The South African Civil Society Information Service

The Currency Wars, the G20 and the Intrepid Finance Minister: Who Benefits from the Strong Rand?

By Leonard Gentle · 19 Nov 2010

Picture: Republic of Korea

The ongoing saga of the United States of America's (US) accusation against China – that it is deliberately pushing down its currency – and thereby defeating US attempts to get balance in the world economy, trundled on into the G20 meeting in Korea. At the same time, middle range countries such as Brazil, South Korea, Russia and South Africa (SA) have been battling with currencies that are hugely inflated. 

Accusations flew fast and furious that countries were using currency devaluation as a form of protectionism.

As if to demonstrate their contempt for the G20 talk-shop, the US promptly decided to indulge in another round of quantitative easing – to the tune of US$600bn – essentially a form of printing money and then buying back bonds from private banks and crediting the banks’ balance sheets with money. 

Whilst in theory such money could then be used by banks to lend to other capitalists who would invest in plant and machinery and stimulate jobs and economic activity, this is not what has happened in practise. Bankers and corporations are now little more than speculators looking for opportunities to make money by buying and selling bonds, derivatives and other financial instruments called “financialisation,” which has become the dominant form of economic activity in the course of the last 30 years.

And if you are getting free money from the Fed, and it is cheap money that you can borrow at very low interest rates, then where would you look for opportunities to make more money? Well, obviously, in countries where you can make secure returns on low-risk bonds. And who are these countries? These would be countries with higher interest rates of course...like SA, India and Brazil, where interest rates are in the 5-10% range, while they are a meagre 0.5% in the US and in the European Union (EU).

So the banks are using cheap money to buy bonds and equity in key developing countries, in the currency of the country that the bonds are being purchased in. In the case of SA, so far, the buying of bonds has gone up by 90% over the course of 2010.

Thus, it is not the World Cup that has led to a massive influx of foreign investment in SA; it is the interest rate differential between what is charged in the US and the EU and what is on offer in SA. So it is, as they say in the US, a “no-brainer” to take the cheap money and invest it in bonds in Brazil, India and SA, which is driving up the value of the Real, the Rupee and the Rand.

Why has the US done this? Well, because they have already cut interest rates to nearly zero and their treasury bonds are not attractive to speculators -- and also because they already have a US$12 trillion debt and are reluctant to increase their budget deficit even further.

So, printing money it is.

Why are they doing this when the other G20 countries are foaming at the mouth at the low value of the dollar? Because they can…they are America and they can get away with it -- or, at least, they can for the moment. But we are seeing a shift in power relations in the world, away from the mono-polar world of the late 20th century, which the US could so proudly declare, the “American Century.”

So why does China not buckle under US pressure to appreciate the Renminbi? Well, actually China has slightly increased the value of the Renminbi in comparison with other currencies, but certainly not enough to satisfy the US. And why do they dig in their heels? Because they can.

But China’s power rise is offset by its own internal weaknesses. It has overtaken Japan as the world’s second biggest economy, but its per capita income is still very low compared to the US and many other countries. Thus, China’s success has been based on neo-liberal capitalism, presided over by an authoritarian state with only a weak social base.              

With the old power – the US – in decline and the pretender to the throne – China – still beset with it own problems, there is a space emerging for independence, for a new path that is not merely about kowtowing to the dictates of one superpower.

Already the old order institutions of US domination - the International Monetary Fund (IMF), the World Bank (WB) and World Trade organisation (WTO) - no longer command the kind of shock and awe power they had before. The IMF and the WB have been used, since the presidency of Ronald Reagan, as vehicles for US power and as instruments for imposing neo-liberal policies on all countries. 

Much has been made in some media circles about the fact that the IMF has agreed to Germany and France giving up seats for China and India to have greater voting rights in the IMF. But this is a small shift. The real indicator of the superpower decline has been the emergence of the G20 itself taking over the role that the IMF was supposed to play and showing that the US can’t simply stand back and have the IMF do its bidding, but that it needs to engage a broader range of other elite powers. China, on other hand, does not yet have the global muscle and formal institutions to force other countries to do its bidding. 

So, although the G20 can be dismissed as a talk shop, its very existence speaks to a more complex play of forces than the old mono-polar world of the 1990s. The very existence of other power blocs, including the BRICs, of which South Africa covets membership, further illustrates these power shifts. These shifts open possibilities for countries to pursue independent paths for development that are not simply at the behest of the US and its institutions of globalisation (the IMF, WB and WTO).

In this regard, it is not so clear cut - as argued by many a media economist - that that there is nothing that can be done by the mid-range countries to intervene in the currency wars. Of course they cannot use free market mechanisms like buying dollars on a huge scale (for example, buying US treasury bonds like China is doing). They simply do not have enough reserves and their economies are miniscule in comparison with the US or China. 

But there are other responses in the context of the spaces being opened by the power vacuums globally. Options like bringing down your own interest rates and attempting to smooth out the differential with the US and the EU and thus make things a little more unattractive for speculators. Options like re-introducing capital controls – either imposing conditions on inward flows or making outward flows of capital more difficult. This latter option is precisely what countries like Brazil and India are doing -- echoing what Indonesia did after the 1997 Asian crash. 

And in this scenario, even the IMF after 30 years of saying the exact opposite, has endorsed such measures while the most recent G20 communiqué “effectively endorsed the broad direction among developing markets towards capital flow protection.”

These are measures, which would have been regarded as so heretical in the past, that a country was sure to be punished by a ratings downgrade and the threat of capital flight.

So why is South Africa doing neither? Not substantially lowering real interest rates and - wait for it - not only not imposing capital controls, but actually doing away with the few that still exist.

One may not be surprised that SA’s privatised reserve bank has no appetite for aggressive interest rate cuts. After all the South African Reserve Bank has been strangling the South African economy for years.

But why then when fellow sufferers, Brazil and India, are imposing capital controls and the IMF is even prepared to sanctify these actions, is South Africa doing the opposite? For which the business media in this country have lauded Finance Minister, Pravin Gordhan. This, after the Rand has been through its greatest turmoil in the last 14 years, enduring four crashes, and now a 27% escalation to the point where it hurts.

Unless one wants to entertain the unkind thought that the man is simply not up to the job, one is forced to conclude that there are vested interests here that the finance minister and his ANC government are kowtowing to.

Who gains from high interest rates and inflated currency? Well, bond holders in Rand-denominated bonds who have access to easy money in the US and the EU for one. And South African citizens who want to take Rands out of the country and then buy Dollars or Euros overseas.

Now who might that be?

British economist, Ben Fine, has long alleged that much of SA’s political and economic policies in the apartheid era were shaped by interests of its largest monopolies who in 1985 owned up to 85% of all shares traded on the Johannesburg Stock Exchange -- Anglo American, Liberty Life, Old Mutual, Rembrandt-Richemond and Anglo’s offspring’s like SA Breweries.

In the 1990s, under the ANC, these companies relocated offshore whilst Gencor bought out the shell BHP to create BHP Billiton and ex-Eskom employee, Mike Davis, set up Xstrata. With the active complicity of Gordhan’s predecessor, Trevor Manuel, they were all allowed to relocate offshore. In the process they created SA’s current account deficit problem, as profits and dividends earned here now need to be paid offshore.

According to Fine, “The broad thrust of economic developments and economic policy since the end of apartheid has been to manage the globalisation and financialisation of South Africa’s domestic conglomerates, whilst sustaining their profitability on core activities within the domestic economy itself. In particular, high interest rates have allowed for short-term capital inflows to compensate for long-term capital outflows, and exchange controls have been successively diminished to prevent the Rand from collapsing at the expense of Rand-denominated capital exports.” 

Wits University’s Corporate Strategy and Industrial Development Programme has gone even further, stating, “As much as 23% of SA’s wealth went abroad in 2007. These outflows amounted to more than R450bn that could have been used for domestic investment, job creation and economic development."

Capital flight from SA is not a new phenomenon. Successive apartheid governments turned a blind eye to illegal capital flight by big business. Total capital flight between 1970-88 was about 7% of gross domestic product. The evidence is that it has only worsened post-apartheid.

It is surely time for the government to address the issue of capital flight, both in terms of the expatriation of wealth, as well as lost revenue through tax evasion by the super rich. But recent announcements from the Treasury and the Reserve Bank show the government is doing the opposite.

So the more things change, the more things stay the same. Apartheid policies benefited the South African conglomerates at the expense of the black majority, whilst they were largely confined to these borders. A new ANC government and its successive finance ministers, whilst talking tough about transformation and a developmental state merely carry out policies, which help these become global behemoths in the period of neo-liberal globalisation at the expense of a more rainbow colour of people. 

After the ex-South African conglomerates took blows from their foreign investments in the crisis of 2008 and 2009, they are doing very well with shifting investment into bonds and equity in South Africa. Speaking at a Eurofinance conference in Sandton, ex-Anglo executive turned author, Clem Sunter noted that “The benchmark Standard and Poor’s 500 stock market index in the US was now 20% lower than it had been in 2000, while the JSE all-share index had trebled in value…unlike governments, which were stuck with their ailing economies, multinationals were able to switch operations to areas where there were growth opportunities.”  He forgot to add his appreciation to our government for making this possible with its policies of high interest rates, a freely tradable Rand and no capital controls.

They do very well – in London and Sydney - with a strong Rand, thank you very much. Could this be the reason that Gordhan is relaxing exchange controls even further? Nice work if you can get it!            

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