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Zimbabwe's Export Performance: The Impact of the Parallel Market and Governance Factors
International Monetary Fund (IMF)
January 01, 2006

http://www.imf.org/external/pubs/cat/longres.cfm?sk=18744.0

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Introduction
Empirical studies have found that real exchange rate misalignment is negatively related to economic growth (Frenkel and Khan (1990), Cotanni et al. (1990), Edwards (1988)). In particular, Ghura and Grennes (1993) found that different measures of real exchange rate misalignment and its instability have negative effects on the growth rate of real per capita income, exports, and agricultural output as well as on investment for a sample of 33 sub- Saharan African countries including Zimbabwe. Misalignment of the exchange rate means lower profitability in the sectors whose output prices are lowered relative to prices in other sectors. Very often, misalignment takes the form of domestic currency overvaluation, which hurts tradable activities. This affects growth performance adversely since productivity improvements tend to be concentrated in export or import-competing industries. Moreover, distorted exchange rates have negative indirect effects usually referred to as smuggling activities that cause the supply of goods to legal or official markets to fall.

However, all these studies are based on cross-country data. It is possible that differences in the structure of economies, unrelated to real exchange rate misalignment, may explain the crosscountry differences in economic performance. It is therefore important to complement crosscountry studies on the relationship between exchange rate misalignment and economic performance with those using country-specific analyses in order to increase confidence in the estimated relationships.

Zimbabwe’s experience provides a typical example of a country that has pursued inappropriate foreign exchange policies and suffered as result of these policies. Owing to foreign exchange controls in Zimbabwe, there has been always a black market for foreign currencies which is dominated by the U.S. dollar. Before the start of the fast-track land reform in 2000, the official and the black market value of the Zimbabwean dollar were close (about Z$40 per US$1). In 2000 when the violent land reform program started, the black market rate began to deviate from the official rate. As years went by, the black market premium widened to 600 percent at end- 2003. As a result, a heavily managed auction system was in place during January 2004-October 2005. The black market rate, however, continued to depreciate after an initial appreciation.

The increasing incidence of ethnic conflicts and the much-publicized consequences of these conflicts have led economists to make a connection between ethnic diversity and economic phenomena like growth and investment (Easterly and Levine, 1997; Alesina et al., 2003; La Porta et al., 1999). Easterly and Levine (1997) found empirical evidence to support their claim that the very high level of ethnic diversity of countries in Africa is an important contributor to their poor economic performance. La Porta et al. (1999) pointed out that ethnic diversity leads to corruption and low efficiency in governments that expropriate from disadvantaged ethnic groups.

In this context, Zimbabwe initiated a fast-track land reform program to redistribute land from white to black farmers in 2000. The program redistributed—often by use of force—over 80 percent of former commercial farmland, changing radically the racial distribution of access to land. Nine thousand farms were listed for acquisition by end-2004, but few farmers were compensated and many farms remained unallocated to new settlers. The execution of the land reform was accompanied by significant losses in production. Agricultural output declined by 30 percent during 2000-04 since the land reform led to significant losses in the agricultural capital stock and in production, uneven distribution of land and infrastructure, lack of security of tenure, and impoverishment of a large proportion of former farm workers.

Against this background, the purpose of the paper is twofold: it aims to demonstrate empirically that a depreciation of the currency in the black market had a negative effect on exports and that ethnic tensions adversely affected export performance in Zimbabwe.

The paper is structured as follows. Section II presents the evolution of export performance in Zimbabwe. Section III analyses the determinants of export demand. Section IV compares measures of competitiveness with neighboring countries and, in Section V, policy measures are suggested. Data and definitions are reported in an Appendix.

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