It is not written in granite that countries must use their national currency in international trade. We must think “outside the box”. South Africa has the option of choosing the euro or the dollar instead of the rand as its currency.
The decision to adopt a common currency would mean the country ceases to have an exchange rate. From a monetary point of view, it becomes analogous to an individual state or region in a political federation — the size of current and capital account imbalances becomes irrelevant.
Use of a single currency dramatically lessens the risks of international trade. Without different currencies and exchange rates, there can be no capital flight. Increased transparency would result in a huge boom in trade and tourism, and facilitate public understanding of the true extent of international income inequality.
The exchange rate disappears as a critically important price, and with it the uncertainty of predicting future exchange rate levels.
The need for countries to maintain a balance between exports and imports in the current account (external balance) is not a necessary condition of economic life. The adage “One must pay for what one receives” holds only for barter economies. In modern economies, most purchases for capital goods are on credit.
Policy conflict between “internal balance” (price stability and full employment) and “external balance” (a stable exchange rate) stems solely from governments’ decision to use their national currency in international trade, beyond their jurisdictional ability to proclaim by fiat their own debt as “legal tender”.
When a group of countries adopts a common currency as their legal tender, as in the eurozone, the problems bedeviling international trade and clouding open economy relationships disappear for all of them.
A world central bank and world currency are the best long-run goals for a global economy, and will undoubtedly evolve. But if these are the optimal solutions to the deflationary bias imposed by an imperfect, flexible exchange rate system, why have economists been silent about it?
The answer is that political differences rule out a world central bank and a global currency at present. Given huge international disparities in income, culture, development, education, ethnicity and history, anyone who espouses the idea appears hopelessly naive and utopian.
A second-best solution would be for countries to adopt the money of their most important trading partners. In South Africa’s case, this is the euro.
With a single currency, international competition must be relied on to ensure wage moderation. Individual countries can then concentrate on pursuing expansionary domestic policies to achieve internal balance: price stability, full employment and rapid growth.
The case for dollarisation or euroisation is particularly strong for countries of low economic growth and high unemployment, where central banks are forced by external balance constraints to pursue restrictive monetary and fiscal policies.
With dollarisation or euroisation, interest rates on the periphery would fall to the lower levels at the centre. Developing countries would be fertilised by cheap credit. Imagine bank lending rates of 2% to 4% in South Africa.
Central banks in developing countries currently cannot reduce bank rates to the level necessary to achieve full employment. Each must keep interest rates high and government deficits low, with sufficient slack in the system to moderate wage inflation and defend their foreign exchange.
Countries threatened with negative current account balances are forced into restrictive policies: high interest rates to attract the short-term capital inflows, to maintain stable exchange rates and keep job levels high enough to moderate union pay claims. Surplus countries are not pushed to pursue expansionary policies, imposing a serious net deflationary bias on the world trading system.
The low growth rates of many African economies, and general unpopularity of the World Bank and International Monetary Fund, flow from forcing countries to pursue highly restrictive aggregate-demand policies against their own domestic interests to achieve external balances.
If dollarisation or euroisation succeed, it will be market-driven. Countries will one day realise it is in their best interest to adopt the money that is used by most of their trading partners.
They will give up an independent central bank, an autonomous monetary policy and the seigniorage gains from money issue. But they will be more than compensated by escaping the net deflationary bias of the external balance constraint, and enjoy the benefits of internal balance: low interest rates, rapid growth and domestic full employment.
With a common currency, national authorities need only worry about internal balance, and the world could flourish under a monetary regime of low interest rates and high wealth values. International competition would restrain firms from raising mark-ups and reducing real wages, and restrain unions from immoderate wage demands, keeping both unit costs and prices stable.
Such a world will come. Money is like a language — every year dozens of languages disappear and students worldwide are learning English.
For the moment South Africa, if it has the intelligence and imagination, can at least get on the winning side.
Basil John Moore is professor extraordinary of economics at Stellenbosch University