The 2nd Zimbabwean Hyperinflation

by Serban V.C. Enache

Zimbabwe is once again facing rampant inflation, a rate of almost 100 percent recorded in the month of May.

I felt the need to investigate its macros. As usual, the graphs are based on info from tradingeconomcis. An important development is that last month, the Government removed the legal tender status of foreign currencies and made the new Zimbabwean Dollar [RTGS] the sole legal tender.

The country dropped its national currency back in 2009, and replaced it with a multi [foreign] currency system in efforts to combat hyperinflation at the time. The recent reverse measure, taken by Emmerson Mnangagwa’s administration, comes in response to dire commodity shortages across the country. Mnangagwa replaced Robert Mugabe as president two years ago in a coup. However, without sufficient US dollars to pay for imports, the country’s fuel stations have frequently run out and gasoline prices more than doubled between the months of January and April.

Fuel going up, coupled with the currency’s depreciation, made the cost of food, transportation, and housing utilities to soar. Due to the lack of confidence, as expected, more and more vendors set prices in US dollars.

In a milestone deal with the IMF last month, the Government agreed to cease net money creation [deficit spending] in order to pay its bills, which was a root cause of the sudden hyperinflation. The IMF is monitoring economic reforms for a year under a mutually agreed program. Debt relief was promised at the end of this year, provided the Government respects the deal. Companies are meant to trade RTGS dollars on an official market, but there were few takers. Analysts said that the Government’s gamble to force greater adoption of the RTGS might very well backfire, pushing transactions in foreign currencies underground.

With all these developments in mind, let’s see Zimbabwe’s flow of funds, and later on we’ll look at other indicators. The country has been a net exporter of Aggregate Demand and a net importer of goods for ten years straight. The Domestic Private sector [composed of domestic firms and households] has been going severely into debt for those same ten years. Only in the last two years was it able to net save financial assets, when the Government seriously expanded fiscal deficit spending.

We also see how the country’s money supply shot up, especially in 2018 and 2019. The M2 measurement [which includes cash and checking deposits + savings deposits, money market securities, mutual funds, and other time deposits] reached an all time high of 10.55 billion US dollars last March.

The unemployment figure has remained stable throughout years, but I don’t put much faith in the accuracy of this data, simply because of how the State defines being unemployed. For example, people like subsistence farmers, who consume all of their own output, are categorized as employed. And more to the point, the graph below is based on the “strict unemployed” definition [one who has been without work, is available for work and is actively seeking work]. The broader definition doesn’t require the latter condition.

Those working in the grey [informal] economy include people who do unpaid labor for a family business or paid employees who are not entitled to sick leave or paid holidays. In Zimbabwe, there are a great many who work in these circumstances. If we count as employed those workers on a payroll with taxes deducted at source and pension coverage, then the unemployment estimate is huge.

On to trade. South Africa owns the largest share of Zimbabwe’s exports. In my opinion, the country is far too dependent on its southern neighbor for commerce, and South Africa’s socio-political stability looks bleak these days. It would be better to seek out markets in different countries, in order to minimize risk and better handle potential negative demand shocks [for Zimbabwean exports] and negative supply shocks [for Zimbabwean imports].

The graph below shows Zimbabwe’s exports by countries of destination.

The graph below shows Zimbabwe’s imports by countries of source.

According to the World Bank, Zimbabwe’s exports sector as percentage of GDP last year was 22.9 percent and its imports sector 25.5 percent.

It’s safe to say that strategic bilateral relations cannot be formed, so long as Zimbabwe’s political class doesn’t compromise on a certain vector the country needs to maintain long term. Foreign investors [state and private agents] won’t be willing to come in, if they believe their investments will be at risk at the next election cycle, or if the chances for political instability and social upheaval are high. In recent years, Russia has been paying more attention to Africa, the northern states in particular, investing mostly in oil rigs and nuclear power plant deals. That’s one potential partner state with which the Mnangagwa administration should seek to do business.

Going back to Zimbabwe’s main trade partner, South Africa… that country is experiencing serious problems in rising criminality, and Ramaphosa’s land reform [confiscation without compensation] is bound to fail. In South Africa, since 1994, 21 percent of farms were put into Black African ownership. But more than 80 percent of those farms failed to remain economically active. If you ask Black farmers the reason for that miserable success rate, they blame the Government, and that’s absolutely true. That’s how you know it was a simulation of reform and not a legit effort behind it; because a singular reform, in and of itself, can’t be successful when everything else remains the same. In order to be a commercial success, an agribusiness requires access to infrastructure, to financial and physical capital, crop insurance, skilled labor, competent management, and access to markets capable of absorbing its output at a price which covers operation costs plus the markup.

South Africa [and Zimbabwe] needs a holistic approach to its national problems, and that means a combination of measures. Changing ownership doesn’t fix anything. The goal should be to decommodify land, which can be done via nationalization or [my personal preference] through site value taxation. Complementary measures should include: community land trusts, community banking, a national infrastructure investment plan, a national health care and education service, a national trade strategy, and last but not least, asset-side reform of the financial sector.

Reducing bureaucracy should be a priority as well. Currently, Zimbabwe is ranked 155th in 190 countries in the category of ‘ease of doing business.’ The more complex the laws and regulations are, the more wasteful and corrupt the system is. The State-dirigist method and Single Tax philosophy don’t require more time spent between citizen and bureaucrat, quite the opposite!

After Mugabe’s land reform, Zimbabwe isn’t out of the woods, and its population is growing too.

Using the printing press without any regard to budgetary rules, without any clear goal in mind, will only make the situation worse. The Zimbabwean Dollar [RTGS], in order to appreciate in value, requires a combination of tighter supply and higher demand for it. The Government’s specialists need to determine the country’s potential output vis-a-vis actual output and adjust fiscal policy in consequence. A negative output gap occurs when actual output is less than what the economy can produce at full capacity – while a positive output gap is the reverse and is inflationary.

The Government should aim for a near zero fiscal deficit; should temporarily ban the importation of luxury items, at least for a few years if not several years; should prioritize the importation of vital commodities – fuel, water, pharmaceuticals, grain, milk, and the like. The Central Bank should be ordered to run permanent zero interest rate policy. Reduced interest payments into the economy means a smaller supply of Zimbabwean currency. And the Government should only accept RTGS in payment of its exports, and it should only guarantee bank deposits denominated in RTGS. This combo would be sufficient to halt inflation, bring price stability and political confidence in state institutions and fuel hope for a better tomorrow.

UBI isn’t bad or good

by Serban V.C. Enache

I’ve written in the past about Universal Basic Income, and readers of this website know that I don’t support UBI if it’s not paired with legislation aimed at capturing economic rent. Since John McDonnell said that Labour is supporting a UBI scheme, many voices were raised in opposition, even among the Left, and the Job Guarantee was invoked as a substitute. I will focus on economic arguments and will try to be brief.

These are some of the criticisms I’ve seen: “UBI is inflationary” – “UBI gives people more money to spend, but doesn’t increase production, unlike the Job Guarantee” – “A Job Guarantee is an opportunity for many, but an obligation for none” – “UBI doesn’t create employment; it leaves the private sector as the sole job creator” – “Workers won’t benefit from UBI, capitalists will, because UBI will allow them to pay workers less.”

Firstly, let’s analyze the assumptions, because if we can’t agree on the premise, we’re just wasting our time talking to each other.

“Workers won’t benefit from UBI, capitalists will, because UBI will allow them to pay workers less.”

Giving everyone a fast and non-bureaucratic safety net allows workers to organize better. Better collective effort = strikes are easier to pull off and maintain for longer. The argument that a UBI will allow capitalists to pay their employees less is the same argument fiscal conservatives make against minimum wage laws and unemployment checks; that this safety net is bad for business and bad for workers’ motivation. Again, in and of itself, UBI would directly increase labor’s bargaining power. To what extent? It depends on a bunch of factors…

“A Job Guarantee is an opportunity for many, but an obligation for none”

The same is true for UBI. Supporters of UBI and Job Guarantee should also have a plan to contain both legal and illegal immigration; because any of these two programs would explode the aforementioned, ditto for Medicare For All. And I know liberals and lefties don’t like this, but the difference between a territory and a country is borders – and the way to enforce those borders is through staff, technology, and barriers – BARRIERS – just like you need barriers on sidewalks to prevent drivers from parking there. And no, you don’t get off the hook because you love immigrants, when you support political parties that sabotage and destroy foreign countries, creating those refugees and economic migrants in the first place.

“UBI gives people more money to spend, but doesn’t increase production, unlike the Job Guarantee”

In what sectors will the Job Guarantee introduce the unemployed? I always ask this because it’s important. Without a proper answer to this, you don’t know how well the Job Guarantee will act as a price anchor. If people in the Job Guarantee are put to produce things like food, fuel, and electricity, then yes, that particular Job Guarantee scheme is a solid price stabilizer program. If you put people in the Job Guarantee to fix swings in the park, shine railings, read stories to blind kids, play the guitar for old folks in asylums, help elders afflicted with mental illness and the like, then that scheme will have next to no impact on price stabilization, even though it provides humane social services. As for the demand boost from UBI, I’m sure it won’t cause firms to say – hmm, higher orders this month, I still have tons of unused capacity, but instead of making these machine tools produce more cans and calling up folks I previously let go due to weak demand so I can service all these orders at a profit, I’m just going to keep production level as is and just increase my markup. Please, spare me this logic. Firms that will take this improbable decision will lose market share to those firms who will adjust output instead of prices. If people in the West are worried about this, then they should draw attention to weak anti-cartel legislation and or weak enforcement of these laws.

“UBI doesn’t create employment; it leaves the private sector as the sole job creator”

These type of points are just worthless rhetoric. No, it doesn’t leave the private sector as the sole job creator. The private sector is never the sole job creator. In fact, it can’t be.

As for the “UBI is inflationary” concerns… if you do an analysis on UBI with the marginalist point of view on currency value in mind, yes, UBI will be inflationary. But this point of view is fallacious, because at the margin, some people, many people, are already getting an income without a formal job attached to it. According to the marginalist lens, there should already be hyperinflation or at least high inflation caused by traditional unemployment checks and food stamps. If you’re a die-hard Minskyite and like to call food stamps “funny money printing,” like Minsky did back in his day, you’re free to do so, but that doesn’t make your argument correct.

One more observation… If economists, orthodox and heterodox alike, are worried that UBI will cause both demand side and cost-push inflation [people just becoming lazy], half of that fear doesn’t square away with their insistence that UBI will subsidize bad jobs. If under a UBI people are more willing to accept poorly paying jobs and or poorer working conditions, then firms won’t experience cost pressures.

Let’s look at a country that actually implemented UBI nationwide, let’s look at Iran. According to this working paper from 2017 on the effect of unconditional cash transfers on the labor supply, there were no extraordinary results. Iran’s UBI was implemented in 2011 as a necessity to the drastic cuts to gas and bread subsidies made by Ahmadinejad in late 2010; the Government argued that the subsidies benefited the rich disproportionately. The UBI was set at 29 percent of median household income, about 1.50 US dollars extra per head of household, per day. In the US, that threshold would be over 16,000 dollars per year, well above the standard scheme of 1 grant per month proposed by the likes of Andrew Yang.

Despite reports in local press that the poor were leaving their jobs to spend the extra money, the investigators found no such evidence. Of the individuals employed in 2010, 88.5 percent remained employed, 4.5 percent lost or quit their jobs and 7 percent became inactive in 2011. Of the unemployed, 26.3 percent got jobs in 2011, approximately the same number as those who lost their jobs in 2011. For those engaged in housework in 2010, 3.2 percent found employment in 2011, fewer than those who left their jobs for housework. UBI had a good impact on Iran’s service sector, in which many firms have a difficult time obtaining bank credit. Some examples of workers in the service industry are housekeepers, teachers and deliverymen. In fact, their weekly hours increased by roughly 36 minutes. The only bad effect on labor supply was folks between the ages of 20 and 29. However, this age group had a weak connection with the labor market well before the UBI was implemented; because Iranians can opt to enroll in tertiary and graduate education. In spite of all this, Iranian public reaction to the UBI program has been largely negative. So Corbyn and McDonnell might think twice about it… “As more oil exporting countries decide to remove energy subsidies, or for political economy reasons decide to transfer a part of their oil wealth unconditionally to their citizens,” the authors wrote, “the question of how such transfers affect the incentive of their citizens in working and acquiring skills become more important.”

So the problem isn’t UBI itself, the problem is that UBI won’t do what its advocates and detractors claim it will. The effect after the reform is passed is gonna be near zero. The macro-economic effect will leave the Government deficit the same, plus minus 1 percent of GDP or slightly more [aka. errors in projection]. If the reform will have good or bad effects, the effects will be very small. Iran’s been on UBI since 2011 [and the country didn’t fall apart, nor did it become a utopia for workers and consumers – and let’s remember the trade sanctions they are under; extra proof that UBI alone is not a doomsday scenario].

As for me, I support UBI as a theoretical, and I’ve laid down my view in the past on how to make it work. Those politicians and political factions currently advocating UBI are controlled opposition; they want to “pay for it” with VAT [a regressive tax], they want to leave land rents privatized [not to mention patents], and want to leave the asset side of banks undisciplined [free predatory lending with smokes and mirrors]. The benefits of UBI, if it produces any in net terms, will get eroded by landlords and money lenders. The Job Guarantee isn’t immune from this either. And I wish the MMT academics would give more thought to this, instead of advocating a cubic meter property tax [which doesn’t distinguish between buildings and land, giving it thus regressive, perverse effects], and instead of ignoring one of the gravest sins in the economics profession, that of equating Land with Capital. It’s not sufficient to have full employment if the Natural Commons remain at the mercy of the few. Why further tolerate this millennia-old tumor on the back of Mankind?

Derek McDaniel wrote about BIG & inflation this last September. His article is much shorter than mine, and I encourage readers to see what he was to say.

Cat, mouse and snake

by Serban V.C. Enache

In his essay, “The Precariat: Today’s Transformative Class?”, Guy Standing tries to set up a historical context, a categorization of current class identities and class dynamics, and puts forth several measures to achieve a brighter future. It’s great that he talks about reclaiming the commons and taxing economic rents – albeit he forgets to stress that regressive taxes should be abolished while doing so. Continue reading “Cat, mouse and snake”

Debunking UBI funding schemes

by Serban V.C. Enache

There are a number of people on the internet, supporters of Universal Basic Income or Basic Income Guarantee, who peddle regressive taxation to “pay for” the program. The most common funding schemes you’ll find on the internet consist of: VAT (Value Added Tax) or a Tax on all financial transactions – the latter’s final goal being that of replacing all other taxes. Continue reading “Debunking UBI funding schemes”

Jordan Peterson & Bret Weinstein: UBI, Rent-Seeking, and Inequality

A Great Joe Rogan Podcast excerpt

by Serban V.C. Enache

Jordan Peterson comments about Inequality and Universal Basic Income. He admits that too much inequality destabilizes the system and should be combated and even admits that a Universal Basic Income would be a good solution in this regard, albeit he loathes the policy itself. Continue reading “Jordan Peterson & Bret Weinstein: UBI, Rent-Seeking, and Inequality”