Business Maverick


Addressing the economic subject that dare not speak its name — a fair value for the rand


Dr Michael Power recently retired from Ninety One where he was the Global Strategist for most of the past two decades. He remains a Consultant to Ninety One. Prior to Ninety One, he had worked in London, South Africa and Kenya for Anglo-American, Rothschild, HSBC Equator and Barings. He has a PhD from UCT, a master’s from the Fletcher School at Tufts and a bachelor’s from Oxford. His primary focus today is doing research into the emerging field of geo-economics focussing in particular on the global implications of the return of the economic centre of gravity to a China-centred Asia.

There is no single silver economic bullet that would be a cure for what ails South Africa but a good start would be for the rand to be a lot more competitive than it is today.

My fellow — and senior — scribbler at Daily Maverick, Tim Cohen, recently wrote that South Africa “needs a policy breach. It needs a wholesale rethink of its entire economic system.”

I sensed exasperation in his tone. If so, I wholeheartedly share it. But I suspect that is where our agreement will end: anticipating Tim Cohen’s preferences, I probably disagree with him on the most important matter that needs to be addressed.

South Africa’s GDP reads like a near-flatlining ECG for the past decade, with only the Covid down-up confirming there was still an economic heartbeat. From 2013 to 2022, average annual GDP growth came in at less than 1%. According to The Economist, 2023 will see GDP growth at 0.5%. Worse still, they estimate our current unemployment at 32.9%.  

One of the advantages of retirement is that I can now speak up about my fundamental disagreement with the framework of South Africa’s economic policies. In public, I have done so very guardedly over the past two decades, most comprehensively in a trio of 2021 opinions in Daily Maverick titled: “Why the Bangladeshi taka is now the South African rand’s most important cross-rate” (see Part One, Part Two and Part Three here).

Almost two years on, I stand by the essential logic of those three pieces. Indeed, if anything, that logic shouts louder today than it did then. Please do read them if you want to grasp the depth of the challenge that South Africa faces as the global economy rapidly shifts its centre of gravity to Asia. Our economic position cannot be understood without grasping the impact of Asia’s renaissance.

Behind closed doors, I have debated – often heatedly – with SA-based economists in both the public and private sectors as to what ails South Africa… and what might be considered possible solutions to its low growth and high employment.

I have been flabbergasted at how shockingly schtum most in this community have remained in suggesting constructive ways out of our quagmire. Truth to tell, many remain dogmatically hypnotised by the conventional wisdom proselytised by the high priests of economics in the treasuries of the West and, in particular, the central banking halls of Washington, Frankfurt and London.

Yet beneath the bling bluster of these idols, profoundly deep challenges now face the West too: tellingly, even Washington has now formally abandoned the Washington Consensus!

Where would the US have been today had it not quadrupled federal debt since 2008, from $8-trillion to $32-trillion, with over 40% of that debt being funded by the kindness of foreign strangers? Where would the US be now were it not running, in the face of full employment, a budget deficit of 8.6% of GDP for the past year?

One critic pithily nailed it: the US has abandoned the Washington Consensus only to adopt the Buenos Aires Consensus instead… though that is being much too hard on Argentina, whose budget deficit is “only” 4.6% of GDP (ours is forecast to be 5.7%.) The US — indeed much of the West — is now wallowing in the debt-drenched cauldron of “Boiling Frog Economics”… but that is a discussion for another time. 

Back here in South Africa, few economists exhibit any understanding of what different policy mixes have been pursued by other higher-growth emerging markets. In particular, the varied paths taken by Asia’s rising nations are mostly a mystery to them.

Worse still, they have little grasp of even the economic history of their current crop of graven images in the West and what most of them had to do to achieve the developed market status they enjoy today. Few with whom I have debated have ever referenced in detail any of these old or new routes to prosperity.

Correction: one did, approvingly citing Singapore but without knowing the “whats, whys and wherefores” of that which led to Singapore’s expulsion from the Federation of Malaysia in 1965. It seemed as if the adorer could only relate to the glitz of today’s Orchard Road without understanding the hard choices that Lee Kuan Yew and his extraordinary team made after 1965 to bring about this remarkable transformation… and even what sacrifices are still being made by Singaporeans today to sustain it.

That said, and with no disrespect to the miracle of Singapore, the development of a city state of five million people is no model for a large country of 60 million to emulate.

Such blinkeredness by our economic fraternity is even absent towards appreciating the hard yards being made by Kenya where their cocktail of the conventional and the not-so-conventional has produced near extraordinary economic progress: much higher GDP growth and much lower unemployment than South Africa has been achieved. A decade ago, the South African economy was over 10 times Kenya’s and yet by last year that ratio had shrunk to 3.7 times. Kenya’s unemployment, according to Trading Economics, is now under 5%.

Read more in Daily Maverick: Everything keeps going right for Kenya as it consolidates its powerhouse status

So where to start? The first point to be made is that there is no single silver bullet that would be a cure for what ails South Africa. No doubt a long “to-do” list could be drawn up with many items deserving to be included: good governance and reliable electricity supply for obvious instance.

What follows — the focus I bring to the appropriate valuation of the rand — needs to be understood within that weighty proviso. Repeat: there is no one silver bullet.  

However, I will say this with conviction: yes, doing all the other repairs on that to-do list no doubt would help alleviate some of South Africa’s economic pains but they would not, deep down, rebuild and restructure a new South African economy so that it could become globally and economically relevant to the 21st Century that will by 2050 be an Asian century unless the fundamental issue of the appropriate currency valuation addressed below was central to that list.

And before I begin — in a “cold-water-in-your-face” effort to get readers and the opinion formers of South Africa’s establishment to open their minds to what for them is a likely “no go area” — let me quote the American Upton Sinclair (1878–1968). He was a Pulitzer Prize-winning novelist, an outspoken reformer — a so-called “muckraker” — and a man whose mostly socialist political views I most decidedly do not share.

But there is an eerie and unsettling ring of truth to his famous quote: “It is difficult to get a man to understand something when his salary depends on his not understanding it”.

Rand currency valuation

When psychiatrists take on a traumatised patient, one possible approach is to probe gently into what issue above all others their new patient does not want to discuss. Using that approach in addressing South Africa’s economic trauma — with that 32.9% unemployment rate being its defining challenge — quickly unearths the “no-go” subject most South Africans of means never want to talk about: what is the appropriate value for the South African rand.

At the risk of oversimplification, most monied South Africans believe that “a strong rand is a good thing and a weak rand is a bad thing. And that is all there is to it.” Even replacing “strong” with “uncompetitive” and “weak” with “competitive” stands little chance of shifting such set-in-stone convictions.

The simple truth is that there is no one “correct” exchange rate that works for every player in any economy: exporters would prefer a competitive rand as that would boost their revenue lines… and so boost their profits; importers would prefer an uncompetitive rand as that would reduce their costs… and so boost their profits.

And there is a whole range of agendas other actors in an economy might have: foreign tourists would visit South Africa more if their dollars, euros, pounds, riyals and dirhams went further here, whereas South African travellers going abroad want their rands to count for more whether they are in Bali or the Balearics. 

This means the “right” exchange rate for any economy can never be so much a “right” rate as a “compromise” rate. Where I differ from many of my colleagues is that I believe the rand should be valued at a “compromise” rate that serves our greater national good. I strongly recommend that this does not mean an exchange rate that freezes out a third of our workforce from being able to secure a job on the international ladder of value-adding occupations.

If our unemployed can only offer their work at, say, a Bangladeshi taka equivalent wage that is completely out of line by being materially higher than that of our mostly emerging Asia and increasingly African peers, then our unemployed will likely remain stranded and so unemployed indefinitely. Many of my fellow economists still see South Africa as a cheap Europe. That may be so. But more pointedly, today we are an expensive emerging Asia… and even Africa.

Reflexively there are those that will say, when setting our exchange rate, “let the market take its course”. Yet until South Africa has no exchange controls — repeat, none — this appeal to a “free market nirvana” is purely hypothetical.

And were all our exchange controls on capital to be relaxed — including most critically those on institutional investors — the value of the rand would likely gap lower to a material degree, perhaps even to a level where the wages sought by our semi-skilled job seekers would be internationally competitive.

For now, that heavily qualified free market mantra many intone speaks only to clearing a market for trade that is relatively free and a market for capital that is heavily constrained by our exchange control regulations. That mantra makes no effort whatsoever to address the third massively distorted and far-from-clearing market, that for labour.

Please don’t get me started on that canard that “Purchasing Power Parity says the rand should be x against the dollar. PPP, as it is usually called, is a theory derived from a notion in classical economics called “the Law of One Price”. And, as with all such notions, it is generally assumed that a high degree of factor utilisation across all relevant markets prevails before that law can pertain. With 32.9% unemployment, we in South Africa are very far from occupying that idealistic “laboratory condition”.

Read more in Daily Maverick: Don’t get caught in the rand exchange rat race

Many will also appeal to The Economist’s Big Mac Index to say the rand is even undervalued. This index is also famously based on PPP; less famous is the confession The Economist once made that when it comes to forecasting “fair” currency cross-rates, PPP rather stands for Pretty Poor Predictor!

I have seen — over five years ago so the data would likely be stale — an attempt to marry the ultimate form of purchasing power — wages — with the ultimate form of selling power — prices. It calculated an index (based on the excellent but discontinued-in-2017 UBS Prices & Earnings Report) that measured the lifestyle afforded by the wages of someone living in one of the world’s 77 major cities: a city-based quality of life index.

Hardly surprisingly, the two South African cities represented — Johannesburg and Cape Town — were way out of line (meaning far higher ranked) when compared to nearly all their emerging market peers.

So yes, a more competitive exchange rate would mean a less good life for the few (self-included) in order to give the many the chance of a better life and not be kept alive on the drip feed of a government grant. 

Our grant figures are truly eye-watering and bear repetition. According to President Ramaphosa, as of January this year, 29 million South Africans received state support: 18 million via welfare grants and 11 million via the state’s R350 grant. Treasury reports South Africa has 7.4 million taxpayers; this means that each taxpayer, in addition to supporting their families and other dependents, on average and indirectly supports a further four South Africans via grants.

This uncomfortable trade-off — the few having a good life even as the many do not — pinpoints exactly why the issue of “a more competitive exchange rate” is so contentious among South Africa’s “already haves”.

Even a cursory glance at the relevant economic history books will confirm that the US, Germany, Japan, the original Asian Tigers (so including the city states of Singapore and Hong Kong), China, Vietnam and Bangladesh all followed or are still following the same essential path: competitive currencies greatly facilitated their economic catch up.

India currency

The eagle-eyed among you will note India is not on this list: my sense has long been that the Indian rupee is still too strong to create jobs for India’s multitudes of semi-skilled. This opinion headline in the Financial Times of 7 August caught my eye: “Only a cheaper rupee can spur India’s Growth”. The sub-heading underneath it was equally relevant to our case: “Elite interest favours a strong currency, to the detriment of the nation”.

For historical completeness, it must be noted that the UK, being the first to industrialise, was an exception to the “must have a competitive currency” rule in that its industries had no one else with which to compete.

But it helped that the UK could use colonial legislation — as they did, as Gandhi famously noted, against India’s thriving cotton industry — to prioritise British manufacturers over any potential undercutting from imperial competitors. Thereafter the British Empire became a captive market for British-made goods.

There are only a few exceptions to this “competitive currency” rule, most notably commodity-producing countries like Australia, New Zealand, Iceland, Norway, Kuwait, Bahrain, Qatar and the UAE. But their successes have heavily depended upon having smallish populations juxtaposed with the capacity to produce very significant volumes of and so earnings from commodities.

In other words, the total value of their raw material output created sufficient wealth that could be amply shared among the relatively few. Last year, Australia — the “Lucky Country” — had over three times the value of resource exports as South Africa to share among a population well less than half ours in size.

Despite what some suggest, South Africa is no such lucky country. We have a population of 60 million, more than the eight “rich” countries listed above combined.

I am not repeating here a more precise discussion as to what would be the “fair compromise exchange rate” that would work for the broad cross-section of the South African population. Suffice it to say, as I did in my linked three Daily Maverick articles, the rand would need to be a lot more competitive than it is today.

Rather, in responding to the spirit of Tim Cohen’s challenge — that we need a policy breach that involves a wholesale rethink of our entire economic system — I would like to throw down this gauntlet into the arena for discussion:

“What would be the ‘fair’ or ‘compromise’ exchange rate that would stand a chance of working for a broad cross-section of South Africans and in particular allow our semi and unskilled workforce – now largely unemployed — to offer their labour on an international market?”

Time is not on our side. The rest of Africa — led by Ethiopia and Kenya — is already answering this challenge. DM


Comments - Please in order to comment.

  • Robert Pegg says:

    In less than 50 years the population of South Africa has more than doubled. The economy has not kept up with the population explosion, so how will the unemployment rate ever decrease ? Mining companies are clapping their hands with the poor exchange rate when they pay workers in Rands and are paid in US dollars. I don’t profess to understand complex economics but supply and demand rules all.

    • MICHAEL POWER says:

      Fair point about the population. To the extent there have been solutions offered by others – from the US in the 1880s to Asia today – it involves developing a labour-intensive manufacturing sector, something that SA has singularly failed to do over the last 30 years. And you are exactly right regarding mining. But that has not stopped South Africa falling from being the largest gold producer in 2007 to 8th largest now. Worse output is down from 600 tonnes in 1994 to about 100 tonnes today. There is gold in the ground but it is simply not (at this exchange rate?) economic to mine.

      • Ben Harper says:

        SA, more specifically the Unions, have effectively destroyed the manufacturing sector. Until there are radical changes to the BCEA and BBBEE legislations and the unions are curtailed, SA has no chance in hell of becoming a manufacturing state

        • MICHAEL POWER says:

          The unions played their part yes. But they were not alone. A rapid joining of GATT (now the WTO) sadly played a huge part too: we could have quite legitimately joined more gradually in the mid-1990s but chose the ‘big bang’ approach, Our industry simply could not withstand the sudden winds of global competition. I remember one of the leading industrialists at the time – Leslie Boyd of Anglo American Industrial – bemoaning that South Africa had “out-Gatted Gatt”. Then and now our industry is rarely able to compete globally as our operating costs are much too high.

  • Dennis Bailey says:

    Helpful and insightful for us poor novices. Thanks. When get to rethinking with some new era suggestions do make your solutions as accessible as your gauntlet throwing. Not many economists can do that!

    • MICHAEL POWER says:

      Denis, I try very hard – whilst always being constructive – to get the powers-that-be to listen to my suggestions. I always adopt a respectful approach too…and try never to be too theoretical (though I leave strong hints that I am happy to go down that path when challenged!). I have a strong bias towards being solutions-oriented and not throw stones. The tragedy with the latter approach is that even when the stones might be justified, the default response is to ignore them.

    • MICHAEL POWER says:

      Dennis with 2 N’s!

  • Steve Davidson says:

    Thanks for debunking the tedious repetition of the Economist’s Big Mac Index! IMHO it’s only applicable to First World countries – and even then pretty badly – not with a hybrid 1st/2nd(?)/3rd world one like SA. I read that publication every week and reckon it gives a more useful indication of the Rand’s value by charging me R100 for it here and £8.99 (about R215) in the UK – over twice as much, although there are of course other factors involved. Does that sound like a fair argument?

    • MICHAEL POWER says:

      Completely fair, Steve! It is the classic behaviour of a near monopolist. In economics this is called “price discrimination”: charging different consumers different prices for the same product…the poorer consumer pays less!

  • Paul Zille says:

    Compelling. So how do we do this – by removing all capital controls, save for emergency measures to stop a ruinous run? And what happens to the Reserve Bank’s core mandate? Interest rates would need to be sky high until/if ever confidence returned. The discipline of sound political-economic governance that this regime would impose on government means it will be a non-starter – certainly under the present lot. Much easier to bumble along, with the new elite and the bureaucratic bourgeoisie insulated from the consequences of bad policies, and the poor and excluded (in whose name they operate) left to rot.

    • MICHAEL POWER says:

      Paul Zille, The Reserve Bank’s mandate – as written in the constitution – is, when looked at closely, as clear as mud. “The primary object of the South African Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic.” The SARB has focussed on inflation control and they do this via the Parliamentary-mandated approach of ‘Inflation Targeting’. And one might say that managing the value of the Rand (were it to try and fall, not so much were it to try and rise) might be an extension of that mandate if it were to keep a lid on price inflation. But let me ask this: If the policies followed DO NOT end up promoting “balanced and sustainable economic growth in the Republic” (and that has not happened since Inflation Targeting was adopted), should another approach be considered? Without being nit-pickingly legalistic, surely in the final analysis achieving the end is the all important and over-riding objective? Isn’t the means just a way to achieve that end?

  • Robin Smaill says:

    The exchange rate is a good point but there is another even more important. The cognitive ability of the unemployed is very limited. Many believe that this is a product of the education system but is even more basic than that. Traumatized people are inclined to behave irrationally and there is plenty of reasons in South Africa to be traumatized. Traumatized people are not good parents and their behaviour influences the brain development of their children. These children are disadvantage before they even start school. People generate wealth so improving social stability and reducing stress will eventually result in better skills. We have a long road to walk no matter how you look at our problems.

    • MICHAEL POWER says:

      Robin Smaill. I hear where you are coming from but this in a sense only makes the need to create job opportunities even more important. And those jobs have to be matched to capabilities and priced in the global market accordingly. The populations of Korea and Vietnam were subjected to extraordinary traumas – civil wars that dragged in the Great Powers. Those two nations have found ways (or are now finding ways) out.

  • Allen Masomere says:

    This makes sense as an academic exercise but as you know very well, good ideas have little value if they are unlikely to be adopted, let alone implemented, given the resistance of the usual suspects and the geo-political and South African historical contexts.

    • MICHAEL POWER says:

      Allen, I fear you are right. Some countries only find a way out after being taken to – and sometimes even over – the edge. I am watching both Sri Lanka and Turkey closely to see if they can overcome their recent ordeals. And yes, both ordeals involved substantial currency devaluation.

    • MICHAEL POWER says:

      My reply to you Allen, is below…

  • Andrew Blaine says:

    To a significant extent, the exchange rate is a matter of perception?
    The international perception of the country is reflected in the fact that in 1960 the rate was parity v the US$. As the political situation has changed, from the end of colonialism to the era of independence, opinion has hardened. This resulted mainly from a position of doubt in emerging leadership. As different economies exhibited varying degrees of efficiency and pragmatism, these economies grew at a range of rates, with commensurate exchange rates!
    In this country, particularly post 1994, the infrastructure and politics have followed a similar path. Eight now the infrastructure is such that it cannot sustain meaningful growth. Similarly, the level of education among our people means that, for success, we must import intellect to plan and implement an increase in employment and initiative. We have a long and hard road ahead?

    • MICHAEL POWER says:

      Andrew, Tour point on infrastructure is well made though more versus Asia than the West. Another of the truths that dare not speak its name is that as countries evolve – specifically in terms of their growth in productivity most especially in terms of how new technologies are adopted – their exchange rate value would likely evolve too. So a nation improving its technology and so productivity would see its currency strengthening against the country not achieving those advances. On this fact alone, how much ‘should’ the US Dollar have strengthened versus the Rand since, say, 2000?

  • Humbler Eachday says:

    My 2 cents, somewhat agree with Andrew, to sort out our internals first is maybe to put pressure on the CDBC research and implementation so tax, debt and expenses go onto a public ledger. It is after all the publics money and we have a right to know where our 2c goes,,,

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