eBusiness Weekly
Clifford Shambare
We ended Part One last week by beginning to consider the economic conditions and/or developments that (have) led to Zimbabwe’s current inflationary environment — an environment in which the phenomenon is now stubbornly lodged.
Looking closely into this matter, we come across an interesting — rather fascinating, but worrying scenario all the same. You see, Zimbabwean blacks had been brought up by the colonists to be their employees. This was a strategy that Cecil John Rhodes himself, the master colonist —was directly involved in implementing.
So the said blacks — if they ended up at the top at all — would only be accommodated in the system, right at the top as general managers and directors of companies. This is actually what took place when some of them were used by the system, as window dressers. Considered in hindsight, this was the position that would later become rather difficult for the colonists to maintain due to the effluxion of time, as well as the inevitable experience those blacks eventually acquired over time.
That said, here there is a paradox in which — even though he seems to be in charge — the black manager is only partly in the know of what is really happening and how a company is run.
On the other hand, the real owner — the white colonist, maintains control of the whole system through share ownership at the top and practical and/or operational prowess in the middle, going right down to the bottom of the organisation.
So at the end of the era of colonial rule, this was the position of the blacks in the economy. But because of the above mentioned safeguards, it continued to run smoothly. But then, there was an element of fear and uncertainty slowly gnawing at the minds of the colonists. Such a situation only needed a trigger to push the colonists onto a run — so to speak. And this is what finally came about through the land reform programme of 2000.
The result of the trigger here was the capital flight that took place because of the land reform programme. This is the point at which the Rhodesians decided to relocate their capital since, in their view, the said programme interfered with their right to property, the bulwark of capitalism. This capital flight manifested itself on two fronts — one literal and visible — the other subtle and invisible to the ordinary man in the street.
The former is the one that everyone in the country could see and experience. Gradually, supermarkets became devoid of products and/or goods. Meanwhile, capitalisation levels began to fall on the Zimbabwe Stock Exchange as shareholders began to sell off their shareholdings therein. As could be expected, the latter was accompanied by a drop in share prices — a phenomenon that is normally tied up with the earnings and resultant dividends of same. The latter is in turn, connected to industrial production.
Interestingly but sadly, it took Gideon Gono, the then RBZ governor, a period of approximately two years to decipher what was going on then — a loss of the production capacity by industry — the economy’s productive sector and engine. On making this discovery, Gono wasted no time in trying to ameliorate the resultant damage. He proceeded to implement a strategy — for lack of a better term — of distributing goods to the populace through unconventional means. He called the strategy BACOSSI — an acronym standing for Basic Commodities Supply Side Intervention.
Over time, apparently responding to the initial shock, most of it during the Government of National Unity, GNU — industry began a process of slow recovery. But then, this process was slowed down by the return of ZANU(PF) into office after the 2008 general elections. Sadly, this process of recovery is proving to be quite difficult for us. And whether we like it or not, this reality inadvertently throws us straight into the political arena.
When it comes to the matter of (economic)recovery, we find that for over 23 years now, we have been struggling but failing, to have our industries operating at full capacity. And as a result, we are importing those goods that we should be producing locally, in the process using the US dollar for the purpose.
This ‘strategy’ puts pressure on our local currency, the Zimbabwe dollar, thus forcing its value to sink against the green back; hence the current very high exchange rate of ZW850/1 US$. At this point let us look more closely into this aspect to see what is happening here. Here we find that the interface between exports and imports is critical in any relationship between nations these days since every nation now trades with almost every other nation.
Here, let us hypothesise that two trading partners — that is A and B exchange goods and money. In our case, if B is the purchaser, she needs A’s currency — and vice versa. If the exchange rate is 1:1 there is no problem. But if A’s currency’s value is double that of B, then B pays in her own currency, an amount numerically twice as much as A would pay in her own currency if she were the buyer of same. So here, the final scenario would be determined by the direction of the goods and/or the money. If the balance between the two is in A’s favour in terms of goods, not money, then A becomes — to a large extent — the determiner of B’s fortunes. At this point, it becomes clear that the critical aspect of the matter ends up being the goods — not the money. Such a scenario explains why a person can die in the desert while carrying loads of money but without food on his person.
This is where some individuals and entities start competing for foreign currency to purchase the goods they need. And naturally, in such circumstances, the demand for one currency will exceed that of the other, in the process affecting the exchange rates between the two.
And in cases where a country is in the process of developing its own manufacturing industries, it usually wants foreign currency to purchase and to maintain this machinery, and also to procure the raw materials it needs.
On considering the history of the OECD economies, we come to observe that they hardly, if ever, fell into such a situation since they had invented and proceeded to develop the said machinery in the first place.
As for raw materials, they initially acquired them locally. But when the amounts started to dwindle, they left home ground looking for some. Interestingly, they literally looted most of it at little or (virtually) no cost from their colonies. Coupled with the practice of mercantilism, this was a strategy and practice that boosted considerably, their profit margins and consequently, the rate of growth and development of their economies.
Back to our two countries, And B: If the level of manufacturing in country B is low or even zero, the latter will want more of A’s currency to enable it to purchase goods from there. As can be expected, the higher the proportion of finished goods B imports from A, the more intense and sustained, its dependence on the former. This is the scenario that most African economies find themselves today. It places — or even thrusts them — at the mercy of the developed economies. This state of affairs has been epitomised by the relationship between the French and their former African colonies to this date.
But then, in regard to such a case, we find that, even though she had been involved in a number of discoveries and inventions in the sphere of industrialisation, China continued to wallow in the unenviable position of abject poverty for a couple of centuries.
Interestingly, there seems to have been a change of attitude at some point in time in that country — a change that made China decide to start competing with America in every sphere of life — ranging from politics and war, to technology and economics.
But interestingly still, China decided to do so by going all the way, starting at the bottom, building viable industries, forming own financial institutions, pumping money into them and keeping going. But here there was a catch that the Chinese noticed along their way up. They realised that in the process of competing with the developed economies, they had to keep pace — or even outrun the latter on the technological front as well.
In this respect, China could have been following the strategy of Japan — a country that had used exactly the same strategy. This was a country which, as a result, the West had been compelled to co-opt in their economic and financial system(s) soon after the end of WWII.
But China decided that she should not stop there since she had realised that, in order to continue making progress, she had to start and build her own strong Reconstruction Banks along the same lines as the Breton Woods institutions. This decision culminated in the BRICS Bank.
But she also realised that, to make real and lasting progress, she had to work at the level of world trade. In the process, she pegged her currency the yuan, at the rate of 6yuan: US$1. Since then, she has endeavoured to keep this exchange rate there.
This is the position at which she seems to have decided should enable her to keep her inflation rate in check. Apparently, at some point, America recognised the power in China’s strategy here. This action may explain why the former is always haranguing the latter by accusing it of manipulating the US$ dollar/Chinese yuan exchange rate, among (her) other charges.
At this stage it becomes easier to appreciate that in Zimbabwe, this is the other — but not the only source — of our hyperinflation challenge. We have a rudimentary economy whose trade and consequently, balance of payment, is highly depended on her access to the American dollar.
At this juncture, it may help us to juxtapose our situation to the Rhodesian one for the simple reason that, here we will be considering the same economy but within different eras. In doing this, we find the RF regime employing a strong strategy of import substitution. Such a strategy enabled them to use their local currency — the Rhodesian dollar — in the same vein, busting sanctions.
Some of those activities involved were the importation of fuel clandestinely and exporting tobacco in the same way, thus busting the said sanctions. Because those economic activities — that is a high energy bill and large volumes of tobacco — involved much money, most of it in foreign currency — mainly the US dollar, they became the fulcrum of the survival of that economy through its current account. The tobacco was a major income earner while energy was a major income spender — so to speak. And even today, any economy that does not have a relatively cheap and reliable energy source, (and) without a sound manufacturing industry, is never going to make it on the economic front.
(This is the main — if not the only — reason for the current state of high agitation and tension that is manifesting itself in the whole world today).
The other useful strategy then was to manufacture a sizeable proportion of products the country needed, locally. Some of the major products manufactured comprised machinery, covering agricultural machinery and accessories, steel products, electrical parts and accessories, clothing and footwear, as well as consumables such as food and beverages, detergents, paper products, and so forth. During the sanctions period, Bulawayo’s role as a manufacturing hub became enhanced and even more critical to the country’s economy.
The companies involved were RISCO (now ZISCO) as the supplier of raw materials of iron and steel; Zeco (railway rolling stock); Morewear Industries(road and rail tankers); Proff Engineering (locomotives) IMCO (agricultural machinery), Sable Chemicals’ Kwe Kwe fertiliser plant, Kwe Kwe Maltings (malt), CAFCA and Borman Electrical (electric cables transformers, etc), among others.
In clothing and footwear industry there was David Whitehead, Merlin, Be Warm Textile Mills and others; and Bata Shoe Company. In the wood product industry there were the Forestry Commission, PG Industries, Border Timbers, Hunyani Pulp and Paper Mills and Wiggins Teape.
By comparison, today the local spinning and clothing industries are facing serious competition with imported products from developed and Asian economies. In the case of clothing and footwear, these imported products are of varying quality; from junk plastic products to fine linen.
The result has been a dying cotton industry that has been further damaged by corruption on the raw material supply side.
That said, in order not to lose our way here, let us trace our case backwards a little bit. In doing so, let us revisit the reasons for inflation to rear its ugly head in an economy. This phenomenon has been found to be caused by a number of ills or malfunctions in such an economy. The major one is the inability of the economy to produce and supply the goods that the market needs — starting with the local one. This fact does not need too much effort to decipher.
Then there is cost push inflation that arises from an increased cost of inputs, particularly raw materials and also, labour. Then there are such strategies and/or actions by the authorities, the main ones being increased money supply, devaluation, rising wages and policies and regulations.
Shambare is an agriculture economist based in Chinhoyi and is reachable on 0714045435
