Zimbabwe’s Economic Recovery Prompted by Spontaneous Dollarization

Here are some very interesting developments in post-hyperinflation Zimbabwe.

Hyperinflation has prompted the average Zimbabweans to junk the domestic currency [the defunct 'Zimbabwe Dollar'] while simultaneously gravitating spontaneously to dollarize their economy. This has resulted to a rebound in economic growth.

Writes Professor Steve Hanke at the Cato Institute

So how did Zimbabwe go from economic ruin to an annual GDP growth rate of 9.32 percent in 2011, with estimates of relatively strong growth rates through 2013?  As I predicted in early 2008, the answer is simple: spontaneous dollarization brought an end to the horrors of hyperinflation.

The important point to emphasize is that the average Zimbabweans responded to failed and repressive regulations and edicts through their own spontaneous initiative (and exactly the OPPOSITE from government imposition) which eventually became the nation’s informal ‘standard’.

Yet the informal dollarized money standard has been reflected on the economy as the informal economy dominates Zimbabwe which accounts for nearly 84% of employment (and could be more).

Yet Zimbabwe’s government continues to force its way on a society which has already rebelled on them economically

Again Mr. Hanke (bold mine)

While these achievements are cause for celebration, there are still problems in paradise: Robert Mugabe continues to hold the reins of power; Zimbabwe’s “Ease of Doing Business” ranking is a dismal 172nd out of 185; and “change” is, in short, hard to come by. In addition, the government’s external debt is now close to $12.5 billion and lending rates between Zimbabwe’s embattled banks are as high as 25 percent. To top it off, the Zimbabwean government is attempting to force banks to buy its treasury bills at significantly discounted rates, after its debt auction flopped in early October. Talk about ruling with an iron fist.

Also the Zimbabwean government, notes Mr. Hanke, continues to manipulate statistics “Lying statistics remain the order of the day” to embellish what has been a monumental government failure.

It’s amazing that the average Zimbabweans, who seemingly remain submissive and tolerant with the incumbent abusive and oppressive government, apparently live in a paradox or in a parallel universe.

Perhaps the Zimbabwean political economy could be a seminal manifestation of Étienne de La Boétie’s nonviolent political resistance and civil disobedience through the starvation of the beast.

Gary North on How to Gum Up Any Institutions

Well if governments can make a mess of society through immoral  statutes and regulations, people can reciprocate by goofing up the system through non-violent means.

Austrian economist and author Gary North offers how to gum up any institutions, not limited to the government.

Rules are about redirecting people’s behavior to assure compliance. And institutions rely on sets of rules for it to thrive.

Economist Gary North explains:

First, every institution assumes voluntary compliance in at least 95% of all cases. This may be a low-ball estimate. Most people comply, either out of fear or lack of concern or strong belief in the system and its goals.

Second, every institution has more rules than it can follow, let alone enforce. Some of these rules are self-contradictory. The more rules, the larger the number of contradictions. (There is probably a statistical pattern here – some variant of Parkinson's law.)

Third, every institution is built on this assumption: partial compliance. Not everyone will comply with any given procedural rule. There are negative sanctions to enforce compliance on the few who resist. They serve as examples to force compliance. Conversely, very few people under the institution's jurisdiction will attempt to force the institution to comply exactly with any procedural rule.

These three laws of institutions – and they really are laws – offer any resistance movement an opportunity to shut down any system.

Economist North provides an example of how Vladimir Bukovsky jammed the Soviet Union Gulag, along with other inmates, by sending daily letter of protests to the Soviet bureaucracy from which the latter had to legally respond. The result was bureaucratic chaos.

As the 75,000 complaints became part of the statistical record, the statistical record of the prison camp and the regional camps was spoiled. All bureaucrats suffered. There went the prizes, pennants, and other benefits. "The workers start seething with discontent, there is panic in the regional Party headquarters, and a senior commission of inquiry is dispatched to the prison."…

Finally, in 1977, they capitulated to several specific demands of the prisoners to improve the conditions of the camps. The governor of the prison was removed and pensioned off. Their ability to inflict death-producing punishments did them little good, once the prisoners learned of the Achilles' heel of the bureaucracy: paperwork.. The leaders of the Soviet Union could bear it no longer: they deported Bukovsky.

Economist North further discusses on American community organizer Saul Alinsky’s improvisation of Mahatma Gandhi’s non-violent means of protests:

Alinksy realized early that very few people will pay the price that Gandhi paid. So, he devised a system of resistance that lowered the risk, thereby lowering the cost. He understood the economists' law: "When the cost of producing anything falls, more will be supplied." More of what? Resistance.

His system involved at least one of two tactics: (1) violating a rule to which only a minimal negative sanction was attached, (2) follow the organization's procedural rules to the letter in a Bukovsky-like manner.

He tested his non-violent strategy and tactics in the 1960s in Chicago. He wrote a book on his system, Rules For Radicals (1972). He wrote this.

Let us in the name of radical pragmatism not forget that in our system with all its repressions we can still speak out and denounce the administration, attack its policies, work to build an opposition political base. True, there is still government harassment, but there still is that relative freedom to fight. I can attack my government, try to organize to change it. That's more than I can do in Moscow, Peking, or Havana. Remember the reaction of the Red Guard to the "cultural revolution" and the fate of the Chinese college students. Just a few of the violent episodes of bombings or a courtroom shootout that we have experienced here would have resulted in a sweeping purge and mass executions in Russia, China, or Cuba. Let us keep some perspective.

We will start with the system because there is no other place to start from except political lunacy. It is most important for those of us who want revolutionary change to understand that revolution must be preceded by reformation. To assume that a political revolution can survive without a supporting base of popular reformation is to ask for the impossible in politics. Men don't like to step abruptly out of the security of familiar experience; they need a bridge to cross from their own experience to a new way. A revolutionary organizer must shake up the prevailing patterns of their lives – agitate, create disenchantment and discontent with the current values, to produce, if not a passion for change, at least a passive, affirmative, non-challenging climate. "The revolution was effected before the war commenced; John Adams wrote. "The Revolution was in the hearts and minds of the people. . . . This radical change in the principles, opinions, sentiments and affections of the people was the real American Revolution." A revolution without a prior reformation would collapse or become a totalitarian tyranny.

Read the rest here 

Mr. Alinsky then devised of 13 tactical guidelines for the “gummit” model, again Mr. North:

1. Power is not only what you have but what the enemy thinks you have.
2. Never go outside the experience of your people.
3. Wherever possible go outside the experience of the enemy.
4. Make the enemy live up to their own book of rules.
5. Ridicule is man's most potent weapon.
6. A good tactic is one your people enjoy.
7. A tactic that drags on too long is a drag.
8. Keep the pressure on.
9. The threat is usually more terrifying than the thing itself.
10. The major premise for tactics is the development of operations that will maintain a constant pressure upon the opposition.
11. If you push a negative hard and deep enough it will break through into its counter side.
12. The price of a successful attack is a constructive alternative.
13. Pick the target, freeze it, personalize and polarize it.

The Gandhi Alinsky disobedience model reminds me of Etienne de la Boetie, French judge, writer and founder of modern philosophy and one of the early advocates of civil disobedience, who once wrote 

Resolve to serve no more, and you are at once freed. I do not ask that you place hands upon the tyrant to topple him over, but simply that you support him no longer; then you will behold him, like a great Colossus whose pedestal has been pulled away, fall of his own weight and break into pieces

Gumming up a tyrannical institution is a way to re-establish or win back freedom.

Why Socialists Hate the Internet

Writes Mary O’Grady at the Wall Street Journal, (bold emphasis mine) [hat tip Mark Perry]

'There's a reason the people in Cuba don't have access to the Internet. It is because the government [couldn't] survive it."

That was Florida Sen. Marco Rubio last week at a Washington conference titled "Cuba Needs a (Technological) Revolution: How the Internet Can Thaw an Island Frozen in Time." The event was sponsored by Google Ideas, a for-profit venture of the giant Internet search enterprise, and the nonprofit Heritage Foundation. I was asked to kick off things with a Rubio interview. So I began by asking him what he makes of the Cuban military's reference last year to technology that allows young people to exchange thoughts digitally as "the permanent battlefield."

Mr. Rubio responded that it isn't communication with the outside world that the regime fears the most, but Cuban-to-Cuban chatter. "I think Raúl Castro clearly understands that his regime cannot survive a Cuban reality where individual Cubans can communicate [with] each other in an unfettered manner." He called "unfiltered access to the Internet and social media" Cuba's "best hope" of avoiding "a stagnated dictatorship" for "the next 50 years that would survive even the death of Raul and Fidel."

The internet or the information age isn’t just about connectivity though. Rather the age of the internet is about the knowledge revolution or democratization of knowledge through “geographically noncontiguous communication” as author Jeffrey Tucker recently described.

The information age brings about unfettered opportunities to learn or to expand one’s horizon of wisdom. Say for instance anyone who wants to access literatures from libraries around the world may try openlibrary.org.

How about basic materials for self learning or home schooling? You may also try the revolutionary Khan Academy.

The political power of despots and their socialists supporters principally derives from ignorance. This is why the public has been vulnerable to fear and to mind manipulation—via indoctrination and propaganda.

People hardly realize that conventional education, for instance, has been surreptitiously designed for the worship of the state. The internet brought me to this reality and made me an apostate to the religion of the state.

The internet essentially provides the platform for the unceasing struggle to attain civil and economic liberties, through the effective neutralization of political manipulations of the people’s minds.

The chief proponent and inspiration of nonviolent resistance and civil disobedience, the great philosopher anarchist Étienne de La Boétie once wrote,

Obviously there is no need of fighting to overcome this single tyrant, for he is automatically defeated if the country refuses consent to its own enslavement: it is not necessary to deprive him of anything, but simply to give him nothing; there is no need that the country make an effort to do anything for itself provided it does nothing against itself. It is therefore the inhabitants themselves who permit, or, rather, bring about, their own subjection, since by ceasing to submit they would put an end to their servitude. A people enslaves itself,
cuts its own throat, when, having a choice between being vassals and being free men, it deserts its liberties and takes on the yoke, gives consent to its own misery, or, rather, apparently welcomes it. If it cost the people anything to recover its freedom

Thus enslavement and freedom is a matter of people’s choice. And the state of knowledge or ignorance by every individual in a society determines that choice.

The more the diffusion of knowledge in a society, the balance of power shifts towards individual sovereignty at the expense of political entities.

And that’s why welfare warfare based governments have been averse to the internet, and that’s why political authorities will continue to wage an all out war of control of the internet.

Remembering The Philippines’ People Power

In the midst of the ongoing string of upheavals in MENA, today, the Philippines celebrate our version of nonviolent revolution which also toppled a dictator, popularly known as People Power, an event that occurred in 1986 or 25 years ago.

And in the spirit of Étienne de La Boétie, the early proponent of nonviolent resistance and civil disobedience, I quote Dr. Antony Mueller’s poignant comment on the ongoing revolution in Libya,

All it takes for government to fall is not to follow orders. Just stop doing what you're being told and the state will wither away and dictators will stand naked.

Though yours truly was an avid participant of both People Power and People Power 2, I was lucky to be part of a portrait taken by a magazine for an airline called 'Mabuhay ' during People Power 2.

But no same luck or remembrance for the original People Power.

ASEAN Bourses Undergoing Interim Correction

Since the advent of 2011, the Philippine Phisix has been on a losing streak.

In four out of the five weeks into the year so far or a string 4 consecutive weeks in the red, the Philippine benchmark has accrued a year-to- date decline of 10.76%

Regional Event and Seasonality

Before jumping to conclude about what’s been ailing the Phisix, we should take note of the following:

Figure 1: Bloomberg: Correcting ASEAN Bourses

One, this has been a regional phenomenon.

As the above chart reveals, our ASEAN contemporaries (Thailand-green, Indonesia-orange) have been synchronically on a downside path since November of 2010 (with the exception of Malaysia (red).

To extrapolate, there seems no internal dynamic that has been causing the current weakness—not the Rabusa expose nor the Angelo Reyes incident. And I don’t think that local or regional consumer price inflation has reached critical levels yet to incite political hysteria.

The Philippines just posted a record economic growth during the last quarter of 2010[1], and so with Indonesia[2], whose economic growth hit a 6 year high.

One may suggest that these events account for as past performances that does not serve as a good indicator of the future, from which the markets could be be pricing in. This could be true.

And that perhaps the market could be portending of a possible downshift following a turbocharged upside momentum. This could likely be a factor, too. But I would refrain from fixating on this premise as the main causation to the current market action.

The other thing is that the current correction could signify a cyclical motion.

The white arrows on figure 1 points to general market infirmities at the onset of 2009 and 2010.

The first quarter of 2009 marked the trough of the 2007-2008 bear market which culminated with the post Lehman bankruptcy global market collapse in October 2008.

In 2010, the first quarter weakness was then attributed to the Greece Debt Crisis, where the mainstream had insisted that deflation would return, the financial market would collapse and that the Euro dies along with this. All of which we had set out to debunk[3] and had been validated or proven correct.

So it appears that we have a normal countercyclical trend unfolding before our eyes.

No Egypt and Middle East Domino Contagion

Next, no this isn’t about Egypt nor is it about Tunisia’s Jasmine revolution or the falling dominos of autocratic regimes in the Middle East.

Figure 2: Bespoke Invest: Flight To Safety, Where?

As the excellent Bespoke Invest[4] charts shown in Figure 2, there hardly has been material signs of widespread anxiety as seen in the US dollar (left window) or Gold (right window). In short many of so-called market stress attributed to Egypt has been predicated on available bias.

Going back to the ASEAN equity markets, the interim bullmarket reversals began in November 2010, way before such Middle East “People Power” movements or political events that had long been predicted by French judge, political philosopher and anarchist, Étienne de la Boétie[5], during the 16^th century who once wrote[6], (bold emphasis mine)

``Resolve to serve no more, and you are at once freed. I do not ask that you place hands upon the tyrant to topple him over, but simply that you support him no longer; then you will behold him, like a great Colossus whose pedestal has been pulled away, fall of his own weight and break in pieces.”

In addition, people always tend to fall prey to mainstream media’s soundbites, yet the media blitz over Egypt has eclipsed the Thailand-Cambodia border military skirmishes that has also accounted for as negative news[7] this week. The risk of military escalation between our neighbors has apparently been eluded mainstream analysts.

Yet, such bellicostic incident should have prompted for a collapse in Thailand’s stocks, if we go by the mainstream’s logic. But this has not been so. Thailand SET lost 3.6% over the week was even less than Korea’s Kospi 4.6% or even nearly at par with the declines registered by the Philippine Phisix 3.18%.

I’d also like to point out that the bloody street riots[8] in Bangkok, Thailand’s capital, in May of 2010, didn’t trigger a collapse in Thai stocks, in the same way as the latest political crisis in Egypt.

In other words, political events do not necessarily or automatically create volatility in stock market pricing.

Inflation Led Slowdown? Not So Fast....

Some may argue that rising inflation could be a factor.

Theoretically, inflation will not be good for equities in general because from the corporate earnings perspective—earnings get squeezed or crimped out of rising real cost of capital and losses on the net asset position that are fixed in nominal terms.

Most importantly, the biggest threat to shareholder value, writes McKinsey Quarterly[9], lies in the inability of most companies to pass on cost increases to their customers fully without losing sales volumes. When they don’t pass on all of their rising costs, they fail to maintain their cash flows in real terms.

But I would argue that the impact to equities from an inflationary environment greatly depends on the underlying state or conditions. That’s because equities have proven to be hedges during episodes of hyperinflations, such as in 1920 Weimar Germany hyperinflation[10] or most recently the Zimbabwe hyperinflation.

I quoted an All African article[11] in 2008

``The feat continued into 2008 with industrials posting a year-to-date growth of 960 quadrillion percent, which is 4,15 billion times as much as July's annual inflation of 231 million percent.

``The resource index is up 444 quadrillion percent since January. And so, from the look of things, ZSE investors may have indeed managed to hedge their assets against the effects of high inflation but some have been at a loss in US dollar terms."

A great living example of the stock market as an inflation “hedge” would be Venezuela (see Figure 3)

Figure 3 Tradingeconomics.com[12]: Venezuela Stock Market Driven By Rampant Inflation

Notice as the rate of annual change in consumer price inflation ramps up, the stock market, on a time lag, follows. As the inflation rate declines, the Venezuela’s stock market bellwether also, on a time lag, declines.

I’d like to further point out that Venezuela’s inflation rate has been at high double digits (25-35%) and appears to nearly tip over to the hyperinflation level or where inflation exceeds 50% a month[13].

The fundamental premise why stocks can function as a hedge doesn’t tag along the lines of earnings but rather on the public’s perception of the changes in the role of money—a deterioration in the “store of value” function.

As Adam Fergusson wrote about the disastrous Weimar Hyperinflation in When Money Dies[14],

October 1922, however, was the nadir for shareholders. From then on not only did money find its way back into shares, but people who could obtain cheap credit, or were unable to send their money abroad, began to realise the advantages of buying up their own country's industrial and other assets at a fraction of their true value. Although in real terms the stock market began to go up, the mark's purchasing power continued to go down.

Said differently under the state of high inflation, even if the values of shares go up, in real terms share values lose money because the money’s value erodes faster than the increase in share prices.

And those who argue on the premise where ‘company earnings determine share prices’ have found current movements in the global stock markets baffling and inexplicable. That’s because these experts have basically been focusing on the wrong aspects and has been ignoring the fast expanding role of monetary inflation’s impact on share prices[15].

Perhaps even Warren Buffett’s dramatic shift to political lobbying-crony capitalism[16] based investment approach could, in reality, be reflective of such changes.

To add, since inflation is basically a redistribution process, some industries are likely to benefit more than the others. Thus, a generalized or broadmarket decline is definitely not a characteristic of the supposed inflation based anxieties.

So all these point to an unsubstantiated premise where the decline in the values of ASEAN bourses has been imputed on the risks of inflation.

More On Growing Divergences

Here’s more: earlier we have pointed to several divergences[17] in the global market such as surging commodities, developed economy share prices and a firming Peso.

I’d like to add that one of the serious manifestations of a market meltdown/breakdown could be seen in the price actions of the local currency.

Figure 4: Bloomberg: JP Morgan Asia Dollar Index

That’s because market meltdowns tend to instigate a “flight to safety” dynamic where investors both local and foreign flee domestic capital markets and seek safehaven elsewhere abroad. In two words: capital flight.

This was demonstrably the case during the 2008 Lehman episode in 2008, (as shown by the white down arrow in the above chart) where the bellwether basket of Asian currencies represented by Bloomberg-JP Morgan Asia Dollar Index cratered.

Today, despite the quarter long weakness envisaged by the region’s stock market, Asian currencies values have remained buoyant.

Yet it is important to point out that Asian currencies tanked only during the latter half of 2008 or nearly at the pinnacle of the crisis. The Philippine Peso likewise began its descent 3 months after the peak in the local stock market.

This only means that as lagging indicators currency values can’t be used as a standalone metric to assess the state of the markets. It has to be combined with other indicators.

Finally here’s another important divergence as noted by Bespoke Invest (see figure 5)

Figure 5: Divergences in Global Markets (Bespoke Invest)

Figure 5 shows that the Exchange Traded Funds (ETF) of various emerging markets, the natural gas, various treasuries funds and gold mining issues have failed to live up to the animated performances by their contemporaries.

As Bespoke Invest[18] notes,

It's not the emerging markets in one region of the world that are struggling either. ETFs that track Brazil, Latin America, China, India, and Asia Pacific are all below their 50-days. Typically when the US market is rallying, emerging markets are rallying even more. Bulls looking to outperform the S&P 500 have been using emerging market securities to do so for multiple years now. Recently, however, this strategy has been a performance killer.

As duly noted by Bespoke, past performance can’t be expected to deliver similar results.

And it should apply opposite ways.

Although such divergences may be construed or seen by some as decoupling, it isn’t. Asian and most of emerging markets have vastly outperformed in 2010, thus given that no trend goes in a straight line, today’s relative underperformance signify as a pause or natural correction process and is likely a temporary event.

Bottom line: Current developments represent as buying opportunities.

---

[1] Inquirer.net, Philippines posts record economic growth at 7.3%, January 31, 2011

[2] Financial Times Asia, Indonesian growth hits six-year high, February 7, 2011

[3] See Why The Greece Episode Means More Inflationism, February 15, 2010

[4] Bespoke Invest Where's the Flight to Safety? February 11, 2011

[5] Wikipedia.org, Étienne de la Boétie

[6] de la Boétie, Étienne The Politics Of Obedience: The Discourse Of Voluntary Servitude, Mises.org, p.47

[7] Telegraph.co.uk Ancient temple damaged by shell fire in Cambodia, February 7, 2011

[8] See Politics And Markets: Bangkok Burns Edition, May 20, 2010

[9] McKinsey Quarterly How inflation can destroy shareholder value, Winter 2010

[10] Wikipedia.org Inflation in Weimar Germany

[11] See Black Swan Problem: Not All Markets Are Down! November 11, 2008

[12] Tradingeconomics.com, Venezuela Indicators

[13] Wikipedia.org, Hyperinflation

[14] Fergusson Adam, When Money Dies: The Nightmare of the Weimar Collapse, p.78

[15] See Stock Market Prices: Inflation versus Corporate Fundamentals, February 8, 2011

[16] See Warren Buffett: Embracing Crony Capitalism, February 12, 2011

[17] See Phisix: Panicking Retail Investors Equals Buying Opportunity, January 31, 2010

[18] Bespoke Invest Emerging Markets Not Participating in Global Rally, February 10, 2011

Tunisia’s People Power: A Combination Of Creative Destruction And The Politics of Obedience

The New York Times reports,

The fall of Mr. Ben Ali marked the first time that widespread street demonstrations had overthrown an Arab leader. And even before the last clouds of tear gas had drifted away from the capital’s cafe-lined Bourguiba Boulevard, people throughout the Arab world had begun debating whether Tunisia’s uprising could prove to be a model, threatening other autocratic rulers in the region….

Because the protests came together largely through informal online networks, their success has also raised questions about whether a new opposition movement has formed that could challenge whatever new government takes shape. (emphasis mine)

This represents another validation of our prediction when I wrote,

The growing friction between technology and the old political society is definitely taking shape; eventually one has to give. My bet: creative destruction will win.

Aside from the first People Power at an Arab nation where the changes in the political order appear to be significantly influenced by the rapidly diffusing adaption to connectivity based technology platforms, the Tunisian experience suggests that People Power as a political concept as presciently advanced by the founder of modern political philosophy in France, Etienne de la Boetie, will become more accepted from the grassroots levels or become more widespread globally as more people will learn about their inherent power over governments.

To quote Etienne de la Boetie in the Politics of Obedience

Obviously there is no need of fighting to overcome this single tyrant, for he is automatically defeated if the country refuses consent to its own enslavement: it is not necessary to deprive him of anything but simply to give him nothing; there is no need that the country make an effort to do anything for itself provided it does nothing against itself. It is therefore the inhabitants themselves who permit, or, rather, bring about, their own subjection, since by ceasing to submit they would put an end to their servitude. A people enslaves itself, cuts its own throat, when, having a choice between being vassals and being free men, it deserts its liberties and takes on the yoke, gives consent to its own misery, or, rather, apparently welcomes it.

In short, people power and the web would make a mighty combination over the tyranny of governments.

So governments will try to fight these via the introduction of regulations and control of the web which would limit the democratization of information.

As one of the five things we should worry about in 2011 Cato’s Dan Mitchell rightly observers, (bold emphasis mine)

The Federal Communications Commission just engaged in an unprecedented power grab as part of its “Net Neutrality” initiative, so we already have bad news for both Internet consumers and America’s telecommunications industry. But it may get worse. The bureaucrats at the United Nations, conspiring with autocratic governments, have created an Internet Governance Forum in hopes of grabbing power over the online world. This has caused considerable angst, leading Vint Cerf, one of inventors of the Internet (sorry, Al Gore) to warn: “We don’t believe governments should be allowed to grant themselves a monopoly on Internet governance. The current bottoms-up, open approach works — protecting users from vested interests and enabling rapid innovation. Let’s fight to keep it that way.” International bureaucracies are very skilled at incrementally increasing their authority, so this won’t be a one-year fight. Stopping this power grab will require persistent oversight and a willingness to reject compromises that inevitably give bureaucracies more power and simply set the stage for further demands.