Mistakes that are driving away investors and donors
Presentation by John Robertson
One of my favourite economists is Henry Hazlitt, an American who became as famous for his ability to write as for his understanding of economics. He is the man who pointed out that good economics takes full account of the secondary consequences of policies, not just their immediate or primary effects. And good economics considers the effects that policies will have on everybody, not just on the group that proposed the policy changes.
Zimbabwe is now living with, and struggling with, the consequences of many policies that were adopted to sort out problems that were identified by people who had lots of influence, but who wanted to make sure that this influence would be turned into a formidable power base, just for them.
It has to be accepted that they succeeded. At the expense of everyone else, their power increased. But we can now see that they were busily acquiring more and more power over less and less. Because they chose not to look at secondary consequences, their power is now over an economy that is a shadow of its former self. Every other country in the region has overtaken us and the country has suffered sharp falls in its food security and its ability to produce goods of every other kind. These falls have taken with them the country’s export revenues, its employment levels, its ability to pay for the imports it needs, its tax revenues and its ability to settle its debts.
This sequence of falls generated a long list of other casualties. Among them, some might be classified as walking wounded, but many are severely disabled and some should be receiving expert attention in intensive care units. Unfortunately, some are dead.
You will all be able to add to my list, but I invite you to start with the institutional casualties, such as the Zimbabwe dollar and the banking sector, Zimbabwe Electricity Supply Authority, National Railways of Zimbabwe, Air Zimbabwe, Hwange Colliery, Zimbabwe Iron & Steel Company, almost every city and town council, almost every water purification plant and nearly all of the suburban roads in these towns and cities.
The hugely important social institutions, such as the hospitals, schools and universities, have been lucky enough to get some attention in the past year, but they remain in need of very much more than the country can afford. And we can afford very little because our productive capacity has been so dramatically reduced. I would argue that as almost none of the companies that do the producing has been able to pay a dividend in the last few years, almost all of them can be listed among the casualties.
I have started my talk on mistakes we have made that are driving away investors and donors with these issues because they are all contributing to the disappearance of investors, and because these issues have persuaded the donors that we Zimbabweans should make the first moves to overcome self-inflicted handicaps.
Many donors have shown willingness to help us out of the mess, but they cannot justify offering such help while we continue making – and defending – dumb policy choices, or while we tell them to stop interfering with our sovereign right to make them. They are not denying us our rights, but they see no good reason to give us money to make up for the losses caused by our behaviour, or to make it easy for us to carry on behaving badly.
A statement of a few basic economic facts might help in our discussions on this subject, simply because undisputed facts often bring important issues into sharper focus.
The facts that are undisputed are that:
• Zimbabwe is in desperate need of huge amounts of investment
• Investment requires savings
• Zimbabwe’s savings mostly disappeared during the country’s economic collapse and when hyperinflation wiped out what was left
• The savings now needed therefore have to come from abroad
• Foreign investors can choose between more than 200 countries, all of which are trying harder than we are to compete for the world’s limited investment funds
• Investors of the kind that we need the most will choose countries that respect the rule of law
• Investors will choose countries from which attractive rates of return can be earned
• Investments in high risk ventures require prospects of high rates of return
• Investors who choose high risk countries are usually looking for exceptionally high short-term gains
• More desirable long-term investments require stable political and economic environments that inspire confidence
• Current conditions in Zimbabwe offer very few reasons for investors to feel confident, and
• Far from offering security of ownership, Zimbabwe requires new investors to agree to relinquish controlling interests in their companies within five years.
Unfortunately, government seems to believe that it needs only to describe Zimbabwe’s natural endowments and economic potential in enormously positive terms to make all of these problems too small to worry about.
But this remarkable potential, which certainly does exist, has not proved to be enough to offset investors’ concerns. Investors know what they want and they are very good at making their own assessments about whether the investment climate they need is present in Zimbabwe.
Investors look at the past and present as well as the future. When we have so much going for us, they will ask how on Earth we got into the mess we are in now?
The basic answers are simple enough and while we might prefer to forget them, prospective investors quickly find out that that we are suffering from the effects of an extremely serious sequence of events:
• Recent events in Zimbabwe caused a massive decline in agricultural output.
• This forced the country to become dependent on imported food.
• However, the same events quickly reduced the country’s ability to pay for this food.
• They also damaged output from other sectors, so its ability to pay for most other imports also fell.
• For lack of maintenance, the efficiency of its services infrastructure soon declined as well, reducing further the output from all productive sectors.
• As foreign reserves declined, government reintroduced exchange controls.
• As the Zimbabwe dollar weakened, government imposed fixed exchange rates.
• When scarcities mounted and inflation rates increased, government tightened price controls.
• Controlled exchange rates and prices could not stop costs from rising, so many producers were forced out of business
• As jobs disappeared, thousands of skilled people left the country
• When tax revenues declined, government increased its reliance on public sector borrowings.
• When interest rates became too large a burden, government fixed interest rates at a fraction of inflation rates and thus began to erode the national savings stock.
• When lenders could no longer lend enough to close the financing gap, government set Statutory Reserves at figures that confiscated bank balances.
• And when all these sums became too small to sustain government subsidies, transfer payments, salaries and other expenditures, government authorised the printing of the huge amounts needed.
• The resulting hyperinflation was inevitable, and it destroyed the Zimbabwe dollar.
• Zimbabwe became reliant on US dollars, but it lacks the ability to earn or otherwise acquire enough of these for the economy to operate efficiently.
• Because the inflows of tax revenues from the crippled economy are too small and because the country has disqualified itself from receiving most forms of assistance, government is unable to sustain subsidies or most other transfer payments.
This list of government’s responses to the challenges is itself a long list of serious mistakes, and anyone studying this sequence of events will quickly see why: government’s responses almost all dealt with the symptoms, not the causes of the problems.
That is perhaps the biggest mistake of all, because by dealing with only the symptoms, the authorities permitted themselves to take detours right around the problems that need attention.
These unsolved problems all led to falls in output, the consequences of which were falls in jobs, export revenues, imports, taxes, electricity, water, education, health and in the quality of just about everything, life included.
So it started with output. If we want to start fixing the problems, we have to restore output. That means restoring our ability to produce. And for that, we need people who know how to produce, and we need investment capital.
But instead, our government has been driving away the people who know how to run the farms, factories and mines, and it has been sending messages to potential investors that seem to suggest our political leaders actually want Zimbabwe to be the least attractive investment destination on Earth.
At the same time, these politicians are trying to claim that the country has a right to donor support and international aid. Therefore, claims the Zimbabwe government, all those countries and development institutions that refuse to deliver the support to which we are “entitled” are guilty of imposing “illegal sanctions”. The claim has achieved recognition only on the absurdity scale.
This paper is entitled mistakes we have made that are driving away investors and donors, but I have to now question the assumption lurking in that title. We are certainly driving away investors and donors, so I am not arguing with that, but all the careful efforts put into deliberately generating policies that have already displaced productive people and are set to displace many more, seem to have a common purpose.
They therefore seem to have been done on purpose. In other words, they are not mistakes.
This purpose, or basic objective, can only be to put people with political authority into the driving seats of every industry. The reason why politicians might have such an objective appears to be a basic fear that business success could quickly become a challenge, or even a threat, if it is not controlled. So this would best be countered by ensuring that all those who are permitted to succeed should first prove themselves to be loyal supporters.
Although I might seem to have demolished the whole purpose of this address, I believe that I still have plenty of scope left to describe mistakes. If we go back to the start of the more recent series, the Land Reform policies, I believe government made one of its biggest fundamental mistakes in completely misjudging the importance of commercial agriculture.
For one thing, the population of Zimbabwe is vastly bigger than it was a hundred years ago. Zimbabwe’s population grew at three times the average rate achieved by the rest of Africa. The bigger population needed the greater levels of efficiency that commercial farming made possible and the population grew that much faster because commercial farming was successful.
The fact that is important here is that the processes involved are expensive. They call for and depend upon considerable amounts of investment. The costs involved in modern farming dictate that the methods can be successfully and profitably applied only on large-scale properties, or on highly capital-intensive smaller farms.
People who employed these methods therefore needed access to finance, but they had access to this finance because their lands had collateral value. That is another vital component of the system that worked. The amount they could borrow against their title to the land was determined by the value of that land in an active property market. Successful investment added to property values and increased the funding available to achieve even more success.
As a result, and over time, the commercial farming sector became much bigger than the sum of its parts. The skills and experience that had been accumulated over several generations by these farmers had become vital national assets and their investments over the years had resulted in intellectual as well as physical capital.
Today, the great-grandchildren of people who were colonising parts of Africa in the 19th Century are told that they should accept being dispossessed by the great-grandchildren of those who were being colonised, but these arguments always carefully avoid mentioning that the entire world went through incredible changes during that extraordinary century.
As a result, the needs of the populations of every country today could not be accommodated by the technologies that were use in the 19th Century. But that is specially true of Zimbabwe, where our population increased 20-fold, compared to six-fold for the rest of Africa. Zimbabwean politicians can deny the importance of this if they like, but Zimbabwe still does not have the option to go back to its pre-colonial economic or social structures.
When government believed it had successfully legalised the confiscation of all the farmers’ physical assets, the farmers still walked away with their biggest assets of all – their knowledge of these technologies and their experience. Today, if government were to accept the need to harness these available skills and to restore the collateral value of the land, it would quickly restore the dependable output of large-scale farmers. Their contribution could soon become the principal driving force in Zimbabwe’s economic recovery.
Perhaps most importantly, property rights had brought the physical resources, the financial resources and the skills together. So property rights have to be restored if the country’s fortunes are to be changed for the better.
To bring about the conditions needed for success, Zimbabwe would have only to re-install the components needed to make commercial farming function as a big, successful, subsidy-free industry in a modernising economy. These are simple requirements: property rights, title deeds, security of tenure and legal procedures to permit the transferability of land in an open market.
The events of the past decade have made obvious to everyone the complex nature of the linkages between the different economic sectors as well as between the sources and beneficiaries of bank credit. But equally obvious is the fact that credit is most readily extended to people who have bankable security.
The history of the world for the past three hundred years has shown that freehold property is far and away the best form of collateral. Proof of this can be seen in the fact that the countries that show the greatest respect for property rights are the richest countries in the world.
Zimbabwe has only to accept the validity of these facts to put into place the recovery of agriculture. Once achieved, this will underpin the recovery and expansion of the entire economy. It will also restore to Zimbabwe the respect it once enjoyed from international financial institutions, investors and even donor countries.
So, what are the mistakes we have made? I would love to be able to say that the politicians made a serious mistake in deciding that they could dispossess, victimise and impoverish the population without ever having to fear a backlash. But I can’t say that – yet. However, I believe the government will be making a serious mistake if it believes this will never change.
Zimbabwe’s dominant politicians would like me to be able to assure them that if the population becomes more prosperous, if it is empowered by the same freehold property rights that empowered the populations of the world’s wealthiest countries, this more prosperous population would not want to vote this government out of office. But I can’t offer any such assurance.
I can say that more prosperous voters are more demanding, and that politicians hoping to impress financially independent voters have to be clever, resourceful and honest. Many of our current politicians find that disturbing.
They have preferred to rely completely on being accepted as the only legitimate candidates and on being far too powerful to be challenged. But I believe they are mistaken if they hold the belief that this will be enough for the voters of the future.
Whatever way we define mistakes and whichever claims we make about who made them, the fact remains that our economy is in very bad shape and many years as well as many millions of dollars will be needed to bring it right. But what it will need most is good people. To the good people who have filled this conference room, I make this plea:
Don’t make the mistake of leaving now, just when things are getting interesting!
June 2 2010