Transcript DDS_Zimbabwe

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 Africa’s best performing
economies.
In fact, the country’s 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



Zimbabwe’s 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
Percentage per annum
5
0
-5
-10
-15
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Agricultural Output (1990 prices)
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
5500
5000
4500
4000
3500
3000
2500
2000
1500
Manufacturing Value-Added
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
5500
5000
4500
4000
3500
3000
2500
2000
1500
900
1980
1985
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Formal employment
1400
1300
1200
1100
1000
Employment (000)
800
700
Mining Output (1990 prices)
1100
1000
900
800
700
Value-added
600
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
500
Real wages
Z$
(1990)
19
85
19
90
19
95
20
00
20
01
20
02
20
03
20
04
20
05
-e
st
8000
7000
6000
5000
4000
3000
2000
1000
0
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 country’s regression,
the picture they convey is incomplete.
They do not capture the institutional and
qualitative elements, nor the political
economy of Zimbabwe’s decline.
THE POLITICAL
ECONOMY OF
RECOVERY
LEFT OUT IN THE COLD

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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

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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
Partially supplanting
Mining
Agriculture and
Manufacturing
Manufacturing
Distribution &Trade
Telecoms, finance,
real estate
Tourism
Public Sector
Private Sector
THE “NEW” ECONOMY
Enhanced Role
Partially supplanting
Informal sector
Formal economy
Foreign Trade
Domestic output
“Financial”
investment
SMEs and
subsistence farming
“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 Zimbabwe’s 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
Zimbabwe’s 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
Zimbabwe’s 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 government’s 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 economy’s function is to finance
the state’s 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 don’t 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 government’s policies
had created a predatory state.
“Corruption imposes a huge cost burden on the
conduct of business .. efforts to revive the
country’s 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
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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
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
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
Income per head
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
1000
INVESTMENT AS A
RATIO OF GDP
% of GDP
2001-06
96-2000
90-95
85-89
80-84
75-79
70-74
0
5
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. state-dependent,
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 won’t.
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 don’t believe me, just look around
Africa.