Only political change will put the economy back on its feet, writes John Robertson
Like the front-runner in a demolition derby, Zimbabwean President Robert Mugabe has left behind a trail of destruction as he races for the finishing line, frantically trying to avoid being overtaken. Whoever wins, a massive amount of restoration work will have to be undertaken to put the Zimbabwean economy back on its feet.
However, the two major contenders already see the challenges very differently.
Mugabe targeted for destruction some of the country’s most important institutions because they were in his way. He is hardly likely to rebuild them, whereas opposition Movement for Democratic Change leader Morgan Tsvangirai has already given their reconstruction the highest priority.
Confidence was among the earlier casualties. By succumbing to pressures to reward war veterans with gratuities and pensions, Mugabe was happy to reclassify the veterans as mercenaries rather than patriots, and to dip into the population’s pockets to meet the payments.
After empowering the war veterans financially, Mugabe consolidated their support for him by exonerating in advance their delinquent behaviour. Their impunity was confirmed when the state’s protection was withdrawn from farmers as the land invasions started in earnest in March 2000 after the defeat of Mugabe’s constitutional referendum. However, the problems had started earlier when decisions to confiscate land from commercial farmers were formalised in the last quarter of 1997.
The land confiscation notices in December 1997 severely undermined property rights. Effectively, the government had removed commercial farmland from the market. This, plus news of the billions to be paid to war veterans, prompted a run on the country’s foreign reserves, and led to the first collapse of the Zimbabwean dollar, taking it from Z$11 to Z$18 to one United States dollar by the end of 1997.
The attack on property rights brought new investment inflows almost to a halt. Employment and manufacturing output declined, and inflation jumped to almost 30% by mid-1998. Then Mugabe decided to send Zimbabwean troops to the Democratic Republic of Congo. Inevitable inflation and increasing foreign exchange implications caused another Zimbabwe dollar collapse, pushing it from Z$18 to about Z$40 to one US dollar by December 1998.
The government’s response was to take the Zimbabwean dollar out of the market. The exchange rate was fixed at Z$38 to one US dollar in January 1999, but controlled fuel prices caused concern among supplies and led to shortages from the end of 1999. Tourism was badly affected by the fuel shortages, but growing unrest soon had the bigger impact on tourist arrivals.
The exchange rate remained fixed for the 20 months to August 2000, a period spanning the February 2000 referendum and the June 2000 general election. By that time inflation had risen to more than 50%. With production costs rising and revenues held constant, many exporting companies saw profitability shrink and disappear.
Exporters on the brink of closure were saved by the devaluation to Z$50 to one US dollar in August 2000, and the further weakening to Z$55 to one by October 2000, but then the exchange rate was fixed again. It is still Z$55 to one US dollar today. Meanwhile, the inflation rate has increased to 116,7%.
But for the development of an illegal and highly efficient parallel market on which Zimbabwe dollars can be traded for as much as Z$320 to one US dollar, every exporter in the country would have gone bankrupt. As it is, the reduced export revenues, cancelled investment inflows and suspended foreign assistance account for much of the scarcity of foreign exchange, but this became much worse when foreign suppliers became concerned about being paid.
The normally steady inflows of imports on credit became erratic flows that had to be paid for in advance. As the costs of the Congo adventure escalated, billions of dollars had to be diverted to defence from other ministries and the quality of government services, such as health and education, deteriorated sharply.
At high interest rates, debt service costs became a major proportion of the government’s expenditure. In January last year the government realised that the investment climate had been so badly damaged that no other borrowers were competing for the money, so it took interest rates out of the market as well, setting their level at about 12%. The government later boasted that it had saved Z$53-billion in interest payments by this strategy, but omitted to mention that this had been at the expense of current and future pensioners.
The same low interest rates led to speculative deals and more inflation. With cheap loans, speculators bought scarce foreign exchange to import goods that would hold their values. This drove the exchange rate to Z$400 to one US dollar by October last year, prompting the government to launch price controls into the retail sector.
By October last year signs of a serious food shortage were evident, but low prices were imposed for maize. The government reestablished its marketing board’s buying and selling monopoly for maize and wheat, taking these products out of the market as well. At the lower price chosen to suit consumers, growers were badly discouraged and a very small crop was planted.
Zimbabwe’s food crisis today is the result of farm disruptions at the end of 2000 and last year’s small harvests. The small crops now on the lands, worsened by drought, will result in even more serious scarcities later this year. At least a million tonnes of maize must be imported in the second half of this year. With no money to pay for it, the country has never been in greater need of international support, but those with the ability to help feel that Zimbabwe has never been less deserving.
Only one thing can change that uncompromising view, which is that the man who engineered one of the most spectacular economic collapses in history should not be re-elected. If the electorate displays the backbone needed to rid itself of the man widely regarded as a tyrant, it is likely that generous support for the needed reconstruction will be readily but conditionally offered.
Great difficulties will be encountered in trying to unravel the sequence of events. Farm occupations and the disruptions to production that link into every other commercial and industrial sector will be particularly hard to reverse so hard that, if he wins, Mugabe won’t even try
He is far more likely to concentrate on immediate issues by pursuing his redistribution exercise, nationalising and giving away more productive assets to a powerful few. He will leave the recovery challenge to future generations, leaving the vast majority of today’s population in a state of traumatised subjugation. Only equally despotic friends will have anything to do with him while he plays the final cards of his political career.
Tsvangirai, on the other hand, will be offered help if he wins, particularly as his first objective is to restore law and order. He then plans to restore property rights and re-establish the market for land. He will also place back into the market the exchange rate, the interest rates, the food crops and the rest of the country’s traded goods and services.
As many of the remaining problems will be self-correcting under the right policies, Zimbabwe could quickly recover. It could soon improve upon its former status as a dependable supplier, a good customer and an attractive investment and tourist destination.
John Robertson is an independent economic consultant in Zimbabwe