I am writing this in South Africa, where its currency, the rand, provides a useful illustration of the effects of monetary inflation described in Part 1.
When I was last here, three years ago, the going rate of exchange was around 16 rand to the British pound; now it is 21. That’s a 31 per cent devaluation (against sterling) over that period. Local prices adjust, of course, but that happens only over a period. Meanwhile, on the face of it, we are enjoying a “cheap” holiday.
But note that there is nothing objective about the statement that the rand has suffered a 31 per cent “devaluation”: that measure does not relate directly to its power to purchase actual consumer goods or services, still less a commodity like gold or silver. It is purely a comparison of exchange rates between two currencies at two dates, three years apart.
Seen thus, “cheap” is a relative term, and it disregards any devaluation that the comparator currency itself (sterling in this instance) might have suffered over that period, as measured objectively against, say, gold rather than just another volatile fiat currency. My statement therefore amounts to nothing more than that the rand suffered a greater loss of purchasing power than the pound sterling.
Background to the rand
Let’s broaden the picture: when the rand was established as the national currency in 1961, amid the euphoria of South Africa’s newly gained independence, it was not permitted to float and find its own level against other currencies; it was allotted an exchange rate of 2 rand to the British pound – the country’s former currency. As noted, today’s conversion rate is 21 rand to the pound – representing an apparent loss of relative purchasing power of more than 500 per cent since its inception.
But what of the pound itself, if objectively gauged? In 1961 £7 would have bought an ounce of gold, but now you would need close to £1,300 to pay for that ounce – an almost incalculable loss of purchasing power. So we see that the full debasement of the rand, as a currency, cannot be measured by reference to sterling alone – it needs a rock-solid comparator like gold.
Back to consumer prices. As the rand clearly has suffered a greater loss of purchasing power than the pound, it makes sense to say that, as British tourists in South Africa, we are enjoying a cheap holiday. One of the most obvious indications appears when eating out. Dinner for four in a good local North London restaurant would set me back between £120 and £130, including a bottle of decent wine and a 10% tip. Here, in Johannesburg, an equivalent evening out, including a bottle of delicious Pinotage, would cost around half of that, or 1,400 rand.
I’ll refrain from pressing the story much further than this, although clearly there is much to learn from it. It is, however, worth commenting on how that glorious country got into such a mess.
Currency destruction writ large
Looking back at the “apartheid” system under which I grew up, my generation didn’t see it then as we do now: as a scourge and national disgrace. But it is equally clear that the democratic transition to black majority rule did not have to incorporate measures since shown to be fully as destructive and counterproductive as those they replaced. In short, political infighting is hardly conducive to economic progress and in their frenzy to achieve racial equality the new governing class adopted practices such as land expropriation without compensation as legitimate policy platforms.
Employment opportunities are blighted by reverse discrimination in the form of statutes upholding “BEE” or “Black Economic Empowerment”. The powers have yet to learn the limits of what legislative reform can achieve. While the law can prescribe equality of opportunity, people themselves will never be “equal” – not even in the gulag. It is certainly beyond anything the law can achieve.
As you might expect the new wave of employment legislation facilitated the formation of some of the most powerful trade unions in Africa and, again, as you might expect, the youth unemployment rate of nigh 50 per cent is also among the highest in Africa. Do you think there might be a connection?
State capture and corruption
All the money creation that destroyed the South African currency simply filled the vacuum left by the billions stolen, literally, from its Treasury through systematic “state capture” by President Zuma and his criminal henchmen, including the Gupta family, now holed up out of reach in Dubai. They didn’t take it all themselves, of course, but they established, on a par with their Northern neighbour Mugabe in Zimbabwe, a culture of rampant and systemic theft of state assets now so entrenched that it represents the new norm for South African civil governance. Not merely corrupt, more a way of life.
State-owned enterprises, such South African Airways, energy generator Eskom, military technology conglomerate Denel or the transport monopoly Transnet, all depend on extensive supply chains from mines and imported raw materials through the production stages, whether they are in the business of light and heat or defence weaponry. At every point in the chain valuable resources are “skimmed” whereby cronies, having bribed their way into position, take their rake-off. The final cost finishes up as a huge multiple of the chain’s component elements.
As no consumers can afford prices that would cover thefts on this scale the entities involved incur massive losses, and virtually all of them are insolvent – as, indeed, is the nation itself. Eskom’s debt now stands at R454 billion and the only discussion centres on the best method of hiding the inevitability of its impending write-off.
On each day of the holiday our “luxury” hotel supplied us with that day’s “load-shedding” schedule – the hours during which elevators will be out of action, appliances and TV will have no electricity, the kitchen will not offer hot meals and there are no functioning traffic lights on the roads. These measures are not primarily designed to save energy – but arise from the many years in which sums earmarked for maintenance have been quietly misappropriated, leaving capital equipment on its last legs.
No correction in sight
An inescapable by-product of corruption on this scale is the legacy of nepotism and gross incompetence in its wake. Although everyone knows the story and talk about it is commonplace, we encountered no seething resentment, still less rebellion – only a marked increase in the number of beggars, including white BEE victims, that ply the pavements and look pleadingly at motorists waiting for the lights to change.
By its nature corruption starts at the top. And only from the top can a transformative remedy emerge.
The Goodnight Vienna Audio file