Changing Reserve Bank mandate won’t solve SA’s economic ills
The Zondo and Nugent commissions of inquiry are revealing in lurid detail how the integrity and effectiveness of some of SA’s key institutions were eroded by state capture — and the cost in terms of lost economic growth is only now becoming clear. The danger is that even those institutions that have stayed strong could see their effectiveness and credibility undermined because in a very weak and dysfunctional economy they are being looked at to deliver way more than what they were designed for. That’s arguably the case in relation to SA’s competition authorities. Far-reaching new amendments to the competition legislation are attempting to task them with changing the structure of markets to bring in new firms and create new jobs — in effect trying to make them instruments of industrial policy rather than, primarily, competition regulators.
It is even more obviously the case in relation to the Reserve Bank. The nationalisation issue has gone relatively quiet and at least some of its proponents now seem at last to grasp that the Bank’s ownership has nothing to do with its mandate of maintaining price stability — “in the interests of balanced and sustainable growth” — which is set out in the constitution. But the calls for nationalisation were always something of a stalking horse for an attack on the Bank’s mandate. That attack is growing ever louder as desperation about SA’s dearth of growth and jobs mounts and politicians and some economists clutch at the straw of lower interest rates as a fix. But they are no such thing, as the Bank highlighted at its recent monetary policy forums. And though it may seem tempting to tinker with the Bank’s mandate, that could damage the institution and not only not fix SA’s growth and jobs problems but make them worse in the long term.
As Bank officials pointed out at the recent forum in Pretoria, SA’s real interest rates have in any event been lower than they technically should have been for much of the decade since the global financial crisis — in other words, monetary policy has been slightly expansionary and should have provided some stimulus to the economy. That is in large part because the Bank is not a pure inflation targeter but a flexible one, and its constitutional mandate already requires it to consider growth, not just inflation. But the key is “balanced and sustainable” growth, and even if the Bank were to ignore inflation danger signs and cut interest rates to boost growth in the short term, letting prices get out of control would undermine it in the longer term. There are few, if any, examples of economies that have grown rapidly and sustainably over long periods without price stability, deputy governor Kuben Naidoo pointed out at the Pretoria forum. Price stability is a necessary condition for growth — but not a sufficient one. To lift its growth rate SA needs other things — a skilled population, good health, good microeconomic and tax policies. Those are not what central banks do or have the competence to do.
And loading the Bank up with a bunch of extra objectives would simply damage its credibility and ability to pursue its core task of keeping inflation under control effectively.
As it is, SA’s inflation rate is still high by the standards of most of its trading partners and the Bank has still not managed to keep it close to the 4.5% midpoint of the target range. But for anyone who doubts the need for the Bank to stick with doing what it does best and stay on course with getting inflation down, the International Monetary Fund has, in an annexe to its latest Article IV report on SA, taken a stab at trying to estimate whether hiking interest rates when inflation is climbing is good or bad for inequality. Its analysis is technical and rather timid, but the bottom line is that it’s good for the poor in SA when the Bank uses contractionary monetary policy (hikes rates) to keep inflation under control.
Politicians and some economists clutch at the straw of lower interest rates as a fix