Stronger rand may keep inflation down but it destroys jobs
November 26, 2009
By Tshepo Ntsimane
This is a response to Investec economist Annabel Bishop, who wrote in Business Report on November 19: "Deflation can have serious unintended effects."
I think it was former British prime minister Benjamin Disraeli who was reported to have said something to the effect that "there are lies, damned lies and statistics". The dismal science that is economics does not help matters, because two people can look at the same data and reach differing conclusions. Until the recent ongoing debate over climate change, I thought such disagreements about facts were restricted to the social sciences.
In case you think I am digressing from matters economic, remember that the debates about the effects of greenhouse gases directly affect how much fossil fuel companies such as Eskom, PetroSA and Sasol use and therefore how many jobs they maintain, if not create, in the coal mining, oil and gas industries.
Those of us who argue about the unsustainable level of the rand are concerned about its contribution to joblessness, especially in manufacturing and mining. While we realise the recent recession in the West was the catalyst, we also recognise that the rand's current level has a huge impact on the profitability of the platinum and gold mining sectors, not to mention the export-oriented sections of the manufacturing sector. These two sectors lost 243 000 jobs this year alone.
Including agriculture, which also exports some of products, job losses are 354 000. It can't be right that so many people have lost their jobs, some of which could have been saved by a weaker rand.
Of course, there is a price to pay in terms of potential inflation. However, which is the bigger price to pay: the 4.1 million unemployed people who care to be counted, plus the 1.1 million discouraged workers, or higher inflation?
As Finance Minister Pravin Gordhan recently put it in his maiden medium-term budget statement: "Economic distress is not a statistical trajectory, but a very human, very real, often painful, series of shocks. Men and women have lost their jobs. Households cannot pay the rent or food bills. Companies face the threat of liquidation."
The 962 000 people who have lost their jobs this year have, on average, four people dependent on them. That is 4.8 million people without a sustainable source of sustenance.
International Monetary Fund research shows that, even when the economy recovers, countries such as South Africa have little chance of regaining most of the jobs lost. Should we therefore not do all we can to minimise the job losses, including intervening in the exchange markets, if not cutting interest rates further?
After all, the rand's current level reflects the carry trade fuelled by the low interest rates in the West, which do not look like being raised any time soon.
Then there is the impact of such high unemployment on government social spending, let alone government tax revenue. Should people be dependent on the government for their livelihoods? What about their self esteem? More than 13 million people get welfare benefits. It cannot be right that some of these people, who are able and willing to work, have lost jobs in part due to a strong rand.
When we turn to imported inflation, Statistics SA data show that, in the context of the global recession and the accompanying deflation, this source of inflation is currently not a problem. The price of non-electrical machinery and equipment, together with that of transport equipment, may have increased, but this is countered by decreases in other areas such as mining and petroleum products. Recently, these may also have begun to increase but, as we know, it is the average price paid by producers that matters not prices at specific points in time. So, for now, these are not a threat to the inflation outlook.
We also have to ask questions about business collusion and its impact on sustaining high overall consumer inflation.
The current account balance raises two questions that also have an impact on economic growth and development. The first question is whether South Africa has to have a deficit on the current account. Lest we forget, in 2002 this country had a positive balance on the current account.
The increased capital intensity of our production processes as we entered a high growth trajectory changed that into a deficit since 2003. Given that we have no choice but to sustain a deficit for now, the next question is whether we have to finance it with the sort of portfolio flows that made the rand one of the most volatile emerging market currencies.
According to data from the Economist Intelligence Unit between 2002 and 2007, prior to the Western financial crisis, South Africa attracted foreign direct investment (FDI) flows equivalent to 0.9 percent of gross domestic product (GDP) compared with an average of 2.2 percent for Brazil, Russia, India and China, 2.1 percent for other emerging markets in the Group of 20, and 3.4 percent for Egypt, Tunisia, Nigeria and Algeria. This is despite ranking higher than most of these countries in the global competitiveness ranking (GCR).
My analysis of the GCR shows that, to attract the much more stable FDI, the country must pay particular attention to such factors as the savings rate, inflation, government finances, and also focus on primary education and health.
In addition, with a ranking of 90, the country ranks low on labour market efficiency. Addressing labour market flexibility, however, is likely to only be a necessary but not sufficient condition in attracting FDI.
Despite ranking better than Algeria, Argentina, Egypt, Mexico, Tunisia, and Turkey, South Africa still gets less FDI than these countries.
The current account deficit is also a reflection of our low savings rate. Compared with an average of 35 percent of GDP for emerging economies, we save less than 20 percent of GDP. Given our higher investment rate of 24 percent of GDP, this means we have to import capital. This investment rate is also a problem since the only real way to create decent, sustainable jobs is through capital formation. Our investment compares poorly with the 31 percent of GDP in other emerging economies.
All these issues must be addressed for us to move forward as a nation. What social and economic policy choices we make will make a difference to how we fight poverty, unemployment and crime.
The government cannot directly create many jobs without overburdening the taxpayer. It can only create the right environment for business to create jobs that will help reduce the forecast increase in the public debt-to-GDP ratio and improve the standard of living.
As President Jacob Zuma and the ruling party have urged us, let us all work towards "a better life for all".
This, in my view, starts with the policy choices we make with respect to macroeconomics, society, education, skills development, labour, trade and industry, as wells as choices on business strategy.
I was heartened to hear Reserve Bank governor Gill Marcus say in Parliament the other day that the Reserve Bank only intervenes in foreign exchange markets to accumulate reserves. It doesn't do it to get some desired level of the rand exchange rate, which it does not have anyway.
I say by all means, accumulate as much foreign reserves as you can, especially at these attractive levels of the rand. If that moves the rand one way or the other in the process, it will simply be a by-product of market forces of demand and supply of foreign reserves.
Tshepo Ntsimane runs a small investment and economic research firm based in Johannesburg
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