The high cost of schizophrenia

Anver Versi

If ever a country’s economy can be described as having a personality disorder, then surely it must apply to Zimbabwe. From independence, its well-developed commercial farming and manufacturing sectors, as well as rich mineral deposits, led to years of growth and expansion and promised an ever-brighter future. However, Anver Versi looks at how an incredible disparity of wealth, an endless cycle of boom and bust and confused government policy have undermined economic progress.

At the time of independence in 1980, Zimbabwe inherited, courtesy of the ‘self-sufficiency’ drive by the previous embattled Ian Smith regime, one of the best-developed economic superstructures in Africa. The new majority government led by Robert Mugabe capitalised on the country’s national assets – a sophisticated commercial farming sector exporting some of the best tobacco and cotton in the world; a strong manufacturing sector; and a pile of very high value minerals such as gold, diamonds and platinum. In addition, with the thundering Victoria Falls, the mystical Matobo Hills, the thrilling rapids of the Zambezi River and a treasure house of wild flora and fauna, Zimbabwe was a tourism destination made in heaven.

Released from the international sanctions imposed on the Smith regime, Zimbabwe’s first decade after independence was a golden period with growth reaching 10 percent in some years. There was a rapid roll-out of education and health facilities for the majority, and an expanded government provided decent jobs for blacks who had previously been shut out of the mainstream.

But there was an obvious canker at the heart of the progress – a tiny minority of less than 5,000 white families controlled 75 percent of the most productive land in the country. Even by 1991, 50 percent of the population received less than 15 percent of total annual incomes and about 15 percent of total consumption, while the richest 3 percent of the population received 30 percent of total incomes and were responsible for 30 percent of total consumption.

Disparity of such magnitude could not be contained by the government’s feeble attempts to ‘take back the economy’ by adding to its list of nationalised industries or spouting quasi-socialist rhetoric. If anything, both measures led to gross inefficiencies and, ironically, to the stamping down on promising shoots of black private sector enterprise.

Throughout the 1990s, the economy remained vulnerable to the vagaries of the climate, leading to boom and bust cycles. A series of droughts and the sudden decimation of the manufacturing sector when the African National Congress (ANC) government in South Africa cancelled some of its favourable trade agreements with Zimbabwe leading to mass hardship for the majority. When the British government washed its hands of providing compensation for displaced white farmers, the die was cast.

The events that followed have been well catalogued and the rights and wrongs of the various parties involved will continue to be argued for some time to come. The net result was one of the most rapid and catastrophic falls in the economic fortunes of any country in the world.

According to the African Development Bank (AfDB), between 2000 and 2008, GPD declined by over 50 percent. Per capita income fell sharply from about $644 in 1990 to $433 in 2006, and to an estimated $338 in 2008. The poverty rate increased from 42 percent in 1995 to 63 percent in 2003, and is currently estimated to be over 70 percent. Some estimates put unemployment at 80 percent, and Zimbabwean commentators say that even those who have been fortunate enough to obtain jobs cannot make ends meet without borrowing.

Ironically, inequality, the reduction of which was the ostensible rationale behind the land redistribution policy, has increased. The Gini coefficient, which measures income disparity, was estimated at 57 percent, one of the highest in the world in 2003.

All of the country’s major economic pillars – agriculture, mining, manufacturing and services – were dealt hammer blows. Agriculture is still the most important economic activity in the country as it provides a livelihood for the majority and produces the bulk of the nation’s food and raw materials for its industries. In 2001, according to the AfDB, the share of agriculture in GDP was around 22 percent; it fell to 10 percent in 2008, while its value-added component shrank by 66 percent.

The severe contraction of the agricultural sector had ripple effects throughout the economy. There have always been strong linkages between the agricultural and manufacturing sectors, with the former supplying a sizeable proportion of the of the raw materials required in the industrial sector, as well as being a consumer of a large portion of industrial sector output such as fertilisers, chemicals, stock feed, machinery, spare parts and liquid fuels.

The devastation of the agricultural sector, as well as the political unrest and the violence often associated with it, has led to hundreds of thousands of able-bodied Zimbabweans fleeing to neighbouring countries. As a consequence, small-scale farms have been neglected while commercial farms, ‘liberated’ from whites, have more often than not been mismanaged by inexperienced new owners.

There has been a rally of sorts since the setting up of an inclusive government in 2009, but heavy investment is required to bring the sector back to its pre-2000 performance levels.

There has been a similarly gloomy picture for the mining sector, which at one time contributed 8 percent to the economy. Its share of GPD in 2008 was less than 3 percent. Between 1999 and 2008, the cumulative contraction of the industry amounted to 81 percent. Services fared no better during the ‘lost decade’.

What were the causes of the dramatic ‘riches to rags’ saga of the Zimbabwean economy? Several factors played a part, but perhaps the leading role was taken by the government’s schizophrenic attitude alternating between a socialist command economy on the one hand and a grudging acknowledgement of the private sector on the other. This led to unsustainable labour wage policies, an unrealistic tax regime, especially in the mining sector, draconian foreign exchange regulations that encouraged massive flight capital, and more recently, a confused and confusing empowerment policy that has more or less put paid to foreign direct investment.

While these were serious issues, in themselves they would not have been fatal. Several developing countries, including African ones, have endured worse and come through to register healthy growth.

What delivered the coup de grâce was the confrontational attitude adopted by Mugabe in the wake of the turmoil over the land redistribution. Even at the age of 88, Mugabe remains perhaps the most witty and articulate African leader, and in the early period after independence, his diplomatic skills in defusing what could have been a volatile clash between black and white led to him being nominated for the Nobel Peace Prize and receiving a knighthood from the Queen.

But 20 years later, caught in the crunch between an obdurate community of white farmers and a restive movement by the former freedom fighters and other landless, the gloves were off and Mugabe lashed out at the West in general and Britain in particular.

The upshot was the most punitive set of sanctions ever imposed on any African country. Mugabe’s earlier disastrous military foray into the Democratic Republic of Congo had already alienated the World Bank and the International Monetary Fund (IMF) who withdrew their support, and when the full brunt of the sanctions, masquerading as ‘personal sanctions’ fell on the country, all financial access to the outside world completely dried up.

To maintain some liquidity, the central bank started printing money, with the inevitable result of galloping inflation. By the end of 2008, hyperinflation had reached the stratospheric regions of 500 billion percent! As one Zimbabwean put it, “We are the only country in history with millions of starving billionaires.” He could have said “trillionaires” when the country printed its one trillion dollar notes.

This was the nadir of the country’s economic and social descent – only a full-scale civil war could have been worse. That catastrophe seemed imminent as violence between the ruling ZANU PF party and the opposition Movement for Democratic Change (MDC) led by Morgan Tsvangirai intensified in the run-up to the 2008 national and presidential elections. Eventually, wiser counsel prevailed and an inclusive government, with Tsvangirai as prime minister and Mugabe as president was formed in 2009. The relative political calm allowed the opening of a small window to begin the daunting process of a return to economic normality.

The first pragmatic move by the new government was to dump the worthless Zimbabwe dollar and adopt a basket of currencies, including the Botswana pula, the South African rand and the US dollar. The effect was immediate. The downward slide was arrested as prices stabilised. With the MDC’s Tendai Biti appointed as finance minister, a measure of fiscal discipline was introduced. Inflation fell to -7.7 percent in December 2009 before moving upwards again the following two years to around 5 percent. Biti expects it will remain within that margin in 2013.

Starting from a very low level (-14 percent in 2008), the economy grew 6 percent in 2009, 8 percent in 2010 and around 7 percent in 2011. Biti had projected a growth of around 10 percent for 2012 but revised the figure to a more realistic 5 percent when the revenues from mining, expected to be the driving engine for growth, were lower than anticipated. The sector registered a growth of 25 percent instead of the 33 percent projected earlier.

Agriculture, manufacture and services, particularly in the IT sector, all registered positive growth, although Zimbabwe still has to import food; its current trade balance is in deficit, with imports constituting 9 percent of GDP, and the import/export ratio is pegged at 3:1. The domestic account balance is in deficit at 29 percent of GDP. “We depend on a false accumulation model where we think we can create wealth by extracting and importing,” Biti said. “The loot committee mentality is still with us in this present day.”

The biggest hurdle for sustained and rapid growth, according to Biti, is the debt overhang. “Zimbabwe remains in debt distress,” he said, with total external debt estimated at $10.7 billion (113.5 percent of GDP) at the end of 2011.

The World Bank and the IMF have resumed relations with Zimbabwe, but new money from these institutions and other international donors will only be forthcoming when the outstanding debts have been settled or an agreement on the process reached. The governor of the central bank, Gideon Gono, has proposed the Zimbabwe Accelerated Arrears Clearance, Debt and Development Strategy (ZAADDS), based on negotiations with donors and other creditors, as the way forward.

Zimbabwe urgently needs large lashings of foreign capital if its mining, manufacturing and agricultural sectors are to regain anything of their former vigour. But the schizophrenic nature of the economic management has become even more pronounced with the different components of the inclusive government pulling in different directions.

While the finance minister is looking for at least $6 billion to reinvigorate the mining sector, President Mugabe seems determined to scare away all new investors with the empowerment policy requiring foreign companies to indigenise 51 percent of their shares. Two of the largest platinum mining firms have already done so but many others have shied away. The stricture does not seem to apply to Chinese mining companies who have been forming an increasing number of joint ventures. Foreign direct investment (FDI) inflows have been a paltry $125 million.

Zimbabwe has embarked on the long trek back to health, but the economy remains weak and fragile. It will take careful nursing and help and support from outside if it is to make the transition. The fundamentals are good but unless the leadership can reconcile its Jekyll and Hyde personalities, the biggest harm can come from inside.

About the author:

Anver Versi is Editor of London-based African Business and African Banker magazines

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