The South African manufacturing sector has been in a state of decline for more than a decade (Dube, Hausmann and Rodrik, 2007). Whilst it is arguable that the decline is structural in nature, recently it has become popular to appeal to policy makers to intervene in foreign exchange markets to bring about a weakening in the Rand against the currencies of South Africa’s major trading partners. It is argued by these advocates of ‘Rand weakness’ that a depreciation in the Rand will provide relief to the domestic manufacturing sector which has been under acute pressure since 2008.
An examination of the data that captures the relationship between the performance of the manufacturing sector and movements in the Rand over the last three decades reveals a result that runs contrary to conventional wisdom and the arguments of mainstream economic textbooks. Specifically, the evidence in the South African economy shows no explanatory relationship between a depreciating Rand and growth in the manufacturing sector.
By focusing on promoting productivity, and sharing gains in productivity, South African manufacturers will establish a source of sustained competitive gains, whilst labour will establish a sustainable source of income growth. In time, the ‘weak Rand’ advocates will be surprised to find that this world of higher productivity and higher incomes correlates with a stronger Rand, greater global competitiveness of South African firms and higher standards of living for South Africans generally.
Extract from article by Dr Adrian Saville (Chief Investment Officer - Cannon Asset Managers)
See full article with charts and statistics published on Moneyweb
