Extract
from “South Africa: Think About How Country Works Before You Pick Your
Rand” by Michael Power, Strategist, Investec Asset Management.
First published on the 7th March 2008 by the Business Day
“...My essential view -- which I have doggedly maintained for more than a
decade -- is that the rand remains structurally overvalued. The main reason
I give is that the Rand's current trading range is trapped in the
straitjacket of what works for SA's first economy. But, at this elevated
rate, the overvalued rand prevents the second economy from having even the
remotest of chances of working, literally and metaphorically.
The result? We have unemployment of more than 25%
as a quarter of all South Africans remain priced out of the global labour market, plus 12,7-million
South Africans living off social grants from the national treasury, all set
within a dichotomous di-conomy where those who
live in the formal first economy (myself included) cannot begin to understand
what it means to live beyond it.
My concern about the Rand's value is not just economic; politically, it
lies at the heart of the dialogue of the deaf now taking place between left
and right: it seems as though neither side can hear (or even wants to hear)
what the other side is trying to say.
Let's start with the basics. SA is living way beyond its means; we have a
current account deficit of 7,8% of gross domestic
product (GDP). To balance our national books, we need inflows of foreign
capital of about R3bn a week, or R600m a working
day. Those economists who say it is "natural for a successful
developing country to run external deficits and so import capital"
need to read pretty much any post-1980 book on real-world economics. Even
at the risk of generalising, no, it is not
natural to run a deficit if you want to be successful. The emerging
economies that have grown most -- essentially the east Asian Tigers and now
the waking dragon that is China -- have been the ones that have put
export-led growth first by adopting a hyper-competitive currency; this puts
current account surpluses at the centre of their development strategy. I
feel sorry for those economists who simply cannot accept that the
"developing countries run deficits" piece of conventional
economic wisdom is precisely wrong. Sure, occasionally when global
liquidity is abundant you can run deficits and get away with it. But, to
paraphrase Warren Buffett, when the tide goes out, then you see who has
been swimming naked. And boy, did that tide go out! And sure enough, now
everyone can see that SA dispensed with its (no doubt Chinese-made)
swimming trunks years ago. Save for the Euro-converging Baltic states, no major economy is less covered than we are. None.
All this raises a deeper question as to just what has been going on in SA
in the post-2000 period. Here is my summary. After the rand fell to R14 to
the dollar in late 2001 and interest rates were increased to squeeze out
imported inflation, we created a low base from which the expansion of the
past six years could be built. Fortuitously or coincidentally, as commodity
prices started to take off in 2002, the rand recovered. Thus we imported
deflation, thereby permitting interest rates to fall. This gave birth to
the mother of all credit cycles, at least for those of us lucky enough to
live in the first economy.
Car sales, retail spending, house prices ... all exploded. Banks supported
this bonanza with liberal lending; many of us added to this consumption
boom by saving far less. Party time galore. The
current account surplus vanished; in its stead, a huge deficit bloomed.
Meanwhile, a strengthening rand eroded our manufacturing competitiveness:
goodbye textiles, footwear and furniture-making; only the Motor Industry
Development Programme prop saved our car assembly
sector and yet, even with that prop, our weekly automotive trade deficit
last year was up to about R800m. Dutch disease has ravaged our economy like
a cancer, but then who cared when we first-economy types were all having so
much fun? (Dutch disease is the economic affliction in which a windfall
from higher commodity prices strengthens the currency and, in so doing,
renders much of a nation's manufacturing base uncompetitive. And the truly awful thing about Dutch disease? It is a
curse in the disguise of a blessing.)
Now comes SA's hangover. Retail sales growth is
negative. Some house prices are falling. Car sales have not been this bad
in years. Our purchasing manager s' index is well below 50. And to cap it
all, those fickle foreigners -- shame on them! -- are
leaving our shores with their capital and dumping our rand in the process.
Sound familiar? It should -- SA has become a mini-US.
It is time to catch a wake-up, SA. Is this roller coaster we are riding
going to be the way we continue to run our economy for ever and a day? Is
our economic development plan to become little more than a case of surfing
the ebb and flow of the credit cycle, while all the time being subject to
the capricious kindness of strangers and their capital? Will we ever remain
little more than a slave to America's unhealthy rhythms? Must we wait for
the planets to align in our favour again, enjoy
the party that follows, only to rue the hangover that follows thereafter?
And worst of all, by far worst of all, are we in the first economy going to
continue to avoid addressing the plight of those trapped in the second
economy, unemployable in today's global economy given today's Rand's
exchange rate?
And do we practice this last denial by turning a blind eye to the
economically disenfranchised, buying off our consciences with the
equivalent of an annual 3% of GDP transfer by way of social grants for 12,7-million people? (If you answer "yes" to the
latter, shame on you.)
So now it is my turn to play a game with you, dear reader. Think carefully
before you answer this question. I offer you the following choice. Do we
build SA's economy by sticking with the "First Economy First"
approach and go with a strong rand? Or do we do what east
Asia did and adopt a "Second Economy First" approach, using a
more competitive and so much weaker rand? You know which option I would go
for. Now you choose.”
© 2008
Progressive Initiative. The
Progressive Initiative rejects all forms of discrimination, embraces
democracy and encourages transparent politics. The views expressed in this
site are those of its members.