Why the Bangladeshi taka is now the South African rand’s most important cross-rate (Part One)

Why the Bangladeshi taka is now the South African rand’s most important cross-rate (Part One)
Daily labourers carry bricks as they unload a cargo boat on the bank of the river Buriganga in Dhaka, Bangladesh, on 3 March 2012. (Photo: EPA / ABIR ABDULLAH)

In understanding more deeply why South Africa finds itself in its current crisis, we need to revisit the most consequential period in recent world economic history: 1991 to 1992. For South Africa, it occurred right in the middle of a time – 1989 to 1994 – where, wholly understandably, our attention was internally focused. Largely unappreciated in South Africa, during the same period, seismic shifts were also taking place elsewhere in the world and, most especially, beyond the West.


Part One of a three-part series.

Michael Power is a strategist at NinetyOne asset management.


Those who survive heart attacks are often strongly advised to change their lifestyles. So it is with South Africa given its recent ordeal: in July, the country experienced the national equivalent of a cardiac arrest in that it saw its most serious civil unrest since 1994.

It was Albert Einstein who noted “insanity is doing the same thing over and over again and expecting different results”. Since 1994, macroeconomically, South Africa has pursued variations on the same theme of neoliberal economic reform. They have not worked: unemployment has doubled from 20% to over 40%. It is therefore time for some fresh thinking – indeed, radical thinking – regarding the economic challenges facing South Africa.

There are many dimensions to the civil unrest that took place, mostly in Kwazulu-Natal and Gauteng. Here I will confine myself to commenting upon the economic causes and what “lifestyle changes” South Africa might consider making to address those causes, thereby avoiding another, more serious “heart attack” in the future. And even within those economic causes, there are many strands. So my focus here will chiefly be upon one strand, and it is overwhelmingly the most important strand: unemployment.

South Africans should be under absolutely no illusion as to the seriousness of our unemployment problem. In the Great Depression of the 1930s, US unemployment peaked at 25%, while the UK’s peaked at 15%. This previously unprecedented failure of their labour markets prompted John Maynard Keynes to tear up and rewrite the standard economics textbook. 

Albeit exacerbated by the pandemic, South Africa’s unemployment is now over 40%; its youth unemployment has topped 70%. Surely it is, following Einstein’s logic, time to try something different?

What is this essay trying to achieve?

The main aim here is to get South African policymakers and economists to think deeply about South Africa’s predicament. Given the sheer scale of the challenges we face, there is no “tried and tested” playbook to follow, and what has been tried simply has not worked. In order to suggest what needs to be done to avoid another heart attack, the starting point is to diagnose the problem correctly. That is what I attempt to do here.

And whatever programme South Africa does choose to follow if this diagnosis is correct, it must be built around the following observation: Asia is moving centre-stage in the global economy and any package of policies chosen will need to be keyed off this essential fact. This is especially obvious when one accepts that our overwhelming priority is to create jobs for South Africa’s unemployed skilled and semi-skilled workers, a sector where our primary competitor is Asia.

Competitor. That word goes to the heart of this multi-part essay. Simply, even brutally put, in a global context much of South Africa’s labour pool is uncompetitive and so unemployable at the wages they seek. And any set of solutions to our predicament that does not try to overcome this essential fact is a non-starter.

And yes, there are many dimensions to competitiveness: it does not help, for instance, that in terms of the “Ease of Doing Business Index”, South Africa has fallen from 28th (out of 155) in 2006 to 84th (out of 190) in 2020. But none of the 10 sub-components of that index covers the price of labour and, though such a consideration may not feature in standard thinking of the Western mind-set that created the index (but perhaps it now should), this is an absolutely critical ingredient in any overall measure of national competitiveness in today’s world of emerging markets. Even getting all the other measures right but overlooking where the wages of our semi-skilled and unskilled workers rank in the global hierarchy would not be remotely sufficient to overcome our competitiveness deficit.

In achieving that competitiveness for our unemployed, this does not mean South Africa must slavishly follow, for example, China’s economic model as it has evolved since the 1980s. Not at all. For instance, it would almost certainly be wrong for South Africa to adopt controls on capital wanting to exit South Africa in the same manner as have been imposed in China. In fact, as will be suggested below, precisely the opposite – opening up capital outflows yet further for South African residents – may yet be more beneficial.

But whatever set of policies we do adopt, they must be driven by understanding the implications of the economic forces now emanating from Asia. With the centre of economic gravity rapidly migrating back towards China – hardly surprising given that in the decade following 2008, a full 45% of global GDP growth emanated from China – it is natural that many of the world’s key economic metrics are centrifugal forces now centred on China.

So just as China’s 56% share of global steel production has weighed heavily on determining the price of iron ore, the size of the pool of semi-skilled and unskilled workers China has added to the global labour market since it began opening up to the world economy in the 1980s has weighed heavily on determining the wages such workers could command, and not just in China.

Unsurprisingly, with industrial wages now rising in China, these forces are radiating beyond China as the wage structures of South East and South Asia can outcompete those of China; these forces are even reaching the shores of East Africa. Africa is rapidly being drawn into the economic orbit of Asia.

By 2030, the centre of global economic gravity will have decisively returned to from whence it originally came in the early 19th century: Asia. By the end of this decade, HSBC forecasts a full 50% of global GDP will be found within the East Asian/Australasian Regional Comprehensive Economic Partnership free trade zone that has China as its economic anchor.

An essay in four parts 

  1. The first part addresses how we must understand the changed economic setting of South Africa in the new Asia-centric world arising. It also addresses the new macroeconomic thinking that the shifting of the centre of economic gravity to Asia has brought about and in particular how the Keynesian “religion” of Aggregate Demand Management, still dominant in the West, has begun to be challenged.
  2. The second part addresses the economic experience of South Africa since 1994 and what we have got wrong in understanding our place in the new world arising.
  3. The third part contrasts what is the currency language of capital with what has, in the wake of Asia’s renaissance, become the currency language of labour and how, given our circumstances, we in South Africa have become fluent in the wrong language: the title of this essay speaks to that.
  4. The fourth part asks a series of questions as to what we might do to improve the competitiveness of South Africa’s surplus labour to a degree that they would be readily employable in a global context.

(NB Daily Maverick will publish the essay in three instalments, with parts three and four combined – Ed)

Part One: Understanding the changed economic context of South Africa in the new Asia-centric world arising

In understanding more deeply why South Africa finds itself in its current crisis, we need to revisit the most consequential period in recent world economic history: 1991 to 1992. For South Africa, it occurred right in the middle of a time – 1989 to 1994 – where, wholly understandably, our attention was internally focussed. After FW de Klerk became president in 1989, Nelson Mandela was released in early 1990. Majority rule came to South Africa four years later, in 1994.

Largely unappreciated in South Africa, during the exact same period, seismic shifts were also taking place elsewhere in the world and most especially beyond the West. The Soviet Union dissolved in 1991, two years after the fall of the Berlin Wall. Also in 1991, India’s dynamic duo of Prime Minister Narasimha Rao and Finance Minister Manmohan Singh began a substantial liberalisation of the Indian economy. And early in 1992, Deng Xiaoping went on his now famed Southern Tour, resulting in a fresh set of policies (of which the ensuing devaluation of the renminbi by 50% in 1994 was but one) that were to supercharge the heretofore hesitant opening up of the China that Deng had overseen since 1978.

The net effect of this trio of “revolutions” was to break down pre-existing semi-autonomous economic blocs and start integrating over 2.3 billion people – 38% of the world’s then population – into what would become a far more globally connected economy. Yes, these 2.3 billion people were seen, given Western biases, principally as potential consumers but, at the outset and even now, their primary impact on the structure of the global economy was and remains that they were and are overwhelmingly producers. As Chinese workers would quip: “We make TVs; Americans watch them.”

In the 1990s, the deeper economic implications of these tectonic shifts were all but unappreciated in the West, from treasury offices to central banking halls, from the IMF to the World Bank, from the ratings agencies to the mainstream financial press, from the West’s private sector to its universities, and especially the latter’s departments of economics. Even now, the consequential fallout of this economic earthquake has yet to be fully grasped by these players. And this is especially the case for those academics living in those ivory towers. 

There are exceptions: I would cite economists Dani Rodrik and Ricardo Haussman, both – not coincidentally – born in emerging markets, as having grasped the ramifications.

Not just re-understanding South Africa in a new geo-economic framework, but in a new intellectual one too

Keynes died in 1946, just after World War 2 ended. But his ideas lived on to become the dominant economic paradigm – with variations – throughout the West. Broadly, those ideas still dominate Western policy thinking today, though more often than not they have further evolved into the “reductio ad absurdum” extreme of what Joan Robinson first dubbed “bastard Keynesianism”: Modern Monetary Theory. In 1965, even monetarist Milton Friedman was to say, with Nixon later borrowing the phrase: “We are all Keynesians now.”

While Keynes made many contributions to what, since 1941, has been called “microeconomics”, he is undisputedly the father of modern “macroeconomics”. The latter term dates back to 1933, when Keynes was formulating his 1936 magnum opus: The General Theory of Employment, Interest and Money.

Keynes’ reputation rests mainly on his origination of the idea of aggregate demand management, the orchestration of which would be done by treasuries (with their focus on fiscal policy) and central banks (focussing on monetary policy). Since 1945, few Western governments have disagreed that the best way of directing macroeconomic policy is achieved through aggregate demand management. Even Germany, the “reluctant Keynesian”, resorted to massive aggregate demand subsidisation when the need arose: after East Germany reunified with West Germany in 1990, Germany relaxed their spending disciplines; in 1995, the enlarged Germany ran a budget deficit that exceeded 9% of GDP.

The arrival in the early 1990s of one billion new workers, nearly all from Asia, on the supply side of the global economy simply did not compute within this accepted Keynesian economic paradigm, which continued to focus on the battle against “insufficient aggregate demand” through notions like “the output gap”. Accommodating the concept of “more-than-sufficient aggregate supply”, both of labour and the resultant volume of goods produced by that labour, was simply outside the West’s prevailing intellectual economic framework. Yet it would reset the price of unskilled and semi-skilled labour globally at a materially lower level. The meaning of labour market competitiveness took on a whole new dimension.

For those living today in the Keynesian paradigm, aggregate demand management still reigns supreme even though, since 1990, the global economy has become swamped with – and remains swamped with, nowhere more so than here in South Africa – unemployed semi-skilled and unskilled labour.

Yet when the New South Africa launched itself on the world in the mid-1990s, it bravely – considering the socialist policies previously espoused by the ANC – sought to do “the right thing” economically by following Western macroeconomic consensus. And, in such circumstances where South Africa was seeking membership of the democratic capitalist club, one can hardly criticise the determination of our policymakers to play by the Western book, except perhaps and so unfairly, with hindsight.

Meanwhile, in 1989, the economist John Williamson had formalised the Washington Consensus, a set of 10 commandments for any capitalist economy, existing and especially aspiring, to live by. While accommodating and so not contradicting Keynesian logic, these “good behaviour” rules also sought to limit excessive addiction to that logic. In the wake of Modern Monetary Theory – a set of policies to which arguably a corrupted version of Keynesianism opened the door – the latter’s ideas now seem as remote as (or, for some, even a direct descendant of) alchemy. DM


Comments - Please in order to comment.

  • Sydney Kaye says:

    You have diagnosed the problem and I look forward to the solution and what the unions will make of it.
    When there is a surplus on the market the price should naturally go down until it reaches a level at which it will be cleared but when the price is fixed there is no market activity. We see this in the high end housing market. Sellers won’t reduce their prices and the market just freezes. Hence unemployment when with those who control the price of labour won’t reduce it, and in fact astonishingly push it up in the face of a falling market. Next time you can’t sell a house at your selling price, try Increasing it and see what happens.

    • MICHAEL POWER says:

      I think you have explained one of the great paradoxes of the market, Sydney. From now on I will think of it as Kaye’s Dilemma! Liquidity is one of the least understood and so least predictable elements of market risk. The “geniuses in the room” at LTCM in 1998 clearly showed they had absolutely no grasp of it!

      I suggest – by way of pointed questions – certain solutions in Part 3.

  • cobus venter says:

    It is a rare skill to be able to clearly explain very complex, multi dimensional system changes so that even us mortals can understand them. Well done. I fear the next parts will tend to be pretty sobering. If one is able to diagnose the problem correctly, the chances of actually healing the patient obviously increases. But as with the vaccine debates, I wonder how many will simply dismiss the “solution” as being unpalatable simply because they don’t like it?

    • MICHAEL POWER says:

      As one of those who has suffered from COVID despite being double vaxxed – a rare breakthrough infection – the mildness of the symptoms (and I am an over 60s diabetic) speaks volumes to the vaccine’s efficacy, Cobus. It is the counterfactual question that haunts me: where would I be if I had not had that vaccine? So it is with SA’s future: where will we be tomorrow if we don’t give ourselves an appropriate policy vaccine today?

  • Frikkie Baderbuis says:

    It’s unlikely that Einstein said that unfortunately. The Ultimate Quotable Einstein by Alice Calaprace is an amazing resource to check Einsteniasms. The qoute is according to her from a book called Sudden Death by Rita Mae Brown. However, Qoute Investigator has found a number of other origins for the saying, none of which includes Einstein.

    • MICHAEL POWER says:

      Upon closer examination, you may well be right, Frikkie. I stand by my general point however. What we have been doing since 1994 has not worked: arguably the prevailing conditions are even worse. From first principles, we need to re-examine our approach to our economic policies.

Please peer review 3 community comments before your comment can be posted


This article is free to read.

Sign up for free or sign in to continue reading.

Unlike our competitors, we don’t force you to pay to read the news but we do need your email address to make your experience better.

Nearly there! Create a password to finish signing up with us:

Please enter your password or get a sign in link if you’ve forgotten

Open Sesame! Thanks for signing up.

Daily Maverick Elections Toolbox

Download the Daily Maverick Elections Toolbox.

+ Your election day questions answered
+ What's different this election
+ Test yourself! Take the quiz