What kind of financial system is sure to collapse if the central bank cares about people’s well-being?
The recommendation by South Africa’s Public Protector that the Reserve Bank’s mandate change, says much about Busisiwe Mkhwebane, none of it flattering. It says just as much about mainstream economic debate – and none of that is flattering either.
Mkhwebane recommended that the central bank’s constitutional mandate, which makes protecting the currency its primary goal, be changed to one which requires it to “promote balanced and sustainable economic growth while ensuring that the socio-economic well-being of the citizens are protected”. She also said the constitution should require the bank “to achieve meaningful socio-economic transformation”.
This triggered a wave of protests, as well as an announcement from the South African Reserve Bank that it would take the matter to court. The Reserve Bank had no option. The constitutional court has ruled that the Public Protector’s findings are binding unless they are challenged in court. Her recommendation wildly exceeded what she is allowed to do by the constitution – or democratic good sense – and the Reserve Bank could not allow it to stand.
Democratic constitutions are changed by large majorities of the people or their elected representatives – not by individuals. By making a binding recommendation that the constitution be changed, Mkhwebane signalled that she either doesn’t understand – or does not care – for democracy.
Her report is also very useful to a faction of the governing party which wants to deflect charges of state capture by claiming that white monopoly capital already controls the state. There are real questions about the fitness for office of a Public Protector whose report seems more interested in protecting connected politicians and business people than with taking the people’s will seriously.
But the reaction did not stop at insisting that Mkhwebane has no business telling the people what the constitution should say. Much of it objected not only to her saying what the Reserve Bank’s mandate should be, but to anyone at all doing that.
The prize for the wildest reaction went to the commentator who declared that Mkhwebane’s ideas on the Bank’s mandate were inspired by someone who denied that the Nazi genocide happened. Others stopped short of tarring constitutional change with the same brush as mass murder but were united in claiming that to suggest that the Reserve Bank’s mandate be broadened is “economically illiterate” and deeply damaging.
Absa, who was the subject of a separate finding by the public protector on the issue of a controversial bailout, asked a court to rule that her proposed change posed a “serious risk to the financial system”. For its part the rating agency Standard & Poor’s, happy as ever to police the boundaries of economic correctness, warned that any interference with the Reserve Bank’s independence could trigger new downgrades.
To insist that anyone who proposes changing the Reserve Bank’s mandate is economically damaging and stupid is as contemptuous of democracy and dangerous to the economy as Mkhwebane’s excess. It is undemocratic because it seeks to close down policy debate by declaring that only one view of the Reserve Bank’s mandate can ensure a healthy economy. It is dangerous because it blocks the search for economic remedies by seeking to bully even those who propose only mild changes to what the country now has.
The idea that the Reserve Bank should have a broader mandate is neither radical nor dangerous. The most famous central bank, the US Federal Reserve, has a broader mandate. Its dual mandate requires it to seek maximum employment as well as price stability.
The Australian equivalent’s mandate includes “maintenance of full employment and economic prosperity and welfare of the people”. The European Central Bank, famed for its love of austerity, has a mandate to seek “sustainable growth”.
And the the Bank of England’s website says that, subject to its goal of price stability, it aims to support the government’s economic objectives.
In South Africa, not only has the view that the central bank’s mandate is too restrictive been repeated periodically but it may well have been implemented for a while. In 2010, then finance minister Pravin Gordhan wrote to then Reserve Bank governor, Gill Marcus, proposing a mandate which included growth and employment. Marcus reacted positively, which suggests that the bank acted on Gordhan’s letter. The financial system survived.
The US, European and Australian financial systems have also not collapsed. Their mandates have not triggered a downgrade and no one has accused these societies of economic illiteracy.
So either double standards are being applied or we are being told that restrictive central bank mandates are essential only if countries are in particular parts of the world (such as Africa) and governed by particular types of people (Africans).
And why does a change in the Bank’s mandate undermine its independence? A central bank loses its independence if politicians (or anyone else) can tell it what to do, not if its mandate changes.
For all its flaws, the Public Protector’s proposal would retain the Reserve Bank’s independence, leaving it to the bank to decide what promotes the “well-being” of the people or “transformation”.
None of this means that the Reserve Bank’s mandate must change. Or that central bank independence must go. But it does mean that no one should be discouraged from debating the issue, as people routinely do in other democracies and market economies. What, besides that prejudice which we prettify by the term Afropessimism, explains the insistence that we may not debate what is freely discussed in most other places?
Closing down debate in this way is common in South Africa. It also lies behind complaints of policy uncertainty which does not mean, as it does elsewhere, that government keeps changing its mind and sending mixed messages – the macro-economic framework has been stable for more than two decades. It means, rather, that some people – who some others may take seriously – raise policy ideas the economic mainstream does not like.
This demand that people can say anything they like about economic policy as long as the mainstream likes it too offers a misleading view of the economy. It says that there is nothing wrong with it except political interference and that it will flourish if politicians simply leave alone what is done now.
The contrary evidence is offered by mainstream organisations such as the International Monetary Fund and the South African Reserve Bank itself which have shown that the current economic rut is a product of problems in the private economy as well as what government does.