Monday, July 24, 2006

That is the economy, stupid.

While reading Saturday's edition of the Herald I was reminded of how badly the Zimbabwean government has misunderstood the capitalist system and how it is playing itself out our country. Generally put, the Zimbabwean government, is guilty of distrusting the market system. In their bid to correct all that is wrong with the economy, they've overregulated the formal market, so much that it has become inaccessible for most Zimbabweans and Zimbabwean businesses.

But there's a minority in Zimbabwe who, in the face of the failure of the formal economy, have become part of a vibrant alternative market. In the informal market people operate laissez faire; free from the entrapments of government precipitated laws and unweilding influence. Here they have been able to unleash the power of their creative thinking and be rewarded fairly well for it. Just like it is supposed to work.

The Herald's erstwhile business editor, Victoria Ruzvidzo, is astonished to find just how well the informal economy is doing when she immerses herself into one of it's most prosperous markets; the Dubai cross border trade.
At least 170 shoppers travel to Dubai every week, spending an average of US$3 000 each.

Some spend tens of thousands of the greenback and have to bring their wares in containers by sea.

On each visit, one person folks out US$115 for a single entry visa and $258 million for a return ticket.

This effectively means that on average, the shoppers, or cross-border traders as they have come to be known, spend a combined US$510 000 per week or about US$2,4 million per month on their trips, enough to buy a day’s petrol supply for the whole country.

Add this to the figures spent by those who ply the China, Singapore, and other traditional routes such as South Africa, Botswana and Zambia and you have a huge figure of foreign currency that could otherwise be allocated to more deserving national needs.
Sadly, like the officials over at the Reserve Bank and in the Ministry of Finance, Ruzvidzo is resentful of the informal market because the government cannot regulate and influence it. More importanly, they cannot levy and collect taxes on most informal market activity. So they yell and scream, deride and chase, but fail to realize that they cannot eradicate the informal market.

No one can do that.

Like the Zimbabwean government, many people don't understand that the miracle of the capitalist free market resides not in the places where the business transactions occur (eg. Wall Street, Nikkei), or in the currencies of trade (US$, Yen). No, the magic of the free market is in the mind where an unparelled creative capacity ensures the most efficient matching of needs and resources.

Look around you, is there a "black" market? It's doing just that; making sure that people with needs are brought into contact with resources that address their needs.

In many cases, say the U.S. (where, for the most part, the formal market is doing a phenomenal job of allocating resources to the needs of people) for example the informal market becomes "black" because it isthe place where trade in illicit goods is happening.

This is not the case everywhere; certainly not in developing countries like Zimbabwe.

Those readers who've read me for a while know that I have long been intrigued in discovering the reason why the market economy has succeeded so well in some parts of the world, while it let the rest of the of us down. My quest has led me among other things, to Hernando De Soto and this erudite assertion of his; the free market hasn't failed in the developing world, it just hasn't been discovered yet. De Soto claims contrary to popular opinion, the free market is alive in the developing world; it is just not recognized as the "formal market." (more...)

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