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Monday, 23 August 2010

Trade, Industrial Policy and Exchange Rates in South Africa

  Peter Draper

SAIIA Occasional Paper No 66, August 2010

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Development through Trade Programme- Now part of the Economic Diplomacy Programme

South Africa’s trade, industrial and exchange rate policies have been the subject of substantial public debate in recent months, not least owing to the impact of the 2008–10 global financial crisis. On the trade and industrial policy fronts a substantial reorientation of policy has been under way for some time – a process accelerated by the financial crisis and associated policy responses in developed countries. The debate on the exchange rate is relatively new and its linkages to trade and industrial policies not well understood. Accordingly, the South African Institute of International Affairs and the Mail & Guardian newspaper convened a one-day Critical Thinking Forum to consider these matters, specifically the interlinkages among these three policy issues. Overall, a consensus emerged that tinkering with the exchange rate with a view to boosting export competitiveness is not the silver bullet that some protagonists believe it to be. Rather, microeconomic reforms to address underlying structural lack of competitiveness and bottlenecks in key network services are central to promoting longer-term international competitiveness, exports and job creation. In this regard, concerns were raised that the reorientation of trade and industrial policies may not promote this microeconomic reform agenda, particularly if a more protectionist policy stance ensues. In this context, acting to undervalue the exchange rate would create more distortions and over time undermine the very competitiveness such policies are intended to promote. Therefore, forum participants were in agreement that for any exchange rate intervention to succeed and be sustainable, it had to be preceded by and underpinned with a comprehensive microeconomic reform agenda.

Author: Peter Draper