Pitching the rand

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By Cees Bruggemans, Chief Economist FNB.

There is much clamouring for a weaker Rand.

Indeed, why stop at fair value (reckoned at 8.50:$) if you can get 9:$ or 10.50:$? Why not go straight to 15:$ and feel really rich (for a while, at least, until you want to replace the car, buy a tractor, drive them or do other exotic things with imports, like generate electricity and stuff).

There is also much clamouring for higher wages.

Apparently no longer so much a specific percentage gain just over the inflation rate (intended to capture a part of the minimal productivity increase) as demanding a multiple of the inflation rate (effortlessly attempting to hugely increase the real wage by political means – the ultimately self-enrichment scheme).

One wonders how these things are decided? Go for a wage increase twice the inflation rate or really go for broke and demand thrice?

One also wonders whether labour appreciates the inconsistency between these two types of demands?

A much lower Rand is supposedly needed to become “much” more trade competitive. Yet a humongous wage increase wipes out all vestige of trade competitiveness, even that offered by a lower Rand.

Or is the real explanation a call for a “very” low Rand so that we can “afford” very high wage increases?

And imagine the government being asked to subsidise at enormous cost the purchasing of foreign exchange so that the Rand may weaken so that labour’s extraordinary wage demands can be accommodated?

Labour elites would love it, but would the poor?

As things stand, very high wage increases aren’t resisted. They are apparently rather easily accepted by many employers, going by the data. But employers in turn just as easily shed labour, for their main preoccupation is to remain in business. That means sustaining labour peace but also keeping their wage bills manageable and surviving in the business arena.

This way everyone is happy, except the 5% of private formal labour whose jobs are sacrificed annually on this higher altar of the greater general happiness.

But that apparently isn’t a major concern to the remaining 95% of employed labour and capital who keep distributing growing national income among themselves.

Of course, if you try to do this every year, a rather interesting thing starts to happen. Employment becomes a shrinking violet, every year shrinking some more.

For which reason we now apparently have Ministers dedicated to make employment grow, preferably as fast as possible. A fascinating challenge, you will agree.

To top it all, it may be useful to also cut interest rates really, really low so that we may be enticed into consuming and investing more.

Clearly, our society increasingly believes in free lunches in order to make hard work possible.

All of this starts to create some sympathy for a strong Rand, given to us not for anything we have ever done, but because the world is awash in liquidity, metal prices are doing rather well (precious metals mostly in record territory) and we apparently still having desirable corporate assets and government bonds for sale (but for how long, going by the deplorable state of South African sewerage?).

A strong Rand is a kind of buffer, forcing employers to discipline worker demands AND demand more productivity in order to survive intense trade competition and still make a return on capital risked.

Without such a firm Rand, businesses could make easier profits as well as buy off labour with attractive real wage gains.

Except that this isn’t a stable picture, merely the first round of a merry-go-round.

And with each passing round, accelerating wage costs would push inflation higher, eroding the initial “benefit” of the undervalued Rand, ere long requiring the Rand to slide some more.

And thus are launched galloping wage demands and inflation, with the Rand having to slide ever faster too.

And if the world doesn’t oblige, and deluges us with a firming Rand, we get galloping employment losses instead.

When evaluating the macro policy stance, it must perhaps not come as a surprise that a firm Rand isn’t necessarily all bad news.

It requires employers to resist unrealistic wage demands directly, and indirectly suppresses inflation, lowering the base on which wage demands can be made.

This is all to the good for the poor in this country, who make up more than two-thirds (nearer three-quarters) of the population. That makes them VERY important, much more important than small well-off elites. For unlike the elites, the poor don’t have much bargaining strength to protect them from the ravages of accelerating inflation. Their only bulwark is the country’s political leadership.

Imagine, calling a firm currency a bulwark against gross irresponsibility by elites. Japanese wouldn’t recognize the planet this was invented on.

But then we tend to occupy our own star constellation where we apparently like to recreate economic laws to our own narrow liking, even if the same mistakes were made over many decades, with nothing to show for it except underperformance, and much hardship for the many poor.

If a weaker Rand eventually comes, it will presumably come cyclically, because the world has turned less generous, something we should dread rather than actively wish. A weaker Rand can be useful PROVIDED we don’t fritter away the trade advantage through high wage demands and higher export prices, something apparently too often lost on labour and capital alike.

Engineering a weaker currency isn’t as simple as it sounds. And some may not actually want it, indeed dreading its coming, for good reason, as higher inflation and interest rates may come in its wake. Perhaps better to improve productivity and trade competitiveness and earn our way to a richer, more broadly based society.

But that would require hard work.

Source: Cees Bruggemans, First National Bank, May 12, 2010.

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