Currency devaluations and consolidating democracy: the example of the South African rand

Abstract In 2001 the South African rand depreciated suddenly and steeply against the dollar and euro. This triggered inflation as the prices of imported products gapped upward. To offset the imminent inflationary effects and attract foreign exchange, the Reserve Bank raised interest rates, resulting in slower domestic growth. The critical question was the cause of the currency depreciation. We argue here that the rand's decline was the result of a concatenation of internal and external factors, specifically the way the operations of the global financial markets magnified and exacerbated the effects of internal financial policy decisions. The article illustrates the heightening connectivity between domestic policy decisions aimed at regulating the national economy and the globalizing financial markets that operate on an altogether different logic. The Reserve Bank's attempt to regulate the local foreign exchange regime in concert with the corporate use of financial instruments to circumvent these exchange ...