ATTAC - University of the Witwatersrand - A Case for Capital Controls

This paper was commissioned by the Nedlac Labour Caucus in September 1999. Acknowledgements are due to many colleagues in South African labour and social movements, and internationally, who assisted in fine-tuning the argumentation. Any flaws are the author's responsibility alone.

In 1995, South Africa removed a decade-old financial rand exchange control mechanism. In 1998, Malaysia instituted even tougher controls on inflows and outflows of capital. South Africa has been subjected to two extremely destructive bouts of international financial volatility since 1995, while it is broadly recognised that Malaysia's capital-control experience was positive. Given the overall decline of "Washington Consensus" ideology, one of its main elements--liberalised financial markets--can now also be called into question. Thus there are strong historical, contemporary-comparative and theoretical grounds for the immediate reinstallation of exchange controls in South Africa.

The need for a rethink of South Africa's--and indeed the world economy's--approach to capital and exchange control issues is increasingly obvious. Post-apartheid South Africa has suffered two extremely serious outflows of capital (in early 1996 and mid-1998), not to mention a quarter-century of capital flight and economic turbulence associated with apartheid and the struggle to end it through financial sanctions, as well as more than a century and a half of periodic financial booms and busts (often associated with global processes).[i] In contributing to such a rethink, this article considers, firstly, the contemporary international debate; secondly, relevant experiences from other emerging-market economies; and thirdly, South Africa's particular conditions.

By way of an initial definition, exchange controls regulate the way the local currency relates to international currency markets; numerous rules prevent full "convertibility" (direct exchange) of the rand and many other currencies. Capital controls refer mainly to prohibitions against the export of capital by either residents or non-residents, but also to a variety of controls on financial and investment processes applied to residents and non-residents. In the wake of the lifting of the finrand in 1995, South Africa retains no capital export controls on non-residents imported funds and profit remittances. Residents have annual ceilings (R400 000, not including travel- and education-related funds) on export of their capital. Institutional investors are limited to investing 15 per cent of their portfolio abroad, and then only under conditions of asset-swaps with other investors. Certain other regulations (such as in relation to deposit accounts, and against foreign sales of locally-owned shares) have been retained on both currency exchange and capital investments for residents and non-residents.

The key rationale for exchange controls is that recent bouts of global financial turbulence have had devastating effects upon the South African economy. Over the course of a few weeks in mid-1998, for instance, more than R30 billion was effectively wasted by the Reserve Bank in unsuccessful attempts to defend the rand; interest rates were raised by 7 per cent (with a subsequent slowdown of the economy); and the value of the currency dropped by nearly 30 per cent. A previous currency crash, of roughly 30 per cent in nominal terms over several months, was set off by a Union Bank of Switzerland report in February 1996, in turn inspired by a false rumour that then-president Nelson Mandela was ill. These incidents caused substantial structural damage to the economy.[ii]

South Africa is not alone, for such experiences coincide with a growing international critique of financial liberalisation, based not only on problems of volatility, but on the peculiar characteristics of financial markets that generate structural imperfections. Information and market certainty are regularly impaired by speculators or herd instincts; allocative efficiency is sacrificed; inappropriate policy discipline is imposed on states by financiers; there emerges a macroeconomic policy bias towards austerity; and aspects of equity and equal-credit opportunity (and in South Africa's case, ethical redress for apartheid-era wealth) are harmed in the process.

One purpose of this article is to explain why, notwithstanding the devastating experiences of South Africa and many other middle-income countries since 1995, efforts to establish international financial stability have not been successful, and why such efforts are not being pursued with the requisite vigour by global economic managers. In considering policy options that flow logically from this explanation, it is important to recall South Africa's own experience with dual exchange controls, the experiences of other countries (including Malaysia and even Zimbabwe) with more ambitious capital controls and financial transaction taxes, and the possibility of other regulatory interventions that will help direct financial capital to more appropriate investments than is presently the case.

To telegraph the argument in advance, the article makes three essential points about global and domestic financial management that South African authorities must now come to grips with. Although there is an urgent, universally-recognised need for stronger international financial regulation--and indeed for a new "global financial architecture"--the G-8 countries and multilateral financial institutions have done virtually nothing to this end, and appear ideologically opposed to taking the steps necessary for averting further meltdowns. This means, therefore, that any individual country's overreliance upon (and likewise vulnerability to the reversal of) hot-money inflows is not good public policy. Yet, most importantly, individual countries do indeed have options for exercising national sovereignty over investable resources in the face of international finance.

[i]. For an historical review of similar patterns, see P.Bond, `A History of Finance and Uneven Geographical Development in South Africa,' South African Geographical Journal, 80, 1, 1998, pp.23-32; for more on the contemporary global context, see P.Bond, `Global Economic Crisis: A View from South Africa,' Journal of World-Systems Research, 5, 2, 1999, pp.330-361.

[ii]. Several aspects deserve mention. Even if based on irrational sentiment unrelated to underlying economic strength, macroeconomic policies or currency valuation, rapid changes in South Africa's international financial standing do affect domestic economic prospects, for they signal instability to potential local and foreign investors. Interest rate increases are invariably associated with defending the value of the currency, and were responsible for downturns in real economic growth in both 1996 and 1998. Given South Africa's relatively open trading position, currency crises have the potential to immediately import inflation. The dramatic declines in currency valuation throw off investment and trade planning, especially where vital imports are concerned. Financial stability is also endangered in the event that South African banks have borrowed short-term on the basis of currency assumptions (as happened, at great cost to the country's largest bank, in 1996). Servicing South Africa's substantial hard-currency-denominated foreign debt (of roughly $25 billion) becomes increasingly expensive, the more the rand declines against hard currencies. The South African Reserve Bank's forward cover book--which guarantees domestic borrowers against foreign exchange depreciation risk--is also adversely affected, which in turn makes South Africa yet more vulnerable to foreign financial speculation. And South Africa's already reduced national macroeconomic policy autonomy wanes further, the more vulnerable the country becomes to international financial flows, for pressure rises for the Finance Ministry and Reserve Bank to intensify bias against inflation even where that ensures rising unemployment.