The strong-Rand, weak-Rand debate 1

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.

Rand cents per dollar exchange rate

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.

A first round of data on Zimbabwean firms Reply

Over the past 10 years the Zimbabwean economy has suffered political repression, expropriation of private property and mass emigration of the skilled workforce. Analysis of what has been an economy-wide disaster has been limited due to a dearth of data. Today the World Bank for first time released enterprise survey data from Zimbabwe. 599 firms were interviewed from May 2011 through March 2012. It paints an interesting picture of firms and the business environment.

World Bank Enterprise Surveys

  • The firms in the survey are established survivors with an average age of 33 years.
  • On average the firms have 53 permanent full-time workers and 10 part-time workers.
  • 46% of production workers are unskilled and 31% of firms offer formal training.
  • Female participation in ownership is markedly high at 56%, but only 23% of the permanent full-time workers are female.
  • Capacity utilization is only 45%.
  • 97.7% of sales are domestic sales and 63% of inputs have a domestic origin.
  • 11% of firms report exporting more than 1% of sales, but direct and indirect exports account for 2.3% of sales.
  • On average the firms hold 48 days’ inventory, compared to 24 in the rest of Sub-Saharan Africa.
  • The firms are clearly finance constrained – 84% of investments are financed internally and 63% view access to finance as a constraint to doing business.
  • 71% of the firms reported that they are competing against informal firms – compared to 65% in Sub-Saharan African and 56% in the world. Of these firms, 47% view this competition as a major constraint.
  • The firms report fewer power outages per month than those in other Sub-Saharan African countries, but a much greater share of firms report owning a generator.
  • A notably small share of firms (10%) identifies transportation as a constraint to doing business.
  • 41% of firms identify tax rates as a constraint.
  • Compared to other Sub-Saharan African countries, licensing seems to be less of a concern.
  • 32.6% of firms identify corruption as a constraint, compared to the average of 37% in Africa and 36% in the rest of the world.

It is possible to further slice and dice the data by sector, firm-size and location. I hope to follow up with some proper analysis soon.

About cities and economics Reply

In the introduction to Economics we typically teach students that it is all about unlimited wants and scare resources and the key questions that we need to answer are WHAT, HOW and FOR WHOM to produce. Another aspect is WHERE production and consumption happens and Porter (1998) provided an intuitive explanation of the importance of the clustering of economic activity.

A cluster can be any town of city where you find a critical mass of producers in a particular field located together. This is the result of so-called localisation economies that affect the business environment, competition, and growth.  Firstly, factors of production influence the location of firms. These range from basic inputs such as physical infrastructure, to information.  In clusters, the fact that firms are close to one another lead to spillovers that improve the flow of information and the success of innovation.  This is also true for related and supporting industries.  They provide specialised inputs and information, and facilitate sharing among firms.  Materials, components, machinery and services are supplied more efficiently and at lower cost when producers are concentrated in a particular town or city.  Location also plays a role in firm strategy and rivalry.  If you are closer to your competitors, you imitate and learn from each other, everyone tries to make their product slightly different and better and this leads to growth.  In the final instance, the demand conditions in a locality may also influence the business environment, competition, and growth.  Sophisticated and demanding customers at home press firms to improve and differentiate and a cluster may provide such a group of customers.  Thus, Porter (1998) saw the enduring competitive advantages in a global economy as localised.  Proximity allows for relationships, better information and other advantages in productivity and productivity growth.

Now these things are not only discussed in academic circles. Yesterday evening saw a lively Twitter discussion on the future of cities. The participants did not really mention localisation economies or spillovers, but these concepts are there behind some interesting comments on drivers of growth, innovation, the environment, institutions and communities. Have a look at our Storify summary of the discussion:

[View the story “Tweet for cities” on Storify]

Die toekoms van produksie en verbruik? Reply

Verlede en die toekoms?
Bron: The Economist

Ons leer aspirant ekonome dat produksie van goedere en dienste gaan oor spesialisasie, arbeidsverdeling en skaalvoordele. Verbruik word tipies beskryf in terme van nutsmaksimering en mense se voorliefde vir verskeidenheid. Ek het onlangs twee interessante stukke gelees wat mens nuut laat dink oor die toekoms van produksie en verbruik.

Produksie gaan beïnvloed word deur nuwe toerusting, prosesse en materiale – ‘n onlangse spesiale verslag in The Economist beskryf dit as ‘n Derde Nywerheidsomwenteling:

  • Vervaardiging is toenemend digitaal en 3D-drukkers en robotte word oral gebruik.
  • Prosesse en komponente word so gestandaardiseer dat meer modelle in dieselfde produksielyn vervaardig kan word.
  • Materiale soos koolstofvesels vervang staal en aluminium in produkte.

Dit alles help om vervaardiging meer buigsaam te maak. Vervaardigers kan nuwe produkte vinniger op die mark kry en winsgewend pasmaak vir individue. Die verslag voorsien dat dit alles belangrike gevolge gaan hê:

  • ‘n Kleiner hoeveelheid arbeid gaan nodig wees en die arbeiders sal hoogsgeskoold moet wees.
  • Die koste van arbeid gaan minder belangrik wees en eerder as om produksie uit te kontrakteer na Sjina, gaan ondernemings nader aan hul verbruikersmarkte wil wees om vervoerkoste te spaar en produkte aan te pas vir plaaslike smaak en voorkeure.
  • Klein- en medium-grootte ondernemings sal kan deelneem en meeding in vervaardiging.
  • Daar gaan geleenthede wees in die “groen”-ekonomie.

Johan Fourie skryf op sy blog meer oor die gevolge vir werkers.

Aan die verbruikskant was daar weer ‘n interessante Wêreldbank blog oor sogenaamde “collaborative consumption”. Volgs die artikel is die nuuste neiging onder jong stedelinge om geld, hulpbronne en tyd te spaar. Eerder as om self ‘n kar te koop, teken mense in die VSA in op die Zipcar diens waardeur jy ‘n kar kan huur per uur, soos wat jy dit nodig het. Ander gebruik die internet om saamrygeleenthede te bied en te benut: in sommige stede moet bestuurders sonder enige passasiers meer tolgelde betaal en dit spaar letterlik geld om te deel. Daar is ook dienste waardeur jy vinnig ‘n das kan huur vir ‘n vergadering met die baas (sien Tie Society), ‘n hammer, boor of saag vir die werk by die huis, of  in New York, ‘n skaap om jou gras kort te hou! Regoor die wêrld is daar skemas om fietse te deel en te huur.

So as jy ‘n Econ-1 student is en leer van produksiemoontlikheidskrommes, of vraag en aanbod, hou gerus die nuwe eras van produksie en verbruik ingedagte.