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Learning from Failure: Property Rights, Land Reforms, and the Hidden Architecture of Capitalism
Craig J. Richardson
Extracted from AEI Development Policy Outlook, No. 2, 2006
April 06, 2006

http://www.aei.org/publications/pubID.24196,filter.all/pub_detail.asp

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Few countries have failed as spectacularly, or as tragically, as Zimbabwe has over the past half decade. Zimbabwe has transformed from one of Africa’s rare success stories into one of its worst economic and humanitarian disasters. But while culpability for Zimbabwe’s collapse is broadly attributed to the policies of President Robert Mugabe, the intricacies of the country’s unraveling remain poorly appreciated--above all, the importance of property rights in the process. That is unfortunate, because the destruction of Zimbabwe, like that of Nicaragua two decades earlier, offers important, cautionary lessons for other developing countries--as grim natural experiments in the hidden architecture of capitalism.

Development economists like to study success: how to pull a country out of poverty, how to spur growth, how to improve living conditions. This emphasis on positive outcomes is even reflected in their vocabulary: "third world" countries are now "developing" countries, regardless of whether they are developing or not.

Yet what about a country undergoing a rapid and devastating economic collapse? Curiously, development economics has devoted little attention to studying this phenomenon, and there is scant research to explain how it happens.

Consider Zimbabwe--a state which, since 2000, has been in an economic tailspin. Today, it is shrinking faster than any other country on earth that is not at war. Zimbabwe’s currency is nearly worthless from hyperinflation; its financial institutions are in disarray; its world-class farms sit idle; and its manufacturing, mining, and export sectors are declining steeply. The informal exchange rate for the Zimbabwe dollar is Z$150,000 to US$1; six years ago, it was Z$55 to US$1. With millions of people having fled the country and millions more out of work and close to starvation, the question arises: "What exactly went wrong in Zimbabwe, and how did it take place so quickly?"

Certainly Zimbabwe’s problems have been the subject of scrutiny by the international community. By 2003, real output had already dropped by one-third, and the International Monetary Fund (IMF) was determined to know why. In its yearly Article IV report, the IMF produced a laundry list of potential culprits, including loose fiscal and monetary policies, a fixed exchange rate highly out of sync with "street prices," and price controls. The IMF blamed these "inappropriate economic policies" for the collapse. President Robert Mugabe’s land reform program, along with the ongoing HIV/AIDS pandemic, were identified as "exacerbating" Zimbabwe’s newfound poverty, but not the primary reason for it.¹ The IMF’s recommendations were consequently macroeconomic in nature: they included freeing up price controls, as well as exchange and interest rates, and clamping down on the money supply.

Yet what the IMF’s analysis never sufficiently addressed was how and why the rapid collapse of Zimbabwe’s economy occurred in the first place. The sharp upward pressures on prices and exchange and interest rates were the result of a swift increase in the money supply, to be sure. Yet since 2000, where had the pressure to print money--on a scale never before seen--come from? Why were previously sound banks failing by the dozens? And given the enormous foreign direct investment (FDI) in Zimbabwe in the late 1990s, why were investors suddenly jumping ship?

Given the breadth of Zimbabwe’s problems, it is perhaps unsurprising that no one has attempted to put forward a comprehensive explanation for them. Reviewing the IMF’s reports, Zimbabwe simply appears to be a country falling apart under the collective weight of countless bad policies. To an outside observer, it might seem difficult, if not hopeless, to tag any one factor with overarching culpability.

But while many problems cited by the IMF and others are important, they do not provide a full explanation for how a country can lose fifty years of economic progress in only five years.² In fact, Zimbabwe’s collapse can be traced to a single policy: its fast track land reform program, under which the Mugabe government, beginning in 2000, seized thousands of white-owned commercial farms, leading to a sharp drop in agricultural output. The other "inappropriate" policies adopted by the Mugabe government exacerbated the damage, but they were not the underlying cause.

Although the introduction of Zimbabwe’s land reforms coincided with its dramatic collapse a puzzle remains: the farming sector was only 18 percent of the entire economy. Other sectors, such as banking, tourism, manufacturing, and mining, also shrank dramatically during this time, however. How, then, to explain the discrepancy?

In fact, the damage done to property rights by the land reforms caused a series of ripple effects throughout Zimbabwe’s other economic sectors. Studying this "cascade failure" helps better reveal the framework of developing market economies--what economist Hernando de Soto calls "the hidden architecture" of capitalism. In this regard, the destruction of Zimbabwe represents a grim "natural experiment" that illustrates the tremendous negative consequences of ignoring the rule of law and provides a cautionary lesson for what other developing countries should not do in the future.

Unfortunately, the rebuilding of an economy after property rights have been revoked is likely to be contentious and slow, akin to rebuilding trust in a relationship after a serious betrayal. The case of Nicaragua is illustrative in this regard as a counterpoint to Zimbabwe, as its history of land expropriation under the Sandinistas, its resulting collapse, and its long and difficult struggle toward recovery provide useful clues for what a post-Mugabe future might hold.

*Craig J. Richardson is associate professor of economics at Salem College and the author of The Collapse of Zimbabwe in the Wake ofthe 2000-2003 Land Reforms (Edwin Mellen Press, 2004).

*AEI research fellow Vance Serchuk is editor for the Development Policy Outlook series. AEI editor Scott R. Palmer worked with Mr. Serchuk to edit and produce this Outlook.

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1.International Monetary Fund, Zimbabwe: 2003 Article IV Consultation--Staff Report (Washington, D.C.: IMF Country Report no. 03/224, July 2003), 3-5, available at www.imf.org/external/pubs/ft/scr/2003/cr03224.pdf.

2. Michael Clemens and Todd Moss, Costs and Causes of Zimbabwe’s Crisis (Washington, D.C.: Center for Global Development, July 2005), available at www.cgdev.org/files/2918_file_Zimbabwe_Crisis.pdf.

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