An address by Lesetja Kganyago,
Governor of the South African Reserve Bank,
at the INCA Capacity Building Fund (ICBF) Summer School,
Sandton, Johannesburg, 5 February 2024
Delivering on Mandates
Good afternoon
Thank you for having me on this panel and thank you more broadly for the opportunity
to engage with you on the topic of building state capacity at the municipal level.
I recently returned from the World Economic Forum in Davos, where people like me
try to convince those looking for investment opportunities to choose South Africa.
Davos is a very well-resourced town, and its local government runs smoothly, unlike
most South African municipalities that are facing power outages, water shortages and
long queues at municipal offices.
At Davos, we talk about the big issues facing the global community. Local government
does not feature much. But what happens at the local government level affects
people's lives just as much as the main Davos themes, like artificial intelligence (AI)
and climate change.
Furthermore, if we had a technology that improved local government capacity as
drastically as AI has improved recently, I would say that would be a more important
breakthrough than what we pondered at Davos.
Of course, we do not have that technology. What we have is you, the officials who
manage municipalities. Today's objective is to discuss mandates with you, and to
share our knowledge and experience in trying to deliver on our mandates, in the hope
that there are some common lessons.
A mandate defines an organisation's mission. In government, it is one of the ways in
which a community achieves its goals.
There are different ways, of course, to achieve social objectives. The classic
mechanism in modern democracies is to choose people who then make choices on a
community's behalf, and if they do not like those choices, then they choose someone
else the next time.
But there are many decisions in democracies that are not directly made by voted-in
representatives. Rather, they are delegated to specialist organisations that have
mandates. The South African Reserve bank (SARB) is one of those organisations.
This model works well when that mandate is clear and you know what is expected of
you.
It works best with goals that are generally agreed to be desirable, and for which we
have the relevant and effective tools.
It is also a particularly good way of insulating decision making from short-term political
pressures, which can get in the way of good outcomes.1
Let me illustrate these points with the example of central banking which, of course, is
the example I know best.
There is a broad global consensus on the model of central banking that we use in
South Africa. In that model, a central bank is independent, but independence does not
mean that the central bank can do whatever it pleases. The central bank is given
independence to achieve specific mandates.
Those mandates are things most people agree are in the interest of society. Our
mandates, in common with many other central banks, are for price and financial
stability.
We have a toolkit to achieve these mandates. We can set interest rates and we can
enact a range of regulations, supervise financial institutions and intervene in the
financial market to counter dysfunction and instability.
Central bank independence came about because we tried central bank dependence
and it did not work.
In countries where central banks are captives of the political process, they tend to be
willing to fund whatever government wants, or to adjust monetary policy to suit election
timetables. Ultimately, these come at a huge cost to the economy, paid with an inflation
tax, which is levied disproportionately on the poor and vulnerable people in society.
1
This discussion draws on Paul Tucker, Unelected Power, 2019.
You also get central banks that let banks misbehave, take huge risks, then extract
bailouts from the public purse to save the financial system.
In the short term, central banks can make themselves popular by providing cheap
money and encouraging credit sprees.
Conversely, central banks can also make themselves deeply unpopular by interrupting
the ruling party by insisting on protecting price and financial stability.
But ordinary people want stability. They do not want the currency crashing; they do not
want prices in the shops spiralling; and they do not want to worry if their money in the
bank is safe.
Simultaneously, most citizens do not have the time or the power to enact policies to
protect price and financial stability. What they have is us.
This is not to speak disparagingly of our stakeholders, but we cannot expect citizens
to master these issues. They have their own priorities; they have their own projects.
There is too much information for them to understand everything and it is not their job
to do the things we are responsible for. This is a phenomenon economists call 'rational
ignorance'. Just like with smartphones or cars, you want to be able to leave the
technical details to someone else and rely on the system to work.
Of course, when it does not work, there is a reckoning. People complain, they take to
the streets and they shout at you through the media. This can bring some
accountability.
And yet, unfortunately, there are ways to dodge criticism. You can always find reasons
why you did not deliver. There is a sad history of central banks finding excuses for why
they cannot protect the value of their currencies. They talk about how they do not
control oil prices or food prices, or how they are being attacked by unethical
speculators, or how the political mood of the country just makes inflation inevitable.2
However, even where these things are true, after a year or so you get two kinds of
countries. You have countries that make excuses and you have countries that have
price stability. There are people who get the job done and there are people who make
excuses. They are rarely the same people. The people who stick to their mandates
eventually get results.
2
A classic example is Arthur Burns, 'The anguish of central banking', September 1987, available at:
https://fraser.stlouisfed.org/files/docs/publications/FRB/pages/1985-1989/32252_1985-1989.pdf. For a
discussion, see Lesetja Kganyago, 'In the shadow of COVID: lessons from 20 years of inflation targeting', 12
August 2020, available at:
https://www.resbank.co.za/en/home/publications/publication-detailpages/speeches/speeches-by-governors/2020/565
Of course, there are some good excuses out there. Everyone makes mistakes, honest
mistakes. We call these mistakes 'excusable' for a reason. But I have seen clearly, in
the history of central banking, many unconvincing excuses. And the longer the
excuses go on, the weaker they get.
Reviewing this history, I think the practical policymaking lesson is that we need to
practice error-tolerance and excuse-scepticism.3
Error-tolerance means you come forward, confess your mistakes honestly, discuss
your plans for recovering the situation, and you get a fair hearing.
Excuse-scepticism means you get a harsh reception when you say nothing is your
fault and you cannot be held accountable, even though the mandate you were trusted
with is not being delivered on.
Quite a few central banks got it wrong in recent years. They did not see inflation
coming and they did not understand it when it did.
In emerging markets, we have taken some satisfaction in the verdict of many in the
policy community4 that some of us did better here than the developed countries. But
the big central banks are high-quality organisations and they demonstrate that quality,
not by avoiding mistakes but by dealing with them and being honest about their errors.
In the 1970s - the last big global inflation surge - central banks made many mistakes,
gave many excuses and lost control of inflation. In the 2020s, I am confident we will
do better, with far fewer excuses and much more success.5 We are going to deliver on
our mandates.
Of course, I am not a municipal manager. I doubt that my challenges, and the
challenges of my profession, map directly to your challenges.
That said, there is one area where our work overlaps, and that is the issue of inflation.
At the SARB, our fundamental mission is to protect the buying power of the rand, and
we specifically aim to protect it from increases in the cost of living, as measured by the
consumer price index from Stats SA.
If you go to that index, you see some significant components where prices are set at
the municipal level. Think of water, think of rubbish collection, think of municipal
rates.
3
This discussion draws on Amy Edmondson. Right kind of wrong: The science of failing well. 2023
4
An example is
https://www.piie.com/publications/working-papers/central-banks-and-policy-communicationhow-emerging-markets-have
5
https://www.federalreserve.gov/newsevents/speech/powell20220826a.htm
Unfortunately, these prices are often rising by more than headline inflation. In the
latest inflation report from Stats SA, for example, water inflation was 9.6%. Housing
assessment or municipal rates was 8.4%. These numbers should be much closer to
the midpoint of the SARB's target of 4.5%.
High municipal inflation eats away the incomes of our people, keeps our inflation rate
elevated, and makes it harder for us to lower interest rates. It's OK for prices to keep
up with inflation; it's not OK for some prices to always be rising by more than
inflation. And we need you to take the lead to tackle this.
Let me conclude by summarising the main points I have made today.
• It is important to understand mandates as part of the democratic process - a
system for producing specific outcomes in the interest of society.
• This model works best when there are specific powers, requiring expert knowledge
to achieve outcomes driven by a clear mandate that ensures transparency and
accountability, and importantly, is devoid of short-term political considerations.
It is important to have the courage to acknowledge mistakes and how you plan to
•
fix them, rather than covering them up or making excuses.
• Ultimately, mandates represent a duty to South Africans who need us and trust us
to deliver.
For those of us who commit ourselves to delivering on these mandates, it can be
difficult if you do not have the requisite skills and resources. But we have seen
enormous commitment, creativity and perseverance across society to deliver on our
mandates. We should all feel great pride in our work, serving the people of South
Africa.
Thank you.