Boomerang effects of ‘rigging’ an economy
In most developing countries, policy planning is made ugly by the conflict between market forces and state regulation. Market forces often produce outcomes that are not necessarily favourable to the ruling class. Or they are too slow to achieve the desired outcomes, the low hanging fruits. We have cases in Africa where the strict implementation of market driven IMF/World Bank structural adjustment programmes led to riots and the fall of governments. In light of this, authorities have resorted to economic rigging in order to achieve phoney or quick superficial macroeconomic stability that is fake and unsustainable.
We witnessed this in Zimbabwe in 2008. The economic meltdown from 2000 to 2008 yielded successive negative growth rates and a record hyperinflation. The country's productive sector crumbled on the back of a declining agricultural sector. The Reserve Bank printed money and started quasi-fiscal policies with a view to stimulating a dead economy. This did not work. The Reserve Bank tried to cheat inflation by removing zeros from the local currency but this again did not work. Yet the primary route of hyperinflation was due to a myriad of inflationary pressures arising from, inter alia, the monetisation of the budget deficit, money supply growth and the parallel market. For industrialists, it was more profitable to "burn" money than to produce. My argument is that, when market forces fail to correct a disequilibrium due to policy missteps, the easy thing is to introduce quick interventionist measures which will give a false sense of relief without resolving the underlying structural problems. The lessons of the period 2000 to 2008 are instructive. Government failed to correct the exchange rate regime and rising prices due to wrong policies that did not inspire market confidence.
Enter the Government of National Unity (2009-13). Instead of addressing the underlying problems that had triggered the devaluation of the local currency, we simply introduced the multi-currency regime and by this we killed hyperinflation by the stroke of the pen. But we did not address the currency issue. Neither did we address the underlying problems of capacity utilisation and the exchange rate. In fact, during the multi-currency regime, Zimbabwe did not have an exchange rate. We lost this important leg of monetary policy. These challenges are still hounding us to date.
As soon as we de-dollarised and introduced the bond note in 2014/15, we soon realised that we had gone back to square one: exchange rate crisis, currency crisis and de- industrialisation. Instead of addressing the exchange rate and currency crisis, we pronounced the 1:1 exchange rate policy. We lied to ourselves that the bond note carried the same value as the US dollar. We later realised that this was unrealistic. We then introduced the interbank market which was controlled. This did not work as the parallel market grew faster.
The Dutch auction system was introduced in 2020 and for some time it managed to play the trick by keeping the exchange rate at 1:85. But this defiance of market forces was exposed in recent months as the parallel market rate rose to 200:1 thereby creating a huge premium. Corruption kicked in as companies received cheap forex but continued to sell their products in hard currency (double dipping). It is alleged that some companies took advantage of arbitrage and resold the forex on the grey market.
Another lie was the issue of a budget surplus which in reality is an accrued deficit as it was achieved by a deliberate failure to disburse money to government departments. This seriously affected service delivery and compromised the welfare of citizens.
Zimbabwe’s experience clearly demonstrates that governments can achieve desired metrics and declare macroeconomic stability whilst real structural economic fundamentals remain weak and suppressed. State regulation can shortcircuit market forces in order to achieve quick superficial equilibriums but this is not sustainable. There are no quick fixes in economics. Economics is guided by certain tried and tested principles, especially the one on demand and supply.
In this regard, I opine that the current stable macroeconomic environment is welcome but it remains fragile until NDS1 stimulates production and reverses longterm de- industrialisation and underemployment of resources. This is not to say that market forces alone are good for the economy. Far from it. My argument is that state regulation must seek to strengthen and not undermine market forces. This is the gist of a developmental state, which in essence, is a mixed economy. The state can do more to promote economic development through economic planning and infrastructural development.
Other programmes can be introduced to boost Agriculture, Mining, Tourism and other key sectors. State-led growth has succeeded in China and Southeast Asia. The magic is that in these economies, the State found a way of strategic intervention without subverting market forces especially in regard to the exchange rate, currency and production.
I conclude by arguing that Zimbabwe ought to accept a market-led and efficient mechanism to allocate the scarce foreign currency. This is called a managed floating exchange rate regime. On the currency, it is clear that the market has dollarised due to the debauched mono-currency. Dollarisation is an easy option. We have travelled that road before. But how can we redollarise again without answering the question: How did the wheels come off after we had dollarised from.2009 to 2013? Solutions that appear easy such as dollarisation are not sustainable. We have gold and other abundant mineral resources that we should use as reserves to strengthen the mono-currency rather than abandon it for the greenback. We must defend our currency by producing and refraining from printing money.
I hope that I have demonstrated how an economy can be rigged to achieve superficial macroeconomic stability against all odds. I conclude that Zimbabwe needs to deal with structural challenges concerning weak market forces in order to correct this less-than-full employment equilibrium, to use the economist's parlance.
To sum up, rigging of the Zimbabwe economy might have occured in the following areas:
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The removal of zeros and the introduction of quasi-fiscal operations
(2000-2008)
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. The introduction of the so-called multiple currency regime in order to address hyperinflation (2009 -2013)
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The 1:1 exchange rate policy of 20152017 where the USD was given the same value as the bond note -- a classic case of bad currency chasing good currency.
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. The budget surplus of the economic stabilisation programme (2018-2020). I hope that scholars and policymakers will find this piece interesting enough to encourage more intellectual fermentation of ideas in economic thought.
Mashakada is an economist, former Minister of Economic Planning and Zimbabwe Economics Society (ZES) council member. These weekly New Perspectives articles are coordinated by Lovemore Kadenge, independent consultant, past president of ZES and past president of the Institute of Chartered Secretaries and Administrators in Zimbabwe now under a new name Chartered Governance and Accountancy Institute in Zimbabwe (CGI Zimbabwe). — kadenge. zes@gmail.com ormobile +263 772 382 852