Finance Minister Pravin Gordhan recently repeated the sensationalist fears promoted in the mainstream business media about the possibility of currency wars and trade protectionism.
These fears reflect concerns about the broken state of the global economy more than the actual threat of economic wars. The rich countries, particularly the US, Germany and Japan, have been mani- pulating exchange rates and protecting different economic sectors while perpetuating the myth that they are the champions of free markets.
The myth that neoliberal globalisation has led to free markets is what drives the rhetoric about currency and trade wars when developing countries work to protect themselves from huge financial and trade instability in the global economy. Unfortunately, senior economic policymakers in South Africa have swallowed the myths and do not seem to be willing to take the necessary defensive actions to protect the South African economy from the threats in global markets.
The myth perpetuated during neo- liberal economic globalisation over the past few decades was that the developed countries had moved away from managing their currencies and protecting trade. The myth was that they had free markets. There was a huge programme to convert all developing countries to free markets. In fact, we were all led to believe that the integration of trade and financial markets through economic globalisation was inevitable and that countries resisted this inevitable process at great peril. In the words of Margaret Thatcher: “There is no alternative.”
We were supposed to believe that the US had achieved the ultimate system and, according to Francis Fukuyama, we had reached the “end of history”. However, the reality was that the powerful developed countries had not moved to free trade and had manipulated their exchange rates. For example, the Plaza Accord, in 1985, was an agreement between the US, Germany, Japan, France and the UK to depreciate the dollar relative to the German mark and Japanese yen. These countries used their economic and political power to support their economic interests. They used global financial institutions to serve their own agendas. And they continued to blatantly subsidise and protect their agricultural sectors, while loudly espousing free trade rhetoric.
The myth that there were free markets was so strong that, today, when more countries assert their rights to protect domestic markets or to devalue their currency, we face alarmist cries about trade and currency wars. All the while, the most powerful countries rigged the game in their favour, while telling us all was free and fair.
The world is recovering from a period where the richest countries allowed their financial institutions to wreak havoc. An important part of this havoc was the creation of mountains of debt that allowed people in those countries to behave as if they were rich without actually producing enough services, goods and new technology to match the amount of goods they consumed and the money they wasted. This eco- nomic activity and debt creation led to a huge economic imbalance.
US policymakers have pursued a weaker exchange rate over the past few years in response to this economic imbalance. They have tried to use their economic and poli- tical power to pass on the costs of their debt-driven consumptive behaviour to the rest of the world. China has correctly pegged its currency to the dollar. Other countries negatively affected by depreciating US and Chinese currencies have correctly depreciated their currencies.
It is time that South African economic policymakers look beyond ideology and unrealistic economic models to face up to the fact that, if we are to deal with poverty and unemployment, we should also be managing our exchange rates and protecting our local industries.
During this global economic downturn, where we can expect a drawn-out and uneven recovery, the need for managing our economy and currency is vitally necessary. By so doing, we will not be participating in a war, but we will be operating in the global economy on the same terms as the powerful economic players.