On Why Zimbabwe Should Abandon the United States Dollar and Adopt the South African Rand as its Single Currency
Introduction and Motivations
In 2009, the Zimbabwean government (GOZ) introduced a multi-currency regime to help curb the hyperinflation and extreme macroeconomic volatility that had tormented the economy for over a decade. At the time, the multi-currency regime was widely viewed as a temporary measure but currently there is no sign of the regime being officially abandoned. While there are up to nine legal tenders in Zimbabwe, the most prevalent currencies used in trading for the last six years have been the United States Dollar (USD) and the South African Rand (Rand), respectively. Because of the prevalence of these two currencies and for the sake of clarity, my analysis and illustrations focus on Rand and USD two-currency system.
Economists use the term Dollarization to describe the situation when a country adopts another country’s more stable currency, even if the adopted (or anchor) currency is not the USD. Dollarization may serve several purposes, one of which is signaling to investors that the adopting country is committed to maintaining a more stable economic environment. Such a signal would be expected to instill investor confidence in the dollarizing country and help kick-start the country’s recovery. A major disadvantage of dollarization is that the country gives up its currency and ability to stimulate or stabilize its economy using monetary policy (the setting of money supply by central bank policymakers to alter output and price level). Consequently, this loss of monetary policy control puts additional pressure on the dollarizing country’s fiscal policy (the setting of the level of government purchases and taxation to alter output and price level) to be more robust.
In this article I make two distinct but closely related arguments. First, I argue that the multi-currency regime was a big mistake, and the country should adopt a single currency. Second, I argue that the currency of choice should be the Rand instead of the USD. I also explain why the recent depreciation of the Rand against the USD, combined with Zimbabwe’s prevalent use of the USD is leading Zimbabwe’s economy deep into a deflation, worsening the plight of the average Zimbabwean instead of benefiting them.
My arguments are based on analyzing the interlinkage between choice of currency and some important properties of the Zimbabwean economy. These important properties include a huge informal sector and a large inflow of remittances. I emphasize the point that a combination of dollarization and large informal sector means standard monetary and fiscal policy tools for stimulating the Zimbabwean economy are extremely constrained. The Government of Zimbabwe has no control over monetary policy as it does not have its own currency. Stimulating the economy through fiscal policy is also constrained by an already shrinking small tax revenue base (formal, tax paying sector) and growing and informal sector (non-tax paying sector). With monetary and fiscal policy virtually out of the control of the government, careful choice of a nominal anchor currency becomes critical.
I will conclude the article by proposing some economic policies (in addition to exclusive use of Rand) that the GOZ can consider implementing to get the economy back on its feet.
A good starting point would be to emphasize more analysis-based macroeconomic policies that are rooted on a “describe-before-prescribe” approach. The GOZ policy makers should always be seeking a deeper understanding of how the policy would work under ideal conditions, analyzing the unique constraints the Zimbabwean economy faces that may prevent the proposed policy from achieving ideal results and incorporating this knowledge to mitigate the effects of these constraints. For instance, for every policy implemented, the policy makers should be asking: (i) how will investors and other economic participants perceive a particular policy and how can the GOZ quantify the market perception of the policy? (ii) Does the policy inadvertently lead to moral hazard problems that may lead to inefficiencies? (For example, do economic agents bear the full cost of their actions? If they can shift the bad consequences to others, they have less incentive to be more careful or take appropriate risks.)
As an example of analysis-based policy making applied to the multi-currency regime, what did the policy makers conceptualize as the mechanics of the multi-currency regime? Was each product’s price supposed to be listed in each of the nine currencies? What were the criteria used for determining whether a particular currency qualified to be in the official multi-currency basket? Why nine currencies, and not eight or ten? What was the end game for this policy? What parameters will be used to measure effectiveness of the policy?
Why Zimbabwe should officially abandon the multi-currency regime
A big problem of using multiple currencies is the complexity and confusion that it brings. The complexity is especially big in a cash economy like Zimbabwe where people need to carry physical cash to buy goods and services. As a concrete example of such complexity and confusion, in early 2015, commuter (“Kombi”) fare was 1 USD for two or 5 Rands per head from most Harare neighborhoods to the city center. This fare implied a “Kombi Exchange Rate” of 1 USD to 10 Rand. At that time, banks bought the USD at a rate of 1 USD to about 8 Rands while selling at 1 USD to about 12 Rands. The street/black market exchange rate was 1 USD to 12 Rands. Based on the above example, the seemingly simple question regarding the Rand/USD exchange rate no longer has a simple answer.
The production of actual goods and services that is given up as economic agents attempt to chase the arbitrage opportunities caused by this exchange rate confusion could be substantial. This loss in economic efficiency or deadweight loss increases as the number of adopted currencies increases.
Consumers also have to familiarize themselves with the currencies that are in the official multi-currency basket, which takes time and effort and the risk of fraud and counterfeit currencies increases as the number of currencies in official use increases. The most vulnerable people within society (elderly, rural folks, uneducated and disabled) are more likely to suffer from fraud and counterfeit as it may take this group more time to understand the currencies and their values. The multi-currency regime thus imposes a burden on the government to continually educate these vulnerable groups of people on the changing features of the various currencies in the basket.
Why the Rand should be Zimbabwe’s exclusive adopted currency
To determine which single currency to use as nominal anchor, I use criteria borrowed from the theory of optimal currency areas. The term “optimal currency area” refers to a geographical region for which economic efficiency can be maximized by using a single currency. Having a nine currency parallel exchange rate regime is not optimal because there is no way that all nine currencies would simultaneously satisfy the criteria listed below as set by the theory of optimal currency areas.
The main considerations for which currency the government should use as a nominal anchor are:
a) Trade with anchor country: The best choice for a nominal anchor would be the currency of a country that Zimbabwe trades with the most. This would help reduce transaction costs resulting from converting one currency to another. According to the IMF, South Africa was Zimbabwe’s largest trading partner in 2008, around the time Zimbabwe was deciding which currency to adopt, accounting for 44% of Zimbabwean imports and 24% of exports. The rest of Africa accounted for 21% of imports and 17% of exports and the US and European Union had a combined 12% of imports and 24% of Exports. Today South Africa remains Zimbabwean’s biggest trading partner accounting for around 44% of imports and 40% of exports.
b) Anchor country and Zimbabwe should have synchronized business cycles: If Zimbabwe and its anchor country have out-of-sync business cycles, then optimal monetary policy in the anchor country may diverge, with Zimbabwe being made worse off when out-of-sync anchor country implements its monetary policy. Empirical evidence from IMF shows that business cycles in Zimbabwe are more in sync with South African business cycles than with the United States business cycles.
c) Labor mobility between Zimbabwe and Anchor Country: If there is a recession in one part of a currency area, workers in the recession-hit part should be able to easily move to the booming part and find employment there. This labor mobility mitigates the fact that once a country joins a currency union, it cannot use monetary policy to stimulate its economy. Labor mobility includes the physical ability to travel, for example, cost of transportation and visas. For the average Zimbabwean, it is much easier to obtain a work visa in South Africa than in the USA.
d) The Burden of Change: The optimal choice for an anchor currency is one where the supply of the whole range of bank notes and coins is not prohibitively expensive. The notes and coins can be obtained through natural trade, remittances from Zimbabwe’s Diaspora community or direct purchase by the adopting government. In a dollarized economy where majority of transactions are done on a cash basis, the adequate supply of the foreign notes and coins is critical in maintaining low transaction costs and promoting local trade. Zimbabwe population is still predominantly rural based with the last census showing around two thirds of the population as rural. The majority of this population lives on less than a 1 USD a day. This means USD 10 cents (approx. R1.5) is still worth a lot to this population. The physical distance of the USA from Zimbabwe, makes the technicalities of supplying US coins prohibitively expensive, leaving Zimbabwe with a dangerously depleted supply of low-value denominated USD coins. Such a situation has helped to devalue the USD in the country as business is forced to price most low value goods starting at USD 50 cents or goods are priced in bulk (that is, two loaves of bread for 1 USD) simply because of the burden of getting the change necessary to make such transactions feasible. In instances where change of low value is required, businesses offer consumers small-value-goods like sweets, matches, chewing gum: things that two thirds of the country do not have the luxury to buy on a daily basis. This sort of “barter change” or the inconvenience of pricing of low value goods starting at USD 50 cents essentially becomes the cost of transacting in USD because the consumer either overpays for the goods or ends up spending on unneeded goods in-order to facilitate the purchase of needed goods. This cost clearly makes the USD the least optimal currency to use in Zimbabwe. Using the Rand would thus remove the "burden of change" due to (i) the proximity of South Africa, (ii) the relative ease with which Zimbabweans move to and from South Africa and (iii) the strong political ties between Zimbabwe and South Africa coupled with the large volume of trade, all of which, will facilitate a continuous supply of bank notes and coins at a relatively cheaper cost.
e) The case for stability and transparency
The choice of country for anchor currency should be one that has a stable and transparent economic and political environment, which eliminates elements of surprises for the adopting country. The USA given the size of its economy and the age of its democracy is a clear favorite under this scenario.
However, South Africa also offers a relatively stable economic and political future in the 10-15 year timeframe. The economy is by far the most sophisticated and advanced in Africa supported by independent and functional institutions like the South African Reserve Bank and the South African Supreme Court and Constitutional Court. The ruling ANC which enjoys a steady but declining majority (62.1% in 2014 vs. 69.7% in 2009) has been in power since the end of apartheid in 1994 and successfully transferred power within its ranks three times over the same timeframe offering a relatively stable political environment.
Also to note is that the depreciation of the Rand over the past 12 months was not entirely an idiosyncratic event as both Brazil and Russian (both members of BRICS with free market system) currencies lost value by 40% and 55% respectively over the same period of time. Much of the Rand's drop has to do with overall health of the world economy and US monetary policy on rates than the performance of the South African economy.
Based on the above considerations, I conclude that the Rand is the best currency for Zimbabwe to exclusively adopt as a nominal anchor.
Depreciating Rand poses a deflation challenge for Zimbabwe: The role of remittances and the informal sector
According to statistics from the RBZ, 88% of Zimbabwe’s Diaspora is in South Africa, and the highest percentage of remittances, at 33%, come from South Africa (May 2015). In this section, I examine the effects of depreciation of the Rand against the dollar on GDP via the remittance channel. A depreciating Rand reduces the incentive to send money home for South-African-based Zimbabweans. I use an anecdote-inspired example to illustrate the interlinkage between a depreciating Rand vis-à-vis the USD, remittances from South Africa and the informal sector. To make it easier to follow the argument here, it’s worthwhile to note that gross domestic product (GDP), a measure of the value of final goods and services produced in a country’s economy and a frequently used measure of a country’s standard of living, can be measured as the sum of the values of investment, household consumption, government expenditure on goods and services and net exports (that is, GDP= Investment+Consumption + (Exports - Imports) + Government Expenditure).
Consider Trymore, a Zimbabwean who currently works in South Africa and sends R3, 000 every month. The purpose for the remittances is for constructing a house (an example of what an economist would consider an investment). Let’s also take into account Loveness, another South African-based Zimbabwean who sends R1, 500 every month to her mom so that she can pay rent and buy groceries (Consumption). Suppose that the exchange rate starts at R10 to 1 USD and the Rand depreciates to R15 to 1 USD. I investigate the expected effect of this Rand depreciation on each of the components of Zimbabwe’s GDP:
a) Investment channel (GDP declines): Initially, Trymore’s remittances of R3, 000 were 300 USD in Zimbabwe. After depreciation, the same R3, 000 only gets him 200 USD. Since prices haven’t changed in Zimbabwe, it becomes too expensive for Trymore to continue with the house construction project. The construction workers have to be laid off and join the informal sector, further suppressing profitability in that sector.
b) Consumption channel (GDP declines): Loveness’ mom will not be able to buy as much groceries as before because she now receives only 100 USD from her daughter, down from 150 USD. As she and others like her reduce consumption, domestic firms have to reduce production since demand has decreased.
c) Net exports channel (GDP declines): Zimbabwean firms have to reduce production and retrench workers since their market has been reduced because their domestic customers are going towards cheaper South African produced goods, and their South African customers are finding it more expensive to buy Zimbabwe’s produced goods.
d) Government Expenditure channel (GDP declines): Government spending is typically financed from three sources: taxes, borrowing or seigniorage (The profit made by the government from printing more money. Seigniorage is calculated as the value of the money minus the cost of printing the money). The three channels above imply tax revenue will go down. The government loses a source of income tax revenue as workers move from the formal sector to the informal sector because in the informal sector, it is extremely hard for the government to collect taxes. The decline in tax revenues is worsened by the fact that seigniorage is not an option since the GOZ does not have its own currency and borrowing is complicated and expensive because Zimbabwe has a bad credit history.
Based on the analysis above, I conclude that a depreciating Rand unambiguously leads to a decline in Zimbabwe’s GDP, via the remittance-plus-informal-sector channel. The extent of this drop is huge because the largest proportion of Zimbabwe’s Diaspora community is based in South Africa. To make matters worse, monetary policy and fiscal policy are not available to stimulate the Zimbabwean economy out of the recession. It is therefore unsurprising that there have been signs of worsening deflation (a general decrease in the price level) in Zimbabwe as the Rand depreciation intensified.
I will not go into details about the crippling effects on the Zimbabwean economy of a “deflation vicious cycle”, but they are summarized in the two charts below. The basic point is that lower prices will not be of much help to consumers if they are more broke.
Two illustrations of a deflation cycle
Can Zimbabwean firms take advantage of depreciating Rand and buy capital goods?
At this point, I briefly point out potential problems with some recent perspectives regarding the Rand depreciation: (“SA’s loss is Zimbabwe’s gain” (P. Gwanyanya, The Sunday Mail, and 10 Jan 2016) and “Take advantage of weak Rand, say RBZ boss” (L. Gumbo, The Herald, and 16 Jan. 2016). In the Sunday mail article, the author opines that “Zimbabwe can capitalize on lower prices obtaining in South Africa and other emerging markets facing currency depreciation to import some machines and retool its industries.” In the Herald, the RBZ governor is quoted as saying “This might be the time for Zimbabweans to import capital goods from South Africa at a cheaper price and invest in Zimbabwe and also produce at a lower cost.”
I find Mr. Gwanyanya and Dr. Mangudya’s analysis problematic on several grounds:
i. The incentive to invest is driven by a positive outlook on the state of the Zimbabwean economy so that the potential investors can expect a positive return on their investment. At this point, there are no signs that local demand is going to increase and that Zimbabwe’s producers will not continue losing international competitiveness in the region due to the of use of the USD.
ii. Owners of local firms will likely need to borrow to finance purchase of machinery because of current low productivity levels and liquidity issues. When an economy is in a deflation, the real value of debts increase, making it harder for borrowers to pay back and increasing the risk of default. Because risk of default is higher, banks are less willing to give loans. (A simplistic illustration: Suppose I borrow 10 USD from my friend Goodmore to buy a 10kg of mealie meal, which currently costs 10 USD. Now, because of lower demand, suppose the price levels went down 50% and that my work hours were also cut in half (instead of cutting my wage in half, there is contract!). The 10kg mealie meal now cost 5 USD but I still owe Goodmore 10 USD, enough for 20kg! It’s now harder for me to pay back the same 10 USD because it’s now worth more goods and services.)
iii. The analyses in the aforementioned articles ignore the reduction in investment and consumption through the remittance channel above.
I therefore conclude that the argument that Zimbabwe can benefit from the recent depreciation of the rand by acquiring capital and boosting the investment component of GDP is flawed.
Pressing the Reset Button: Policy Options to Complement Exclusive Adoption of Rand
I now consider some of the policies the GOZ can implement to help kick-start the economy under a Rand regime.
Exclusively adopting the Rand can give the GOZ the rare opportunity to directly and indirectly force a restructuring of the pricing and wage model of the country. One of the drawbacks of the USD dominated regime is that it sustained profiteering that was ushered by the hyperinflationary period that preceded dollarization. During the hyperinflationary period, production was grounded to a halt as both capitalists and labor downed tools in search of "fast money" from foreign exchange arbitrage. The prolonged existence of the hyperinflationary period meant a culture and generation of "fast money” was born and when dollarization was adopted the culture persisted. These ambitious entrepreneurs used the property markets to bank proceeds of their foreign exchange arbitrage, driving the (property) market to unsustainable high levels. Eight years later, Zimbabwe is still stuck with an overvalued property market that only 1% of the population can afford. For example, it’s hard to imagine how a family of 5 making 500 USD a month can afford a 30, 000 USD house in Chitungwiza. These prices have remained high despite extremely low disposable income in the country because of:(i) the growing Diaspora population has been willing to spend large on property as they are eager to show fruits of their adventures abroad and (ii) the fast money capitalists are reluctant to offload their properties at a loss as they still regard property ownership as one of the safest ways of storing value in an economic and political environment mired with high degree of uncertainty. High prices have persisted in consumer goods as well due to a combination of fast money culture (capitalist profiteering), industry low efficiency, high taxes, and unreliable and expensive energy.
As I argued earlier, the Rand will help drive consumption in the economy, which reduces profiteering (prices) as capitalists enjoy higher sales volume and are willing to cash in their property investments to invest in a growing consumer industry. The current stagnation in consumer sector makes the reasons to dispose of these properties at a loss in order to gain liquidity less compelling as there are no alternative investments to recoup the losses.
Marking prices in Rand will force consumer prices to converge to regional averages as consumers can easily compare prices of goods between South Africa and Zimbabwe without going through the headache of calculating the dollar equivalent of South African or Namibian prices. For example (i) a dozen eggs today cost R30 in South Africa and 4 USD (R60) in Zimbabwe (that is, 100% more expensive) (ii) a loaf of bread cost R10 in South Africa and 1 USD (R15) in Zimbabwe or 50% more expensive at the current exchange rate of 1:15. Such huge price variances are easily masked when consumers are comparing Rands and USD but become more glaring if the same consumer is looking at Rand prices in both South Africa and Zimbabwe. Once labor and other resources are priced in Rand, it becomes easier to compare efficiencies between industries across the border. Assuming comparable energy and input prices between South Africa and Zimbabwe, if Zimbabwean farmers, after converting to a Rand economy are still producing eggs at two times the price in South Africa, GOZ should allow South African eggs to be consumed in Zimbabwe. It will be senseless and wasteful for the GOZ to protect such inefficient farmers. Today, the arguments can be made that Zimbabwean eggs are simply more expensive because the USD is expensive and such arguments will fall away when the USD is replaced with the Rand. Zimbabwean industries will have to adapt structurally to be competitive once labor and resources are priced in Rand. Any arguments about an expensive currency as the reason for higher prices will no longer hold water.
The GOZ can structurally devalue the current Civil Servant wage bill by converting the USD denominated pay into Rands at a rate much lower than the current market rate (For example, a conversion at 1 USD to R10 or thereabouts should be plausible, saving the GOZ about R5 at the current exchange rate). This devaluation is possible because though the Rand has lost over 50% of its value over the past 12 months, prices and labor costs in the Rand monetized area has barely moved. This structural devaluation, will force the private sector to follow with wage adjustment, as GOZ is the biggest employer in the country. We have already witnessed ECONET (one of the biggest and most successful private sector employers) successfully implement this wage reduction which resulted in better profits and less labor cuts. Resetting wage rates is critical for the new Rand economy to be regionally competitive. Ideally, GOZ would want wage rates in Zimbabwe to be lower than the regional averages to give Zimbabwe industry room to grow and play catch up. The country is awash with University graduates, and finding reasonably cheap labor should be possible. Hypothetically, wage rates that are 75%-85% of regional averages, should be optimal to maintain reasonably sophisticated labor that can give Zimbabwean industry the impetus it needs to be competitive (that is, wage rates should be lower than South Africa, but high enough to stop the brain drain. Few people are willing to leave their country for 15-25% pay increase in a foreign country. Once that premium goes above 50% the decision to migrate becomes much easier).
The same structural devaluation should be applied to government offered services such as electricity, water, council rates, vehicle registration, school fees, police fines etc. The cascading effect of these lower rates will help drive consumption as households will have more disposable income, some of which will be coming via Diaspora remittances.
A Dash of Sound Policy to Help the Transition from multi-currency to Rand
The resetting of prices and wages alone cannot work if GOZ does not enact policies that help industry to recapitalize, restructure, and be regionally competitive. Such government policy can come in the form of (i) energy procurement and subsidy guarantees during a ramp up period (transition to Rand) that can ran from 12 to 36 months depending on the industries, (ii) temporary tariffs on imports to protect vulnerable industries as they adjust structurally during the ramp up period, and (iii) temporary tax breaks. Such tariffs, taxes and subsidies need to be carefully crafted and enforced so that the benefit to the consumer can be measured over time and players that abuse the facilities weeded out. It becomes a waste of resources for government to protect industries that are unwilling to adapt and be competitive. Such subsidies to uncompetitive industries are as good as taking money from the consumer’s pocket and giving it to capitalists, shareholders and industry managers.
When thinking about temporary subsidies to local firms, it is worth noting that protecting local industries can potentially create a huge moral hazard problem. “Infant” industries that are protected from foreign competition by tariffs with the noble goal of allowing them to find their feet are less likely to have the incentive to figure out ways to be efficient and be internationally competitive and hence might remain in the infantile state forever. Infant industries should be willing to absorb some initial losses in the short run with the goal of attaining long run profits. The GOZ should focus more on investing its scarce resources in training the labor force and improving the institutions and structures that strengthen the international competitiveness of local industries and promote ventures that add the highest value to Zimbabwean economy.
During the transition period, it is expected that the GOZ will run budget deficits as resources are directed to implement policies mentioned above. This deficit should be temporary, as the Rand economy will give GOZ a bigger taxation base from improved consumption and a broader formal sector. The GOZ can work with international organizations and South Africa to help manage the transition and implementation of the Rand economy through temporary budget support.
A Step to Building USD Reserves
Swapping USD for Rand will give the GOZ room to start building USD reserves from Diaspora remittances. Under the current multi-currency regime, USD remittances are passed directly to the recipients, and used in an economy where the real value is undermined thereby having a reduced impact on the economy. The Rand remittances from the Rand Common Monetary Area (South Africa, Namibia, Lesotho and Swaziland) are used to buy USD in order to pay for local services thereby devaluing their real value. Rands earned by the GOZ from customs and trade are used by treasury to buy USD to meet the USD denominated civil servant wage bill, which also results in value loss due to falling exchange rate and general devaluation of the USD in the Zimbabwean economy. As I argued previously a Rand economy will force Zimbabwean prices to converge to regional averages thereby giving Rands remittance greater value and impact on the economy as the Rands can buy more goods. The use of the Rand would also mean GOZ can reduce wastages from Rand revenues from customs and trade as they are used to meet GOZ Rand expenditures. Excess Rand revenues can be used to buy USD remittances thereby allowing the GOZ to naturally build on USD reserves from these remittances.
Eventual introduction of Zimbabwean currency: Need for Soft Landing
I should emphasize that dollarization is like taking a bitter pill with serious side effects. It’s hard to swallow (giving up a your own currency), but it’s the only viable cure for the disease (hyperinflation) and it’s side effects (deflation, loss of monetary policy etc.) if not managed well could also be fatal. Dollarization should thus be viewed as a temporary, costly and easy fix to a long-term problem. GOZ should be thinking of the long-term end game to this national scourge. As GOZ works to get the economy up and running again policy should be focused on how they plan to restore confidence and shake off the stigma and shame of Dollarization. No country can realize its full potential under the shackles of Dollarization. Economic targets must be established at which point a soft reintroduction of the Zimbabwean Dollar be initiated. For example, targets may include lowering the unemployment rate, increasing factory utilization, budget deficit, foreign currency reserves. Once these targets are met, the approach will be to reintroduce the Zimbabwean Dollar pegged to the Rand and allow the two currencies to be used freely side-by-side until consumers have gained enough confidence, at which point the GOZ can slowly mop up Rands from circulation leaving the Zimbabwe Dollar to stand on its own. Zimbabwe’s proximity to South Africa, coupled with huge trade, and synchronized economic cycles makes the Rand the perfect choice for effective dollarization with the long term view of a soft landing back to a Zimbabwe Dollar. Landing period can be as long as 5 years or more depending on the choice and strength of policies applied. While hitting the economic targets may take fiscal discipline and cooperation from foreign governments and international institutions, restoring confidence should be relatively cheap and 100% homegrown. A starting point will be for the governing party to clearly spell out and adhere to policy doctrines regarding hot issues like indigenization, land ownership, and leadership succession which can allow for economic stakeholders to make meaningful long term planning and risk assessment. In addition the GOZ can strengthen and promote the independence of institutions like the Reserve Bank Zimbabwe, Ministry of Finance, Constitutional and Supreme Courts by appointing strong leaders and providing adequate funding. These elements will be critical for a successful decoupling from dollarization in the long-run.
Concluding Remarks
In this article, I have used basic economic analysis to argue that Zimbabwe would be better off officially abandoning the current multi-currency exchange regime. I further argued that the currency that Zimbabwe should adopt is the Rand. My approach emphasizes “general equilibrium-type” analysis in which I take into account important characteristics of the Zimbabwean economy. The main characteristics that I consider are Zimbabwe’s huge informal sector and a large dependence on remittance inflows, especially from South Africa. Adopting another country’s currency and a huge informal sector combine to make monetary and fiscal policy inaccessible as policy tools to the government of Zimbabwe. The loss of these two tools make it even more important that the country chooses the optimal anchor currency. It also makes it equally important that the GOZ implements policies that encourage investment, as those are now the only tools available to stimulating the Zimbabwean economy.
One of the most popular introductory economics textbooks is by N Gregory Mankiw. The book starts with a discussion of the “ten principles of economics” which provide a unifying framework for economic analysis. Three of these principles are:
· The cost of something is what you give up to get it
· People respond to incentives
· A country's standard of living depends on its ability to produce goods and services.
These principles accurately summarize my major points in this article. If there is no production of goods and services in Zimbabwe, the current economic quagmire will persist. Government policies should be carefully designed so that economic agents are given the incentives to invest in Zimbabwe, work in Zimbabwe, buy Zimbabwean-produced goods, send remittances to Zimbabwe, and join the formal sector, among other things. Finally, policy makers should carefully evaluate the potential costs and benefits of their policies. All potential sources of deadweight loss should be carefully considered.
About the author
Dr. Ranganai Gwati attained a B.A. in Mathematics & Economics from Reed College (Portland, OR), where he was awarded the Meier award for “distinction in the Reed undergraduate economics curriculum.” He went on to obtain a Master’s and PhD. degrees in Economics at the University of Washington (Seattle), specializing in International Finance. At UW, he also obtained a Graduate Certificate in Computational Finance. Dr. Gwati is currently an Assistant Professor of Economics at Benedict College (Columbia, South Carolina) and can be reached at ranganaigwati@gmail.com . Dr. Gwati acknowledges contributions from F.S. Nyangore (Rusape)