By Alex T Magaisa
THE rescue package from South Africa to Zimbabwe has raised considerable interest in the last few weeks.
has the worst performing economy in Southern Africa. Even the DRC, which has been involved in conflict in recent years is recording positive growth. That Zimbabwe now needs a bailout package is official acknowledgement of its precarious state. No amount of denials will cover the fact that the country is in dire straits. Not even the headlines and statements proclaiming that the country is on the road to recovery.
However, the debate over what SA can do for Zimbabwe and how it can achieve that result appears to overlook the wider politics of international bailouts. In organising a bailout, SA is not simply acting as a benevolent big brother, but is also acting to safeguard its interests. Such rescue packages have been organised elsewhere previously. SA must however realise that in the pursuit of its interests present a moral hazard. To the extent that such moral hazard arises SA also has at the very least, a moral obligation to account to Zimbabwean citizens. They need assistance to survive these hardships but far more important is that they need help to lay down a foundation for restoration of prosperity in the long-term.
Bailouts are not new and we can learn a bit from recent history. The two principal goals of bailouts are firstly, to prevent total collapse of a country’s economic system and enable it to meet its international obligations and secondly, to prevent the spread of systemic risk to other countries. The total breakdown of a country’s economic system has major social and economic implications on the region. It would mean mass migration to neighbouring countries, breakdown in trade relations and loss of major markets.
It would not have escaped SA’s attention that Zimbabwe is one of its major trading partners in Africa.
Zimbabweans flock to South Africa as economic migrants and political refugees. SA cannot afford to have a total collapse in Zimbabwe because it would entail a huge loss of market as well as open the floodgates of immigration. Total collapse would negatively affect SA and other neighbouring countries.
In organising a rescue package for Zimbabwe, SA is doing no more than the US did in 1994-5 during the Mexican financial crisis. At that time the US led a major financial rescue operation to save Mexico partly to safeguard its own interests. In the end Mexico received almost US$50 billion from the US, the IMF and a consortium of other countries. Similar responses were taken during the Asian financial crisis in 1997-8. The international community took a pro-active stance to safeguard the international financial system from the threats posed by crises in the emerging economies.
There is a key theme in all this: protection of self-interest. It is therefore not surprising that SA would deploy its resources not so much for the sake of Zimbabwe, but for its own interests. And that is where the problem lies: the moral hazard created by such rescue packages and what SA could do to minimise it.
The assistance that was given to Mexico and Asian countries was criticised as giving rise to specific moral hazard in the investment community. Besides the superficial picture of assisting the country in crisis, critics argued that it was in fact assisting imprudent investors who would otherwise have lost their money if the crises were to persist. In other words, the interventions had the effect of encouraging unwise and reckless behaviour of investors knowing that whatever happens they would recoup their losses. Critics argued that the governments were using taxpayers’ money to bail out reckless investors who should have carried their losses.
Now getting back to Zimbabwe, there is a large number of SA business involvement in Zimbabwe. The South Africans who have invested in Zimbabwe would suffer great losses as a result of economic and political collapse in Zimbabwe. The package has the effect of cushioning these investors and the question really is for South Africans to question whether they would allow their taxpayers’ money to be used to protect a selection of businesses investing in Zimbabwe. But for Zimbabweans there is also a further moral hazard and that is why SA should also be concerned with their views.
The argument is that other than being a temporary reprieve, the loan will not really solve the core problem affecting Zimbabwe’s economy. Further, it would be argued that far from rescuing the country from economic malaise, the loan permits the government to pursue skewed economic and political policies knowing that it has a cushion to fall back on. It is this moral hazard that SA ought to consider in its relations with Zimbabwe.
The question they ought to ask themselves is: Are we, by advancing this rescue package to Zimbabwe permitting and encouraging imprudent behaviour on the part of the Zimbabwe government? If the answer to that question is yes, it does not necessarily mean that SA should not advance the rescue package. As I have stated already, SA also has some self-interest to safeguard. It means, however, that in making its decisions, SA must balance the self-interest and the interests of Zimbabweans.
The question that arises therefore would be: If by our assistance we create such a moral hazard, what can we do to minimise it? It is at this point where the issue of conditions to the loan arise. In these circumstances, the principal purpose of the conditions should be to minimise the moral hazard created by advancing the bailout package. The loan should not simply have the effect of a temporary solution, but should be part of a long-lasting transformation covering economic, political and social aspects pertaining to Zimbabwe.
We ought to recall again that the issue of conditions to rescue packages is not new. In accepting the rescue packages, Mexico and most of the Asian countries had to also accept certain conditions. These conditions had impact on both economic and political matters in the respective countries. It has been said that Malaysia resisted these conditions but most of the countries believed that they had no choice and duly accepted.
Conditions do not always work in the anticipated fashion and the IMF-led rescue packages have been widely criticised over the years. The key, however, as far as Zimbabwe is concerned, is for SA to identify and understand the causes of Zimbabwe’s problems and negotiate conditions that have the effect of dealing with those specific challenges.
Now there is also some controversy regarding the genesis of Zimbabwe’s problems and care must be taken at this stage. In my view, these causes may be both external and internal to Zimbabwe. All too often, however, there is huge polarisation. On the one hand there are those who argue that Zimbabwe’s problems are internal but refuse to acknowledge the external factors and on the other hand are those who argue that Zimbabwe’s problems are external but refuse to acknowledge the internal factors. There is need to accept the reality that there is no single cause to the problems.
Perhaps some are more prominent than others, depending on each individual’s platform but it would be a mistake, as we have seen over the years, to adopt a narrow view and refuse to see the point from the other side. So what’s the point of all this?
The point is that in debating SA’s position in relation to the rescue package and how it can play a role in helping Zimbabwe, we need to avoid a narrow approach. We should take a wider and more comprehensive plan that addresses a wider cross-section of issues impacting on the Zimbabwean economy. The more the issues we place on the table, the easier it is to negotiate the major obstacle.
The way I see it is that simply discussing the issue in political terms has the effect of placing SA in a difficult position. We have seen over the years that it is keen to avoid being seen as a bully by the Zimbabwe government and its allies. Yet in being soft it has also risked being called a poodle by its critics. The key however is that it must take into account the long-term interests of Zimbabweans and realise that its actions have an impact on their future.
In doing so SA has to realise that the key question is not whether it gives Zimbabwe the current loan request, but what it will do next time when Zimbabwe comes again extending the begging bowl. This is because unless there is fundamental overhaul stretching from political to economic systems in Zimbabwe, it is more than likely that Zimbabwe will soon be broke again. In order to avoid that, SA needs to assist Zimbabwe out of this by taking a more comprehensive approach. In doing so it would also be assisting itself, because it has major economic and political interests to safeguard by helping Zimbabwe to be successful.
There are of course differences between the Mexican and Asian crises on the one hand and the Zimbabwean crisis on the other. Unlike the Mexican and Asian crises, the Zimbabwean crisis is not seen as a major threat to the international financial system. If anything, its impact is limited to the Southern African region, which explains why SA would be interested in keeping systemic risk at bay.
Secondly, the other crises took place over a relatively short space of time and were major shocks to the international economic system at the time. Zimbabwe’s crisis has unfolded gradually and visibly over a period of time and its demise has been predictable. The current liquidity problem is widely seen as an opportunity to halt that crisis.
Third, the crises in Mexico and Asia were largely perceived as threats to the model of the free-market economy, which at the time was being largely promoted by the Bretton-Woods institutions the World Bank and the IMF.
Rightly or wrongly, the Zimbabwean crisis is largely perceived as political rather than a threat to that model. In any event, as we saw in relation to the Argentinean crisis, the criticisms of the rescue packages of the 1990s have discouraged knee-jerk reactions on the part of the IMF in crisis situations.
Hence, despite persistent talk about Zimbabwe and the need for reform, it is unsurprising that there has not been much international mobilisation to advance a rescue package.
Finally, the key lies in the fact that financial injection alone will not solve the problems in Zimbabwe. Zimbabwe and SA both need a clear plan on what needs to be done. The message must be driven home that the idea is not to punish Zimbabwe, but to help it out of its crisis. SA has a legal obligation to account to its citizens for using their money.
But at the very least, it also has a moral obligation to the people of Zimbabwe not simply to assist them as neighbours but also to ensure that its assistance is put to good use.
Zimbabwe needs more than a temporary solution. It requires assistance that has long term implications on its political and economic stability. SA is not doing anything new. All it needs to do is learn from history to avoid making similar mistakes. It is free as a sovereign nation to help its neighbour and also safeguard its interests. Its key challenge however is to minimise the moral hazard that would arise from extending the bailout package.
* Dr Magaisa is a specialist in Corporate and Financial Services Law. He can be contacted at firstname.lastname@example.org