Origins of the Zimbabwe crisis

Alex | Sep 30, 2009
Teddy Brett and Simon Winter argue that Zimbabwe's ills cannot be blamed solely on economic structural adjustment programmes.
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.