SANE Views

Vol.2 No.4, 24 January 2002

Inquiry into the Collapse of the Rand

Johan van Zyl
Pretoria
January 2002

SANE board member Prof Johan van Zyl has drawn up a submission on behalf of MWU/Solidarity questioning the focus and scope of the Myburgh Commission of Inquiry. This Commission has been charged with the investigation of the collapse of the Rand. A slightly modified and abbreviated version of this submission is presented here.

The Myburgh Commission of Inquiry will focus only on particular, possibly irregular, transactions in the foreign exchange market, and the efficiency of current administrative procedures to control these. Nothing further. The deeper, more basic causes of the dramatic fall in the rand, related to current economic or social conditions and policies, will not be investigated,

We regard the terms of reference as much too narrow and indeed quite inappropriate under current circumstances in our country.

Our main concern is the following: even if any technical loopholes around currency dealings should be blocked, the more important basic reasons for the disastrous fall in the Rand will continue to exist. In other words, the whole drama could easily repeat itself in future. The [unnecessary] suffering of all ordinary South Africans will simply continue.

Even within the narrow brief of the Commission there is a serious flaw in that the basic structure of the foreign exchange market today differs very significantly from what it was until about the middle 'seventies. In those days the ratio of real, i.e. trade-based foreign exchange transactions, to purely speculative dealings was about 80/20. Over the last decade or more this ratio has been turned upside down. Today speculative transactions constitute more than 90% of foreign exchange dealings. Small wonder that there is so much talk these days of "the global casino" !

The upshot of this considerable structural change in global forex markets is that the exchange rate of any particular currency is currently much more at the mercy of multi-national speculators than ever before in history. Any perceived weakness is likely to be ruthlessly exploited to reap speculative capital gains, especially in relatively thin markets. Currently the "emergent market" of the rand potentially qualifies admirably for such a speculative attack - provided of course that some basic [perceived] weaknesses exist in the first place.

Recent policy-making: were the right options taken ?

We do not like saying this but the recent raising of interest rates by the Reserve Bank is an unfortunate example of bad policy-making.

When the rand was falling sharply for months on end many commentators were warning about its impact on inflation. Yet at the time, the Reserve Bank and other senior government officials stated publicly that they were not concerned that the official inflation targets were in any danger. Clearly they have changed their minds and have now increased interest rates in an attempt to combat the inflationary danger that they kept denying for many months. What makes this step so extraordinary and ominous is that since the catastrophy of Sept. 11, most [major] countries in the world have actually lowered their interest rate patterns to counteract an impending world-wide recession. South Africa cannot escape such a broadly-based recession.

The trouble started when officialdom decided to do practically nothing to stop the obviously severe and prolonged collapse of the rand. Instead, they advocated simply "sweating it out". Why ? What for ? What was their thinking ? For example, why did they not introduce exchange controls ? These crucial policy questions were never addressed nor answered publicly. Instead, all we heard repeatedly was a statement that "the fundamentals of the economy are sound".

Speculators who were directly involved in the problem were clearly not impressed. This is basically why we are so concerned that unless the relevant issues are addressed solidly and visibly, the current most unfortunate drama could easily be repeated in future. And, once again, ordinary citizens will be the innocent victims of important but controversial policy decisions taken by "high authorities".

It seems clear that some crucial [especially monetary] policy decisions about economic stability in our country are being taken essentially behind closed doors. In turn, the public at large is not adequately informed but simply expected to "understand". But what about the understanding of the monetary authorities themselves?

We are well aware of the government's strong commitment to obeying the policy dictates of the so-called "Washington Consensus". But again, this major economic policy stance has never been subjected to public scrutiny. This is hardly "transparent governance" !

It is for such reasons that we feel strongly that the Commission simply must expand its terms of reference. Its appointment represents a golden opportunity to bring out into the open some key policy issues that face our country which, perhaps ironically, the world's big-time speculators have now so pertinently brought to our notice.

Some key broader issues to consider

At a recent MWU/Solidarity workshop, the overall consensus reached was that "the basic underlying cause of the sharply falling rand is a significant lack of confidence in the future of South Africa". Clearly this implies very much more than suggesting that some technical irregularities in foreign exchange dealings were mainly responsible for the collapse of the rand. This is why a narrow focus on only such technical matters is likely to be widely regarded as merely a cover-up operation.

A major fundamental underlying issue identified in the workshop is the sharply dualistic character of the South African socio-economic system. At present, this critical factor is hardly recognised by the authorities.

The key point here is that South Africans at large do actually live in "two worlds". The dividing line is no longer mainly that of skin colour as in our Apartheid past. At present, it is much more an economic development issue. In everyday fact, we have two economies viz. (a) a modern, well-developed sector but also (b) a large marginalised, under-developed sector - mainly that of townships and rural areas which are heavily dependent on the modern sector both for jobs and for the production of the basic necessities of life.

Essentially, what needs to be done is to make these areas more self-reliant i.e. to enable citizens who live there to take greater effective control of their personal destiny. This boils down to helping these local communities to become "working local economies" - as opposed to being merely dormitory towns. It should be mentioned that such a strategy does not necessarily imply a greater [socialist] role for the state in economic affairs. It is more a matter of the state actually trusting local communities to manage their own affairs within a market-orientated framework.

Such a policy approach boils down to promoting greater 'localisation' all over the country -to counter-balance today's dominating 'globalisation' ideology. But in political terms it also implies pertinently that the government should have the courage to de-link - if only partially so - from their current strong adherence to the so-called Washington Consensus.

Our basic point here is that the above broader but utterly crucial issue of 'appropriate development strategy for South Africa' - given our long-standing and serious structural problems of poverty, unemployment and crime - has never been raised or discussed openly in public affairs. The current Commission constitutes a great opportunity for doing so. This is a major reason for our serious and sincere request that the Commission broaden its current terms of reference.

A brief suggestion for expanding the terms of reference of the Commission

"In addition to the above, the Commission will consider and investigate the more basic reasons for the recent rapid fall of the rand. In this context the Commission will be guided by the key weaknesses in the South African socio-economic situation perceived and acted upon so effectively by the recent speculative onslaught on the rand".

Johan van Zyl
Pretoria
January 2002