RESERVE Bank Governor, Gideon Gono’s repeated call to replace the US dollar with the Chinese Yuan alongside the Zimbabwe dollar is either superbly feckless, crafty deception or economic emotionalism.
There is no denying that the ‘Look East Policy’ is bearing fruits – at least in Kuwadzana; a local tabloid last week carried the story of a Kuwadzana woman who gave birth to a Chinese baby. Evidently, the Chinese have penetrated everything Zimbabwean, from flea markets to mining concessions in platinum, gold and diamonds. But I digress.
The obsession with China as the centre of global growth is not misplaced. Confidence in capitalism is probably at an all-time low. The Washington consensus, the organising idea behind the global advance of laisser-faire financial capitalism has suffered irreparable harm following the global economic crisis. The rise of the new ‘superpowers’ in the East has been helped in no small measure by a crisis of decisive leadership and political authority in the West.
Barack Obama is struggling for confidence and has lacked the temperament of a Franklin Roosevelt. European leaders in countries such as Italy and Greece have been falling faster than Arab dictators. Charles Kupchan, a professor of international relations at Georgetown University, says the political breakdown in the US and the fracturing of solidarity in Europe has added to the crisis of governability whilst emerging economies like China, Brazil and India are moving up as the new economic order.
Undoubtedly, China is on its way to becoming a formidable global power. The size of its economy has quadrupled and is estimated to double again in the next decade. Again the country has accumulated massive foreign reserves worth more than $1 trillion. China has become one of the world’s major manufacturing centres and consumes roughly a third of the global supply of iron, steel, and coal.
The assumption, however, that the rise of China will inevitably bring the US-led international order to a standstill is perhaps overstated. The United States did not simply establish itself as a leading world power; it led in the creation of universal institutions that invited global participation in an integrated financial architecture which will take years to dismantle. Even, as predicted, the US is overtaken by China as the world’s leading economy, the US dollar will most likely remain the dominant trading currency for the foreseeable future.
The governor’s argument in favour of introducing the Yuan is premised on the rise of China and the crisis of capitalism as a justification. Considering we are just creeping out of a ‘world record economic disaster’ a proposal to tinker with modest economic recovery by adopting a currency whose suitability and benefits are at best circumstantial, empirically unproven and largely speculative is seriously questionable. Now is hardly the time for another currency experiment of ‘quintillion dollar proportions’.
The Yuan idea can only be taken seriously when considering the suitability of adopting a ‘China-type market economy’ with the state as a pivotal actor in economic management. The sustained growth in the East suggests the success of such a judicious mix of market liberalism with an entrepreneurial role for the state.
The nationalisation of a slew of financial institutions in America has been described as “socialism with American characteristics”. In Britain, Labour leader Ed Miliband is calling for what he describes as “Responsible capitalism” based on controlling the excesses of market liberalism. In this regard, A ‘Look East Policy’ adopted by the government although born out of necessity is completely justifiable, but adopting the Yen is not.
To Yuan or not to Yuan
In terms of cost and benefit, Zimbabwe is better off adopting the Zambian Kwacha than a currency whose name no one can pronounce without the aid of a mandarin interpreter. Despite the Chinese invasion, South Africa remains the country’s largest trading partner. We should be more concerned with South Africa’s recent protectionist policies than China.
Nonetheless, the tradability of a Yuan currency is practically complex if not outright impossible. There is no evidence to suggest that the Yuan will lead to different liquidity challenges than those currently being faced with the US dollar.
If the governor’s Yuan idea makes no sense, it maybe because the sub-text is more about the introduction of the Zimbabwean dollar than the Yuan. Logically, if the Yuan was the focus, there is no reason why this cannot be added to the multi-currency basket alongside, the USD, Rand and Pula, allowing the market to determine its tradability.
The governor’s idea, which calls for the introduction of the Yuan alongside the Zimbabwe dollar, would in effect result in de-dollarisation. The net effect would be a crafty return of the Zim dollar with the Yuan as an anchor.
A popular misconception is that the Unity government dollarised the Zimbabwean economy. It didn’t; the reality is that the economy succumbed to market forces and dollarized itself well before authorities introduced the multi-currency basket. The fall of the Zimbabwe dollar was simply the evidence of a failure of economic policy. Adopting a multi-currency regime was surrender to market forces which legitimised economic realism.
Based on evidence from Peru, Egypt and Liberia, de-dollarisation can be costly and complex. When the minimum conditions for the return of the dollar have been met, possibly within a 5 year time-frame or even longer, the Zimbabwe dollar can be introduced in the current multi-currency basket. When managed prudently with market incentives such as the creation of local currency denominated bonds, gradual de-dollarisation can be achieved.
To achieve de-dollarisation, three basic approaches can then be adopted. First, macro-economic policies can be utilized to keep the exchange rate and prices stable through inflation targeting. Second, regulatory/legal reforms such as setting differential reserve requirements or remuneration rates or adjusting provisioning and liquidity requirements will have to be considered.
Other legal reforms could entail requiring all or certain payments or contracts to be conducted in the local currency. Other administrative enforcements such as taxes on dollar intermediation and a gradual conversion to local currency deposits would be useful.
Zimbabwe is coming out of a decade-long economic crisis which made us a worldwide laughing stock and a test case on ‘How not to manage an economy’. Presently, the Zim dollar is a ‘collector’s item’ on Amazon on account of the zeros we invented in a ‘Ripley Believe it or Not’ fashion. The serious question should be how to restore sufficient credibility in our own economic policy, consolidate recovery and improve productivity and not grandstanding economic experiments. For now, the Zim dollar should remain on Amazon.
Dr Lance Mambondiani is an Investment Executive at Coronation Financial. He is also a Teaching Assistant in International Finance for Development and Financial Markets and Corporate Governance at the University of Manchester. He can be contacted on email@example.com. The view expressed in this articles are personal and do not necessarily reflect the position of Coronation Financial.