 Good morning everybody. Good morning ladies and gentlemen and thank you to you and you wider for inviting me to come and talk About the objectives of macroeconomic policy and a bit about development policy in South Africa My sort of career spans three parts one in the Treasury One in the Planning Commission and one in the Central Bank And so what I'll attempt to do is to try and give a bit of a flavor for how emerging markets think about macroeconomic policy in a development context I'll speak more generally at first and then talk a little bit about South Africa's experience In the last 20 years and then just to reflect on some of the present discussions and debates in the global economy today I'll end off with that. I guess one of our general views which is consistent with the with the Growth Commission report is that macroeconomic stability we see as a Necessary condition for economic development for poverty reduction, but certainly not a sufficient condition Macroeconomic stability However, you define it broadly. I guess the absence of crisis the absence of boom bust periods are generally positive for development They generally contribute both to poverty reduction and inequality reduction in general, but they of course not sufficient Microeconomic reforms the quality of education the quality of institutions the relationship with trading partners all of those things are Increasingly seen as determinants of good development strategy And so macroeconomic policy has to merely be seen as an underpinning a girding a chassis a foundation Rather than a the be all and end all of development policy Globalization has brought costs and benefits for emerging markets The benefits include the ability to export the ability to trade the ability to use the global economy to create scale economies back home And to import goods that are more efficiently produced elsewhere that lowers your production costs and lowest transaction costs at home The benefits also include easier access to capital, which is especially true for countries like my own Like myself the one that I come from which have low savings rates, but large investment needs Countries that are less open to trade in general have grown more slowly than countries that are more open to trade However countries that have liberalized their capital accounts slowly have done better than countries that have liberalized too fast And so that there's a general lesson there But those are the benefits it would be completely unfair to talk about the benefits of globalization Without talking about the costs of globalization and there are costs and they are significant those costs Workers in less competitive firms are often left stranded when global sentiment or dynamics change They're unable to switch easily to new sectors or firms When external prices change this has a spillover not only on the rest of the economy via terms of trade shock But exchange rates and prices as well To put it more crudely When the global financial market Happened sort of Lehman brothers collapsed in in in the u.s And the woman selling bananas outside a platinum mine was the first to lose her job Because there was the platinum miners were sent home Were about two months of pay And she had nobody to sell the bananas to the transmission mechanisms of the global economy are instantaneous Decisions taken in one part of the world affect the poor in very very disparate parts of the world in an immediate way And that's one of the costs of globalization. That's one of the costs And of course this cost is asymmetric because capital is free to move If the terms of trade change and and a platinum mine is no more viable Investors can quite easily get out of the platinum mine and invest in something else Invest in a garment factory in vietnam, for example, or in a services company in in california For example, and this asymmetry between the inability of low skilled workers to move rapidly from one sector to another Alongside juxtaposed with the ease of the ability of capital to move from one sector to another and one region to another Creates an asymmetry that in my view is one of the reasons why we've seen a rise in inequality globally The globalization has had benefits Don't mistake that they've had significant benefits for emerging markets, but the costs have often been increased volatility increased marginalization of low and unskilled workers And often insufficient gains for low and unskilled workers And of course at the macroeconomic level increased transmission of shocks to emerging markets Our challenge in macroeconomics is to maximize the benefits that globalization brings But to limit the cost and the poorest and to maintain macroeconomic stability by building resilience to external shocks And I guess the key question is is this possible? It's not yet clear whether this is possible In the long term we want to diversify our economies. We want to move up the value chain What macroeconomic policies could facilitate that? As a start we have what I would refer to as a multiple equilibrium or a multiple objective problem We want capital from abroad. We want to sell our goods to external markets We want to keep domestic prices relatively stable. We want to build resilience to external shocks We want to diversify towards non-traditional exports and we want to do all of this quickly When investors and politicians both have much shorter time horizons And how do you manage this multiple equilibrium problem in macroeconomics? What great difficulty I may add or suggest the use of evidence and research helps But prioritizing is important and that may suggest different priorities at different times It might be perfectly acceptable to prioritize price stability today But if you're in the midst of a financial crisis then price stability is the least of your concerns Protecting output and jobs is much more important And often the macroeconomic policymaker has to be agile enough to switch from one policy priority to another depending on the circumstances The key instruments that we've used are counter cyclical fiscal policy A shift towards flexible inflation targeting and at least a dirty float of the exchange rate More recently macro prudential tools that and the regulation of the financial sector Have emerged as important for mitigating the channels by which capital flows By which capital flows could destabilize markets and I'll say a little bit more about that in a few minutes Within these broad frameworks of relatively open economies Some free float and the degrees of grayness Some degree of flexible inflation targeting There are gray areas and there are nuances It's not it's not it's not it's not a black or white it's not an either or situation Historically macroeconomists have thought of what the impossible trinity of Relatively stable prices relatively stable exchange rates and open capital accounts This is not just a theoretical issue in models. This is practically what we confront as policymakers on a day by day basis What tolerances do you have for price stability relative to an open capital account or what how do you prioritize an open capital account relative to the cost of Shocks in the exchange rate, for example Most countries from china to finland price a degree of financial stability is important The question then emerges is do you prioritize open capital markets or stable exchange rates? Capital account how open or how closed what pace of liberalization? There are no right or wrong answers I guess it depends on the savings rate of the country Countries with high savings rates such as china are much less reliant on foreign capital flows Countries such as south africa with the savings rate of about 15 percent of gdp is heavily reliant on foreign capital inflows And because we reliant on foreign capital inflows We have to have a degree of liberalization in our capital account A degree of liberalization that introduces vulnerabilities and shocks for us But the consequence of not opening up the capital account would essentially mean that you're limited your savings pool is limited To domestic investment and that domestic investment is too small To finance your investment needs Countries that have have more sophisticated financial markets have greater options But even here There's a there's a nuance countries such as south africa would very sophisticated financial markets Often see the transmission mechanism between a global event and a domestic shock Accelerated not not mitigated and so we have amongst the most deep and liquid Foreign exchange markets for example in the developing world But it does mean that we have one of the most volatile exchange rates in in in the real world If one is reliant on foreign capital, how does one take account of changes in sentiment? That have little to do with fundamentals building reserves counter cyclical fiscal policy And regulations on the banking sector that limit currency mismatches seems to be the way to go Today most emerging markets are not debating how to prevent money from leaving their country Most emerging markets are debating should we impose capital controls on financial influence Which is a very different situation from the 70s and 80s. It's a positive situation But when the u.s unleashed quantitative easing we saw the rand appreciate by 40 percent 40 percent of our manufacturing sector went out of business in four years It was a phenomenal adjustment By something that happened. Was it a market mechanism? No, it happened in another part of the world So brazil introduced capital controls to attempt to prevent money from flowing into the country and the jury is out Did this work or not? When you talk to brazilians, they think it worked when you talk to almost any other central banker or prominent economists around the world, they think that it didn't work They think that it was clumsy. It was led to a loss of credibility and the currency still appreciated massively Olivia blanchard the outgoing chief economist of the imf think that brazil was successful in imposing capital controls And the capital controls that they imposed in his words slow down the appreciation of the currency And so that's a key issue for economic policy makers that we've got to consider Financial globalization has increased the linkages or spillovers of monetary policy to from advanced economies such as the u.s Helene ray argues that we don't have a trinity of issues anymore It's a dilemma either you have an open capital account And you lose monetary policy independence to the fed Or you have a closed capital account and a degree of monetary policy independence And that's a big part of the debate that even in south africa we we embarking on What's presently on our table the slowdown in china Has affected demand for commodities. We're major commodity exporter iron ore coal platinum manganese copper prices are all down between 30 and 50 percent From the 1st of january 2014 china has not bought a single briquette of coal from south africa Not one. We shipped about 10 million tons of coal a year for the in the four years before that Dramatic impact on both volume and price for for our major exports Correctly the currency is depreciated to reflect those lower terms of trade And at the same time the prospect of tighter monetary policy in the u.s May and a stronger dollar further exacerbates the lower commodity prices and and capital flows to advanced economies Are we two more minutes? And so we confronted with a problem that most northern countries are not confronted with We've got rising inflation as a result of a weaker exchange rate But slowing growth The economy has grown at one and a half percent for the last three years So very weak growth in a context of rising inflation. And how do we manage that? Let me spend one minute if I may chair on what what are the big macroeconomic debates in the world today Is why is there slow growth in the world economy? And there are two broad views about this and i'm sure there's a range of intermediate answers The one view is called the secular stagnation argument That the world is in a period of low growth because there's a savings glut largely for demographic reasons And that in a perfectly functioning market Interest rates will fall fast enough and investment rates will rise to compensate for that sudden increase in savings But in the real world There's a large intertemporal gap between when savings rise and investment rises And that intertemporal gap means that the world economy is going to grow slowly for at least another three to five Maybe 10 years and you need very very low real interstates to balance That even negative real interstate. It's largely associated with larry summers, but not exclusively So that's the one school of thought the exact op and he would argue for incredibly low interstates negative real interstates Large fiscal stimulus on infrastructure and productivity enhancing investment At the other end of the spectrum, you've got the bis the bank for international settlements That argues that the problem in the macroeconomy globally is the exact opposite that Low interest rates channel money into financial speculation equity markets and housing booms and that does nothing for the real economy And that what you need to do to solve the investment problem is to raise the interest rate level So that you can discourage financial speculation and equity price bubbles And that will channel money into real investments and that's how you get out of this debate So there's a two very diametrically opposed views of the real economy and the key macro debates in the world And of course, we're watching those closely. Thanks