ZIMBABWE’S failure to learn from economic disasters that befell other states that expropriated land led to its swift slide from a plum investment destination in 1980 to one of the grimmest plac
es on earth, a recent study says.
Land seizures after 2000 and total disregard for property rights have converged to haul Zimbabwe into an economic cesspool contrary to claims by Harare and aid agencies that blame the drought for the country’s economic woes, the study says.
The study by Craig Richardson, associate Professor of Economics at Salem College in the US, disproves assertions by the IMF, the UN, and the Organisation for Economic Cooperation and Development (OECD) which blame “severe drought” in 2001/2 along with a host of other factor, including Aids, poor fiscal and monetary policies, and rigid price controls – for causing much of the food shortages and resulting economic difficulties.
Richardson estimates that from 1999 to 2000, more than US$5 billion in wealth which included the total revenue from all commercial farm production vanished from the agricultural sector.
During 2000 the value of the commercial farmland dropped dramatically by US$5,3 billion and changed into “dead capital” because it lost its value as collateral security.
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, Richardson says.
He notes that before 1997, an average of 1 600 tractors were sold each year throughout Zimbabwe, with farmland used as collateral.
By 2002, total national sales dropped by more than 1 590 tractors to only eight.
Gross private capital formation, once a healthy 20% of GDP in 1995, fell to minus 6,7% in 2002 as farming equipment was looted, destroyed, or sold, and new farmers saw little reason to invest in tobacco barns or tillage equipment.
The study shows Zimbabwe’s economy contracted by 5% in 2000, 8% in 2001 and by 12% in 2002, peaking at an estimated 18% in 2003 while inflation spiralled to 500%, forcing the Zimbabwean dollar to lose more than 99% of its real exchange value.
Currently the inflation rate stands at 359,29% and is still rising.
“Land reforms alone were responsible for an estimated 12,5% average annual decline in GDP growth,” Richardson says. “Rainfall played a minimal role in the GDP contraction.”
He says of the 15 countries in his study that undertook arbitrary seizure of property, nine had negative growth rates. These included Chad (- 6,1 %), Liberia (- 4,0 %), and Zaire (-5,1%).
Richardson says after the revoking of commercial farm property titles, the aggregate value of Zimbabwean farmland dropped so quickly that the net loss in one year was nearly three and a half times larger than all the World Bank aid ever given to Zimbabwe.
This loss in wealth rippled throughout the economy, severely strained the banking sector, and led to a rapid downward spiral in the economy.
Last month Zimbabwe further consolidated its land seizures by enacting the Constitutional Amendment Bill No 17, which effectively nationalised all agricultural land. The amendment curtailed owners’ rights to contest the acquisition of their farmland in the courts.
The study illustrates Zimbabwe’s collapse by showing how the damage to property rights destroyed three key components of the marketplace: investor trust, land equity, and entrepreneurial knowledge and incentives.
“There are three effects of attenuating private property rights that ultimately change individuals’ perceptions in a drastic way,” Richardson says. “First, there is the loss of trust in the government to enforce the law, which dramatically affects foreign investors’ views of the country. Second, the loss of property titles dramatically limits the amount of borrowing and entrepreneurial activity by disrupting the banking sector. Individuals no longer can offer banks their property as collateral for a loan. Third, there is the loss in the incentive to pass along entrepreneurial knowledge, and work initiatives are sharply stymied as well, since one’s investment is not retained.”
Richardson says by 1996, Zimbabwe’s equity markets on the ZSE were surging with more than half the top 35 sub-Saharan companies (excluding South African groups, which are listed separately) coming from Zimbabwe.
More importantly, their combined market capitalisation more than doubled to $2,6 billion from $1,2 billion. Zimbabwe was one of top performers in the world’s emerging markets and a new favourite of investors.
Yet in 1998, the stock market began to plunge mainly because of loss of confidence in the government, including the government’s publicly stated intention to acquire commercial farms for resettlement. At the end of 1998, the value of stocks traded on the ZSE had dropped by 88%.
Foreign investors became increasingly concerned with the Mugabe government’s willful disregard of the law.
Between 1998 and 2001, foreign direct investment dropped by 99%, the study reveals.