Lurking in the shadows, a free market enterprise is thriving

Adrian Mapiye and Ngonidzaishe Makaha

Zimbabwe’s formal economy is like the split-second moment of a boxer who has just been a recipient of a devastating sledge hammer punch from his opponent. Within that flash the boxer realises his fate lies in a swift thought process. The most afflicting thought is the possibility of a knockout and the second thought is embedded in the spirit of positivity and defiance where the boxer aims at keeping his feet planted to the earth. In all this concatenation, the boxer’s shadow is a contradiction of its physical self. Though the shadow follows its physical form, it does not feel the pain and anguish.

In the context of the Zimbabwean economic set up, the boxer is the formal economy and his shadow is the “shadow economy”

The shadow economy takes two forms, the organised informal market and the extreme and mostly illegal “black market”.  According to the International Monetary Fund, Zimbabwe has one of the highest informal markets in the world. A restrained economy and financial system with a lot of state interventions and control drives economic agents to the shadow economy. In our economy there has been a lot of state interference in the determination of foreign exchange rates, commodity prices and financial intermediation that has resulted in the inevitable rise of the shadow economy. The shadow economy in Zimbabwe is highly organised and sophisticated with many support systems to the broader market. It is an economy anchored on shadow financial system that holds a significant chuck of foreign exchange reserves which in turn facilitate financial intermediation between the surplus and deficit units.

The illustration below explains the basic structural functionalism of the shadow economy in Zimbabwe.

Mai Ruva is a second-hand shoe retailer who sells on the street pavements due to high shop licence fees, rentals and exorbitant taxes. To start up her business she approached her brother Smart, a foreign currency dealer and mobile money merchant, who is also into business of lending “cash”. According to the street wise credit analytics employed by Smart, Mai Ruva qualifies for a one-month term 5000.00 loan whose USD equivalent is $1000 at the shadow economy rates but about $1600 using the formal and government gazetted bank rates. Mai Ruva cannot approach the formal banks for credit because of paperwork, collateral issues and uncompetitive credit prices thus her only source of credit is the informal channels. To hedge his loans against the risk of inflation and currency value erosion, Smart employed a type of financial derivative called currency futures. That means on repayment Mai Ruva’s principal and interest amount will be tied to the shadow economy exchange rate of the day. Mai Ruva goes on to buy her first batch of second hand clothing and shoes for resale, from the port of Beira through her associates who are in the business of smuggling goods at the border. Smuggling is rife because the gazetted customs duty is too steep for the sustainability of small enterprises.

Sithembile is attending her friend’s wedding in a few weeks’ time and she has been looking around for the perfect shoes for the occasion. Her aunt who works in South Africa send her some money through a cross border truck driver called Dunmore. Sithembile’s aunt could not send the money through the formal channels because of high transactional fees and unavailability of cash sometimes. Being a rational economic agent, Sithembile opts to trade the foreign currency that she got from her aunt with Smart, the street forex dealer. This is because the informal market rates have a higher return than the bank rates. There has not been significant investment in the country and that has hurt clothing manufacturers and retailers a lot such that there is only a few left operating. From the few formal clothing retails left in operation, Sithembile cannot find the right shoes she wants. She can only get poor quality offers which are expensive, but she realises she can get a better deal from the informal market. Whilst walking down the pavement, Sithembile finds Mai Ruva’s stall with the perfect shoe type she has been looking for. The price she is quoted is pretty much competitive and the quality seems perfectly fine to her.

Its day end, and Mai Ruva has made significant earnings to contribute to her start up loan repayment. Smart has made some significant foreign currency holdings from the trading activities with the likes of Sithembile and many others such that he can now aggressively bolster his lending and forex trading business. Sithembile is happy she finally got the shoe type she wanted and some extra money from trading her forex with Smart compared with what she would have got had she quoted the bank rates.

In Zimbabwe, our everyday trading and economic decisions have been tied up to the shadow economy and we contribute to its organisation and growing sophistication. From the tomatoes we buy at the informal market, to the high foreign exchange rates that attract us to the parallel market we have all become part of the shadow economy. In the shadow economy a free market economy is the hallmark with forces of demand and supply at interplay. There is no force or coercion or any form of state intervention. Every economic agent is free! It is a sharp contrast of the formal economy which is characterised by an overly regulated financial system, arbitrary and uncompetitive tax systems and monopolies.

In advanced free market economies Sithembile’s aunt would trust the formalised financial system to transact and transfer money more than a cross border truck driver. In a free market, credit ratings, innovative solutions and competitive credit pricing attract individuals and businesses to the formal financial system. In a free market space, Mai Ruva would choose to operate legally because she would qualify for credit from organised financial institutions at competitive rates and her government would not burden her with complex paperwork and tax rates because of the emphasis on rewarding small enterprises to grow. In a free market economy, Sithembile would have a wide choice of retail chains to buy her shoes from. In fact, she might have discount offers at every enquiry. In a free market economy, Smart would be using his financial skills actively trading in regulated swaps, options, futures, forwards and hedge funds to make riskless profit and contribute to the national economy.

A free market system is most desirable and highly effective as the reference model to the formal economy. A liberalised economy can give greater choice, reward and room for innovation. Its high time Zimbabwe strides towards greater economic liberalisation with effort towards keeping intact some key social safety nets like education, health and amenities. It’s time to let the economy free!

Ngonidzaishe Makaha and Adrian Mapiye write blogs which cover financial analysis, equities, financial inclusion, development finance, analytics and Cybersecurity. They write in their personal capacities.


Related Articles

Leave a Reply

Back to top button