Preamble: after my last two posts on Zimbabwe, “Zimbabwe Hyperinflation 2.0: The US Dollar Version” and “Zimbabwe’s New Hyperinflation: How Will It End?“, I received a number of questions and comments around bitcoin. Specifically, readers wondered whether Zimbabwe should just start using cryptocurrency as a ‘fix’ to the current crisis. So I’m going to try and explain why I didn’t mention it as a potential solution – although I wanted to. All the sexiest economic solutions seem to involve some kind of blockchain tech – and I like to get in on that action. However, in this case, I believe that a bitcoin-type currency would have been even more disastrous for the Zimbabwean economy than the current RTGS one.
Here’s something to think about:
The real problem is not really the money
The current economic situation in Zimbabwe is a political problem with a monetary expression. Yes, there are cash shortages. Yes, there are parallel cash markets. But they are only symptoms, not causes.
It’s a bit like suffering from a bleeding wound. The loss of blood might well be the thing that kills you, but the blood itself is not to blame. The wound is. That is the underlying cause.
And I could follow that analogy through here:
- Let’s say that money (or, rather, the purchasing power of money) is the lifeblood of the Zimbabwean economy (as it is of any economy – it is the medium of trade).
- But a gaping wound has been created by deficit spending, poor government policies and a lack of competitiveness.
Now, if you focus on the blood loss alone, you’re just delaying the inevitable. For example, you could get blood transfusions (like Afreximbank loans and bond notes) – but those will still run out if the wound remains open.
You could also argue that the problem is that the blood is thinning. So you might try to thicken it (and turn the money into something more ‘stable’ like bitcoin or gold). But even if this slows the bleeding, the wound would still be there. And you’d be prone to secondary infections, assuming that the clotting process itself doesn’t kill you first with an aneurism.
The problem here is not the money. The problem is the politics and the economics that have led us to this point.
How did we get here?*
*Sorry if you’ve read the other posts, and this sounds repetitive. But please bear with me – I’m working towards a larger point.
Well, we know how we got here. Zimbabwe underwent hyperinflation, and the economy abandoned the use of the Zimbabwe dollar. Then, instead of adopting a regional currency like the South African rand, we de facto adopted the US dollar as our primary medium of exchange.
And at the time, this made sense. The US dollar was what Zimbabweans were already using. And Zimbabweans could still be somewhat competitive because all the cheap money from Quantitative Easing in the US was flowing into emerging markets in search of returns, and strengthening the currencies of our neighbours (South Africa, in particular).
So Tendai Biti could go ahead and balance his USD budget. And the Government of National Unity went about rebuilding. Currency controls were relaxed, and foreign money flowed into Zimbabwean investments. Foreign remittances arrived, and they were worth something. The commodity cycle was peaking, and Zimbabwe’s economy began to improve.
When did it all start to go wrong?
In 2013, Ben Bernanke announced that the Federal Reserve would start tapering its QE program. All that cheap money flowed back to the United States, and the emerging market currencies collapsed.
Also in 2013, the Government of National Unity ended. The now-former Minister of Finance, Tendai Biti, claimed that ZANU-PF had almost doubled the size of the civil servant workforce in order to win the 2013 election.
The implications of those two events:
- The weakening of the South African Rand in the wake of QE tapering dramatically changed the way that Zimbabwe did business. The US dollar cost of South African wages, salaries and overheads effectively halved between 2013 and 2015, as did the cost of all South African imports.
- This meant that the cost of doing business in Zimbabwe went from being somewhat reasonable to being unbelievably expensive.
- Also, the end of QE was a double hit – because it also halved the value of any rand-based remittances (as well as the value of remittances from the diaspora in other emerging markets).
- Finally, the cost of doubling the civil servant workforce meant that government needed to raise its revenue collection targets just as the economy was entering a period of depression.
At this point, I want to focus on the QE part of the story.
The cost of South Africa’s competitiveness
Let me use a really simplistic example of a South African miner, who earns R10,000 per month:
- When the USD:ZAR exchange rate was R7.00 to $1 in 2012, his salary in “real” terms was $1,430.
- Today, the USD:ZAR exchange rate is R13 to $1, making his salary in “real” terms $770.
Then let’s assume that a Zimbabwean miner started off in the same place – only his salary was set in US dollars.
When we compare them:
|2012 Monthly Salary||2017 Month Salary|
|South African Miner||USD 1,430||USD 770|
|Zimbabwean Miner||USD 1,430||USD 1,430|
Not to overstate it: but this is devastating.
- Local productive industries (like manufacturing and farming) would suddenly find themselves unable to compete with the flood of cheap imports out of its closest trading partner.
- The mining industries may find that their high cost of extraction render their mining shafts unprofitable.
- Foreign investment would shift to where the inputs costs are cheaper.
You could have the best government in the world, with the most independent central bank, and this fundamental lack of competitiveness would still have driven the economy into depression.
This is a primary reason for having a sovereign currency. The shifting exchange rates act as a buffer between local industry and foreign competition.
That is: if Zimbabwe had had its own currency, then it too would have weakened alongside the rand. And there would not have been the same degree of difference between two regionally similar economies.
And just remember that the South African economy didn’t collapse because the bottom fell out of its exchange rate. Yes, there were negative impacts – but these were mostly in the importing industries. The rest of the economy managed to survive the higher costs for anything with an import exposure – and the exporting industries received a boost.
The reason for exchange rates
Zimbabwe is a poster child for what happens when a country does not have its own currency.
Of course, it is also a poster child for what happens when a government destroys its own currency (which is why we’re in this position in the first place). But the history does not change the fact that the lack of a functioning Zimbabwe dollar is a terrible economic burden.
Without it, the only way for an economy to internally devalue itself, and remain competitive, is to slash wages. And that is not so easy (especially when Zimbabwean labour laws forbid it).
In many ways, this economic fact alone is enough to have led to this point.
But when you couple this lack of competitiveness with a massive increase in the government wage bill, then you’re on track for a forced internal devaluation. Where the economics and politics has literally torn the US dollar apart, and created multiple versions of it.
So where does bitcoin come in?
Well, if a massive part of Zimbabwe’s problem is its reliance on a currency that is too strong relative to the region, then a “currency” like bitcoin would have been even worse.
In December 2012, a bitcoin would have set you back about $13. Today, the bitcoin price floats around the $4,000 mark.
Let me redo that miner example in bitcoin, taking into account:
|2012 Monthly Salary||2017 Month Salary|
|South African Miner||BTC 119.00||BTC 0.19|
|Zimbabwean Miner||BTC 119.00||BTC 119.00|
If we’d done something like this, Zimbabwean miners wouldn’t be earning double what a South African earns in real terms. They’d be earning more than 600 times as much.
Unfortunately, a cryptocurrency is not a real economic solution here. Cryptocurrencies may be good for preserving value – but for the purposes of trade, for transacting on a daily basis, they’re far too volatile.
Business would be locked in endless negotiations trying to regularly re-base salaries and supermarket prices in crypto terms. And that’s before it starts dealing with a hostile government and the infrastructural issues of transaction block size and processing times.
I guess my point is: Zimbabweans can absolutely use bitcoin as a store of value.
But as a medium of exchange, as money, it would have made things much worse.
Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha. Also, check out the RA podcast on iTunes: The Story of Money.