Central bank independence before and after the democratisation of South Africa

Abstract

Political changes, especially profound ones with a revolutionary potential, always hold serious consequences for the entire economic system of a country in general, and the central bank and its monetary functions in particular. This is even more true in the case of emerging countries with unsettled political circumstances and structures, and with a historic legacy such as the former apartheid system in South Africa. The vexing question then naturally arises what consequences such wide-ranging and profound political changes might have for, inter alia, the central bank of a country. If the transformation takes place against the backdrop of a world-wide accepted increase in the importance of the CBI on the one hand, but involves a political grouping (the ANC) with an initial inclination towards socialism and an alliance with the Communist Party, also involving many jobless and disadvantaged stakeholders on the other, the scene is prepared for an interesting public debate. Such was the situation in South Africa during the early and middle 1990s. The importance of central bank independence (CBI) derives from the argument that the power to create money should be separated from the power to spend it. Governments are more short term orientated, have an inflationary inclination and are tempted to spend money in order to create favourable economic and political environments just before elections. Various studies indicate lower inflation in those countries where independence of their central banks is the strongest. A prime example in this regard used to be the position and policy of Germany's central bank, the Bundesbank. Renowned for its strong stance against inflation and political intervention, this bank obtained wide recognition for its successful monetary policy leading to consistently low inflation. This, in turn, was ascribed to its persistent opposition to political interference. Many other countries around the globe have also increased the independence of their central banks, for example New Zealand, Chile, Britain, France and many South American countries. South Africa belongs to this league because it has improved its central bank's independence both before and after democratisation. Independence for the SARB was not an explicit issue or focal point of debate with regard to monetary matters during a large part of the 1970s and 1980s. However, during the early years of the 1990s it was increasingly discussed more openly and extensively, especially after the end of the apartheid era and the establishment of the above-mentioned new political dispensation and new constitution. The question naturally arises as to the differences between the pre- and post-democratisation versions of CBI in South Africa. The CBI concept has many political connotations and implications and a move either towards or away from democratisation might influence a central bank's independence. This article compares the pre- and post-democratisation situation regarding CBI in South Africa, not only for its own sake, but also to uncover the impact of political transformation on CBI. The discussion of the pre-democratisation phase will especially emphasise developments since 1984, when the well-known De Kock report on monetary policy was released. The post-democratisation phase, on the other hand, started in 1994 with the institution of the Government of National Unity. During 1996 the ANC established a new government and became the sole and effective governing body in the country. The impact of the new government and post-democratisation phase on the SARB became even more explicit when the first ANC-appointed governor assumed office in 1999. It is specifically this phase that the article endeavours to compare with the prior pre-democratisation phase. In pursuing this aim, Section 1 first develops criteria for assessing legal CBI. Political as well as economic yardsticks of the concept will be discussed, emanating from the flood of research on CBI since the 1980s and 1990s. Section 2 focuses on the application of the political yardsticks to the pre-and post-apartheid CBI, whereas Section 3 compares the economic criteria. The results are then presented in a tabulated form to simplify comparison. Section 4 presents a conclusion.