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Reversing the freefall
Craig Richardson
May 03, 2007

http://www.mg.co.za/articlePage.aspx?articleid=306511&area=/supzim0407_home/supzim0407_content/

As the British Airways jet lifted off from Heathrow on its way to Harare on October 2 2006, I reflected on what lay ahead. In 12 hours I would be touching down, landing in a country which I had studied for 14 years, but had not yet set foot upon.

I had been invited to serve on a panel in Harare, sponsored by the American Business Association of Zimbabwe, which was focused on having experts share ideas on rebuilding the country. I was greatly looking forward to matching impressions "on the ground" with my previous research outside the country.

Prior to this, I had read many books and articles, studied satellite photos and written a fair amount about Zimbabwe while teaching economics at Salem College in North Carolina, United States.

In 1992, when I first become interested in Zimbabwe, I learned that it had challenges, but was one of the clear jewels of Africa, achieving more than 90% literacy since independence, and consistently strong economic growth. The country fascinated me, with its rich and complicated history, vast resources, sophisticated manufacturing base and enormous potential for the future.

In 2000, as Zimbabwe's economy began to go into a freefall, I became puzzled and fascinated about what was happening. This former success story was beginning to unravel with rapid and alarming speed and I took a sabbatical from teaching to find out why.

The result in 2004 was a book, entitled The Collapse of Zimbabwe in the Wake of the 2000-2003 Land Reforms. The theme of the book was that the dramatic collapse of a country with so much potential contained lessons that went far beyond Zimbabwe

What I've learned from my research is that given Zimbabwe's precipitous failures, a clear path for rebuilding the country is now needed more than ever. One creative avenue, if it were modified slightly, lies within Zimbabwe's own borders, and I'll share that later.

But first, any new government must acknowledge that the precipitous slide in the economy, and the current devastating 2 200% hyperinflation is inextricably linked to the seizure of the large-scale commercial farms.

The economy through the 1980s and 1990s rarely had a year where the economy shrank -- now, since 1999, it has shrunk between 5% and 10% a year. That is no coincidence. I have written extensively about the disastrous economic consequences of the land seizures.

In all of these articles, I return to a main theme: the land seizures shattered the foundation of the market economy that held up three important, yet invisible, pillars of commerce: trust by foreign investors that their investment was safe, the ability to use property as collateral in the banking system and thus turn land equity into myriad forms of new wealth, and the incentive to acquire business knowledge, given that one could profit from the long time ownership of land.

First foreign investors pulled out, and foreign investment dropped nearly 95% in two years. Banks failed because the government now owned land, and loans which used land titles as collateral were worthless.

Subsidiary companies sharply contracted as well. And the sophisticated knowledge base of the commercial farmers evaporated, as most farmers emigrated.

With production of Zimbabwe's staple crop down to 30% of its former output, the government tried to blame droughts as the culprit. My research showed that rainfall was plentiful throughout most of the early 2000s, and even the "drought" of 2001/02 was only 22% below average.

The land seizures caused a cascade failure that has rippled through the country and affected nearly everyone.

So here is where we are: appropriation of land without compensation is tantamount to a betrayal in a longstanding relationship. The government has betrayed the people, and this simple truth means that rebuilding the country must start from that premise.

A betrayal in a financial market carries a cost: financial investors and domestic entrepreneurs will seek a premium that accounts for the twinge they feel in their guts when they ask the question: "Could Zimbabwe's government do this again?"

We must remember that market relationships are, at their bottom, human relationships. Trust takes a long time to build, and even longer to rebuild after it has been shattered. Broken trust carries with it a very real economic expense. A new government must remember that mending this broken relationship is the most important thing it can do.

The next thing a new government must remember is that in order for entrepreneurs to stake their hearts and souls in Zimbabwe's economy, the economy's new rules must be simple and transparent yet radical -- so simple a foreign investor in Sydney can easily explain them to another investor in New York, and so radical that the second investor asks a follow-up question, his curiosity sharply piqued by the plan.

Economies with simple and clear guiding rules grow the fastest. Hong Kong is one of the world's fastest-growing economies and, not coincidentally, a new business licence is approved in hours.

Let's not be misunderstood: Zimbabwe has a lot of repair work to do, and there are plenty of complicated problems to work through, including a probable need for foreign aid. However, the country should move quickly away from any dependence on the outside world to maintain its sovereignty, pride and incentives to produce.

One strong focus should be on quickly moving to restore property rights.

Swiss economist Christina Zenker has written that in order for property rights to generate economic growth, they must have three properties: universality, definability and security.

Universality means everyone in the country should have access to the institution of property rights and all its benefits. Historically, Zimbabwe's laws and customs have excluded women from owning land as well as those living on communal lands. This should be changed.

Definability means that an owner of property has the right to exclude others from using it. The land can then serve as collateral for bank loans.

Security means that the above is defended by the rule of law and that citizens and investors trust that their property is safe from expropriation.

Zimbabwe needs to reduce sharply the cost of business. Realistically, foreign investors will still hesitate in the wake of the recent history of land expropriation. Therefore a bold plan is needed to win back their trust.

A framework for such a plan comes from right within Zimbabwe's own borders, from an entity so little known that many Zimbabwean experts don't even know of its existence.

In the midst of Zimbabwe's quasi-socialist regime is a region of the country whose free-market regulations could have come straight from Hong Kong. This region is called the Export Processing Zone (EPZ). Within the EPZ, there is no corporate income tax. Nor are there taxes on capital gains, imported machinery or dividends.

For those interested in commercial farming, the government could auction off the thousands of hectares of unused or mismanaged lands, and apply this tax strategy to the entire agriculture sector. Lands could be zoned for large-scale and small-scale farming, addressing the issues of both efficiency and equity.

There would be many positive consequences. Hundreds of thousands of Zimbabweans who were former farmworkers could return to work. As a consequence, income-tax receipts would rise. Soon after, all auxiliary enterprises serving agricultural sector would begin to revive, paying in corporate taxes as well.

This would also have a positive effect on small-scale farming. As a side effect, Zimbabwe would capture worldwide attention because of its bold new policy, which it can claim as its own. Eventually, inflation pressures would begin to subside, as tax receipts increased.

In the long run, the time horizons for all Zimbabweans increase, giving incentives for everyone to invest in their land, health, children and retirement.

After my panel presentation in Harare in October, I reflected more on my visit. What I understood only now was that Zimbabwe's greatest assets do not show up on its balance sheet. Its pride in its education system was evidenced by parents' insistence that children walk five miles or more to school despite the breakdown in public transportation. Bizarre and complex laws designed to stymie commercial activity didn't succeed in breaking the incredible entrepreneurial energy of this country.

Lastly, Zimbabwe always felt safe and secure during my visit. People I met believed in the judicial system and wanted a peaceful transition to a new government.

These hidden assets -- a belief in education, entrepreneurship and rule of law -- are the vital qualities that Zimbabwe still possesses. These will vastly increase the odds of recovery if a new government chooses the path of secure property rights as an important first step toward rebuilding the country.

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