Exchange controls

THE global financial crisis has turned the world upside down. Conventional wisdom no longer holds in many cases, and we are left searching for answers.

A case in point is exchange controls. This issue used to be as straightforward as motherhood and apple pie. We all thought that exchange controls were "a bad thing"; people should be allowed to vote with their feet when it comes to their own money and the capital markets should be freed up completely, as fast as possible.

But by now it's common cause that exchange control prevented SA banks from putting their money into the toxic assets that have caused disaster at international banks. Given the present dire straits of foreign banks compared with the health of local banks, it's clear that exchange control is a far more complicated issue than conventional wisdom would have us believe.

This was underlined last week when a top SA businessman went out of his way to praise exchange controls - surely a first! Remgro chairperson Johann Rupert last week said South Africans should be grateful for exchange control regulations, which shielded the country from some of the worst effects of the global financial crisis.

"Thank goodness once again for exchange control," Rupert said. And we find ourselves agreeing with him - despite the previous conventional wisdom that exchange controls could only be bad.

Motherhood and apple pie

The issue of exchange control emerges from one of the main themes of the crisis: the role of unfettered, free markets in its cause. Judging from the gleeful reaction of socialists, the belief is held in some quarters that the crisis is an indictment of free markets.

But that is an overly simplistic way of looking at things, as much so as the previous "motherhood and apple pie" view of exchange controls. What the crisis has demonstrated to SA is that exchange controls have a role to play in the country.

That doesn't mean that every single foreign capital transaction should be subject to control. It's all a question of degree.

The financial crunch has shown us that some exchange control is desirable. The questions that policy-makers and their advisers have to answer are: how much control is needed? Where do you draw the line? When does control stop being a way of protecting the economy from excessive capital outflows and become dangerously interventionist?

These questions don't have easy, pat answers. The crisis has shown us that easy "truths" about markets are a thing of the past.

New respect for maligned middle road

But in practice the economic debate sadly doesn't allow for delicate shades of grey. It's a black and white discourse; you're either for unfettered and fully free markets or you're a leftie. The middle road - surely the most desirable place to be - is subject to stereotyping and caricature from both sides.

Perhaps one benefit of the crisis will be that the middle ground in the economic policy debate will gain new respect.

That is a wish that holds true not just for the issue of exchange controls, but for the broader one of free markets. It must be said, however, that the socialists' crowing about the semi-nationalisation of major banks is completely misplaced.

The crisis isn't proof that banking is better managed by governments, as some would have it. Rather, it is a symptom of what happens when banking regulation and supervision are too lax.

Once again, the question is: when is there too much regulation that stifles innovation, and when too little, so that bankers take excessive risks? Again, there are no easy answers. The solution lies somewhere in the middle.

The importance of the middle ground is illustrated when we look at the policy challenges we face. In monetary policy, the challenge is to pursue an inflation target without throttling economic growth.

In fiscal policy, the challenge is to deliver services and create jobs without taxing the nation to death or incurring huge debts.

These challenges might seem obvious, but the point is that the responses to them aren't as easy as most people believe.

In monetary policy, the Reserve Bank has been characterised as "an inflation nutter" (to borrow a phrase from Bank of England governor Mervyn King) as well as too lax. Finance Minister Trevor Manuel is often seen as overly strict, with many forgetting that the country faced a debt trap when he took over.

Economic policy is about trade-offs and finding the right balance. That point has been rammed home by the global financial meltdown.

- Fin24.com