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Causes of low domestic investment

OUR domestic investment (gross fixed capital formation) in proportion to our annual gross domestic product (GDP) is extremely low in comparison to the world average of 20% and to our regional peers. This is concerning — without significant domestic investment, it is not possible to attain an upper middle income status as envisioned by Zimbabwe’s Vision 2030.

The Brett Chulu Column

Post-Government of National Unity (GNU), our country has been investing domestically an average of 9% of its annual income (GDP). Historically, our country’s habit of domestic investment in proportion to our national annual income (GDP) has risen and fallen like a wave. Since 1960, five distinct troughs and crests are discernible. Between 1960 and 1975, our domestic investment peaked at 20,2% (1960) and 21,5% (1975) of annual national income, with a low point of 10,6% of annual income in 1966.

The next peak after 1975 was in 1995, with 24,6% of our national income allocated to domestic investment. Between 1975 and 1995 (excluding the peaks), average domestic investment in relation to national income was 15,2%.

The next peak after 1995 was recorded in 1998. In 1998, 20,6% of national income went to domestic investment.

The next peak was in 2010, two years into the GNU. In that year, 17,0% of our national income was allocated towards domestic investment. Between 1998 and 2010, average annual domestic investment (excluding 1998 and 2010), as a fraction of our national income, was 7,3%. This average of 7,3% masks the extreme lows of 3,2% in 2005 and 2,0% in 2008.

We now compare our current domestic investment rates with our regional peers. Botswana allocates 32% of its national income towards domestic investment. Tanzania sits at 35%. Zambia spends 35% of its annual income on domestic investment. Ethiopia channels 38% of its annual income towards domestic investment. These African countries have experienced good and consistent real economic growth rates. They spend four times their annual national income as domestic investment as compared to Zimbabwe.

We need to look at the gross national savings rates of these countries in comparison to Zimbabwe.

Gross national savings are savings from households, government and corporates put together. Zimbabwe has a gross national savings rate of 23%. Botswana has a gross national savings rate of 40%.

Botswana utilises 80% of its national savings towards domestic investment. Zambia’s gross national savings rate is 38% of national income.
Zambia utilises 92% of its national savings in domestic investment.

Tanzania has a gross national savings rate of 25%; she utilises 140% of her annual national savings in domestic investment — she draws down from current and past national savings.
Ethiopia has a gross national savings rate of 32% of national income; she utilises 118% of her annual national annual savings towards domestic investment.

Zimbabwe utilises 39% of her annual national savings towards domestic investment. There is a sizeable pool of investible surplus in Zimbabwe that is not finding its way into domestic investment. It is clear from the data, at face value, that Zimbabwe has the potential to drive sustainable good economic growth from savings generated domestically. Zimbabwe is positioned more favourably than most of its regional peers in terms of economic growth potential. Botswana and Zambia, with much less diversified economies, have been enjoying good economic growth rates for over a decade. Tanzania’s agricultural sector contributes 25% to national income.

Zimbabwe has a very high potential in agriculture. Zimbabwe, starting from the UDI period has had its economy driven mainly by agriculture, mining and manufacturing. Agriculture and manufacturing have fallen in terms of their contribution to national income.

The key question that needs exploration is: why is 61% of Zimbabwe’s national savings not finding its way into domestic investment? A second question is: why is there a disproportionate emphasis on foreign investment to resuscitate our economy when our own national savings are not being exploited for domestic investment?

We need to look to Zimbabwe’s economic history for possible answers. We start with the UDI period. To bust sanctions, the Rhodesian government used multi-national companies as the sanctions-busting rallying point.

The Rhodesian government offered low taxation as well as guaranteeing low wages, offering the affiliates of multi-national companies’ immense opportunities for relatively big profits. Thus the Rhodesian economy under sanctions was subtly linked to multi-nationals through their affiliates in South Africa who in turn had subsidiaries in Rhodesia. An industrial-financial-banking-multi-nationalcomplex was formed, with multi-national companies having significant indirect and shareholding in Rhodesia’s commercial banking, merchant banking, building societies, insurance and discount houses. The financial-banking complex was architected to serve the interests of multinational companies that dominated agriculture, mining and manufacturing. Expensive capital goods (machinery and equipment) that modernised manufacturing, agriculture and mining in the UDI period were sourced via multinational networks. This was a critical strategic play — Rhodesia did not have the technical and financial capacity to underwrite the huge outlays to bring in the state-of-the-art machinery and equipment.

The Rhodesian government made sure the huge profits they allowed multinational companies to reap did not leave the country; in that regard restrictions on external capital flows and tight foreign exchange controls were put in place.

This resulted in huge national savings multinational corporations would tap into for continual domestic investment. It is clear, UDI economic growth was largely driven by domestic investment. Even with multinational companies devising stratagems to game capital controls via under-invoicing exports, over-invoicing imports and creation of management fees, there was still a huge pool of national savings. Let us now contrast the UDI economic institutions with our current economic architecture.

Let us start with manufacturing. Heavy investment in modern machinery is needed. Zimbabwe’s financial system has no capacity to underwrite these capital outlays.

The Rhodesians, under the UDI, had multinational connections to underwrite the capital requirements. Zimbabwe’s sovereign risk remains elevated. Foreign direct investment (FDI) can potentially address the capital goods underwriting gap but Zimbabwe ranks lowly as an FDI destination due to perceived country risk. We turn to agriculture. The elephant in the room is security of property rights. Farming land rights are not transferrable.

During the UDI multinationals and other domestic investors had secure land rights that gave confidence to investors to continually invest in the agriculture sector. Without secure land tenure, emergent farmers are reluctant to invest their personal resources in fixed infrastructure. Banks are not willing to lend long-term to domestic agricultural investors.

The picture is clearer: without external support, manufacturing cannot meaningfully tap into our national savings for domestic investment. Without secure land rights, domestic investors have neither the incentive to meaningfully invest domestically nor the means to tap into our collective national savings.

With under-investment in agriculture and manufacturing we cannot expect sustainable economic growth.

We can now confidently answer the two questions we posed. Inability to normalise relations with external financial stakeholders and lack of secure property rights have a huge hand in driving low utilisation of our national domestic savings. This is a key reason government keeps stepping in to finance a key sector like agriculture either directly or through guarantees. Even if we lift agricultural production through our locally developed technologies such as Pfumvudza, we will still face a huge challenge with our manufacturing sector that needs modern technologies developed outside Zimbabwe.

We cannot sustainably grow our economy without normalising international relations.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com.

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