One has to wonder what South African policymakers might have learnt from the highly successful growth strategies of Asia’s economic tigers. For while the Asian central banks routinely engage in massive foreign exchange intervention to keep their currencies cheap and their export sectors competitive, South African policymakers seem content to allow the rand to enter into the stratosphere. And while the Asian tigers remain intent on retaining strict controls on outward capital movements, South African policymakers are happy to increase the country’s external vulnerability to any future deterioration in international conditions by moving in the direction of abolishing all exchange controls.

One of the more striking features of the global economic landscape over the past few years has been the massive foreign exchange intervention by the Asian central banks. They have done so with the explicit objective of preventing their currencies from appreciating against the U.S. dollar. Notwithstanding Trevor Manuel’s recent assertion that international central banks have learnt that foreign exchange intervention is futile, Asian central banks have succeeded in keeping their currencies cheap through foreign exchange intervention totaling a staggering $900 billion over the last three years.

The maintenance of cheap currencies has been a critical factor powering Asia’s spectacular export led growth. Over the past five years, China and India have consistently grown each year by 9 percent and 6 percent, respectively. They have done this on the basis of export growth routinely in the range of 20 percent a year, which has been facilitated by their cheap currency policies.

South Africa’s growth performance at less than 3 percent a year over the past ten years has to be judged as highly disappointing in relation to that of the Asian tigers. Despite policies that have provided a number of the necessary conditions for more rapid growth, South Africa’s economic growth performance since 1994 has barely kept up with its population growth. Moreover, South Africa has hardly made a dent in reducing its very high unemployment rate

South Africa’s exchange rate management over the past few years has been particularly harmful to longer run economic growth. Over this period, the South African currency stands out internationally as among those currencies that have experienced the most real appreciation and that have been the most volatile. Indeed, the rand appreciated from as high as 13 rand to the dollar in February 2002 to around 6 rand to the dollar at present. While there can be honest differences of opinion as to what the appropriate level of the South African rand should be, there can be little doubt that an exchange rate at 6 rand to the U.S. dollar is hardly consistent with more buoyant externally oriented economic growth.

South African policymakers would appear to have much to learn from their Asian counterparts in the art of exchange rate management. The Asian central banks never lose sight of the fact that the external sector of their countries’ economies can serve as the major engine for rapid economic growth. To that end, the Asian central banks consistently engage in large-scale foreign exchange intervention in order to maintain very competitive exchange rates. At the same time, they engage in massive domestic “sterilization” operations in order to ensure that their large international reserve purchases do not result in an inflationary expansion in the domestic money supply.

The case for an aggressive exchange rate intervention policy would appear to be all the stronger in South Africa where the Reserve Bank’s level of international reserves is still very low by international standards. One may well ask whether the Reserve Bank should not be taking advantage of the currently favorable international environment to substantially build up its reserves to a more adequate level. Such a build-up would allow the Reserve Bank to prevent the currency from unduly weakening when the currently favorable international conditions change.

One might also question the wisdom of moving so rapidly in the direction of capital account liberalization. With oil prices now above $50 a barrel, can we be so sure that the global economic recovery will be sustained in 2005 at its recent pace? With the United States’ budget and external deficits now approaching record levels, can we be so sure that international interest rates will remain so favorable for emerging markets? Against that backdrop, might Asia’s cautious approach to capital account liberalization not offer some valuable lessons to South African policymakers?

Desmond Lachman is a resident fellow at AEI.