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Zimbabwe faces battle for economic revival - Part 1 of 5
Darren Taylor, VOA News
September 29, 2008

http://voanews.com/english/Africa/Zimbabwe-faces-Battle-for-Economic-Revival-PART-1-of-5.cfm

In terms of Zimbabwe's power-sharing deal, the parties have agreed to prioritize the restoration of economic stability and growth in the country. The southern African nation's financial sector is ravaged. Its official inflation rate is the highest in the world at 11 million per cent, with unemployment estimated at 80 per cent. Most Zimbabweans are mired in poverty. Shortages of food, fuel, electricity and foreign currency persist. Economists agree that a vibrant economy is non-negotiable for a lasting peace in the country.

Dr. Raymond Gilpin, an economist at the United States Institute of Peace - the USIP - who's originally from Sierra Leone, has conducted intensive research into Zimbabwe's economy, and the consequences of the country's "mind boggling" inflation rate.

"The people of Zimbabwe have to contend with prices that rise practically every minute. You have the curious circumstance there where the moment you make a purchase, it devalues almost immediately. People's money also loses value every minute. If you have savings in Zimbabwe, they're practically worthless," says the Cambridge and Georgetown University-educated financial expert, who's also served as an economist at the World Bank and African Development Bank Group.

Gilpin attributes the sad state of Zimbabwe's economy first and foremost to "two decades of bad economic policies" by President Robert Mugabe's government, which instituted "catastrophic" price controls, fixed exchange rates and harmed mainstays of Zimbabwe's economy, such as agriculture.

Gilpin says the ZANU-PF administration simply spent too much on the wrong things.

A clause in the power-sharing agreement reads, "the parties are committed to working together on a full and comprehensive economic programme to resuscitate Zimbabwe's economy, which will urgently address the issues of production, food security, poverty and unemployment and the challenges of high inflation, interest rates and the exchange rate."

As a result of the deal, the Movement for Democratic Change - MDC - led by Morgan Tsvangirai wants to assume responsibility for reviving Zimbabwe's economy. However, some analysts have concluded that this will be a poisoned chalice for the country's new Prime Minister, given the massive scale of the task ahead.

"It's daunting, to say the least," Gilpin told VOA. "There are problems everywhere."

Mr. Mugabe's government though is balking at permitting Tsvangirai's MDC to take control of key ministries, including that of finance, even though observers are in agreement that ZANU-PF has in recent years presided over economic degradation on a grand scale.

A recent USIP briefing moderated by Gilpin concluded that the Mugabe government's "failure to uphold the rule of law created chaos and uncertainty, which eroded business confidence, led to the misallocation of resources and depressed economic output."

Corruption burgeoned under Mugabe, says Gilpin, and was evident for example in allocation of prime crop land confiscated from white farmers to ruling party members and allies with little or no experience in agriculture.

Rampant cronyism

The USIP briefing found that politics and economics were "very closely intertwined in Zimbabwe . . . . Bad governance has fostered a culture of impunity and helped reinforce the political and economic muscle of the regime's leadership. This group has become deeply vested in the status quo. They have demonstrated a capacity to do whatever it takes to maintain their privileged positions, which guarantee unfettered access to wealth and power - at the expense of the vast majority of Zimbabweans."

Gilpin says president Mugabe's "very close relationship" with Zimbabwe's armed forces has "exacerbated the fiscal pressures" in the country, as it's resulted in the state spending a lot of money on the security sectors, and reducing spending on sectors such as health, education and job creation.

According to Bernard Harborne, Lead Conflict Specialist at the World Bank, Zimbabwe's military and its leaders have been "major beneficiaries" of government "quasi-fiscal excesses."

"Substantial transfers and subsidies are made to keep them loyal and in check. This fiscal drain has reinforced the regime-focused nature of the military and cultivated a culture of entitlement," Harborne says.

He adds that fiscal reform in Zimbabwe will have "profound ramifications" for the country's armed forces.

Gilpin says the "paradox" in Zimbabwe presently is that certain people in the country are getting rich directly as a result of the chaotic state of the economy.

"Wherever you have economic policies that impose controls on currency and trade, those with access to the levers of power are able to use that for their benefit. They control trade; they impose premiums on currency transactions. Those are the people who are making the most money. The few who have access to political power use that to derive vast economic benefit."

The effect of this, Gilpin explains, is that Zimbabwe's dollar continues to weaken and inflation rises, "meaning that the ordinary Zimbabwean earns less every day for the same amount of work, and their savings - particularly if it's in local currency - is devalued on an ongoing basis."

Foreign investments still pouring in

Yet as the economic situation has progressively worsened for Zimbabwe's citizens, large investments have continued to flow into the country.

"The Zimbabwean economy, back into the mid-1980s, had always been a strong economic regional anchor. As such, a number of large companies have ongoing investment programs in Zimbabwe. A number of the more recent investments are continuation plans by these large companies," Gilpin comments.

In June, Anglo American, one of the largest mining conglomerates in the world, decided to invest a further $400 million in Zimbabwe's platinum mines. The London-based Lonhro mining group is also planning to invest about $66 million in the country this year. But economic observers say it's mainly South African mining operations that have been injecting investments into Zimbabwe.

Gilpin says it's "very difficult to say" if this foreign money has benefited "ordinary" Zimbabweans. "One could hypothesize that at the household level there might be some benefit in terms of employment, in terms of availability to some services provided by large companies."

MDC officials have previously blamed some big international companies for "propping up" the ZANU-PF government with cash, and have said that many of the Mugabe administration's abuses wouldn't have happened without the money provided to it by certain foreign enterprises. The opposition members warned that such firms would suffer consequences in the event of the MDC wielding executive power in Zimbabwe.

But Gilpin says it is "important to distinguish between the excesses of the Mugabe regime and their mismanagement of the economy, and private sector enterprise."

The economist says it's the ZANU-PF administration, and not international big business, that's ultimately to blame for human rights and financial abuses in Zimbabwe.

In addition, he says, "A number of the companies doing business in and business with Zimbabwe do not do business directly with the Zimbabwe regime. To that degree, there has been some degree of welfare benefit to the people."

Innovative methods used to circumvent inflation rate

Gilpin says an informal economy that's sprung up in Zimbabwe as a result of the poor economy has in effect saved the country from complete economic devastation.

"Households and firms have developed mechanisms to go around the frightening inflation rate."

At the USIP briefing, Frank Young, the vice-president of one of the largest international for-profit government and business research and consulting firms, Abt Associates, explained how citizens and businesses had developed "imaginative and extremely agile strategies" to survive because "the Zimbabwean currency has lost value as a medium of exchange."

The barter system has re-emerged in the country, for example.

The briefing concluded: "The failure of financial institutions to attract deposits and provide credit has forced Zimbabweans to adopt mechanisms to avoid the costs and perils of doing business via official channels. The practically worthless currency has been replaced with innovative means of exchange, like petrol coupons and non-perishable groceries. Savings are widely held in US dollars and South African rand. The 'official' economy is irrelevant and a number of informal, barter systems have developed, based on strong community networks. They allow groups to purchase and barter essential commodities (like food and fuel) while hedging against inflation and currency depreciation."

Solutions?

The agreement proposes the creation of a National Economic Council, comprised of members of the different parties, with members of major sectors of the economy, such as manufacturing and mining, to advise government on policy.

However, some economists estimate that, if there's true political and economic reform in Zimbabwe as a result of the power-sharing agreement, it'll take at least 15 years for the country's economy to reach a favorable level.

Gilpin says there are certain steps that need to be taken as soon as possible for this to happen.

"The necessary first step is an answer to the political situation. Policy frameworks have to be completely changed, controls have to be removed; institutions have to be depoliticized."

He points out that the Mugabe government "ran ongoing budget deficits" and that these were primarily financed by Zimbabwe's Central Bank, which injected money at extraordinary rates. This action by the Central Bank, he states, must end, as must control of certain sectors of the economy by the top brass of Zimbabwe's security forces.

"Funds need to be channeled to more needy sectors of the economy, not the army and Mugabe's political allies," Gilpin comments.

He says Zimbabwe's economy can eventually be stabilized if inflation is controlled.

"We also have to make sense of the currency to stop the wide gap between the official exchange rate and the market exchange rate. To do that, firstly - and very, very simply but politically it has been difficult to do - the Reserve Bank of Zimbabwe needs to stop printing money. The main impetus for the printing of money is the fact that the Reserve Bank has been lumped with a number of quasi-fiscal responsibilities, like paying subsidies, paying government debt and providing export credits to the favored few. That has to stop. Once we stanch the flow of money into the economy, inflation will come down."

Confidence in Zimbabwe's economy and its currency are also essential to economic recovery, Gilpin says.

"Confidence in the economy will only come once people recognize that there are focused and transparent policies, and that the key institutions - primarily the Reserve Bank - are doing the right things.

According to the USIP briefing, the massive debt amassed by the ZANU-PF administration must be addressed, and "external resources" and international assistance must be mobilized to "help finance reform and provide social safety nets."

Keith Campbell, whose South Africa-based risk analysis firm, Executive Research Associates, has been closely monitoring the situation in Zimbabwe, is convinced that "in the end, there's only one way" to ensure economic rehabilitation in the country.

"There must be a political solution that takes the economy away from ZANU-PF. Then, the failed policies of the past can be corrected, and this network of people around Mugabe that have been monopolizing government contracts and subsidies can be broken down."

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