1. INTRODUCTION

First of all, let me thank the Department of Economics of UNISA for the pleasant invitation extended to me to take the honourary chair in Economics. It is indeed a great honour for me personally but also for my institution, the South African Reserve Bank. I have no doubt in my mind that one of the considerations for this invitation was to improve the relationship between this university and the central bank. Personally, I think that academics and public policy-makers need each other for the simple reason that their work is mutually reinforcing.

I have chosen to speak tonight on the subject of "Globalisation and Policy-making in South Africa". As things turned out, when I was preparing this address, I discovered that I covered almost the same subject at Rand Afrikaans University on 25 October 2000. It is thus unavoidable that some of the material used here will overlap with the address at RAU. Maybe it goes to show how much the subject of globalisation is permanently in our minds.

Definitions of globalisation abound in the literature of today. A 1994 OECD Jobs Study said, "Globalisation refers to an evolving pattern of cross-border activities of firms, involving international investment, trade and collaboration for product development, production and sourcing, and marketing. It is driven by firm strategies to exploit competitive advantages internationally, use favourable local inputs and infrastructure, and locate in final markets. These strategies are shaped by declining communication and transport costs, and rising R&D costs, macroeconomic trends and exchange rate fluctuations, and liberalisation of trade, investment and capital movements."1 In short, the internationalisation of trade and investment, growing international markets, the rapid development and use of information and communication technology (ICT), high mobility of skilled people, the growing trend towards flexible exchange rates, and the extremely influential role of money and capital markets characterise the economics of globalisation.

The size of the figures involved in this process changes from day to day. But for the sake of focus and illustration, let me mention a few. In 1998, total foreign direct investment (FDI) was $693 billion and in 2000 it was $1,3 trillion. Africa’s share was a static $8 billion respectively. Most of the flows went into the developed countries: $483 billion and $1,005 trillion respectively.2 Between 1970 and 1997, "countries without exchange controls rose from 35 to 137" and the "ratio of exports to world output rose from 12 per cent to 17 per cent"3. Financial markets have increased in importance in numerous ways. Thirty years ago financial assets were seldom traded in the secondary market and were often held until maturity. Nowadays secondary market activity in financial instruments dwarfs world income. For instance, annual turnover on the 16 major industrial countries' stock markets rose sixfold from around US$ 5 trillion a decade ago to around $ 30 trillion at present.

2. PROTESTS AGAINST GLOBALISATION

We are now all too familiar with the regularity of protests against globalisation. In London, Seattle, Davos, Genoa, Prague and many other cities around the world, anti-globalisation protests have turned violent, symptomatic of a growing anger and desperation by these organisations. But the process seems to be gaining momentum. The protests have at times focussed on the debt burden of emerging market countries, calling for its cancellation. But at the core of these protests, is a fundamental opposition to globalisation with the IMF, World Bank and the WTO attracting the fiercest opposition. It is unlikely that the globalisation momentum will be halted, but some of the issues raised by the protests must be listened to, studied and responded to.

On a lighter note, a Peruvian author (quoted by Gouws) says, "fighting globalisation is rather like fighting against the metric system. You may not like it, but the costs of being outside it far outweigh any of the disadvantages of being inside." Further, he says "complaining about globalisation is as futile as complaining about the weather. For the foreseeable future, we can do little about either. It’s better to make most of the sunshine, but also prepare yourself for when it rains."4

3. LESSONS FROM GLOBALISATION

New technologies will continue to make the world a smaller place. The linkages between stock exchanges in many countries increased significantly in the 1990s. Recent empirical evidence shows that due to the elimination of obstacles to free trade, greater financial market integration has led to greater market efficiency and better risk-and-return combinations for investors. There has been a sharp increase in the weight of foreign assets in the portfolios of some agents, as well as the correlation between the relevant stock indices and the ability of each market return to explain the behaviour of returns in other markets. The disadvantage of the greater integration of financial markets is that it reduces the ability of domestically focused policies to deal with the problems arising in the respective domestic financial markets.

South African share prices are increasingly influenced by the views of international investors. Developments in London, New York, Frankfurt and Tokyo often have a greater influence on domestic share prices than actual developments in South Africa. South Africa has seen major swings in foreign exchange flows, interest and exchange rates in recent years. Under these circumstances, errors of judgement may be easily made with domestic macroeconomic policy that could have a detrimental effect on aggregate domestic economic activity in South Africa. It can be said that the greater the level of integration of the global market, the greater the need for worldwide supervision. One of the important questions in this regard is whether such worldwide supervision should be provided by a single international supervisor or by a closely linked group of supervisors.

South Africa’s sophisticated financial system compares favourably with those of most industrialised countries and surpasses those of many emerging market countries. Although great strides have been made in recent years with global and regional integration, the process of financial integration has had a few setbacks. South Africa has experienced the contagion effects of periodic emerging markets crises that have forced painful adjustments. The Mexican crisis, and more recently the Asian crisis, were unlike any seen before and spread quickly around the world. They quickly took on systemic proportions and could only be addressed through the immediate mobilisation of substantial international effort.

The Asian crisis in 1997 and 1998 was characterised by three important factors. Firstly there were macroeconomic imbalances, along with massive outflows of short-term capital. Secondly there was an acute crisis in the financial sector, reflecting institutional and banking practice weaknesses. Thirdly an economic management model was applied which was not in keeping with the new demands of a globalised economy. Before massive financial assistance could be considered for these countries, a set of measures or rules was required that would lead to greater transparency, better management and anti-corruption efforts. Furthermore, the relationship among corporations, banks and governments needed immediate fundamental changes.

Some analysts believe that the Asian crisis did not stem from so-called "crony capitalism" but from economic liberalisation. They postulate that a flood of speculative capital first caused a real-estate bubble, which affected the rest of the economies when the bubble burst. The problem therefore was not a lack of openness but too much of it, too soon. They also suggest that as capital rushed out of Asia, countries like Taiwan and others still had sound fundamentals - budget surpluses, low inflation, high savings rates. Some critics also maintain that the IMF’s actions made a bad situation worse. Draconian prescriptions, such as bank closures, budget cuts, higher interest rates and structural reforms intended to root out everything wrong with the Asian approach to the economic policy, had an excessive deflationary effect.

Whether the IMF’s actions were entirely appropriate in all instances during the Asian crisis is a matter for another day, but the important characteristic distinguishing the Asian crisis from other crises was the prominence of private financial institutions and other private enterprises as both creditors and debtors.

Globalisation accelerates and spreads the international consequences of domestic policies. No country can escape the consequences of globalisation, and all countries are being called upon to ensure "rigour and transparency in overall economic management; banking and financial sector soundness; reform of the institutions of the state in terms of seeking public sector efficiency, appropriate regulation, emphasis on the rule of law, independence of the judiciary (and the central banks), anti-corruption measures, etc.; and growth that is centred on human development".

Whether a country is large or small, a financial crisis can become systemic through contagion on the globalised markets. The domestic economic policies of the major industrialised countries have in recent years increasingly taken into account their potential worldwide impact. This duty of universal responsibility is also becoming important for all countries, large and small. As globalisation progresses, all countries take a measure of responsibility for the stability of the international financial system and the quality of world growth. This adds commitment and responsibility that are required of every government in the management of their economies. Globalisation mercilessly exposes the shortcomings in national economic policies in countries that do not apply the universal "laws" for prudent macroeconomic management. The process of globalisation accentuates the pressure for change and for greater co-ordination and harmonisation of economic policies.

4. SOUTH AFRICA’S RE-ENTRY INTO THE GLOBAL ECONOMY

Since 1994 South Africa has introduced major changes to domestic political, social and economic structures. After years of apartheid-induced isolation from the global economy, countries lifted sanctions and companies ceased disinvesting from South Africa. Profitable opportunities were opened up for South Africa to reintegrate its economy into the global economy.

South Africa’s integration into the global economy had important implications for the South African banking sector. The official policy has been to open up the South African banking sector to foreign participation, and to expose South African banking institutions to foreign competition. As a result of this policy, 15 foreign banks have registered branches in South Africa and 60 foreign banks do business in the country through representative offices. The South African banking sector remains sound and well-managed. Some mergers are taking place in line with world trends, and the 42 domestic banks are rationalising their activities to face the challenges of globalisation. The four big banks in South Africa have assets of over R600 billion. The registered banks in our country have an aggregate balance sheet of some R929 billion as at the end of July 2001 with capital and reserves of R85 billion. The South African Reserve Bank is responsible for bank regulation and supervision which is based entirely on the recommendations of the Basel Committee. Regulation and supervision concentrates on the management of risk exposures within each banking institution.

Exchange controls were relaxed by removing all restrictions on current account transactions, and on the inward and outward transfer of funds by non-residents, and then by gradually enabling residents to invest specific amounts of capital outside the country. As a step along the indicated path of systematically abolishing exchange controls, all such controls over non-residents were abolished in March 1995 when the dual exchange rate system was terminated. The result was that the financial rand disappeared and the proceeds of local sales of non-resident-owned South African assets were regarded as freely transferable from the Republic and could also be freely used in the Republic for any other purpose. In March 1997, the Minister of Finance also announced that individuals who are tax-payers in good standing would be allowed to invest a specified amount of their savings in any manner abroad and in fixed property in SADC countries. Alternatively, they would be allowed to hold foreign currency deposits, up to a defined limit, with South African authorised foreign-exchange dealers or with foreign banks outside South Africa. In February 2001 the Minister also increased the amount that South African corporates investing abroad could remit from South Africa. The amount per new investment project in foreign countries was increased from up to R50 million per new project to R500 million. The amount that South African corporates can send out of South Africa per new investment project in SADC was changed from up to R250 million in SADC to R750 million per new investment project in Africa.

Government took the lead in reintroducing South Africa gradually to the global markets for public loan issues. A number of issues were made in the global and Yankee US dollar markets, in Sterling, Deutsche Mark and in the Samurai Yen market. South African private corporates were also encouraged to raise funds through equity and bond issues in international capital markets, and were free to use part of the proceeds from such issues for financing the expansion of their activities in the rest of the world.

South African institutional investors, such as insurers and pension funds, were allowed to exchange part of their rand-denominated portfolios for foreign-currency denominated assets through swap transactions entered into with foreign counterparts. In accordance with the principle of relaxing exchange controls, permission was granted in June 1995 to South African institutional investors (long-term insurers, pension funds and unit trusts) to exchange, through approved asset swap transactions, part of their South African portfolio for foreign securities. In March 1997 it was announced that institutions that qualified for asset swaps would be broadened to include regulated fund managers registered with the Financial Services Board. With effect from July 1997, portfolio managers registered with the Financial Services Board as well as stockbroking firms which are members of either the Johannesburg Stock Exchange, the Bond Exchange of South Africa or the South African Futures Exchange, could also apply to acquire foreign portfolio investments by way of asset swaps.

Integration into the world financial markets required a major restructuring of the institutional arrangements in the South African capital markets. The JSE Securities Exchange introduced changes to provide for corporate ownership, foreign ownership of stockbrokerage firms, dual capacity trading, negotiated commissions, and electronic screen trading. The JSE Securities Exchange is continuing to improve its facilities by providing for the immobilisation and dematerialisation of shares, and for improved clearing and settlement arrangements. The total value of shares traded on the JSE increased from R63 billion in 1995 to R537 billion in 2000.

The most spectacular increase in volumes over the past few years took place in the Bond Exchange of South Africa. Total turnover in this market increased from R2 trillion in 1995 to R10,5 trillion in 2000. The relaxation of South African exchange controls made an important contribution to the development of the Bond Exchange and transactions by non-residents in this market have increased significantly.

The adjustments that have occurred in the South African economy, and on South African monetary policies during the past few years, were necessary and timely. These adjustments were needed to restore and maintain overall economic equilibrium. South Africa has increasingly developed robust financial, economic and foreign exchange markets. This latter market is growing rapidly and its daily average turnover now exceeds $9 billion.

Another interesting development following the globalisation process is the emergence of a Euro-rand market. The outstanding nominal amount of rand-denominated loans raised in this market by South African and non-South African borrowers from non-South African investors, is now almost R202 billion. A part of these loan issues is usually hedged by investing in South African bonds.

5. GLOBALISATION AND POLICY-MAKING

The reintegration of South Africa into the world economy and the liberalisation of financial markets also have important implications for policy-making. As Bill McDonough president of the Federal Reserve Bank pointed out in 1998: "The technology for processing information and making this information widely available has fundamentally altered the way the world channels saving into investment. No longer does the global economy rely primarily on loans from commercial banks to meet its financing and investment needs. Rather, more than ever before, the global economy of today looks to funds from the fixed-income and related capital markets to intermediate its credit needs. Because the global capital markets have become so important in the credit intermediation process, the economic well-being of us all depends on the orderly flow of funds in these markets. The flow of these funds, in turn, increasingly relies on price signals generated by trading activity that takes place daily in these markets. The reliance on secondary market trading for price discovery constitutes the fundamental difference between funds from securities markets and loans from banks."

This change in the way that savings are channelled to investments has resulted in greater volatility in international capital movements. Recent non-resident transactions on our Bond Exchange are a clear reflection of this greater volatility in international capital flows. In such a situation, it is more important than ever before to create and maintain a sound environment for foreign investment in a country. This makes it more imperative for monetary policy to pursue clearly stated objectives. Increasingly throughout the world, central banks are pursuing price stability as their basic policy focus. Where countries have high rates of inflation which are out of line with the rest of the world, disruptive capital flows could occur because of fears of currency misalignments.

The closer integration of the world economy has therefore focused the ultimate objective of monetary policy and made it even more important to attain this objective. It should, however, also be realised that such a policy stance does not provide unconditional protection against speculative capital outflows. External economic shocks or perceived poor policy measures can still trigger a reversal in capital movements. Domestic policy, on its own, cannot prevent these reversals. International investors make their decisions on the basis of a wide variety of developments. The best approach that central banks can follow is to pursue price stability in a transparent and accountable manner so that they can at least forestall any uncertainties in this regard.

Although the objective of monetary policy has been better focussed within the context of globalisation, the integrated world economy has resulted in a more complex mechanism for transmitting monetary policy. The relationship between changes in interest rates, money supply and inflation has become less clear under these new conditions, compared with the period when South Africa was more isolated from external influences. As a result of large international capital flows, the effects of policy changes are being transmitted to a greater extent through critical indicators such as bond yields and exchange rates. There are of course longer time lags between policy changes and their desired impact on the real economy.

These changes in the transmission mechanism of monetary policy have reduced the credibility of the money supply as an intermediate guideline for policy. The integration of financial markets and financial innovations made the demand-for-money function less stable. This was clearly reflected in a consistent decline in the income velocity of circulation of M3 money of nearly 15 per cent from the end of 1994 to the end of 1999. The money supply accordingly became a less reliable anchor for monetary policy.

Volatile capital movements further complicate the transmission mechanism under floating exchange rates, because of the impact that exchange rate changes have on the foreign transactions of a country. In a closed economy, the transmission mechanism runs from increases in the repo rate and other short-term interest rates through to longer-term interest rates and asset prices and then to aggregate demand and prices. The open economy version of the transmission mechanism under floating exchange rates runs from interest rates, to nominal exchange rates, to the absolute and relative prices of tradeable goods and eventually to the prices of non-tradeable goods.

In view of this more complicated transmission mechanism in a reintegrated global economy, the Reserve Bank has had to reconsider the framework that it applied in pursuing price stability. Informal inflation targeting using intermediate money supply guidelines or targets was obviously no longer suitable in the changed international environment. From the beginning of the year 2000, the authorities therefore decided to adopt inflation targeting as the formal monetary policy framework of the South African Reserve Bank. This framework should focus monetary policy, increase transparency and lead to a clearer accountability of the Reserve Bank. Such a framework also allows for exchange rate flexibility. Exchange rates should, in theory, be determined by the supply of and demand for currency in foreign exchange markets.

6. SOME OBSERVATIONS AND CONCLUSION

Domestic economic policy making has lost its independence in this highly integrated globalisation process. This is more so in the developing countries. Increasingly, countries (nation states to be more precise) have to follow internationally determined policy rules. In other words they have to toe the line in accordance with internationally perceived best practice policies.

The basic tenets of policy can now be recited by all policy-makers everywhere. In the macroeconomic policy arena these policy rules are: budget deficits which are not more than 3 per cent of GDP, inflation rates of less than 10 per cent, preferably in the 3 - 5 per cent zone, current account deficits of not more than 3 per cent of GDP (unless you are the United States of America!), net foreign reserves which can cover at least three months of the imports of goods and services and average tariffs of less than 10 per cent. Add to this list flexible labour markets, liberalised financial markets with no exchange controls, flexible exchange rates, free movement of skilled labour, central bank independence with the concomitant policy of not directly financing government deficits, democratic political dispensations where the rule of law, including property rights, is the order of the day, privatisation of government owned enterprises and transparency.

As any Wall Street trader will say, ‘if we do not understand the policy framework in any country, we stay out’! What they understand must broadly conform to the above-mentioned basic tenets of policy. The expression "the market punishes" those who are seen to be non-conformists is probably true. Market reactions tend to be swift and dramatic in this day and age. What are seen as bad policies are immediately punished by massive outflows of capital leading to weaknesses in their bond and currency markets. Does this mean that the markets are always right? We do not have the time on this occasion to answer this question in detail. All I can do for today is to say that maybe the markets are not always right, if one is to evaluate this against our own experiences with our exchange rate, in the light of the fact that we generally comply with most but not all of the basic tenets of the policy mentioned before.

One of the most difficult and certainly challenging issues facing developing countries is the classification of all of us under the same label of emerging markets. One negative development in one emerging market tends to tarnish all with the same brush. As such developments in Africa, Latin America, non-Japan Asia and even some former socialist countries such as Russia, Poland the Czech Republic, or in Greece and Turkey, tend to affect all emerging market economies. It is a tough globalised world we live in. Sometimes one feels that the expression "damned if you do, damned if you don’t" is literally true.

Despite all the difficulties we face, there is just no clear alternative at the moment to toeing the internationally accepted policy paradigm. The costs of doing otherwise are too great to take a chance with.

Therefore, the Reserve Bank’s approach to globalisation has been to adapt our framework as well as the banking structure of the country to comply with the international best practice as understood by international investors and regulators. This approach recognises the important contribution that these investors can make to real economic growth, development and employment creation in South Africa.

I remain optimistic about the benefits our country will derive from engaging in the financial globalisation process and the constructive role that monetary policy could play in this process by ensuring price stability.

What we are seeing in many countries, is an improvement in governance, and the establishment of transparent, arms length relationships among governments, corporations and financial institutions, that are typical of mature markets. We are also witnessing the global acceptance by political leaders of the independence of central banks as a critical factor for credible monetary policy. There are greater responsibilities on all sides. Just as the public sector is being called upon to change and improve codes of good practice, so too the private sector has to follow suit by complying with these international norms and codes of good corporate governance.

Thank you very much.

References

OECD Jobs Study, 1994

WorldInvestment Report 2001, press release, p2

Gouws, R. Rand Merchant Bank presentation, June 2001, at the South African Reserve Bank

Gouws, R. Rand Merchant Bank presentation, June 2001, at the South African Reserve Bank