Johannesburg — WILL a weak currency improve SA's competitiveness and be positive for growth and job creation, or be just a short-term solution, outweighed by longer-term damage?

In attempting to increase a country's competitiveness, it is often tempting to use price competitiveness for its exports through currency devaluation or keeping wages low. Clearly keeping wages low is anathema to those who advocate rand weakness to boost growth and employment. However, with currency devaluation the citizens of the country take a communal pay cut through dropping the cost of their goods sold in world markets and paying substantially more for imports.

Continued rand devaluation runs the risk of entrenching SA as a country with a substantial export share but one which still remains poor. By pursuing a weaker rand, workers become trapped with ever-lower wages as their purchasing power continually diminishes (and inflation rises relentlessly).

Rand weakness results in higher import costs. Substantial, continuing rand weakness makes the cost of importing goods exorbitant or unaffordable. Workers are doomed to producing relatively cheap products and earning low pay as a result, without the ability to tap into economies of scale as the cost of mechanisation of the production process is beyond the county's reach because of the severe weakness of the currency.

Weakening the currency to result in a more competitive rand, one that increases the county's level of exports, would actually result in a substantial lowering of living standards for those already employed. A country's standard of living is shaped by its output.

This means high levels of quality health care, education and public services become easily affordable and per capita incomes keep rising significantly (sustainable growth and employment results). Indeed, manufacture of high-quality products with high price tags, allows a nation to support high wages, a strong currency and attractive returns to capital resulting in a sustainable, high standard of living.

Chiefly exporting low-priced products only supports subsistence wages and translates into a low level of gross domestic product per capita. This need for low wages indicates lack of competitiveness as the country has to compete on price instead of on quality to gain market share.

Pursuing an endlessly depreciating currency is clearly not the answer. However, some temporary rand weakness could help SA move a little faster away from its recent recession toward growth. An option would be the temporary purchases of hard currency by the Reserve Bank without sterilisation. (Sterilisation removes the inflationary component by neutralising the increase in money supply).

Reserve Bank purchases of hard currency without sterilisation would need to be aimed at temporarily stimulating money supply (printing money to sell for hard currency), a worthy goal in itself due to the weak nature of primary borrowing, with any rand weakness only an indirect result. The risk is speculators would see direct intervention as a desire to weaken the currency, which could be an unwanted, self-fulfilling prophecy resulting in too much rand weakness too soon.

And while the trade-weighted rand (the rand against SA's key trading partners weighted in terms of importance) is now 23% stronger on the year, rand strength is likely to be only a relatively temporary phenomenon, waning as developed economies recoveries strengthen (and interest rates rise) and the cost of funding the carry trade increases.

Risk aversion levels will balance out and portfolio flows into SA subside, without the materialisation of strong, sustainable growth, resulting in limited foreign borrowing being available to fund SA's current account deficit.

This is another reason to temporarily increase money supply and the demand for credit; stimulating economic growth will push up the current account deficit, causing rand strength to subside naturally.

Pursuing anticompetitive policies such as formally weakening the rand will only worsen SA's purchasing power and hence living standards. Fortunately, the government's policies have pursued further relaxation, not tightening of exchange controls.

Bishop is the South African economist for the Investec Group.