Exchange controls have failed for 56 years – Independent Economist, Luke Muller

South Africa’s long-standing exchange controls have been singularly unsuccessful in their attempt at trapping capital within the country. Historical data shows that rapid rand devaluations (2008 and 2016 being recent examples) have been commonplace since 1961, despite costly attempts by government to prevent them. 

Clued-up governments today seek the mutual benefits that arise from the free flow of goods, services and capital. Back in the 1970s, the United States, Japan, Germany, United Kingdom, Canada, and Switzerland realised the damage exchange controls were doing to their economies and abandoned them. Other industrialised countries followed suit during the 1980s and freed up local companies to operate across national borders. In the 1990s, many developing countries chose to also take advantage of the benefits of free trade and globalisation and ditched exchange controls. 

A few countries have retained these anachronisms. They are usually characterised by statism and include such pariah nations as those of Cuba, Venezuela, North Korea and Angola. Regrettably, and to our great cost, South Africa can be counted among them.

Authorities tightened exchange controls shortly after the introduction of the South African rand in 1961. The controls were used to block large-scale capital outflows occurring in the wake of the 1960 Sharpeville massacre.  

Continued state enforcement of these controls is a burden our country’s economy can no longer afford. In addition to creating economic inefficiencies, the extensive web of regulation requires a staff of thousands to police and administer. It is time for South Africa to enter the global economy and abandon exchange controls.

Presently, South African residents and companies require prior approval to effect a transfer involving foreign currencies. Outward payments are limited to “permissible” reasons and must be made using specific currency dealers authorised by the Reserve Bank. In addition, specified allowances must be adhered to. All transactions must be justified, imposing bureaucratic second-guessing and reliance on subjective approvals. Paperwork is onerous and penalties can be enforced if regulation is not followed to the letter.

Exchange controls distort markets and encourage regulatory evasion, lobbying and rent-seeking. Even mild controls lower market liquidity, damage transparency and create black markets.

Tech entrepreneur Mark Shuttleworth has been one of the most vocal antagonists of this economically destructive practice. He experienced first-hand how South African entrepreneurs are permanently and significantly disadvantaged by exchange controls when trying to compete with the rest of the world, creating inefficiencies and preventing them from drawing from a global pool of resources and talents. In an interview with TechCentral Shuttleworth noted:

“Exchange controls particularly prejudice small businesses and individuals, preventing South African citizens from managing their finances and businesses in a global economy. Yet they do not provide the state with meaningful control over the value of the rand. They are a remnant of apartheid-era concerns about capital flight that pre-date globalisation, imposed at a time when government did not reflect the broader interests of society.”

Company and investor risks increase exponentially when currency convertibility is restricted at the whim of civil servants who can make and change the rules as they go along, without future clarity. Restrictions on convertibility, that aim in theory to prevent capital flight, end up instead promoting it by increasing economic uncertainty. Local and foreign investors are justifiably nervous when salaried bureaucrats have the discretion to impose exchange controls without so much as the blessing of parliament. It makes investors even less likely to want to keep their capital in a country when the guarantee of full convertibility is uncertain. 

Exchange controls are an obvious signal to investors that a country’s government is not confident that people wish to invest in that country. It also signifies that the government is overly controlling and burdensome for businesses. South Africans are prohibited from engaging in a host of potential wealth-generating foreign investments and opportunities.

When our currency is undervalued, this would normally present an ideal opportunity for citizens who invest offshore to profit from a repatriation of their foreign investments, and thus help to stabilise the rand. Our tired 56-year-old exchange controls restrict foreign currency purchases by South African citizens, however, and limit the pool of funds available for repatriation.

Most countries, big and small alike, have found that the direct, indirect and often indeterminate costs of market distortions caused by exchange controls and the additional cost of creating, updating and enforcing them, are entirely counter-productive.

South Africa is no exception and should re-integrate with the global economy without further equivocation. It would then immediately begin to enjoy the many fruits that come with leaving the economic backwaters of pariah nations and take on the mantle of a prosperous global nation.

Luke Muller is an independent economist

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