Policy should be cyclical that’s what the currency crisis tells us


Chris Chenga

China’s years of sustained economic growth are impressionable to many hopeful emerging economies, perhaps to an extent just as much as it is agitating to its more critical observers. The latter have continually predicted an overdue slowdown caused by varied narratives ranging from economic, societal, to far-fetched geopolitical exposures that would otherwise stagnated growth for any other country. Yet, China moves right along.

Not so much a government that postures its economic management, choosing instead to get down to its own business, there remains somewhat of a mystique into the psychological guidance of how China’s government approaches its economic management. Thus, admirers and skeptics alike frequently struggle to pin point how it has managed to sustain economic growth for so long. Maybe insight to sustained growth can be captured in China’s outlook of approaching economic development in five year plans. While many nations perceive economic circumstances in terms of democratic cycles – for instance, vote for a new government for new policies, or when this administration came with these policies things were great – China may be better positioned psychologically as its model of five year development plans are more coherent to economic cycles. Fundamentally, economic management, should be about keeping coherence with economic cycles. There is a nuance here. Countries that retain cognisance of economic cycles are better able to management economies than those that emphasise democratic cycles. An ailment in emerging economies is that they are frequently caught unaware by the tail end of economic cycles.

For instance, as they borrow or receive fresh financial inflows, short term growth is perceived as its own short term circumstance or maybe even complimented to a supposedly new government after elections. This was the case in Zimbabwe. Dollarisation triggered a debt and inflow cycle without many businesses and citizens knowing. By the time the debt cycle or financial inflow cycle hit its peak, not many knew where along the economic cycle the country was, at the precipice of a currency crisis.

China has the psychological discipline, right down to its business and citizens’ impulses, to understand and put economic cycles into context. Indeed this does not imply that a government should infringe on free will, innovation, and cherished civil liberties of business and citizens. It means that a government can inform business and citizens on the desirable impulses and behavior complementary to an economic cycle. For instance, over consecutive five year plans, China can transition from a construction focused economy – whereby business and citizens are conditioned into the push towards subsidised housing, industrialisation of construction material, and educative enhancement of construction professionals – to a service driven economy whereby new homeowners can diversify their skillsets into service oriented jobs that enable them to pay off long term mortgages, or financiers find new portfolios to re-allocate their capital and retain value. It is this coherence of such five year plans that have made China sustain its most recent economic growth trend, in contrast to emerging economies such as Turkey where a recent construction boom left sky scrapers and infrastructure abound, yet much of it, particularly at the premium end lacks any occupation and utility to pay for such investment.

Unfortunately, such discipline to this extent remains synonymous to disparaged systems of socialism or controlled governance. Western ideals fancy the impressions of unregulated, free economies without any traceable intentional planning, let alone influence of business and citizens’ impulses and behavior. Perhaps this is why Americans have recently settled to accept that every so often there is an inevitable economic crash, of which the free spirit economy can spring up again after governmental intervention. Emerging economies, however, lacking similar social safety nets cannot afford to be so adventurous and they cannot rise from such calamities.

Currently Zimbabwe is at the tail end of a financial inflow and credit boom that came with dollarisation. Due to a lack of understanding of the kind of economic management warranted by initiating such a cycle, business and citizens find themselves in a conflict over price and wage distortions.

After taking on the USD and resultant capital inflows, the Zimbabwean economy failed to strategically structure itself to exploit the advantages of such a trusted, albeit strong currency and credit. Having taken on a strongly valued currency, Zimbabwe should have focused that capital allocation to its comparative advantages. There are two important points to ponder on.

Firstly, the USD is good for the professional service sector and white collar industries that Zimbabwe retains comparative advantage because of a well-educated workforce. For instance, the greatest inflows of FDI into Africa are from the USA, which raised its investment on the continent 40% year on year. However, it is largely in the form of portfolio investments into IT and professional services sector. Unbeknownst to many, while regions such as East Africa receive the most investment into IT, a lot of the IT systems in East Africa are outsourced from Zimbabwean professionals. This simply means that Zimbabwe needs to create an enabling environment for local IT professionals who can then export their services from here, priced in USD. Professional services such as finance and accounting are still a comparative advantage. Unfortunately because of poor investment into soft infrastructure, particularly connectivity, many locals cannot service the region and instead relocate to their client markets in other economies. This is all lost USD revenue, but most importantly, this explains the wage distortions felt by local employees! This is all depressed real wages from industries that could have sustained USD parity incomes. Higher wages are not going to come from blue collar labour industries and the fall in wages in Zimbabwe today is due to a deficit in professional service sector jobs.

Secondly, the USD inflows could have been utilized for capital formation in Zimbabwe in capital intensive comparative advantages such as manufacturing, agriculture and mining. Unfortunately, business and citizens used USDs to consume foreign products, thus wasting valuable USDs. Instead, business and citizens should have invested in plant and equipment at low acquisition rates due to a strong USD. A strong currency lowers the cost of imported equipment, and at the tail end of the inflows cycle, Zimbabwe would have had well capitalised industry ready for potent production. Today as the cycle comes to an end, many industries are just now trying to secure foreign markets, but they lack adequate capital equipment hence are price takers, not price makers. So the distortions for the Zimbabwean consumer are that they would wish for a certain pricing point, however, they are in an economy which is a price taker to foreign producers.

The emphasis in economic management is that government must be agile to the economic cycles that they choose. Dollarisation was a choice to initiate an economic cycle.

Accordingly Zimbabwe should have created efficient mechanisms to get businesses and citizens into necessary impulses and behavior so as to take advantage or mitigate the economic cycle. This is also why after five to seven years USD inflows started to dip. That is the nature of such debt and inflow cycles. Maybe in its reflections of future currency choice, Zimbabwe should ask itself how well it did in response to its most recent voluntary economic cycle; perhaps it will also find answers to is current price and wage distortions.