By Chris Becker
Once basket hub of commercial agricultural activity in sub-Saharan Africa, with well-developed basic infrastructure and one of the highest incomes per capita in the region, today Zimbabwe is an economic wasteland characterized by low levels of private foreign investment, low per capita income, high corruption, and the highest asset expropriation risk on the continent and potentially even the world. Understanding Zimbabwe’s ultra-high corruption and state expropriation risk requires an understanding of the nature of money and banking, and the role that central banks play in surreptitiously expropriating assets from the public on behalf of government.
The profits that accrue to governments by creating money through the central bank-commercial banking nexus, is called ‘seigniorage.’ Printing bits of paper stamped with a government seal, and outlawing anyone else from doing the same through legal tender laws, is very a profitable endeavor. The unit cost of printing legal tender notes is a fraction of the value that those notes can ultimately be exchanged for on the market. This has always been the allure to money printing cartels.
Moreover, by creating legal tender and thereby expanding the money stock, the government dilutes the value of each unit of money supply already in circulation, which is an unnoticeable way of extracting purchasing power from the public. Although this amounts to a confiscation of resources from the public, the complexity of the process makes it hard to detect, while the effects of this extraction only makes itself felt in the future, once prices rise in response to the increase in money supply.
One of the greatest champions of inflationism, John Maynard Keynes, wrote in 1919:
“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
Just because the process is entirely discreet and lumps real costs on the public that cannot be easily identified and measured, does not make it any less a way of extracting resources from the private sector than outright taxation or even asset expropriation.
The Zimbabwean government in the late 1990’s required funding for war veteran pensions, to pay for a costly land reform programme, and to pay for a military adventure in the Democratic Republic of the Congo. With little ability to raise the necessary funds directly from the taxpayer, the government borrowed the money directly from the Reserve Bank of Zimbabwe, which the RBZ printed out of thin air. Lacking the sophistication of, say, the American monetary system, where the commercial banks are essentially the gatekeepers to the creation of money supply through credit extension, the RBZ printed and lent high-powered money (i.e. cash) directly to the government. As the government spent it, this high-powered money made its way into deposits in the commercial banking system, and banks were then able to lend out multiples of this money back to the government and also credit-worthy individuals or corporations.
As this process became entrenched and continued after 2001, the imbalances that were created as a result of the deficit spending and money printing made it nearly impossible for the RBZ and the government to reverse this policy without precipitating a major deflationary economic collapse that would have sent unemployment skyrocketing and caused government to default on its debts.
In a fight to prevent a deflationary collapse of the economy, the RBZ went into printing overdrive and the hyperinflation Pandora was let out of the box.
This economic process was best described, and indeed predicted, by economist Ludwig von Mises, when he wrote in 1911 The Theory of Money and Credit that:
“Consistently and uninterruptedly continued inflation must eventually lead to collapse. The purchasing power of money will fall lower and lower, until it eventually disappears altogether.”
And in 1949 when he wrote in Human Action of the resulting impact on the economic and monetary system:
“The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion.
The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
The Zimbabwean government attempted to postpone the crisis ever further into the future, and this resulted in the complete destruction of the Zimbabwean dollar and full dollarization (US dollar) in 2009. The public rejected the Zimbabwe dollar completely, and instead began to use US dollars, South African rand, Mozambican metical, Zambian kwacha, and Botswana pula instead. Robert Mugabe’s government had no choice but to allow it – it was pointless enforcing legal tender in a currency that no longer held any exchange value.
As a result, the RBZ could no longer lend government the money it required to meet its obligations, since the money it printed was immediately valued by the market as worthless. The Zimbabwean credit market was completely decimated and to this day, no long-term credit is available. Individuals or businesses in Zimbabwe cannot even get a credit card from Zimbabwean banks. The RBZ governor noted in the January 2013 Monthly Economic Review that:
“Credit to the private sector, however, continued to be short term in nature and largely channeled towards recurrent expenditures. As at January 2013, credit from banks was utilized for recurrent expenditures, 78.4%; consumer durables, 14.5%; and capital expenditures, 5.1%.”
The dearth of credit does not end there. As recently as October 2012 banks refused to lend the Zimbabwean government short-term money (rands and US dollars) at prevailing market interest rates, questioning whether the government could repay the loans with the RBZ unable to act as a lender of last resort to the banks if the government did default.
Fiscal discipline has been imposed on the Zimbabwean government following the destruction of its paper money.
This is one of the key reasons to why Zimbabwe is the highest risk country in sub-Saharan Africa on ETM Analytics’ Africa Asset Expropriation Risk Ranking. With a score of 2.2/10, Zimbabwe is the lowest ranking (i.e highest risk) country in SSA, ranking below Niger (3.7/10) and Sudan (4.1/10).
Because the Zimbabwean government has destroyed its ability to expropriate resources from the private sector subtly through monetary inflation, and because this imposes tremendous fiscal discipline, it must now resort to outright asset expropriation in order to extract resources from the private sector. This is exactly what the government has done in recent years by passing “indigenization” laws that compel foreign owned businesses to hand over, what may yet prove to be uncompensated, a 51% equity stake in their Zimbabwean business operations to local Zimbabweans. First, the mines were targeted (eg. Zimplats), and thereafter the government has shifted its focus to the banking sector (eg. Standard Chartered). The RBZ governor in April 2013 urged Standard Chartered shareholders and clients not to panic, claiming the rhetoric used by the Economic Empowerment minister that Standard Chartered will be “indigenized” (i.e. expropriated), is not “of any legal or practical effect.” Yet this attempt to assuage investors’ concerns rings hollow given the well-established precedent of state looting in recent Zimbabwean history.
Everything points toward high and rising asset expropriation risk in Zimbabwe. The less ability the regime has to expropriate resources through monetary inflation and subsidized borrowing, the more it will rely on expropriating assets visibly. The tragic irony of this is that Zimbabwe holds great investment opportunities following the ravages of hyperinflation, yet pervasive asset expropriation risk neuters those opportunities significantly. Investors should be aware that expropriation may not end with farms, banks and mines, but could spread to other industries. In fact, Zimbabwe’s current governance and institutional arrangements that place it among the least free countries in the world essentially guarantee more expropriations in the future.
Chris Becker is an economist at ETM Analytics based in Johannesburg, South Africa, where he heads up the company’s Africa Advisory service. He is a founder of the Ludwig von Mises Institute in South Africa, and is editor of the liberty blog chrislbecker.com. Follow him on twitter @chrislbecker.