SANE Views

Vol.2 No.2, 02 January 2002

Must we Suffer the Falling Rand?

Margaret Legum

How many conventional economists does it take to change a light bulb? Answer: none, because they all sit in the dark and wait for 'the invisible hand' of the market to change it.

How long are we to wait for the vagaries of the market's inscrutable but toxic hand to respond to the remedies it claims to want from us. I refer of course to the fall of the rand.

It is bad enough that total strangers who don't live here can dictate not only our fiscal objectives but also our domestic and foreign political decisions. But they don't stop there. When we follow their prescriptions to the letter, however depressing for our economy, they continue to punish us for undefined sins. Like a sadistic headteacher, they hold aloft the whip of their disapproval as we squirm frantically to guess what we have done wrong this time.

Currently 'experts' ascribe the rand's fall to our 'emerging market' status: we are being punished for the failings of Argentina, Turkey and any others now in the dog-box. That we are so vulnerable is due to the free availability of the rand, which can be used as a kind of international entrepot currency for dealers.

We now know that South African companies which listed overseas on the basis that this will give them - and us - access to overseas capital will in fact have exported funds to the tune of some R38 billion by this year's end.

The fact is that South Africa's openness to the world market is destroying our economy. It suits those who recommended it - the developed economies and their multi-national companies, as well as ours - but not our own national need for stability and expansion

The argument that currency markets efficiently distribute international capital is ludicrous. Over 90% of currency transactions are purely speculative - related not at all to the financing of trade or investment, driven by lemming-like guesswork as to what everyone else will do. These days international capital is not about investment, but about short-term profit-taking.

Speculation with our currency is seriously damaging our economy - raising the inflation rate, threatening interest rate hikes and undermining confidence. It is also a painful reminder that our own government is thereby shackled in its attempts to address our real problems - poverty, unemployment, rural regeneration, decent health and education - for which it was elected. What is the point of elections if the government's focus thereafter is pleasing the currency speculators.

So what can we do about it? Unbelievably, most financial journalists, briefed by the finance houses, propose we drink even deeper of the bitter cup offered by global capital. They suggest we completely drop all controls on the movement of capital in and out of the country - a move they expect to placate the herd of speculators. They also propose higher interest rates. All of these will have the effect of throwing good money after bad as well as further depressing enterprise.

That is exactly the kind of prescription the IMF forced upon the unfortunate government of Argentina which is now therefore on the point of collapse. The IMF also turned a crisis into a catastrophe in the Asian economies, following a similar run on their currencies in the late 1990s. Most are still trying to recover.

South Africa must now decide to take control of its own economy. There are a number of 'speed bumps' the government could put in place to slow down the effect of speculative capital: they have been used by respectable governments with success. The most extreme was the action taken by Malaysia at the time of the Asian Crash; and that is why it is now back on track.

On September 1, 1998, Prime Minister Mahathir Mohamed, made a very angry broadcast. He announced that the ringgit (Malaysia's currency) would no longer circulate outside the country. The government fixed the exchange rate, and non-residents had restricted access to the ringgit. Investments abroad by residents for non-trade purposes required permission. In other words he put out of bounds speculation in the value of the Malaysian currency. He also reinforced measures to expand the economy, including reduced interest rates.

As a solution to Malaysia's problems this was greeted with derision by Western governments, financial institutions and the pundits. Malaysia's equally ravaged neighbours - Japan, Korea, Indonesia, Thailand - obediently followed IMF prescriptions about how to recover: tight fiscal and monetary controls, and free trade and capital flows. Malaysia had done the same for the first year after the crash. The result had been continued depreciation of all their currencies. The ringgit had fallen by 35%, the Kuala Lumpur Stock Exchange composite index by 52%.

Three years on what has happened? The IMF itself acknowledged, in a 'Public Information Notice' of September 2000, the following.

The Malaysian economy had recovered from the 'sharp decline' of 1998, in which domestic demand had fallen by 26%. Real GDP growth was now over 5.5%, the manufacturing sector growth was 13%. Capacity utilisation in many industries had reached pre-crisis levels. Inflation was below 2%. Foreign inward investment had resumed. The Kuala Lumpur Stock Composite Index recovered by 39% during 1999, and rose further by 10% in 2000, while most neighbouring countries' indices fell. The Notice concluded: 'Directors broadly agreed that the regime of capital controls - which was intended by the authorities to be temporary - had produced more positive results than many observers had initially expected'.

Malaysia is now re-opening its economy at its own pace. It has fully regained the confidence of the investing fraternity. This is a major lesson of this story. Investors of capital on the ground - as opposed to speculators - are suited by a stable currency and firm government policies aimed at expanding an economy. There is no evidence that economic growth is a product of foreign investment - foreign capital goes where the economy is already working. The measures taken by the Malaysian authorities provided that environment while discouraging speculative capital. That is the best of both worlds.

There is now a groundswell of support, even among conventional economists, for challenges to the idea that there is a global prescription for all countries. We must end our dependence on footloose finance capital, so that we can build our economy to suit ourselves.