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No time for business as usual

- Wits University

Central banks find themselves at a crossroads of holding to old mandates but having to face up to new world challenges.

There is a surging argument for central banks to become “more radical” and directly responsive in a time of intersecting pressures bearing down on the world, and in particular as the climate crisis deepens.

Professor Adam Tooze in conversation with Reserve Bank Governor Lesetja Kganyago.

Breaking with orthodoxy smartly could wedge open a window of opportunity for emerging economies like South Africa. If the country can move swiftly enough and invest and fund appropriately to realise just energy transition targets there is a chance for the country to reverse its reliance on coal, become more climate-proof and bolster its potential in adding to Africa’s role as reliable renewable energy provider in the world.

These are the sentiments of Professor Adam Tooze, the British-born economic historian, author and director of Columbia University’s European Institute in New York in the United States.

Tooze has become one of today’s pre-eminent global thinkers and analysts. He also comments widely on ways to navigate climate change using the lens of economic history. As part of the launch of Wits University’s new Standard Bank Chair in African Trust Infrastructures, situated in the Wits Institute for Social and Economic Research (Wiser), Tooze met with various South African stakeholders, including Reserve Bank Governor, Lesetja Kganyago, at the Wits Business School. This dialogue session between Tooze and Kanyago was facilitated by Professor Imraan Valodia, Pro-Vice-Chancellor for Climate, Sustainability and Inequality at Wits.

Tooze is a key advocate of shaking up prevailing economic conservatism of central banks. His call is for more proactive economic strategies and innovative instruments to be available to more people in a broadly inclusive model ready to meet the unprecedented challenges presented by climate change impacts.

“There is a moment, surely, when the central bank of a major emerging market economy and a leading member of the G20 [South Africa] also has to say there is a historic challenge in front of us here; a whole societal challenge, which we have to figure out our relationship with,” Tooze told Kganyago.

“In an era that demands radicalism, to say ‘never trust the radical central banker’ feels to me to be almost like a cop out.”

Tooze said it can no longer be business as usual for central banks to remain in the confines of the approach of “staying in your lane because it’s what central banks were designed to do”. He added that the coming climate pressures will mean millions more people will need help, in the form of credit or other financial instruments, as their lives and livelihoods become fundamentally altered. And the impact of climate change will inevitably reshape society, including reshaping banking and banks’ roles.

The historian has previously joined the dots between climate change impacts being triggers for global financial crises and he’s been critical of central banks for being “defensive and narrowly focused on managing financial risk” instead of having strong strategies to meet the challenge of mitigating the effects of the climate crisis and other social ills.

For South Africa, he also warned of an impending expiry date for the South African Reserve Bank’s mandate that was framed by political context of 30-years ago. Tooze said the optimism of democracy in mid-1990s informed trade-offs that also side-lined fundamental issues like addressing employment and poverty, by seeing these concerns as “reserved and separated from decisions about monetary policy”. But he warned: “I’d be very surprised if that 1990s compromise holds much further into the 21st century.”

His comments come against the backdrop of South Africa sitting at 32.7% unemployment; an electricity generation crisis that has seen extended periods of rolling blackouts in the last few years, worsening to a crisis summer, and the country in the position of the 12th largest carbon emitter in the world. In 2019 the Global Carbon Atlas put South Africa at 1% of global greenhouse gas emissions; China in the top spot is responsible for 36% of annual global emissions. Added to this, South Africa’s ambitions of a just energy transition plan announced in November last year at COP27 in Egypt, will need funding to the tune of  R1.5 trillion over five years to be realised.

Kganyago though, countered that central banks have to hold firm. He said while the SARB cannot and is not divorced from needing to respond to climate emergencies and a just energy transition agenda, it also has to be able to withstand the urge of being pulled in multiple directions as more pressing needs emerge. He said central banks cannot be called on to solve a slew of social problems to the point of detracting from its constitutionally mandated objective to protect the value of the rand and also to preserve financial stability and price stability.

He said: “A creative banker is as dangerous as a creative accountant” and added that progress is hampered when so-called “comprehensive, inclusive strategies that go nowhere” give hollow hope of single institutions, like the central bank, being a panacea to all crises. He cautioned too that South Africans should not forget how easily state institutions have been targeted for corruption and looting and the real threat that this represents for stability.

“Institutions in a democracy matter, quality institutions with clear mandates matter even more. And in case South Africans forget, think of how our institutions in the era of state capture served something other than what we designed them for … It is not a scarecrow to say that the Reserve Bank was targeted by proponents of state capture – be alive to that. And so we must not pretend that in this society that there are no contestations and there are no evil forces that seek to change our democracy,” said Kganyago.

Speaking after the dialogue session, Tooze said the open communication and the governor’s willingness to engage publicly was most encouraging. Tooze said this adds to public trust, and South Africa’s advantages of pluralism and sovereignty.

As a historian, Tooze said, South Africa is the “one of history’s great stories of emancipation”. South Africa’s next steps will be determined by what multiple actors can do to mobilise to address inequality and poverty and to pull back from the dysfunction of key infrastructure collapse including the electricity crisis, while preparing for the overarching threats of climate change impacts.

“These are problems that need fixing because if it fails history will remember this moment – just one generation later – as another nail in the coffin of the optimism of South Africa in the mid-1990s,” he said.