it new and difficult challenges. in my remarks this evening i will focus on the growth and financial stability aspects of broadened mandates in the south african context. the modern mandate of central banks had focused primarily on price stability, reinforced by the increased adoption of inflation targeting. the simplistic view of inflation targeting is that all a central bank has to do is to conduct policy in such a way as to keep inflation in line with the target. other possible objectives of monetary policy are seen to be secondary or not the concern of monetary policy. this relates in particular to economic growth, and by extension to employment. although the bank has often been criticised for not being sufficiently concerned about growth, we are also criticised by those who believe that we have gone beyond our mandate by focusing on growth. in the wake of the global financial crisis, it is clear that growth and employment became foremost concerns of most central banks, particularly in those economies where the recovery was slow and protracted, and where inflation was not perceived to be a threat. the persistence of the extraordinarily low interest rate environment in the advanced economies bis central bankers ’ speeches attests to that. so is this focus on growth a new mandate for central banks and an undermining of the primary inflation objective? in this respect, inflation targeting has often been misunderstood, or oversimplified. it is important to distinguish between strict and flexible inflation targeting. a strict inflation targeter is one that only focuses on inflation to the exclusion of all other possible objectives. as such, it is a theoretical construct as in reality no central bank acts in this way. a flexible inflation targeter, by contrast, puts some weight on the deviation of output from potential ( the output gap ), and this weight can change depending on circumstances. in effect this implies that the objective of monetary policy is to achieve the inflation target with output in line with potential. the focus however is on deviations from potential output, as it is generally believed that monetary policy has limited, if any, long run impact on the growth potential of the economy. this is the domain of other policies. the flexibility is manifested when concern for the state of the economy can result in deciding on a longer time horizon for achieving the inflation target, in order to minimise the negative impacts on output growth. it also follows that if inflation is in line with its target and if inflation expectations are well anchored, more weight can be given to stabilising or increasing growth that is below potential,

mr. stals addresses the topic “ implications for the south african financial sector of the process of financial globalisation ” speech by the governor of the south african reserve bank, dr. c. stals, at the tenth annual “ beeld ” economist of the year banquet, held in johannesburg on 8 / 5 / 98. 1. lessons from the east asian crisis recent developments in certain east asian countries focused attention on the many pitfalls for the smaller economies of the world on the road to financial globalisation. the reasons for the collapse of financial markets in east asia may differ from country to country, but a few common shortcomings in the economies of the afflicted countries were identified : firstly, in many countries, inappropriate macroeconomic policies were applied to defend artificial exchange rates, and / or to maintain interest rates at untenable low levels. these countries were highly successful for many years and they achieved remarkably high average economic growth rates over an extended period of time. based mainly on an industrious and frugal labour force, they were able to remain competitive, despite the emergence of underlying weaknesses in the economic fundamentals. secondly, the financial systems did not keep pace with the changing macroeconomic environment. banking institutions were not properly regulated and monitored, and financial markets were distorted by undue governmental intervention. in some cases, there were insufficient disclosure of basic information that could have enabled investors to make a better assessment of the deteriorating situation at an earlier stage. thirdly, the countries became overly exposed to foreign capital flows, and vulnerable balance of payments positions developed that could not be managed once confidence faded. large current account deficits were no longer covered by total capital inflows, and the withdrawal of short - term funds from some countries exacerbated the situation. fourthly, bad governance in public and private sector institutions did not realise the seriousness of the underlying adverse developments, and did not take timely corrective action. when the bubble finally burst, the situation had already advanced to a stage where only costly and painful macroeconomic restructuring could salvage these economies. the experience of the afflicted east asian countries provides ample evidence of the vulnerability of the smaller, emerging market economies in the environment of financial globalisation. other countries, including south africa, can also be subjected by the global financial markets to similar painful corrections, although it might be for completely different reasons. the lesson for south africa from the east asian crisis is therefore to be alert, to be cautious, and to be aware