The global economy is poised for a full-blown “currency war”, where countries deliberately devalue their currencies in order to boost exports and stimulate economic growth. At the recent IMF and G7 meeting in Washington, the IMF’s call for a ceasefire between the two main combatants, the US and China, failed. IMF chief Dominique Strauss-Kahn warned that “there is clearly the idea beginning to circulate that currencies can be used as a policy weapon. Translated into action, such an idea would represent a very serious risk to the global recovery”.
The US economy — despite the massive stimulus package and Federal Reserve Bank intervention in dropping the interest rates — is still on a slow path to recovery. The Democrats are getting desperate. Mid-term elections loom and the rise of a right-wing movement, the Tea Party, are threatening the Democrats’ control of the Congress and Senate. The Tea Party is playing on the frustration of the jobless and the fear of simple-minded Americans who appear to have no clear understanding of how the world economy operates.
Washington is threatening China with trade sanctions if the yuan continues to remain grossly undervalued. China has committed to currency reforms but at its own terms. A rapid appreciation of the yuan may be favourable to the Americans but it would be devastating to the export-dependent economy of China. It is not in the best interest of China to have the yuan’s value rise for the sake of appeasing Washington.
It’s a bit hypocritical of the US to lambast and threaten China when it’s flooding the system with liquidity and stimulus packages. That the Fed and US Treasury have failed to devalue the US dollar cannot be China’s problem.
China is blamed for the surge in global trade imbalances. The G20, IMF and Organisation for Economic Co-operation and Development have tried to redress these global imbalances. But China is not about to surrender its greatest weapon any time soon. China has said that its currency reform policy does not necessarily equate to yuan appreciation.
Japan also recently intervened for the first time since 2004 by selling the yen to prevent its value from rising against the US dollar. The Bank of Japan further dropped benchmark interest rates to 0.1%. Other countries such as Brazil, South Korea, Thailand and Taiwan have also stepped in to tweak their currencies and prevent massive inflows of short-term capital to prevent asset bubbles.
South Africa, not wanting to be left out of the limelight, has also entered the currency fray. The rand has appreciated by more than 28% against the dollar since the beginning of 2009. Minister of Finance Pravin Gordhan and the Governor of the Reserve Bank have expressed concern about the strong value of the rand and its impact on the economy. But the Governor did not propose immediate intervention by the Reserve Bank. The value of the rand will be left to the market to determine.
But Gordhan has been speaking about policies that guard against currency volatility and that ensure its competitiveness. This is the same message that was conveyed by Jacob Zuma to the delegates of the ANC national general council opening session when he said he wanted to see a “stable and competitive” currency. The ANC seems to have a particular obsession with the value of the rand. As a country we seem to imagine ourselves as a largely manufacturing and mining economy, when reality does not support this delusional view.
A weaker rand has never really led to job and economic growth. What we have experienced to the contrary is “imported” inflation due to the weaker rand. In 2001 the rand depreciated by more than 42% and reached its lowest value ever of R13.84 to the dollar on December 21 2001. The current account deficit shrunk. We recorded a rise in merchandise and gold exports, though in real terms merchandise export earnings had dropped. Annual real GDP growth for 2001 was a 2.7% compared to 4.7% growth the previous year when the rand was stronger.
In 1994, when the rand was about R3 to the dollar, GDP growth reached a historical high of 7.60% in December that year. This is in stark contrast to the prevailing economic wisdom among our policymakers that a weaker rand is vital to economic growth. Historical data refutes such notions.
Adrian Saville, a chief investment officer at Cannon Asset Managers, conducted a study using 30 years of data, which demonstrated that there is no correlation between a weaker rand and an increase in manufacturing.
“The closest relationship between movements in the rand and manufacturing growth that the study could identify was a roughly 10% explanatory power, which occurred when observing a lagged manufacturing response time of 12 months and a currency move over six months,” he said.
Saville went on to say: “For the country to embark on a rand-weakening exercise could prove more detrimental than beneficial: the success behind South African manufacturing and its global competitiveness lies elsewhere. With labour being the single most important manufacturing input, labour productivity cannot be overlooked as a source of improving competitiveness.”
Our GDP has grown at an average of about 4% over the past 16 years despite the depreciation of rand over that period, which confirms that there is no direct relationship between the value of the rand and GDP growth. The fact that there has been a so-called “jobless growth” is also not a consequence of the value of the rand. The economy has been creating jobs in sectors that required particular skills as opposed to more labour-intensive sectors that were not creating a sufficient number of jobs. South Africa’s economic growth has been fuelled by knowledge-based sectors. Policymakers ought to recognise this when formulating measures intended to spur growth.
The government should overhaul the education system to respond to the demands of the economy. But there is no clear long-term economic strategy to which our education system must respond to. It is not entirely clear which industries we wish to develop and which new ones we’d like to create as part of broader economic transformation. Government spending on infrastructure development projects has cushioned our economy against the recent global shocks, but these counter-cyclical expenditures are not sustainable. With potential future fiscal constraints the role of government in influencing the direction of the market economy, as shown by developed economies at the moment, would be limited. It is vital to have established industries that contribute to sustainable economic growth.
In 2009 Cosatu leader Zwelinzima Vavi said: “We are on a completely disastrous path … we need a change. We need an exchange rate that will go back to 10 (against the dollar) for South Africa’s manufacturing sector to be given another breath of fresh air.” We are indeed on a disastrous path if policymakers continue to have an absurd obsession with the value of the rand. The minister of finance must let the rand find its value in the market. Our economy is not the same as other emerging economies who benefit from weaker domestic currencies.
It is perhaps time to send our senior ANC leaders to the “naughty corner” to do their homework instead of going to China for political and economic lessons.