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South Africa: No matter what it costs Zimbabwe
Norman Reynolds, Business Day (SA)
July 31, 2007

http://allafrica.com/stories/200707310211.html

THE economic lunacy of Robert Mugabe's regime in Zimbabwe is more than just price fixing. It is another round of what the international community has failed to name, perhaps because to name it would require action. The officially created disaster in Zimbabwe is the longest-running genocide affecting the greatest number of any people for more than half a century. The latest attempt to ordain the economy is yet another demonstration of power and arrogance exercised at whatever the cost to the citizens of Zimbabwe.

Until now, it was mainly Zimbabweans that were baffled by the officially stoked inflation ruining them and the country. Now, with the official decree to halve prices, the whole world must be aghast. Where can such determinist lunacy come from?

I was an economist in Zimbabwe after independence in 1980. Much was achieved -- by small and big farmers, in education, health, tourism, community wildlife, housing and much else. What was not allowed to succeed was any discipline over budgets and macroeconomic policy, and any programme that might strengthen the autonomy of the rural population -- Mugabe's vote bank, which he sought to patronise and control.

Zimbabwe inherited a high "structural" inflation after the 15 years of sanctions against Ian Smith's regime. During that long period of sanctions, import substitution raised the number of manufactured goods from about 500 to more than 2300. This caused inferior goods at high prices to be circulated, passing on increased prices, greater inefficiency and poor service: that is, structural inflation.

The Zanu (PF) government was immediately besieged by "friends" pushing their agendas and seeking to gain influence. One way to do the latter was to appeal to the known idiosyncrasies of Mugabe. As a Marxist-Leninist, he believed that economic decisions could be made at the centre; that all key information could be known officially.

A parallel was India's First Five Year Plan, in the 1950s, which followed the Russian model of directing the commanding heights of the economy. That centrist behaviour suited the predominant class of economic planners -- the educated priestly caste, the Brahmins. Planning sought to "ordain" the economy. So too with Mugabe. T he method appealed to his large intellectual arrogance. And, no doubt, since he is Catholic, to his observation of papal decrees.

The first post-independence "commission" after 1980 in Zimbabwe dealt with wages, prices and labour conditions. Its chairman developed an economic vision that played to Mugabe's preference -- the ordination of the economy. It pictured the major move of migrant worker families into towns, thereby releasing much land for those left behind. This was to be done by a single ordination: minimum wages for the many lower level workers were to be doubled by presidential signature. Then, workers could afford better housing, greater cash costs for food, travel, etc, to maintain families in town. This was done by edict and was followed within a year by a further 50% increase.

The result was a massive jump in the already high inflation rate as there was little ability to double, or more, local production of basic goods to meet the increased wages. Imports rose sharply for consumption goods as against the much needed capital goods to rebuild the economy. The result, for labour, was a once-off bonanza that, for seven years, led to annual wage increases being below the inflation rate -- falling real wages -- to redress the imbalances created by this absurd artificial attempt to boost wages by decree. The very high inflation that resulted damaged savings and pensions, hurting mainly those with fixed incomes. Very few families moved into the towns as housing, schooling and other services cannot be increased as quickly as a wage increase can be "ordained".

The next "gift" by a Zanu (PF) professor of economics "friend" was an even more absurd proposal that cabinet adopted without reference to bureaucracy. Faced with a near run-away inflation, a small piece of paper was given to a silver-tongued minister to read out in cabinet. It stated a complete economic untruth but appealed to the "ordination" urges of Mugabe. It simply reminded cabinet that Zimbabwe was a sovereign state and that, therefore, it could and should introduce a "price freeze" and that such a price freeze could be in perpetuity. "Banish inflation!"

In Zimbabwe, imports and exports form more than 60% of gross domestic product (GDP). It is a hugely open economy, with most prices determined by the world economy. In the US and the European Union, imports and exports form only about 12% and 13% of GDP. In SA, a more primary producer, they form more than 32% of GDP. Unless the Zimbabwe economy is first "closed off" to the world, few prices can be set administratively.

It took a huge effort by the economic departments, business and others to slowly unravel the "price freeze" without ever doing so publicly or politically. Some companies, under the still-ruling sanctions regime, had just received price increases and foreign exchange to run their businesses. They were in the pound seats. Others found themselves at the end of the queue, with no foreign exchange and "old" prices that meant operational losses.

The price freeze was broken in 1983 by a desperate Zimbabwe Breweries. It had been waiting for some time for a price increase to be approved. It had just made a whopping profit on the back of the vast ordained wage increases. As a result, it had the biggest proposed capital investment ever by any company in Zimbabwe. Suddenly, it could only see inflation and frozen prices eat that nest egg away. Unless something changed, the price freeze would bring beer production to a standstill within a year.

The MD was a school friend. We still talked. He became an emotional wreck as the breweries sank into mounting losses. Finally, we met. I explained that this mess was not going to go away quickly. My only suggestion was to play the "game". I advised: "Dry up three small towns before the next long weekend." The breweries did. The following Tuesday it received a price increase. The price freeze was effectively over.

Today, driving all production underground or ending it altogether by halving prices is yet another "ordination" of the economy. It raises vital questions about governance and about the daily social and economic rights of citizens . There has to be another way of establishing social and economic security beyond political democracy.

Dr Reynolds is a development economist.

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