ZIMBABWE: WHERE TO NOW?

Tony Hawkins Graduate School of Management University of Zimbabwe

MYTH No. 1

That until 2000, Zimbabwe was one of Sub-Saharan Africas best performing economies. In fact, the countrys long-run growth record is unimpressive, even by SubSaharan standards, which are dismal.

DISMAL GROWTH RECORD

Over the long haul (1965-2008) real per capita incomes have fallen more than 20% meaning that Zimbabweans are no better off today than 50 years ago. The chart tells the story.

PEAKS AND TROUGHS

2500

2000

1500 PCY

1000

500

0 1965 1974 1979 1981 1991 1997 2008est

MYTH No. 2: Land

Zimbabwes precipitous decline was caused by land resettlement. From the late 1980s onwards, it was increasingly apparent that a serious crisis of unfulfilled expectations was developing. Promises made at Independence in 1980 went unmet.

THE 1997 WATERSHED

War veterans payout (Aug 1997) Fast-track land reform (1997) Entry into the DRC war (1998) Withdrawal of IMF/World Bank funding and donor aid (1999) Simba Makoni Monetary Policy (2001)

MYTH No. 3: Resource rich

Zimbabwe is a resource rich country. It is not. It is classified by the World Bank and others as a resource-poor, land-locked economy. Its minerals endowment is diverse, which is not the same as rich relative to Botswana, Zambia, the DRC and SA.

MYTH No. 4: The Regional Bread Basket

At various times in its history, Zimbabwe has had maize surpluses that were exported regionally. Bu alongside SA (1.5 million tonnes this year), its 200 000 tonnes of food exports in a good season was marginal.

MYTH No 5: 1980 Revisited

That 2009 will be a reprise of 1980 when at independence the economy rebounded strongly. The contrast between the two situations is stark. Then the incoming government inherited a well-managed, diverse economy with strong entrepreneurial and infrastructural base.

TOUGHER TASK

A solid platform was in place, from which there could be a strong economic But in 2009, after ten years of continuous, unprecedented peace time economic and social decline, recovery will be a much lengthier process.

ZIMBABWE 2008

GDP GROWTH
15 10 5 0 -5 -10 -15
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Percentage per annum

Agricultural Output (1990 prices)

5500 5000 4500 4000 3500 3000 2500 2000 1500
Z$ (1990)

19 85 19 90 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 f

Manufacturing Value-Added
5500 5000 4500 4000 3500 3000 2500 2000 1500
Z$ (1990)

19 85 19 90 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 f

1000

1100

1200

1300

1400

700

800

900

Formal employment

Employment (000)

1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Mining Output (1990 prices)

1100 1000 900 800 700 600 500
19 85 19 90 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07

Value-added

Real wages
8000 7000 6000 5000 4000 3000 2000 1000 0

Z$ (1990)

19 85 19 90 19 95 20 00 20 01 20 02 20 03 20 04 20 05 -e st

INFLATION

Inflation has escalated from 7 250% when the price freeze was launched a year ago to 100 000% in January and 11.2 million percent in June 2008. No-one believes the current estimate but then neither does anyone KNOW what a realistic number is.

There is an enormous range of guestimates from 15 million to 30 million percent. None is accurate because no-one is measuring accurately

INCOMPLETE PICTURE

While the graphs and inflation data capture the narrowly economic dimension of the countrys regression, the picture they convey is incomplete. They do not capture the institutional and qualitative elements, nor the political economy of Zimbabwes decline.

THE POLITICAL ECONOMY OF RECOVERY

LEFT OUT IN THE COLD

The starting point is that the past is no guide to the future. Technology, policy, the world and the region have moved on, while Zimbabwe, left out in the cold, has regressed.

NEW BALL GAME

Far-reaching structural change has taken place not just in Zimbabwe, but also in the global and regional economies. Growth models that worked in the past no longer apply. The country is not in the bust phase of a a normal business cycle.

SEISMIC CHANGE

Optimists believe that when the politics normalize, Zimbabwe will revert seamlessly to the mostly unsuccessful growth path of the 1990s. That is wrong - the country has undergone seismic change - rapid structural transformation across several different dimensions.

STRUCTURAL CHANGE

1. 2. 3. 4.

Since the decline started in 1999, long-run changes in the economic landscape include: Demographics Sectoral structure of output De-industrialization The balance between the formal and informal economies

CHANGE - TWO
5. 6. 7. 8. Consumption patterns Market segments Collapse of savings and investment The sectoral structure of exports and imports 9. The nature of production functions, and 10.The impact of globalization

THE NEW ECONOMY

Enhanced Role Mining Distribution &Trade Telecoms, finance, real estate Public Sector Partially supplanting Agriculture and Manufacturing Manufacturing Tourism Private Sector

THE NEW ECONOMY

Enhanced Role Partially supplanting

Informal sector

Formal economy

Foreign Trade
Financial investment SMEs and subsistence farming

Domestic output
Real Investment

Large formal firms and farms

NO GOING BACK

Seismic change means that the future will not be like the past there is no going back.
The post-Mugabe, post-Zanu-PF economy will be very different from the economy of the late 1990s.

1. NEW BUSINESS MODEL

For a start, Zimbabwe will have to develop a new business model The driver of the old economy commercial agriculture will not regain its predominance Nor will manufacturing

2. MARKET SEGMENT SHIFT

A feature of Zimbabwes decline has been the shift in income and wealth from poor to rich and the associated near-elimination of the middle class. This is a tragedy because one of Zimbabwes strengths was a welldeveloped middle class so crucial to sustained economic development.

3. BRAIN DRAIN

The middle-class professionals, teachers, doctors, nurses, public servants, parastatal managers has been forced by inflation either into the low-income group, or into emigration. The brain-drain will have serious longterm implications for the country and the economy.

4. SKILLS REGENERATION

Often overlooked too is the fact that Zimbabwes skills-regenerative capacity has declined. The capacity of educational institutions at all levels to fill the brain-drain gap is minimal.

5. REBUILDING INSTITUTIONS

A major part of the explanation for this is the fact that teachers, lecturers, trainers are the mainstay of the no longer existent middle class. Destroying institutions is simple. Rebuilding them is not.

TIP OF THE ICEBERG

In recent years, Zimbabwe has relied on the international community to help feed a country that 10 years ago was a net exporter of food and agricultural produce. This is merely the tip of the iceberg the start of a protracted process of donor dependence that will last for decades.

6. MISMATCH

In Zimbabwe too, as elsewhere in Africa, there is a striking mismatch between governments demonstrable economic, managerial and administrative incompetence, and Its ability to maintain an iron grip in respect of security and selectivelyapplied law and order.

(a) STATE CAPTURE

Four critical aspects of this mismatch stand out: 1. Zimbabwe today is a classic captured state Captured by a political elite determined to hold on to power regardless of the cost to the economy and to the population.

(b) The politicised economy

2. The system, the economy, works for the elite, as a a milch cow, that is the means to the end of power retention. The economys function is to finance the states unwieldy, costly and increasingly inefficient bureaucracy.

While simultaneously providing opportunities for rent-seeking access for the elite to free land, to cheap fuel, to subsidized bank loans and foreign exchange. Like many economies in the throes of steep decline, the poorer the economy the greater the number of SUVs, Mercs and BMWs.

(c) CRONYISM
3. State capture goes hand in hand with dependency. The command economy has become a patronage system in which it is increasingly difficult for formal businesses to survive without the right connections.

(d) THE LEADERSHIP VACUUM

4. The fourth element to the mismatch is that between a government led by strong leaders on the one hand and the leaderless vacuum of business, agriculture and mining, on the other. Businesses are locked into the system.

100% EMPOWERMENT

This reality is fundamental to the empowerment and indigenization legislation. Businesses that dont play ball with the state risk being targeted as strategic enterprises that must sell 51% of their shares to indigenous Zimbabweans.

THE PREDATORY STATE

On Tuesday President Mugabe himself publicly acknowledged that his governments policies had created a predatory state. Corruption imposes a huge cost burden on the conduct of business .. efforts to revive the countrys economy could remain a pipedream unless supported by stern and decisive action to eradicate the scourge of corruption, which has now reached alarming levels.

RECOVERY

Economics and Institutions

Economic development is more about institutions than policies. Strong institutions can withstand poor policies and bad leaders, but once the institutions are corrupted and destroyed, as in Zimbabwe, the development challenge is much more formidable.

THREE STAGE PROCESS

Recovery will be a 3-stage process: 1. A short-term (2 years) stabilisation programme 2. Medium-term (2 to 5 years) reforms, and 3. Longer-run structural reforms.

BILATERALS CRUCIAL

An effective stabilisation programme is contingent upon re-engagement with the international community. Because the Bretton Woods institutions are likely to require a 6-month Shadow Programme (SMP) before disbursing assistance, initial support will have to come from bilaterals.

POLITICAL PREQUISITE

In effect, this will mean the UK, the EU and the US with backing from Japan, Canada and Australia. Most of these not all the EU can be expected to refuse to fund a rescue package for a government in which Mugabe and Zanu-PF are still influential or powerful players.

STABILISATION

Key elements of stabilisation will be: 1. A draconian fiscal/monetary package designed to bring inflation down to manageable levels as quickly as possible. 2. Interest rate, exchange rate, exchange control and price liberalization,

3. Seek foreign aid to restructure the domestic debt, while negotiating a debt-forgiveness package for foreign debt. 4. Immediate liberalization of food and agricultural markets, while seeking emergency food aid and agricultural inputs for 2009/10.

STRUCTURAL REFORMS
Central Bank independence Restructuring the parastatal sector currently as much as 40% of GDP including privatization. Land Commission to Repeal the Indigenization and Economic Empowerment Act.

THE FUTURE

TWO REALITIES
Whoever comes out on top in the current stalled negotiations will have to take drastic, radical measures along the lines just indicated to turn the economy around.

He will have very little leg-room the donors/lenders will impose tough conditions. The electorate wants a quick fix, but the greater the pressure for this, the greater the likelihood that the administration will seek soft options.

INFLATION

The immediate priority will be reducing inflation. That will require substantial foreign funding of both the budget and the balance-of-payments. Fortunately, successful and that word is key anti-inflationary policies work remarkably quickly.

HOW LONG?

But from so high a rate as 20 million percent (or worse) the dislocations are bound to be traumatic and the process certain to take longer. Zimbabwe is likely to have hyperinflationary conditions inflation of over 50% monthly through 2009, possibly even into 2010.

PROVIDED..?

Any dilution of the anti-inflation package for social or political reasons, which is very likely with a weak, coalition government will just prolong the agony and delay the recovery. Clearly much will depend on politics on the government being able to win over and maintain popular support.

INFORMAL SECTOR

Recovery will be constrained by the huge reduction in public spending, allied with a tighter monetary stance. This will be compounded by an immediate, drastic contraction of informal sector activities as crossborder, fuel and currency traders find suddenly that there are many fewer arbitrage opportunities.

SEASONAL FACTORS

The output recovery will be delayed also because with farm output down by as much as a third for crops like maize, there is unlikely to be an upswing much before the second quarter of 2009.

UPSIDE
On the upside inflows of foreign aid balance of payments and budgetary assistance will ease the forex bottleneck. Imports of fuel, food and electricity will increase, and Exports will recover as inputs become available.

INFLATION WILL BE DECISIVE

Over the next 3 (possibly even 5) years the Zimbabwe dollar will drift lower because inflation will remain way above the global average. What happens in the medium-term will depend on whether inflation gets stuck on a plateau of 25% or so, or falls under 10%.

Many in the diaspora are not going to return any time soon, if at all. There will be a heavy price to pay in terms of neglected investment in infrastructure and social services, not to mention the ravages of hyperinflation and massive domestic and international debt burdens.

Future Prospects

OUTPUT

Strong rebound as spare capacity is brought back into production But severe supplyside constraints, mostly infrastructure and skills, as well as forex Take 10 - 12 years (minimum) to regain 1998 per capita income levels and 15 years plus to get back to where the economy would have been without the downturn of the last decade.

Long Haul
2600 2400 2200 2000 1800 1600 1400 1200 1000
19 85 19 95 19 97 19 99 20 01 20 03 20 05 20 07 20 09 20 11 20 13 20 15 20 17 20 19

Income per head

INVESTMENT AS A RATIO OF GDP

2001-06 96-2000 90-95 85-89 80-84 75-79 70-74

% of GDP

10

15

20

25

GROWTH ENGINES

The main growth engines are likely to be mining, construction, tourism and services (real estate, banking, retail). Agriculture is likely to evolve over a long period from an inefficient lowtechnology small-scale sector through gradual, slow, consolidation to more medium-scale operations.

FARMERS

Some white farmers will come back, but few as investors, and most as managers and professionals. Having been badly burned once, they are not going to risk their own money again.

INDUSTRY

Manufacturing is likely to recover slowly but unlikely to ever get back to contributing more than 16% to 18% of GDP (as against 23% in 1990s) Substantial take-over activity likely mostly by SA and Asian companies rather than traditional Western firms

SOFT INFRASTRUCURE

The real bottleneck is going to be soft infrastructure. The skills will not come back quickly and, in many cases, not at all. We have lost the capability to regenerate skills educational institutions, trainers, lecturers.

THE MIDDLE CLASS IS VITAL

Most importantly because the middle class is the platform from which property-owning capitalists that save and invest can kickstart the economy. Take that away, and you are left with the communalized (i.e. statedependent, rent-seeking) economy mentioned earlier.

TOO EASY

It is just too easy to believe that foreign aid and foreign investors will somehow close the gap They wont. Billions of dollars of aid do not build a sound institutional base but an aiddependent community reliant on dripfeeding from abroad.

ABSORPTION

Economies that do not have that strong institutional base are unable to absorb aid and investment efficiently. They become increasingly reliant on expats who take decisions that should be made by the indigenous people.

SIMPLE POINT

My point is a simple one. Capital without skills, without infrastructure and without efficient, welloiled institutions such as an efficient and incorruptible civil service, will have a very low rate of return. If you dont believe me, just look around Africa.