HomeOpinionHow land policy in Zim led to ruin

How land policy in Zim led to ruin

By Craig Richardson

FEW countries have failed as spectacularly, or as tragically, as Zimbabwe has over the past half-decade. Zimbabwe has been transformed from one of A

frica’s rare success stories into one of its worst economic and humanitarian disasters.

But while culpability for this collapse is broadly attributed to the policies of President Robert Mugabe, the intricacies of the country’s unravelling remain poorly appreciated — above all, the importance of property rights in the process.

That is unfortunate, because the destruction of Zimbabwe offers important, cautionary lessons for other developing countries.

Development economists like to study success: how to pull a country out of poverty, how to spur growth, how to improve living conditions. Yet what about a country undergoing a rapid and devastating economic collapse?

Curiously, development economics has devoted little attention to studying this phenomenon, and there is scant research to explain how it happens.

Consider Zimbabwe, a state which since 2000 has been in an economic tailspin. Today, it is shrinking faster than any other country that is not at war. Zimbabwe’s currency is nearly worthless from hyperinflation, its financial institutions are in disarray, its world-class farms sit idle, and its manufacturing, mining and export sectors are declining steeply. The informal exchange rate is $450 000/US$1; six years ago it was $55/US$1.

In fact, the collapse can be traced to a single policy: the fast-track land reform programme, under which the Mugabe government, beginning in 2000, seized thousands of white-owned commercial farms, leading to a sharp drop in agricultural output. The other “inappropriate” policies adopted by the government added to the damage, but they were not the underlying cause.

Yet a puzzle remains: the farming sector made up only 18% of the entire economy. Other sectors, such as banking, tourism, manufacturing and mining, also shrank dramatically during this time. How to explain the discrepancy?

In fact, the damage done to property rights by the land reforms caused a series of ripple effects throughout Zimbabwe’s other economic sectors.

Studying this “cascade failure” helps to reveal the framework of developing market economies — what economist Hernando de Soto calls “the hidden architecture” of capitalism. The destruction of Zimbabwe represents a grim “natural experiment” that illustrates the consequences of ignoring the rule of law.

Unfortunately, the rebuilding of an economy after property rights have been revoked is likely to be contentious and slow, akin to rebuilding trust in a relationship after a serious betrayal.

Zimbabwe was once considered one of Africa’s success stories, with its modern roads, strong education system, low crime rate and diversified economy. Economic growth from 1980 to 1989 averaged a robust 5,2% in real terms, and though it slowed from 1990 to 1999 because of questionable macroeconomic policies, it still averaged 4,3% during this period.

An important reason for the country’s prosperity was its sophisticated commercial farming sector. Vast tracts of large-scale farms produced thousands of hectares of tobacco, cotton and other cash crops. About 4 500 white families owned these farms. In contrast, 840 000 black farmers eked out a living on small and relatively infertile plots in the communal lands, producing maize, groundnuts and other staples.

By the late 1990s, a broad consensus had taken shape — including the Mugabe government, the International Monetary Fund (IMF), the United Nations, the British government (the original colonial power in Zimbabwe), African scholars and even many of Zimbabwe’s white commercial farmers — that land reforms were needed. The purpose of these reforms would be to improve agricultural productivity and, simultaneously, increase wealth for the black majority.

As it turned out, however, the IMF — along with everyone else who had trusted the Mugabe government — was soon proven wrong. Beginning in 2000, Harare began seizing control of white-owned farmland, with no compensation for its owners, and then redistributing it to political cronies in the Zanu PF party, rather than to poor rural farmers.

Because most of the new owners knew little about farming, agricultural production dropped sharply. Land titles were declared null and void, and all contracts and mortgages related to the farmland were suddenly worthless. The Mugabe government thus recast land reform into a tool of political patronage, with the renewal of leases left to the whims of the party leadership.

Mugabe’s government, the UN, the IMF, international aid agencies and non-governmental organisations have offered many excuses for Zimbabwe’s collapse, all downplaying the impact of the land reforms and Harare’s malfeasance. Among these excuses have been droughts, foreign sanctions and lavish spending on war veterans. None is plausible as an alternative underlying explanation for the country’s unravelling, however.

If the usual explanations for Zimbabwe’s implosion are insufficient, why do the country’s land reforms provide a better explanation? The argument here is straightforward: the expropriation of land without compensation destroyed property rights — the foundation of the economy — and set off a chain reaction, which was intensified by additional actions of the Mugabe government.

Property rights are analogous to the concrete foundation of a building: critical for supporting the frame and the roof, yet invisible to its inhabitants. In fact, there are three economic pillars that rest on this foundation:
* trust on the part of foreign and domestic investors that their investments are safe from expropriation;

* land equity, which allows wealth in property to be transformed into other assets; and

* incentives, which improve economic productivity by allowing individuals to capture the fruit of their labours.

How did Mugabe’s destruction of property rights lead to the collapse of these three pillars and with them the country’s economy?

In sifting through the rubble, it is clear that the pillars were not of equal strength. Trust is the most fragile of the three pillars and was the first to disintegrate, followed by land equity and, lastly, producer and worker incentives. Watching Zimbabwe’s economic unravelling is chillingly reminiscent of watching a building collapse in slow motion after a series of timed explosions.

In 1993, the Zimbabwe Stock Exchange (ZSE) was opened to foreigners for the first time. Investors were bullish and, by 1996, Zimbabwe’s equity markets were surging.

More than half of the growth in the top 35 sub-Saharan companies (excluding South African groups) came from Zimbabwe. The number of Zimbabwean companies in the region’s top 35 rose from nine to 11 in one year, but more importantly, their combined market capitalisation more than doubled from US$1,2 billion to US$2,6 billion.

Zimbabwe was one of the top performers in the world’s emerging markets and a new favourite of investors.

Just before Christmas 1997, however, the government announced that 1 471 of the country’s 4 500 farms had been earmarked for compulsory acquisition. This kind of rhetoric had been heard before from Harare and was largely dismissed as electioneering.

Yet by 1998, the government’s language became even more heated. Speaking to prospective voters in the Matobo district in September of that year, Mugabe attacked “rich farm lands in former white colonial hands” and argued that expropriation would “cure the economic and social ills bedevilling the nation”.

The ZSE began to plunge soon thereafter. News reports indicated that investors were increasingly leery of the government’s plans. By the end of 1998, the value of stocks traded on the ZSE had dropped by a stunning 88%.

As Christopher Dell, US ambassador to Zimbabwe, has noted: “Nothing rattles investor confidence more than the prospect of expropriation. The constitutional amendment striking down the right to redress for victims of land expropriation sent a shock wave through the community of investors who keep an eye on the climate in Zimbabwe.”

Between 1998 and 2001, foreign direct investment dropped by 99%. In addition, the World Bank risk premium on investment in Zimbabwe jumped from 3,4% in 2000 to 153,2% by 2004.

It is hardly surprising that the stock market and foreign direct investment collapsed so quickly, and somewhat in advance of the actual farm seizures. After all, this type of wealth is the most fluid and therefore the most volatile. With a few keystrokes tapped out on a computer, investments can instantly move thousands of kilometres to a more promising country.

As the farm seizures continued, banks became reluctant to lend to the remaining commercial farmers whose land had been listed for compulsory acquisition by the government or occupied by squatters.

A vast constriction of borrowing occurred, which rippled from business to business, and sector to sector. With the Zimbabwean government declaring itself the sole owner of farmland, banks and other property owners now held worthless titles. The land became what De Soto calls “dead capital”, because it was unable to be leveraged and used as equity.

An estimated US$5,3 billion worth of land value vanished as a result. In 2001 alone, this loss of financial equity in the farmland sector exceeded all of the World Bank aid ever given to Zimbabwe by a whopping 242%. This drop in wealth also equalled 65% of Zimbabwe’s GDP in 2003, which the World Bank estimated at US$8,3 billion.

With banks now holding worthless titles and unable to foreclose on properties, 13 of Zimbabwe’s 41 banking institutions were in financial crisis by late 2004. The amount of credit sharply contracted, affecting all sectors of the economy. Gross fixed capital formation, heavily dependent on loans, fell by 43%, from US$1,1 billion in 1999 to US$0,6 billion in 2001.

Before 1997, on average, 1 600 tractors were sold annually throughout Zimbabwe, with farmland typically used as collateral. By 2002, total national sales dropped to only eight tractors, according to a 2003 IMF report. The OECD reported that gross private capital formation, a healthy 20% of GDP in 1995, fell to -6,7% in 2002, as farming equipment was looted, destroyed or sold.

Zimbabwe’s conversion from productive to dead capital was now nearly complete. Just as De Soto’s work has shown how developing countries can harvest wealth by titling land and using that property as collateral for bank loans, the case of Zimbabwe shows that these ideas work in reverse as well — with grim results.

This, then, is the second pillar of the economy that crumbles when land reform movements destroy property rights. Bank investments are certainly less volatile than stock markets and foreign direct investment and have the ability to withstand greater shocks to the system when secure rule of law is under threat.

Property owners have the most to lose and the least to gain by uprooting their livelihoods and moving to another country. Their departure signals the final stage of economic collapse.

The loss of Zimbabwe’s 4 000 farms has had an impact on every aspect of the country’s economy, as noted by economist John Robertson. Each of these farming companies employed 100 or more people, paid taxes to the government and generated incomes for others that also yielded taxes.

In addition, the farms provided housing, clinics and schools; more than 1 million Zimbabwean children received an education from farm schools. Communal farmers also benefited from the farming companies, sourcing their demands for seed, fertiliser, chemicals and expertise to them.

Though agriculture was only directly responsible for 18% of the Zimbabwean economy, 60% of the country’s non-farm enterprises directly or indirectly depended on commercial agriculture inputs. As a result, 700 non-farming companies had shut their doors by late 2001. In addition, the agricultural sector of the economy employed 60% of the entire population, which meant that millions of unemployed workers now had far less disposable income to purchase the nation’s goods and services.

Commercial tobacco and cotton farms also provided about 40% of hard currency in the country, necessary for imports like fuel, machinery and medicine. With the collapse of the commercial agricultural sector, food and other basic goods disappeared from shelves, and widespread fuel shortages paralysed the country’s cars and planes.

Without hard currency in its coffers, the Mugabe government turned to the Reserve Bank of Zimbabwe to pay its bills. Annual money supply growth rose from 57% in January 2001 to 103% by the end of the year, inaugurating a cycle of devastating hyperinflation.

According to the OECD, the acute food shortages caused by the land reforms meant that the country, which was once a net exporter of maize, had to print billions of Zimbabwe dollars to import food. The government even ran out of hard currency to buy the imported ink needed to manufacture its own money; as a result, bills were printed on only one side. By March 2006, it took $60 000 to buy one loaf of bread, even as a new $50 000 note was being printed to “keep up” with higher prices.

Zimbabwe now vies for a number of depressing world records: most orphans per capita, highest number of Aids cases per capita, and lowest life span, at 38 years. It was recently rated by the World Economic Forum as the world’s worst place to do business out of 117 countries surveyed.

The prospect of land reform can be appealing, even seductive, to developing countries with large disparities in wealth — a simple matter of extracting resources from a “less deserving” rich minority and redistributing them to a “more deserving” poor majority. Yet as seen in Zimbabwe, the outcomes of fast-track land reform have enormous potential to backfire, leaving everyone worse off than before.

Unfortunately, several countries continue to ignore this lesson. In South Africa President Thabo Mbeki expressed interest during his latest state of the nation speech in revisiting the “willing buyer, willing seller” principle for land redistribution. South Africa is expected to begin expropriating farmland at state-determined prices this year, part of a broader attempt to address the economic inequalities inherited from apartheid.

South Africa Deputy President Phumzile Mlambo-Ngcuka agrees that the pace of land reform should be accelerated. “There needs to be a bit of oomph,” she said in a 2005 interview. “That’s why we may need the skills of Zimbabwe to help us.”

South Africa and other countries considering land reforms should pay heed to the disastrous experiences of Zimbabwe before plunging ahead. As the market’s foundation, property rights serve many purposes: they bind together work and rewards, expand time horizons from days to years, allow wealth to be transformed into other assets, and encourage foreign investment.

The speed at which an economy can develop ultimately depends on the ability of the government to inspire trust among citizens, banks, and investors that it will fairly enforce the rule of law.

Other factors are important as well, such as free markets, stable money supply, good healthcare, strong educational systems and ease of starting a new business. But none ultimately matters as much as the individual’s ability to secure and retain property rights.

Craig Richardson is an associate professor of economics at Salem College, Winston-Salem, North Carolina. He is author of The Collapse of Zimbabwe in the Wake of the 2000/2003 Land Reforms.

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