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Benefits Of A strong Currency

Wed, 13 Feb 2013 Source: Thompson, Kofi

By Kofi Thompson

We must think creatively as a people, if we want Ghana to become prosperous.

A gentleman called yesterday (to berate me for suggesting in a recent article (entitled: President Mahama: Promote Ghanaian Businesses Across Africa - http://mobile.ghanaweb.com/wap/article.php?ID=264589) that a strong currency can be beneficial. He thought only the contrary was true.

Well, since it is a viewpoint that often leads to wrong policy interventions, today I am reproducing two articles for the benefit of those who seem to think a strong currency hinders exports and is ruinous for an economy.

We should never be afraid of a strong Ghana cedi. It will help keep prices down in a nation with a large appetite for imports. That is beneficial for the economy - and for struggling households nationwide.

When it was legal tender, the German mark was famous for its strength. Yet it did not hinder that nation's export trade at the time it was in use. It rather made German exporters innovative and efficient.

Because of that culture of innovation amongst German manufacturers, today, in the era of the euro, despite the price advantage China enjoys, German goods are still sought after globally.

The first of the two articles is culled from Inve$t Letters.com (http://investletters.com/blog/benefits-of-a-strong-currency/)

Please read on:

"Benefits Of A Strong Currency

by Roger on October 13, 2010

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Since we seem to be in a global “race to the bottom” currency devaluation spiral I thought it would be worthwhile to point out the benefits of a country having a strong currency.

Naturally, all government leaders feel they need a weak currency so they can duplicate the success of China in becoming the go-to source for cheap goods – in relative terms.

But does everyone really want to be living at a lower standard of living? Oh, right, the bureaucrats wouldn’t be, just everyone else.

Here are Doug Casey’s quick recap (following the recent Casey’s Gold & Resource Summit) on the benefits of a strong, versus a weak, currency:

A strong currency only hurts exports over the short run. Nobody seems to remember that the German mark was at .25, and the Japanese yen at 300 before the Nixon devaluation of 1971. The mark afterwards quintupled, and the yen has almost quadrupled since then.

A strong currency reduces the cost of imports, helping to keep prices in check. If the price of your currency doubles, the price of imported oil, machinery, technology, and everything else is cut in half.

Strong currencies attract foreign capital and encourage domestic savings. Businesses prefer to invest in a place where values tend to rise with the currency.

A strong currency encourages producers to be as efficient as possible. When domestic costs rise with the currency, producers run a tighter ship and substitute technology for labor. That is the path to progress. Using cheap workers instead of technology is a poor alternative.

Conversely, devaluing the currency simply makes everyone poorer. Most people keep their savings in the national currency, so are directly impoverished by devaluation. The only people helped (and only over the short term) are the relatively few companies that export. In point of fact, governments have no business fixing the prices of currencies. It creates distortions, just like fixing the price of anything does. The idea of devaluing the currency to make things better is at least as stupid as the idea of printing money to stimulate the economy. And they have the same economic premises."

End of culled Inve$t.com article.

The second article is culled from the Dismal Operator (http://thedismaloperator.wordpress.com/2012/04/24/a-strong-currency-does-not-ruin-an-economy/).

Please read on:

"A Strong Currency Does not Ruin An Economy

24 April 2012 · by Steve Evets · in Economics, Markets. ·

One of my favorite myths pervading in the economics discussion is the idea that a strong currency must be avoided due to the fact it destroys exports by making them uncompetitive. You’ll hear this mantra repeated constantly in mainstream outlets, but the rationale is faulty. Focusing only on one group of actors in the economy over the short run in this manner leads to policy prescriptions that do not benefit the economy as a whole over the long run.

Switzerland released trade data earlier today, and exports declined compared with this month last year. This will give purchase to the mainstream view that a strong currency compromises export driven growth and is ruinous to the economy. This is only part of the picture however. Also released today was the UBS consumption indicator, which rose last month. Reactions to that data point present a less disastrous view of the Swiss prospects than do your standard response to the export data:

“The strength suggests that the economy may be supported by domestic demand,” said Informa Global Markets analyst Nikola Stephan. “Unemployment remains at low levels and low interest rates also fuel the spending mood.”

Prices of imported goods eased 2.2 percent in March, the trade data showed. Export prices were unchanged.

This was the UBS indicator’s strongest reading since July 2011, and the UBS economists said the real level of consumption might have been even stronger, because of high levels of immigration and an increase in consumer purchasing power due to falling prices.

Critics of strong currencies point to the fact that a stronger currency makes it more expensive for foreigners to buy the products produced by exporters. While this is true in the short term, it ignores the fact that the strong currency also serves to cheapen imports and input costs. Over the long term, exporters can alleviate the impacts of a strong domestic currency by lowering prices in nominal terms and increasing the volume of sales, something it can do given the drop in input costs that also come with a strong currency. This is the phenomenon behind the recent growth in Swiss watch exports. In short, strengthening currencies force exporters to constantly remain efficient.

The strengthening currency not only reduces costs for exporters, but for anyone holding the strong currency in question. With the Swiss, this is reflected in the higher purchasing power enjoyed by its citizens as prices have fallen. According to your standard views, the price level dropping is meant to be ruinous, leading to ‘deflationary spirals’ and what not. This simply hasn’t occurred. Rather the rising currency has enabled the Swiss to increase consumption, and increase their imported goods.

Returning to exporters, the rising Swiss Franc is not a new phenomenon. It has been a constant for years. The Swiss National Bank instituted a currency peg to the Euro, the currency of its largest trading partner, at 1.20 EUR/CHF, a level that is still higher in CHF terms than it was a year ago, roughly at 1.30. In 2007, the CHF was at its weakest point against the Euro, at roughly EUR/CHF 1.67. Against the dollar, the CHF has strengthened from a USD/CHF of 1.8 in 2001 to a level of 0.91 today. This constant strengthening since then has not prevented the Swiss export machine from functioning in any way.

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Exports have risen throughout the period, with an understandable blip in 2008 for the financial crisis. Similarly, the resurgence of the Eurozone debt crisis has probably weighed just as much on exports as the strong franc has in the short term, but as the above graph shows, the export figures are hardly troubling in comparison to its long term trends. The benefits of the strong currency are thus shared by everyone, exporters, importers and consumers alike.

Swiss exporters are adjusting to that impending stagnation in the Eurozone by selling products to emerging economies, such as China, as shown below.

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To conclude, a strong currency doesn’t destroy an economy. It merely results in various actors adjusting their spending patterns, in response to the new price levels. Contrary to popular belief, exporters do not suffer in the long run, as the relative difficulty in selling goods overseas is offset by the decrease in input costs. Any holder of the strong currency receives a benefit in the way of increased purchasing power, allowing for an increased standard of living."

End of culled article from the Dismal Operator.

If we want our nation's economy to be transformed sufficiently to lift millions from poverty, our ruling elites must think more creatively.

To use an apt pidgin English phrase to emphasise the point, "chew-and-pour book-long theories" will not help transform our country. Creative thinking will.

We cannot prosper if corporate tax rates remain high, for example. Why not make Ghana the nation with Africa's lowest corporate tax rate regime?

Will it not encourage many foreign companies to relocate their African headquarters here?

And when they do, those foreign companies will buy or rent properties here; employ Ghanaians and pay taxes - all of which will help increase Ghana's GDP.

And what catastrophe will possibly befall Ghana, if personal income tax was abolished, for example?

Will it not rather put more money into the pockets of ordinary Ghanaians - including medical doctors and teachers? And will the consumer spending it will encourage not boost the incomes of traders and other small and medium-sized businesses?

Let us think more creatively as a people, if we want our nation to become prosperous. A word to the wise...

Tel: 027 745 3109.

Email: peakofi.thompson@gmail.com.

Columnist: Thompson, Kofi

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