Exchange controls are an apartheid relic and should be abolished

In November 2005 the Reserve Bank Governor at the time, Tito Mboweni said, “For all intents and purposes exchange controls have become purposeless … the cost of exchange control administration and the inconvenience that goes with managing (it) might not be worth the exercise”. New calls to scrap the last remaining remnants of this apartheid legislation are now being made. Calls which should receive the hearty support of every South African who wants to see our country grow.

Although Mr. Mboweni’s comments could not have made him popular amongst some of his peers, he recognised that exchange controls create endless hassles for investors wishing to enter into transactions with foreigners and that these costs far outweigh those of ‘lost’ employment at the Reserve Bank in the forex control sectors. Indeed, the much greater costs of forex controls are the lost investment opportunities, by both foreign and local investors, that are seldom visible or measurable.

Because of the relatively low savings levels of its citizens, SA desperately needs foreign investment to fund capital expansion programmes vital for future growth and employment opportunities. Why would a foreigner want to invest in any country if they knew that they could not easily get their dividends out of it? Instead, they will simply invest in economies that welcome their money and do not impose forex controls.

Moreover, what message do forex controls send to local investors? One factor frequently under-appreciated is that domestic investor’s base their decisions on future prospects and are rightly sceptical of the motivations behind forex controls. Forex controls are counter-intuitive. They push domestic investors away from trying to keep their money within the country’s borders, to seeking out any suitable foreign investment to hedge against future uncertainty in the local economy. With no forex controls in place, there would be peace-of-mind that the government is confident in its country’s future and a lot of this ‘insurance’ investment would not be necessary. Removing exchange controls would increase the level of freedom for citizens. In any country where individual freedoms and rights are valued, the threat that its citizens may vote with their assets by investing them elsewhere, will keep the government in check, responsive and accountable to its people.

It is important to note that Rands never really ‘leave’ SA through the foreign exchange mechanism. All that happens is that they are exchanged for other currencies and remain for use in SA. After all, this is the only place where they are useful! For example, when a South African travels to the US, he cannot exchange Rands for goods and services while he is in the US – what on earth will the Americans do with those pieces of paper with pictures of the ‘big five’ on them? When a South African and an American exchange Rands for Dollars, no wealth leaves the country and none enters it. Neither country is made richer or poorer by exchanging currency. A country’s wealth is derived from its production of goods and services, not the ratio of foreign to local currency owned by its citizens, government or foreigners.

High growth countries deliberately set out to create the kind of environment that will attract risk-taking entrepreneurs and investors. They do this by producing goods and services that other people actually want. They cut down on taxes and red tape, and, most importantly, refrain from attempting to prescribe to law-abiding local and foreign firms what they may and may not do with their own money.

SA is in a position to send a strong signal to the rest of the world that our economy is open to business. Eliminating these remaining vestiges from the apartheid regime will ensure that to the extent that the Rand may be unduly affected by these controls, our currency will return to its true value.

A common feature of all economically successful nations is that their citizens are not constrained by laws that undermine individual rights and liberties. Advanced economies achieve higher levels of economic growth through higher levels of individual rights and economic freedom – no country has ever grown appreciably by being closed off to the rest of the world. Innovation and competition – the real drivers of economic growth – are stifled when governments seek to control their citizens at every turn. There is nothing to wait for and everything to gain and the ideal opportunity to abandon this failed apartheid policy neatly presents itself on 27 October at the medium-term budget speech. For SA to grow, it can and should abolish exchange controls now.

Author: Jasson Urbach is an economist with the Free Market Foundation. 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 Foundation.

FMF Feature Article/ 12 October 2010