Professor Joseph Stiglitz
Photo by: Duane Daws
South Africa should consider policy interventions that weaken and stabilise the rand as part of a package of industrial-policy measures that supports the emergence of a diversified industrial sector able to export into the region and globally and compete with imports, Nobel prize-winning economist Professor Joseph Stiglitz asserts.
He warns, too, that the economic model previously pursued by resources-rich economies such as South Africa is a “model of the past” as China made a necessary economic policy shift from “quantity to quality” – China is taking active steps towards a less resource-intensive, more sustainable growth path.
In an interview with Engineering News during a recent visit to South Africa, Stiglitz said that, while China’s realignment offered some new opportunities for Africa and South Africa, it also presented risks for the region and the country, which had hitherto benefited from improved terms of trade for its commodities as a result of China’s rising demand for resources.
“South Africa, Africa and South America have been fortunate, until recently, to have experienced the benefits of China’s remarkable growth in the demand for minerals. But the economic model was not a sustainable model . . . [and is] a model of the past”.
The country, therefore, has “no choice now”, but to adapt to the changing global environment or be “doomed” to low growth, the former World Bank chief economist and current Columbia University academic argues.
Part of the adaptation should involve interventions designed to weaken the rand and make it less volatile, as “real exchange rate instability is a major source of uncertainty for the production of tradable goods and services, and therefore discourages investment in these sectors”.
The rand’s volatility, Stiglitz believes, lies at the heart of why industry has not invested as the rand has weakened during 2014, as the country’s non-interventionist stance means that the trend can be reversed, leaving the competitiveness of manufacturers highly vulnerable.
In a paper co-authored with Martin Guzman and Jose Antonio Ocampo, Stiglitz argues that stable and competitive real exchange rate policies are good for economic development.
The paper also suggests that the main argument against such interventions – that they represent interference in the free functioning of markets, which, in the absence of such intervention would ensure efficiency – have been undermined by global developments and research over the past decades.
The “new wisdom” on exchange rate regimes, Stiglitz asserts, is not based on the International Monetary Fund’s (IMF’s) previous notion of either “fully flexible, or completely fixed”.
“The new view is the IMF got it exactly wrong: perfectly fixed doesn’t work, because eventually it breaks; and perfectly flexible makes you subject to volatile international financial flows. So the new wisdom . . . is manage your exchange rate, which means try to make it more stable, but don’t fix it [at a certain level].”
A variety of capital account regulations and foreign exchange market interventions could be employed to achieve greater competitiveness and stability, with Stiglitz maintaining that the costs of intervening to weaken a currency are far lower than those associated with attempting to achieve the opposite.
“There is an asymmetry in trying to maintain an overvalued exchange rate versus trying to maintain a slightly undervalued currency. This is so, because when you are trying to get your exchange rate down, one of the instruments is direct intervention, which means that you sell rand and buy dollars. It costs nothing to produce a rand . . . but to maintain a overvalue exchange rate means you need to sell dollars to buy rand and you only have a certain amount of dollars in reserves.”
But Stiglitz also advocates strongly for a “portfolio of instruments”, which entails direct interventions being combined with capital account management techniques, price as well as quantity interventions.
Intervention is not cost free, but Stiglitz believes the costs of “sterilisation” – efforts designed to mitigate the potential inflationary impact of increasing the supply of money – can be managed and are often “exaggerated.”
“The key question is whether the benefits are greater than the costs. My view is if you can create a more dynamic economy, the benefits are worth the costs.”
He stresses, too, that exchange rates are “not ends in themselves – just as the market is not an end in itself”. “The policies are all means to an end . . . that of creating an economy with sustained and shared prosperity,” he concludes.