The travails SA is experiencing are part
cyclical, part structural. The former are mostly a reflection of what is
happening globally and are well known.
The structural issues assailing SA are mostly internally derived and are either misunderstood or unacknowledged. In large part, they arise from the peculiar structure of the economy. This is characterised by a first-world veneer — consumer-led, service-oriented and debt-dependent — concealing within it a developing African economy struggling to find its economic feet.
The rand’s value is largely still geared to the very visible outer shell; indeed, most economic commentators estimate the "fair" value of the currency by focusing solely on this skin-deep cover. In my experience, few economists even acknowledge the existence — let alone the ordeals — of the remaining part of the economy.
The developing part of SA remains economically stranded, unable to connect financially to the outside world. This is, in large part, because the currency value that would allow it to work is far below the level it is forced to live with. The result? One third of the workforce remains lost in a labyrinth of unemployment, 18-million citizens get by only by receiving government grants, and the overall economy remains trapped in a low-growth rut.
The
rand is trying to get down to a more competitive level, one where the
second part of the economy might just begin to function — specifically
where wages paid in SA measured in dollars can compete with those of
earners with equivalent skills in countries such as Colombia, the
Philippines, Mexico or even the likes of Ethiopia. This tug-of-war
between the exchange rates that would "work" for each of the two
differing economies will not be easily resolved: in the good times, the
exchange rate is pulled towards the first-world component; in the hard
times, as now, it slips back towards the developing country component.
Unfortunately, because the vast majority of this country’s economic commentators live in the developed part of the economy, they tend to argue for a "fair value" of the rand based largely on what works for their world and their lifestyle. Few economists speak up for the exchange rate that might work for the economically marginalised.
Worse still, most commentators resort to using the likes of purchasing power parity (PPP) to justify their arguments. Leaving aside the practicalities of whether the PPP approach is valid in a world swamped by chronic oversupply, be it of semi-skilled workers or product, PPP’s applicability to SA’s current predicament can be questioned even in theory.
Derived from the classical notion of the Law of One Price, there are a slew of preconditions that need to prevail for PPP to work. One of the most important is that all factors of production must be effectively utilised for it to pertain. With unemployment at a chronic 26% (and some saying 35%), this precondition patently does not exist. (A cursory glance at The Economist magazine’s weekly indicators shows just how dramatically out of line SA’s unemployment rate is with its emerging market peers: none has a rate above 13%.)
Indeed, in a world characterised by oversupply, why should we use a demand-side valuation methodology alone to help determine a currency’s fair value? Would a selling power parity index not be more appropriate to indicate a currency’s fair value? Not that such an index exists, perhaps reflecting the deep-seated demand-side bias exhibited by macroeconomics since the Keynes era.
In the world of wages, perhaps the best shadow index trying to reflect such a measure is UBS’s triennial Prices and Earnings Survey, a comprehensive examination of "prices of 122 goods and services, and earnings for 15 professions in 71 cities". Its latest survey, released in September last year, shows Johannesburg dollar wages for the linchpin industrial profession of "female industrial worker" to be way out of line with emerging market peers — three times Mexico City (with Mexican unemployment at just 4.3%); four times Manila (Philippines unemployment 6.5%); and three times Bogota (Colombian unemployment 9%).
Yes, exchange rates have moved down versus the dollar since the March/April survey period, so wage differentials have narrowed, but by no means have they closed.
Among the Brics nations, Johannesburg pays much higher dollar wages than Moscow, New Delhi, Mumbai, Shanghai and Beijing. Only those of Sao Paulo and Rio de Janeiro are on a par. Is it just a coincidence that the Brazilian real and the rand have been the worst-performing Brics currencies since the end of April?
All this economic jostling between the two parts of SA’s bi-conomy is happening while a parallel political ordeal — what might be called a rite of passage — is playing out. It resembles what many other African nations have experienced in the postcolonial era and from which some are only now escaping. The latest countries to move decisively beyond this part of their political lifecycle are arguably Nigeria under Muhammadu Buhari and Tanzania under John Magufuli, both presidents newly elected.
Such graduation involves the political leadership adopting, as has happened in Nigeria and Tanzania, the triptych of transparency, accountability and good governance as the starting points of any administration. Very decidedly, these two presidential newcomers have not arrived in Abuja and Dodoma with the conviction it is, in the scathing words of journalist and author Michaela Wrong, "our turn to eat".
Furthermore, in their short time in office, both leaders have gone out of their way to engage the private sector constructively. But this engagement has not always pleased vested commercial interests. In Nigeria, a move away from an economy built on natural resources towards one in which manufacturing can service customers at home and abroad is the recurring theme in all Buhari’s pronouncements on the direction the Nigerian economy must take.
In return for the government reducing its meddling in the business of business, he expects business to rise to the challenges of a different future and not obstruct much-needed progress by defending its inbuilt privileges.
Only with this two-pronged political and economic attack can the challenges that undoubtedly still remain in Nigeria and Tanzania — and indeed SA — be tackled.
Modern SA’s challenge is to move beyond the bifurcated bi-conomy it inherited in 1994 and the political system it has created post-1994. This dual process will not be easy, especially when the nation faces powerful cyclical economic headwinds.
But as Nigeria and Tanzania’s new presidents have illustrated, cyclical adversity is no excuse for not trying to build a better future for their people. And given the deep-seated strengths SA’s economic and political system still possesses, we have the financial and institutional wherewithal to make this necessary transformation.
• Power is a strategist at Investec Asset Management
The structural issues assailing SA are mostly internally derived and are either misunderstood or unacknowledged. In large part, they arise from the peculiar structure of the economy. This is characterised by a first-world veneer — consumer-led, service-oriented and debt-dependent — concealing within it a developing African economy struggling to find its economic feet.
The rand’s value is largely still geared to the very visible outer shell; indeed, most economic commentators estimate the "fair" value of the currency by focusing solely on this skin-deep cover. In my experience, few economists even acknowledge the existence — let alone the ordeals — of the remaining part of the economy.
The developing part of SA remains economically stranded, unable to connect financially to the outside world. This is, in large part, because the currency value that would allow it to work is far below the level it is forced to live with. The result? One third of the workforce remains lost in a labyrinth of unemployment, 18-million citizens get by only by receiving government grants, and the overall economy remains trapped in a low-growth rut.
Unfortunately, because the vast majority of this country’s economic commentators live in the developed part of the economy, they tend to argue for a "fair value" of the rand based largely on what works for their world and their lifestyle. Few economists speak up for the exchange rate that might work for the economically marginalised.
Worse still, most commentators resort to using the likes of purchasing power parity (PPP) to justify their arguments. Leaving aside the practicalities of whether the PPP approach is valid in a world swamped by chronic oversupply, be it of semi-skilled workers or product, PPP’s applicability to SA’s current predicament can be questioned even in theory.
Derived from the classical notion of the Law of One Price, there are a slew of preconditions that need to prevail for PPP to work. One of the most important is that all factors of production must be effectively utilised for it to pertain. With unemployment at a chronic 26% (and some saying 35%), this precondition patently does not exist. (A cursory glance at The Economist magazine’s weekly indicators shows just how dramatically out of line SA’s unemployment rate is with its emerging market peers: none has a rate above 13%.)
Indeed, in a world characterised by oversupply, why should we use a demand-side valuation methodology alone to help determine a currency’s fair value? Would a selling power parity index not be more appropriate to indicate a currency’s fair value? Not that such an index exists, perhaps reflecting the deep-seated demand-side bias exhibited by macroeconomics since the Keynes era.
In the world of wages, perhaps the best shadow index trying to reflect such a measure is UBS’s triennial Prices and Earnings Survey, a comprehensive examination of "prices of 122 goods and services, and earnings for 15 professions in 71 cities". Its latest survey, released in September last year, shows Johannesburg dollar wages for the linchpin industrial profession of "female industrial worker" to be way out of line with emerging market peers — three times Mexico City (with Mexican unemployment at just 4.3%); four times Manila (Philippines unemployment 6.5%); and three times Bogota (Colombian unemployment 9%).
Yes, exchange rates have moved down versus the dollar since the March/April survey period, so wage differentials have narrowed, but by no means have they closed.
Among the Brics nations, Johannesburg pays much higher dollar wages than Moscow, New Delhi, Mumbai, Shanghai and Beijing. Only those of Sao Paulo and Rio de Janeiro are on a par. Is it just a coincidence that the Brazilian real and the rand have been the worst-performing Brics currencies since the end of April?
All this economic jostling between the two parts of SA’s bi-conomy is happening while a parallel political ordeal — what might be called a rite of passage — is playing out. It resembles what many other African nations have experienced in the postcolonial era and from which some are only now escaping. The latest countries to move decisively beyond this part of their political lifecycle are arguably Nigeria under Muhammadu Buhari and Tanzania under John Magufuli, both presidents newly elected.
Such graduation involves the political leadership adopting, as has happened in Nigeria and Tanzania, the triptych of transparency, accountability and good governance as the starting points of any administration. Very decidedly, these two presidential newcomers have not arrived in Abuja and Dodoma with the conviction it is, in the scathing words of journalist and author Michaela Wrong, "our turn to eat".
Furthermore, in their short time in office, both leaders have gone out of their way to engage the private sector constructively. But this engagement has not always pleased vested commercial interests. In Nigeria, a move away from an economy built on natural resources towards one in which manufacturing can service customers at home and abroad is the recurring theme in all Buhari’s pronouncements on the direction the Nigerian economy must take.
In return for the government reducing its meddling in the business of business, he expects business to rise to the challenges of a different future and not obstruct much-needed progress by defending its inbuilt privileges.
Only with this two-pronged political and economic attack can the challenges that undoubtedly still remain in Nigeria and Tanzania — and indeed SA — be tackled.
Modern SA’s challenge is to move beyond the bifurcated bi-conomy it inherited in 1994 and the political system it has created post-1994. This dual process will not be easy, especially when the nation faces powerful cyclical economic headwinds.
But as Nigeria and Tanzania’s new presidents have illustrated, cyclical adversity is no excuse for not trying to build a better future for their people. And given the deep-seated strengths SA’s economic and political system still possesses, we have the financial and institutional wherewithal to make this necessary transformation.
• Power is a strategist at Investec Asset Management
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