T Mboweni: First Macro-economic Policy Challenges for South Africa
Conference

23 October 2006

Honoured guests,
Colleagues,
Ladies and gentlemen:

1. Introduction

It is with great pleasure that I welcome you to Pretoria on the first
occasion of the South African Reserve Bank (SARB) conference entitled
"Macro-economic Policy Challenges for South Africa". I would like to extend a
warm welcome to the keynote speakers and presenters of the papers and to all
the discussants who will be participating in our proceedings. All those
attending the conference are likewise heartily welcomed and we hope you will
participate actively in the series of discussions.

This conference is the first in a series of conferences that the bank plans
to hold every second year. It is our contribution to a process of open
interaction between economists concerned with macro-economic and central
banking issues. The conference series should further serve as a vehicle for
bringing together researchers from academic and financial institutions. The
main purpose is to provide a platform where current ideas on macro-economic
issues can be shared. This should signal clearly our commitment to a continuous
and active exchange of information between the SARB, academia and private
sector economists.

This initiative has been inspired by the examples set by a number of central
banks. Other central banks that host similar conferences in collaboration with
universities include the Central Bank of Chile, the European Central Bank, the
Federal Reserve Banks in the United States, the Swiss National Bank, the Bank
of Canada and the Deutsche Bundesbank. Generally the aim is to facilitate
debate on monetary policy and related issues. Our economists regularly
participate in some of these conferences and we are pleased to be able to
provide a similar forum. The proceedings of the conference will be published in
order to reach a wider audience.

2. The relationship between SARB and academia

The SARB's relationship with local universities has been evolving over time.
In 1994, the SARB launched a 12-month Cadet Programme providing young graduates
with high potential the opportunity to learn more about the operations of a
central bank and to gain first-hand practical experience. The programme is
managed by the SARB College in collaboration with subject experts from leading
local and international academic institutions. To offer life-long learning
opportunities to these learners, the college has embarked on a process to
develop and register qualifications on the National Qualifications Framework
(NQF) from levels four to six in collaboration with formal educational
institutions.

Regular contact is maintained between academics and researchers in the
various departments of SARB and other central banks. A number of conferences
and workshops have been organised by the SARB in the past and an increasing
number of academics have been presenting their research findings at seminars in
the SARB. During the past two years, a number of collaborative research
projects have also been initiated and completed. This latter initiative has
become more formalised with the launch this year of the Visiting Research
Fellows Programme which will enable leading academics or researchers from other
central banks to spend time at our head office pursuing their research and
interacting with SARB staff. Visitors from the academic world will thus be able
to discuss their latest research work and collaborate with SARB staff as
co-authors of research papers on a regular basis.

The SARB also collaborates formally with tertiary institutions as part of
the strategy to enhance central banking skills and knowledge in South Africa.
To this end, the SARB is currently sponsoring a Chair in Monetary Economics at
the University of Pretoria. This should ensure the development and promotion of
research and tuition in the field of monetary economics at the post-graduate
level. The incumbent serving as chair will become a visiting research fellow at
the SARB to foster closer collaboration and research synergies between the SARB
and the university.

In an effort to improve the quality of economic journalism in Africa, the
SARB, in partnership with Rhodes University, is in the process of establishing
the African Economics Journalism Centre at the School of Journalism and Media
Studies at the university. From 2007, the SARB will provide funding and
institutional support as well as funding for scholarships to attract students
from previously disadvantaged backgrounds to economics and financial
journalism. The SARB College will furthermore assist with the design of the
macro-economics curriculum as part of the programme. Furthermore, from 2008
Rhodes University will offer a dedicated postgraduate diploma in economics
journalism aimed at mid-career journalists and journalism graduates who lack an
economics or commerce background.

Our contributions to universities are not confined to funding. A number of
SARB staff gives specialised lectures or courses at various universities. I
have the honour of being an honorary professor at the University of South
Africa (Unisa), the University of Pretoria, the University of Stellenbosch and
the University of Limpopo. This commits me to present a number of lectures and
seminars to staff and students. I particularly value the interaction with
students and I often feel comforted by the quality of the training that our
future economists are receiving.

Overall, the collaboration with universities and research centres plays a
key role in the continuous upgrading of our intellectual capabilities and the
deepening of our knowledge of relevant subjects. These interactions are
fundamental to the fulfilment of our strong commitment to excellence in
economic analysis and research at the SARB, which is reflected in our series of
working papers and periodic bulletins. The close collaboration between the SARB
and the academic world mirrors what is occurring more broadly between academia
and the new knowledge-based industries. It facilitates the continuous
elaboration and improvement of a large set of tools that are of utmost
importance for decision-making at the SARB, ranging from models for forecasting
and policy evaluation to analytical frameworks for monitoring monetary
developments.

3. The interaction between research and policy-making

Macro-economic policy has attracted a great deal of research in recent
years. Much of this research work has concerned issues that are highly relevant
to those of us who are engaged in monetary policy decisions. One example is the
misconception that there is a permanent trade off between inflation and
unemployment (or output). We are indebted to academic research for proving that
the attempts to exploit such trade off eventually only lead to higher
inflation. It therefore re-established a firm basis for the concept of the
long-term neutrality of money. Indeed, this is a perfect example of an academic
insight that has become a deep-seated principle of central banking around the
world.

I have spoken to you about the important input that economic research
provides to central banking. Let me briefly touch on the other leg of this
exchange from policy to science. By facing the challenge of decision-making in
real time and in the real world policy-makers continuously uncover a wealth of
new intellectual problems that may be unknown to academic researchers.
Moreover, economic policy-makers have a better knowledge of the institutional
constraints affecting policy and are therefore able to transmit a sense of
realism to economists who analyse monetary policy issues. An example that
springs to mind is that of inflation targeting which did not originate in any
textbook but at central banks. This widely implemented monetary policy
framework has in turn spawned a significant academic literature.

An additional, less obvious but very important aspect of this exchange is
that policy-making introduces a form of discipline in the science of monetary
economics by placing a premium on analytical results that prove to be robust
across different approaches and time horizons. A central bank needs to be very
cautious about "jumping on the bandwagon" of any new but untested paradigm that
academic researchers or other observers may provide. Here I agree with
Friedrich Hayek and "confess that I prefer true but imperfect knowledge, even
if it leaves much undetermined and unpredictable to pretence of exact knowledge
that is likely to be false". One thing is clear, however, the sounder the
theoretical foundation for monetary policy, the easier the life of a central
bank governor.

4. Macro-economic policy challenges for South Africa

The theme of the conference is "macro-economic policy challenges". I do not
want to pre-empt the forthcoming discussions but I thought it would be
appropriate to mention some of the macro-economic challenges that I see facing
South Africa.

The fundamental macro-economic challenge in South Africa is the alleviation
of poverty. The best way to alleviate poverty on sustained basis is to generate
employment which in turn requires economic growth. Although the economy is
growing at its highest rate since the advent of democracy, it is generally
accepted that to make sustained and significant inroads into the employment and
poverty situation, a higher growth trend is required. This is recognised by the
Accelerated and Shared Growth Initiative for South Africa (AsgiSA) strategy of
government. Some of the questions that need to be considered are the challenges
and the risks the strategy faces.

We face some monetary policy challenges as well. In recent months the risks
to the inflation outlook have increased. Factors leading to this deterioration
include high growth in consumer spending, rising levels of credit extension to
the private sector and developments in the international oil prices. Although
oil prices have moderated recently, upside risks remain and a challenge we face
in the SARB is to keep inflation within the inflation target range in the face
of significant exogenous shocks as posed by the oil price movements. Research
on the first and second-round inflationary effect of oil price increases is
therefore important for making good monetary policy decisions.

High levels of domestic expenditure have contributed to the widening deficit
on the current account of the balance of payments. While the deficit is
currently more than adequately financed by capital inflows, investor fears
relating to the sustainability of the deficit increase the risks of exchange
rate adjustments which could threaten the longer-term attainment of the
inflation target. The policy challenge is to maintain low inflation within the
context of a growing economy and a sustainable external balance.

There are also challenges facing our financial markets. South Africa is a
small open economy by international standards. This in itself presents some
challenges for the pursuit of domestic price stability. Our foreign exchange
market is very liquid which makes it an easy target for portfolio re-alignment
by international investors. Therefore, there is always a potential threat of a
direct impact on the exchange rate of the rand emanating from this source.

Finally, there are challenges posed by globalisation and regional
co-operation. Regional co-operation is vital for success in our modern world,
one that is becoming increasingly globalised. Although globalisation has
brought many benefits the painful experience emanating from the adverse
developments in international financial markets is still fresh in our memories
and hence one cannot over-emphasise the importance of co-operation,
particularly among central banks.

5. Conclusion

It is important that policy-makers assess the current economic situation and
establish the areas in which further action will be required. A lot has been
achieved but many economic challenges still remain. I believe that the subjects
and the quality of the papers to be presented, the impressive expertise and
experience of our speakers, discussants and panellists will provide fertile
ground to nurture fruitful debates, enhance our understanding and generate new
ideas regarding the challenges facing our economy. Thank you for your
willingness to share your knowledge and experience with us.

We also trust that you will enjoy the opportunity of meeting with other
economists, enjoy the SARB's hospitality and to those who are from outside our
country's borders, enjoy your visit to our beautiful country.

I thank you!

Issued by: South African Reserve Bank
23 October 2006
Source: South African Reserve Bank (http://www.resbank.co.za/)