Zimbabwe is experiencing a cumulative
breakdown. Living standards, life expectancy and production have
plummeted while political oppression has increased, and the
government’s desperate measures to retain control are exacerbating the
problems by fuelling inflation and destroying viable businesses and
farms. How did this happen, and what can be done to prevent it from
recurring? Zimbabwe has tried two contradictory policies since 1980.
Initially, it continued the protectionist policies of UDI, but later
exchanged them for the market-friendly Economic Structural Adjustment
Programme. The expected dividends of ESAP did not materialise, and thus
many critics blame it for the subsequent breakdown. Others, however,
believe that drought and failure to implement ESAP reforms effectively
were responsible. Which view is correct? After 1980 the Zanu government
allowed white farming, industry and mining to continue, while using the
state to improve services and invest heavily in health and education.
It retained Smith-era controls that guaranteed cheap credit and
protected domestic industry from foreign competition. The result was
modest but positive growth. Why, then, was ESAP adopted? There were
four problems. Firstly, restrictions on investment and on the right of
foreign firms to remit profits curtailed investment. This intensified
the foreign exchange shortage, which made it difficult for firms to
upgrade obsolete capital equipment and also limited job creation.
Secondly, subsidised prices and credit allowed businesses to survive
without addressing inefficiencies. Thirdly, increases in civil service
employment and spending on social services led to high taxes and a
serious budget deficit, which was financed by public borrowing.
Fourthly, minimum wages and a system that required ministerial
permission to retrench workers reduced employment. Thus ESAP was
introduced to encourage growth and employment, reduce state
interference in the economy, improve access to foreign exchange, and
reduce the deficit. Yet ESAP is widely seen as an almost unmitigated
failure. Growth was poor, employment contracted, many firms closed, and
social services deteriorated. But the policies can’t be held solely
responsible. Circumstances were unfavourable when ESAP was introduced.
There were disastrous droughts in 1992 and 1995, and a global recession
in 1991/92 reduced raw material prices and export demand. Also, South
Africa cancelled its trade agreement with Zimbabwe. The biggest problem
was the government’s inability to control the deficit. This caused a
sharp rise in interest rates just as local firms faced greater foreign
competition. Liberalisation was implemented too quickly and not
sequenced properly. However, the results were not as bad as many people
believe. There was a robust recovery in 1996 and 1997, with significant
increases in investment, exports and growth. But then, faced with
increasing political opposition, Zanu-PF began to reward its allies,
starting with a Z$ 4 billion payment to war veterans. In 1998 the army
entered the Congo and the breakdown began in earnest. The lessons to be
learned from Zimbabwe’s experience are that 1) old-style
interventionism will not solve the present impasse; 2) greater
pragmatism should prevail; and 3) ESAP requirements for reducing the
deficit were unrealistic, and a future regime will need massive donor
support to introduce the necessary reforms.
Living standards, life expectancy, and production have plummeted,
while political oppression has risen in Zimbabwe over the past five
years. What began in the 1990s as an economic crisis has now turned
into a cumulative breakdown, as the regime resorts to increasingly
desperate measures to retain control, and, in doing so, compounds the
problems it is supposedly trying to overcome. It has been expropriating
assets and foreign exchange in order to buy support and pay its bills,
and thus destroying viable firms, driving away skilled workers,
fuelling inflation, and cutting the food production needed to feed its
people and the exports to pay for its imports. This decline will
continue until a new regime emerges that is fully committed to creating
a very different political and policy environment.
We will not speculate about when and how this might occur. What we
will do is highlight the key challenges that will confront any regime
that emerges to take up this challenge. Any serious reform programme
will not only need to avoid past mistakes, but also recapture and build
on earlier successes. Here we address two straightforward questions.
First, how and why did the breakdown happen? Second, what should be
done to stop it from happening again if and when reconstruction does
begin? Credible answers demand a rigorous re-examination of the policy
programmes that led up to the onset of the crisis in the late
1990s.
The credibility of these policies is difficult to judge and heavily
disputed. Two contradictory policy regimes have been tried since 1980.
The Zanu regime came to power talking a socialist language, but
rejected the wholesale nationalisations tried by Tanzania and
Mozambique before it. Instead, in the 1980s it perpetuated the highly
controlled and protectionist capitalist strategy of UDI, then exchanged
it for a liberal and market-friendly Economic Structural Adjustment
Programme (ESAP) based on liberalisation, devaluation, privatisation,
and tight fiscal discipline. This was supposed to lead to a rapid
expansion in growth, employment and exports. Unfortunately it did not
succeed, so many critics and Zimbabweans blame ESAP, and the
International Financial Institutions (IFIs) that supervised it, for the
subsequent breakdown. Orthodox economists and business leaders, on the
other hand, attribute the difficulties of the early 1990s to exogenous
factors like drought, and a failure to implement the reforms
effectively.
This article evaluates these competing views in order to generate an
informed assessment of the strengths and weaknesses of the policy
regimes of the 1980s and the 1990s and concludes with an assessment of
their impact and of what they suggest for the future.
The successes and failures of
state-led policy in the
1980s
Zimbabwe in 1990 had a relatively well-developed and diversified
economy, good social services and an effective civil service. It was
not forced to adopt ESAP as a result of a fiscal and balance of
payments crisis like most African countries, but had achieved positive,
albeit modest, economic growth during most of the 1980s, and enjoyed
significant improvements in social service provision. The last years of
the decade had seen rising levels of investment and exports and
declining debts. All this suggests that rapid liberalisation was a
serious mistake, and that what should have happened was gradual reforms
combined with strong state controls.
If this is so we must first ask why ESAP was adopted at all. The
state-led regime of the 1980s, in our view, had been increasingly well
managed, but contained contradictory elements that inhibited investment
and employment and constricted credit and foreign exchange. By the late
1980s unemployment was growing rapidly and firms were finding it
increasingly difficult to restructure, so the leading private sector
associations and technocrats in government believed that reform was
essential if growth was to be sustained and accelerated. This suggests
that restoring the old controls would not be enough to overcome the
current breakdown. To substantiate this claim we must first summarise
the key features of the state-led policy regime.
In 1980 Zimbabwe acquired a new black and rhetorically socialist
government that was immediately dependent on a white capitalist class
that had previously blocked the emergence of a black entrepreneurial
class and denied civic and economic rights to black peasants and
workers. Not wishing to repeat the failures of Tanzania and Mozambique,
and wanting to entrench control over the black majority, the new regime
allowed politically marginal large-scale white farming, industry and
mining to continue their economic dominance. However, it also used
state power to improve services, decrease inequality, and ensure that
existing firms accept their nationalist priorities by reinvesting their
profits in the local economy.
This strategy was implemented by maintaining the controls that the
Smith regime had used to promote import-substituting industrialisation
and overcome sanctions during UDI. The controls guaranteed commercial
farmers cheap credit and cost-plus prices, protected domestic industry
from foreign competition, kept interest rates and the costs of imported
inputs low, and allowed wages to grow more slowly than inflation. The
new regime also introduced redistributive policies to reduce
inequalities, including land redistribution in the early 1980s, and big
investments in health and education for the poor. But these strategies
did not threaten existing owners — land was acquired on a ‘willing
seller’ basis, and better schools and health services should have
contributed to long-term growth. In fact per-capita growth was low but
positive over the decade, despite two droughts.
However, the tension between the actions of an interventionist regime
that distrusted capitalists, no matter whether white, black or foreign,
and the needs of existing and, more especially, potential new entrants
into the market, was very strong. The result was policies that
sustained existing firms, but seriously limited their incentives to
invest and innovate. ESAP was designed to address the resulting
structural crisis of the late 1980s, so we can only evaluate its
rationality by looking closely at the problems that it was designed to
overcome.
- First, hostility to foreign capital led to restrictions on
investment and the right of existing foreign firms to remit profits
that virtually eliminated new foreign investment, and new inflows from
existing firms. This intensified the foreign exchange shortage, making
it nearly impossible for firms to renew their often obsolete capital
equipment and limited employment creation.
- Second, existing enterprises, in-cluded monopolistic marketing
boards and the state-owned steel industry, received subsidised prices
and credit. This allowed them to survive, without needing to address
inefficiencies, but also subjected them to cumbersome bureaucratic
controls and increased the fiscal deficit. More important, the
subsidies all went to existing firms and this and the licensing system
excluded newcomers.
- Third, civil service employment, and spending on social services,
drought relief, subsidies and parastatal losses increased rapidly. This
led to a high tax regime as well as a serious budget deficit that was
about ten per cent of GDP over the decade. It was financed by public
borrowing that allocatively ‘crowded out’ private investment and
further intensified the foreign exchange shortage.
- Fourth, the state set minimum wages and demanded ministerial
permission to retrench even a single worker. While actual wage costs
rose faster than the minimum, which did not discourage employment, the
employment regulations probably reduced formal sector employment,
increased the use of casual staff and limited capability building.
These controls and allocations supported existing firms producing for
the domestic market, and favoured workers with formal sector jobs.
However it discouraged new investment, exports and especially new job
creation. As a result less than a third of the new job seekers found
jobs over the decade.
Thus, by 1987/8 the old strategy had to be revised to encourage job
creating growth by improving access to foreign exchange, reducing
administrative controls over commercial and employment decisions, and
reducing the fiscal deficit in order to encourage saving and
investment. The ESAP programme that began in 1990 was expected to do
this. It was supported by most of the business sector, technocrats in
the ministry of finance and the IFIs, and introduced before the
economic problems had reached crisis proportions.
Hence the prognosis should have been good. Unfortunately the results
were much less than satisfactory.
The Failures and Successes of
ESAP
The ESAP experiment in Zimbabwe is widely seen as an almost
unmitigated failure and the cause of the economic crisis of the late
1990s. Growth was poor, employment contracted, many industrial firms,
notably in textiles and footwear closed, and conditions in the communal
areas deteriorated as did social services for the poor. The resulting
increases in inequality, exclusion and disaffection in urban and rural
areas intensified opposition to Zanu-PF and probably led to the
disastrous populist measures that were adopted after 1997. Thus, no one
believes that ESAP achieved its stated objectives. However, while the
experiment did not produce the right results, we cannot necessarily
infer the policies themselves were responsible for the failures.
Policy failures can be induced by three distinct factors — exogenous
forces that throw the programme off course, a failure to implement the
policies as planned, and basic flaws in the policies themselves.
Examining each of these possibilities allows us to come up with a
nuanced interpretation of what actually happened in the early
1990s.
- ESAP was introduced under ex-tremely unfavourable circumstances
that would also have reduced investment, employment and welfare under
the old regime. Disastrous droughts in 1992 and again in 1995 had
effects very similar to those experienced during the less serious
droughts in the 1980s. The global recession in 1991/2 reduced raw
material prices and export demand. At the same time the new ANC regime
in South Africa cancelled its trade agreement with Zimbabwe. This led
to high tariffs on exports, and the arrival of cheap subsidised South
African goods just as Zimbabwe reduced its own tariffs. This
contributed significantly to the de-industrialisation that occurred at
the time.
- The most important failure in implementation was the government’s
inability to control the fiscal deficit of more than ten per cent of
GDP. It would not cut military spending, or inefficiencies and
over-manning in the civil service and parastatals (which required huge
ongoing subsidies). Cuts that were made were concentrated on the social
services, which increased inequality and marginalisation. The resulting
public borrowing requirement led to sharp increases in interest rates.
The cost of credit therefore escalated just as local firms were exposed
to intensified foreign competition, and the exchange rate was not
allowed to fall far enough to compensate. As a result many firms failed
to restructure and new investment was discouraged.
- However, it is also true that liberalisation was implemented too
quickly, not sequenced appropriately, and did not foster a closer
working of the public and private sectors. Formerly protected companies
were denied export subsidies and exposed to international competition,
just as interest rates increased and demand collapsed in response to
the drought and falling world prices. Liberal trade theory would also
have justified blocking subsidized imports from South Africa while the
new trade agreement was being negotiated.
These factors all combined to produce the disappointing results
identified earlier. However, it is also important to note that they
were not nearly as poor as many people believe. Industrial output fell
overall, but many internationally linked enterprises managed to adjust
to the new conditions reasonably well. The recovery in 1996 and 1997
from drought and the inevitable stresses induced by adjustment was
rapid and robust, with significant increases in investment and growth.
At that point exports were growing rapidly, the balance of payments was
positive and foreign exchange freely available. It seemed that a second
ESAP programme that corrected some of the mistakes of the first, would
lead to sustained growth.
However, this would only have been possible if the government had been
willing to give business more appropriate support to overcome
structural constraints, bring its deficit under control and begin to
address the land problem in a sustainable way. In the event, there was
a lack of political transformation to accompany the economic reforms of
the 1990s. The Zanu-PF government remained unwilling to foster the
emergence of independent black capitalist and working classes. Ebbing
support in the elections of 1996 led to increasingly destructive
policies to reward allies of the ruling party, which meant a continuing
failure to control the budget deficit. The first such move was a
payment of Z$ 4 billion to war veterans in 1997 that led to the
withdrawal of IMF support. In 1998 the army entered the Congo, and the
land occupations, irrational currency controls, and destruction of the
rule of law after 1999/2000 subsequently led to a total collapse of
confidence and the cumulative breakdown that we described at the start
of this article.
All of this suggests that we cannot simply blame ESAP and the IFIs for
the crisis of the late 1990s, nor argue that all reforms that were
introduced should be set aside. What is clear from this account is that
no progress will be possible in Zimbabwe until a new regime emerges
that is willing to honour its commitments and adopt policies designed
to benefit the whole of Zimbabwean society, rather than its own
supporters. It would take too long to spell out the full implications
of this analysis. All we can do in conclusion is identify some of the
key insights that emerge out of a dispassionate look at the event of
the last 20 years.
What should be done?
Many committed and courageous people in various social and political
movements are struggling to achieve a progressive political transition
in Zimbabwe. We do not offer them any advice about how to achieve
power, but we do hope to offer some lessons from their past.
First, old-style interventionism is not a viable way out of the
present impasse. It had reached its limits by the end of the 1980s.
However, it is also clear that a strong and capable government must be
fostered that can anticipate, communicate with and respond to the real
needs of producers who can generate the growth, employment and taxes on
which it depends.
Second, the ESAP reforms were badly sequenced, and unevenly applied.
They did not take account of the inevitable institutional complexities
involved in supporting an adjustment from a highly protected
import-substituting industrial sector to an internationally
competitive, export-oriented one. Much greater pragmatism should have
prevailed, including willingness to incentivise local industry to
adjust to the new environment using tariffs and export subsidies and
the development and execution of an industrial strategy based on
micro-economic reforms required to tackle the constraints to deepening
industrialisation.
And, finally, it was unrealistic to expect any regime to bring the
budget deficit down as sharply as ESAP required, under the conditions
that prevailed in the early 1990s, given the inevitable impact on
services and poverty — and thus the regime’s supporting constituencies.
Massive amounts of constructive support from donors will be required to
enable a future regime to execute the necessary transitions.
Brett is the
visiting professor in political studies at Wits University.
Winter is
regional director, Africa, for TechnoServe Inc. He writes in his
personal capacity.