A study by Adrian Saville using 30 years of data shows there is no meaningful relationship between a weaker rand and a rise in South African manufacturing production.
If people are anticipating that a revival of manufacturing will flow from a weaker rand, they are possibly pinning their hopes on defying history.
In fact, the closest relationship between movements in the rand and manufacturing growth that the study could identify was a roughly 10% explanatory power, which occurred when observing a lagged manufacturing response time of 12 months and a currency move over six months.
However, in sharp contrast to the textbook argument, the relationship is negative.
A closer and more powerful explanatory relationship was found between the South African manufacturing industry and G7 GDP, suggesting that the country’s manufacturers simply participate in global economic growth.
If the rand was to be “managed weaker” it assumes that the South African Reserve Bank can control the level of the rand, which infers it can control volatility.
Based on the evidence of the research, the currency price volatility matters more than the level of the rand, so perhaps the point of departure is if the central bank could control a component, it should worry about volatility first.
However, the average daily turnover in the South African foreign-exchange market is $10-billion. This compares with the size of South Africa’s forex reserves of just over $40-billion, equivalent to four days’ turnover and clearly insufficient to manage the rand.
In addition, even if the rand could be managed, who would choose the “right level” for it; and what would happen when that “right level” is no longer right? The risk of a once-off intervention converting into regular price “fixing” becomes apparent.
Furthermore, reducing the price of South African exports and increasing the price of imports by weakening the rand might parade as competition, but it does not represent competitive edge or sustainable advantage. Competing on price is a race to the bottom.
It is arguably perverse that South Africa has forex controls designed to keep money in the country while, at the same time, a growing body is calling for the rand to be allowed to weaken, for example, by taxing inflows through a Tobin tax.
Dynamics have also not been considered. If a weak rand helps us compete then, all things being equal, demand for our exports will rise and imports will fall. This would translate into a greater demand for rand in global markets and a smaller demand for other currencies in South African markets, which should convert into rand appreciation.
Much of the global evidence shows us that successful export nations experience such currency appreciation.
For the country to embark on a rand-weakening exercise could prove more detrimental than beneficial: the success behind South African manufacturing and its global competitiveness lies elsewhere. With labour being the single most important manufacturing input, labour productivity cannot be overlooked as a source of improving competitiveness.
Critically, this view does not mean competing on the basis of lower wages, but rather competing through higher labour productivity, as well as higher productivity in production ingredients. By being part of a country in which these competitive strengths are developed, South African manufacturers will ensure that their success will flow from sustainable advantages over which they have influence and policy makers have control.
Furthermore, in such a setting, employment levels are likely to grow, not shrink, and wages will climb with gains in productivity. This contrasts sharply with a position of relying on the rand as a key competitive input, a factor over which manufacturers and policy makers have little control, and which leaves employment and wage levels at the mercy of “the rand”.
Adrian Saville is CIO of Cannon Asset Managers and he holds a Visiting Professorship in Economics and Finance at the Gordon Institute of Business Science. Visit Adrian’s blog at www.adriansaville.com
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