Zimbabwe’s Economic Revival Hangs In The Balance

THE signing of a Memorandum of Understanding this week by the major political parties in Zimbabwe has been viewed as a welcome relief by many people.

 

 

If carried to completion, the process could be a turning point in the country’s economic collapse.

The MoU has as one of the points of discussion, the need to restore economic stability and growth, addressing the land question and looking at the impact of sanctions on the country’s economy. Realistically, the fate and direction of the country’s economy has looked irredeemably linear.

Whilst the current economic policies of the returning government are at best uncertain, the country’s isolation from the international market place for reasons ranging from sanctions, failure to attract international investments and a reduced export capacity will suffocate the economy further and hurt millions of our citizens already struggling to make a living within an imploding economic nightmare.

The government has increasing been adopting isolationism, the costs of this approach could not be more severe. The inward looking economic approach is unlikely to result in any meaningful economic results. There are several economic reasons why this will be the case. Any discussion regarding the revival of the economy will need to make an honest diagnosis of where we are.

It appears every sector in a previously robust economy is now paralysed. Agricultural production has been adversely affected by the land redistribution programme. Statistics show, for example that annual wheat production has fallen from a high of 300 000 tonnes in 1990 to less than 50 000 in 2007. The tobacco industry which was Zimbabwe’s single largest generator of foreign currency accounting for a third of Zimbabwe’s foreign exchange earnings in 2000 has also been adversely affected. Tobacco earning declined from US$600 million in 2000 to less than US$125 million in 2007. The manufacturing sector is operating at 10% of its capacity, shrinking by more than 47% between 1998 and 2006. This is believed to have brought the output levels back to figures reported in 1972. Price controls introduced in June 2007 condemned the manufacturing sector to extinction. In an attempt to control hyperinflation and spiraling price increases, the government directed all companies to halve their prices for an indeterminate period. Price controls have led to price disequilibrium in the economy resulting in economic distortions and rent seeking behaviour which is feeding one of the most sophisticated black markets in the world.

The Zimbabwe dollar has become virtually worthless against major trading currencies, trading at more than $500 billion to the US dollar and $1,2 trillion to the pound sterling. The return of the zeros has put a strain on the national payment system with many computers failing to handle the enormity of so many zeros. The country’s export capacity has shrunk to record levels, leaving the Zimbabwe dollar in a permanent state of implosion. The recent announcement by some international companies such as Tesco in the UK that it was to stop importing farm produce from Zimbabwe due to the deteriorating political climate in the country is reminiscent of economic sanctions against South Africa during the apartheid era. Whilst we do not expect that the situation will be allowed to match that of South Africa, disinvestments or economic sanctions prohibiting multi-lateral companies from doing business in Zimbabwe can squeeze the economy towards total collapse.

South Africa’s history with economic sanctions is a worthy test case for the government. Increased international isolation will bring the country to its knees, perhaps at a faster pace than was the case with apartheid sanctions. By the 1980s, the United States, the United Kingdom and 23 other nations had passed laws placing various trade restrictions on South Africa. A disinvestment movement in many countries was also widespread, with individual cities and provinces around the world implementing various laws and local regulations forbidding registering corporations under their jurisdiction from doing business with South African firms, factories, or banks.

The difference between the two countries is that when economic sanctions were imposed on South Africa, the country had a vibrant economy with growth rates well above 3%. In contrast, Zimbabwe has had negative growth rates since 1997. Further isolation will be damaging to the country’s remaining export capabilities. The price of the isolationist policies by the current regime is likely to see the Zimbabwe dollar suffer immense pressure as international trading partners cut business ties with the country. Canada and the USA are expected to table a fresh round of sanctions on Zimbabwe with the former having already announced travel sanctions against members of the Zanu PF ruling party and the prohibitions of all flights originating from Zimbabwe in Canada.

The country cannot afford protectionism when most countries in Africa are opening up to international trade and free market economies in an increasingly globalised world.

Among the most important ideas in orthodox economies is the theory that countries prosper through trade and not necessarily through subsistence farming. The perfect example of this is the globalisation of China’s economy, which has propelled the country as a competitive force on the world stage. Trade statistics for China are remarkable; its exports have grown by 13% per annum since 1981 and by 18% since 1991. Its share of world exports has risen 1,1% in 1981 to 6,8% in 2005 making China the world’s third-largest exporting nation after the United States and Germany. It is anticipated that if the growth rates of the past decades can be sustained, it could overtake the US in 2008 and Germany in 2009.

Yes, there has been criticism of the neo-liberal agenda to trade and the need to make trade more equitable across regions but empirical evidence suggest that the case for outward looking policies is stronger than that of inward looking policies. The World Bank’s World Development Report in 1987 is incisive; growth in income per capita was highest in the strongly outward-looking economies.

The same was true for growth in total GDP and in value added in manufacturing, and for the standard measure of the efficiency of investment. On all these indicators, the outward-looking countries also outperformed inward-looking economies, although by a smaller margin. This failure of a strong inward orientation to promote domestic manufacturing –– not just exports of manufacturers –– is particularly striking since the whole point of looking inward is to industrialise faster.

Clear consensus among mainstream economists is that outward looking trade policies are one of the key factors to economic development. Zimbabwe’s inward looking economic model within the context of deteriorating macroeconomic fundamentals cannot support an economic revival of any kind. The polarised political environment will drive away any remaining chance of FDI, the perceived breakdown in the protection of property rights is an indictment to investors seeking opportunities. The recent threats of the nationalisation of industry have now become a reality as the government is set on a vindictive path against foreign owned businesses. Soon, policy makers will have to weigh the economic cost of defending perceived threats to national sovereignty against the rationality of prudent economic policies.

There is no doubt that the state of the economy has reached crisis point. Unfavourable economic climate has led to a mass exodus of Zimbabwe’s talented professionals into the diaspora. It is estimated that 3 million Zimbabweans have migrated to South Africa for economic and political reasons. More than a million more are scattered across the UK, USA and Australia. With the unemployment rate recorded at more than 80%, it certainly will take a while to bring industry utilisation to reasonable sustainability.

Without the resolution of the political process, the pressure on an already crumbling economy will be immense. Whilst it is certainly noble that the country’s sovereignty be protected at all costs, assuming that Zimbabwe can be self sufficient when almost 80% of its consumables and 100% of its fuel requirements are imported is an unrealistic proposition bordering on an exercise in folly. Without cogent, economic policy pronouncements beyond the sovereignty rhetoric or unity of purpose amongst political players, the economic decline cannot be arrested.

*Lance Mambondiani is an investment executive.

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