By Leonard Gentle · 29 Jan 2011
Once again we are being hamstrung by being forced to take sides in what the business media is presenting as the debate of the day. Should the Rand be weak or strong?
Minister of Economic Development, Ebrahim Patel’s New Growth Path (NGP) was released in December 2010 and, predictably, elite economists lined up to criticise it mainly on the lines that it asserted a greater role for the state, promised decent jobs and called for a more “competitive value” for the rand.
Of course Patel was then treated to the usual media trick – all criticism was simply lumped together as “opposition” to the NGP – from the Democratic Alliance wanting to castigate government for daring to suggest that the state must play a pivotal role in the economy (whilst of course liking the idea of a wage restraint) to COSATU, that wants the state to direct the economy (but doesn’t like a wage restraint). This lumping together served to close all debate, as if Patel were simply an isolated maverick and therefore not worthy of an investment of public intellectual energy and debate.
Now, however, Joseph Stieglitz’s call for the rand to be weakened has made the media sit up and take notice. Stieglitz can’t be dismissed as an economic ignoramus the way COSATU has been -- the man’s a Nobel laureate for god’s sake.
The real issue is not so much whether the rand is strong or weak, but why the South African government continues to be so enthralled by the free movement of capital. And this has been consistent throughout three ostensibly different economic growth programmes, GEAR, ASGISA and the NGP.
Fixed investment in plant, machinery and infrastructure creates jobs and development, while investment in bonds, hedge funds and derivatives only creates short-term profits for speculators, and their hangers-on, like fund mangers, the ratings agencies and their embedded economists. This is surely the lesson of the ongoing global financial mess.
The elephant in the room is the silence on capital controls, the very instrument that has been used by South Africa’s (SA’s) BRIC partners to tax the inward flow of hot money and limit the outflow. In the aftermath of the 2008 financial crisis and in the wake of the speculative rush to bonds in Brazil, Indonesia, India and SA, all of these countries (except SA) re-imposed capital controls, taxing capital inflows and limiting the outflow of profits.
These fast growing economies are the new trendsetters. SA has joined them in the BRICS group, but hasn’t followed their example.
Now Patel can speak of making the rand competitive, but the NGP is quiet on the vehicles to achieve this. It is left to Stieglitz to make the call.
How does Stieglitz contemplate devaluing the rand?
Interestingly, while he does make reference to capital controls, he mainly speaks about using reserves to buy dollars, thus weakening the rand-dollar exchange rate. This is problematic for at least two reasons.
Firstly, it’s a waste of idle capital, which could have been used for infrastructure and social services. Secondly, it will open SA to a run on the rand with no reserve back up. Lowering the value of the rand by buying dollars amounts to depleting reserves and in fact making the currency even more vulnerable. The more exposed a currency is, the more it is reliant on market forces and on the trade in currencies, which is itself a source of the current problem. Recall that the reasons for the capital inflows into SA have very little to do with the strength of the South African economy and everything to do with the crisis in the US and the EU, and measures for printing money in the US like quantitative easing and near-zero interest rates.
Why does Stieglitz call for a weaker rand? Because it will make exports more “competitive” and, Stieglitz says, competitive currencies are precisely what all the big developing countries such as China, Indonesia and Brazil are now doing. It’s the only game in town.
What are the arguments against weakening the rand?
A weaker rand fuels inflation because SA, which is still largely dependent on imports of capital goods and oil, will be increasing the cost of imports. Devaluing the currency will disguise SA’s lack of competitiveness. And because the strength of the rand is caused by capital inflows, and these capital inflows are offsetting SA’s current account deficit – we all should be celebrating because this is what is keeping us out of trouble.
So there are good and bad points to both arguments - for strengthening and weakening the rand. But weakening the rand by spending reserves in money markets is dangerous.
So what to do?
Looking back over the last 14 years we have had three economic programmes, GEAR from 1996, ASGISA from 2005 and now Patel’s NGP. Interestingly enough all have been launched at a time of problems with the rand. GEAR was presented by the Mbeki regime as a necessity to stabilise the currency after a run on the rand in the first half of 1996, ASGISA articulated concerns that the rand was over-valued; whilst the NGP too takes the view that the rand is too strong.
Strip away some of the language in the preambles and the three programmes sound remarkably similar with regard to capital movement. All insist on tight fiscal discipline, competitive interest rates and lowering exchange rates.
This is not to suggest that there are no differences between GEAR, ASGISA and the NGP -- there are. But each is driven by a current political conjuncture rather than any serious desire to change SA fundamentally. Much of the neo-liberalism of GEAR, from privatisation to fiscal austerity, to the interest rate regime decided by a privatised Reserve Bank, we now know was already there from the mid-1980s, but GEAR gave clear political signals that the ANC had ditched its liberation identity.
The media and their economists enthusiastically welcomed GEAR. Big business was very happy that the ANC had become business-friendly. On the other hand, COSATU was livid, whilst the SACP declared GEAR the initiative of a “1996 Class Project.” Mbeki cleverly held the Tripartite Alliance together by claiming that GEAR was a necessary macro-economic “stabiliser” to make the promises in the RDP possible. Over time, both COSATU and the SACP shifted from anger to speak of a “post-GEAR” consensus, after “Growth and Development” summits conducted under Mbeki’s watch.
ASGISA achieved a rare distinction. It was lauded by the media and business and welcomed by the SACP as proof that the post-GEAR consensus was now leading to a greater role for the state. Business welcomed state investment, which would “lower the cost of doing business.” The media called ASGISA one of Mbeki and Trevor Manuel’s great successes -- proof that the “tough love” of GEAR made possible the greater state expenditure of ASGISA.
The NGP, however, was initially attacked by all with the media, constructing a “coalition of the critical.” There were obvious assumptions that Patel was on the “left” and isolated and therefore ripe for attack. Interestingly enough schisms appeared between COSASTU and the SACP. The SACP welcomed it unreservedly with their Jeremy Cronin even going so far as to criticise COSATU pointing out that COSATU missed the extent to which this is supposedly a “paradigm shift” in the case of the NGP.
ASGISA marked Mbeki’s second term where he felt confident that he had marginalised his political enemies in the Tripartite Alliance (he was wrong, as subsequent events proved). The NGP, likewise, is an expression of a new political line-up behind the Zuma project, including the expectation that this project must deliver to the line up of forces that comprise the Zuma coalition.
But what is common to all three programmes – and their varying attitude to whether to strengthen or weaken the rand - is the commitment to an open-door policy on capital movement.
This was the elite compact that made the ANC’s peaceful victory possible in 1994. Majority rule was traded for SA’s monopolies, with global aspirations, to move their money freely in and out of the country, unfettered; and with all the state monetary policy commitments and fiscal commitment to low inflation to make this lucrative.
So the NGP speaks of jobs (even decent jobs), industrial policy, a state mining company, even a state bank, but at the same time it is silent on capital controls. Minister of Finance, Pravin Gordhan already made a commitment to further relaxation of exchange controls in his 2010 Medium Term Expenditure Framework speech, and is committed to fiscal discipline and low inflation.
This commitment to free capital movement – of which the current high value of the rand is a symptom – means that a whole series of measures have to be put in place to accommodate it. And these measures run counter to the grandiose promises of the NGP.
Thus, large reserves are required to protect a possible run on the rand (and so keeping capital idle instead of available for infrastructure); the bond market has become the key source of inward speculation and so escalates SA’s debt and places the country at the mercy of Standard & Poor’s and Moodies and their pernicious rating systems. Bond holders have to be kept happy by high real interest rates; and tight fiscal policies become necessary to keep the bond holders happy just when the state is being pressurised by the public to provide more and better social services – and jobs, jobs, jobs.
For all the talk of a “developmental state,” “industrial policy,” “jobs” and “poverty reduction,” the NGP continues in the trajectory of its predecessors. It’s not the state that is shaping the economic terrain; it is SA’s financialised corporations, the banks, fund managers and bondholders.
The ANC government, whether Mbeki or Zuma, simply cannot and will not break the liberation compromise pact. This is why the key is not so much which economic policy can come off the drawing board, but what the political balance of forces are.
In the past the rationale for SA’s growth path was that the interests of SA’s monopolies took priority. Mining and its thirst for cheap labour and cheap energy shaped the contours of apartheid capitalism; the desire to go global prompted the reform agenda of the 1970s and the talks of the 1990s. GEAR was a necessary political device to stabilise the currency and to allow the relocating monopolies the space to shift to London and take their rand-denominated wealth with them.
What is lacking is the political will to confront these monopolies and the mobilisation of public opinion and campaigns to win economic policy battles, not so much in the business press, but in the streets, homes and workplaces and ballot boxes where ordinary people can make their choices.
The SACP has it wrong the NGP is not a “paradigm shift.” It’s back to the same discredited policies of Mbeki. The one rhetorical shift was the call for “decent jobs.” Now Gwede Mantashe has just poured cold water on that promise too.
Manipulating Exchange Rates
To me Leonard's argumentation is also up in the air. Money, of itself, has no real value. It is purely a representation of the real value of the actual goods and services on offer in an economy. That is the bottom line. If the actual goods and services available in an economy do not match up to the purported value of the currency then the purported value will in due course shift closer to the real value. Unfortunately the shift is not immediate, there is a lag and politicians and others are forever tempted to exploit that lag in order to defraud the public. Robert Mugabe did so and totally destroyed the Zim dollar in the process. Manipulating exchange rates is playing with a currency's purported value and is in the same category as Robert Mugabe's debasing of the Zim dollar. Real wealth is not produced by manipulating exchange rates.