This week Mike Schussler wrote a widely read article for Moneyweb in which he argued that rand weakness does not help the manufacturing sector or economic growth, and why South Africa’s excessive consumption relative to productivity threatens yet further depreciation in the rand.
Schussler’s piece is called Just another fishy story.
Here’s what I had to say:
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 re-balance the economy, reemphasise production before consumption, and would give rise to a far stronger and more stable currency that fosters saving, capital accumulation, and competiveness.
I also thought Ian Cruickshanks’ bit was good. It’s true and flies in the face of the mainstream view on the rand and competitiveness.
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.
Hopefully someone’s listening. A weakening nominal rand, which is really just the result of inflationism, is making SA less competitive. As Ian points out, the currency has lost nearly 70% of its nominal value since 1994, yet manufacturing is in stagnation and has fallen dramatically in terms of its proportional contribution to GDP.
South Africa’s economic policy is broken, and a weaker rand is the tattered symbol of that mismanagement.