Issue 9 February - May 2002by Phill Doran

The South African Rand is depreciating at an apparently never-ending and accelerating rate. Financial ‘analysts’—more aligned to the historian than the psychic in that they excel in discussing what has happened rather than what will be—are at a loss to explain the decline. They assure us, however, that it is very bad news for the country and the continent as a whole! In the meanwhile, the stock market climbs, and a chicken—the common currency of 80% of rural South Africa where money is little used—remains worth a chicken, despite Wall Street.

We are simultaneously assured that the declining currency is good news for exporters. But is this actually the case? Traders increase their profits by invoicing out in US Dollars or Pounds. As the Rand declines, so their profits increase which would appear to be excellent news for the economy.

This is not really the case. While the scenario may create a windfall gain, it does not contribute to the real goal, which is sustained and long-term economic growth through a developing export economy.

Let’s look at the arithmetic of such sales. A South African wheelbarrow exporter sells a wheelbarrow to a foreign entity for USD1. When the contract is formed, USD1 buys (say) R5. At the time of the transaction, the Rand has dropped to the value of 15 to the Dollar, so our South African now has R15 from the sale instead of his original R5—a veritable windfall! But, in essence, only USD1 entered the economy and the buyer only received one wheelbarrow in the process. Had the South African quoted a price of R5 at the outset (the equivalent of USD1 at the time of the exporter’s ‘costing’) then when the transaction was paid for, it would be the foreign buyer who gained the windfall. Instead of the USD1 set aside for the purchase, 33 cents would now suffice. By passing the benefit onto the foreign buyer one is able to develop an export economy. The buyer will return and next time instead of buying one wheelbarrow, will buy three. Our South African manufacturer will increase his production, employ more people and create new and stable taxpayers in the process. The manufacturer will have improved margins due to the economy of scale and the increased workforce translates into increased numbers of consumers, who in turn stimulate other markets...and so on. If the South African exporter keeps the windfall profits for himself, there is little incentive for the buyer to return with a second order, or increase the size of his original order. Rather than creating an on-going market, our South African has to look for new sales and other single opportunities to ‘make a killing’ out of the falling Rand.

And it goes deeper than this. By quoting in a foreign currency, our exporter—the life-blood of our economy—becomes part of the problem instead of the solution. If South Africans themselves do not believe in the currency of South Africa; the value of their own economy and its foundation, why should a foreigner believe in it? Some commentators have put the Rand’s decline down to a lack of faith in the currency on the part of foreign investors. Is that lack of faith not to be expected if we ourselves display it? Exporters quoting in a foreign currency actually want the Rand to decline. They go even further by welcoming late payments, hoping that a few extra days delay in conversion will see the currency tumble further to their immediate (perceived) benefit. And while the analysts lament the decline, the myopic exporter revels in the prospect of a further fall, while outwardly complaining that a falling Rand increases their input costs, due to the high import content of our export product. If you want lower input costs, then we have to manufacture more locally and import less, and if you want to achieve this, you have to have a vibrant economy which will only come with a strong export strategy. The illness and the cure derive from one in the same process.

During the transition in India, when it sought independence from the British Empire, there were many political activists agitating in various ways for change. Certainly one of the best known was Mahatma Gandhi, but his philosophy of ‘passive resistance’ while undoubtedly having the moral high-ground, was a slow and (for some of his followers) frustrating approach to the issue. Often they would harangue the master with the question “When will it all produce results? When will the change come?” To this, Gandhi was often quoted as having enigmatically replied, “You must become the change you seek”.

Many South African’s, after years of democratic change that have seen an increase in many social problems, an apparent economic decline and all the related ills that both produce, are often heard to voice similar complaints: “When will it all change? When will the economy turn for the better?”. Gandhi’s words remain fitting—for the exporter who wants to see growth, who wants to see an expanding market, the development of South Africa’s potential: you, the exporter, must become the change you seek.

For further information:
tel: +27 11 450 4140 fax: +27 11 450 4153
email sean@freighttraining.co.za
http://www.freighttraining.co.za

Author's Contact Details
Author: Phill Doran
Tel: +27 11 450 4140
Fax: +27 11 450 4153
Email: phill@freighttraining.co.za