THERE is a belief in Zimbabwe that the best ideology for development is “capitalism”, but Zimbabwe is faced with two opposing versions of capitalism: (a) the Keynesian capitalist model and (b) the Economic Structural Adjustment Programme (Esap) model. Which one is better, or are there good and bad aspects to each? Part one will deal with the Keynesian model, and Part two will focus on the Esap model.
One: The Keynesian model
The inherited Rhodesian economy was a sound capitalist economy, providing state support on the one hand, but also encouraging competition and private enterprise on the other hand.
This is known as the Keynesian model of capitalism. This was a successful economy, but it mainly benefitted the European population, which numbered about 200 000 at its height, but had shrunk to about 80 000 as a result of the liberation war and the departure of young Rhodesians before Independence.
There was vast disparity between the incomes of Europeans and Africans, which was bitterly resented. The average African agricultural worker received Rhodesian $11,83 per month compared to the average Rhodesian of European extraction’s $286,33 (information from DG Clarke, The Distribution of Income and Wealth in Rhodesia, Mambo Press, 1977). Some adjustments were made to narrow this disparity after Independence but, in fact, the changes were minor and not transformative. Zimbabwe remained with two very different economic systems and salary scales.
The initial capitalist model during Rhodes’s day was known as “conquest”, which meant grabbing as much land and cattle as possible. But by the 1950s and 1960s, it had developed into a more stable Keynesian political-economic system, characterised by state ownership of the main infrastructure such as water, electricity, coal, railways, etc.
The state assisted Europeans to buy commercial farms at a low interest rate of 4,5%, as well as to take over manufacturing companies, which had initially been established by the state, but were sold at attractively affordable prices to strengthen the private sector. Interest for mortgages was also affordable: 4,5% for Mabelreign, a lower middle-class European suburb in Harare, and 7,5% for high-income houses in Mt Pleasant, an upper middle-class suburb in Harare.
Moreover, the state guaranteed purchase of agricultural products, mainly the staple diet of maize, and from domestic industries which had guaranteed state purchase of their products.
Thus the state supported the growth of the domestic economy. Education and health services were provided free of charge for Europeans, but not for Africans. It can be said that the Rhodesian economy was a social-democratic economy closely resembling the Labour economy in Britain, but for Europeans only.
Europeans enjoyed all sorts of social and financial benefits, such as grants for giving birth to a European child, and low interest rates for agricultural, industrial and commercial loans. European entrepreneurs were supported by excellent technical support and in-service training: this was particularly true for commercial agriculture, where former unemployed British soldiers were trained to become efficient agricultural producers.
Keynesian economics introduced the revolutionary idea that governments could play a key role in expanding and stabilising the economy. Ironically, it now appears that the Keynesian approach which the settler-colonial regime had embraced for Europeans was a much more progressive and efficient form of capitalism than Esap.
Esap, known as neo-liberal capitalism, had its roots in the highly industrialised economies of Western Europe, including the United States, Europe and Japan. Their industries were suffering lower profits because of over-industrialisation in their countries and the introduction of advanced industrial technologies, which meant they could produce more and better goods more cheaply. It was essential for them to find new markets: this meant selling their goods to non-industrialised developing countries in Africa, Asia and Latin America. It was therefore important to ensure that these countries would not go into manufacturing industrialisation in competition with Western Europe, but would, instead, concentrate on primary production economies, such as agriculture and mining.
Zimbabwe inherited a nascent but primitive manufacturing industrial system, utilising the technologies, as well as management systems of the 1950s and 1960s. In the 1980s, before Esap, they produced about 34% of the gross domestic product (GDP).
They were totally unable to compete with the high-tech industries of the West. It was not surprising that Esap became the development system for developing countries, which could import industrial goods from the West. In the case of Zimbabwe, their main competitors were South Africa which attained majority rule in 1994 and China. Both of these countries had recently modernised their industries. In addition, both of them had large populations on which they could test their products before exporting them.
The Esap form of capitalism became very popular from 1970 up until the international economic and financial crash of 2008, when it lost much of its glitter, and some forms of Keynesian economics made a comeback. However, Esap is still strongly imposed on developing countries in Africa, Asia and Latin America. The establishment of Esap in developing countries was advantageous to highly developed industrial economies, as they retained control of industrial production whilst developing countries would concentrate on agriculture and mining. Thus Esap re-produced the colonial division of labour.
John Maynard Keynes developed his version of capitalism during and after the Great Depression in the United States in 1929-1933.Millions of unemployed people faced starvation, and were fed through soup kitchens. In the United States, industrial production between 1929 and 1933 fell by nearly 47%, GDP declined by 30%, and unemployment reached more than 20%. Because of banking panics, 20% of banks in existence in 1930 had failed by 1933.
Keynes’s theory is that aggregate demand — measured as the sum of spending by households, businesses, and the state — is the most important driving force in an economy. State intervention through public policies could lead to full employment and price stability.
Keynes argued that inadequate overall demand could lead to prolonged periods of high unemployment. An economy’s output of goods and services is the sum of four components: consumption, investment, purchases and net exports. Any increase in demand has to come from one of these four components. But during a recession, strong forces often dampen demand as spending goes down. This reduction in spending by consumers can result in less investment spending by businesses, as firms respond to weakened demand for their products.
This puts the task of increasing output on the shoulders of the state. According to Keynesian economics, state intervention is necessary to moderate the booms and busts in economic activity, otherwise known as the business cycle. There are three principal tenets in the Keynesian description of how the economy works:
l Aggregate demand is influenced by many economic decisions — public and private. Private sector decisions can sometimes lead to adverse macro-economic outcomes, such as reduction in consumer spending during a recession. These market failures sometimes call for active policies by the state, such as a fiscal stimulus package.
Therefore, Keynesian economics supports a mixed economy, guided mainly by the private sector, but partly operated by the state;
l Prices, and especially wages, respond slowly to changes in supply and demand, resulting in periodic shortages and surpluses, especially of labour; and
l Changes in aggregate demand, whether anticipated or unanticipated, have their greatest short-run effect on real output and employment, not on prices. Keynesians believe that, because prices are somewhat rigid, fluctuations in any component of spending — consumption, investment, or state expenditures—cause output to change.
If state spending increases, for example, and all other spending components remain constant, then output will increase. (This description of Keynesian economics is summarised from the article titled What is Keynesian Economics?, by economists Sarwat Jahan, Chris Papageorgiou and Ahmed Saber Mahmud published by the International Monetary Fund (IMF) in 2014.)
Keynes emphasised the need for full employment, and held that free markets would not provide this, as they were based on the need for competitive and low wages: this meant that a large number of unemployed would be retained and they would be willing to work for very low wages, bringing down the cost of labour to the benefit of the capitalists.
But the Western 2007-2008 crisis also showed that Keynesian theory had to include the role of the financial system. Keynesian economists are rectifying that omission by integrating the real and financial sectors of the economy.
Zimbabwe used the Rhodesian economic model faithfully in the first decade, but then switched suddenly to the Esap model in the second decade. Retrospectively, the Rhodesian model, despite its limitations, would have at least enabled the economy to survive.
The Rhodesian economy and industrial systems had stagnated during the war period of the 1960s and 1970s. United National sanctions proved a serious challenge. The escalation of the war by the freedom fighters of Zanla and Zpra ended up with the call-up of all able European men. The economy was also handicapped by the lower technological and managerial levels of industrialists, stemming from the fact that they were denied higher levels of academic and technological education.
Nevertheless, this period marked a breakthrough in industries, which catered adequately for the small settler population through import substitution. Rhodesia emerged from a primary-based economy to one where the manufacturing industries played a significant role.
The post-Independence state did not prioritise the modernisation of these European-owned industries, believing instead in the Esap doctrine that international competition would force them to upgrade or die. Most of them died, and were replaced by African-owned import companies. Before Esap, Zimbabwe was able to feed itself; after the structural adjustment programme, it had to import most of its food.
Chung was a secondary school teacher in the townships (1963-1968); lecturer in polytechnics and university (1968-1975); teacher trainer in the liberation struggle (1976-1979); civil servant (1980-1987); former minister of education (1988-1993); UN civil servant (1994-2003). These weekly New Perspectives articles are coordinated by Lovemore Kadenge, immediate past president of the Zimbabwe Economics Society (ZES) . email email@example.com and Cell +263 772 382 852