Over the past few weeks there have been reports in the media about the strength of the Rand and calls for weakening the exchange rate (see Business Day on Currency instability). Nobel laureate and former World Bank chief economist Joseph Stiglitz is around as an advisor to Economic Development Minister Ebrahim Patel and amongst other things have said that:
“One thing South Africa can produce a lot of cheaply is rand. If people want to buy rand, then selling rand and buying dollars will have the effect of depreciating the currency. Printing presses don’t cost that much,”
In today’s Mail& Guardian Nic Dawes has an interesting article about Minister Patel playing the Stiglitz card.
“He is regularly the headline act as Patel seeks to create — through a series of carefully formulated debates and public events — a new policy consensus that fills up the credibility vacuum created by the financial crisis and global recession.
…This week it was a call for intervention to weaken the rand to protect local jobs and industry.”
Reserve Bank Governor Gill Marcus has ruled out intervension and the M&G article goes on to caution against setting up Prof Stiglitz as a an unofficial Minister of Finance.
To add some analysis to the above mentioned vacuum, this blog would first just like to remind readers that the rand-dollar exchange rate is quite volatile and it has not been a simple story of appreciation that requires weakening to protect local jobs and industry.
When the talk is about protecting jobs and industry it cannot be about the firms that use imported inputs so it must be about exporters. We suppose that the argument is that a weaker rand would drive exports and create growth and jobs. There is an interesting academic article in this regard that is worth a read. In a 2006 article in the South African Journal of Economics Lawrence Edwards and Phil Alves examined the determinants of export supply over the period 1970 to 2002. (Read it here if you have Wiley access). The results provide strong evidence that South African industries are price-takers in the international market.
“Various implications arise from these results:
- Firstly, export volumes are determined by the profitability of export supply. Factors that raise the output price received by exporter and reduce their cost of production will therefore enhance export performance.
- Secondly, exchange rate depreciations on average positively affect export performance by raising the profitability of export supply, and not by increasing the cost competitiveness of South African products. Exporters raise their prices by the depreciation rate and do not, on average, lower the foreign currency price of their products in order to capture market share.
- Thirdly, export growth is not constrained by inelastic foreign demand curves or the inability of South African producers to compete in the export market on the basis of price. This does not imply that world demand and foreign market access are unimportant. While world demand does not directly affect export performance via the demand relationship, it affects export supply via its impact on world prices. Similarly, preferential reductions in foreign tariffs and market access will improve export performance if they raise the price received by exporters. Improved market access without improved export prices (measured in domestic currency) is unlikely to lead to a significant response in export volumes.”
If we were to substantially weaken the rand, consumers will bear the costs of more expensive imports while exporters will pocket some profits. Strong-ZAR vs weak-ZAR is a moot debate and politicians should leave the market to set the exchange rate.