Zimbabwe: recovering the irrecoverable

The results of price-fixing

Their crime? Raising prices.

For the past decade Robert Mugabe has accepted every tenet of the anti-globalist anti-free-market lobby. He nationalised large commercial farms and gave them to the landless poor. He printed cash and gave it to veterans and the rural destitute. He fixed prices on essential products at low prices to benefit the poor. And, when business owners flouted those rules, he arrested them.

The results have been precisely what market-economists, such as myself, have said would happen. Agriculture collapsed, the Zimbabwe Dollar is entirely debased, essential products are unavailable, and the only real trade takes place in the informal market – now 80% of the economy.

The measure of failed states

By every measure of the term, Zimbabwe is a failed state.

The only party trick that Zimbabwe appears to have avoided is street-protests regarding hyperinflation. Zimbabwe remains stubbornly stable.

I have written on this stability before, and so will only summarise here by saying that massive currency inflows from Zimbabwe's diaspora in South Africa and the UK is ensuring that most have a safety net. The support of other African nations in cheering Mugabe on has also indicated to his people that they'll get scant support if they decide to take on his trigger-happy troops.

The question being bandied about now is: how do we stabilise and refloat the country?

Argentina attempted to see off their dance with disaster in the late 1990s by linking the peso to the US dollar. That resulted in currency flight and a shrinking economy. The peso was delinked in 2002.

The South African government is suggesting linking the Zimbabwe dollar to the SA rand in the hopes of stabilising the currency. South Africa already has a currency union with Namibia, Lesotho and Swaziland where the rand is also the local currency. These three countries are all, economically, extremely small. Zimbabwe, for all its current travails, is not.

Zimbabwe has extraordinary natural resources and a highly educated local population. There are also 3 million of their most talented people living in exile and wanting to go home. As soon as the political situation changes they will flock in. A stable Zimbabwe will recover all its losses very rapidly.

Cultural imperialism isn't limited to the US

Linking their currency to the SA rand poses tremendous risks for South Africa. Money is based on fiat, or trust. The money supply must reflect the underlying value of the economy that it represents. Too little in circulation and you limit growth. Too much and you deflate the value of the currency leading to inflation.

Exactly what is the Zimbabwe economy worth right now? It is almost impossible to know. Putting a political value on that will definitely result in an overvaluation and the knock-on effect of destabilising the rand.

Despite the risks it is essential to link the Zimbabwe economy to something that is stable. Linking it to a western currency, like the US dollar or the EU euro, would be better but is also unrealistic. The weakness of the local economy is too great to use such strong currencies to represent it.

I am apprehensive of using the rand to stimulate Zimbabwe's recovery but I do have sufficient faith in our independent Reserve Bank governor, Tito Mboweni, to give tacit support for such an initiative.

The long-term result will be a Zimbabwean economy entirely wedded to South Africa. This poses tremendous opportunities for trade and economic growth between the two countries. It also runs the risk of labelling South Africa with the tag of a local hegemon. One I'm not that uncomfortable with. I'd rather see South Africa shaping the future of Africa than Libya.

If the customs union between Namibia, Zimbabwe, Botswana and Mozambique can be used to create a mini-free-trade zone then we really can look forward to some serious Asian Tiger-style growth.