ANALYSIS: A frail currency pushes up inflation and has no effect on productivity.
There is a prevailing conventional wisdom among labour and certain sectors of the government and industry that believes that a weak rand will reverse South Africa’s sagging industrial competitiveness and thereby lift economic growth and redress our unemployment problem.
But the rand has steadily weakened since 2011 and where are the jobs? Why hasn't a weaker rand saved us?
Part of the answer can be found in Chart 1, which shows changes to South African manufacturing output relative to changes in the real effective exchange rate of the rand, with output lagging by one year to allow industry sufficient time to respond.
But, in sizing up the scatter chart, there doesn't seem to be any discernible relationship between currency and manufacturing output from 1980 to 2013.
Indeed, the correlation is a mere 4.6%, meaning that currency movement explains less than 5% of the change in South African manufacturing between 1980 and 2013.
Put simply, something other than the rand drives our industrial activity, and we think the explanation can be found in global economic growth. When the global economy prospers, our economy prospers, almost irrespective of the level of the rand. Indeed, Chart 3 indicates that at least three-quarters of South Africa’s economic growth can be explained by global growth.
If a weak rand doesn’t seem to help our manufacturing sector, and we are reliant on world economic growth – which we can’t control – to drive our economy, what can we control to create jobs, employment and prosperity?
The answer lies in Chart 4, which shows that real wages have grown 32.6% since 2000, whereas labour productivity has fallen 13.9%. Rising real wages are a great achievement for any country. But if wage increases are not matched (or exceeded) by gains in productivity, competitiveness is in reverse. Essentially, South Africa's labour force is 45% less competitive than it was 12 years ago, against a backdrop of increasing global labour competitiveness.
A weaker currency does not solve this problem. It pushes up imported inflation, which aggravates the cost of labour as wages rise to compensate for inflation, which, in turn, makes employers less willing to hire.
With only 5% of South Africa’s manufacturing capacity being explained by the currency, we believe that the other 95% resides in three elements that have the greatest prospect for shaping South Africa's economic landscape: we have too few firms, our productivity is too low, and we have poor education levels.
Every time the rand weakens, South Africa's balance sheet and income statement are weakened. So, if becoming poor is a way to become rich, then we should allow the rand to keep weakening.
But if South Africa is serious about improving employment, we need to be more competitive, which will in turn make employers more willing to invest and hire more staff.
In the long term, only a substantial improvement in the quality of education, coupled with other important drivers of productivity that include managerial capacity and infrastructural productivity, can drive these required gains.
In the shorter term, productivity-linked real pay increases may at least be one way in which these principles become entrenched.
Rather than a weaker rand, South Africa needs a new social pact, with a serious commitment by labour, government and business to achieve prosperity. South Africa can solve its unemployment problems with strong political will and even stronger leadership on all sides.
Adrian Saville is chief investment officer of Cannon Asset Managers