Assignment Task:
Read this news article and answer the questions about it:
It is not easy to tell resource-rich emerging countries that the recent improvement in commodity prices might prove a curse in the disguise of a blessing. But commodity-rich countries must act pre-emptively to avert the hollowing out of job-rich industries as a result of overvalued exchange rates.
One country grappling with this challenge is South Africa. The positive aspects of demand from China and elsewhere in Asia for Africa's resources have to be balanced against the challenges that low-cost Chinese industrial production creates for Africa's nascent manufacturing sectors
If we are facing a multi-year boom in commodity prices driven by both a resource-hungry Asia, then resource-rich countries like South Africa need to guard against repeating the illusory progress they have seemingly enjoyed since 2001 - illusory because whilst they were consumption-rich, they were poor in production and therefore in long-term employment creation.
Economists are usually in two minds as to what to do if rising resource prices create export bonanza.
The purists argue that markets will adjust to achieve the best overall results. They counsel against interfering in foreign exchange markets to keep the currency competitive.
Others argue that exchange rate intervention is appropriate. Their most persuasive justification is that the bonanza comes from a wasting resource and may be short-lived, in which case surpluses should be managed on behalf of the young and unborn and involve an intergenerational transfer of wealth.
In South Africa's case, if suppressing the Rand's tendency to strengthen were to go as far as to result in a current account surplus, this could be placed in a special state fund invested on global markets (called a "sovereign wealth fund"), income from which could be used over time to support infrastructure development.
In today's increasingly Asia-centric global economy, South Africa and other large population, resource rich emerging markets like Russia and Brazil need to be sensitive to the long-run damage that an overly strong currency might do to their economies.
Please answer the following questions:
Q1. According to the article, how is economic growth in Asia affecting the global markets for the exports of "resource-rich emerging countries"? Brieflycon supply and/or demand in these markets and whether these effects are pushing prices up or down.
Q2. Describe the process through which changes in global commodity price trends could lead to "the hollowing out of job-rich industries"? How if at all do exchange rates feature in this process?
Q3. According to the article, some argue that "exchange-rate intervention" is appropriate to protect domestic industries. Would this intervention aim to promote the appreciation or depreciation of the currency? Briefly explain.
Q4. The article describes and advocates a mechanism called a "sovereign wealth fund". How might such a fund help to protect (and even develop) the domestic industries currently under threat?