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Why the labour movement is wrong to call for a weak Rand

September 9, 2004

After lows of R12 to the dollar at the end of 2001, our doughty currency cracked the R6 to the Dollar mark last month. This panicked that segment of the economy that pays its costs in Rands, but sells its products in Dollars – particularly the mining industry. Workers suffer.

Suddenly, a whole lot of mines are no longer profitable and miners face retrenchment. The unions march on the Reserve Bank, and the governor of the bank, Tito Mboweni, quite coincidentally drops interest rates to a still high 7,5%. The Rand becomes a slightly less attractive option for hot money, since a couple of other currencies – such as the Polish Zloty – offer a slightly better rate of return, and so the Rand drops to around R6,70 to the dollar and more or less holds firm.

“Still too high”, says the labour movement. A weak Rand means companies have more of the devalued currency to splash out on workers, while a strong Rand means it becomes cheaper to buy machines that replace human labour. So anyone who cares about workers in South Africa should call for State intervention to weaken the Rand against the Dollar, right? Wrong.

People say the Rand is overvalued. In relation to what? If there is any currency in the world that is overvalued, it is the Dollar. This is because of the
huge US foreign and domestic debt. US foreign debt is currently somewhere around $ 2.7 trillion – which means that the this economic Leviathan’s sustainability is increasingly underwritten by the central banks of Europe and South East Asia.

And they’re getting worried: if you owe the bank $100 thousand, you have a problem. But if you owe the bank $100 million, the bank has a problem. Which is precisely the kind of problem these banks have – the US owes them a fortune, and it increasingly looks like they won’t be able to pay. So taking its debt into account, the US economy – and its currency – is massively overvalued, easily by as much as 20%.

By keeping our currency undervalued, we perpetuate the idea of South Africa as a bargain shop. But we will never be able to compete with the true bargain shops in China and elsewhere. So rather than taking part in a race to the bottom we don’t want and can’t win, be should move into the market of affordable and sustainable quality.

The Proudly South African brand, for example, could be built as a quality sustainable brand that encourages fair labour standards and environmental sustainability. Already, businesses must have union approval to use the brand to boost their products’ profile– but how many people know that? South Africa should capitalise on positive sentiment about the democratic transition and go for the union-made, anti-sweat, empowerment and high-quality/ organic market.

When the Rand is weak, segments of the economy – those that have to import raw materials or machinery – go into a panic. The petrol price goes up, because we make petrol from oil, which we need to pay for in Dollars. This pushes up the cost of food and just about everything else, because transport becomes more expensive. Again, workers suffer.

When the Rand is strong, the petrol price can go down (provided the strength is sustained, and there isn’t a oil price spike caused by cowboys in Mesopotamia).

Far more important than weakness or strength is stability, so that business can plan and avoid the expensive disaster suffered by South African Airways
(and paid for by the taxpayer) when it bet on the Rand remaining above the R10 to the Dollar mark. A weak Rand keeps a whole lot of marginal business in operation, such as gold mines. But for how long, and to what cost for the rest of the economy, which can’t afford to modernise because of the high cost of importing
machinery.

We need to accept that gold mining is on its way out as a major contributor to the economy, and keeping borderline businesses operational by trying to
weaken the Rand is only postponing the inevitable. We should be planning now for our economy to absorb mine workers who will be retrenched. Making rural areas viable – perhaps by promoting high quality and organic agriculture, and eco-tourism – are attractive options. Instead of jobs far from home in smoky cities, we could be creating livelihoods.

Foreign Direct Investment has clearly not boosted the economy as it was supposed to, and trying to provide for the needs of our people by selling raw materials and cheap manufactured goods will sink the economy while
destroying living standards.

We need state intervention to upgrade infrastructure, particularly in telecommunications and transport. The rail network in particular needs to be redeveloped, and the telecommunications sector should either be
renationalised and run as a service, or opened to competition.

In sophisticated markets like those of the European Union, once you reach the mid price range, being the cheapest is far less important than being the best. The success of Fair Trade in these markets shows that consumers are concerned about labour and environmental standards in developing countries, and are willing to pay a little extra for quality goods that are Earth, people and animal friendly. This should be our focus.

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