Does a Weak Rand Make Us Strong?

One of our most respected economists Mike Schussler wrote an excellent piece on Moneyweb about the weak rand, pointing out – among other things – that it has not stimulated exports to the extent that might have been expected. Given that the ZA currency remains at weak levels, ZA Confidential asked some of our experts for their reactions to what Mike had to say….

John Cairns from RMB:
The rand is helping us. Exports will respond and so too will imports. This, though, will take time – and anyway in South Africa this price effect is quite small, meaning we have to see large rand moves to have any real economic impact (the price elasticity of mining exports in particularly is very low). The alternative anyway to rand weakness is too ghastly to contemplate: jacking up rates aggressively in order to attract more capital. Arguably, what we are seeing is the perfect adjustment – a slow steady decline in the rand and a corresponding slow adjustment in the economy. It would be far worse if this adjustment was forced to take place quickly, whether by rates hikes or a short, very sharp currency fall. 2014, of course, has started with sharp rand weakness; let’s hope this doesn’t become a run and force a rapid economic adjustment.

Russell Lamberti of ETM:
Mike Schussler hits the right notes. Logically and empirically a weak nominal exchange rate cannot help grow the economy or make it more productive – any more than diluting the quality of a car’s fuel can make it go faster. It was also nice to see Mike have a little dig at Jo Stiglitz, if only because it is painful to see how easily a foreign ‘heavyweight’ like Stiglitz, with an impaired understanding of monetary economics and practically zero understanding of South Africa, can influence the discourse. Mike has helped debunk some common myths in this article. It’s not just that a weak rand doesn’t help the economy; it actually hurts it. What can be done? It’s time for South Africa to have a “strong and stable” currency policy. SA needs to recognise that productivity and competitiveness are driven by capital accumulation. More capital means higher productivity, and more savings means more capital, and a strong and stable currency means more savings. The only sustainable way to achieve that is by reversing current excessively loose monetary and fiscal policies, balancing the budget (after interest payments on debt), keeping interest rates well above inflation, de-monopolising State Owned Enterprise-dominated sectors, reducing the size of the state, and slashing business and labour red tape. These reforms would rebalance the economy, re-emphasise production before consumption, and would give rise to a far stronger and more stable currency that fosters saving, capital accumulation, and competiveness.

Dawie Roodt from the Efficient Group:
Sadly……Mike is right. ‘Experts’ like Stiglitz and Cosatu prescribed a weaker currency as the answer to our anaemic growth because it is the easy option. A weaker rand (is supposed to) adjust our local costs structures by stealth (real rather than through more efficiency) but what happens in practice is that organised (and militant) labour can also make sums. They quickly learned that if the rand falls that they (and the rest of us) are all poorer. So, instead of accepting lower (rand adjusted) wages they intimidate and disrupt until their members’ wages are adjusted again (to the detriment of the unemployed and the newly unemployed). The only real answer is not a currency adjustment but good old fashion hard and efficient work – something we will eventually learn, I hope!

Ian Cruickshanks of the SAIRR:
The extent of the decline in the currency since 1994, and the decreasing competitiveness of our exports in global markets, is primarily due to the steep depreciation in the rand’s nominal effective exchange rate – that is the trade-weighted rand. It has fallen from an index level of 180 in 1994 to the current index level of around 60 index points. That means two thirds of the rand’s previous buying power has been lost over this period. This trend exacerbates the rocketing cost of mainly-imported capital equipment needed in the manufacturing sector, which overwhelms short term gains in current global price competitiveness from current rand weakness. Manufacturing has fallen from 20% of the economy to 10% over this period – a weak currency kills the sector.

It must be a concern if our exporting industries cannot reap the benefits of the weak rand, and it is of great concern that this weak currency is likely to stoke inflation, with all the ills that will bring. For the moment we will watch, wait and cut back on our purchases from Amazon.

Tweets of the Day:
Mark Twain (@MarkTwainQuote): Action speaks louder than words but not nearly as often.
Barry Hilton (@barry_hilton): I called a 24hr plumber with a plumbing emergency last night. He told me not to worry, he’d be around within the next 24 hrs. #Hermanus

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