Shattering foreign exchange control myths – and why their removal is very long overdue

It’s seven years since SA’s one-time insurance wunderkind turned professor Brian Benfield hit Wits University’s retirement age of 65. His brilliant mind, however, has clearly not been put out to pasture as we read in the first of two articles assessing South Africa’s obsession with foreign exchange controls. These born-in-sin regulations are justified by bureaucrats as a way to moderate potentially turbulent currency flows and thus protect the developing economy. In reality, they do nothing of the sort, are a tax on business and a subsidy for commercial bankers whose fees are boosted by the need to continuously report their clients’ global activities to the SA Reserve Bank. Benfield argues that excon has long passed its sell-by date. And in this piece addresses three myths and assesses why SA’s forex controls are not relegated to the dumpster where they surely belong. – Alec Hogg

The mythical value of foreign exchange controls

By Dr Brian Benfield* 

A history of foreign exchange (forex) controls

The trouble with forex controls is that they are far more effective at keeping money out than at keeping it in. Almost every historical case shows that forex controls were conceived in shamed and weakened circumstances. In every case, they have ultimately proven to be unalloyed failures.

The first recorded modern forex controls were introduced by the Nazis in Germany just prior to the Second World War in the mistaken belief it would stop fleeing Jews from taking their assets with them. They did not succeed. Hitler’s gold and foreign currency reserves continued to dwindle faster than ever, accelerating his need to go to war.

In South Africa, 60 years ago, the apartheid regime introduced copycat forex controls following the Sharpeville massacre. These, too, did not succeed. Indeed, we know now that they greatly exacerbated those matters they were intended to improve.

Since the 1970s, only the world’s pariah states have maintained forex controls. Almost all open, democratic, well-regarded and self-respecting states ditched these discredited practices soon after the following became clear.

What forex controls cannot do

Global empirical research shows beyond informed debate that forex controls: 

  1. Do not prevent people from acquiring foreign assets. Our previous forex amnesties provided ample proof thereof. After over four decades of the vigorous enforcement of the most draconian forex laws and penalties, individual South Africans in some cases had accumulated more assets offshore than in SA.
  2. Neither enhance nor preserve long-term foreign investment.
  3. Impede and impair both local and international trade.
  4. Neither prevent nor discourage ‘capital flight’ or the emigration of human capital.
  5. Do not engender an environment conducive to business confidence and economic growth.

Forex mythology

Myth No 1

Forex controls serve to limit wealth ‘leaving’ South Africa. This somehow promotes or sustains economic growth within the country.

Apart from the fact that we have ample evidence forex controls cannot and do not stop citizens from accumulating wealth offshore, it is simply not possible for wealth to leave South Africa through the foreign exchange mechanism. In order to get money offshore, citizens must exchange their existing rands for a foreign currency. In doing so, rands do not ‘leave’ SA. They merely change hands within the country. That is where the matter ends.

At the moment of exchange, no wealth leaves the country and none enters it. A South African citizen who already has rands, simply swaps them with, say, an American who has dollars. The American who had the dollars and could have spent them offshore, now has only rands and can spend them only in SA. No wealth and no rands have left SA.

Where there is increased demand by citizens to get money offshore, demand for dollars (or other foreign currencies) may rise and depresses the rand exchange rate. This merely means citizens then exchange more of their existing rands for dollars to the possible advantage of the person willing to accept those rands. Locals enjoy the opposite advantage when there is less demand for dollars and the rand rises in exchange value. Still, under all circumstances, the simple exchange of currencies does not lead to wealth leaving or entering South Africa. This fact alone underscores the folly of those who believe forex controls serve to retain SA’s wealth.

What is more, where a local citizen finds he can acquire something cheaper internationally than locally, it is in everyone’s interests that he do so. This is because he is then left with more money to spend on other things (or to save and invest) and is thus automatically better off … or ‘wealthier’. When many people do this, the nation as a whole is wealthier. To achieve this, the nation exchanges existing rands for dollars (no wealth lost or gained), buys the cheaper goods or services and immediately becomes wealthier as a whole. The great trading nations of the world discovered this elementary economic truth centuries ago.

It, therefore, behooves our Ministry of Finance and Reserve Bank to scrap every last vestige of forex controls, making it possible for international competitors to more readily provide South Africans with goods and services at the best international prices.

Myth No 2

Ditching forex controls will lead to SA citizens wanting to exchange vast sums of rands for dollars and other currencies. This could lead to a sudden collapse in the exchange value of the rand.

Those who earnestly want to exchange rands for foreign currencies have by and large already done so. This was proven by the amnesties and appears relatively easy to do. It is apparent that there are myriad possible ways of achieving this; some legitimate, others not. The chances of being caught are ostensibly remote and the tax incentives are high. Again, the amnesties alone proved this.

De-criminalising the ‘unapproved’ ownership of foreign assets therefore will not lead to a sudden new demand by citizens for foreign assets as it seems certain most of those who want them already have them. Even if there is a temporary upsurge in demand for foreign assets, it cannot be sustained and will merely be reflected in the exchange rate for a short period. Precisely nothing else of negative significance will occur.

Contrary to regulatory mythology, many economists have predicted that scrapping forex controls will soon lead to an improvement in the rand’s value as it gains international esteem and as citizens themselves gain confidence and start to repatriate and invest the many millions held abroad.

Whatever the case may be, there will be parts of SA’s economy that will benefit from either a stronger or a weaker rand while the currency finds its true value in the international markets, unfettered by the abnormal aberrations of forex interventions.

Myth No 3

Current SA forex controls are few and it is actually easy for funds to flow in and out of SA unhindered.

This is simply not true. There are hundreds of staff working at the Reserve Bank and at banks across the country whose tasks are directly or indirectly involved with the administration of forex controls. This fact alone speaks volumes. (Just try to exchange a few rands for pounds or euros and see what hoops they put you through!)

International investors are today able to use the click of a computer mouse to transfer funds into or out of most respected currencies without the presence of an inquisitive bureaucrat probing their every move. They are thus highly suspicious of countries making up their own rules and trying to set their own currency entry and exit terms. They realise it is just as easy for bureaucrats to later prevent money from leaving as it is for them to agree to it entering. Why would anyone want to invest under such circumstances when there are so many easier and less risky investment options available?

What is stopping the scrapping of forex controls now?

When the late president Nelson Mandela opened Parliament in Cape Town in 1996, he said it was not a matter of if forex controls would go, but when. That was over a quarter of a century ago. What are the reasons that our economy is still blighted by an irksome and antiquated system that palpably does more harm than good?

It seems there might be two reasons why the Treasury and the Reserve Bank simply cannot bring themselves to do what is right for South Africa:

  1. They may have to retrench, pension or redeploy numerous SARB employees who have spent a lifetime doing what they were told was good for their country.
  2. The psyche of many a politician and civil servant is such that once having seized power, they simply cannot give it up, no matter that doing so would be right and proper for the country and its tattered economy.

It is time for Minister Godongwana and his contemporaries at the Reserve Bank to show their true mettle and scrap the last vestiges of these iniquitous controls. The confidence and flexibility that such a move would engender will usher in the unleashing of vast swathes of South Africa’s economic potential and make it the southern hemisphere pacesetter of the decade.

On this, they can take poison.

  • Dr Brian Benfield is a retired professor, Department of Economics, University of the Witwatersrand writing for the Free Market Foundation. The views expressed in the article are the author’s and not necessarily shared by the members of the Foundation.

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