Looking at the relationship between rand weakness and industry growth over response times of three, six and 12 months, Adrian Saville, chief investment officer of Cannon Asset Managers and a visiting professor at the Gordon Institute of Business Science (Gibs), found no relationship between currency moves and output over the shorter response periods, and a negative relationship over a response period of 12 months.
"Over the past 30 years, a strengthening of the rand corresponds with growth in the manufacturing sector, whereas the manufacturing sector declines if the rand weakens. This is the exact opposite of what textbook economics and conventional arguments would have us expect," Saville wrote in his report.
"If people are anticipating that a revival of the South African manufacturing industry will flow from a weaker rand, they are possibly pinning their hopes on defying history."
The departments of economic development and trade and industry, together with labour federation Cosatu and the Organisation for Economic Co-operation and Development, have said the rand should be weakened to aid manufacturing and create jobs.
Saville's research is based on the assumption that the manufacturing industry would respond to rand movements, and not anticipate them. Currency moves were averaged over three and six months to get a better sense of an "entrenched", or more permanent, currency move, to which industry is more likely to respond than a "one-off" monthly adjustment.
Saville also selected different data sets - for example to exclude the politically volatile '80s and times of extreme rand weakness, such as end-2001 and early 2002 - but still found no significant correlation between the currency and manufacturing output.
One explanation for the "widely unanticipated result" is that many of SA's exports are reliant on imported inputs. A strengthening in the rand therefore leads to cheaper imported inputs and producer price deflation, which may improve SA's export competitiveness, Saville said.
Another explanation is that, when the world's economies are performing well, SA manufacturers participate in this growth.
According to Saville, the success behind South African manufacturing and its global competitiveness has nothing to do with the currency, but with labour productivity - labour is the single most important input into manufacturing.
The focus should not be on labour costs and a low wage model to mimic the Chinese, but on the promotion of productivity, which will establish a source of "sustained corporate gains" for manufacturers, and a sustainable source of income growth for labour.
SA enjoyed high productivity growth that outpaced the higher-than-inflation wage increases of the late '90s and early 2000s, but this was a consequence of the structural adjustments that the SA economy started to undergo in the early '90s, and "not because SA suddenly discovered a new way to compete. Since the early 2000s, that trend has reversed", Saville said.
SA's public sector, in particular, is now characterised by double-digit wage increases in a single-digit inflation environment, with no corresponding increases in productivity.
"If we want to get globally competitive, we need educated, skilled workers, with access to healthcare," he said.
Instead of debating the "ideal" value of the rand, the high levels of concentration in the SA economy - of firms, labour and government - should be addressed. The backlogs in physical infrastructure, including rail and port capacity, Internet connection speeds and the cost of road transport also need to be addressed, Saville added.
Source: Sunday Times
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