ZIMBABWE: WHERE TO NOW?

Tony Hawkins

Graduate School of Management University of Zimbabwe

MYTH No. 1

That until 2000, Zimbabwe was one of Sub-Saharan Africa’s best performing economies.

In fact, the country’s long-run growth record is unimpressive, even by Sub-Saharan standards, which are dismal.

DISMAL GROWTH RECORD

Over the long haul (1965-2008) real per capita incomes have fallen more than 20% meaning that Zimbabweans are no better off today than 50 years ago.

The chart tells the story.

PEAKS AND TROUGHS

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MYTH No. 2: Land

Zimbabwe’s precipitous decline was caused by land resettlement.

From the late 1980s onwards, it was increasingly apparent that a serious crisis of unfulfilled expectations was developing.

Promises made at Independence in 1980 went unmet.

THE 1997 WATERSHED

War veterans payout (Aug 1997) Fast-track land reform (1997) Entry into the DRC war (1998) Withdrawal of IMF/World Bank funding

and donor aid (1999) Simba Makoni Monetary Policy (2001)

MYTH No. 3: Resource rich Zimbabwe is a resource rich country. It is not. It is classified by the World

Bank and others as a resource-poor, land-locked economy.

Its minerals endowment is diverse, which is not the same as rich – relative to Botswana, Zambia, the DRC and SA.

MYTH No. 4: The Regional Bread Basket At various times in its history,

Zimbabwe has had maize surpluses that were exported regionally.

Bu alongside SA (1.5 million tonnes this year), its 200 000 tonnes of food exports in a good season was marginal.

MYTH No 5: 1980 Revisited

That 2009 will be a reprise of 1980 when at independence the economy rebounded strongly.

The contrast between the two situations is stark.

Then the incoming government inherited a well-managed, diverse economy with strong entrepreneurial and infrastructural base.

TOUGHER TASK

A solid platform was in place, from which there could be a strong economic

But in 2009, after ten years of continuous, unprecedented peace time economic and social decline, recovery will be a much lengthier process.

ZIMBABWE 2008

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INFLATION

Inflation has escalated from 7 250% when the price freeze was launched a year ago to 100 000% in January and 11.2 million percent in June 2008.

No-one believes the current estimate but then neither does anyone KNOW what a realistic number is.

There is an enormous range of guestimates – from 15 million to 30 million percent.

None is accurate – because no-one is measuring accurately

INCOMPLETE PICTURE While the graphs and inflation data

capture the narrowly economic dimension of the country’s regression, the picture they convey is incomplete.

They do not capture the institutional and qualitative elements, nor the political economy of Zimbabwe’s decline.

THE POLITICAL ECONOMY OF RECOVERY

LEFT OUT IN THE COLD The starting point is that the past is no

guide to the future. Technology, policy, the world and the

region have moved on, while Zimbabwe, left out in the cold, has regressed.

NEW BALL GAME

Far-reaching structural change has taken place not just in Zimbabwe, but also in the global and regional economies.

Growth models that worked in the past no longer apply.

The country is not in the bust phase of a a normal business cycle.

SEISMIC CHANGE Optimists believe that when the politics

normalize, Zimbabwe will revert seamlessly to the – mostly unsuccessful – growth path of the 1990s.

That is wrong - the country has undergone seismic change - rapid structural transformation across several different dimensions.

STRUCTURAL CHANGE Since the decline started in 1999,

long-run changes in the economic landscape include:

1. Demographics

2. Sectoral structure of output

3. De-industrialization

4. The balance between the formal and informal economies

CHANGE - TWO5. Consumption patterns

6. Market segments

7. Collapse of savings and investment

8. The sectoral structure of exports and imports

9. The nature of production functions, and

10. The impact of globalization

THE ‘NEW’ ECONOMYEnhanced Role Partially supplanting

Mining Agriculture and Manufacturing

Distribution &Trade Manufacturing

Telecoms, finance, real estate

Tourism

Public Sector Private Sector

THE “NEW” ECONOMYEnhanced Role Partially supplanting

Informal sector Formal economy

Foreign Trade Domestic output

“Financial” investment

“Real” Investment

SMEs and subsistence farming

Large formal firms and farms

NO GOING BACK

Seismic change means that the future will not be like the past – there is no going back.

The post-Mugabe, post-Zanu-PF economy will be very different from the economy of the late 1990s.

1. NEW BUSINESS MODEL For a start, Zimbabwe will have to

develop a new business model The driver of the old economy –

commercial agriculture – will not regain its predominance

Nor will manufacturing

2. MARKET SEGMENT SHIFT A feature of Zimbabwe’s decline has

been the shift in income and wealth from poor to rich and the associated near-elimination of the middle class.

This is a tragedy because one of Zimbabwe’s strengths was a well-developed “middle class” – so crucial to sustained economic development.

3. BRAIN DRAIN

The middle-class – professionals, teachers, doctors, nurses, public servants, parastatal managers – has been forced by inflation either into the low-income group, or into emigration.

The brain-drain will have serious long-term implications for the country and the economy.

4. SKILLS REGENERATION Often overlooked too is the fact that

Zimbabwe’s skills-regenerative capacity has declined.

The capacity of educational institutions at all levels to fill the brain-drain “gap” is minimal.

5. REBUILDING INSTITUTIONS

A major part of the explanation for this is the fact that teachers, lecturers, trainers are the mainstay of the no longer existent middle class.

Destroying institutions is simple. Rebuilding them is not.

TIP OF THE ICEBERG In recent years, Zimbabwe has relied

on the international community to help feed a country that 10 years ago was a net exporter of food and agricultural produce.

This is merely the tip of the iceberg – the start of a protracted process of donor dependence that will last for decades.

6. MISMATCH

In Zimbabwe too, as elsewhere in Africa, there is a striking mismatch between government’s demonstrable economic, managerial and administrative incompetence, and

Its ability to maintain an iron grip in respect of security and selectively-applied law and order.

(a) STATE CAPTURE

Four critical aspects of this mismatch stand out:

1. Zimbabwe today is a classic “captured” state

Captured by a political elite determined to hold on to power regardless of the cost to the economy and to the population.

(b) The “politicised” economy2. The system, the economy, works for

the elite, as a a milch cow, that is the means to the end of power retention.

The economy’s function is to finance the state’s unwieldy, costly and increasingly inefficient bureaucracy.

While simultaneously providing opportunities for rent-seeking – access for the elite to free land, to cheap fuel, to subsidized bank loans and foreign exchange.

Like many economies in the throes of steep decline, the poorer the economy the greater the number of SUVs, Mercs and BMWs.

(c) CRONYISM

3. State capture goes hand in hand with dependency.

The command economy has become a patronage system in which it is increasingly difficult for formal businesses to survive without the right connections.

(d) THE LEADERSHIP VACUUM4. The fourth element to the mismatch is

that between a government led by strong leaders on the one hand and the leaderless vacuum of business, agriculture and mining, on the other.

Businesses are locked into the system.

100% EMPOWERMENT This reality is fundamental to the

empowerment and indigenization legislation.

Businesses that don’t play ball with the state risk being targeted as “strategic” enterprises that must sell 51% of their shares to indigenous Zimbabweans.

THE PREDATORY STATE On Tuesday President Mugabe himself publicly

acknowledged that his government’s policies had created a predatory state.

“Corruption imposes a huge cost burden on the conduct of business .. efforts to revive the country’s economy could remain a pipedream unless supported by stern and decisive action to eradicate the scourge of corruption, which has now reached alarming levels”.

RECOVERY

Economics and Institutions Economic development is more about

institutions than policies. Strong institutions can withstand poor

policies and bad leaders, but once the institutions are corrupted and destroyed, as in Zimbabwe, the development challenge is much more formidable.

THREE STAGE PROCESS Recovery will be a 3-stage process:

1. A short-term (2 years) stabilisation programme

2. Medium-term (2 to 5 years) reforms, and

3. Longer-run structural reforms.

BILATERALS CRUCIAL

An effective stabilisation programme is contingent upon re-engagement with the international community.

Because the Bretton Woods institutions are likely to require a 6-month Shadow Programme (SMP) before disbursing assistance, initial support will have to come from bilaterals.

POLITICAL PREQUISITE

In effect, this will mean the UK, the EU and the US with backing from Japan, Canada and Australia.

Most of these – not all the EU – can be expected to refuse to fund a rescue package for a government in which Mugabe and Zanu-PF are still influential or powerful players.

STABILISATION

Key elements of stabilisation will be: 1. A draconian fiscal/monetary package

designed to bring inflation down to manageable levels as quickly as possible.

2. Interest rate, exchange rate, exchange control and price liberalization,

3. Seek foreign aid to restructure the domestic debt, while negotiating a debt-forgiveness package for foreign debt.

4. Immediate liberalization of food and agricultural markets, while seeking emergency food aid and agricultural inputs for 2009/10.

STRUCTURAL REFORMS

Central Bank independence Restructuring the parastatal sector -

currently as much as 40% of GDP - including privatization.

Land Commission to Repeal the Indigenization and

Economic Empowerment Act.

THE FUTURE

TWO REALITIES

Whoever comes out on top in the current stalled negotiations will have to take drastic, radical measures – along the lines just indicated – to turn the economy around.

He will have very little leg-room – the donors/lenders will impose tough conditions.

The electorate wants a quick fix, but the greater the pressure for this, the greater the likelihood that the administration will seek soft options.

INFLATION The immediate priority will be reducing

inflation. That will require substantial foreign

funding of both the budget and the balance-of-payments.

Fortunately, successful – and that word is key – anti-inflationary policies work remarkably quickly.

HOW LONG?

But from so high a rate as 20 million percent (or worse) the dislocations are bound to be traumatic and the process certain to take longer.

Zimbabwe is likely to have hyperinflationary conditions – inflation of over 50% monthly through 2009, possibly even into 2010.

PROVIDED..?

Any dilution of the anti-inflation package – for social or political reasons, which is very likely with a weak, coalition government – will just prolong the agony and delay the recovery.

Clearly much will depend on politics – on the government being able to win over and maintain popular support.

INFORMAL SECTOR

Recovery will be constrained by the huge reduction in public spending, allied with a tighter monetary stance.

This will be compounded by an immediate, drastic contraction of informal sector activities as cross-border, fuel and currency traders find suddenly that there are many fewer arbitrage opportunities.

SEASONAL FACTORS

The output recovery will be delayed also because with farm output down by as much as a third for crops like maize, there is unlikely to be an upswing much before the second quarter of 2009.

UPSIDE On the upside inflows of foreign aid –

balance of payments and budgetary assistance – will ease the forex bottleneck.

Imports of fuel, food and electricity will increase, and

Exports will recover as inputs become available.

INFLATION WILL BE DECISIVE Over the next 3 (possibly even 5) years

the Zimbabwe dollar will drift lower because inflation will remain way above the global average.

What happens in the medium-term will depend on whether inflation gets stuck on a plateau of 25% or so, or falls under 10%.

Many in the diaspora are not going to return any time soon, if at all.

There will be a heavy price to pay in terms of neglected investment in infrastructure and social services, not to mention the ravages of hyperinflation and massive domestic and international debt burdens.

Future Prospects

OUTPUT Strong rebound as spare capacity is

brought back into production But severe supplyside constraints,

mostly infrastructure and skills, as well as forex

Take 10 - 12 years (minimum) to regain 1998 per capita income levels and 15 years plus to get back to where the economy would have been without the downturn of the last decade.

Long Haul

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GROWTH ENGINES

The main growth engines are likely to be mining, construction, tourism and services (real estate, banking, retail).

Agriculture is likely to evolve – over a long period – from an inefficient low-technology small-scale sector through gradual, slow, consolidation to more medium-scale operations.

FARMERS

Some white farmers will come back, but few as investors, and most as managers and professionals.

Having been badly burned once, they are not going to risk their own money again.

INDUSTRY

Manufacturing is likely to recover slowly but unlikely to ever get back to contributing more than 16% to 18% of GDP (as against 23% in 1990s)

Substantial take-over activity likely – mostly by SA and Asian companies rather than traditional Western firms

SOFT INFRASTRUCURE

The real bottleneck is going to be soft infrastructure.

The skills will not come back quickly and, in many cases, not at all.

We have lost the capability to regenerate skills – educational institutions, trainers, lecturers.

THE MIDDLE CLASS IS VITAL Most importantly because the middle

class is the platform from which property-owning capitalists that save and invest can kickstart the economy.

Take that away, and you are left with the “communalized” (i.e. state-dependent, rent-seeking) economy mentioned earlier.

TOO EASY

It is just too easy to believe that foreign aid and foreign investors will somehow close the gap

They won’t. Billions of dollars of aid do not build a

sound institutional base but an aid-dependent community reliant on drip-feeding from abroad.

ABSORPTION

Economies that do not have that strong institutional base are unable to absorb aid and investment efficiently.

They become increasingly reliant on expats who take decisions that should be made by the indigenous people.

SIMPLE POINT

My point is a simple one. Capital without skills, without

infrastructure and without efficient, well-oiled institutions such as an efficient and incorruptible civil service, will have a very low rate of return.

If you don’t believe me, just look around Africa.