Employment-Oriented Central Bank Policy in an Integrated World Economy: A Reform Proposal for South Africa

The South African Reserve Bank and Ministry of Finance have adopted inflation targeting and the gradual relaxation of exchange controls (along with control of public spending and financial liberalization) as the foundation of their economic policy in an attempt to win the confidence of foreign investors and to attract more foreign investment. However, this policy has not succeded in generating employment growth or investment. Instead, it has contributed to high real interest rates and relative stagnation.In order to improve central bank and capital management policies and have them contribute more to solving the fundamental problems of unemployment and poverty facing the South African economy, three reforms should be undertaken:1) The Reserve Bank should scrap its inflation targeting approach and adopt a more even handed approach which would target employment growth subject to an inflation constraint.2) Rather than loosening the exchange controls system, the Reserve Bank and Ministry of Finance should enforcethe existing controls more strictly, and explore other ways, such as transaction taxes and speed-bumps, to further insulate South African macroeconomic policy from global pressures.3) The South African government should implement other policies and institutions, such as special lending windows, underwriting facilities, asset based reserve requirements and subsidized credit, to further insulate the South African financial markets from the international capital markets and channel credit to employment generating and socially productive activities. This will correct a serious market failure in which international financial markets fail to take into account the social rates of return available on productive investments in South Africa.