Some Thoughts on Devaluation*(1)

D. J. J. BOTHAOUR SUBJECT is one of uncommon complexity. Its choice is explained partly by the convention of our Society wherebyPresidential addresses are elevated beyond discussion and critique. To this convention I subscribe with alacrity. But my choice ofsubject is also partly determined by the disappointing paucity of objective analyses by professional economists of the single mostimportant economic event in this country during recent years. Far too many of us appear ready to accept this momentous stepuncritically as a fait accompli. What follows is an effort to clear my own mind on this question. In this process I shall askquestions without pretending to know the answers, and express views contrary to some of the accepted ones. This I offer in thespirit of a search after truth and as a display of what amounts to an agnosticism with regard to the whole complex and elusiveproblem of currency devaluation. If my views should stand in contrast to the approving and reassuring utterances of ourpolicymakers, I leave it to you to draw your own conclusions.The Rand was devalued in December, simultaneously with the dollar. But we devalued by more than the dollar. When the dollardevalued against gold by 7,89 per cent, we followed by 12,28 per cent. In the case of the Deutschemark and the Yen, both of whichappreciated against the dollar, our devaluation amounted to about 20 and 24 per cent, respectively. And later, when we allowed theRand to float downwards with sterling, the international exchange value of our currency decreased yet again. Thus in December wefollowed the example of the dollar, and six months later that of sterling.This raises two questions. First, what motivated the authorities to abandon our traditional alignment with sterling; and, second, the fundamentalquestion: how successful can we expect to be in achieving the twofold aim with the devaluation as viewed by the authorities, of improving theoverall balance of payments and stimulating economic growth? We know the reserves have recovered remarkably in recent months and thatostensibly this should, as stated on occasion by the Minister of Finance, be ascribed to the salutary effects of the devaluation. Whether this couldbe credited to the devaluation alone is, of course, debatable, as we shall presently see.It is necessary to put the question of devaluation in some perspective and to consider briefly the conditions surrounding the devaluation ofsterling in 1949, followed by many other countries, including our own. We shall then also briefly survey the background to the recent devaluationof the dollar.

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Sterling Devaluation (1949)Almost a quarter of a century ago practically all currencies of the Western World, representing some two-thirds of world trade,followed Britain and devalued against the dollar in varying degrees in an effort to bridge the dollar gap and restore the balance ininternational payments between the dollar area and the rest of the free world. There was at that time an important common problemin the balances of payments of the devaluing countries, viz. the problem of earning the dollars with which to pay for dollar importsto restore the war-devastated economies of Western Europe, and supply the capital equipment for economic development inothers. The dollar shortage was soon alleviated, but to conclude from this that the devaluation was either necessary or successfulwould amount to hypothetical reasoning. We cannot know what would have happened in the absence of the devaluation. Notsurprisingly, therefore, expert opinion was sharply divided on (a) whether the devaluation was necessary at all, and (b) whether itsextent was ustified.Sir Roy Harrod, the most eminent and outspoken critic of the devaluation, once described it as a disaster of the first magnitude.*(2)As usual, his reasoning commands respect. British exports, he said, did not benefit to any large extent because of the deteriorationin the terms of trade resulting from the devaluation. Imports, on the other hand, could not really be reduced any further, beingalready subject to stringent controls. The controls proved effective, for in the year before devaluation Britain had a favourablebalance on current account of £1 million, and a slightly unfavourable one during 1949, in which leads and lags effects followingupon devaluation rumours must have played their part. The dollar problem of the sterling area was further aggravated by thepractice of "switch arrangements" or "commodity shunting" whereby dollar area importers bought commodities from sterling areacountries with sterling obtained at a discount from holders of inconvertible sterling resident outside the dollar and sterling areas. Inthis way exports from sterling area countries to holders of inconvertible sterling eventually reached dollar markets without thesterling area receiving dollars in payment. Further, the low dollar quotation for inconvertible sterling created the impression thatsterling was overvalued in terms of the official rate, and rumours started of an imminent devaluation of sterling. In the United Statesit became a topic of general comment, which did little to enhance the position of sterling in inter-national markets. When thedevaluation eventually came, it was largely designed to solve a crisis of confidence. Basically, said Harrod, devaluation wasengineered by American back-room boys.*(3)

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Devaluation of the Dollar (1971)That was in 1949. Since then the wheel has turned full circle. The dollar gap is a thing of the past, the liquid liabilities of the UnitedStates now far exceed her

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official monetary reserves, the same countries which she had assisted towards recovery have now emerged as her creditors, andduring 1971 she was forced first to suspend dollar convertibility into gold and then to devalue the dollar. For the United States theturning point seems to have occurred with the 1949 devaluations. Before that date the dollar was generally in demandinternationally, even in the 'twenties and 'thirties when the United States was more prepared to sell than to buy, and sheltered herindustries behind protective tariff walls. Europe in the 'thirties reacted with controls, e.g. bilateral trade agreements and competitivedevaluations and other restrictive measures of which the world had grown tired by the end of the war, as reflected in theestablishment of the IMF and GATT in the late 'forties. Following the 1949 devaluations, the United States started to lose gold, atendency that was accelerated by the Korean war.During the 'fifties and 'sixties the United States balance of payments turned increasingly unfavourable. The turn of the tide came soimperceptibly, as Hansen has pointed out,*(4) that monetary authorities continued to refer to a "dollar scar-city" long after thebalance of payments had fallen into deficit. This was due mainly to developments on capital account: huge military commitmentsabroad, substantial private long-term capital outflows and generous aid to less developed countries. This caused a heavy drain onthe U.S. gold and foreign exchange reserves. Whereas at the peak the total U.S. gold holdings amounted to $25 billion in 1948, thisdecreased to $10,9 billion in 1968 and $9,6 billion in February of this year.*(5)Foreign creditors did not invariably demand payment in gold. Sometimes they accepted liquid dollar holdings, e.g. deposits withNew York banks, U.S. Treasury bills or other short-term U.S. Government securities. In this way originated what has loosely beencalled the Euro-dollar system.The trade account, unlike the capital account, has been consistently favourable, and as late as April, 1970, the authoritativeFederal Reserve Bulletin advocated the view that the salvation of the U.S. balance of payments lay in a larger surplus on thetrade and services account, with a lesser reliance on the more volatile capital account. The following year the balance of tradedeteriorated remarkably, changing from a surplus of $2,1 billion in 1970 to a deficit of $2,8 billion in 1971. This is the immediatebackground to the suspension of dollar convertibility into gold and the 10 per cent surcharge on imports introduced in August,1971. For whereas the trade balance was favourable to the tune of $248 million during the first quarter of last year, it turned into adeficit of $1 061 million during the second. At the same time a huge speculative movement took place from dollars intoDeutschemarks which did nothing to enhance the status of the dollar. The writing was on the wall. The reserves could not beexpected to withstand a deficit on both the trade and capital accounts. Something drastic had to be done: a devaluation wasdecided upon, and the dollar price of gold was raised from $35 to $38 in December.

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South Africa: An Open EconomySouth Africa, with a completely different balance of payments structure and history, chose this moment to devalue as well.Structurally, our balance of payments over the last two decades is in many respects the direct opposite of that of the United States:on trade account we have had an unfavourable balance almost throughout, while on capital account there has been a substantialnet inflow in most years. And unlike the United States, we are heavily dependent on foreign trade for our economic developmentgenerally. Exports plus imports for the United States amounted to only 9,4 per cent of gross domestic product over the decade1958-1968. The comparative figure for South Africa is 51,6 per cent, a figure that is surpassed by only a few other countries in theworld.*(6) The South African economy is far more open than that of the United States, and our devaluation may be expected tohave a far greater effect on the domestic economy than it would in the case of the United States-and, one might add, the UnitedKingdom, for the comparative figure for Britain was only 39,2 per cent.The 51,6 per cent for South Africa was fairly evenly divided between exports and imports, viz. 28 per cent for exports, 23,6 per centfor imports. Thus, since devaluation is very much a double-edged sword, we may confidently expect that the cut in our case will gorather deep.

Reasons for DevaluationThis brings us to the central question to which we must address ourselves: for what rational reasons did the authorities decide todevalue rather than resort to measures with a more direct and manageable impact, and ones that could be reversed whennecessary? For a devaluation is one of those pervasive measures whereby with a stroke of the pen the domestic and international

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price relationships of a country are affected all along the line with varying lags and degrees of intensity, starting withinternationally traded goods and gradually spreading to others. Devaluation is a mixture of protectionism and subsidy, notselective but overall, with consequences that are often difficult to foresee. To the impartial observer our devaluation came as asurprise, for two reasons: first, one would have expected the country to maintain as far as possible its existing and traditionalcurrency arrangements with its senior trading partner; second, our country, unlike many others, possesses a number of ratherspecial attributes, all of which would appear to rule out a tampering with the rate of exchange as a feasible and prudent method ofgaining what often turn out to be ephemeral benefits.There are three of these almost unique attributes of the South African economy. Being the largest gold producer in the world, it canitself supply much of its foreign exchange requirements, rather than depending only on the export of agricultural produce andmanufactured goods to world markets in the face of the cold blast of international competition. With the continued industrializationof the country, the

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role played by gold as an earner of foreign exchange may be expected to diminish. But that has not occurred to any remarkabledegree as yet. Whereas in 1962 gold contributed 40 per cent to our earnings from merchandise and gold exports combined, in 1971it was still no less than 38 per cent. The second characteristic of the South African economy is the fact that it is one of the fastestgrowing in the world, and in this process of growth has managed to maintain a level of yields that has been consistently good inthe post war years. South Africa has always been a profitable and safe investment field for overseas capital, and there is no reasonwhy this situation should change in future if the economy is well managed.Third, whereas some of the economically advanced countries in Western Europe today rely heavily on an influx of foreign unskilledlabour to maintain their relatively high growth rates, we have no such problem. Our economy with its enormously broad base ofunskilled labour, if combined with the technical know-how and managerial skills available now and in the future, possesses thepre-conditions for a sustained high level of growth for a long time to come. But that would only follow if the normal process ofoccupational growth was also allowed to take place, i.e. that the unskilled not be forced to remain unskilled, but that they be giventhe opportunity to improve themselves, to fill the increasing number of vacancies among the semi-skilled, the skilled and managerialclasses. Only in this way can we prevent an eventual slow-down of our growth rate due to a shortage of competent managers.Judged by the lessons of history, we may assume that this normal development will take place however much impeded by arbitraryaction. We are reminded of what Marshall once wrote: the two great forming agencies of the world's history have been the religiousand the economic; whereas the religious has always been the more intense, the economic has been the more pervasive. AlthoughMarshall does not mention politics, we may safely assume that arbitrary political trends must, in the long run, succumb to theforces of economic necessity.If these are the essential features of the South African economy, the question again arises: why did the authorities decide todevalue the currency of this country with its vast potential for development and sustained attractiveness for overseas investmentcapital and economic expertise? The answers are found in the statement of the Minister of Finance issued in December, 1971. TheGovernment, said the Minister, had particularly borne in mind the substantial balance of payments deficits which the country hadexperienced since 1969, and the emergence of unused capacity in certain industries and a slower rate of increase in output, possiblyas a result of the monetary and fiscal measures applied at the time. Further, the general uncertainty following suspension of goldconvertibility of the dollar in August, 1971, had a detrimental effect on our balance of payments through (a) the leads and lagseffects on our imports and exports and (b) a decrease in the inflow of private capital from abroad.The Minister listed the expected advantages of the devaluation as follows. In due course the balance of payments might beexpected to improve on both the current and capital accounts by eliminating the leads and lags, stimulating exports,curbing

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imports and encouraging the inflow of capital. Second, a devaluation would promote the process of economic growth, and third,provide a stimulus to the gold mining industry. Fourth, export industries such as agriculture and mining whose export prices aredetermined in foreign currencies, would benefit because of the higher prices in terms of Rands. Fifth, local industries would bebetter able to compete with foreign suppliers, both at home and in foreign markets. Finally, investment in industry would beencouraged, which would lead to the creation of more employment opportunities. The Minister then warned of a possibledisadvantage of the devaluation: it might result in an upward tendency in prices, especially of imported goods.

Balance on Capital AccountA study of our balance of payments figures over the last couple of years does not appear to support the drastic action of a 12 percent devaluation against gold, and more than that against the currencies of our main trading partners.

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Let us start with the uncertainty created by the American measures of August, 1971, and the detrimental effects on our balance ofpayments. Of course, this could have been foreseen: in August the Rand was linked to the dollar-in itself a surprising step-andsince our major trading partners allowed their currencies to float, expecting that they would appreciate vis-a-vis the dollar, thisimplied a similar development with respect to the Rand. An expected or impending devaluation is not calculated to stimulate capitalflows into the country with the weakening currency. The surprising element is not the drastic decrease in our capital inflow overthe latter half of 1971, but the fact that we succeeded in attracting some capital from abroad in the face of this uncertainty. Forexample, during the very trying fourth quarter we received no less than R41 million of private capital (down from R116 million theprevious quarter), and a substantial R129 million in the government and banking sectors. For the year as a whole, we received atotal of R737 million in short and long term capital in the private, government and banking sectors combined, which was almostR200 million more than in the year before. Thus, with hindsight knowledge we may say that the capital flow argument in favour ofdevaluation had been stronger in 1970 than it was in 1971. It would be outside the realm of speculation to say that had wemaintained a link not with the dollar but with sterling, the uncertainty would have been less, and the inflow of private investmentcapital more substantial. Put differently, the uncertainty which inhibited international capital flows into our country appears to havebeen largely of our own making. This compels us to see in a somewhat different light the argument that devaluation was calculatedto eliminate the untoward effects on our balance of payments of the uncertainty in the international capital markets caused by themeasures taken by the United States in August.A devaluation is not a panacea for a persistent drain on the foreign exchange reserves of a country. Other, more short-termselective and reversible measures might be more effectual and often preferable to a devaluation. An almost classic

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example in this respect is the action that Britain took in 1957 to stop the loss in her reserves due to a widespread speculation on theContinent against an expected devaluation of sterling. Confidence in sterling had suffered early in 1957 because of strikes andstrike threats. Speculation against sterling became heavy in the summer for it was feared that Britain would be unable to defend thepound against strong upward pressure in prices and wages compared with trends in other countries. A large spread developedbetween spot and forward sterling which not only reflected a lack of confidence but also rendered profitable internationalborrowing in London-all powerful lead effects which caused a drastic fall in the U.K. reserves. At the height of the crisis thereserves were 22 per cent below the figure of 3 months before. In September the authorities took action: Bank Rate was raised by 2per cent to a crisis level of 7 per cent, as part of a package deal designed to reduce credit at home and to show to the outside worldthe Government's determination to defend the pound. The effect was spectacular. Speculation subsided, confidence returned, andprivate capital again flowed in. A year later the reserves had increased to 70 per cent above the level of September, 1957.It would, of course, be misleading to suggest or even imply that our situation in the latter half of 1971 was comparable to that ofBritain in 1957. But there is an important general lesson to be learned from this experience. Strains and stresses in balances ofpayments are often caused, and more often aggravated, by inter-national capital movements-movements of funds that are notseeking profitable long-term investment opportunities but short-term gains either from favourable interest rate differentials or anexpected currency realignment. Almost overnight masses of money can move from one country to another, aided by rumours,hopes and fears. And it can gain a momentum of its own unless checked by drastic action of one kind or another. This is what theBritish Chancellor of the Exchequer did so successfully in 1957. The South African Government was apparently less determined todo the same in 1971; on the contrary it decided to link our currency to the weakened dollar, a step that has not so far been explainedto the country.

Balance on Current AccountTurning now to the current account, between 1970 and 1971 the balance of trade deteriorated by R210 million and the balance ofservices and net transfers by R24 million, while the value of gold produced increased by R85 million. Thus in total the balance oncurrent account deteriorated by R149 million. Over the same period capital flows increased by R196 million and S.D.R. allocationsby R59 million. Thus between 1970 and 1971 there was a net decrease in the loss of our gold and other foreign exchangereserves of R106 million.This is not the kind of arithmetic that one would normally associate with a devaluation. But ex post figures are far easier to analysethan expected trends in a moment of crisis, and it is necessary to remind ourselves of the immense complexity of the task facing theauthorities under such circumstances. Perhaps even more difficult than deciding whether or not to devalue is to know by howmuch to

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devalue. The reasoning underlying that decision is not, of course, something that governments are wont to disclose.As in the case of capital flows, the leads and lags argument as applied to imports and exports loses much of its weight if viewed as

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the result of an official action that fails to emphasize once and for all a determination to defend the currency. To use the leads andlags argument as a justification for devaluation is tantamount to succumbing to the forces unleashed by official action. A firmstand might have reduced leads and lags on both the capital and current accounts substantially.There is an important fact about our balance of trade which deserves special mention. In its latest Annual Report*(7) the ReserveBank supplies a graph which shows that the rate of increase in the value of imports reached a maximum early in 1971 and thatthereafter it decreased fairly consistently. The corresponding decrease in the volume was much more because of the high prices ofimports. When the rate of spending on imports reached a maximum, the opposite happened to exports: it reached a trough andstarted to rise at a remarkably steep rate by value, and less so by volume. All this occurred before the devaluation or even thelinking of the Rand to the dollar in August, 1971. Again, this is not the kind of situation that would normally supply theenvironment for a devaluation. We are naturally perturbed at the high level of imports, but a breakdown of the figures gives somereason for optimism: since the beginning of 1971 the rate of increase in the imports of consumer and intermediate goods sloweddown, while that of capital goods continued to increase. The capital goods component of imports has been increasing all along,and in 1971 constituted a total of almost 45 per cent of imports. This is a welcome trend for any developing economy.Unfortunately, our terms of trade have increasingly turned against us, especially during 1971 when it decreased from 100 in Januaryto 75 in December, i.e. in December we had to export 11/4 times the volume of goods to pay for the same quantity of imports as thatof January. This was caused by conditions beyond our control, viz. the exceedingly sharp increases in the prices of imports. At thebeginning of 1971 the indices for export and import prices both stood at 101; at the end, export prices were 103 while import priceshad risen to 139.*(8)This happened before South Africa devalued. Although more recent figures are not available, it would not be unrealistic to expectan accelerated increase in the prices of imported goods during the first half of this year. Our worst fears are confirmed by the importcomponent of the wholesale prices index which rose from 123,3 in December, 1971, to 131,1 in March. This is the answer to theremark that prices may rise as a result of the devaluation.We may anticipate further increases in prices in the future. Although the full effects of the devaluation cannot be expectedto have worked themselves out yet, available statistics already point in this direction: in 1971, for the first time since

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1953, the rate of inflation in the country exceeded the percentage growth in real terms, viz. 6,2 as against 3,7 per cent. Whereas thepurchasing power of the Rand (as measured by consumer prices) decreased by only 4,4 index points in 1970, it dropped by 8,1 in1971 and by 3,9 for the first 7 months of this year. Only a very quiescent labour force will accept this kind of development withequanimity, and any successful wage demands are bound to accelerate the cancellation of most of the expected benefits of thedevaluation. In fact, the devaluation itself will have contributed substantially to the increase in domestic prices. And once theprocess has worked itself out, we may be no better off than we were before. Then we shall find ourselves in the situation which thelate Sir Dennis Robertson once described so vividly: if everybody at the races stood on fruit boxes, nobody would see any better.Our current earnings may then buy only very little extra, but our past savings may be worth a great deal less.This also puts in perspective the claim that the gold mining industry stood to benefit from devaluation. With the high degree ofopenness of our economy, that may be true especially in the short run. The rising price on the unofficial gold market should serveas a better stimulus to the industry, with far fewer side-effects than may be expected from a devaluation. In fact, the inflationaryimpulse following upon the devaluation is bound to diminish the benefits of the high unofficial price of gold.The view that the devaluation will improve the balance on current account is, of course, based largely on the elasticity argument,reinforced by a tightening of import control. If, as was the case in 1971, nearly 80 per cent of imports was in respect of capital andintermediate goods, a severe restriction on imports is bound to affect our growth potential. A high degree of correlation seems toexist between imports and the industrial demand for investment goods. This, in a growing economy, implies a low price elasticity ofdemand for imports. As regards exports, with a devaluation more goods must be exported than before in order to earn the sameamount in foreign currency. Devaluation puts the strain on the export trade, in the hope that the initial price advantage in foreignmarkets would cause a sufficient increase in the volume of exports. This presupposes a considerable elasticity in supply,apparently more than that indicated by the general references made by several commentators to excess capacity somewhere in theeconomy. More important, it presupposes a high price elasticity of demand for exports, although evidence exists that the priceeffect has come to play a smaller role in international trade, especially in manufactured articles. Price is no longer the only decisivefactor; of perhaps equal importance are considerations such as regular contact with overseas customers, marketing techniques,regularity in supply, after-sales service, and so on.The latest trade figures are those for the second quarter of 1972. As could be expected, imports did not decrease to any markedextent, viz. by R31 million between the first quarters of 1971 and 1972 and by R17 million between the second quarters of 1971 and1972. Between the first and second quarters of this year the

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import of consumer goods decreased by a negligible amount, while that of intermediary goods increased by R29 million. Exportsincreased remarkably viz. by almost 8100 million between the first quarters of 1971 and 1972 and by a further almost 8100 millionbetween the first and second quarters of this year. This welcome increase has been ascribed mainly to the rise of the price of sugaron the London market, an increase in the price of wool and a steep increase in the export of maize. For example, the export ofagricultural produce was more than twice as high in the first half of this year than during the corresponding period of 1971.Unfortunately, since the prices of these commodities are mainly determined in foreign currencies, the devaluation would have noeffect on the amount earned in foreign exchange, although local producers benefit

Low Productivity and DevaluationThere remains a set of arguments advanced in favour of devaluation which have so far escaped our attention. They all relate to thereal sector, and in dealing with them we may approach the root causes of our devaluation. They refer to economic growth in ageneral way: devaluation, said the Minister, would promote economic growth, local industry would be better able to compete withforeign suppliers, investment in industry would be encouraged and more employment opportunities would be created. These referto fundamental processes expected to take place in the future, not to deficits carried over from the past: structural developments,therefore, not cyclical ones.A sound economy does not require a devaluation to stimulate growth. Devaluation is a structural measure which could be resortedto when structural imbalances occur in the economy over a wide front and on a scale which causes it to lose its competitiveposition in world trade. This would be reflected in lower yields and eventually a reduction in the inflow of capital from abroad,which no country could withstand for any length of time, however large its reserves might be. A country faced by this kind ofsituation is in a fundamental disequilibrium-that vague phrase which the IMF has never been willing to define. A disequilibrium ofthis nature may only be resolved by a devaluation, unlike temporary disruptive capital flows which often result from cyclicaldis turbances of one kind or another and the vicissitudes of investors acting under pressures of the moment.A weakening of the international competitive position of a country is a deep-seated and secular process. In the final analysis itrelates to the fundamental question of the allocative efficiency of the factors of production and, in consequence, the relationshipbetween factor inputs and outputs. The efficiency in allocation and utilization of factors is reflected in productivity, andproductivity in wages and prices.If we view the South African economy in this light, we arrive at some unpleasant conclusions. The growth in our Gross DomesticProduct has been slowing down since 1969 to 3,5 per cent in 1971, which is appreciably lower than our E.D.P. target rate of 6,4 percent. Further, manufacturing production also increased at

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lower rates than in previous years, viz. by 8 per cent in 1970, 4,1 per cent in 1971 and 1,2 per cent up to April, 1972 (compared withthe same period last year).*(9) And as the Reserve Bank survey has shown, during the 10-month period to April, 1972, output perman-hour decreased by about 0,2 per cent.This is perhaps the major malady of the South African economy: its low labour productivity which, in the long run, could havedisastrous consequences for our balance of payments. If we confine ourselves to broad aggregates in this complex field, we findtwo recent references to the problem. In its Annual Report for 1971 the Board of Trade and Industries supplies a Table whichshows an alarming slowing down in the rate of increase in productivity in manufacturing industry in the 'sixties.*(10) Whereas inthe 'sixties as a whole productivity rose by 2,1 per cent, during 1968-1969 it increased by only 1,1 per cent, and for 1969-1970, 0,1 percent. These figures are far lower than those of any of our major trading partners. They are substantiated by a more detailed studymade by Mr. L. J. Fourie for the conference of the International Association for Research in Income and Wealth in September,1971.*(11)It would appear that our high rate of growth in the past was made possible by a lavish input of production factors, especiallylabour, with relatively little regard for factor productivity. The abundant supply of unskilled labour no doubt contributed to thisstate of affairs, to which both Government and industry should pay increasing attention, on pain of losing our foothold ininternational markets. International competition is becoming more intense, especially with the formation of trading blocks like theCommon Market which allow already large manufacturers to reap the economies of scale from the opening up of substantial newmarkets within the group. Smaller countries out in the cold will never be able to benefit from similar economies of scale. This raisesthe question of the future performance of our export trade, bearing in mind the fact that manufactures are contributing an increasingshare to our total export earnings, viz. from 50 per cent in 1961 to 56,8 per cent in 1971. Does our low productivity imply that we maylook forward to a future of yet lower productivity, high unit costs, low real growth rates and successive devaluations to balanceour foreign accounts? If so, we shall have joined the ranks of those South American countries where devaluations and currency

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reforms have come to be regarded as an easy solution to this kind of problem.The task facing industry is to support and promote attempts at raising productivity by institutions such as the Productivity andWage Association and the National Productivity Institute. Then African wages can increase against higher productivity ratherthan as a result of philanthropic pleas. However commendable, an overall increase can only be inflationary, and will deleteriouslyaffect our international competitive position, unless the White section is prepared to make

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sacrifices, which appears to be an idle hope. The task facing the Government is to take a hard look at its labour policy generallywhich, through measures such as the Physical Planning Act and others, has created uncertainty in the minds of many anindustrialist, a fact which may partly account for the poor performance of industry in the recent past. Of our total labour force inmanufacturing industry, 54 per cent is Bantu (or 70,6 per cent if Coloureds are included), and the lack of training facilities will infuture to an increasing degree be reflected in our cost structure and export performance. The practice of on-the-job training is awelcome development, although a second-best one. It is also an instance of ideology succumbing to economic necessity.We may now return to our earlier reference to an agnosticism with regard to the complex question of devaluation. From a cyclicalpoint of view our devaluation seems to have been precipitous: both the leads and lags and capital inflow arguments appear to beless compelling ones which largely resulted from official action. It would appear that the authorities, conscious of the inability ofmonetary and fiscal measures to contain inflationary pressures during recent years, had decided to resort to a devaluation in aneffort at least to increase the growth rate and bring the stagflation to an end. Indeed, from a more long-term, structural point ofview, the deeper reason for the devaluation seems to lie with those factors which the Minister included among the advantagesexpected to flow from the devaluation, viz. those referring to the promotion of economic growth generally. Again, a sound economydoes not need a devaluation to stimulate its growth. Ours is not as sound as we would like to see it, because of the low labourproductivity which appears to have become endemic. From this point of view the devaluation might be welcomed as a salutary stepwith at least short term benefits, provided especially that monetary policy is not inflationary and wage demands not excessive.Which of the two points of view is true, is a question that has no definitive answer.University of the Witwatersrand.

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Endnotes1* Presidential Address delivered in Johannesburg to The Economic Society of South Africa on 14 September1972.Acknowledgment is due to Drs. S. J. Klue and D. C. Krogh and Messrs. C. R. Diamond and A. J. Jacobs, forstatistical data in regard to specific issues raised in this paper, for which the author alone assumesresponsibility.

2R. F. Harrod, Policy Against Inflation, London, 1948 Ch. 6.

3Ibid., p. 150.

4Alvin H. Hansen, The Dollar and the International Monetary System, McGraw-Hill, New York, 1965, p. 5.

5 Federal Reserve Bulletin, April, 1972, p. A96.

6 United Nations, Yearbook of National Accounts Statistics, quoted in Quarterly Bulletin of Statistics, S.A. Reserve Bank,September, 1971, p. 23.

76 S.A. Reserve Bank, Annual Economic Report, 1972, p. 21.

8S.A. Reserve Bank, Quarterly Bulletin of Statistics, June, 1972, p. S56. Export prices exclude gold.

9S.A. Reserve Bank, Annual Economic Report, 1972, p. 11.

10Board of Trade and Industries, Annual Report 1971 (Report No. 1399) Table I.

11L. J. Fourie, Contribution of Factors of Production and Productivity to South African Economic Growth, 1920-1960,twelfth general conference, International Association for Research in Income and Wealth, Ronneby, Sweden.

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