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Institutions the missing link

One of the biggest paradoxes confronting Zimbabwe is that while we are one of the richest countries in terms of resource endowment in Africa, we are one of the poorest countries in terms of economic development.

By Prosper Chitambara

It is imperative for Zimbabwe to strengthen and reform state enterprises and parastatals, such as Air Zimbabwe.

This is often termed the paradox of poverty in the midst of plenty. We have failed to leverage our resource endowment to initiate and sustain economic development. Per capita income averages US$1,700, while it is much higher in a number of countries that are not as richly endowed in terms of resources as we are. Japan for instance, has a per capita income level of about US$40 000; Singapore US$81 000 and South Korea US$35 000.

Interestingly, the deteriorating macro-economic situation in Zimbabwe has coincided with a weakening of our key institutions.
In economics, we define institutions as the rules of the game. Examples of institutions include: property rights, state enterprises and parastatals, taxation and the doing business environment.

It is now generally agreed by both scholars and policymakers that strong institutions are the bedrock of economic development as they help to provide incentives for productive economic activities while also providing disincentives for economic malfeasance.

Strong institutions provide confidence, certainty and stability critical to spur economic activities.

It has also been proven empirically that strong institutions reduce transaction costs, information costs and risks for investment by both local and foreign investors. On the other hand, weak institutions provide a fertile and breeding ground for corruption, state capture and other malfeasance. Institutional reforms are therefore an indispensable ingredient in any sustainable economic development strategy.

Over the past years Zimbabwe has experienced a weakening of key institutions. In some cases, institutions have been captured by elites for rent seeking and personal aggrandisement purposes. The country has fared dismally on the key institutional indicators.

Zimbabwe ranks lowly in the Transparency International Corruption Perception Index at 150 out of 168 countries in 2015, and 154 out 176 countries in 2016. The 2016-17 Global Competitiveness Report identifies corruption as the third most problematic factor for doing business in Zimbabwe.

According to the 2016 Mo Ibrahim Index of African Governance, Zimbabwe is ranked 49 out of 54 countries in the business environment sub category in the year 2015 with a score of 15,5 out of 100. The score represents a decline of 1,9 over the 10-year period 2006-2015.

The country performs poorly in terms of overall ease of doing business. The doing business environment remains problematic with the country moving four places down in the ease of doing business rankings from 157 out of 190 countries in 2016 to 161 in 2017.

According to the 2017 World Bank Doing Business Report, Zimbabwe is ranked 183 out of 190 countries in terms of starting a business one place down from 182 in 2016.

On average, it takes 91 days to start a business and the process requires 10 procedures on the ease of starting a business. There is therefore an urgent need to streamline and simplify the doing business environment.

In particular, corruption in Zimbabwe has manifested itself in many ways and sectors and harmed the economy.

Some of these manifestations of corruption include: bribery, embezzlement, fraud, favouritism, exorbitant salaries for public officials, extortion, illicit payments, money laundering, smuggling, poor corporate governance and tax evasion.

Poor corporate governance has become systemic in the public enterprises, local authorities and the financial sector as audit reports by former Auditor-General Mildred Chiri have continued to expose poor corporate governance, fraudulent activities, financial irregularities and weaknesses in the internal control systems at most of the parastatals and government departments.

The 2016 report of the Comptroller and Auditor-General (CAG) highlighted that poor corporate governance practices still exist in state enterprises and parastatals resulting in the loss of millions of dollars and government having to subsidise those losses. In 2016, government subsidised state enterprises and parastatals to the tune of US$134 million.

It is therefore imperative to strengthen and reform key institutions namely: state enterprises and parastatals.
The reforms should be designed to enhance accountability and transparency in state operations and in major economic institutions.

In particular, our state enterprises and parastatals must be transformed into autonomous and profit-oriented institutions with pro-market regulations and corporate governance mechanisms.

It is now recognised that a participatory approach to restructuring is key to its success. Public sector reforms are most likely to achieve their objectives of delivering efficient, effective and high quality services when planned and implemented with the full participation of public sector workers and their unions and consumers of public services at all stages of the decision-making process.

A participatory restructuring culture helps to transform the public enterprises into an effective results-oriented long-term coalition by reconciling the various conflicting interests. This is also known as Socially Sensitive and Inclusive Enterprise Restructuring.

There is also a need to reform and strengthen property rights in the agricultural sector through granting transfer rights. A productive economy requires that assets be used by those who can do so most productively, and improvements in property rights facilitate this by enabling an asset’s mobility as a factor of production (e.g, via a rental market).

To stem the tide of de-industrialisation and informalisation requires the creation of enabling and supportive policy, institutional and regulatory that reduces the cost of doing business and improves the investment climate as well as lowering the barriers and high cost of transition to formality.

The plethora of taxes, levies and statutory fees must be reduced through the adoption of a uniform tax regime.

Government must urgently embrace an e-government system that includes company registration and national procurement.

E-governance can also help to make public service provision and governance more efficient and effective and also mitigate corruption by raising transparency and accountability through digital footprints and reducing face-face interaction.

The e-governance system must also entail the adoption of biometric payroll registration of public sector workers and pensioners, which has been found to be very effective in cleaning up the payroll and improving its administration.

Most importantly, an inclusive institutional framework for broad-based stakeholder participation in decision-making, implementation, monitoring and evaluation needs to be created as a basis of coming up with a social contract.

This would help improve transparency, accountability, ensure ownership of policies and encourage social cohesion. Inclusive institutions also level the playing field and provide all citizens with opportunities to participate in and shape public policy.

A national framework for social dialogue that is inclusive along the lines of the National Economic Development and Labour Council in South Africa, or Economic and Social Councils implemented in other countries, should be created with participation broadened to cover all key stakeholders, including youths and communities.

Chitambara (PhD Economics) is a development macro-economics scholar and practitioner based in Harare. These New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. E-mail: kadenge.zes@gmail.com, cell +263 772 382 852

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