By David Ochieng
At a time when regional integration is a major political and economic goal for the continent, history suggests to Africa at large and Zimbabwe in particular a possible solution to the twin challenges of mismatched economies and unstable currencies. The experience of the classical gold standard supports the view that a pan-African resource standard could help both to stabilise volatile currencies and aid the integration of sharply uneven economies. A look into that history is thus a good starting point.
Many will be familiar with the words “I promise to pay the bearer on demand…” appearing on bank notes above the signature of a central bank governor. That statement could be traced to the classical gold standard that existed in various forms from the late 1800’s to the mid 1900’s. This was an international monetary regime that required each of the participating currencies to be freely convertible to a determined quantity of gold.
The foundational principle was simple enough. Since each unit of currency was “backed” by a given quantity of gold that was physically held in reserve by the issuing government, the holder of that currency was entitled to exchange the notes for the gold itself on demand. This maintained both confidence and stability in each currency.
The system also facilitated international trade by relieving nineteenth century merchants of the burden of physically shipping precious metals between ports to pay for consignments. This was because it eased and encouraged international transactions across currencies by ensuring that those currencies more or less maintained their value relative to each other. Balance of payment distortions were also said to be virtually self-correcting through eventual movements of the underlying gold.
As more and more economies subscribed to the standard, a vital outcome of this was a degree of cooperation and synthesis between the participating powers that boosted and stabilised trade. This was most pronounced from about 1870 until 1914. The effect was somewhat confirmed by the contrasting volatility and unevenness in international trade during the years between the two World Wars when the gold standard was not being applied uniformly.
After World War II, the classical gold standard was replaced by a reserve currency under the Bretton Woods system. It was agreed that the United States dollar alone would be convertible to gold, and that other currencies could be “backed” by dollars rather than the gold itself. Individual economies could thus hold reserves of United States dollars instead of gold, and could then convert those dollars into gold as under the classical gold standard.
The United States, however, failed to maintain this parity. It eventually issued more dollars than it could afford to redeem in gold. In the end, it unilaterally declared in the early 1970’s that its currency would no loner be convertible to gold, marking the final collapse of what then remained of the gold standard.
African countries were meanwhile gaining independence at different times and on different terms. The multiple nascent currencies of the new states were invariably fiat currencies. As the term implies (“fiat” is Latin for “command”), the value of a fiat currency is largely a function of the dictates and policies of the issuing state. A state not bound by contrary treaty obligation may lawfully fix the exchange rate for its currency unilaterally. Even if the market rejects an arbitrary exchange rate, the value at which exchanges actually occur would really reflect on the confidence that the market places in the issuing state, rather than the intrinsic value of any commodity. The variance between and fluctuations of the many African currencies could thus be thought of as reflecting market responses to the sometimes-erratic conditions and developments in the different countries. That variance, in turn, placed a fetter on the avenues for cooperation and integration.
Although Africa broadly adopted the aim of regional integration more or less from the start, its realisation remains a longstanding work in progress. A significant recent step towards this is the implementation of the African Continental Free Trade Area Agreement just six months ago. This aims to create a single, liberalised market with free movement of capital and persons. While supporting this ideal, it is important to recall the conditions that are necessary to realise it.
One of the settings that should be achieved for successful integration is an initial degree of homogeneity between the intending members of the bloc. Studies indicate that the higher the degree of integration that is pursued, the greater the similarity that must exist in the economic institutions and performance of the respective states. The firmness and convertibility of each domestic currency is assuredly one of the key variables in that matrix. This is illustrated by the fact of countries like Bulgaria being awkward candidates for membership of the European Union for that reason.
Africa’s economies are not only mismatched in terms of actual currency stability, but also in terms of the endowments supporting economic development and strength. In other words, not only are they pitched at different levels to begin with, they also differ considerably in terms of their capacity or propensity to develop further. Zimbabwe is a compelling case of one extreme, where the currency is so malleable that different rates and prices apply to the Zimbabwe dollar depending on whether one transacts in cash, using mobile money or by bank transfer. The currency effectively trades against itself! This denies it the stability and convertibility on which meaningful participation in regional integration would depend.
It should be noted that Zimbabwe has previously sought to validate its currency on a basis comparable to the gold standard concept. Upon the introduction of bond notes as what was termed a “surrogate currency,” it was claimed that the face value of the notes was backed by a sum of United States dollars advanced by the African Development Bank. On this basis, it was held out that each note was redeemable for its face value in United States dollars at par. Questions have been asked about whether this was in fact the case. A recent order of the High Court of Zimbabwe requires the state to provide answers. While these answers are awaited, it can simply be noted that the mere claim that the bond note was backed by United States dollars did much to make the medium somewhat acceptable. It even allowed it to coexist (albeit briefly) with the United States dollar at something close to parity. Imagine what more could have been achieved through the proven reality of resource backing?
While a disputed claim of backing secured some acceptability for the bond note, the factual reality of backing could produce genuine stability and sustainable convertibility for the Zimbabwe dollar. And just as the classical gold standard promoted the economic cooperation of the then powers, a pan-African resource standard has the potential to smooth the road to durable integration. The time has likely come to revisit the discussions that have already occurred around the topic, for there is no need to reinvent the wheel of economic cooperation. In addressing a domestic challenge, Zimbabwe could well present a model that triggers a charge towards shared continental prosperity.
David Ochieng is an advocate at the Harare Bar whose academic interests include international relations and diplomacy. He can be contacted at [email protected].