The Sunday Mail
Zimbabwe’s economy is not producing much output. It has become a recurrent theme in this column to deride our economic affinity for arbitrage and marginal trading.
While the former is often done in informal monetary channels, marginal trading is inspired by formal channels that are largely organised by policy.
It can be argued that central economic planning is culpable of stimulating the undesirable impulses that lead to widespread marginal trading.
Marginal trading is not inherently wrong, it is as much a part of economic transacting as the actual productivity that creates goods and services themselves.
However, marginal trading should be carried out in an economy at a proportion that is significantly lower than productive activity.
This is why astute economic regulation and planning will create structural reforms across as many sectors as possible so as to motivate productive value chains that are of greater incentive than the returns gained from marginal trading.
Indeed, while our policy-makers often verse their policy in a pretext of productivity, certain structural guidance enforced by their policy implementation creates greater motive for marginal trading than productive value chains.
Definitively, marginal trading is derived from the practice of trading in financial markets, particularly more sophisticated liberal stock or mercantile exchanges.
A margin transaction is when an agent uses collateral to deposit into the account of a counterpart to cover some or all of the credit risk in a transaction.
For instance, an agent has to deposit collateral worth US$20,000 into a broker’s account in order to acquire securities valued at US$100,000. The amount of tolerable margin available to the agent by their broker is then kept within the value of securities acquired and the amount of collateral put up by the agent (within US$20,000).
As such, all economic activity carried out by the agent on the stock market has a set margin in which risk is tolerable of which economic activity will not fluctuate outside that margin.
To put this in a context of the Zimbabwean structural economy, many sectors operate within set parameters of credit risk determined by expected collateral.
Our formally organised economy continues to function much like the marginal trading example in that almost all formally available credit will abide by then thin margin enforced by the collateral demands of the banking sector in particular.
In effect economic agents involved in diverse sectors such as manufacturing, retail, and agriculture are all constrained by a given margin of tolerable credit risk, determined by collateral.
In effect, the focal determinant of all economic activity in Zimbabwe is whatever margin the banking sector abides by, off the structural guidance of collateral benchmarks often set by the central bank.
Unfortunately, the collateral demands on which credit is determined in Zimbabwe are not aligned to the productivity capacity of our value chains.
Conclusively, the credit available in the economy is constrained to an inadequate extent of inspiring productivity but rather, the credit available motivates simple margin trading by economic agents.
A recent paper by Maria Arias and Yi Wen compared the economic output of productivity in instances where there is unsecured debt versus secured debt (collateral) in the banking sector.
The research revealed that economies that had more unsecured debt — which is no constraining collateral demands — showed more productivity that economies with high levels of secured debt, collateral demands.
Their research focused on how important is debt in determining business cycle fluctuations.
Also, it investigated if there is a difference between the effects of secured debt and unsecured debt.
By decomposing corporate debt into the two segments of secured and unsecured, it becomes easier to evaluate the business cycles of corporates based on their level of either category of debt.
Their research referenced results that showed that the amount of unsecured debt is strongly and positively correlated with GDP across all multiple samples — a 0,70 to 0,75 correlation — while secured debt is only weakly correlated with GDP.
More simply this means that the more corporates received unsecured debt without collateral constraints, national productivity out was positively influenced.
This is the opposite of how Zimbabwe’s financial cycle functions.
Zimbabwe has greater emphasis on collateral in determining credit to be availed into the economy.
Actually most of our banks have tiers of collateral expectations for various sectors based on the enterprise to which they are lending. Based on the referenced researched, this manner of credit regulation and allocation does not inspire growth in business cycles.
In fact, as the aforementioned research shows, conventional macro-finance theories assume the value of collateral — which allows firms to issue secured debt — is the important factor that allows firms to borrow and be productive.
The data show, however, that unsecured debt is the important driver of economic activity, so the value of collateral is probably not very important.
So, for many enterprises, unsecured debt is more important than secured debt in understanding the business cycle.
Conclusively, a prescription for the Zimbabwean economy is to reassess our affinity towards collateral guidance in how credit is accessed. We have created an economy where instead of aligning and vitalising productive value chains; enterprises in sectors that should be productive and inclusive get their credit guidance based on rigid collateral constraints.
For their existential expedience, these enterprises do not focus on inclusive and efficient production value chains; instead they carry out marginal trading so as to function within the credit confines of our financial system.
Think of it in this manner, if an economic agent is in the agricultural processing business, collateral constraints will force that agent to conduct procurement within the margins that enable debt payback. Unfortunately, local procurement due to weak value chains are of a higher cost.
So, this agricultural processor will import products that are already processed higher up the value chain, in effect cutting out local processors from the value chain in order to meet the collateral demands in which the agent accessed credit.
What would be more desirable for our economy is a sectorial approach where credit is allocated to align and strengthen the local value chain and create an inclusive and more productive value chain.