The economic shocks of 2008 and 2018 arise from essentially the same source – a severe shortage of locally produced goods.
A big part of the problem is that the Zimbabwean government misdiagnosed the crisis back in 2008. It incorrectly assumed the cause was the amount of currency in circulation. A more serious diagnosis of the crisis would have concluded that regardless of how many Zimbabwean dollars the government issued it was always going to experience high levels of inflation in the years leading up to 2008. Following self-imposed structural reforms in the 1990s, which crippled the public service, and the deliberate destruction of the productive capacity of the private sector in the early 2000s, the country was not able to produce the things it needed. By way of example, Zimbabwe went from producing approximately 300 thousand tonnes of wheat in 1998 to just 34 thousand tonnes in 2008.
The reactive step of abandoning the local Zimbabwean dollar was really imposed on the government back in 2008 by a mindboggling inflation rate of 231 million percent. This meant the government had to accept the de facto reality that ordinary people were going to be using foreign currency to conduct their daily trade, including the rand. The decision to adopt the US dollar as the country’s unit of account, however, dealt a deathblow to any potential turnaround in the real economy. While the government permitted the use of other currencies in the country, including the rand, the US dollar became the currency in which the government operated and in which official price determinations were made.
One would have imagined that had it been just about the use of a local currency then the adoption of the US dollar should have solved the crisis. But it didn’t. Because it was both the wrong currency to compete regionally and the wrong currency to enable businesses to solve the real underlying crisis of production. The adoption of the US dollar in fact made things worse. Since 2008, the production of wheat, for example, like many other productive outputs, has continued to decline, with the country only producing 20 thousand tonnes in 2017. While Zimbabwe needs to rebuild its productive capacity in the long term, this is not going to be possible in the short term unless it adopts a currency that allows it to compete on an equal footing in the region.
With a flood of imports largely from South Africa and acquired in rands, but with prices often denominated in US dollars in the country, ordinary Zimbabweans have gone from hyper-inflation to deflation. While perhaps counterintuitive, deflation is far more destructive to a market economy. In this environment it’s a tough ask for local producers to compete with the deluge of ever cheaper imports especially when your workforce and suppliers are going to be demanding payment in US dollars. There is also the problem of customers being reluctant to buy something today if it’s cheaper tomorrow.
To further exacerbate the country’s economic crisis there has been a nearly permanent shortage of US dollars during the past 10 years. The reason for this is not a mystery; Zimbabwe does very little trade with the United States and access to US dollar markets has been constrained. Almost all Zimbabwe’s exports are to South Africa and the majority of its financial inflows are denominated in rands. Clearly the Zimbabwe government chose the wrong foreign currency.
The current crisis reared its head this October when the Zimbabwean government again miscalculated and attempted to re-impose a form of its own currency. It announced it would be converting US dollar bank accounts to the new local currency (with exchange controls blocking their conversion back) and at the same time imposed a flat rate tax on electronic bank transfers.
The result was an instant supply shock that has immediately brought into question the viability of the bond note or putative local currency. The reason the bond note isn’t going to fly in 2018 is that it just doesn’t have the purchasing power necessary to be a sustainable currency. The government really should be considering adopting the rand, whether it joins the Common Monetary Area with Namibia, Lesotho, eSwatini and South Africa, or not. Already large parts of the country are indirectly operating in rands. Goods from South Africa are being sold to people paying for them with remittances transferred to them from expatriate family members living and working in South Africa.
The Zimbabwean government’s current approach, much like Dorothy Gale when first lost in the mystical land of Oz, appears directionless. The modern American fairy tale of The Wonderful Wizard of Oz is in fact an apt metaphor for the stark choice before the Zimbabwe government. Written in 1900 by L. Frank Baum, the original story was arguably a subversive political allegory about the rise of the Populist Party and the push by small scale farmers in rural America for a change in 19th century monetary policy.
In the Gilded Age of American robber barons the political establishment had adopted a very restrictive monetary policy pegging the US dollar to gold, which resulted in large returns for wealthy savers and a relative high cost of borrowing for small business, particularly farmers. The campaign for “Peoples Money” aimed to shift monetary policy and to force the adoption of silver alongside gold as the backing for the US dollar.
The reason for this push towards bimetallism was purely practical. The US produced a large amount of silver at the time and the adoption of silver would greatly increase money supply, which would result in credit being cheaper. The symbolism is not so subtly represented in the original book – with the land of Oz (or gold ounces) being traversed down a yellow brick road and later for Dorothy to use her recently acquired magical silver slippers to return home. Modern audiences watching the 1939 movie or later editions might be confused because Dorothy’s shoes were changed to ruby slippers, the reason for this was purely aesthetic, to take advantage of the the age of technicolour films.
Given this allegory, it is somewhat ironic that the simple solution most likely to help stabilise Zimbabwe in the short term is the adoption of a currency named after the most productive gold reef in the word – the rand. The yellow brick road, it turns out, might be the best route to escape the land of Oz. Once the rand is adopted, the real task of rebuilding the economy and critically increasing local production will then have to begin in earnest. DM