ZIMBABWE:%20WHERE%20TO%20NOW?

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ZIMBABWE WHERE TO NOW?

• Tony Hawkins
• Graduate School of Management University of
  Zimbabwe

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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 Sub-Saharan standards,
  which are dismal.

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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.

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PEAKS AND TROUGHS
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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.

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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)

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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.

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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.

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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.

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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.

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ZIMBABWE 2008
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GDP GROWTH
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Agricultural Output (1990 prices)
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Manufacturing Value-Added
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Formal employment
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Mining Output (1990 prices)
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Real wages
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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.

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

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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.

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THE POLITICAL ECONOMY OF RECOVERY
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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.

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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.

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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.

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STRUCTURAL CHANGE

• 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

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CHANGE - TWO

1. Consumption patterns
2. Market segments
3. Collapse of savings and investment
4. The sectoral structure of exports and imports
5. The nature of production functions, and
6. The impact of globalization

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THE NEW ECONOMY
Enhanced Role Partially supplanting
Mining Agriculture and Manufacturing
Distribution Trade Manufacturing
Telecoms, finance, real estate Tourism
Public Sector Private Sector
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THE NEW ECONOMY
Enhanced Role Partially supplanting
Informal sector Formal economy
Foreign Trade Domestic output
Financial investment Real Investment
SMEs and subsistence farming Large formal firms and farms
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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.

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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

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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 well-developed middle class
  so crucial to sustained economic development.

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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 long-term
  implications for the country and the economy.

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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.

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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.

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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.

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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 selectively-applied law and
  order.

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(a) STATE CAPTURE

• Four critical aspects of this mismatch stand out
• 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.

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(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.

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• 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.

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(c) CRONYISM

• 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.

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(d) THE LEADERSHIP VACUUM

• 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.

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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.

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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.

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RECOVERY
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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.

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THREE STAGE PROCESS

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

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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.

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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.

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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,

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• 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.

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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.

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THE FUTURE
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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.

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• 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.

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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.

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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.

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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.

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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
  cross-border, fuel and currency traders find
  suddenly that there are many fewer arbitrage
  opportunities.

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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.

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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.

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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.

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• 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.

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Future Prospects
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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.

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Long Haul
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INVESTMENT AS A RATIO OF GDP
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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 low-technology
  small-scale sector through gradual, slow,
  consolidation to more medium-scale operations.

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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.

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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

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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.

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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. state-dependent,
  rent-seeking) economy mentioned earlier.

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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 aid-dependent community
  reliant on drip-feeding from abroad.

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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.

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SIMPLE POINT

• My point is a simple one.
• Capital without skills, without infrastructure
  and without efficient, well-oiled 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.