SANE Views

Vol.2 No.28, 15 October 2002

Are These Hardships Necessary?

By Johan van Zyl

Article for Business Day

The past year will surely go down as one of the poorer periods of [official] economic analysis and policy-making in our country.

The catalogue of painful practical hardships for most citizens - especially the poor - is now well known. Prices have been rising over a broad front but in particular for food which has now increased by some 18% since last September.

Despite our serious problems of much poverty, unemployment and a highly skewed income distribution, inflation has now become enemy no.1. In turn, interest rates have risen four times and may rise again!

There is, of course, no denying that inflation is a serious issue. But given the above key socio-economic realities it has seldom been more urgent to analyse accurately and bravely the underlying cause(s) of inflation and to take appropriate policy steps accordingly.

What is quite clear is that South Africa is not suffering from classic overall demand inflation of "too much money chasing too few goods". To the contrary, most price rises are being induced from the supply side.

The major villain here is a substantially undervalued exchange rate. Since Sept. 11 last year the rand has depreciated disastrously and is battling to recover even half of these losses. In consequence, much of our current inflation results from paying too much for all imported commodities, which subsequently escalates throughout the local production and distribution chain.

On the other hand, we have to export more in physical terms to obtain the same volume of imports as before. Hence, in real terms heightened incentives [in Rand terms only] to export more, are actually leading to a transfer of our wealth abroad.

It follows that the orthodox policy remedies to curb overall demand inflation by increasing interest rates and/or reducing government expenditure basically do not apply.

In fact, the authorities have missed out badly on the above kind of analysis. Determined [obstinate?] orthodoxy appears to have prevailed above all else.

Why has this occurred? The likely answers to this important issue go much further than local domestic interests.

Our government is - problematically - committed to the dictates of the modern-day globalisation thrust. It is keenly pursuing "free markets" and an open economy but has missed the key domestic correctives of (a) curbing speculative capital flows and (b) strongly promoting more self-reliant local-level development initiatives to counter globalisation.

Apart from information technology, a major driving force behind today's globalisation is a new liberal economic policy doctrine aimed essentially at "deregulating the world economy". This came into being after the demise in the early 'seventies of the so-called Bretton Woods fixed exchange rate system.

The core organisational base for the new liberal policy line has become the "Washington Consensus", dominated by major American political and multi-national corporate interests. It is without doubt a very powerful force in the world economy today. It dominates the UN and was clearly foremost at the recent WSSD.

A basic tenet of the new approach is to push hard for opening up all countries [including the developing nations] towards free commodity trade but especially to free international capital movements - of whatever kind. One major upshot has been the financial "global casino" of today's world.

In her latest book "Beyond Globalisation" the well-known economist and writer Hazel Henderson notes that much over 90% of all foreign exchange transactions today stem directly from purely financial investment and/or speculative considerations. In turn, the financing of underlying "real" commodity trade has taken a back seat. This is in sharp contrast to the basic world pattern that prevailed up to about the middle 'seventies.

This fundamental structural shift in [international] foreign exchange markets raises a very major question for South Africa. "Can we afford to allow the exchange rate of the Rand to be determined predominantly by international financial flows - and the essentially fickle perceptions involved - as opposed to being judged by our own "real" economic relations with the rest of the world?" Is the tail not now wagging the dog in an alarming and indeed destructive manner?

At bottom, what is at stake here is a choice between the welfare of [most] South African citizens and conformity to the globalisation dictates of the "Washington Consensus".

This politically painful choice is well illustrated by the rather obvious option of re-introducing a dual exchange rate system for South Africa. Such a dispensation - recommended in the 'eighties by the highly respected De Kock Commission - would install a minimal but basic degree of exchange control [still anathema to Washcon !] It would again separate the capital and the current accounts of the balance of payments, implying a separate "financial" and a "commercial" rand.

In personal conversations with some Reserve Bank economists it was suggested that such a measure will very likely be regarded as "a backward step". An interesting observation! Has orthodox economics really become autistic?

There are certainly administrative problems and tensions involved in a dual exchange rate system. For example, all the banks would have to keep two separate sets of accounts - a costly imposition. But in the end, this important issue clearly has to become a policy "judgement call".

The outcome of a dual rate system might well be an exchange rate for the Commercial Rand of, say, R7 - 8 to the US dollar. Just imagine what this would do directly to dampen domestic inflation! Furthermore, using the blunt instrument of raising interest rates [and possibly cutting back on government expenditure] would become unnecessary. We can return to normal!

Surely such an approach would generate much more of a win-win situation especially for [poor] South African citizens at large? Are our current hardships indeed necessary? There is still time, Mr. Mboweni and Mr. Manuel, to do the right thing.

Pretoria,
September 2002.

Johan van Zyl is an honorary professor in the School for Public Management and Administration at Pretoria University. He was a Technical Advisor to the De Kock (Monetary) Commission in the 'eighties. He is a SANE board member.