncertain times. They lack the personnel or institutional knowhow and will restrict themselves to pre-packaged solutions that may even do more harm than good. They are totally detached from the cutting-edge research, though they may try to convince you otherwise with their Armani suits and Harvard MBAs.
The economic transformations that the Gulf countries are undergoing are complex and unprecedented phenomena that require the attention of elite researchers. The US Federal Reserve has an exemplary system for integrating research into decision-making, and their Gulf counterparts could benefit greatly from seeking to emulate it. The science fiction author Isaac Asimov captured this eloquently when he quipped: “Self-education is, I firmly believe, the only kind of education there is.”
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