1983, the countrya€™s real gdp growth dwindled to 2, 6 per cent per annum. in the early 1970s, the semi - fixed exchange rate system, which had been in force up to that time in most parts of the world, broke down, reducing the discipline imposed on policy makers. the first oil price shock together with a substantial increase in the gold price initiated an inflation spiral and financial conditions became less stable with inflation rising to double - digit levels from 1974. growth in manufacturing slowed to 3, 4 per cent per annum, as momentum could not be sustained given the more uncertain economic environment and the shortages of highly skilled people. still, growth in the tertiary sectors remained relatively buoyant at 3, 5 per cent per annum. non - gold mining output expanded by 3, 6 per cent per annum during this period, with coal performing well as the high price of crude oil lifted the prices of all energy - related minerals. although gold production contracted as ore grades were reduced to prolong the lives of mines, gold mining profits remained robust because of the high gold price. the high gold price of 1979 and 1980 acted as a buffer and protected south africa from the effects of the second oil crisis in 1979, ensuring record growth in 1980. however, this artificial boost did not last as the gold price declined from its $ 800 a fine ounce peak. fixed capital formation remained positive during 1973 - 83, although its average growth rate slowed down appreciably to 2, 8 per cent per annum. but final consumption expenditure by general government recorded the strongest growth rate amongst the expenditure components. during this period, its growth rate averaged 5, 3 per cent per year. as south africa became more isolated from the international arena, growth contracted. from 1983 to 1993 real gdp growth fell to a mere 1, 0 per cent average per annum. manufacturing grew at only 0, 3 per cent per annum, and confidence was shaken as international pressure, sanctions and internal dissatisfaction mounted. financial instability severely undermined the economy. consumer price inflation peaked at 20, 7 per cent in january 1986 and the prime overdraft rate rose from 14 per cent in 1983 to 25 per cent in 1984 before declining to 12 per cent at the end of 1986. the subdued gold price also impacted negatively on the economy. only agriculture, which is an inherently volatile sector, managed to grow at a rate in excess of the 2, 2 per cent per annum population growth rate. on the expenditure side, fixed capital

in bringing their inflation rates down to low levels have left south africa with no other alternative than to bring our inflation in step with that of the rest of the world and to keep it there. if this is not achieved in the coming years, market adjustments will take place to compensate for the inflation differential. such adjustments could include large disruptive capital outflows, a depreciation in the external value of the rand and high interest rates. the thrust of monetary policy in the new globalised financial environment must therefore be the pursuance of price stability. fortunately the reserve bank has already chosen to follow this course and success in bringing inflation down is within our grasp. unfortunately such a policy stance does not provide unconditional protection against speculative capital outflows. the decisions of international investors are based on international interest rates, exchange rates and such factors as political stability. these factors are beyond the control of the central bank. the only approach that the reserve bank can follow is to do its important bit for stability, growth and employment creation, and that means establishing and maintaining financial stability. however, the way in which this objective is pursued, is in the hands of the reserve bank. recently an inflation - targeting monetary policy framework was adopted for this purpose. inflation targeting has been used in many other countries with great success. with the adoption of this approach to monetary policy in south africa, the authorities attempted to create greater certainty about what monetary policy wants to achieve. no one is left in the dark any longer. everyone should know by now that the reserve bank ’ s ultimate objective is an annual average inflation target range of 3 to 6 % for the year 2002. this new framework has helped to focus monetary policy, has promoted transparency and has led to a clearer public accountability of the reserve bank. globalisation and increased international competition have made it important for the reserve bank to adopt inflation targeting as its policy approach. international capital flows and liberalised financial markets obscure the relationship between money supply, interest rates and inflation. in an integrated world economy the money supply becomes a less reliable anchor for monetary policy, forcing the authorities to take a different approach. a fixed exchange rate system would also be a difficult monetary policy framework to pursue in a world experiencing large and volatile capital movements. this was clear from the developments in mexico during the tequila crisis and in thailand, malaysia and indonesia during 1998 when large amounts of capital were withdrawn from emerging - market economies. however, some countries, such as hong kong and argentina, have applied a