Globally, central banks are under attack, supposedly for having too narrow mandates that focus on price stability (low inflation), or for failing to boost economic growth when economies are not growing.
I find this renewed impetuous to push for wider mandates for central banks in the run-up to national elections very suspicious and opportunistic. They are evidence of a lack of creativity in how to kick-start economic growth.
In the US, President Donald Trump has frequently attacked the US Federal Reserve for hiking interest rates because it hurt economic growth, which raised concerns about the independence of the Fed. Turkish president Recep Tayyip Erdogan also put pressure on the Bank of Turkey to force it to cut rates ahead of an election. India’s politicians replaced Urjit Patel as its bank governor in 2018, the second governor to face political pressure after Raghuram Rajan, whose second term was not renewed in 2016. Patel’s successor immediately cut rates.
In the UK, the same people who advocated for Brexit attack the Bank of England, saying its economists, many of whom have PhDs, are incompetent. The populist gravy train is clearly steaming ahead in both developed and developing countries.
In SA, the calls to either nationalise the Reserve Bank or expand its mandate also reveals a degree of dishonesty in confronting the causes of poor growth. SA does not have a demand problem, which monetary policy could influence. The main reasons growth has been deteriorating over the past decade are due to supply-side or production problems, which the Bank cannot influence in any meaningful way.
To those who have written in these pages advocating for Modern monetary theory, which one of the world’s top monetary economists, Kenneth Rogoff, calls modern monetary nonsense, all seem noble given promises that nationalising the Reserve Bank will democratise the institution and thus give elected officials control to print money and fund even the most unprofitable state-owned enterprises.
Some people will be convinced that the Reserve Bank has the ability to boost economic growth and reduce unemployment. Over the short-term, this might be true, but in the long run, the Reserve Bank has no such ability through printing money.
Such a scenario would essentially be asking the Bank to over-react to malfunctioning productive sectors by printing money. The result of such money printing policies would be hyperinflation, the result of which is well documented — Zimbabwe currently, Hungary in 1946 and Germany in 1922.
The consequences of hyperinflation include a decline in the value of savings, low confidence in the financial sector, lack of investment and ultimately lower economic growth and rising unemployment. History teaches us that nationalising or ambiguously expanding the mandate of the Reserve Bank would most likely result in macroeconomic instability as it will erode the independence of the institution.
The structural problems that are holding back economic growth in SA are well documented by the Treasury, the Reserve Bank and independent research houses, including multilateral institutions such as the IMF and World Bank. They do not include monetary policy as a constraint to potential economic growth and the reduction of unemployment.
It must be obvious then that low potential economic growth will not be solved by printing money. The solution has to be fixing the productive sectors of the economy and incentivising the private sector to invest in greenfield projects.
With this in mind, citizens must guard the Reserve Bank’s independence, which together with prudent fiscal policy, has provided a relatively stable macroeconomic environment. It is policymakers elsewhere in the public sector who have failed to capitalise by not implementing policies that promote growth and reduce unemployment.
Macroeconomic stability is a necessary condition for private sector investment that can improve economic growth and reduce unemployment. An independent central bank contributes to that macroeconomic stability.
• Mhlanga is executive chief economist at Alexander Forbes.
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