Always listen to the young: their minds are less cluttered and that thankfully lets them see things more clearly! One bright spark made an insightful comment at a dinner the other night about how politics and economics were again converging and it got me thinking.
Slowly but surely the debate about the value of the Rand is moving centre stage. Aside from the crazies – and they are just as voluble on the “Right” as they are on the “Left” (even though I think it facile to reduce this debate to the parameters of the overly linear Left vs. Right spectrum) – there are two main schools of thinking. The first is still dominant and is the one we live by today: it says “Come what may, we should leave the Rand to the vagaries of the Free Market regardless of the consequences”.
I subscribe to a different school. It says: “Because the world’s leading economic powers are abusing the global system to their own advantage (the US, with 4% of the world’s population and 21% of the world’s GDP is able to consume over 60% of the world’s mobile savings by exploiting the Reserve Currency status of the US Dollar), you cannot simply leave the determination of exchange rates to the Free Market. And besides with a not insignificant portion of the rest of the world not playing by the “rules” either (including China, South East Asia, much of OPEC), you cannot call the trading arena that has resulted one that is determined by the Free Market either. In this disturbed and artificial environment, South Africa must seize the market bull by the horns and, implementing a set of policies that work to address South Africa’s most glaring market failure – its 25%+ unemployment rate – devise an exchange rate policy that works for South Africa.”
And yes, this does mean putting political imperatives ahead of economic ones. And no, this is not the first time it has happened. Firstly, there is no country in the world that does not let policy intrude into the market; everyone to some degree lets politics curb free market economics. And secondly, the West has been far more interventionist than many emerging markets like South Africa have been – and for far longer. The West has just been better at hiding this fact and saying they live in a world that lets the markets roam free. For all the advertizing of their free market credentials, why do so many developed markets have such high debt to GDP ratios, Japan’s now being well over 200%? Such debt is the detritus – the left behind evidence – of prior interventions in the market. And why do most Western nations have a current Government spending to GDP ratio of well over 40%? Contrast this to the South African mid 20s ratio. And why is the US going to run a government spending deficit to GDP of 14% in 2009? Still maybe the Land of the Brave. But definitely no longer the Home of the Free Market.
The truth is that the West is now so thoroughly Keynesian – in good times (which Keynes would have abhorred) as well as bad (which he would have not) – that virtually no one seems prepared to remark on that which has become so ordinary and acceptable. And – and here’s the rub – so addictive politically have the Keynesian sweeties become that they cannot be removed from the mouths of Western voters without risk of the incumbent regime being ejected at the next election! Thus Western Governments distort the market mechanism: mostly by subsidizing demand through permanently loose fiscal policy. The net result – evidenced by the detritus in the form of current account deficits – is that the West (US, UK, EU, Canada, Australia, 2009 forecast) will have to hoover up 85% of mobile world savings balance their external accounts.
Clever emerging markets have realised they cannot compete in this global tug-of-war by responding on the same level – fiscally. So they are forced to use the only weapons available to them – monetary tools. Managing exchange rates and generating FX surpluses which they themselves own (even if they do lend most of them back to the West) has been their forced response. And it has worked. Emerging market monetary policy has reacted to developed world fiscal policy. Emerging market politics has reacted to Western politics.
Those commentators who believe South Africa should continue to be a free market purist and live in a policy free zone are to be admired for their principles. WOULD THAT WE COULD LIVE IN SUCH A NIRVANA. But we do not and cannot. So to assume that we do live in such a world is not simply naive; it is destructive for South Africa. We need to respond with policies because of our political imperatices. But again, there is nothing new here: policy always has always had a place in Real World economics.