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Tapiwa Maswera Correspondent

Modern society is built on the fact that people trust money more than they trust each other.

When the money system of a country is no longer trustworthy, then society starts to crumble.

This calls for Zimbabwe to build a sound financial model.

The most critical question that a sound financial model must answer is: how do we add value to this country’s currency?

The question of our currency has been at the core of all economic discourse since 2009.

It is the go-to topic whenever conversation veers towards the economy of Zimbabwe.

Businesspeople do business between each other because they trust the currency.

Insurance policyholders and pensioners who lost all their savings in 2009 want assurance that the value that they put away will be availed to them — and that corrective action will be taken in this regard. 

And the trust in currency then extends itself to trust in our business partners. It’s that basic and simple.

Another question that our financial model must answer is: How do we start growing this economy at a rate faster than we are borrowing?

There are consequences to borrowing and we are best advised to anticipate them.

And finally, how do we ensure that borrowings are used to generate more value than the interest due on them?

In other words, there is no point borrowing if after repayment, we are worse off than we were before borrowing.

The financial model that conquered the world

When Napoleon Bonaparte faced Wellington at Waterloo, it was not just a confrontation of the men who held guns on the battlefield.

It was also the confrontation of the economic and financial might of England — a country that Napoleon liked to denigratingly describe as “a nation of shopkeepers and fishermen” against that of France — a country that had just been financially ruined by Napoleon’s folly. 

The ill-advised invasion of Russia had bankrupted France. Over the previous two decades, Napoleon had ravaged Europe.

A brilliant soldier, Napoleon was known for lightning counter-attacks and brilliant manoeuvres on the battlefield.

He was the first General to design a financial model for calculating the profits of war and used it so effectively that he brought all mainland Europe under his control.

Drunk on these successes and in his vanity, Napoleon ignored his own advice and invaded Russia.

It was unlike Napoleon to fight an unprofitable war. The Russians avoided direct confrontation and cleverly used a mixture of a scorched earth policy and cold weather as weapons of war.

The failure by Napoleon to defeat Russia broke the spine of the French economy and finances.

In the meantime, Britain, his major adversary had invented the Square of Power, the financial model that was to make it the most powerful country in the world over the next hundred years.

Everything that followed was a matter of time. The future of the two countries lay in the soundness of their financial models.

The square of power

The square of power is a model for raising government finances. It is a peculiarly British invention.

Many other countries have gone on to copy and modify it with various levels of success.

In this financial model, the first corner of the square — the first institution that has to be in place is Parliament.

Without serving the people, a national financial model is useless.

The one corner of the square of power is the Reserve Bank, representing the money system of the country.

Without a sound money system, every initiative that a country undertakes is doomed. If anyone wants to understand England’s motivations, successes or failures, they need to understand its money system.

The other corner is taxes representing the profits which are made in the economy. Without profits, businesses in any economy are not sustainable and the economy cannot grow. A

And finally, the corner that is diagonally opposite Parliament is the loans that can be raised from financial markets.

Financial markets are the key to everything, because a well-functioning financial market can avail any amount of money.

The trick about the square of power is to maximise the amount of money that can be raised by each corner while keeping the people happy. 

Zimbabwe’s financial model

After the debacle of 2009, Zimbabweans know the devastation and havoc that can be caused by an unsound money system.

Our new Constitution, which we completed in 2013 should have been about preventing a repeat of 2009.

Germany rose from the ashes of hyperinflation to build the most advanced economy in Europe.

When two businessmen meet in the market and enter into a private contract, they both know that the value of money is determined by free markets.

They trust both the money system and the role of markets in making everything work. They enter into a private contract, to bind the profit that each party expects to make.

Zimbabweans do not want to save anymore because when they do, every 10 years or so, the money system will be arbitrarily changed, causing policyholders and pensioners to lose everything that they have saved.

What do other countries do?

Some countries are more organised than us. Some much less so. The ones that are more organised have financial models that speak to their needs. 

They take their time to ensure that they are financially sound.

Imagine a country like South Korea, where Samsung is one of the biggest manufacturers of cellphones in the world.

When they buy cobalt from the Democratic Republic of Congo to make cellphone batteries, they know they can sell back enough cellphones to Africa at many times the price they bought the cobalt to recoup all their costs and make a profit.

This gives value to South Korea’s currency. Not much accrues to the Democratic Republic of Congo though.

The price they receive for their cobalt is far smaller than their appetite for highly priced cellphones.

Similarly, Germany and Japan may need platinum to make catalytic converters in the cars that they make from Zimbabwe and South Africa.

They are smart enough to figure how to add value to these raw materials while giving value to their own paper money.

Meanwhile, the Zimbabwean and South African economies do not benefit much because the demand for luxury cars in these two countries far outweighs the value that is generated by selling raw platinum.

If we do not design a smart financial model we will remain weak, and continue to have no bargaining power.

Conclusion

Debauching the money system corrupts the entire fabric of a society.

A society that allows financial unsound money system is undoing the pillars that support its own foundation.

It is institutionalising corruption and thievery as a way of doing business.

It is allowing value to change hands in the economy without any money being paid, and money to change hands without value being exchanged.

Money is the means by which value is exchanged in society. And by this token it is the keeper of the entire national value system.

Money itself derives its value from a free market. Anyone setting the value of money without recourse to markets is debauching the money system.

No thriving and sound society can be built on a foundation of an unsound money system. No economy has ever thrived without knowing the value of markets.

Tapiwa Maswera is an actuary and founder of Global Worldview, a company dedicated to the development of world class financial leadership. He can be contacted on [email protected]