Moral suasion won’t work in hyperinflation

THE government and the private sector have reportedly agreed a freeze in prices. The measures are, however, unenforceable, given the exchange rate depreciation. The authorities have largely refrained from price controls, but pressure is mounting.

Respect Gwenzi

Moral suasion is an economics management tactic used by monetary and fiscal authorities to engage business and other players in the economy through negotiations and mutual understanding. Morals are basically value based and it is the persuasion of the authorities that engaging from a point of values may yield superior or even marginal positive returns for either parties.

The opposite of moral suasion is the imposition of policy, notably price controls on goods and service. Price controls were quite common before dollarisation. The government of Zimbabwe was always quick to impose price floors, threatening producers and this had an impact on the availability of goods.

Before we look at whether moral suasion works or not, let us delve into the dreaded price controls. In the period between 2005 and 2008, prices of goods and services were rapidly rising such that the economy plunged into hyperinflation. This rise in prices was mainly a function of money supply growth. Under governor Gideon Gono, the Reserve Bank was always printing money in a bid to stimulate the economy.

New money flooded the market but, with it, the flood gates of inflation were flung wide open. This was simply because the issued money was not put to productive use. Most of the farmers were inexperienced and could not give fair return, instead channelling the resources to immediate consumption.

The manufacturing sector continued to suffer and, with price controls in place, production viability was challenged. Eventually, most industries collapsed or mothballed operations while the few remaining ones operated at low capacity. It is not conceivable in business that one sells a good at a price that is not enough to compensate them for their cost of production. As Adam Smith rightly puts it: “It is not for the benevolence of the butcher, brewer or baker that we expect our dinner, but from their regard of their self-interest”. The objective of business is to maximise profit, even if it means breaking even, at worst. When a for-profit corporation fails to maximise shareholder value through earnings growth, then the respective management should be replaced.

As industry recalibrated, taking different form under price controls, shelves in retail outlets went empty. The more money was being printed, the more value it lost. Value in a currency is lost in a very simple manner. Just like a good which is low on supply, a currency which is under-supplied always has high demand and so appreciates in value; the opposite is also true.

So, the system failed and was naturally phased out with the Zimdollar in 2009. Fast forward to 2019, the Zimdollar returns and similar challenges return to the fore. The local currency has failed to stabilise, losing more than 90% in value against the US dollar between February 2019 and April 2020. Naturally, inflation has gone up, rising by more than 600% year-on-year in March, its highest level since 2009. Given the reversion towards multi-currency, the psychology and practice of pricing while marking Zimdollar prices to the US dollar equivalent is now more pronounced.

In the early days of the Covid-19 lockdown, the Zimdollar exchange rate to the US dollar initially recovered before reverting to and even surpassing pre-lockdown levels. This, together with scarcity of supplies, given the supply chain disruptions, has driven prices of commodities up. Government’s move to pursue moral suasion is a complete change of strategy from pre-dollarisation practices but not enough to restore sanity. Moral suasion is a preferred path to price controls but its challenge is that it remains just what it is: “a gentleman’s agreement”. It is not enforceable at law as it is non-binding.

The chances of success are also diminished by the ever-weakening exchange rate which is nearing the 1:50 mark, twice as much as the government-controlled exchange rate of 1:25. There is no amount of moral suasion that can persuade players to sell at a loss or at significantly reduced profitability; it defies the very essence of enterprise.

Gwenzi is a financial analyst and managing director of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net

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