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. 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. 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. Yet, most importantly, individual countries do indeed have options for exercising national sovereignty over investable resources in the face of international finance.
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. 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.