Abolish exchange controls now

Tito Mboweni, Governor of the SA Reserve Bank, recently lamented the harmful consequences of the labour laws that he himself introduced as Labour Minister. If the Government were to heed his calls for labour law reform they would empower the individual and reduce unemployment, both of which would benefit the economy and the county as a whole. Mboweni has now called for the remaining exchange control laws to be removed, which likewise would empower the individual and benefit the economy. Whether or not the government does the right thing, however, probably depends on vested interests and not economic logic.

Exchange controls are nothing new. Around 2,400 years ago, the Greek philosopher Plato advocated an unconvertible currency in order to limit outside influences on the economy and the value of the currency. During the 20th Century many governments, including communist and fascist regimes, instituted some form of control over the convertibility of their currency. The apartheid government introduced exchange controls to prevent citizens from escaping from their apartheid laager.

Politicians and the political elite more often than not fear what they cannot control. Therefore exchange controls provide a useful tool for governments to limit the flow of ‘hot money’ and curtail speculators. However, in doing that, they more often than not harm all investors, reduce the value of all assets and undermine the rights of individuals over their own property.

The market price of an investment is determined by the future income that it will generate, discounted to present value by an appropriate interest rate. But as Steven Hanke of Johns Hopkins University explains, ‘when convertibility is restricted, risk increases and so the risk-adjusted interest rate employed to value assets is higher than it would be with the full convertibility.’ Exchange controls therefore reduce the value of our assets.

Since 1994, the government has gradually relaxed many of the exchange control laws so that now South Africans can legally hold more of their money in other currencies than they ever could during the oppressive days of apartheid. Yet the government can and should go further and scrap the laws in their entirety. Fears that this will result in massive financial outflows are not supported by the experiences of other countries.

First, as Hanke explained, the reduced risk that would arise simply because the state would have no right to limit or expropriate people’s assets would increase asset values. Second, the absence of exchange controls would help to ensure that the sound fiscal management of the economy continues. When individuals are free to invest anywhere so as to maximize their returns, governments are forced to adopt policies that will attract the maximum number of investors. This in turn should translate into higher economic growth, more employment and reduced poverty.

Removing exchange controls in SA would remove the ability of government to exploit its citizens. The less direct power that a government has over their daily lives, the more it is reminded that its power is provided ‘by the people and for the people.’ Nothing would keep a government in check, responsive and accountable to the people more than the threat of those people voting with their assets and investing in a country that places a higher value on individual freedoms and rights.

Nobel Laureate Friedrich von Hayek understood this well and regarded exchange controls as ’the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape not merely for the rich, but for everybody.’

The United Kingdom removed its exchange control regulations in 1979 after the ‘winter of discontent’ and at a time when Britain was considered the ‘sick man of Europe’. Former Chancellor of the Exchequer Lord Lawson notes that ’the flexibility which their demise unleashed was spectacular, ushering in more than a decade of rapid growth and recovery, and setting in train the economic flexibility which now makes Britain the EU's pace-setter.’

Removing exchange controls would send an important message to foreign investors that SA really is ‘alive with possibility’. Ensuring that investors can take their money out is a crucial first step in ensuring that the money will be invested in the first place. But while many developing country governments do carve out special deals for foreign investors, these should be available to locals as well. Why should a government grant greater freedoms and rights to foreigners than to the very people that it represents and to whom it is accountable?

Of course there are vested interests that would like to retain exchange controls. Apart from some politicians who would fear the greater rights granted to citizens, the armies of officials employed to enforce the complex web of rules and regulations would clearly lose out. South Africans should not be held to ransom by these special interest groups.

We now enjoy greater freedoms than ever before. Restrictions on whom we can marry and sleep with, where we can live, work, travel and eat are almost all gone. It is high time that we are granted these same freedoms over our property. A common feature of all winning, confident, nations is that their people are not shackled with laws that undermine individual rights and liberties. Indeed nations achieve their winning status precisely as a result of maximal individual rights and economic freedom. There is nothing to wait for and everything to gain. South Africa can and should abolish exchange controls now.

Author: Richard Tren is a council member of the Free Market Foundation and director of the health advocacy group Africa Fighting Malaria. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article /15 November 2005