Dollarisation misconception unpacked

The Brett Chulu

THE monetary authorities, intellectually speaking, have heavily invested in pushing back the narrative from business lobby bodies and analysts that the economy is re-dollarising. The public media went all out, headlining the front pages with the message that de-dollarisation was on course.

The head of the Reserve Bank, John Mangudya, last week pitched a nuanced argument that the move to allow fuel retailers with free funds (forex) could use them to import fuel directly was a pragmatic response to the forex supply constraint and could not be leased as evidence of a re-dollarising economy.

Here is why both the de-dollarisation and re-dollarisation arguments need to be corrected.We will first address the flaws in the de-dollarisation narrative. The de-dollarisation narrative is based on a weak scientific analysis. To build the case of a successfully de-dollarising economy based on the billions of ZW$ transactions since the selective outlawing on June 24, 2019 of the use of forex currencies for local transactions is simplistic intellection.

An exposition of how fact-based theory in social sciences is built is unavoidable. Theory does not mean theoretical — there is a nuanced difference spanning the two.

Theory, as the late award-winning Harvard Business School professor Clayton Christensen would relentlessly teach, is a statement of what causes what and why — it is a statement of causality.

Theory has two levels: descriptive and prescriptive. Descriptive theory is based on description of phenomena — its validity is restricted to the time, place and people where the data to build the theory was collected. Descriptive theories are easily challenged when clever researchers simply apply the theories to different times, places and people — more often than not, contradictory findings are uncovered, leading to the common intellectual hiding spot, where researchers in social sciences hide behind the it-is-conclusive mantra.

In contrast, a prescriptive theory in social sciences is constructed from conceptualising the data collected, carefully classifying related concepts into categories and uncovering how the concepts naturally bind (called a theoretical code). When data is transformed into concepts, the concepts escape the restriction of time, place and people — they become a-temporal (timeless), a-geographical (not restricted to the place where data came from) and a-demos (not confined to the sample of people who were researched).

In technical terms, prescriptive social science theories have a high external validity. Why? It is because prescriptive social science theories uncover the hidden social-psychological pattern underlying social and economic interactions.

Classic grounded theory is the original methodology that results in prescriptive theory. I am not aware of any prominent economist who applies classic grounded theory in their theory-building work.

Here is how this prescriptive theory-building elucidation corrects the de-dollarisation misconception. Using classic grounded theory methodology, I was able, right after the promulgation of Statutory Instrument 142 of 2019, banning the use of multi-currencies, to predict that the economy was not going to de-dollarise by diktat — the argument was published in this column last year in June.

I found out that people continued to transact in forex in both overt (open) and covert (subtle) ways. So the economy never de-dollarised in the real markets.
The economy swiftly adapted and adopted a de-localisation social-psychological economic behaviour. There is an economic name for that process: it is called reverse-Gresham.

In the typical grounded theory building research step of conceptually incorporating literature into the emerging theory, the concept of reverse-Gresham uncovered by other researchers sheds more light on the de-localisation leaning of the markets. Reverse-Gresham (also known as Thiers’ law) occurs when a government, through diktat, foists an untrusted currency onto the citizens, outlawing the use of a more valuable currency.

Reverse Gresham says good money drives out bad money. A trusted currency, among other key traits, must exhibit uniformity — the different forms and denominations of the currency must maintain the same value.

Our foisted local currency, post-bond notes, has never exhibited uniformity — electronic, mobile and paper forms of the same nominal value have differential values when tendered for local transactions in the retail and forex markets.

People, in their quest to store value, prefer to hold the banned currency. It is the opposite of Gresham’s law, which states that bad money drives out good money (out of circulation). During Zimbabwe’s infamous hyperinflationary period, which reached its peak in 2008 — reverse-Gresham set in — people simply discarded the worthless Zimbabwean dollar for the stable United States dollar.

The decision by government to de-monetise the Zimbabwean dollar in February 2009 in favour of the multi-currency regime was an act of wisdom, simply recognising reverse-Gresham and officially acknowledging it.

When the local currency was subtlety re-introduced in 2016 as bond notes, the central bank took us to the Tudor times of England, where Sir Thomas Gresham was the financier who held the interests of King Edward the VI.

The Tudors wanted to hoodwink the people that the debased new coins were of the same value as the old coins — that Tudorial act of mass deception backfired — people simply hoarded the more valuable coins and transacted in the debased coins.

The 16th century experiment was tried in Zimbabwe in 2016 — bond notes were touted as having equal value as the US dollar — the market did not buy the Tudorial horseplay — the US dollar rapidly went out of circulation.

Then a celebrated professor of economics and finance came and removed the Tudorial pretence — inflation soared and reverse-Gresham that had set in 2008 kicked into play and scared the powers that be who responded by banning the multi-currencies for local currencies, prematurely reintroducing the local currency before the economic and political fundamentals were re-established.

The response was predictable — a rapid decline in the value of the local currency and the raging of inflation. Incessant inflation strengthened reverse-Gresham (de-dollarisation resistance).

By understanding the social-psychological patterns in the currency users, we can conclude that the claim that de-dollarisation is on course has no scientific support.

The soaring of the use of ZW$ transaction is in line with the rapid growth of high-powered money (reserve money or base money) and explains the 520%-plus year-on-year inflation. It is a prescriptive scientific truth that when an untrusted currency is foisted on people and other trusted stores of value are outlawed, de-dollarisation is resisted. A de-dollarisation wish remains what it is — a mere wish. Wishes should not be confused with fact.

Let us now pick the inadequacies in the re-dollarisation polemic. The economy never de-dollarised and so re-dollarisataion is a misnomer. In my June 2019 article, I argued that the use of the dollar would become more and more open. This is what is happening now which is now being classified as re-dollarisation. It is just a case of a shift from covert dollar use to more overt dollar use.

What is the sum of the matter? As Christensen would put it, prescriptive theory is more accurate than data — managers who erroneously think that theory is the same as being theoretical wait for the data to be clear in the future and make decisions for a game that is already over. As long as the open use of the US dollar remains outlawed and inflation keeps elevated, just know what is happening — dollarisation is happening.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. —