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Zimbabwe’s latest crisis: it’s the economy – and politics, stupid!

The images of economic crisis in Zimbabwe are all too familiar. Queues for petrol and cash, commodity hoarding, parallel markets in currency, rising inflation and so on. It all seems reminiscent of the dark days of the mid 2000s, in the build-up to the full-blown crisis of the hyperinflationary collapse of 2008. This was not meant to be how the much-hailed second republic started out.

Bill Clinton’s 1992 election slogan, ‘it’s the economy, stupid’ does ring true. Years of economic mismanagement, deep corruption and failure to invest, combined with sanctions, credit embargoes and investment freezes, have taken their toll. But the current crisis is also to do with politics, both domestic and international.

The dimensions of the economic crisis

Tony Hawkins, an economics professor at the University of Zimbabwe, recently gave a widely-circulated talk to the British Council on the economic travails of Zimbabwe. There was much to agree with in his summary of the situation.

The economy is uncompetitive, he argued, not helped by the appreciation of the US dollar by 17 percent since dollarization, the huge loss of value of the South African Rand and rising oil prices. Estimated 14% revenue increases from tobacco, gold and other minerals are offset by a massive hike in state expenditure, up 57%, exacerbated by election commitments to public servant wage hikes. The budget deficit has ballooned to $3.3 billion, with a projected trade gap of around $2.5 billion.

What’s more, he said, the total national debt now stands at a staggering $22 billion, now more than the GDP. Government borrowing continues to grow, crowding out the private sector, and putting pressure on available finance for investments, as people seek cash on the (expensive) parallel market. Inflationary pressures are also increasing dramatically therefore, with money supply far exceeding (formal) GDP growth.

But, despite the value of this description (repeated of course in numerous assessments by the IMF, the World Bank and other economists), his diagnosis of causes was only partially on target, and his solutions missed crucial dimensions.

Causes were laid largely at the door of domestic economic policy (or lack of it) and corruption by the ruling party. This, as is well documented, is a key part of the story. From Gideon Gono’s use of the reserve bank as a political tool in the ‘casino economy’ years to the massive expropriation of diamond resources, both show how the Zimbabwean economy has been destroyed from within.

This has not been the only story. The sanctions imposed following the land reform of 2000 took their toll too. While only targeting select individuals, and withdrawing aid from government led programmes, this signalled diplomatic disapproval from the West, and it had a major impact on patterns of economic support.

Aid programmes still continued but under a humanitarian label channelled through NGOs. But much more significant was the withdrawal of international finance and credit lines. This had a devastating impact and, even if not directed by official sanction policies, were their direct consequence. Despite the easing of diplomatic tensions in the post-Mugabe era, and the charm offensive that Mnangagwa has been engaging in from Davos to New York, the situation has not fundamentally changed.

Hawkins does point to the problem of ZDERA (the Zimbabwe Democracy and Economic Recovery Act of 2001, amended this year) in particular. This is the US law that prevents the US government supporting Zimbabwe at the IFIs, without implementing a set of political reforms. In the coming months, this will likely prevent the US rep at the IMF backing a recovery plan, making the position of others on the IMF board crucial if any changes to support Zimbabwe’s recovery are to be realised.

Reforming the economy

The new finance minister, Mthuli Ncube, knows all this, but does he have the leeway to change course? He is severely hampered by the political legacy of sanctions and other ‘restrictive measures’, and deep distrust across international actors. However, there have been some good signs. His interviews with Bloomberg and speeches around the world have mostly been impressive, and suggest that he is committed to a major economic restructuring.

Some of this will be tough, and will be highly political. A test of the new government’s commitment will be how far he is allowed to go. Already attempts at introducing taxation measures have resulted in protests. What happens when he is forced to cull the public sector, massively reducing the salary bill, or overhaul the currency system, which benefits those dealing on the black market, including powerful individuals well connected to the political system?

Clearly the stop-gap measure of a “multi-currency” environment that followed the abandonment of the Zimbabwe dollar and the adoption of the US dollar is no longer working. Local ‘bond notes’ were supposed to be backed by external hard currency finance, but are clearly no longer, and are fast losing value. Stalling the massive flow of hard currency out of Zimbabwe is vital, and this means ending the pretence of equivalence between greenbacks and bond notes. Sticking to the US dollar in a period when US protectionism is boosting its value is risky too, as it makes everything absurdly expensive. But setting up a new currency in such straitened times is not wise either, given the low levels of confidence in the economy.

What to do? Given the dire experiences of structural adjustment from 1991 – which in many ways set the scene for much of Zimbabwe’s current malaise – making the case for IMF stabilisation intervention, combined with a HIPC-style debt relief package, with all the raft of expected conditionalities does seem rash. But there really doesn’t seem to be any other option currently. The Chinese are fed up with Zimbabwe given its failure to pay back loans in the past, and the ‘socialist solidarity’ line has worn thin. Reluctantly, this may be the only route.

The centrality of the rural economy

Assuming a political route to reform can be created, it therefore matters a lot what such reforms look like, and how they are implemented (lessons from Greece and others of course). Where I fundamentally part company with Hawkins’ analysis is his disparaging rejection of the importance of the rural economy. Like so many conventional economists, he focuses on the urban, industrial sector, forgetting that this is dependent on a wider economic system that remains substantially small-scale, informal and rural. The distinctions between ‘formal’ and ‘informal’ economies in Zimbabwe are irrelevant today: most of the economy is ‘informal’, and that’s where livelihoods are made.

In the rural areas this is especially so. And, as we have shown in our research over many years, this is vibrant, growing and generating employment in significant ways, particularly when linked to land reform areas that are producing surpluses and creating spin-off linkages in local economies. It is far from dead, as Hawkins suggests, but it is different to what went before. This is not backward-looking rural traditionalism, bound by archaic cultural norms, as Hawkins seems to suggest, but the new economy; one that everyone must get used to and support. For sure, it is the ZANU-PF support base, and the reason they won the parliamentary elections, but that makes it even more important that the government gets its reforms right for rural people, as well as the urban middle classes.

The small steps towards a positive dynamic of rural growth spurred on by land reform however stalls dramatically when the wider economy is in crisis. With no liquidity, investments dry up, and with a lack of credit, the financing of new operations cannot occur. If inflation kicks in, as it is now (some estimate that annual inflation is touching 50 percent already), then the value of goods is uncertain, and economic transactions are risky. The result is that the economic dynamism ceases, and livelihoods are affected up and down value chains, from agricultural producers to traders to processers to wholesalers to retailers and consumers.

This is what happened in the mid-2000s, and again is what is happening now. But rather than dismiss rural people and areas as economically backward, somehow culturally unable to engage with a modern economy, policymakers and economic advisers need to appreciate the potential of the agrarian economy, and encourage investment. Simply wishing an industrial revival without a core agrarian productive base supporting the mass of the population is foolish, especially in Zimbabwe’s context, as a small economy operating in a highly competitive global environment.

Wider stabilisation, debt write-offs and addressing inflation and currency instability is vital at the macroeconomic level and must be central to Mthuli Ncube’s agenda. But his next step must be to set up the type of investment strategy that allows a dispersed, largely informal economy to thrive, and contribute to growth and employment in multiple ways for long-term, sustained and equitable recovery.

Only then will links be made that allow the industrial and service sectors to thrive, and taxation and so government revenue raising to be applied. The post land reform economy does not look like that of the 1990s in the earlier adjustment era, or the post UDI sanctions period in 1980. Big ticket ‘modern’ investments in agriculture, tourism, maybe even some industries, will be important, but they must not undermine or take attention away from the key challenge, which is supporting the real, predominantly rural, economy where most people make their living.

It’s politics, stupid!

The on-going negotiations with the IMF and the wider diplomatic and donor community are of course not just about economic restructuring, investment and financial prudence. They are also (of course) about politics. With Nelson Chamisa and the opposition MDC still not recognising the results of the elections, their lobbying of western governments continues.

Their strategy is unclear, but it seems to be to encourage the US in particular to maintain sanctions and the ZDERA law, with the aim of extracting political concessions for the long-term. You can see the rationale, but the consequence is that the economy is nose-diving and people are suffering; if not from cholera due to lack of investment in urban infrastructure, certainly from growing economic hardships, even if this is only queuing for petrol at night. This may backfire, with the opposition seen as holding the country hostage, undermining recovery for political gains.

Calls for demilitarising the state apparatus as part of conditions are appropriately central to many demands. The latest bogey-man for the international community is of course the Vice President General Chiwenga. But, with ZANU-PF, despite the new, PR-branded version that President Mnangagwa is projecting, a securitised state is likely to persist, even after the army has returned to the barracks or swapped uniforms for suits. A technocratic-military state is a feature of the current dispensation, and by some seen as a positive route to implementing a state-led (aka ‘command’) developmentalist policy, in the mode of Kagame in Rwanda or previously Meles in Ethiopia.

Where next?

There are divisions amongst the western diplomatic community on how to move forward. Some take a pragmatic stance and argue that a stabilisation bailout will create stability, and allow the economy to function, arguing that conditions for future elections and a deeper embedding of (western-style, liberal) democracy will emerge only when the country is not in crisis mode. Others make the case that a crisis of legitimacy following the elections means that this is the moment to exert pressure on Mnangagwa and exact the maximum concessions in favour of the opposition’s stance. Economic crisis is a price worth paying if political reform emerges, goes the argument. Within ZANU-PF and the MDC, as well as commentators not linked to any party, all shades of opinion exist.

What all agree is that a return to 2007-08 is not desirable, and that action to avert this needs to happen soon. And I would add: a focus on supporting the informal sector and the agrarian economy – and the linkages beyond – is vital to any way forward.

This post was written by Ian Scoones and this version first appeared on Zimbabweland.

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Abbatoirs and the Zimbabwe meat trade

Continuing the blog series on meat and livestock, this week I am going to focus on abbatoirs and the meat trade, again drawing on our work in Masvingo. Just as we have seen with the retail and production ends of the value chain, the ‘middlemen’ who source animals, slaughter then and supply butcheries have also been changing.

In the past the Masvingo trade was dominated by a narrow group of abbatoirs – essentially Carswell and Montana, together with the CSC (Cold Storage Company). They were organised around an external trade, mostly to Harare. With the CSC now effectively defunct, the big two remain, and continue to have a healthy trade in the province. Still around 90% of their meat ends up in Harare, although Montana has a number of shops and butcheries elsewhere. Both have networks of buyers who work across the rural areas, sourcing animals which are then transported to the Masvingo-based abbatoirs. They both rent farms near town to act as holding and fattening areas, so as to assure even supplies and higher value. Several thousand head are held on farms near Masvingo at any one time, involving paying grazing fees of $3-5 per beast per month. With the decline in beef production in the Highveld following land reform, assuring supplies from Masvingo is essential.

Local producers however complain about the prices at these two abbatoirs, plus the fact neither pay for the ‘fifth quarter’ (offal etc.), yet this is sold on. In recent years some other abbatoirs have sprung up serving a different market. In Masvingo there are currently three, each reflecting differences in the customer base.

Kismet is linked to a farm and so has direct access to animals. In addition the owners buy at auctions in Mwenezi, Bikita and elsewhere. They have restaurant and butchery in town, and so have a fairly well organised and vertically integrated business. They offer service slaughter, but most people currently prefer Gonyohori abbatoir. Farmers come to abbatoir for service slaughter, and the abbatoir has very good links with butcheries in town. Mr Machingambi says: “I link producers and buyers at this abbatoir”. Although there is no refrigerator, butchers know when meat is available and around 5 beasts are slaughtered each day. Nearly all the meat is economy grade. As Mrs Foroma explained “Meat is meat” in the market she supplies to, and Gonyohori supplies is efficiently and complying with safety standards. The only other abbatoir, Tafira, has gone downhill recently, and used to be the favoured place for service slaughter. The links with the butchery and restaurant trade are not so well developed, although on relative has a butchery in Zvishavane.

The other option is to buy from ‘under the tree’ pole slaughtering sites. Most butcheries do not prefer this because of the health risks, but some argue that as long as the meat is fresh, it is fine, and much cheaper. A number of people operate such sites, although they are constantly being closed down by the municipal health authorities.

Another option is to buy from meat traders who purchase animals, have it slaughtered and sell it on. Again there are complaints about health standards, but the supply is regular and efficient. Mr C explained his business: “I entered the business of meat trading through bartering scotch carts for oxen. I make good carts, and there is a demand. I now buy cattle from those who urgently need to sell” He sources from Mushandike and surrounding areas, and moves them in his 1.5 tonne truck. He rents space in a shop and distributes to butcheries after slaughter. “I regularly supply butcheries. I’m now a petrol attendant, so everyone knows where to find me”, he explained.

Others have entered the trade, finding it lucrative. A group of veterinarians in the district office for example buy up heifers and barter them for oxen or cows who no longer produce milk. They leave heifers with local farmers they trust and exchange across the district. They can also buy for cash. Animals are then slaughtered in town either for cash, or as part of advance deals with butcheries and restaurants. The syndicate buys up to 5-6 cattle per month, and given their expert knowledge and access to farmers they make a good profit to supplement their meagre government salaries.

Finally, there are ‘beef committees’ operating across the rural areas where single animals are bought by a group, usually of civil servants resident in the rural areas. Teachers, police, extension workers and others may be members. This allows a supply of meat which by-passes butcheries and supermarkets, allowing premium deals to be struck.

All such transactions are expected to be regulated, often by multiple authorities. This can sometimes cause confusion and cost. The police have to be involved for any transport of meat or live animals, as a way of preventing stock theft. The veterinary department too must provide certificates for movement, to avoid disease spread. And slaughter places are supposed to be regulated by the health authorities, particularly in urban, municipal areas. Farmers, traders, butchers and abbatoir owners complain that this plethora of regulations, and the involvement of so many different people can be a problem. If someone arrives late or not at all a deal may be lost, or meat may be left unrefrigerated for a long time. Sometimes transport is provided to the relevant people to facilitate the process, but the right people have to turn up with the right forms at the right time. Sometimes too the process is smoothed by a bribe or a gift, and increasingly this has become the pattern. But this too can slow down transactions as officials bid for a better level of compensation.

The beef value chain is certainly complex and diverse with multiple different actors at each stage. But it does seem to work: cheap, safe meat is provided to the customers that want it, and quite a number of people get gainful employment in the process. But is the current, often highly informal, system efficient and effective? Too often we deem anything informal as in need of reform, with a need to formalise, structure and regulate. Yet this system is responsive to diverse demands, and apparently flexible to changing supply situations. Indeed, the main thing that seems to slow things down, and add sometimes unnecessary cost is the complex system of regulation, now associated with bribes and payments. While such regulations and controls are clearly necessary, a more streamlined system is clearly needed to improve returns and value.

As next week’s blog shows, this is even more important in the context of rural livestock marketing.

This post was written by Ian Scoones and originally appeared on Zimbabweland

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‘Resource nationalism’: a risk to economic recovery?

 In a recent presentation, Southern Africa: Economic Prospects 2012, Professor Tony Hawkins from the University of Zimbabwe, offered some notes of caution about Zimbabwe’s economic recovery, despite the high growth rates being recorded recently.

 He argues that Zimbabwe is becoming “increasingly resource-reliant with the share of GDP of agriculture and mining together now virtually double that of manufacturing”. This structural change is illustrated in a table, contrasting the share of GDP and percentage of exports in 1990 and 2010-11.

SHARE   IN GDP 1990 2010
Mining 4% 9.1%
Agriculture 15% 13%
Manufacturing 22% 11.5%
EXPORT   SHARES 1990 2011
Primary 82% 94.5%
Manufactures 18% 5.5%
Exports:GDP 28% 50%

Exports he explained “now contribute half of GDP – up from 28% – while the share of primary exports is up 95% from 82%. This reflects the de-industrialization of the economy”. He continues: “…if Zimbabwe is to re-industrialize, firms will need to have very different business models from those of the past”. But, he says policymakers are fixated “on capacity utilization, strategic industries, import substitution, self-sufficiency and local ownership”. This, he says, is “more likely to accelerate de-industrialization than reverse it”.

This is overlain with what he calls a “toxic cocktail of resource nationalism and the resource curse”. He explains: “The two interact as politicians, desperate for revenue and votes, prioritize wealth exploitation over wealth creation. The resource curse is evident where policymakers use diamond revenues to finance current – not capital – spending”.  Policymakers, he says, “argue that Zimbabwe is not a poor country – its diamond, gold and platinum wealth could – and should – be used to repay our foreign debt, rather than seeking debt relief. This is a political – sovereignty – argument, not an economic one. Those who tout this argument believe not just that Zimbabwe can – and should – go it alone, but also that this is a means of escaping the governance and structural reforms implicit in HIPC debt relief.”

He argues: “Resource nationalism takes many forms ranging from higher mining taxes to indigenization and local ownership laws. Regardless of what form it takes resource nationalism fails unless its long-run focus is on wealth generation, not asset ownership and short-termist wealth exploitation”. Reflecting on the statistics, he comments: “Today the Zimbabwe economy is recovering – not growing – by consuming its wealth. The country has increased its reliance on resource-depletion growth, while failing to diversify production and exports and invest in the future”.

He concludes that policy needs to shift the focus

  • “From consumption to investment
  • From asset ownership and wealth consumption to wealth creation
  • From needs-based remuneration to productivity-based earnings
  • From reviving uncompetitive firms that have passed their sell-by date to start-ups and new entrants.
  • From near-term income growth, reliant on wealth depletion and consumption, to long-term growth sustainability based on investment and competitiveness”.

These are all certainly good aims, and the note of caution about how mineral and agricultural riches can be fragile, if not reinvested is important. But the commodity boom driving economic growth across Africa is not going to go away. Africa is resource rich, and the demand for these riches is growing, particular in Asia. The new geopolitics reflects this as China, India, the Middle East, Brazil and others seek out alliances in Africa in order to secure access to resources to fuel their own economic growth.

This new world order is what Hawkins calls the ‘new normal’. Rethinking the political economy of growth in the era of the commodity boom will require accommodating these new realities, but also guarding against the risks, making sure the new riches are broadly shared and appropriately invested, and keeping the new investors accountable  and avoid dependency in a new periphery.  This will be a major challenge for future economic policy, in Zimbabwe and beyond; one that will require some major rethinking.

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