DEFENDING STABILITY

IT IS PROBABLY trite to say this was a very difficult year. This university, like most universities in South Africa, experienced one of the longest student protests in years. The Wits #FeesMustFall campaign captured the attention of this country and the world for a number of weeks. Suddenly, the struggle mood of many people was uplifted or re-awakened and reminded all of us that the journey to our intermediate destination is still very long.

As President Nelson Mandela would have said, “I have walked that long road to freedom. I have tried not to falter; I have made missteps along the way. But I have discovered the secret that after climbing a great hill, one only finds that there are many more hills to climb.

“I have taken a moment here to rest, to steal a view of the glorious vista that surrounds me, to look back on the distance I have come. But I can only rest for a moment, for with freedom come responsibilities, and I dare not linger, for my long walk is not yet ended”. (Page 617, Long Walk to Freedom, Nelson Mandela, 1994, Macdonald Purnell).

Some might argue that maybe we “lingered” for too long on the issue of university fees. Our youth reminded us of the Freedom Charter. It says under the heading The Doors of Learning and Culture Shall be Opened, “Education shall be free, compulsory, universal and equal for all children; Higher education and technical training shall be opened to all by means of state allowances and scholarships awarded on the basis of merit”. The primary objective of central banks over many years was understood and internalised as the pursuit of price stability. Price stability being defined as a sustained period of low inflation with the accompanying benefits of economic growth at or near potential and low or full employment.

For many years, central bankers drove this message home via effective communications and monetary policy actions. The legendary Paul Volcker led the central banking troops on this journey and was enthusiastically accompanied by many notable governors of central banks and their esteemed colleagues. This became, for many years, central banking 101.

Things began to change when, in the late 1990s and early 2000, the central bank of Japan broke ranks and began to implement a strange sort of monetary policy. They referred to this as quantitative easing (QE). I recall the meetings of the shareholding central banks in Basel, at the Bank for International Settlements (BIS), where we all looked at the Japanese with suspicion, as if saying, “What’s wrong with these Japanese?”

You see, as we all know, the Japanese economy had experienced a prolonged period of negative inflation and no growth. QE was meant to, in lay people’s language, pump money into the economy to get it moving. In fact the Japanese wanted to see some inflation in their economy. It still has not happened.

Then, when the global financial crisis hit us in 2007/2008, the unthinkable in central banking happened. The US Federal Reserve Bank (the Fed), the Bank of England (BoE) and the European Central Bank (ECB) adopted the QE approach to central banking.

“The genie was out of the bottle” as Professor Charles Goodhart, one of my former central banking colleagues from the BoE has said. (Professor Goodhart is also famously known for a number of “laws” in economics named after him. Among others the following: “When a measure becomes a target, it ceases to be a good measure” and “As soon as a government attempts to regulate any sets of financial assets, these become unreliable as indicators of economic trends”).

From this point onwards, in my view and on reflection, inflation targeting as the primary focus of central banks was dead. We did not kill it; it just walked away from us just like M3 had done before.

It has become clearer to me that central banks cannot have a primary objective, but have to explain in detail and clearly what is it that they do. Of late, central banks have been found wanting as far as clear communication is concerned. The situation can be improved.

From my experience at the SA Reserve Bank, it is clear to me now that the “genie is out of the bottle”, central banks should make it clear that they have many functions, but they prioritise financial stability (the stability of the banking and related sectors or sub-sectors) and the national payments system. These two functions are, in my reflection, very central to central banking.

The emerging regulatory framework in South Africa, the so-called Twin Peaks Model, is well suited for this approach and I support it, despite my reservations about the possible pollution of the central bank from non-central banking issues. But my concerns are contradictory, because they are in actual fact supportive of my view that the primary function of central banks can no longer be price stability, but financial and payments system stability. This in a very strange way, takes us back to what my predecessor, Dr Chris Stals used to refer to as the “eclectic approach to central banking”. Maybe he was correct.

It seems that nobody in South Africa, except Ministers Rob Davies and Ibrahim Patel, would love to live in a country with a weaker exchange rate of the rand. I suspect that even those two gentlemen would not want to see our exchange rate at these levels for long. And the myth they (these two ministers) have been peddling around that the weaker exchange rate would be the saviour of the manufacturing sector has been exposed as being both theoretically and empirically weak.

An exchange rate cannot be a proxy for industrial policy. In fact, the policy conflicts in our government need to be sorted out. Better co-ordination and leadership is required. Let me give you an example of confusion around industrial policy. The Department of Trade and Industry (dti) says that they would like to drive the industrialisation of South Africa. Well and good. Do they have a clear policy on the plastics industrial sub-sector? No, they don’t.

So, the Department of the Environmental Affairs and Tourism proposes a law that is meant to protect the environment from the littering of plastics throughout the country. Well and good. They suggest a tax on companies which produce anything plastic. That is industrial policy by the back door. And where is the dti. Vas geslaap!

Back to the exchange rate. I am in favour of a stable exchange rate at whatever level.

The exchange rate, ceteris paribus, is an important automatic stabiliser in any economy with a floating system. But the economics problem we are facing today is that this assumption is not applying. We have conflicting and nationalistic economic policies around the world.

The global institutions which are supposed to bring about some form of global co-ordination of policies are failing us: the Group of Twenty, the International Monetary Fund, the Bank for International Settlements and the Organisation for Economic Co-operation and Development. It is dog eats dog out there.

At the end of the day, the US Fed is going to start raising the federal funds rate. They have now ceased QE. This has already been factored into the market. Long rates are now indicating a Fed Funds Rate increase in December or by March next year. And here is the thing about the globalised financial markets. Now that they have already priced in a Fed Funds Rate increase, they are trading on the interest differential between South Africa and the US in search of yield.

Our central bank is fully aware of this and is watching the US markets very closely and they are doing a good job. So going forward, one should expect the rand exchange rate to be a bit volatile, but will settle at an equilibrium level consistent

Tito Mboweni served as the South African Reserve Bank Governor from 1999 to 2009, and as the Minister of Labour in former President Nelson Mandela’s Cabinet. He is also a member of the ANC National Executive Committee and serves as a non-executive director of the new Development Bank (Brics Bank). He joined Wits in August this year as an honorary professor at the School of Economic and Business Sciences. The column is the edited version of a speech he gave on Tuesday at the Wits graduation ceremony of the Faculty of Commerce, Law and Management.