eBusiness Weekly
Clifford Shambare
When I first thought of writing this piece, I titled it; “Zimbabwe badly needs its currency back.” However, it soon dawned on me that Zimbabwe has never had a currency of its own; instead it had adopted the Rhodesian currency in 1980.
All the new government did was to erase the name “Rhodesia” from those notes replacing it with “Zimbabwe”. So what this situation implied was that this change that the Government instituted, was only cosmetic.
Continuing to look critically at the matter, I came to the realisation that the value of a currency lies somewhere deeper than the label/name on a bill. In order to appreciate this fact better, consider that the main functions of a currency are to facilitate trade, as a unit of account and as a store of value. In the days of commodity money the third function given here was effective but in these days of fiat and electronic money, it is fraught with risk, what with such negative phenomena as inflation, cyber currency theft and money laundering. These are phenomena that are now always lurking in our monetary systems today.
If we direct our focus on the use of money to facilitate trade, we find that currency value and its capacity to fulfil the role for which it was created become the critical aspects that we need to consider in our analysis. In that case we need to ask ourselves what it is that is being traded in here.
As time went on barter trade was replaced with the use of money. In that case if B wanted to buy a good from A, he/she paid money in exchange for that good, period; no invoice, no receipt, no letter of credit, and other paraphernalia that go with the modern more sophisticated trade activities. In most cases, especially where the traded items were relatively small, no third party would be involved in the transaction.
This essentially meant that the base of trade then was tangible goods, without which any trade transaction was possible. Interestingly though, there were some simple services such as one where an individual consulted a fortune teller and ended up paying for that service. One such example is found in the book of Acts 16:18 in the Judeo-Christian bible. However, such transactions most probably, did not contribute much to the economy concerned.
Extending this line of argument further still, we make the observation that the potential for an economy to grow from trading in services alone was quite limited. But of course, some of us can argue that this is now quite possible in the current era of high tech that nearly always accompanies service provision.
Nonetheless, even now, the capacity of any economy to fully depend on services is contextual because even those economies where the services component is substantial, have had to depend to a large extent, on the production of tangible goods in order to reach the level of economic complexity and prosperity that they have achieved to date.
Examples here are Switzerland — jewellery, precision instruments, pharmaceuticals, and banking (a service business), India (steel, motor and pharmaceutical manufacturing, and outsourcing (a service business) among others.
And come to think of it, in order for one to be able to provide services to the level of quality standards that are required today, they need tangible items —that is, instruments in the form of cables, optical fibres, computers, cellphones, and even conventional telephone gear, as well as many other gadgets that go with ICT — the backbone of the services industry.
So, a robust and prosperous economy needs to have all the ingredients that are necessary for it to achieve that status, these being people — that is, producers/ manufacturers, services providers and consumers, and of course, money. In such circumstances any currency will be functional, no matter how anybody feels about the matter.
Under those same conditions there has to be, and in fact there are, always locally manufactured goods in the economy, for purchasing with that money.
This effectively means that in such circumstances, it is not the value of that money relative to any other currency, hard or weak — but its capacity to fulfil its function (s), that counts.
In order for an economy to partake successfully in international trade, it has to first have a functional local currency and a robust internal trade system. At that stage the people who claim to be owners of that currency have to believe in its capacity to fulfil its intended function and not necessarily its exchange value.
And of course, under those circumstances, the people have to agree that this is their money. In this respect, consider Gervais R. Heddle’s Enigma Theory of Money.
As an example of this logic, the exchange rate of the Japanese yen to the US dollar is 1:109.79 as I write this piece. This implies that from a purely mathematical (valuation) stand point, the Japanese yen is much weaker than the US dollar as well as the currencies of those countries that make up the G7 or (even the G20) economic grouping. However, Japan’s economy occupies the fourth position in the world today as measured by the GDP index.
In Zimbabwe today, money matters have virtually become so academic to the extent of being almost detached from the real economy and the intended functions of money. But money and its several variants, has had to be deliberately created by someone first before it can be introduced and used in an economy; it has not just dropped from heaven!
And logic informs us that he who creates something should have the power to make it grow and of course, to kill it! But this is where a lot of us get flustered by (the concept of) money and its creation. In his 1844 manuscript Karl Marx dwells on this matter to some extent.
In monetary economics the subject of money creation has been and still is, being discussed extensively. According to Brad Sturgill in Money Growth and Economic Growth in Developed Countries: An Empirical Analysis. “(..) The general conclusion among macro and monetary economists is that there is no correlation between money growth and real output growth(..).”
However, in the OECD economies this correction has been found to exist. In this study, Sturgill argues that this is the case because in those countries “there are higher levels of economic freedom which may create an environment where nominal money creation facilitates the production process or expedites capital accumulation”. And economic freedom is defined as “the freedom to prosper within a country without intervention from a government or economic authority”.
At this stage we have inadvertently, stumbled into the politico-economic realm where capitalism with its concept of freedom, together with communism and all the economic variants in between — interact in ways that may not be that friendly to one another.
And this is where African economists — especially Zimbabwean ones — would want to ape Western ones by insisting on this economic freedom in their economies, forgetting that these Western economies did not just start their economies on the base of the free (economic model) but instead they first went through the mercantilist economic model, in the process accumulating a sound capital base — a base which the developing economies do not have at present.
Therefore, wanting to play in the free market economic model arena without a productive system is simply not a feasible proposition; in that same realm, you cannot have your own currency whose supply mechanism you can control as and when necessary.
So if we go back to our own case in this respect, these findings imply that we can only solve our monetary challenges by first putting in place a viable manufacturing industry that produces physical outputs.
And if we put Zimbabwe’s case into the context of currency valuation and exchange rates, we come across a very interesting and rather intriguing scenario in which is implied that our RTGS dollar is now stronger than the Japanese yen — itself, a hard currency, but is it?
It is not easy for one to provide a definite answer to this question off hand without a deeper analysis of the issue since the value of a currency is sometimes determined by factors that are outside the influence of purely economic forces. And politics is the major one of these factors.
In this respect, consider that after the Breton Woods Conference of July 1, 1944 that was convened in order to repair the damage that the Second World War inflicted on the major economies of the world, America deliberately set the US: Japanese yen exchange rate at 1:360 in 1949 — that is, five years after that war. (This action by the US was based on political considerations since Japan had been on the side of Nazi Germany during that war.)
On the economic front, Japan’s [economy] is strong, so its currency though appearing to be weak particularly against the US dollar, is functional; it facilitates trade effectively and efficiently between that country and its trading partners, the biggest of which is the US itself.
And due to the vibrancy of that economy whose strength is largely due to that country’s technological prowess, its high manufacturing capacity, as well as the positive psyche of its people, the Japanese yen still remains functional today, even in spite of the fact that one does not need it to purchase Japanese goods — an activity that can be effectively carried out using the US dollar.
Of these companies, less than 1 percent is involved in the manufacturing of non-food products, and of this number, only three companies — that is Cafca, Zeco and Zimplow — are involved in serious manufacturing of engineering related products (Business Weekly, May 17-23, 2019).
And when one considers that three of the manufacturing companies — Delta, Innscor and BAT — make up 61 percent of this industry — they can easily see the sort of challenges the economy faces at this very moment. In any case, it does not need rocket science to discern this fact since a drive through the industrial areas of both Bulawayo and Harare clearly shows the virtual lifelessness that is prevalent in our industrial areas today!
Overall, the Zimbabwean situation implies two possibilities; either most of the country’s non-food manufacturing industries are in the informal sector, or that the contribution of the manufacturing industry to the economy is almost negligible. If the latter is the case, then the adage that Zimbabwe is a “supermarket economy” holds true. In that case, when expressed in more derogatory terms, this country is a virtual ‘banana republic’.
So, because of this situation, this new exchange rate as set by the RBZ is virtually artificial; as a result it, will not be very effective in the resuscitation of the economy.
And because of the current conditions of a generally weak economic structure that is largely dependent on FDI as well as on foreign currency, if only to remain alive — Zimbabwe cannot make use of quantitative easing in the same way that the developed economies as well as China, have often done.
In fact today, Zimbabweans are dead scared of increasing money supply — a phenomenon that is nevertheless already taking place by default through the RTGS phenomenon!
This case brings us straight into that realm where we begin to realise and [hopefully] appreciate the complexity of this whole matter. In the process, we begin to appreciate that the challenge Zimbabwe currently faces today is not one of the value of its currency per se — but one where a much wider array of factors is involved. And the production of tangible goods — mainly through manufacturing — is critical to this whole matter.
And come to think of it, if those manufacturing companies currently in production tried to raise their capacity even by a modest margin, a good part of this challenge could be taken care of since they would be able to raise economies of scale, thereby hopefully, keeping item prices at a reasonable level while achieving decent profit margins in the same breath!
The overall result would be a better managed inflation regime and a consequent stabilisation of the local currency.
But sadly, a study done by the CZI in 2017 revealed that the manufacturing industry’s production capacity then, was only 45 percent — that is below half of the total!
But interestingly, the Zimbabwean industry and political leadership, as well as the economics fraternity and some members of the public, are now well aware of this fact, so the question to ask here is this: where or what is the problem here?
To be continued
Clifford Shambare is an agriculturist cum economist and is reachable on 0774960937.
