Comprehensive Economic Recovery in Zimbabwe -...

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Comprehensive EconomicRecovery in Zimbabwe

A Discussion Document

2008

Zimbabwe

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Copyright © UNDP [2008]

All rights reserved

Manufactured in Zimbabwe

Layout and Design: Fontline International

The views expressed in this publication are those of the authorsand do not necessarily represent those of the United Nations or UNDP

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Table of Contents

Research Team v

Preface vii

Executive Summary viii

Acknowledgments ix

Acronyms x

Chapter 1: Overview and Key Messages 11.1 Methodological Approach 11.2 Choice of Sectors and Themes and Structure of the Report 11.3 Some Definitional Clarity 21.4 Managing Expectations 51.5 A Final Cautionary Note – The Problem of Data 6

Chapter 2: Zimbabwe’s Macroeconomic Situation 72.1 Situational Analysis Over Policy Periods 72.2 Macroeconomic Policies and their Impact on Growth and Poverty Reduction 142.3 Zimbabwe’s External Position 192.4 Macroeconomic Stability as a Precondition for Sustainable Growth and

Recovery 242.5 Concluding remarks 27

Chapter 3: Stabilization for Sustained Growth 293.1 Components 293.2 Stabilization: 2009/10 303.3. Fiscal Consolidation and Monetary Stabilization 303.4 Stabilizing Prices 323.5 The Exchange Rate 343.6 Domestic Financial Reforms 373.7 Fiscal Reform 373.8 Fiscal Space 393.9 Taxation 403.10 External Finance 413.11 Debt Sustainability and Debt Relief 413.12 Institutional and Structural Reforms 423.13 The Deflationary Impact of the Stabilization Package 423.14 Social Dimensions 423.15 Medium-Term Outlook 443.16 Recovery Prospects 45

Chapter 4: Aid Flows and Management Systems 474.1 An Overview of Aid Delivery 474.2 Applying the Paris Principles to Zimbabwe’s Recovery 504.3 Debt Relief and Building National Debt Management Capacity 544.4 Aid Flow Management 564.5 Conclusions 58

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Comprehensive Economic Recovery in Zimbabwe

Chapter 5: Recovery of the Financial Sector 595.1 Overview of the Financial Sector 595.2 Overview of Past Performance 625.3 Constraints Facing the Financial Sector 755.4 Sustainable Recovery Paths and Policy Recommendations 76

Chapter 6: Private Sector Development 836.1 The Private Sector in 2008 836.2 Constraints to Private-Sector Development (PSD) 866.3 Policy for Private Sector Development 88

Chapter 7: Labour Markets, Human Capital and the Diaspora 1017.1 Introduction 1017.2 The Labour Market and Poverty Reduction 1017.3 Overview of Past Performance in Zimbabwe 1037.4 The Diaspora 1097.5 Constraints to the Growth and Recovery of Labour Markets, Human

Capital and the Diaspora 1137.6 Sustainable and Inclusive Recovery Pathways at the Level of Strategic

Thrusts and Detailed Policy Recommendations 1177.7 Concluding Remarks 122

Chapter 8: Reviving Manufacturing, Mining and Tourism 1258.1 Manufacturing Industry 1258.2 The Mining Industry 1328.3 Tourism 139

Chapter 9: Land Policy and Agricultural Recovery 1499.1 Overview of Past Performance: 1980–1997 1499.2 Current Situation Analysis, 1997–2008 1539.3 Constraints to agricultural Growth and Recovery 1589.4 Sustainable Recovery Policies and Pathways 1669.5 Sequencing of Land Reform and Agricultural Recovery Policies 1819.6 Concluding Remarks 183

Chapter 10: Restructuring of Public Enterprises, Infrastructure and Housing 18510.1 Overview of Global Trends 18510.2 Public Enterprises, Infrastructure and Housing Provision in Zimbabwe 18610.3 Constraints to Growth and Recovery 19510.4 Remedial Actions and Policy Measures 201

Chapter 11: How the State Does Business 20911.1 Governance Indicators 20911.2 Deterioration of economic governance over time 21011.3 Institutional Structure and Functional Overlap 21211.4 Concentration of Powers 21311.5 How the State Should do Business 21511.6 Political Governance 21511.7 Development Orientation 21611.8 Additional Lessons for the Post-Crisis Developmental State 218

Operational Framework 221

References 231

v

Dr. Dale Doré is the Director of Shanduko in Harare, a non-profit research institute onagrarian and environmental issues in Zimbabwe. After an undergraduate degree inBusiness Adminstration, he completed his M.Sc in Regional and Urban Planning at theUniversity of Zimbabwe, and his D.Phil in Agricultural Economics at the University ofOxford. Prior to joining the UNDP recovery strategy research team, he was thecoordinator of a WWF and IUCN community-based natural resource managementprogramme in five Southern Africa countries, and later a land tenure specialist for a fourcountry study in S.E.Asia on behalf of the Center for International Forestry Researchand the FAO.

Professor Tony Hawkins is currently Professor of Economics at the Graduate School ofManagement at the University of Zimbabwe, an institution which he founded. ProfessorHawkins received his B.A. in Economics from the University of Zimbabwe, was aRhodes Scholar at Oxford where he read for a B.Litt in Economics, and a FulbrightFellow at Harvard. He has written extensively on the Zimbabwean economy with aspecial focus on the private sector, and consulted for a range of international organizationsincluding the World Bank, UNIDO, UNDP, UNCTAD and SADC.

Dr. Godfrey Kanyenze is the Director of the Labour and Economic Development ResearchInstitute of Zimbabwe (LEDRIZ). Prior to this he was an economist with the ZimbabweCongress of Trade Unions (ZCTU) and statistician with the Central Statistical Office(CSO) in Harare. He currently also serves as a member of the Technical Committee ofthe Tripartite Negotiating Forum (TNF) and the Tripartite Wages and Salaries AdvisoryBoard. He received his B.Sc in Economics at the University of Zimbabwe, his Mastersat the University of Kent, and completed his Ph.D in Labour Economics at the Instituteof Development Studies, University of Sussex (UK).

Professor Daniel Makina is currently Professor of Finance and Banking at the Universityof South Africa in Pretoria. Following his B.Acc at the University of Zimbabwe, ProfessorMakina completed his M.Sc in Financial Economics at the School of Oriental and AfricanStudies, University of London, and his Ph.D. at the University of the Witwatersrand inJohannesburg. He has also taught at the Graduate School of Management at the Universityof Zimbabwe, and conducted training programmes for public servants from Sudan andSouth Africa in public financial management.

Dr. Daniel Ndlela is a Director of Zimconsult, a consultancy firm in Harare. He completedhis undergraduate degree at the Higher Institute of Economics in Sofia, Bulgaria, andhis Ph.D at the University of Lund, Sweden. After serving as Principal Economist at theMinistry of Planning and Development in the early 1980s, he lectured at the Departmentof Economics at the University of Zimbabwe. He briefly served as Deputy Dean of theFaculty of Social Studies at the University of Zimbabwe before becoming a SeniorRegional Advisor at the United Nations Economic Commission for Africa (UNECA).He has consulted extensively for, amongst others, the World Bank, COMESA, SADC,UNIDO and UNCTAD.

Research Team

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UNDP Chief Technical Adviser

Dr. Mark Simpson completed his B.Sc (Econ) and Ph.D at the London School of Economics,and his Masters at the School of Oriental and African Studies, University of London.Prior to his posting to UNDP Zimbabwe, Dr. Simpson served with the UN’s Departmentof Peace-Keeping Operations in missions in Angola and East Timor, and with UNDP inMozambique.

vii

Preface

This discussion document is the result of work commissioned by UNDP-Zimbabwe andbased on extensive research conducted by a team of eminent Zimbabwean economists withtechnical support from the UNDP Country Office. The questions it raises and the suggestionsit puts forward in terms of possible economic recovery trajectories for Zimbabwe are intendedto trigger national debates which might help to inform sound policy formulation processes.The issuing of this document is taking place at a time when Zimbabweans of all walks of lifeand political affiliations have agreed to work together to overcome the enormous economicchallenges that the country faces. It is hoped that this document will be read by all interestedplayers, both national and international and thereby, in some small way, contribute to a rapidand sustainable recovery process for this country.

Dr. Agostinho ZacariasUNDP Resident Representative

viii

This discussion document contains an economic recovery framework for Zimbabwe, basedon analytical work conducted by a team of senior Zimbabwean economists. It provides anoverview of the post-independence performance of the economy at both macroeconomicas well as sectoral levels, identifying key constraints to past growth, and breaks these downinto financial, legal, institutional and policy variables. This methodological approach is carriedforward and applied to the last ten years in order to elucidate those factors underlying theeconomic regression that has taken place. On this basis a package of remedial actions is putforward, the adoption of which it is believed will trigger a sustainable, pro-poor growthdynamic.

One common thread which runs throughout the document is that of the imperative of restoringmacroeconomic stability as a pre-condition for recovery. Specific measures that flow fromthis include profound changes to current patterns of both monetary and fiscal policymanagement in order to correct widespread distortions which have acted as impediments tosavings, investment and production.

At the same time, with a view to sustaining in the longer-term the recovery that would flowfrom such stabilization, the team has advanced a package of reforms in areas ranging fromtrade policy, public enterprises, the financial sector, agriculture, manufacturing, mining, tourism,the informal and SME sectors, and the labour market. These are sequenced, prioritized, andbroken down into short and medium to long term actions. Key considerations which haveinformed the analysis underpinning the proposed package include the need to ensure thatgrowth is broad-based, inclusive and sustainable, and that it addresses longstanding problemsrooted in the economic dualism inherited at Independence. Particular attention was based tothe need to remove existing impediments to the participation of the poor in growth, and thenecessary measures required to ensure this transformation takes place are detailed in thedocument.

The document also contains proposals on how the country could best manage internationalassistance if Zimbabwe’s traditional development partners, including the Bretton WoodsInstitutions, were willing to reengage with and support its recovery and longer-termdevelopment efforts. In addition, the role of the State in supporting recovery is analysed.The team advances a set of proposals which it believes are necessary in terms of changesto the various ways the State interacts with the economy and society.

Executive Summary

ix

The team of national economists, brought together and commissioned by UNDP to reflecton the economic challenges facing Zimbabwe, benefited from informal discussions withmany Zimbabwean and non-Zimbabwean analysts too numerous to mention. Each encounterhelped to deepen the shared understanding amongst team members of both general andspecific aspects of the performance of the Zimbabwean economy. Without these discussionsthe document would have been all the poorer.

In addition, as the work progressed, extensive written comments on earlier versions werereceived from experts which have helped to shape both the scope in terms of areas covered,as well as improved the content of the final document. Unwitting contributors to this report,therefore, include Dr. Peter Robinson, one of Zimbabwe’s most eminent economists. Atvery short notice, Dr. Robinson was willing to share his unique insights into issues related toboth productive and social infrastructure with the team, encouraged the team to carry outfurther work on trade policy and the international competitiveness of the Zimbabweaneconomy, and pointed out other lacunae which needed to be addressed. Dr. Lloyd Sachikonyehelped the team to impose restrictions on themselves in terms of their forays into the field ofpolitical economy, assisting the researchers to clearly delimit what they were capable ofresearching given their limited expertise in this area and therefore helping them to avoid thedanger of ‘overstretch’. Dr. Stephen Chipika provided the team with invaluable informationon the current status of Zimbabwe’s SMEs and informal sectors which was incorporated inthe report. Dr. Peter Nicholas and Dr. Mungai Lenneiye of the World Bank in Washingtonand Harare respectively, as well as their teams, both commented extensively on draft versions,as did Dr. Stuart Tibbs, Dr. Alexis Ferrand and Ms. Joanne Manda. On a number of occasions,and as work progressed, preliminary findings were shared with a team of economists fromthe Ministry of Economic Development and useful feedback was received.

Dr. Agostinho Zacarias, UNDP’s Resident Representative, played a key role in supportingthe initial proposal for such an initiative, its rollout and subsequent formulation phases. Mr.Lare Sisay, UNDP’s Deputy Resident Representative, was extremely adept at finding solutionsto various operational and administrative constraints as these arose. It would be true to saythat the team was provided with the means and the space to focus on their ‘core business’,and this is largely attributable to his unwavering support. Ms. Bettina Kittel, Special Assistantto the Resident Representative, worked in the engine room throughout, and quite simply‘made things happen’.

Finally, the Embassy of Norway made a generous financial contribution to the initiative,complementing the UNDP Country Office’s own resources as well as funding receivedfrom UNDP’s Bureau for Crisis Prevention and Recovery. Even more important than itsfinancial contribution, however, was the encouragement received from Norwegian Embassystaff throughout the exercise. The team are indebted to all of the above who in their variousways made this work possible.

Dr. Mark SimpsonUNDP Chief Technical Adviser

Acknowledgments

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AFC Agricultural Finance Corporation

AfDB African Development Bank

AMU Arab Maghreb Union

AREX Agricultural Research and ExtensionART Anti-Retroviral Treatment

ASPEF Agricultural Sector Productivity Enhancement Facility

AU African Union

BACOSSI Basic Commodities Supply Side Intervention

BEAM Basic Education Assistance ModuleBWIs Bretton Woods Institutions

CABS Central African Building Society

CBZ Commercial Bank of Zimbabwe

CEDC Children in Especially Difficult Circumstances

CMB Cotton Marketing BoardCOMESA Common Market for Eastern and Southern Africa

CPI Consumer Price Index

CSCL Cold Storage Company Limited

CSO Central Statistical Office

CZI Confederation of Zimbabwe Industries

DFID Department for International Development (UK)DRC Democratic Republic of Congo

DSA Debt Sustainability Analysis

DZL Dairibord Zimbabwe Limited

EAC East African Community

ECCAS Economic Community for Central African StatesECOWAS Economic Community of West African States

EDM Emergency Drugs and Medical Supplies

ESAP Economic Structural Adjustment Programme

ESOPs Employee Share Ownership Plans

ESPP Enhanced Social Protection ProgrammeFAO Food and Agricultural Organization

FDI Foreign Direct Investment

FTLRP Fast Track Land Reform Programme

GDI Gross Domestic Income

GDP Gross Domestic ProductGFCF Gross Fixed Capital Formation

GMB Grain Marketing Board

GNP Gross National Product

GNS Gross National Savings

GPS Ground Positioning SystemGVC Global Value Chains

Acronyms

xi

Acronyms

HIPC Highly Indebted Poor Countries

IBRD International Bank for Reconstruction and Development

ICT Information and Communication Technologies

IDA International Development Association

IFAD International Fund for Agricultural DevelopmentIFC International Financial Corporation

IMCCP Inter-Ministerial Committee on Commercialization and Privatization

IMF International Monetary Fund

IOM International Organization for Migration

JOC Joint Operations CommandJSA Joint Staff Assessment

LDCs Least-Developed Countries

MDG Millennium Development Goal

MPC Monetory Policy Committee

MTA Money Transfer AgencyMTEF Medium-Term Expenditure Framework

MVA Manufacturing Value Added

NAC National Aids Council

NEC National Employment Council

NGO Non-Governmental OrganisationNIT National Investment Trust

NOCZIM National Oil Company of Zimbabwe

NPV Net Present Value

NRA Nominal Rates of Assistance

NRZ National Railways of Zimbabwe

ODA Official Development AssistanceOECD Organization for Co-operation and Development

OVC Orphans and Vulnerable Children

PAF Performance Assessment Framework

PAPPAF Programme Aid Partners Performance Assessment Framework

PAZ Privatization Agency of ZimbabwePE Public Enterprise

PLARP Parastatal and Local Authorities Reorientation Program

POSB People’s Own Savings Bank

PRSP Poverty Reduction Strategy Paper

PSD Private Sector DevelopmentPSIP Public Sector Investment Programme

PTC Posts and Telecommunications Corporation

PWC Public Works Component

QFAs Quasi-Fiscal Activities

RBZ Reserve Bank of ZimbabweRECs Regional Economic Communities

REER Real Effective Exchange Rate

RER Real Exchange Rate

SADC Southern African Development Community

SAP Structural Adjustment Programme

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SERA State Enterprises Restructuring Agency

SIDA Swedish International Development Agency

SME Small and Medium-Enterprise

SPS Social Protection StrategyTCPL Total Consumption Poverty Line

TFP Total Factor Productivity

TVET Technical Vocational Education and Training

UDI Unilateral Declaration of Independence

UMP Uzumba Maramba PfungweUNAIDS Joint United Nations Programme on HIV/AIDS

UNCTAD United Nations Conference on Trade and Development

UNDP United Nations Development Programme

UNICEF United Nations Children’s Fund

UNIDO United Nations Industrial Development OrganisationUSAID United States Agency for International Development

UZ University of Zimbabwe

ZABG Zimbabwe Allied Banking Group

ZESA Zimbabwe Electricity Supply Authority

ZIMACE Zimbabwe Agricultural Commodity ExchangeZIMDEF Zimbabwe Manpower Development Fund

ZIMPREST Zimbabwe Programme for Economic and Social Transformation

ZIMRA Zimbabwe Revenue Authority

ZINWA Zimbabwe National Water Authority

ZISCO Zimbabwe Iron and Steel CompanyZMDC Zimbabwe Mining Development Corporation

ZSE Zimbabwe Stock Exchange

1

In 2006, UNDP’s Regional Bureau for Africapublished the results of a comprehensiveStrategy and Management Review it hadconducted. Amongst the recommendations itcontained were that UNDP Country Officesshould provide ‘support through specialinitiatives to states in fragile transitionprocesses’ and that this might take theform of, amongst other actions, ‘analyses ofnational policy environments’1.

Launched in 2007 by the Zimbabwe CountryOffice, the key objective of the presentanalytical exercise was to arrive at a soundunderstanding of the extent and nature ofthe regression that has taken place inZimbabwe over the last decade, and on thisbasis to provide insights into the key featuresof a possible comprehensive economicrecovery trajectory for the country thatwould set it back on the path of growth andsustainable human development. Thisdiscussion document is meant as a modestcontribution to ongoing debates among bothinternational and national actors as to the bestway forward for Zimbabwe in a post-crisisscenario.

1.1 METHODOLOGICALAPPROACH

The team of senior Zimbabwean economiststhat was brought together, and provided withan opportunity to reflect critically on theeconomic challenges facing Zimbabwe,adopted a common methodological approachin their work. This involved examining pastperformance in specific sectors/themes inorder to tease out the key explanatoryvariables which underpinned the behaviourof these sectors since independence. Asituational analysis of the present state ofthe sectors in question was then undertaken,

Chapter 1

Overview and Key Messages

which in turn allowed each individualresearcher to advance a set of policyrecommendations in terms of what wouldbe required to unblock existing bottlenecksto the resumption of growth at sectoral level.These bottlenecks were broken down intolegal, institutional, human capital (capacity),policy frameworks and financial constraints,and an attempt was made to understand howthey interacted over time and impacted onoverall performance.

Respect for the principle of logical derivationwas a constant consideration throughoutthe team’s work. As a result, efforts weremade to ensure that any given policyrecommendation that was advanced in agiven report was grounded in, and flowedlogically from, the preceding analytical work,that it reflected the best evidence available,and that in terms of inter-sectoral consistencyit did not contradict the recommendationscontained in other reports.

In order to ensure both inter-sectoralconsistency and the overall coherence of theframework contained in this document,reports were subjected at regular intervals tointernal and external quality-assuranceprocesses. Each individual report, therefore,underwent a number of revisions as theexercise progressed and new light was thrownon the behaviour of particular aspects of othersectors and aspects of the Zimbabweaneconomy.

1.2 CHOICE OF SECTORS ANDTHEMES AND STRUCTUREOF THE REPORT

While the intention was to ensure that theinitiative was as comprehensive as possiblein terms of the areas it covered, both time

1 UNDP, Regional Bureau for Africa, Strategy and Management Review’, New York, 2006, p.16.


2

and human-capacity constraints led to acurtailing of the initial list of sectors andthemes that were to be analysed. Therequirements for recovery in areas such associal-service delivery systems and theenvironment have not been addressed. Thegender-specific impacts of the ongoingeconomic downturn have not been teasedout in any significant manner, nor has theimpact along gender lines of possiblerecovery trajectories. The latter is an areathat particularly merits more work throughex ante Poverty and Social Impact Analysis.

At the same time, new themes not on theoriginal list at the time the exercise wasdesigned were tackled as the workprogressed. For example, it was felt that,notwithstanding the overall medium-term tolong-term time horizon that was adopted, theissue of appropriate short-term economicstabilization measures could not be ignored.It was therefore agreed that short-termstabilization imperatives would be addressed,and that these should be coupled with someconsiderations on necessary countervailingsocial safety nets to deal with the inevitabledeflationary impacts of such an adjustmentprocess. The critical role of infrastructure,both productive and social, as well as tradepolicy and issues related to the internationalcompetitiveness of the Zimbabweaneconomy, were also addressed in the finalstages of the exercise.

The issue of how the state had operated inthe past, how it was currently operating, andhow it should operate in a recovery scenario,also began to feature prominently as acommon denominator that cut across thefindings in all the sectoral and thematicreports. It was therefore agreed that theseinsights should be analysed during theconsolidation phase of the exercise andbrought together in a specific chapter.

A third theme, which also began to take onincreasing importance as work progressed,was that of future aid flows in a scenario inwhich the international donor community wasprepared to re-engage with Zimbabwe andsupport its efforts to recover. This issue was

seen by the team as one which also neededto be analysed and its effects factored intothe proposed recovery strategy. Thought wasgiven as to how Zimbabwe could derivemaximum benefit from such a possibleresumption of non-humanitarian internationalassistance. A chapter on aid flows andappropriate national aid-managementsystems was therefore drafted containingsome insights into how this partnership mightdevelop over time.

In terms of the structure of the report, itbecame clear during the consolidation phaseof the exercise that a number of individualsector and thematic reports overlapped withothers to such an extent that it made sensefor them to be merged. So, for example,separate reports on land policy and recoveryof the agricultural sector were merged. Atthe same time, as the analysis of certainsectors progressed, logic dictated that somechapters needed to be sub-divided. The reporton the private sector was divided into twochapters, one covering generic problems andthe other focusing on the specificities ofmanufacturing, mining and tourism. The keyfindings of a report on ‘the developmentalpotential of the diaspora’ were hived off intotwo other chapters; the human capitaldimensions of the diaspora were brought intothe chapter on labour markets and humancapital, while the financial aspects of diasporaremittances are now reflected in the chapteron the recovery of the financial sector. Suchchanges are intended to both improve theflow of the document as well as to facilitateease of comprehension on the part ofreaders.

1.3 SOME DEFINITIONALCLARITY

A number of theoretical constructs andconcepts appear throughout this document and therefore merit some elucidation for thebenefit of the reader. Foremost among theseis the concept of pro-poor growth. Giventhe vertiginous decline in poverty indicatorsin Zimbabwe, the team was seized of the needto design a recovery strategy that was not

THE ISSUE OF HOW

THE STATE HAD

OPERATED IN THE

PAST, HOW IT IS

CURRENTLY

OPERATING, AND

HOW IT SHOULD

OPERATE IN A

RECOVERY

SCENARIO, ALSO

BEGAN TO

FEATURE

PROMINENTLY

AS A COMMON

DENOMINATOR

THAT CUT ACROSS

THE FINDINGS IN

ALL THE SECTORAL

AND THEMATIC

REPORTS

3

Chapter 1 – Overview and Key Messages

only focused on triggering rapid growth butalso addressed the need to reverse theextremely serious impoverishment of the vastmajority of the Zimbabwean population overthe last decade. The team was constantlyaware of the fact that the concept of pro-poor growth does not translate into a singlepolicy formula, and that the concept itself is‘contested terrain’. Even a cursory readingof recent global economic history shows thatcountries with very similar growth rates canhave markedly different success rates in termsof translating those growth rates into sustainedpoverty reduction. Nevertheless, there iswidespread acceptance that growth, if notalways sufficient for poverty reduction, isalways certainly necessary.

What was clear to the team was that thekey transmission channel between growthand poverty reduction is employment, andthat Zimbabwe’s deteriorating povertyindicators are directly related to the collapsein employment levels, particularly in formalemployment. To the extent that there isconsensus within the development literature– and in a post-Washington Consensus world,it is one of the few areas of agreement – itis clear that sustained and rapid povertyreduction requires both robust growth as wellas growth that in terms of its pattern (asbroad-based as possible in terms of itssectoral and geographical distribution) allowsthe poor to participate in and derive benefitsfrom a growth dynamic. Both the pace andpattern of Zimbabwe’s growth in a recoveryscenario will define the extent to which thepoor are able to participate in and benefitfrom growth.

In this light, the recommendations containedherein have sought to address the need toensure that a recovery process in Zimbabweis as inclusive as possible, and that theintegrability factor of the poor in anexpanding economy is enhanced. The relatedconcept of capability deprivation, derivedfrom the work of Amartya Sen 2 , has also

informed the thought processes of the team.This is reflected in recommendationscontained in this document concerning theneed to remove obstacles to the participationof the poor in the growth process, such asthrough increasing their access to land andfinancial services, as well as through the needto invest in human capital formation via theprovision of basic social services.

These policy recommendations should beaccompanied by the restoration of the marketmechanism to its role as an engine of growth,in order precisely to ensure that theintegrability and capabilities potential of thepoor are realised. But the arguments for sodoing go beyond purely economic outcomes,and should also be seen in the context offundamental freedoms: As Sen has argued:

‘In recent discussions, the focus inassessing the market mechanism hastended to focus on the results itultimately generates, such as theincomes or the utilities yielded by themarkets…. But the more immediatecase for the freedom of markettransactions lie in the basic imperativeof that freedom itself. We have goodreasons to buy and sell, to exchange,and to seek lives that can flourish onthe basis of transactions. To deny thatfreedom in general would be in itself amajor failing of society.’ 3

Another related concept which featuresprominently throughout this work is that ofdualism in the Zimbabwean economy.Applied initially to characterize the structureof the economy inherited at independence,the team has taken the concept forward andusefully applied it to the crisis period. Atindependence, the new government inheritedan economy characterized by a relativelydeveloped and diversified formal economysitting alongside a neglected and under-developed peasant-based subsistence ruraleconomy.

2 Amartya Sen, Development as Freedom, Random House, 2000.3 Sen, p.112.

THE ISSUE OF HOW

THE STATE HAD

OPERATED IN THE

PAST, HOW IT WAS

CURRENTLY

OPERATING, AND

HOW IT SHOULD

OPERATE IN A

RECOVERY

SCENARIO, ALSO

BEGAN TO

FEATURE

PROMINENTLY AS A

COMMON

DENOMINATOR

THAT CUT ACROSS

THE FINDINGS IN

ALL THE SECTORAL

AND THEMATIC

REPORTS


4

Pre-independence policies had beendirected to supporting the former, while thelatter was largely left to its own devices. Areading of post-independence economichistory indicates that this dualism was notaddressed, and that if anything, with thecollapse of the formal economy and theexponential growth of the informal economyboth in urban and rural areas during thecrisis period, the problem has deepened,with most economic transactions and unitsnow operating outside formal systems.Policy recommendations are advanced inthis report that aim to break definitively withthis structural feature of the Zimbabweaneconomy.

The team also found much to agree with inrelation to the notion of the missing middle,as expounded by Nancy Birdsall4 , whichresonated with their own analysis of the pastand current structure of the Zimbabweaneconomy. The crisis years have seen thesevere weakening of the country’s middleclass, as many have either dropped belowthe national poverty line or been forced toemigrate, as well as a gradual witheringaway of formal small and medium-sizedenterprises of which they were previouslythe owners. The latter have suffered duringthe downturn through having only localsystems to meet their financial needs; theirskilled workforce has emigrated, and theirmarkets have shrunk as a result of a collapsein aggregate demand. The economy is nowdominated, on the one hand, by a number oflarge companies that have been able tosurvive the downturn through access to their

own secure lines of credit, input and exportmarkets, and on the other, a massive andstill-growing informal economy. This trendis observed to have cut across all sectors,from the financial services sector toagriculture, mining and manufacturing, andthis dominant feature of the crisis economywill need to be tackled in a process ofrecovery.

In the course of the research, the centralityof the role of the state as either enabler orimpediment to past, present and futuregrowth and poverty-reduction efforts becamea recurrent theme throughout allthe reports. Given the decision to dedicate aspecific chapter to the issue, the teamconducted extensive research on comparativeexperiences in terms of international bestpractices on the role of the state as a facilitatorof growth and poverty reduction. The conceptof the developmental state, derived initiallyfrom research on the experience of Asiandevelopment models5 , was seen to have someapplicability to the Zimbabwean experience,though largely in a negative sense through thecurrent absence of the key features whichcharacterize such successful states.

Drawing on the experience of a number ofAsian states, developmental state theory6

is based on the idea of a state’s commitmentto a technically sound, long-term nationaldevelopment agenda. Through its capacityto both design and implement policies thatsupport such an agenda, developmentalstates are able to trigger and sustain growthas well as poverty reduction over extended

4 Birdsall, Nancy, Do no harm: Aid, Weak Institutions, and the Missing Middle in Africa. Working Paper 113,2007, Center for Global Development, Washington DC. See also her Reflections on the Macro Foundations ofthe Middle Class in the Developing World. Working Paper 130, Center for Global Development, 2007, WashingtonDC. Central to the thesis is the argument that ‘inclusive growth’ necessarily translates into the movement ofpeople out of poverty into the middle class, with a commensurate expansion of the wealth they command. Sucha transformation is seen to be correlated to growth that is based on wealth creation and productivity gainsthrough private sector activities, as opposed to the non-productive rent-seeking behaviour of elites, and istherefore more sustainable over the long-term. The argument is also linked to economic governance issues, witha strong middle class demanding sound macroeconomic governance (e.g., fair and efficient tax systems, fiscalprobity, transparent budgetary processes, competitive exchange rates), as well as strong public accountabilitysystems. Logic would dictate that absent such a class, the reverse would take place.

5 To these Asian examples might be added others closer to home, such as Botswana and Mauritius.6 See, for example Fritz, Verena and Alina Rocha Menocal, Developmental States in the New Millennium: Concepts

and Challenges for a New Aid Agenda, Development Policy Review, 2007, 25(5) pp.531-552.

THE CRISIS YEARS

HAVE SEEN THE

SEVERE

WEAKENING OF

THE COUNTRY’S

MIDDLE CLASS, AS

MANY HAVE EITHER

DROPPED BELOW

THE NATIONAL

POVERTY LINE OR

BEEN FORCED TO

EMIGRATE, AS

WELL AS A

GRADUAL

WITHERING AWAY

OF FORMAL SMALL

AND MEDIUM-SIZED

ENTERPRISES OF

WHICH THEY WERE

PREVIOUSLY THE

OWNERS

5

Chapter 1 – Overview and Key Messages

periods, which in turn leads to a positivetransformation of the economy and societywithin a condensed period of time. Suchtransformations have been characterized byrapid processes of industrialization, theadoption of new technologies, and the moveto higher value-added production processes,running concurrently with a shift fromsubsistence to more commercial, export-oriented farming. An expansion ofopportunities for all to participate in themodern economy, partly through the removalof impediments – be these legal or financialor in terms of improved access to otherassets such as land – as well as through theprovision and expansion of public servicessuch as health, education and agriculturalextension, has been key to the success ofsuch states.

To these features of a developmental statemight be added others, such as soundmanagement of public finances, effectivepublic borrowing, investment in humancapital, the provision and maintenance ofinfrastructure, a respect for private propertyrights, and an ability to stimulate andcooperate with the domestic private sectorwhich is seen as the key engine of growth,technological innovation and employment, aswell as the main source of tax revenues. Thechapter on how the state does business isinformed by the various components thatcharacterize such developmental states, andthe concept is used to evaluate the pastbehaviour of the Zimbabwean state as wellas being the basis on which policyrecommendations are put forward in termsof how the state should be reformed andreoriented so as to enable it to support arecovery process.

1.4 MANAGINGEXPECTATIONS

As the team set out to understand therealities of the current state of theZimbabwean economy and society, itbecame clear that profound damage hasoccurred over time, some aspects of whichare easily reversible, others less so. For

example, while the correction of pricedistortions and the restoration of reliablesupplies of water and electricity may lead toa quick rebound in the mining sector, tourismand in some areas of manufacturing, thedamage done to public sector capacity andthe loss of the country’s human capital basemay well take decades to reverse.

An additional insight thrown up by theresearch was that, contrary to popular views,the country’s growth model had beenunderperforming long before the onset of thecurrent crisis. By way of example, thedownturn in both manufacturing and miningin terms of value added per capita occurredbefore the deepening of the crisis associatedwith the introduction of the Fast Track LandReform Programme in 2000, in the case ofmining in 1998 and in manufacturing in 1996.

Historical data therefore provide aninvaluable reality check. Over the long haul,i.e., the period 1960–2002, and evenincluding the growth spurts of 1968–1974and the early 1980s, far from being one ofAfrica’s better performing economies,Zimbabwe lagged behind the regionalaverage, growing at an annual average rateof 2.6 percent over the period, as against anaverage of 3.2 percent for sub-SaharanAfrica. More significantly, with an annualpopulation growth of 2.9 percent over thesame period, this translated into real percapita incomes declining between 1960 and2002. One key conclusion is, therefore, thatneither the command economy of the 1980s(and certainly not the ‘command economyplus’ of the post-1997 period) nor theabortive liberalization experiment of the1990s, succeeded in putting Zimbabwe onto a fast-growth track.

Full recovery, defined simply in terms of areturn to the peak real per capita incomesof 1991, would take twelve years, assuminga bottoming out of the decline in the courseof 2008, and uninterrupted growth of 5percent annually from 2009 to 2020. And,given that Zimbabwe is susceptible todrought on average every three years, andthat with the decline of commercial

THE DAMAGE DONE

TO PUBLIC SECTOR

CAPACITY AND THE

LOSS OF THE

COUNTRY’S HUMAN

CAPITAL BASE MAY

WELL TAKE

DECADES TO

REVERSE


6

agriculture this vulnerability has increased,even the 5 percent annual growth in percapita GDP may be beyond the upper boundsof probability.

This cautionary note is necessary in orderto guard against misplaced enthusiasm anda misreading of positive signals in the earlyyears of a recovery scenario. While therewill be a bounceback effect, possibly a strongone as current idle capacity is brought onstream once again, and as internationalassistance helps to overcome constraints toproduction, this may well peter out unlessthe necessary measures are taken to sustainthis rebound. As was the case with the newpost-independence government in 1980s,there is a danger that – in the same waythat the early and robust growth ratesevidenced in the first three years ofindependence were seen as indicative oflong-term trends (and which, with theadvantage of hindsight, should now be moreproperly attributed to the end of the war, thedismantling of sanctions, the utilization ofspare capacity, and renewed access tomarkets and imported inputs) – an earlyrebound in a post-crisis scenario might bemisinterpreted once again as translating intoa sound and sustainable longer-term growthmodel.

1.5 A FINAL CAUTIONARYNOTE – THE PROBLEM OFDATA

One key difficulty faced by the team as itcarried out its analytical work centred on theavailability and quality of data sets. Thedeterioration in the national statistics systemover recent years has been a marked one.Not only has the brain drain impactedadversely on national capacity in this area,but a shrinking state-revenue base has meantthat even the recurrent costs required tosupport data-collection efforts are no longer

being covered. As a result, many data arequite simply no longer being collected, wherethey are being collected they are of dubiousquality, where they are available they are nolonger being analysed and, increasingly overrecent years, on the grounds of ‘nationalsecurity’, they are no longer being madeavailable. Added to these difficulties facingeconomic analysts is that, in a hyper-inflationary environment, indicators based onthe national currency are of limited utility ascomparators.

The problem of up-to-date data and theirreliability runs the whole gamut from therequirement for a new population census(the last one having been undertaken in 2002)through to the need to update the nationalpoverty assessment in the light of theprecipitous decline in macroeconomicindicators since the last assessment basedon 2004 data, as well as outdated sectoralsurveys, most significantly in the area ofagriculture. To this might be added the lackof information in areas such as Zimbabwe’stotal external debt stock that is owed to‘other official bilaterals’, i.e., non-OECD(Organization for Co-operation andDevelopment) creditors, and that will havea significant impact on any proposalsregarding future debt relief and the country’spossible debt sustainability levels.

All statistics in this document therefore comewith a serious ‘health warning’. It hasbecome clear to the team that a significanteffort will have to be made to update nationaldatabases. Reliable baselines are a sine quanon for the formulation of national andsectoral recovery plans, the setting of targets,the basis on which progress towards thesetargets can be monitored and evaluated, andthe effectiveness of international assistancegauged. Seen in this light, it would be in theinterest of both government and its inter-national partners to address this constraintas quickly and comprehensively as possible.

RELIABLE

BASELINES ARE A

SINE QUA NON FOR

THE FORMULATION

OF NATIONAL AND

SECTORAL

RECOVERY PLANS,

THE SETTING OF

TARGETS, THE

BASIS ON WHICH

PROGRESS

TOWARDS THESE

TARGETS CAN BE

MONITORED AND

EVALUATED, AND

THE

EFFECTIVENESS

OF INTERNATIONAL

ASSISTANCE

GAUGED

7

The objective of the present chapter is topull together in a comprehensive manner theevolution of the country’s economicmanagement system since independencein 1980 and bring to bear the lessons learnedfrom this experience. The chapter is alsomeant to bring together the links betweenmacroeconomic policy positions, micro-economic dynamics, and developments in thesectoral structure of the economy.

A situational analysis of the developments inZimbabwe is undertaken within a frameworkof four different periods: (i) the pre-independence period (ii) the control regimeperiod, 1980–1990, (iii) the liberalization era,1990–1996, and (iv) the deepening crisisperiod, 1997–2008. Through this timeframea diagnostic analysis of Zimbabwe’s economicperformance is presented using some relevanteconomic indicators: GDP (Growth DomesticProduct) growth per capita, inflation, sectoraltrends, employment, real wages, and humandevelopment indexes.

What is highlighted in this chapter is thefundamental structural change in Zimbabwe’seconomy, which started with the onset ofeconomic crisis in 1997 and deepened in thepost-2000 period. The fundamental rupturewith past patterns of growth that took placein 2000 means that lessons learned during thepre-crisis period should be treated withcaution. At the same time, the analysis alsomakes clear that the economy has beenoperating sub-optimally throughout thepost-independence period, a factor whichis often ignored in research on Zimbabwe.

The main focus of this chapter is to putforward suggestions in terms of futuremacroeconomic management that couldsupport a comprehensive economic recoverystrategy. These macroeconomic policiesshould aim at achieving sustainable, broad-based and inclusive growth and povertyreduction.The chapter also throws light on

the short-term stabilization requirements,policy recommendations and actionscontained in chapter 3 on stabilization andthe section on an operational framework.

2.1 SITUATIONAL ANALYSISOVER POLICY PERIODS

2.1.1 The pre-independence era,1965–1979

In response to the imposition of internationalsanctions against Rhodesia’s UnilateralDeclaration of Independence (UDI) in 1965,the government assumed extensive inter-ventionist powers, adopting inward-lookingand import-substitution policies, designed topromote domestic manufacturing andachieve self-sufficiency in major consumergoods. Extensive intervention in theeconomy, mainly through elaborate controlson prices, wages, interest rates, and inexchange-rate markets, became pervasive.

Externally propelled protectionism during theUDI period, combined with the forcedreinvestment of blocked profits, contributedto high growth rates during the period 1965–1973. The increased role of the state ineconomic activity was shown by increasesin investment. The growth associated withthe above factors soon came to an end,however after 1974, mainly as a result ofthe impact of the liberation war and the oil-shock-inspired global recession.

Notwithstanding this post-1974 downturn, inoverall terms the UDI economy was wellmanaged, albeit for the benefit of a racialminority, with stable prices, high savings andinvestment rates, and a slowly depreciatingcurrency in real terms. It was alsocharacterized by a great deal of governmentintervention, which worked closely with thewhite-dominated private sector.

Chapter 2

Zimbabwe’s Macroeconomic Situation

THE FUNDAMENTAL

RUPTURE WITH

PAST PATTERNS OF

GROWTH THAT

TOOK PLACE IN

2000 MEANS THAT

LESSONS LEARNED

DURING THE PRE-

CRISIS PERIOD

SHOULD BE

TREATED WITH

CAUTION

8


2.1.2 The control regime,1980–1990

At independence in 1980, Zimbabwe’s newgovernment maintained the macroeconomiccontrols inherited from the Rhodesiangovernment. Within the framework of acommand economy, the government alsointroduced redistributive objectives thatnecessitated a large public sector andincreased government spending on health,education, and other social welfare pro-grammes throughout the 1980s. Although the1980s might be interpreted as a decade ofsuccess, particularly when judged byimprovements in terms of social indicators,the downside was the high cost in terms ofunsustainably high budget deficits, whoseharmful effects remained hidden behinda plethora of economy-wide controls.Zimbabwe’s average growth rate of 4.3percent per annum in the 1980s was the envyof sub-Saharan Africa during the so-called‘lost decade’ for Africa. Upon closerinspection however, it was clear that therewere problems with the growth model. Forexample, formal employment grew at just1.9 percent per annum over the period.

A combination of fortuitous political andsocial factors and climatic conditions led toa ‘boom and bust’ experience in the 1980s.Zimbabwe’s immediate post-independenceperiod was greeted by exceptionally highgrowth rates: 10.7 percent and 9.7 percentfor 1980 and 1981, respectively. Thisunprecedented economic boom could beexplained by three factors:

• Favourable exogenous growth conditionsat the end of the liberation war: lifting ofeconomic sanctions, favourable worldmarket conditions, two consecutive andexceptionally good rainfall seasons.

• The pursuit of fiscally driven redistributivepolicies, which in turn stimulated overalldemand in the economy.

• The opening up of external markets.

The Zimbabwe government made it clearthat the state was to play a central role inthe country’s economic and social develop-ment. The economic boom in the immediateaftermath of independence might have beenmisinterpreted by the government asobviating the need to strengthen theorientation and effectiveness of the state tomanage the required transition towardsbroad-based, inclusive growth, and to ensurean internationally competitive economy, usingboth the private and public sectors.

When these favourable exogenous growthfactors began to weaken by the mid-1980s,the economy was plunged into recession. Thiswas initially sparked by two consecutivedroughts (1982/83 and 1984/85), fallingdemand for Zimbabwe’s exports in worldmarkets, and the start of a decline ininvestment.1 While some would argue thatthis ‘boom and bust’ pattern could beexplained by exogenous factors, usuallydrought, the tendency for Zimbabwe’s long-term growth rates to decline is stronglyrelated to a controlled macroeconomicenvironment that failed to provide adequateand predictable resource flows andincentives for long-term investment.

Although output grew more strongly duringthe 1980s than in the rest of the post-independence period, Zimbabwe’s weakexport performance, low levels of capitalformation and foreign-exchange scarcitysubsequently led virtually all economicplayers – industrialists, government andlabour – to accept the need for a packageof reforms.

2.1.3 Economic liberalizationperiod, 1991–1996

The key elements of the Economic StructuralAdjustment Programme (ESAP) whichbegan in 1991 were:

• A shift from import substitution to anopen-market economy fostering export-driven growth.

1 The investment ratio declined from 20 percent of GDP between 1980 and 1985 to 17.5 percent between 1986and 1990 (Central Statistical Office, Quarterly Digest of Statistics).

9

Chapter 2 – Zimbabwe’s Macroeconomic Situation

• Monetary policy reform: market-deter-mined interest rates and the removal ofbarriers to the financial sector.

• The establishment of a one-stop invest-ment promotion centre – the ZimbabweInvestment Centre.

• The commercialization of public enter-prises in order to facilitate autonomyin business decision-making on issuessuch as investment, pricing, accountabilityand efficiency in the utilization ofresources.

• Liberalization of the labour market toallow free collective bargaining betweenlabour and employers.

While the government vigorously pursuedtrade liberalization under ESAP, it stalled onpublic sector reforms. The government failedto adhere to the internal logic of the reforms.For example, fiscal stabilization which wasrequired up-front was never seriouslyattempted because the government found itpolitically difficult to reduce its expenditure.Exogenous factors, in particular the 1992/93 drought (the severest in living memory),served only to aggravate an inherentlyprecarious situation created by thegovernment’s own delays in public sector andpublic enterprise reforms. By 1995, thesedelays had given rise to high budget deficits– of over 8 percent compared to the ESAPtarget of 5 percent of GDP. At the sametime, instead of the target of 5 percent GDPgrowth, the actual average growth rateachieved was 0.8 percent under ESAP from1991 to 1995.

The economic reforms of the 1990s failedto induce the behaviour, by both the privateand public sectors, that was needed to putthe economy on a sustainable growth paththrough faster accumulation of physical andhuman capital that are key to gains inproductivity.

The successor programme, the ZimbabweProgramme for Economic and SocialTransformation, ZIMPREST (1996–2000),sought to continue the unfinished businessof ESAP. This included the reduction of thebudget deficit, facilitating public sector andpublic enterprise reforms, and financialliberalization. It also sought to address thebroader social and political agenda of povertyreduction, land reform, black economicempowerment and the indigenization of theeconomy. Yet ZIMPREST faltered forreasons similar to those that impactedadversely on ESAP – the government’sfiscal policy, which threw macroeconomicfundamentals into disarray and resulted inhigh budget deficits, high inflation, lowforeign-exchange reserves, a weak balance-of-payments position and overall low growth.

The broad picture at the start of the deepeningcrisis period in 1997 was one in which thepopulation had been made to bear a heavysocial cost for the reforms, with little to showin terms of improved international competitive-ness of the economy. The liberalization of theeconomy had not led to poverty reduction andeconomic diversification; on the contrary,economic performance and exportcompetitiveness had been adversely affectedby high production costs, declining terms oftrade, climatic conditions and the realappreciation of the Zimbabwe dollar. Thesame phenomenon was observed in other sub-Saharan African countries that had‘implemented the rules of World TradeOrganization (WTO) and reforms of theBWIs [Bretton Woods Institutions], openedup their economies, and implementedliberalization and privatization, but growth[had] not occurred’ (Sindzingre, 2004: 7).2

2.1.4 The deepening crisis, 1997–2008

The onset of the economic crisis can betraced to the so-called ‘Black Friday’ crash

2 Sindzingre refers to the 1980s, when most of sub-Saharan Africa adopted SAPs (Structural Adjustment Plan) andhad nothing to show for it. However from 1997 to 2002, the rest of sub-Saharan Africa grew by 1.8 percent, andby 4.1 percent since 2003, during the time that Zimbabwe’s economy was sliding.

THE BROAD

PICTURE AT THE

START OF THE

DEEPENING CRISIS

PERIOD IN 1997

WAS ONE IN WHICH

THE POPULATION

HAD BEEN MADE

TO BEAR A HEAVY

SOCIAL COST FOR

THE REFORMS

10


of the Zimbabwe dollar on 14 November1997, which was precipitated by thegovernment’s unbudgeted payment ofgratuities to war veterans. This was followedin 1998 by Zimbabwe’s participation in theconflict in the DRC, which furthercontributed to the ballooning fiscal deficit.Following the reversal of reforms undertakenduring ESAP and ZIMPREST, governmentpolicy became increasingly interventionist asthe authorities sought to reverse economicdecline. In several respects these inter-ventions were designed to boost privatesector performance, primarily through theprovision of cheap bank finance at negativereal interest rates, via a plethora of lendingwindows operated by the Reserve Bank ofZimbabwe. Private sector performance washowever, constrained by an overvaluedexchange rate, severe shortages of foreignexchange, a shrinking domestic market, anda variety of supply-side bottlenecks thatincluded fuel, electric power, imported inputsand skills. At the same time, the steep declineof commercial agriculture after 2000 (seechapter 9 on land policy and agriculture)robbed industry of its traditional source ofsupply of domestic inputs while also

contributing to the economy-wide shrinkageof effective demand.

On the fiscal front, the government hascontinuously run large budget deficits,financed mainly through domestic bankingsector borrowing. By the end of the 1990s,the interest burden on its rapidly growingdomestic debt had come to exceed totalexpenditure leading to a debt trap.3

In real terms GDP growth stood at 5.8percent in 1994, fell to 0.2 percent in 1995,mainly due to the 1994/95 drought, and roseto its highest level of the decade at 9.7percent in 1996 before falling to 1.4 percentin 1997. Since the onset of the deepeningeconomic and social decline in 1997, GDPgrowth has suffered a decline from 0 percentin 1998 to –7.4 percent in 2000 and to –10.4percent in 2003. Thereafter, real GDPgrowth has averaged –5.9 percent between2005 and 2007 (see Figure 2.1).

Zimbabwe’s economic decline occurred atprecisely the time that other African countrieswere beginning to achieve reasonable ratesof growth. Compared with a cumulative gainof over 40 percent of GDP elsewhere in

3 A country falls into a debt trap when it is forced to borrow to pay interest on existing debt. Where there is aprimary budget deficit – that is, where non-interest expenditure exceeds revenue – then the total budget deficitwill keep growing as debt increases and the cost of servicing that debt rises.

Note: The figure for 2007 is estimated

Source: Central Statistical Office

Figure 2.1: GDP growth at 1990 prices, 1994–2007

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

15%

10%

5%

0%

-5%

-10%

-15%

11


Africa, Zimbabwe’s GDP between 1998 and2006 declined by –37 percent (ZimbabweInstitute, 2007: 37). Figure 2.2 comparesZimbabwe with a group of ten selectedSADC countries with which Zimbabwe hadearlier compared favourably in terms ofGDP growth. It shows that Zimbabwedropped to an average negative growth for2000–2006 of 5.7 percent compared to thesecountries’ average positive growth of 4.8percent during the same period. Even ifAngola is removed from this list, because itsgrowth is fuelled by the oil-extractive sector,the remaining eight countries had an annualaverage growth rate of 4.2 percent over thisperiod, well above that of Zimbabwe.

To these variables must be added the impactof the HIV and AIDS pandemic on theeconomy. Estimates from UNAIDS and theIMF in Southern Africa suggest that annualGDP growth rates may decrease by 1-2percentage points as a result of the HIV andAIDS pandemic (see Lisk, 2002). It isestimated that economic growth could be 25percent lower than it would have beenwithout the pandemic over a 20 year periodin high prevalence countries, theirpopulations could be 20 percent lower by2015, and their labour forces 10–22 percentsmaller (ILO, 2000). Data from the 2002population census suggests that the

intercensal population growth rate declinedfrom 3.9 percent during the period 1982-1992to 1.2 percent during the period 1992-2002mainly due to the HIV and AIDS pandemic.

Zimbabwe is one of the worst affectedcountries by HIV and AIDS in SouthernAfrica, a region at the epicentre of theglobal pandemic. At the national level, lifeexpectancy fell dramatically from just over57 years in 1982 to about 50 years by 1995and an estimated 39 years in 2003. Lifeexpectancy is estimated at 37 years for menand 34 years for women in 2007. Thedramatic decline in life expectancy is aresult of the HIV and AIDS pandemic,which saw the HIV adult prevalence ratereach a level of 24.6 percent by 2003. Atotal of 1.6 million Zimbabweans under 50years are living with HIV and AIDS.However, recent data from the Ministry ofHealth and Child Welfare suggest that adultHIV prevalence had declined to 20.1percent in 2005, 18.1 percent by 2005/06and 15.9 percent by 2007.

Another feature of Zimbabwe’s deep-crisisperiod is the country’s growing fiscal deficitwhich averaged –6.5 percent during 2000–2006 (Table 2.1). However, the fiscal deficitfigure is a serious underestimate given quasi-fiscal expenditures not being reflected in the

Source: African Development Bank

Figure 2.2: Average GDP growth rates of selected SADC countries, 2000–2006

Angola DRC Madagascar Malawi Mauritius Namibia Swaziland Tanzania Zambia Zimbabwe

12%

10%

8%

6%

4%

2%

0%

-2%

-4%

-6%

-8%

12


national budget. All other major macro-economic indicators are in sympathy withthe worsening fiscal account deficit, inparticular the current account balance whichaccording to the IMF’s figures was alsonegative throughout this period, averaging–3.7 percent, while growth rates have alsobeen in negative territory throughout theperiod.

Throughout this period, business confidencehas been progressively undermined by publicallegations and condemnations by thegovernment of private sector involvement in‘profiteering’ and ‘economic sabotage’. Inaddition, national policy incoherence andinconsistency has made forward planningby the private sector an extremely precariousundertaking. Most recently, theIndigenization and Economic EmpowermentAct (No. 14 of 2007) – which requiresbusinesses to sell 51 percent of their sharesto indigenous Zimbabweans, defined as thosepeople and groups who were disadvantagedunder colonial rule – has further compoundedthis uncertainty.

2.1.5 An overview of the long-haul:the continuous downwardtrend in economicperformance since 1980

The macroeconomic aggregates show analmost continuous downward trend since1980 (Table 2.2). As the table shows, formal

Table 2.1: Zimbabwe's macroeconomic indicators, 2000–2006

Indicator 2000 2001 2002 2003 2004 2005 2006

GDP (current US$ million) 8,135.8 12,882.6 17,875.6 7,913.1 4,712.1 3,372.5 7,033.7

GNP US$ 7,150.0 12,800.0 30,800.0 7,850.0 4,640.0 3,180.0 n.a.

Population 12,595.0 12,698.0 12,786.0 12,863.0 12,936.0 13,010.0 13,085.0

Current account balance(as % of GDP) –0.4 –1.0 –2.6 –4.6 –5.6 –7.5 –4.0

Fiscal deficit, includinggrants (% of GDP) –18.6 –7.0 –2.7 –0.2 –7.6 –6.1 –3.1

GNS per GDP (%) 11.1 7.0 4.9 –1.4 –3.2 –6.7 4.0

Gross official reserves(months of imports) 1.5 0.6 0.7 n.a. n.a. n.a. n.a.

GDP growth rates –7.3 –2.7 –4.4 –10.4 –3.8 –6.5 –5.1

CPI inflation 55.6 73.4 133.2 365.0 350.0 237.8 1,216.0

n.a. Data not available

Sources: African Development Bank database; IMF (for balance-of-payments current account balance)

employment growth declined to just above 0percent in the 1990s and became negativeby the post-2000 period. However, the majorsectors of the economy – agriculture,manufacturing and mining – had mixedgrowth paths, with the first two registeringtheir highest growth in 1996 – 19.8 percentand 14.7 percent, respectively – mining’shighest growth was in 1994 (10.8 percent)and 1998 (8.1 percent). Thereafter allthe three sectors declined progressively withthe decline becoming very steep in recentyears.

Track record on inflation management

In order to counter the budget debt trap, thegovernment introduced a policy ofsuppressed interest rates in 2001, which wascombined with a fixed exchange rate and aforeign-currency surrender requirement onexporters. This strategy succeededtemporarily in reducing the burden in thebudget of interest payments on the nationaldebt, but at huge cost to the economy as awhole. As expected, negative real interestrates encouraged over-consumption andspeculation, particularly in the foreign-exchange market. The parallel exchange ratedepreciated rapidly, creating a lucrativewedge for the few who were able to accessforeign currency at the official rate andeither trade it directly at its market value orimport luxury items for resale on the domesticmarket.

13


Inflationary pressures had built up from 1997,when it rose from 19 percent in that year to56 percent by 2000, to over 1,000 percent by2006, and to an average of 12,563 percent in2007 (Figure 2.3). Zimbabwe’s inflationreached hyperinflation levels in June 2007.At the time of writing, the most recent officialestimates (June) was that inflation was over11.2 million percent year-on-year.Zimbabwe’s inflation is fundamentally causedby excess government expenditure, financed

by the printing of money in an economy witha real GDP that has been declining for thelast nine years. Money-supply growth hasbeen completely decoupled from economicgrowth, the inevitable result being continuedand accelerating inflation.

Emergency policy initiatives

After 1997, and in response to the recurrentfalls in GDP growth rates and employment

Table 2.2: Zimbabwe's economic performance, 1980–2006

Economic Indicators 1980–1990 1991–2000 2001–2006

Average annual GDP growth (%) 4.30 0.90 –5.70

Employment growth (%) 1.90 0.40 –7.50

End-of-year population (millions) 9.74 11.34 11.95

Formal employment (% of pop.) 12.20 10.90 7.00

Manufacturing VA average growth (%) 4.60 –0.70 –7.40

Manufacturing employment growth (%) 3.00 –0.70 –5.30

Inflation in final year of period (%) 12.00 56.00 238.00

MVI in final year of period (%) 138.10 100.70 67.80

Exports–GDP in final year of period (%) 23.00 43.00 24.00

Manufacturing as % of GDP 20.35 17.70 15.00

Agriculture as % of GDP 16.20 14.90 17.00

Mining as % of GDP 4.30 4.20 4.00

Savings–GDP 16.50* 17.90 –0.10

Investment–GDP 16.00* 19.40 6.30

Budget deficit (% of GDP) –2.10* –6.30 –5.80

MVI = Manufacturing Volume Index *Average for 1986-1990 only

Sources:Central Statistical Office; International Monetary Fund (various publications)


Figure 2.3: Zimbabwe’s CPI inflation, annual average, 2001–2007

2001 2002 2003 2004 2005 2006 2007

100,000%

10,000%

1,000%

100%

10%

14


levels, the government announced, withincreasing regularity, a succession ofturnaround economic blueprints/programmes(Table 2.3). As shown in Table 2.2, notwith-standing these programmes, real GDP hascontinued to decline every year since 1997.

It may be concluded from the coincidencein the timings of the declining macro-economic indicators and the unveiling ofthese successive turnaround programmesthat the programmes were either flawed interms of their analytical content and policyrecommendations, or were never imple-mented in a consistent manner.

2.2 MACROECONOMICPOLICIES AND THEIRIMPACT ON GROWTH ANDPOVERTY REDUCTION

2.2.1 Fiscal policy

Instead of being supportive of growth andpoverty reduction, the government’s

macroeconomic policies have oftenconstituted the main binding constraints.

During the 1980s, Zimbabwe’s record ofsocial service delivery (education, health,basic services and infrastructure) and publicsector growth (civil service, parastatals) wasostensibly impressive. However, this wasachieved at a high cost in terms ofunsustainably high budget deficits, whoseharmful effects were high inflation and thecrowding out of private sector credit. Asshown in Table 2.2, the budget deficit rosefrom an average of –2.1 percent of GDPbetween 1980 and 1990, to –6.3 percentbetween 1991 and 2000, and –5.8 percentbetween 2001 and 2006.

2.2.2 Investment, gross fixed capitalformation and savings ratios

The investment–GDP ratios, gross fixedcapital formation (GFCF),4 and savings–GDP ratios in Figures 2.4, 2.5 and 2.6 showmarked declining trends from 1996, with evenmore significant deterioration in performanceafter 2000.

4 Gross fixed capital formation is measured by the total value of a producer’s acquisitions, less disposals of fixedassets during the accounting period, plus certain additions to the value of non-produced assets (such as subsoilassets or major improvements in the quantity, quality or productivity of land) realized by the productive activityof institutional units.

Table 2.3: Zimbabwe’s economic planning programmes, 1998–2008

Date Economic blueprint/plan Responsible authority

29 Jan1998 Vision 2020 and Long-Term Development Strategies* National Economic PlanningCommission, Office of thePresident and Cabinet

20 Feb 1998 Zimbabwe Programme for Economic and Social Ministry of FinanceTransformation (ZIMPREST)

28 Mar 1998 Three-Year Medium-Term Development Plan National Economic PlanningCommission, Office of thePresident and Cabinet

August 2001 Millennium Economic Recovery Programme (MERP) Ministry of Finance

April 2003 National Economic Revival Plan (NERP) Ministry of Finance

November 2004 Macroeconomic Policy Framework, 2005–2006 Ministry of Finance

April 2006 National Economic Development Priority Programme Ministry of Economic(NEDPP) Development

Ongoing Zimbabwe Economic Development Strategy (ZEDS) Ministry of EconomicDevelopment

* Submitted for consideration by the National Economic Planning Commission and Cabinet, but was neitherapproved nor released.

AFTER 1997, AND IN

RESPONSE TO THE

RECURRENT FALLS

IN GDP GROWTH

RATES AND

EMPLOYMENT

LEVELS, THE

GOVERNMENT

ANNOUNCED, WITH

INCREASING

REGULARITY, A

SUCCESSION OF

TURNAROUND

ECONOMIC

BLUEPRINTS/

PROGRAMMES

15


Investment as a percentage of GDP declinedfrom an average of 15 percent in the 1995–2000 period to 4 percent from 2000 to 2006.The collapse of investment is furthercorroborated by the decline in the figures ofgross fixed capital formation (GFCF) inFigure 2.5 below which declined from anaverage of 23 percent in beween 1995 and1997 (the onset of the deepening crisis),picking up slightly to 25 percent in 1998before declining precipitously in the post-2000 period. GFCF in the 2000–2006 periodaveraged only 6 percent, declining to 2percent in 2005 (Figure 2.5). These figures

are dwarfed by the performance of GFCFin the pre-independence period, whichaveraged 24 percent between 1970 and1974, and 17 percent between 1975 and 1979(Zimbabwe, 1982: 5–6).

Another important indicator of the country’sregression can be seen in terms of its grossnational savings (GNS) as a percentage ofGDP. This variable is important, given thatincreasing aggregate savings and investmentare key contributors to growth. Accordingto the CSO figures, the savings–GDP ratiodeclined from 28 percent in 1995 to a low of

Source: Central Statistical Office, Quarterly Bulletin of Statistics, various issues

Figure 2.4: Investment–GDP ratios, 1995–2006


Figure 2.5: Gross Fixed Capital Formation (GFCF) as percentage of GDP

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

25%

20%

15%

10%

5%

0%

30%

25%

20%

15%

10%

5%

0%

16


Note: The savings figure for 2006 is an estimate

Source: Central Statistical Office Quarterly bulletins (various issues)

Figure 2.6: Savings–GDP ratios, 1995–2006

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

35%

30%

25%

20%

15%

10%

5%

0%

Figure 2.7: Gross national savings as a percentage of GDP, 2000–2006

35%

30%

25%

20%

15%

10%

5%

0%Kenya Malawi Mauritius Namibia Tanzania Uganda Zambia Zimbabwe

Table 2.4: Gross national savings as percentage of GDP in selected regional economies

Average2000 2001 2002 2003 2004 2005 2006 growth

2000-06

Kenya 15.7 16.1 18.5 17.2 14.2 14.6 14.3 15.8

Malawi 8.3 7.0 –0.8 3.3 5.1 8.6 10.0 5.9

Mauritius 25.8 26.0 26.0 27.3 23.7 19.6 19.7 24.0

Namibia 30.4 26.6 25.2 34.9 35.7 31.3 32.6 31.0

Tanzania 12.1 11.8 12.1 13.8 14.3 12.9 10.0 12.4

Uganda 12.5 14.3 14.5 14.8 21.5 21.1 18.2 16.7

Zambia 0.7 –0.8 6.7 10.7 14.0 15.2 16.4 9.0

Zimbabwe 11.1 7.0 4.9 –1.4 –3.2 –6.7 4.0 2.2

Source: AfDB Statistics Department and World Economic Outlook (September 2006)

Source: AfDB Statistics Department and World Economic Outlook (September 2006)

17


5 percent in 2001, rising to 17 percent in 2004before slightly dropping to 14 percent in 2005.A wide gap in figures between the officialCSO figures and the AfDB’s (AfricanDevelopment Bank) is shown by thedifferences in averages in the period 2003–2005. While the CSO records a positivesavings–GDP average ratio of 14 percent,the AfDB comes up with a wide negativefigure of 3 percent during the same period(Figure 2.6 and Table 2.4).

When compared to a select group ofcountries in the East and Southern Africanregion, Zimbabwe lagged behind them all inGNS as a percentage of GDP from 2000 to2006 (Figure 2.7), e.g., while Namibia andMauritius top the list at 31 percent and 24percent, respectively, Zimbabwe laggedbehind at 2.2 percent.

2.2.3 Decapitalization anddisarticulation of the economy

In the current situation, the impact of themacroeconomic variables on the structureof the Zimbabwean economy isschematically represented in Table 2.5.

Leaving aside the mining sector, which iscurrently on the ascendant, all otherproductive sectors – agriculture,manufacturing, and tourism – are on thedecline. While productive investments areon the decline, speculative activities are onthe ascendant. An increasing volume ofeconomic activities are taking place outsidethe formal economy. There has been anoverall reduction in the number of formal-sector economic units, as well as significantdownsizing of the same. This has beenaccompanied by fundamental breakages ininter-sectoral linkages, such as the previouslysymbiotic nexus between the manufacturingsector and large-scale commercialagriculture,5 and a significant decline in therole of commercial banks as providers offinance to the private sector.6

2.2.4 Deepening poverty

The 2003 Poverty Assessment Study Survey(PASS II) showed that 72 percent of thepopulation was living below the TotalConsumption Poverty Line (TCPL),compared to 55 percent in 1995.7 Thisrepresents a 30 percent increase in the

Table 2.5: Main features of the Zimbabwe economy under crisis

Declining Growing

Agriculture Mining*

Manufacturing Distribution and trade

Tourism Telecommunications, finance, real estate

Private sector Public sector

Formal economy Informal sector

Domestic output Foreign trade

'Real' investment 'Financial investment' (speculation)

Large formal firms and farms SMEs/subsistence farming

Diminishing Increasing

Middle-income segment Low-income segment

Income from domestic employment Diaspora remittances

Differentiation - style, quality, branding Down-trading and cost leadership

Skills and entrepreneurship Low skills and low technologies

* The mining sector may be growing in value terms but not in volume

5 See chapters 6 and 9 on private sector development and agriculture respectively.6 See chapter 5 on the financial sector.7 The TCPL is an income metric definition reflecting the minimum monthly income required by an individual to

meet both basic food and non-food requirements.

THERE HAS BEEN

AN OVERALL

REDUCTION IN THE

NUMBER OF

FORMAL-SECTOR

ECONOMIC UNITS,

AS WELL AS

SIGNIFICANT

DOWNSIZING OF

THE SAME. THIS

HAS BEEN

ACCOMPANIED BY

FUNDAMENTAL

BREAKAGES IN

INTER-SECTORAL

LINKAGES, SUCH AS

THE PREVIOUSLY

SYMBIOTIC NEXUS

BETWEEN THE

MANUFACTURING

SECTOR AND

LARGE-SCALE

COMMERCIAL

AGRICULTURE

18


incidence of poverty (Zimbabwe, 2006b: 61).The challenge of meeting the MillenniumDevelopment Goal target of halving theproportion of the population below the TCPLto 36 percent by 2015 has significantlyincreased.8 A similar trend can be observedwith regard to the Gini coefficient ofinequality9, which increased from 0.53 in1995 to 0.61 in 2003. In addition, povertytook on an increasingly rural and woman’sface, reflecting the latter’s weak integrabilitycapacity and their location in the marginalizedsegment of Zimbabwe’s dual economicstructure.10 Significant job losses haveoccurred with de-industrialization, and realwages have declined (see below). Given arapidly contracting revenue base, the statereduced its investment in education, health,housing and other public services, and as aresult social conditions among the poor havedeteriorated markedly. Collapsing incomesand increasing poverty have in turn,translated into low levels of effective demandfor goods and services. This has contributed

to significant underutilization of existingfactory and shop capacities, as well asextensive environmental degradation, aspeople scavenge for firewood, water andother possible means of survival.

The vertiginous decline in terms of purchasingpower is shown in Figure 2.8. Real averageearnings peaked at an index of 120 in 1982,when wages were adjusted in line with thePoverty Datum Line as recommended by theRiddell Commission.11 However, followingthe adoption of a wage-restraint policy in1983, real wages fell, a trend that wasrepeated during the period of ESAP (1991–95) following the deregulation of wage-settingand rising prices. A period of worker militancyresulted in an increase in real wages between1995 and 2000. But, by 2004, real averageearnings were far lower than during the lastyears of the UDI period (1975–79), havingcollapsed to 10 on the real earnings index.The Zimbabwean economic crisis has seendemand become entrenched at very low

Source: Unpublished Central Statistical Office data

Figure 2.8: Average real earnings index, 1975– 2004 (1990 = 100)

8 The status of the Millennium Development Goal was assessed in Zimbabwe & United Nations (2004), ZimbabweMillennium Development Goals: 2004 Progress Report, Harare.

9 The Gini coefficient is the most commonly used measure of inequality. The coefficient varies between 0, whichreflects complete equality, and 1, which indicates complete inequality.

10 Dualism is the co-existence of two distinct and different sectors in an economy, with few linkages between them.In the case of Zimbabwe, one is made up of the communal areas (with predominantly peasant-based farmingactivities) and an urban informal sector, while the other is a modern, commercially oriented and formal sector,consisting of industry, services, mining and commercial agriculture.

11 Zimbabwe Report of the Commission of Inquiry into Incomes, Prices and Conditions of Service [Chairman: R.Riddell]. Government Printer, Harare, 1981.

140

120

100

80

60

40

20

01975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

19


levels as a result of both falling real incomesand shrinking producer and consumermarkets.

2.3 ZIMBABWE’S EXTERNALPOSITION

2.3.1 Debt structure over time

With persistent budget deficits, added to newborrowing requirements each year, and withthese deficits being incurred primarily tosupport recurrent expenditure rather thaninvestments in infrastructure or productiveassets, the debt burden increased significantly.Up to 1994 total debt (domestic and external)was less than 60 percent of GDP, butfrom 1995 total debt rose sharply, reaching90 percent of GDP in 2000, 115 percent in2006, and 189 percent (estimate) in 2007.

This has been coupled with an apparentattempt by the government to reduce its debtburden through the fuelling of inflation.During 2005 and 2006 the country’s externaldebt averaged 53 percent of GDP,12 243percent of exports and 192 percent ofimports (Figure 2.9).

Zimbabwe began to default on its foreign-debt payments in 2000. Since 2000 theforeign-debt stock from the OECD countrieshas not increased significantly, and itsincrease as a proportion of GDP has beenthe result of relative price changes and adeclining GDP. According to IMF data, thedebt-service ratio increased from 24 percentin 2000 to an average of 30 percent over theperiod 2001–2004. Reported foreign-exchange reserves are at extremely lowlevels, with net effective reserves (taking intoaccount contingent liabilities) being deemedby the IMF to be negative.

With the drying up of capital flows since 1997,Zimbabwe’s external debt profile deterioratedrapidly, and the country ran up arrears inexcess of US$3 billion, including the ‘pipeline’of current transfer payments for the year 2007alone of US$450 million. In fact the real extentof external indebtedness is unknown, partlybecause of the contingency liabilities of thegovernment and the central bank in respectof offshore loans for which they haveprovided guarantees, partly because the fullextent of the current payments pipeline isunknown, and also because details of loansfrom non-OECD countries such as China,India, Iran and Venezuela are not in the publicdomain.

Source: World Bank database

Figure 2.9: Zimbabwe’s external debt structure, 1980–2006

12 The IMF (2008) estimates it to have reached 100 percent by the end of 2006, compared to an average of 21percent for the sub-Saharan African region.

1980–1985 1986–1990 1991–1995 1996–2000 2001–2004 2005–2006

250%

200%

150%

100%

50%

0%

as % of importsas % of exportsas % of GDP

THE ZIMBABWEAN

ECONOMIC CRISIS

HAS SEEN DEMAND

BECOME

ENTRENCHED AT

VERY LOW LEVELS

AS A RESULT OF

BOTH FALLING

REAL INCOMES

AND SHRINKING

PRODUCER AND

CONSUMER

MARKETS

20


2.3.2 Foreign trade

Throughout the post-independence period,shortages of foreign currency have been amajor constraint on economic growth and arelargely attributable to weak exportperformance. Table 2.6 shows that averageexport and import growth (in US dollars)during the 1980–2007 period were on averagehigher than in the deepening crisis period of1997–2007. Prior to the onset of economicdecline, during the liberalization period (1990–1996) both export and import growth averageswere the highest in terms of the whole post-independence period (Table 2.6).

At their peak in 1996 and 1997 exports ofgoods and services reached US$3,090 million

and US$3,168 million respectively, whileimports accounted for US$3,074 million andUS$3,759 million (Figure 2.10). Exports hadstarted to peak with a time lag, i.e., at theend of ESAP, thereafter declining toUS$1,694 million in 2004 (US$2,067 millionfor imports).

Exports per capita declined and stagnatedduring the 1980s before recovering stronglyin the ESAP period, peaking in 1997, butsince then they have halved. Figure 2.11shows that per capita exports have declinedby more than a third since 1980. As withexports there was a strong recovery inimports during the liberalization phase, butby 2007 imports per capita were 35 percentlower than at independence.

Figure 2.10: Export and import revenues

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0

US$ millions

Exports Imports

Table 2.6: Foreign Trade 1980–2007

Growth rates Control Economic Deepening Averageregime liberalization crisis for

(1980-1989) (1990-1996) 1980-2007 (1997-2007)

% exports growth p.a. 2.2 6.7 –4.5 0.4

% imports growth p.a. 5.2 6.5 –4.0 0.3

Exports/GDP 24.5% 27.4% 32.9% 29.3% (1980–2006)

Imports/GDP 27.4% 35.5% 35.8% 32.8% (1980–2006)

Current account balance –3.8 –5.2 –7.0 –6.0(% of GDP – average) (1997–2005) (1980–2005)

Terms of trade (1980 = 100) 111.0 107.0 116.5 111.0

Sources:World Bank: African Development Indicators (various editions). IMF Regional Economic Outlook forsub-Saharan Africa (various editions) and World Economic Outlook Database (2008); ReserveBank of Zimbabwe: Quarterly Monetary Policy Statements (various editions); Central StatisticalOffice, Harare: Quarterly Digest of Statistics and National Accounts (various editions)

21


Even more striking is the weak performanceof export volumes. These peaked in 1987,with a 28 percent increase on the figure for1980. But as Figure 2.12 shows, by 1990volumes had fallen by a third from theirrecord 1987 levels. Exports reached theirpeak in 1996 in value terms, but volumeswere only 4 percent higher than in 1980.Indeed, in only six of the twenty-five yearsfor which volume data are available wereexports greater than in 1980. By 2004, exportvolumes were one third below 1980 levels.

Figure 2.12 indicates that export revenuesmay have been sustained by strong exportprices, which to some extent offset falling

volumes, especially since the start of thecommodity price super-cycle in 2002/3. Atthe end of the 25-year period (1980–2004),however, export prices (in US dollars) wereonly modestly higher (up 9.5 percent) thanin 1980. Indeed, for most of the period exportprices were below 1980 levels. Despite this,Zimbabwe’s terms of trade (1980=100)averaged 111 over the entire period (1980–2007), reflecting the fact that although exportprices were depressed for most of the period,import prices were even more so.

No single factor explains Zimbabwe’s poorexport performance. Figure 2.12, doeshowever, indicate that part of the


Figure 2.11: Exports and imports per capita, 1980–2007 (US$)

Source: Central Statistical Office, International Monetary Fund

Figure 2.12: Index of export volumes and prices (1980+100)

1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

350

300

250

200

150

100

50

0

Exports per head Imports per head

Volume Unit value

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2001 2002 2003 2004

200

180

160

140

120

100

80

60

40

20

0

Volume Unit value

US$

22


explanation rests with a weak supply-sideresponse, especially during the crisis periodwhich both export volumes and revenueshave declined despite buoyant internationalcommodity prices. Three other explanationsstand out:

• Deteriorating competitiveness, asmeasured in the World EconomicForum’s Global Competitiveness Indexand the World Bank’s Doing Businessindicators.13

• An overvalued exchange rate duringboth the control regime period of the1980s and the 2000–2007 deep crisisperiod.

• A significant change in the compositionof Zimbabwe’s export basket, evidencedby a growing reliance on mining andcommodity exports with minimal value-addition, and a commensurate decline inexports of manufactured goods,especially medium and high-techmanufactures.

Table 2.7 shows that exports of manufacturedgoods reached their peak in terms of market

share in the late 1990s and have sincedeclined, as have that of agriculture, mostlyowing to the sharp contraction in the value oftobacco exports. The mining industrycurrently accounts for just over half of thetotal exports.

2.3.3 Exchange-rate policy

Figure 2.13 shows that the real effectiveexchange rate (REER) for the Zimbabwedollar depreciated from 158 at independencein 1980 to 100 ten years later.14 During the1990s, the REER depreciated further toaverage 84 over the decade, suggesting thatdespite the exchange rate, it wasconsiderably more competitive during thisreform decade than under the control regimeof the 1980s – the more so given the factthat Zimbabwe’s export prices were morefavourable than the average for sub-Saharan Africa over the decade.

The REER was massively overvalued duringthe 2001–2003 period and while it returnedto competitiveness in 2004/5 as hyperinflationtook hold, it escalated to reach an estimated74 in 2007 (IMF, 2008).

13 See chapter 6 on private sector development.14 The REER is the weighted average of a country’s currency relative to an index or basket of other major

currencies measured in nominal exchange rates. The REER can also be understood in the context of the RealExchange Rate (RER), defined as the relative price of tradables to non-tradables, which indicates the degree ofcompetitiveness or profitability of the tradable-goods sector in the domestic economy. For example, an increasein RER will make the production of tradables relatively more profitable, inducing resources to move out of thenon-tradables sector into the tradable sector.

Table 2.7: Sectoral composition of exports, 1981–2007

% shares 1981 1990 1996 2000 2007(provisional)

Agriculture 42.3 43.5 46.1 51.1 32.0

Mining 37.0 40.6 30.1 30.5 50.6

Manufacturing 9.9 14.1 21.0 15.5 16.8

Main exports

Tobacco 22.0 20.1 30.5 30.6 16.7

Gold 7.5 13.8 12.3 12.1

Ferrochrome 7.8 9.0 7.0 8.6

Cotton 6.3 6.5 4.7 7.4

Sources:Central Statistical Office; Reserve Bank of Zimbabwe

23


2.3.4 The balance of payments

For most of the pre-crisis period Zimbabweran a visible trade surplus that was more thanoffset by the deficit on invisible transactions,leaving a current-account deficit averaging3.7 percent of GDP in the 1980s, 4.3 percentin the 1990s, and 3.7 percent from 2000 to2006 (Table 2.8). Reflecting declining outputand growing import dependence, the visibletrade balance turned negative in 2002 andhas since remained in the red.

On their own such figures are largelymeaningless to the extent that they disguisethe underlying macroeconomic andinstitutional factors at work. In the early1980s imports were constrained by limitedaccess to foreign currency and highlybureaucratic import-licensing and allocationsystems. Liberalization after 1990 led to ashort-term surge in imports (1991–1997) that

was followed by a transformation in thestructure of imports as the demand for capitalgoods and intermediates fell away during thecrisis period, to be partially replaced byincreased food, electricity, fuel and mostrecently, consumer imports.

The current account figures also camouflagechanging capital account profiles. In the1990s Zimbabwe attracted very little ForeignDirect Investment (FDI), especially whenthe US$450 million Hartley Platinum projectis excluded. Bank lending was negative,while foreign aid disbursements werevolatile, partly reflecting food crises (1982–83, 1992–94 and 2002 onwards) and since1997, deepening donor unhappiness with thepolicies of the Zimbabwe government.

Table 2.9 captures the key capital accountmagnitudes, showing that there was a netoutflow of private sector finance over the

Table 2.8: Zimbabwe: Balance of payments on current account

% of GDP 1980–1989 1990–1999 2000–2006

Exports of goods and services 28.0 36.0 27.0

Imports of goods and services 31.0 30.0 29.0

Visible trade balance 3.2 0.9 –0.5

Current account balance –3.7 –4.3 –3.7

Sources:World Bank: African Development Indicators (various editions); IMF Article IV Reports onZimbabwe (various editions)

Source: World Bank: African Economic Indicators (various editions); IMF Regional Outlook for sub-SaharanAfrica (various editions)

Figure 2.13: Zimbabwe Real Effective Exchange Rate (REER) (1980–2006) (1990=100)

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

400

350

300

250

200

150

100

50

0

24


1980–2005 period. In terms of net resourceflows (excluding aid) the table shows thatthere was a net outflow of private sectorfinance over this period of US$205 milliondue to the reduction in bank and trade financelending which was negative. In other words,since 1980 Zimbabwe has been wholly relianton official inflows of some US$6.8 billion,partly offset by a net outflow of US$205million in private finance. Even during thepost-2000 period the net inflow of aid funding,averaging US$155 million annually, was only23 percent less than the US$195 millionannually received during the 1980s.

2.4 MACROECONOMICSTABILITY AS APRECONDITION FORSUSTAINABLE GROWTHAND RECOVERY

The key constraint that has impeded growthin Zimbabwe and which needs to be tackledin order to trigger a sustainable, broad-based,pro-poor recovery dynamic is macro-economic instability. One overarchingstrategic objective in a recovery scenario willtherefore be the return to sound macro-economic management.

In support of this, it is imperative that aprocess of institutional reforms be under-taken in order to build a developmentalorientation within the post-crisisadministration.

2.4.1 Sound macroeconomicmanagement

Following a short-term macroeconomicstabilization programme, aimed at rapidlybringing down inflation and correcting priceand exchange-rate distortions,15 a longer-term macroeconomic managementframework should be put in place and containthe following key features:

Fiscal discipline

As shown earlier, the lack of fiscal disciplinethroughout the recent post-independenceperiod has consistently had an adverseimpact on growth. Having begun with the1997 recourse to unbudgeted expenditures,the situation is now characterized by quasi-fiscal expenditures that outweigh budgetedexpenditures. The resultant high inflation hasreduced aggregate domestic demand,crowded out the private sector, and broughtabout the disarticulation of the economy andthe collapse of real productive investment.Properly coordinated fiscal and monetarypolicies will be required in order to put theeconomy back on a sound footing.

Such financial conservatism imposes strongrequirements, but these must be weighedagainst the overall objectives of public policy.Macroeconomic stability should not betreated as a stand-alone policy objective andthe sole concern of government economicpolicy, irrespective of social costs given the

Table 2.9: Long-term aggregate net Resource Flows, 1980–2005

Years FDI Portfolio Bonds, bank & Foreign aid Totaltrade finance

US$ millions

1980–1989 –115 0 –115 1,950 1,720

1990–1999 420 100 –610 3,950 3,860

2000–2005 226 1 –112 935 1,050

Total 531 101 –837 6,835 6,630

% Shares 8% 1.5% –12.5% 103.0% 100.0%

Source: World Bank Debt Tables; Global Development Finance (various editions)

15 See chapters 3 and 6 on stabilization and private sector development respectively.

ONE

OVERARCHING

STRATEGIC

OBJECTIVE IN A

RECOVERY

SCENARIO WILL

THEREFORE BE

THE RETURN TO

SOUND MACRO-

ECONOMIC

MANAGEMENT

25


essential role of public expenditure inproviding the means and conditions for thepoor to integrate into growth dynamicsthrough the strengthening of their capabilities.

Equitable, transparent and effectiverevenue collection

There has been an ongoing contraction ofstate revenues owing to the collapse ofeconomic activity in the formal sector. Inaddition, tax evasion has been growing, in viewof the decreasing capacity of revenue-collection authorities, as well as corruption.There is therefore a need to formalize theinformal sector in order to expand the revenuebase,16 as well as to restructure andmodernize Zimbabwe Revenue Authority(ZIMRA). Such measures will help to addressthe perennial problem of Zimbabwe’s low tax–GDP ratio, which is a key contributor to thestate’s limited financial capacity to provideessential social services and maintaininfrastructure.

Sound and transparent budget system

A return to sound budgetary processes(allocation, expenditure, accounting andimpact assessment) is not only key toassuring the judicious and effective use ofstate resources but will also help to restorethe transparency of government transactionsand strengthen the accountability ofgovernment and public institutions that arefunded through the budget.

A competitive exchange-rate regime

Throughout Zimbabwe’s post-independencehistory, shortages of foreign currency andthe appreciation of the exchange rate havebeen major constraints to growth, inparticular for export-oriented sectors. Asshown above, Zimbabwe’s precipitousdecline in international competitiveness canlargely be attributed to the maintenance ofan uncompetitive exchange rate throughout

most of the post-independence period. Thechallenge of ensuring a competitiveexchange rate will be heightened in a post-crisis scenario, which may be characterizedby a significant inflow of foreign exchangein the form of overseas developmentassistance. Mitigation measures may berequired in order to deal with the dangers ofDutch Disease under this scenario.17

Firm commitment to price stability

In the post-stabilization period the governmentshould show a firm commitment to pricestability by adopting an inflation-targetingregime, but one that recognizes that this doesnot entail targeting zero inflation and anti-deficit fundamentalism. The need to preservea degree of fiscal policy space for Govern-ment, particularly during the process ofrecovery, must be factored into decisionsregarding the fiscal stance and monetarypolicy to be adopted. What is clear however,is that institutional arrangements should be putin place that confer/restore independence interms of monetary management to the centralbank,18 and the clear separation of powersin terms of responsibility over fiscal policy(Treasury) and monetary policy (the centralbank).

2.4.2 Institutional reform to build adevelopmental state

A developmental state is one that shows aclear commitment to a long-term nationaldevelopment agenda, has solid capacity andreach, and seeks to encourage growth andpoverty reduction, and ensures the provisionof essential public services.

A developmental state:

• invests in human capital

• soundly manages public finances

• engages in effective public borrowing

16 See chapter 6 on private sector development.17 See chapter 4 on aid flows.18 See chapter 5 on recovery of the financial sector.

A DEVELOPMENTAL

STATE IS ONE THAT

SHOWS A CLEAR

COMMITMENT TO A

LONG-TERM

NATIONAL

DEVELOPMENT

AGENDA, HAS

SOLID CAPACITY

AND REACH, AND

SEEKS TO

ENCOURAGE

GROWTH AND

POVERTY

REDUCTION, AND

ENSURES THE

PROVISION OF

ESSENTIAL PUBLIC

SERVICES

26


• engages in sound management of stateassets

• is an efficient provider of infrastructure

• engages in market formation and dealsefficiently with market failures

• is able to stimulate the domestic privatesector

• has autonomy from the pressures ofinterest groups

• ensures respect for property rights.

Given recent history, the importance ofrespect for private property rights will needto be reaffirmed by the post-crisis state. Thiswill be key to restoring the confidence ofboth domestic and foreign investors, and isa sine qua non for raising and sustainingsavings and investment ratios. It willconstitute a central pillar of a predictableeconomic environment, on the basis of whichit will be possible for economic agents tomove away from the current, short-termsurvivalist strategies that are being pursued,and to engage in longer-term planning.

Institutional overlap

As shown throughout other chapters of thisdocument, the deep-crisis period inZimbabwe has seen a proliferation of stateand semi-state institutions, many of them withunclear and overlapping mandates.19

Resources have increasingly been usedsimply to support the recurrent costs ofmaintaining these entities, with a diminishingpercentage being directed to achievingconcrete development objectives. Animmediate requirement in a post-crisisscenario will be an in-depth audit of theseentities, their utility and value-added, with aview to initiating an extensive programmeof rationalization.

Policy unpredictability and incoherence

As mentioned above, one key feature of adevelopmental state is its capacity to bothdevelop and pursue a long-term developmentvision. As shown in this chapter, policyincoherence, poor implementation rates, andthe constantly shifting sands of nationalframeworks have seriously undermined thecredibility of the state, led to themarginalization of the private sector, andconstrained the scope for both state and non-state actors to engage in long-term forwardplanning. A multiplicity of decision-makingbodies, often working at cross purposes,pursuing disconnected agendas without anyapparent coordination and with increasinglyshort-term planning horizons, has been a keyfeature of public policy during the crisisperiod. In a recovery scenario, there is animperative need for a single, technicallysound and overarching national developmentstrategy in which the roles andresponsibilities of both state and non-stateactors are clearly defined, and in which theformer is assigned the role of facilitatorrather than omnipresent economic agent.

Capacity

Throughout this document it is shown thatphysical capacity problems arising fromdecaying infrastructure and disinvestment bythe private sector as a response to an unstablemacroeconomic environment have becomebinding constraints to economic growth. Inaddition, the flight of skills from both theprivate and public sectors through out-migration has debilitated human capacity inboth. The return of skills in the area ofmacroeconomic management and planningtechniques in general will be essential forthe development of sound national recoverypolicy frameworks. This should beaccompanied by the retraining of existingstaff, aimed at familiarizing them with the

19 See, in particular, chapters 7, 8 and 10 on labour markets and human capital formation, agriculture and landpolicy, and public enterprises respectively.

GIVEN RECENT

HISTORY, THE

IMPORTANCE OF

RESPECT FOR

PRIVATE PROPERTY

RIGHTS WILL NEED

TO BE REAFFIRMED

BY THE POST-

CRISIS STATE

27


latest thinking on development issues andgradually weaning them off the prevailingdirigiste mindset in which the role of the stateis all-pervasive.

2.5 CONCLUDING REMARKS

As this chapter has sought to demonstrate,Zimbabwe’s post-independence developmentmodel ran into problems long before thecurrent crisis, and with the exception of thefirst few years after 1980, has consistentlyfailed to deliver robust growth rates. Inaddition, apart from a brief flirtation with freemarkets under ESAP, the management ofthe economy has been characterized byextensive – and in many cases counter-productive – state interventions in theeconomy. There has been continuousrecourse to unsustainable fiscal deficits,without the necessary attention being paidto issues of productivity and growth.

While investments over time in humancapital through expanded social sectorprogrammes (health and education) are validdevelopment objectives in themselves, it isalso the case that they can be maintainedand expanded only on the basis of a growinggovernment revenue base, which itselfpresumes an expansion of the productivebase of the economy. Some consequencesof this lack of attention to issues ofproductivity, international competitiveness,and the importance of the role of the privatesector in wealth generation, includeextremely low rates of employment growthand an increasing informalization of theeconomy. A post-crisis scenario will presentZimbabwe with an opportunity tofundamentally rethink the developmentalpath it wishes to pursue in order to triggersustainable, broad-based and inclusivegrowth.

WHILE

INVESTMENTS

OVER TIME IN

HUMAN CAPITAL

THROUGH

EXPANDED SOCIAL

SECTOR

PROGRAMMES

(HEALTH AND

EDUCATION) ARE

VALID

DEVELOPMENT

OBJECTIVES IN

THEMSELVES, IT IS

ALSO THE CASE

THAT THEY CAN BE

MAINTAINED AND

EXPANDED ONLY

ON THE BASIS OF A

GROWING

GOVERNMENT

REVENUE BASE,

WHICH ITSELF

PRESUMES AN

EXPANSION OF THE

PRODUCTIVE BASE

OF THE ECONOMY

28


29

After a decade of decline, full economicrecovery with a return to sustainable, inclusivegrowth will be a lengthy, three-phase process:

• Phase One – short-term macroeconomicstabilization, a period of at least two years.

• Phase Two – institutional and structuralreforms designed to create a sturdyplatform for strong growth. Ideally, someof these reforms should be implemented– or at least designed and initiated –during Phase One.

• Phase Three – second-generationinstitutional and structural reforms thatare necessary to ensure that growth isboth sustainable and inclusive and thatZimbabwe evades the experience ofmany other sub-Saharan Africaneconomies of short-lived growth spellsthat prove unsustainable. Many, perhapsmost, of these second-generationreforms will have been launched duringPhase Two, but the process will becomplex and the delivery period lengthy.

Although stabilization programmes typicallyhave a short-to-medium-term focus theymust be seen in the context of securing aplatform for long-run growth. Not only willthe three phases overlap with one another,but recent experience suggests that front-loaded reforms are more likely to succeed,because, typically, opposition to radicalreform is at its weakest in the first two yearsof a new administration. Failure to implementnecessary reforms quickly and decisivelyallows entrenched interests to garnersupport and block progress.

Three features of a stabilization programmefor Zimbabwe merit special attention:

1. The starting point is abnormallyunfavourable in respect of inflation –officially estimated at 11.2 million percent

Chapter 3

Stabilization for Sustained Growth

in June 2008 – and a consolidated budgetdeficit in excess of 80 percent of GrossDomestic Product (GDP).

2. In a number of respects Zimbabwe’seconomic crisis is structural in nature.Land ownership was not a problem thatemerged suddenly nor was the failureto create sufficient jobs to absorb school-leavers. Similarly, the fiscal balance hasbeen a serious constraint throughout thepost-independence period, while thecountry has lived with an underlyingbalance-of-payments problem for thepast 50 years. Above all, Zimbabwe’slong-run growth record is poor, so thatby the turn of the century per capitaincomes were lower than in 1960.

3. A possible future transitional admin-istration should be aware of the dangersof constrained decision-making fosteringconsensus-style compromises that bothdelay and undermine reforms. Becausethe politicians will understandably beworking to short electoral cycles, theymight be less willing to implement radicalreforms for fear that the benefits willnot materialize within the electoral time-frame.

It will be hoped that these aspects willconcentrate the minds of a new administration,especially if the donor community as well asprivate sector investors hold back for someor all of the transitional period. This point iscritical since, without substantial foreignassistance, sustainable economic recovery isimpossible.

3.1 COMPONENTS

Typical components of orthodox stabilizationprogrammes include:

• Fiscal and monetary stabilization

WITHOUT

SUBSTANTIAL

FOREIGN

ASSISTANCE,

SUSTAINABLE

ECONOMIC

RECOVERY IS

IMPOSSIBLE

30


• Exchange-rate and price liberalization

• Institutional reforms

• Reform of the domestic financial sector

• Debt management.

Phase Two and Three (structural) reformsusually include:

• Public sector restructuring

• Labour-market reform

• Trade reform

• Capital-account liberalization

• Doing Business and Investment Climatereforms not covered elsewhere

• Competition reforms.

3.2 STABILIZATION: 2009/10

There is no single, unique stabilization modelthat is applicable to different countries atdifferent times in different regional locationsthat followed different paths to economicdecline and hyperinflation. However, thekey basic principle that stands out is thatthe stabilization package must be seen tobe credible, not only in the eyes of marketparticipants, foreign as well as domestic,and the community at large, but also ofexternal financial institutions and donoragencies. Credibility has less to do withsequencing during the short-run stabilizationperiod proper (though sequencing decisionsloom larger over time) than with politicalfeasibility, administrative capability andfocused targeting.

3.3 FISCAL CONSOLIDATIONAND MONETARYSTABILIZATION

There is broad, though not complete,agreement that, because Zimbabwe’s

hyperinflation is directly attributable to fiscalexpansion and reckless credit creation by thecentral bank, the starting point for astabilization programme must be acombination of fiscal retrenchment andmonetary constraint. The immediate priorityis to terminate all quasi-fiscal operations andincorporate them into the national budget, aswas tried in 2007 but abandoned in the 2008budget.

The full extent of Zimbabwe’s fiscal crisisis unknown, partly because of the verysubstantial discrepancies between budgetdata and that published subsequently by theMinistry of Finance, but primarily becausequasi-fiscal activities have been excludedfrom the annual budget statements, exceptin 2006. Although the full extent of quasi-fiscal activities is unknown, estimates by theInternational Monetary Fund (IMF) put theoverall financial borrowing requirement at64 percent of GDP in 2005, when the centralbudget deficit was 3 percent of GDP, implyinga quasi-fiscal deficit of 61 percent of GDPand of 82 percent in 2006, when the centralgovernment deficit was 7.5 percent,indicating a quasi-fiscal deficit in the regionof three-quarters of GDP. The IMF (2008)has recently estimated the quasi-fiscal deficitfor 2007 at 82 percent of GDP – a figureidentical to that of 2006 (which seemsunlikely), during which year there was alsoa central government deficit of 10 percentof GDP.

Table 3.1 summarizes the main budgetfigures for 2007/8, showing that, while the2008 budget statement (November 2007)estimated a 2007 central government budgetdeficit of $13.9 trillion, year-end figurespublished by the Reserve Bank ofZimbabwe (RBZ) show a surplus for theyear of $13.3 trillion. However, during 2007,the domestic debt of central governmentincreased by approximately $21 trillion,implying a quasi-fiscal deficit of some $34.3trillion, funded partially by the centralgovernment surplus and RBZ borrowing onbehalf of the government.

THE STARTING

POINT FOR A

STABILIZATION

PROGRAMME MUST

BE A COMBINATION

OF FISCAL

RETRENCHMENT

AND MONETARY

CONSTRAINT

31

Chapter 3 – Stabilization for Sustained Growth

The situation deteriorated dramatically in thefirst half of 2008. The projected budget deficitfor 2008 is Z$1,760 trillion,1 but by mid-year,domestic debt had increased to $790,600trillion, which meant that that by the end ofthe second quarter the consolidated publicsector deficit exceeded the budget deficittarget for the full year by some $789,000trillion.

This explosive growth in domestic debtillustrates the magnitude of off-budget QFAs(Quasi-fiscal activities) that, in the first halfof 2008 alone, exceeded budgeted spendingby a factor of 200, translating into money-supply growth of 421,000 percent in the firstfour months of 2008.

Although the immediate cessation of allquasi-fiscal operations by the RBZ ought tobe the top priority in a stabilizationprogramme, the Government of ZimbabweShort-Term Economic StabilizationProgramme (July 2008) makes no referenceto QFA operations. At the outset of thestabilization programme expenditurescurrently undertaken by the RBZ, including

lending, interest and exchange-rate subsidies,must either be discontinued or financed bytransparent transfers from budget account.While this will achieve a much greater degreeof transparency than at present, it will onlycontribute to reduced inflation if public sectorspending – on both budget and quasi-fiscalaccounts – is reduced.

In the near-term, the main spending cuts willhave to come from the quasi-fiscal ‘budget’with potentially severe knock-on effects inagriculture, parastatals, general governmentspending, importers and the financial sector.However, the IMF suggestion that there isscope for a substantial reduction in the publicsector wage bill needs to be treatedcautiously, given the security and crime risksinherent in sudden reductions in militaryspending and the heavy costs of terminalbenefits, early retirement packages and re-training and re-skilling programmes.

Similar caution applies to the IMF’srecommended reduction in the capital budget.Table 3.2 (p.38) shows sustained under-investment by the public sector over a

Table 3.1: Zimbabwe: Budget balance 2007/08

2007

$ trillions Budget Estimated out-turn Actual out-turn(Dec. 2006) (November 2007)

Revenue 29.4 46.6 99.8

Expenditure 43.3 43.6 86.5

Deficit 13.9 +3.0 (surplus) +13.3 (surplus)

Domestic debt, year-end 0.176 (2006) 21,176 (2007) +21.0 (increase)

Sources:Government of Zimbabwe: Financial Statements 2008 Budget; Reserve Bank of ZimbabweMonetary Statistics (January 2008)

2008

$ trillions Budget (Nov. 2007) July 2008

Revenue 6,080 (38% of GDP) n.a.

Expenditure 7,840 (49%) n.a.

Deficit 1,760 (11%) n.a

Domestic debt, year-end 21,176 (2007) 790,600

Sources:Government of Zimbabwe: Budget Statement 2008 and 2008 Half-Year Monetary Policy Statement(July 2008)

1 Budget Documents, November 2007.

32


20-year period and given acute infra-structural deficiencies across the economy– electric power, water, transport, roads,telecommunications, not to mention thesocial sectors (schools, health and housing)– an expanded public sector investmentbudget should be a priority. Indeed, the sameIMF document that recommends reducedpublic sector investment refers to ‘thecollapsing health infrastructure’ (IMF 2007).In the Zimbabwe context this is particularlyimportant especially in the light of theIMF’s warning that in developing regionsas a whole, ‘a disproportionate share offiscal adjustment has been borne by theinfrastructure’( IMF 2006).

A disinflationary fiscal stance will necessitatea major reduction in the budget deficitincluding the incorporated quasi-fiscalactivities, to be achieved by:

• Spending cuts.

• Securing aid funding to supplementdomestic budgetary revenue during PhaseOne of the stabilization programme.

• Extra revenue measures, includingimproved revenue-collection efficiency,achieved in part by strengthening taxcompliance, making it rule-based ratherthan discretion-based as at present.

While such measures will ensure a degreeof monetary tightening, they will have to beaccompanied by the imposition of hardbudget caps in the parastatal sector as aresult of the removal of subsidies in respectof food, fuel, electricity and air travel.Monetary tightening in the private sector willnecessitate a sharp increase in interest ratesallied with the speedy phasing out ofconcessional lending programmes.2

At the same time, statutory-reserve ratiosshould be lowered substantially, while

foreign-exchange flows are liberalized toallow the financial sector to trade foreigncurrency freely. In all probability, specialarrangements will be needed whereby over-borrowed companies and farmers areenabled to reschedule their loans.

The current mismatch between the maturityof government securities and short-termdeposits poses a serious liquidity threat forthe banks, especially at a time whenconfidence in the sector is low. Open-marketoperations that incorporate anticipatoryrepurchase agreements would enable thefinancial market to be proactive in managingliquidity and in the market determination ofinterest rates. The implementation of reserveaveraging will ensure that liquidity ratios aredetermined by prudential requirements to bemet over a significantly long time and not atany specific time.3 The idea is to give morescope to financial institutions to manage theirliquidity and eventually reduce reserverequirements.

3.4 STABILIZING PRICES

Stabilization should go hand-in-hand withprice liberalization – the upfront removal ofall price controls. At the outset policy-makersmust choose between two potential anchorsfor price stabilization – the exchange rate ora monetary aggregate. The choice betweenthe two is frequently deemed to be politicalrather than technical because exchange-ratestabilization is invariably associated with ashort-lived consumption boom followed byrecession, while a monetary-based pro-gramme results in a short-term consumptionbust followed by economic recovery. It istherefore believed that an administrationseeking a quick-fix solution ahead ofelections will opt for the exchange-rateapproach, while a newly elected governmentworking to a five-year time-frame will prefera monetary-based strategy.

2 ASPEF and BACOSSI – see chapter 5 on recovery of the financial sector.3 Reserve averaging refers to the practice of averaging the statutory reserve payments of the banks over a period

of time – at present it is averaged weekly – rather than tying the requirement to a bank’s position on a specificday.

33


In the Zimbabwe context such analysis doesnot apply, partly because the criteria foranchor selection will be influenced sub-stantially by past experience – how and whythe country slipped into hyperinflation. InZimbabwe’s case, the administration soughtto maintain an unworkable combination of afixed exchange rate with fiscal and monetaryexpansion. The failure of this peculiarcombination may influence future policy-makers...

Secondly, an exchange-rate approach istechnically inferior where a country’s balanceof payments on current account is vulnerableto adverse exogenous shocks – specificallythe terms of trade in the form of rising energyprices or a decline in export prices forprimary commodities (gold, platinum,tobacco, cotton, ferrochrome), or adverseclimatic and structural influences in thedomestic economy (drought and the supply-side bottlenecks created by landresettlement).

The exchange-rate anchor is then at risk ontwo fronts – the possible failure to narrowthe purchasing power parity gap with tradingpartners because inflation does not declinerapidly enough, and a large current accountdeficit in the balance of payments, whichmust then be funded from capital inflows,including aid. There is then a serious riskthat external funding – designed to loosenthe import constraint that is holding backdomestic production, investment and jobcreation – is wasted in seeking to defend apre-selected exchange-rate peg.

Thirdly, an exchange-rate peg assumes theexistence of substantial foreign reserves todefend the rate. Currently, Zimbabwe’sforeign reserves are negligible and it wouldbe an extremely wasteful use of aid fundsor offshore credit lines to use them to defendan arbitrarily-selected exchange rate.

Fourthly, an exchange-rate anchor targetsinflation indirectly, unless it is formalized into

a currency board arrangement whereby thebalance of payments on current accountdrives the size of the monetary base.Because purchasing power parity does notdrive a country’s current account in the shortto medium term, there is a danger that policy-makers will be distracted by a focus on twotargets – the exchange rate and inflation –rather than just one, inflation.

In any event, there can be no guarantee thatlower inflation – and thereby a realexchange-rate depreciation – will translateinto rapid export growth and a reducedcurrent account payments deficit, especiallygiven the structural bottlenecks to exportgrowth. In other words, while a stableexchange rate might help to restore pricestability it might also leave the economyvulnerable to subsequent recession anddevaluation, which has been the experienceof many exchange-rate-based programmes.

For these and other reasons a monetaryanchor is likely to be more effective. Thatsaid, there is no doubt that where the demandfor money is unstable – as in Zimbabwe – amonetary-based strategy will encounter somevery real problems. Unstable money demandis usually caused by high and volatile inflation,extensive unofficial dollarization in the formof a tendency of the public to shift to foreigncurrencies as a hedge against inflation, andpolitical uncertainty and financial deepening.All three influences apply to Zimbabwe, withfinancial deepening4 being the leastsignificant.

Accordingly, common sense suggests a‘constrained discretion’ approach that strikesa balance between a rigid monetary rule anda wholly discretionary approach to monetarypolicy by the central bank (Bernanke, 2003).Precisely which monetary aggregate shouldbe used is best left to the professionals in thecentral bank, but recent IMF programmeshave tended to focus on the monetary base(reserve money),5 though IMF research inZimbabwe has found a reasonably consistent

4 Financial deepening means increasing usage of financial services.5 See chapter 5 on recovery of the financial sector.

COMMON SENSE

SUGGESTS A

‘CONSTRAINED

DISCRETION’

APPROACH THAT

STRIKES A

BALANCE BETWEEN

A RIGID MONETARY

RULE AND A

WHOLLY

DISCRETIONARY

APPROACH TO

MONETARY POLICY

BY THE CENTRAL

BANK

34


relationship between notes in circulation (M0)and inflation, suggesting that this might makea suitable anchor for a short-term stabilizationprogramme.

Kovanen (2004: 14) found ‘a strong linkagebetween currency in circulation and the pricelevel’, suggesting that M0 (currency incirculation) would provide ‘a good leadingindicator of future price movements’. Hefound also that there is a ‘well-identified long-run money-demand relation for currency incirculation’, which implied that currency incirculation could serve as an intermediatemonetary operating target. He concluded thatreserve money, used in the past both by theRBZ and in IMF programmes (1998/9) was‘ineffective in the current high inflationenvironment’.

A serious drawback to a money-basedstabilization programme will be the extentof dollarization, which increased sharply inthe first half of 2008. During the transitionalperiod when dollarization levels will remainhigh and may even increase it will beessential for the RBZ to adopt a tightmonetary stance consistent with theunderlying growth rate of real output.

Whatever the model adopted – exchangerate or money-based – and whatever thechosen monetary aggregate and degree ofmonetary discretion and flexibility, thereshould be an exit strategy within a specifiedtime-frame, whereby monetary or exchange-rate targeting will be replaced, initially withimplicit inflation-targeting (without a specifiedinflation target) and subsequently explicitinflation-targeting conducted by anindependent central bank.

3.5 THE EXCHANGE RATE

In the real world, policy-makers have tochoose between allowing the exchange rateto find its own competitive level andchoosing a rate which they deem to beappropriate and defendable. However,where a monetary anchor is chosen, therequirement is to allow the exchange rate to

find its own level consistent with thatmonetary target. In choosing a (subsidiary)exchange-rate target as well as a monetaryanchor the central bank is required to targettwo, invariably irreconcilable, targets.

However, political pressures may be suchthat the authorities find it necessary to havean implicit exchange-rate target as well asan explicit monetary one, notwithstanding therisks attached to such dual targeting. Thedifficulties of setting an exchange-rate targetshould not be underestimated. During thedecade of crisis and decline the economyhas undergone far-reaching structuralchange and hyperinflation, meaning thatindicators of competitiveness stretch wellbeyond the exchange rate alone. Any attemptto ‘guess’ what might be a competitiveexchange rate is fraught with danger.

Nonetheless, there is a widely held perceptionthat the Zimbabwe dollar is seriouslyundervalued in the parallel market. The sharp65 percent appreciation of the Zimbabwedollar on the parallel market in the immediateaftermath of the 29 March 2008 electionssuggests that this is, in fact, the case.Accordingly, in a post-crisis environment –and especially given the importance attachedto exchange-rate management by allstakeholders – there is likely to be a publicclamour, even before any stabilizationprogramme is announced, that the parallel rateinforms the exchange rate.

The foreign-exchange market was partiallyliberalized on 30 April 2008, when the RBZallowed authorized dealers (banks) topurchase foreign currency at market rates.However, they were required to sell theirforeign currency to priority buyers inproportions, specified by the central bank.Initially, the free-funds market, as it is called,traded at a premium over the parallel rate,but within weeks the gap between the twomarkets widened substantially to the pointwhere by August 2008 parallel marketdealers were buying foreign currency atrates ten to twelve times above the free-funds rate. At the same time, there is noeffective inter-bank market because banks

35


buy foreign exchange to sell to theircustomers, not to other banks. Theimplication is that the authorities may wellfeel pressured to choose a rate somewherebetween the ‘free-funds6 ’ and parallel-market rates as the starting point for an(eventually) unfettered inter-bank foreign-currency market.

There are three downsides to such anapproach. The first is that an arbitrarilyselected exchange rate may not becompatible with the monetary anchor,especially if, as is often the case, monetarytargets are exceeded, with the result thatinflation declines more slowly than projected.In that situation, an exchange rate assumedto be compatible with an implicit inflationtarget will not be so, and will be driven lowerin parallel-market trading.

More seriously, the moment the RBZ showsits cards by stipulating a ‘market’ exchangerate, the market will assume that the centralbank will use whatever resources it hasavailable to defend that rate, or, at the veryleast, to manage an orderly retreat from thatlevel in the event of it proving misconceived.For this reason, a low-risk strategy is one inwhich the central bank focuses on itsmonetary target, leaving the market todetermine the exchange rate, thereby avoidingboth the cost – indeed, the waste – andembarrassment of defending an inappropriateone.

Above all, in a country where exchange-ratedetermination has become an intenselypolitical issue, macroeconomic stabilitydictates that exchange-rate decision-makingbe de-politicized and removed from the sphereof public bargaining where special interests,not economic common sense, becomeparamount. That in the last three years,tobacco auctions have had to be postponedpending a political decision on the ‘appropriate’exchange rate and foreign-currency retentionregulations for tobacco exports, underlines thedesirability of depoliticization.

Ideally, all restrictions on current transactionsshould be abolished, along with capitalcontrols affecting individuals. Subject todevelopments, capital controls on companiescould then be reviewed subsequently. In thepast, it has always been argued that pent-upforeign exchange demand exists in the formof former residents with blocked funds inthe country that would be withdrawnimmediately. However, in the light of themassive devaluation of the Zimbabwe dollar,pent-up demand is unlikely to be great, otherthan in the event that there is substantialdisinvestment from the business andresidential property sectors, where assetvalues may have been maintained. Onceagain, credibility is crucial – if thedisinflationary package, including theexchange-rate stance, is credible, therelaxation of capital controls in respect ofindividuals might well have positive capitalaccount implications, especially in a situationwhere substantial diaspora inflows areanticipated and, indeed, facilitated.

Within Zimbabwe, considerable publicity hasbeen given to an alternative, unorthodox,strategy for disinflation, using an inter-nationally determined or market-drivenanchor. The attraction of these proposals isthat they take political manipulation of themonetary and exchange-rate systems out ofthe equation, either by pegging the exchangerate to a foreign currency or to a country’sbalance of payments.

Professor Steve Hanke of Johns HopkinsUniversity in the United States has trailed amenu of three exchange-rate systems forZimbabwe that he believes would be moresuitable for speedily resolving the country’shyperinflationary crisis and restoringeconomic growth because internationalexperience is that central banks that havemade the permanent transition to low inflationusually required a long transition period toestablish their credibility, during whichinterest rates were ‘punishingly high’.Consequently, GDP growth was slow, living

6 Free-funds in Zimbabwe refer to foreign currency receipts from the diaspora, travel and subsistence allowances,donations and any other foreign receipts not classified as exports.

MACROECONOMIC

STABILITY

DICTATES THAT

EXCHANGE-RATE

DECISION-MAKING

BE DE-POLITICIZED

AND REMOVED

FROM THE SPHERE

OF PUBLIC

BARGAINING

WHERE SPECIAL

INTERESTS, NOT

ECONOMIC

COMMON SENSE,

BECOME

PARAMOUNT

36


standards stagnated, and poverty worsenedduring the stabilization phase. Hanke sets outthree options for the next Zimbabwegovernment to consider: official dollarization,free banking, or a currency board, any oneof which would establish stability and restoreeconomic growth (see Box 3.1).

All three options are open to a variety ofcriticisms, both technical and political. Onthe technical side, it would be unwise for afuture Zimbabwe administration to adopt astabilization strategy that was not backed bymajor donors and the Bretton WoodsInstitutions. Given that the IMF favours anorthodox approach, along the linessummarized in this chapter, the adoption offull ‘official’ dollarization or a currency boardmight prove costly in terms of forgonesupport.

A serious objection to dollarization is that thebusiness cycle in the US, whose monetarypolicy is being ‘imported’, is unlikely tocoincide with that in Zimbabwe, meaning thatthe Zimbabwe authorities might be forcedinto a deflationary monetary stance, or toallow the currency to depreciate, whendomestic market conditions required a verydifferent approach.

Above all, in the light of the recent stancetaken by central banks around the world aslenders of last resort, and the extremeactivism of the RBZ, especially sinceDecember 2003, both as a lender of lastresort and much further afield, it is veryunlikely that a Zimbabwe government wouldaccept the extreme solution of abolishing theRBZ, as advocated by Professor Hanke.

Hanke believes that Zimbabwe (formerlyRhodesia) – when a member of theFederation of Rhodesia and Nyasaland(1953–1963) – was wrong to abandon thecurrency board system that had existed since1940 and replace it with a central bank. Hebelieves that under a currency-board systemthe country would have had lower inflationand higher economic growth than under acentral bank regime.

Although such statements cannot bevalidated one way or the other, the factremains that, for the first half of thesanctions period (1965–1979), when thecountry operated with a central bank,inflation averaged 4 percent a year and theeconomy grew faster (8 percent annually)than at any time since independence in 1980.It follows that there is no necessary link

Box 3.1: Exchange Rate Options

The Three Options

1. Dollarization (or Randization). Zimbabwe already has a high, but unknown, degree of unofficial dollarization– prices of cars and houses, fees for services, salaries of scarce personnel, are either paid or calculated inUS dollars. Official or full dollarization is where a foreign currency – possibly the rand, or US dollar – hasexclusive, predominant status as full legal tender so that the domestic currency is phased out and replacedby the US dollar or South African rand. Countries that adopt this model can no longer have an independentmonetary policy and set their own interest rates but must ‘import’ the monetary policy of the country whosecurrency is chosen.

2. Free Banking, which existed in Zimbabwe (then Southern Rhodesia) until 1940 when a currency boardwas established, leaves private commercial banks to issue notes and other liabilities with ‘minimal regulation’.The banking system is unregulated – no reserve ratios, no legal restrictions on bank portfolios and nolender of last resort.

3. A Currency Board must hold foreign reserves equal to 100 percent of the domestic money supply determinedat a fixed exchange rate. Hanke says that, as a result, money supply, and thereby interest rates, aredetermined ‘entirely by market forces’.

* Steve H. Hanke, Zimbabwe: Hyperinflation to Growth. Harare: Imara Holdings, 2008.

37


between a country’s monetary system andits economic performance.

Given the salience of national sovereignty inpolitical discourse, the adoption of anexchange-rate policy that surrenderedcontrol of monetary policy to outsiders oreven to market forces would be a high-riskstrategy for a fresh administration.Furthermore, the suggestion that Zimbabweshould abolish its central bank when muchsmaller regional economies – Lesotho andSwaziland – find it necessary to operate acentral-bank system even though they aremembers of the Rand Monetary Area isunrealistic.

Even more fundamentally, Hanke concedesthat a ‘government may try to undermineany of the options for monetary reform’,which emphasizes the need for ‘strong legalprotection’ to prevent the state fromimposing its will. In other words, adopting adollarization or a currency board is noguarantee of monetary and fiscal rectitude.As with any anchor, if the government ofthe day finds such externally imposed, ormarket-imposed, discipline burdensomepolitically, it will assume full sovereignty.

3.6 DOMESTIC FINANCIALREFORMS

Given the centrality of credibility to anystabilization programme, there is a powerfulcase for the new administration to commitpublicly to an autonomous, independentcentral bank. The credibility of a monetary-based stabilization programme will besubstantially greater if the RBZ is perceived,both domestically and internationally, to befully autonomous.

Since a new constitution is likely to be highon the political agenda during the immediatepost-crisis period, the question of whetherthe RBZ’s independence should beenshrined constitutionally should be part ofthe public debate over a new constitutionaldispensation. Given Zimbabwe’s unhappyrecent history with a politically driven

central bank, the economic case for RBZindependence is very powerful.

There is much to be said also for theappointment of a Monetary PolicyCommittee charged with advising theGovernor on monetary-policy issues. Thiswould serve a dual purpose in ensuring thatthe central bank is kept well informed ofmarket and private sector concerns andexpectations while simultaneously ensuringthat private sector participants appreciate thedifficult nature of critical interest rate andother monetary policy decisions.

3.7 FISCAL REFORM

Just as monetary-policy credibility would beenhanced by a public commitment to theindependence of the central bank, so fiscalcredibility would be strengthened were theMinister of Finance to announce fiscal rulesand targets for the stabilization phase. Thecentrepiece should be the announcement ofpublic sector (including parastatals) domesticborrowing requirements over the stabilizationperiod. The emphasis should be on domesticborrowing, thereby enabling public sectorentities to draw on aid inflows or borrowoffshore for critical social-service spending(education, health, housing, social welfare)and for essential and urgent investment inphysical infrastructure. The actual level ofpublic sector borrowing will have to beconsistent with the monetary policy targetand with the availability and cost of foreignfunding.

Inevitably, there will be considerable overlapbetween short-term stabilization measuresand the medium-to-long-term structuralreforms necessary to revive economicactivity. Because inappropriate fiscal andmonetary policies (see chapter 2) contributedsubstantially to the country’s economicdecline, the need for sweeping reformsin these two related fields cannot beexaggerated.

A major – some would say the major –contributor to Zimbabwe’s lacklustre long-

38


term economic performance has been weakfiscal management. Table 3.2 summarizesthe key aggregates showing that over thelong haul (1985 to 2004) governmentspending exceeded total revenue, includinggrants, by 6.3 percent of GDP.

This is striking because Zimbabwe’srevenue-to-GDP ratio of 26.1 percent is wellabove the recent average for sub-SaharanAfrica (21.2 percent) as is its tax-to-GDPratio. Zimbabwe’s tax ratio of 22.7 percentof GDP is substantially above the sub-Saharan average of only 16.5 percent. Alsostriking is the fact that over the 20-yearperiod capital expenditure was a mere 2.7percent of GDP, compared with a sub-Saharan average of 18.5 percent, whileZimbabwe spent more on wages (10.8percent of GDP) and interest (6.1 percent)than sub-Saharan countries.

These data are both encouraging anddepressing. Encouraging because the countryhas a much greater taxable capacity than itsAfrican peers, but depressing because the

resources raised by the state did not translateinto rapid, sustainable growth.

Moreover, the data in Table 3.2 do not reflectthe fiscal impact of quasi-fiscal activities(QFAs) that have expanded dramaticallysince 2004. IMF estimates put the primarybudget deficit (excluding interest charges)at 25 percent of GDP in 2006 compared withan officially stated 2 percent surplus. Whengovernment and RBZ interest charges aretaken into account, the central governmentfinancing requirement increased to 80percent of GDP.

The 2007 Budget

Budget measures approved by parliamenthave been overwhelmed by the combinationof rapidly-escalating hyperinflation and theRBZ’s quasi-fiscal activities. Table 3.3shows that for 2007, parliament approvedbudget spending of $6.2 trillion with aprojected central government deficit of $3.2trillion. In the event, revenue was almost$100 trillion, of which nearly half ($45 trillion)

Table 3.2: Zimbabwe and sub-Saharan Africa: Fiscal aggregates 1985-2004

% of GDP Zimbabwe Sub-Saharan Africa (average)

Revenue (excluding grants) 26.1 21.2 (a)

Taxation 22.7 16.5 (b)

Expenditure 32.2 24.9 (a)

Budget deficit 6.3 3.7 (a)

Capital Expenditure 2.7 18.5 (b)

Wages and Salaries 10.8 7.4 (b)

Interest 6.1 5.1 (b)

Notes: (a) Sub-Saharan averages refer to 1997-2002 (IMF 2008). Zimbabwe figures cover 1985-2004.

(b) 1990-1998 (World Bank: African Economic Indicators, 2000)

Table 3.3: The 2007 budget outturn

Z$ trillions 2007 budget Mid-term fiscal review Outturn(November 2006) (September 2007) (July 2008)

Revenue 3.0 37.1 99.8

Expenditure 6.2 50.4 86.6

Deficit 3.2 13.3 13.2 (surplus)

Domestic Debt 0.176 n.a. 21.2

Financing - - 21.0

Total Deficit 3.2 13.3 34.2 (imputed)

Source: Ministry of Finance

39


accrued during the final month of the fiscalyear (December). Expenditure of $86.6trillion was some $80 trillion above the levelinitially approved by parliament.

The twin impacts of hyperinflation and theRBZ’s quasi-fiscal operations effectivelytakes fiscal policy out of the hands of theMinistry of Finance and Parliament. Fiscalpolicy is effectively the preserve of thecentral bank, oversight is minimal and allpretensions to disinflation have beenabandoned.

3.8 FISCAL SPACE

From the above it is clear that restructuringZimbabwe’s public finances will be far morecomplicated than simplistic expenditurereduction solutions suggest. Decades ofgovernment overspending and over-taxation,exacerbated since 2004 by massive off-budget QFA spending, cannot be switchedoff overnight. In the near term, the yawningfiscal gap will have to be filled by acombination of revenue-enhancingmeasures, substantial spending reductions,mostly from the quasi-fiscal budget, andforeign assistance, with revenue enhancingmeasures making the smallest contribution.

Fiscal space exists when a government canincrease expenditure without impairingmacroeconomic stability (IMF 2006).Additional revenue can be raised byincreasing taxation, strengthening taxadministration and implementing costrecovery for state-provided services.Reduced spending on lower priorities– suchas defence – creates fiscal space as doesincreased borrowing by the state, additionalforeign aid grants or credit creation by thecentral bank.

The link to sustainability is crucial. Somerevenue-raising measures may inhibiteconomic growth and reduce welfare.Seldom is it simple to identify ‘lower priority’expenditures. Underinvestment ininfrastructure investment across Africabecause of perceived lower priorities relative

to social spending have come back to hauntthe continent’s governments in the form ofa severe infrastructure deficit. Increasedborrowing translates into higher debt-serviceand foreign currency commitments, whilecredit creation by the central bank fuelsinflation and currency depreciation.

Past experience (Table 3.2) suggests thatbecause only a handful of sub-Saharaneconomies raise more revenue relative toGDP than Zimbabwe, fiscal space issuesshould not be a reform priority. In 2007, onlyfour sub-Saharan countries (out of 44) hadhigher spending-to-GDP ratios thanZimbabwe (39.1 percent), while Zimbabwe’srevenue generation (28.8 percent of GDP)comfortably exceeded the regional average(23.4 percent) (IMF 2008). Yet, above-average levels of revenue mobilization andspending by the state did not translate intoincreased public sector investment, fastereconomic growth or progress towards meetingthe MDGs (Millennium Development Goal).

Accordingly, Zimbabwe’s fiscal reforms needto target the composition and quality ofexpenditure on the one hand and theefficiency of revenue-raising measures on theother. ‘The composition and efficiency ofexpenditure is a key to achievement ofoutputs and outcomes’ (IMF 2006). Further-more, and in the context of post-crisisZimbabwe, this is a crucial consideration.Fiscal policy must take account of growthconstraints, especially the institutional capacityto make effective use of available resources.

Compositional changes to spending patternsshould target phasing down subsidies, whilstboosting social and investment expenditures.There will be scope too for savings in thefield of general administrative spending byreducing the number of overlapping govern-ment departments and rationalizing the publicservice, though because Zimbabwe has longunderspent on operations and management,savings are unlikely to be substantial.

The extent of savings will depend also onbroader strategic issues. Given the rundownstate of public infrastructure increased

COMPOSITIONAL

CHANGES TO

SPENDING

PATTERNS SHOULD

TARGET PHASING

DOWN SUBSIDIES,

WHILST BOOSTING

SOCIAL AND

INVESTMENT

EXPENDITURES

40


investment is essential but future admin-istrations should ensure that where this canbe undertaken more efficiently by the privatesector or in private-public partnerships,public finance is conserved for use in areasthat will not attract private participation –rural roads, schools, clinics and land reform.

This highlights the need to frontload structuralreforms. It is essential to avoid the situation,experienced in so many other Africancountries, where privatization and otherprivate sector initiatives have been delayedwhile government has sought, usually in vain,to rescue failed state enterprises. Coppermining in Zambia is a classic example. Publicservice and public sector restructuringshould be high on the stabilization agenda.

3.9 TAXATION

Because Zimbabwe is a high-tax state,collecting 22.7 percent of GDP in tax revenuecompared with 12.9 percent for low incomecountries as a whole and 16 percent for low-middle income countries, the focus of taxreform should also be compositional.Zimbabwe relies on direct income taxes for47 percent of revenue, the bulk of thiscoming from individual taxpayers (39.6percent) and the balance of 7.5 percent fromcompanies.

There is therefore, a strong case for flatteningthe tax structure for individuals by raisingthresholds for low income groups while alsoreducing the very high top marginal tax ratethat exceeds 50 percent. At the same timethe effective corporate tax yield could beraised by both lowering the company tax ratewhile abolishing some of the myriad tax-breaks that have been built into the systemover the years. There is persuasive inter-national evidence suggesting that suchreforms increase the corporate tax yieldwhile reducing tax bureaucracy and loweringcollection costs.

In 2007, 95 percent of tax revenue wasderived from four tax categories – profit and

income taxes (58 percent), VAT (24.5percent) and customs and excise tax (12.5percent). There is a significant number of‘nuisance’ taxes that yield very little relativeto collection costs that could be abolished.At the same time it is essential to widen thetax base by eliminating exemptions (VAT)and implementing pro-market reformsdesigned to formalize the informal sectorbringing its participants into the tax net.

At the macroeconomic level, four broadreforms should be investigated:

(a) The early compilation of a nationalbalance sheet that identifies the country’snet worth in terms of assets and liabilities.Such data are not available and aninventory of this kind would make itpossible to ascertain the rate of returnearned on public investments as a guideto future policymaking.

(b) A shift away from the existing UK-stylesecretive budgetary processes that limitthe scope for public debate andparticipation until after the budget hasbeen presented and acquired the statusof a fait accompli thereby limiting thescope for positive changes.

(c) Extending the budget cycle with the aimof ensuring that fiscal policy is framedon the basis of medium-term objectivesand constraints. The setting of medium-term frameworks in respect of the shareof revenue and public spending in GDPas well as the main categories of publicexpenditure – capital, interest chargesand wage bills – would enhance both thetransparency and efficiency of publicsector financial management.

(d) The explicit adoption of a wealth-basedapproach to budgeting whereby theauthorities seek to increase nationalwealth by ensuring that resourcedepletion through mining, some types ofagriculture, forestry and even tourism,is compensated by offsetting publicinvestment in produced assets andhuman capital.

41


3.10 EXTERNAL FINANCE

Without foreign funding, stabilization isunlikely to succeed, which is why itsimplementation will depend on politicalreforms. It is fashionable for stabilizationprogramme design to include projections ofthe funds required and their sourcing. Sincethis exercise is being conducted elsewhere(Bretton Woods Institutions and bilateraldonors) it has been excluded from thisexercise.

However, three points are pertinent.Typically such funding estimates are drawnup on the basis not of what will be requiredbut what the providers think – often hope –will be available. There is no reason tobelieve that there is any meaningfulrelationship between availability andrequirements. The net result is either forprogramme design to be tailored to suit theavailability of finance or to fill the black holeof the remaining financial requirement withoptimistic guesstimates of private (andremittance) inflows.

Secondly, the financing requirement isunknown and will depend on the policystance taken by a new administration. Oneobvious unknown is the extent, if any, towhich a new administration will agree to paycompensation for those whose assets wereexpropriated in the land-reform process.Estimates of this amount vary tremendously,but the full cost, relative to the likelyavailability of aid finance, would be verylarge indeed. Similarly, there is a case forcompensating pensioners – especially, butnot only, public sector pensioners, who havebeen seriously disadvantaged by governmentfiscal and monetary policies since 1997.Whether such compensation claims areincluded or excluded will have a dramaticimpact on the likely post-crisis financingrequirement.

Thirdly, Zimbabwe is fortunate to the extentthat it has a strong domestic financial sectorand would be able to access offshorecommercial bank funding, especially through

the multinational banks operating in thecountry (Barclays, Standard Chartered,Stanbic and MBCA). It would also haveaccess to portfolio inflows via the ZimbabweStock Exchange and investment in theofficial fixed-interest market, were treasurybills and government stock to be marketedexternally.

3.11 DEBT SUSTAINABILITY ANDDEBT RELIEF

The most recently published debt sustain-ability analysis was undertaken by the IMFfor its February 2007 Article IV report,which concluded that, on current policies,Zimbabwe’s external debt was notsustainable without debt relief (IMF, 2007).It noted that debt sustainability analysisprojections were only indicative, asZimbabwe does not have reliable externaldebt and debt-service data, while meaningfulmedium-term projections of macroeconomicvariables were difficult given the high degreeof uncertainty over future policies.

External debt was estimated at US$5 billion(69 percent of GDP) at the end of 2005, ofwhich US$2 billion was owed to multilateralcreditors, while arrears were put at US$2.7billion (38 percent of GDP). Under theassumptions of the baseline scenario, by 2011the total stock of outstanding debt (both publicand private) would amount to US$7 billionor 103 percent of GDP.

By 2011 the net present value (NPV) of publicand publicly guaranteed external-debt–GDPratio was expected to exceed 90 percent, whilethe NPV of such external-debt–exports ratiowas projected to exceed 440 percent. Thedebt-service–exports ratio was estimated at24 percent, and the NPV of total external-debt–exports ratio would approximate 1000percent by 2026. The IMF noted that, ifpolicies were to improve, the debt indicatorswould improve as well, but the very high debtratios in the baseline scenario suggested thatbetter policies alone were unlikely to besufficient to make Zimbabwe’s external-debt

42


burden sustainable, meaning that debt relieffrom both multilateral and bilateral creditorswill have to be part of the stabilizationpackage.

The debt sustainability analysis estimateddomestic public debt, denominated inZimbabwe dollars, to be 19 percent of GDPin 2005 and 2006. Using the officialprojection for GDP in 2008 of Z$16,000trillion, this ratio had declined to 15 percentof GDP by March 2008. Even assuming thatdomestic debt continues to increase at theexponential rate experienced in the firstquarter of the year, because nominal GDPwill rise in line with inflation, the debt–GDPratio is unlikely to increase materially. Indeed,in real terms – converted to US dollars atparallel market rates – Zimbabwe’s domesticdebt burden is tiny, at less than US$50 million,so that the foreign exchange cost of takingthe debt off the government’s books andconverting it into a foreign liability would notsignificantly affect the debt sustainabilityanalysis. Accordingly, inclusion of thedomestic debt, valued at current exchangerates, would have minimal impact onZimbabwe’s debt sustainability analysis.

3.12 INSTITUTIONAL ANDSTRUCTURAL REFORMS

As noted at the beginning of this chapter, inall probability there will be – indeed, shouldbe – overlaps in the three phases ofstabilization. Because institutional andstructural reforms are the main focus of theentire report, they are not discussed here, saveto stress that some such reforms – fiscaltargets and rules, an independent central bank,a depoliticized exchange-rate strategy andreform of the financial sector – will benecessary during the stabilization phase.

It is a fact that governments that movequickly soon after taking office to implementDoing Business and Investment Climatereforms achieve greater success than those

whose approach is more measured.7 Giventhat so many of these reforms are essentiallyuncontroversial, there is a very strong casefor fast-tracking them in the interest ofspeeding up the pace of economic recovery,job generation and poverty reduction.

3.13 THE DEFLATIONARYIMPACT OF THESTABILIZATION PACKAGE

It would be idle to pretend that macro-economic stability can be restored without asubstantial, but hopefully transitory,contraction in effective demand. In theZimbabwe case formal economy contractionwill be exacerbated by the immediate shut-down of much informal economy activity.

While loosening the foreign-exchangeconstraint, through exchange-rate adjustmentand accessing external finance, will ensurea strong rebound in the formal economy, therewill also be a simultaneous, and severe,contraction in the informal economy.Thousands, possibly hundreds of thousands,of Zimbabweans have resorted to informalcross-border trading and parallel-marketactivities in respect of foodstuffs, goods andservices and foreign exchange. Currencyand price-control liberalization, allied withimproved access to foreign exchange byformal businesses, will quickly eliminate mostof these activities, with the loss of thousandsof informal-economy ‘jobs’ and income.

One consequence of this is likely to be areluctance on the part of people in thediaspora to return to the country, while theirbeneficiaries at home in Zimbabwe willbecome, hopefully temporarily, even morereliant on remittance income than in the past.

3.14 SOCIAL DIMENSIONS

Stabilization measures will need to beaccompanied by measures to protect

7 See chapter 6 on private sector development.

43


vulnerable sections of the community. This iswhere the international community can makea major contribution in the form of budgetaryassistance to ensure that real spending onhealth, education, social welfare and food aidis not undermined, despite an overallcontraction in the level government spending.

Countervailing measures to deal with thesocial dimensions of stabilization, and indeedthe hardships associated with the crisis,should build on the Enhanced SocialProtection Programme (ESPP) designed bythe World Bank, government and civil societyin 1999, which was developed on the basisof an extensive review of past programmes.The major components of the ESPP are:

• Basic Education Assistance Module(BEAM), which aims to reduce thenumber of people failing to attend schoolbecause of hardships, and providingschool-fee waivers to reduce the rateof drop-outs.

• Children in Especially Difficult Circum-stances (CEDC), which aims to identifyand assist children in difficult circum-stances through community support andimplementation of component.

• Public Works Component (PWC),which seeks to put in place labour-intensive public works that offer employ-ment to the poor.

• Emergency Drugs and Medical Supplies(EDMS) component.

• Social Protection Strategy (SPS), whichset up studies, analyses, consultations andtechnical assistance aimed at improvingstrategic planning, monitoring andimplementing programmes in the Ministryof Public Service, Labour and SocialWelfare.

External assistance for the ESPP was madeconditional on government paying the arrearson its debt with the World Bank. Its failureto do so resulted in the programme being

suspended in 2000. As the relationshipbetween government and the internationalcommunity deteriorated, government decidedto go it alone, fast-tracking the BEAMcomponent.

Subsequent safety nets implemented bygovernment have drawn from the frameworkprovided by the ESPP. However, the majordrawback has been the absence of externalfunding. Interventions by government sufferfrom declining access, low quality of theinterventions in terms of the extent ofmitigation, and poor targeting of beneficiaries.

These building blocks derived from the ESPPshould form the basis for designing safetynets to counter the adverse social effects ofboth the current crisis as well as a futurestabilization programme. These developmentpartner-driven efforts such as the donor-funded Programme of Support for theNational Action Plan for Orphans andVulnerable Children (OVC), run parallel tothe government’s social safety nets.

After the crisis, there will be a need tointegrate other elements of the ESPP – suchas the PWC and EDMS components – intoa common funding arrangement leadingeventually to sector-wide budgetary support.A case in point is the formal educationsupport programme, which is currently beingimplemented by both the government andunder the Programme of Support for theNational Action Plan for OVCs. A suggestedsolution is to integrate the formal educationsupport intervention supported by donors intothe BEAM programme, leaving the othernon-fee interventions with NGOs. Similarly,the public works programme and theemergency drugs and medical assistanceintervention can be supported by donorsthrough government.

Such cooperation during the stabilizationperiod will provide invaluable insights into thelonger-term institutional mechanism for themedium-term recovery of basic socialservice delivery systems,

STABILIZATION

MEASURES WILL

NEED TO BE

ACCOMPANIED BY

MEASURES TO

PROTECT

VULNERABLE

SECTIONS OF THE

COMMUNITY

44


3.15 MEDIUM-TERM OUTLOOK

Table 3.4 assumes a starting point GDP ofUS$6 billion (2007) with a 10 percent declinein output during 2008. From 2009, GDP isassumed to grow at an annual average rateof 6 percent while population increases by 1percent a year. National savings start froma very low base of 4 percent in 2008 butinvestment grows rapidly reflecting bothpublic and private sector spending onrevamping the infrastructure and the privatesector capital base.

The budget deficit is brought down rapidlyfrom 16 percent of GDP to 2 percentreflecting spending cuts, gradual growth inrevenue as a percentage of GDP and foreignaid (budgetary support) of some US$1.8billion over the five-year period. Projectsupport (concessional loans) average someUS$235 million annually over the period.There is no provision for debt relief, otherthan a notional grant of $200 million in 2009,designed to help finance the restructuring ofdomestic debt.

Table 3.4: Five-year scenario

2008 2009 2010 2011 2012 2013

GDP (US$ billions) 5.4 5.78 6.18 6.49 6.81 7.22

% Change –10.00 7.00 7.00 5.00 5.00 6.00

Population (millions) 12.00 12.13 12.25 12.37 12.49 12.61

Per capita Income 450.00 477.00 505.00 525.00 545.00 575.00

Resource balance

Savings (% of GDP) 4 7 10 12 14 15

Savings (US$ millions) 216 405 620 780 950 1,080

Investment Gross FixedCapital Formation (% of GDP) 14 21 25 28 36

GFCF ($ millions) 810 1,300 1,620 1,910 2,600

Resource Gap (US$ millions) –405 –680 –840 –970 –1 520

Budget

Revenue (% of GDP) 24 25 26 27 28

Expenditure (% of GDP) 40 36 34 32 30

Deficit (% of GDP) 16 11 8 5 2

Deficit (US$ millions) 925 680 520 430 140

Financing (US$ millions)

Grants 700 450 300 200 140

Budget Support 250 250 150 100 40

Food 250 150 50 0

Land 50 100 100 100

Debt Relief 200 0 0 0 0

Project Support 225 230 220 230 250

Balance of Payments

Exports (US$ millions) 1,400 1,610 1,820 2,050 2,275 2,550

Imports (US$ millions) 1,700 2,400 2,600 2,800 3,000 3,400

Trade Balance (US$ millions) –300 –790 –780 –750 – 725 – 850

Net Invisibles (US$ millions) –400 –500 –600 –650 –750 –750

Transfers : Grants (US$ millions) 200 700 450 300 200 100

Other Transfers (US$ millions) 300 200 200 200 150 100

Current Account (US$ millions) –200 –390 –730 –900 –1,075 –1,350

Net Capital (US$ millions)

Project Loans 225 230 220 230 250

Portfolio 100 70 50 50 50

FDI 170 250 350 400 500

Funding Gap – 180 300 400 500

45


It is assumed that debt relief in respect offoreign debt will be forthcoming but that thiswould be both budget and balance-of-payments neutral because Zimbabwe has notbeen servicing its foreign debt, nor has itmade budgetary provisions for that purpose.Total foreign aid is projected at some US$3billion over the period, excluding debt relief,which, if factored into the calculations, wouldtake the total to some US$5 billion and this,realistically, is likely to be the upper boundof public international support, excludingprivate donors, such as NGOs.

In balance of payments terms over the five-year period there is an assumed financinggap of US$1.4 billion. This assumes relativelymodest inflows of foreign direct investmentand takes no account of short-term capitalflows nor of offshore borrowing by the publicand private sector. The assumptions aboutthe growth of imports and the deficit oninvisible transactions are at the pessimisticend implying that in the current globaleconomic environment the funding gapwould be manageable.

3.16 RECOVERY PROSPECTS

Although a strong short-term rebound is likelyas spare capacity in the economy is broughtback into production and foreign assistanceresumes, so far-reaching is the damageincurred over the last decade that there can

be no quick fix. Full recovery – a return tothe peak real per capita income levelsachieved in 1991 – would take 12 years,assuming uninterrupted growth of 5 percentannually from 2009 to 2020 (Figure 3.2)

Historical data serve as a reality check. Overthe long haul (1960–2002), far from beingone of Africa’s better performing economies,Zimbabwe not only lagged behind theregional average but grew more slowly than24 of the 43 sub-Saharan economies fromwhich comparable data are available. Duringthis period, the Zimbabwe economy grew atan average annual rate of 2.6 percentcompared with the sub-Saharan average of3.2 percent. With population growthestimated at 2.9 percent annually over theperiod, real per capita incomes declined.

Moreover growth was driven entirely byfactor accumulation – physical capitalinvestment of 1.6 percent annually andincreased employment of 1.8 percent a year.Productivity – more technically Total FactorProductivity (TFP) – declined at an annualrate of some 0.7 percent. Figure 3.2 alsodepicts also the extent to which Zimbabwehas fallen behind the rest of the regionshowing a counterfactual of where thecountry would have been in per capitaincome terms had it grown during the lostdecade (1998–2008) at the average rateachieved by oil importing sub-Saharaneconomies.

Sources:Central Statistical Office, Harare: National Accounts (various editions) and the InternationalMonetary Fund: World Economic Outlook (April 2008)

Figure 3.2: Projected per capita income growth, 1985–2024

1985 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

3,000

2,800

2,600

2,400

2,200

2,000

1,800

1,600

1,400

1,200

1,000

Crisis

Non-crisis

46


In a no-crisis scenario, Zimbabwe’s GDP perhead in 2008 would be more than double itsestimated level. Assuming annual per capitaincome growth of 5 percent annually it wouldtake until 2024 to achieve the level of percapita that, without the crisis, would havebeen reached by 2008.

Clearly, the economy was underperformingbefore the onset of the crisis and recognitionof this reality undoubtedly played a role in thedecision to pursue a new and different growthpath spearheaded by the Fast Track LandReform Programme (FTLRP). The failure ofland resettlement however should not beallowed to erase the lessons of the 1980s and1990s. Neither the command economy modelof the 1980s nor the abortive liberalizationexperiment of the 1990s succeeded. Nostalgiafor a return to either is misplaced.

In any event, even were such a return to thepast desirable, it is simply not feasible.Globalization, regionalization, technologicalprogress and shifts in both the global andregional economic environments, not tomention the damage suffered during thecrisis period, mean that a return to 1998 isnot an option.

Going forward, expectations are high – inmany respects unrealistically so. This reportdetails the constraints that will inhibit growthin the years ahead. The 5 percent per capitaprojected growth rate from 2009 to 2024 isoptimistic, not just in terms of the actualperformance since 1960 but because:

• Physical infrastructure and human capitalwill put an effective ceiling on growthrates, certainly over the next five to eightyears.

• The economic impact of HIV and AIDSwill intensify before peaking after 2015Regional studies suggest the disease

could reduce per capita growth by up toone percent annually.

• Reorienting and restructuring theeconomy during the post-crisis phasewill have some disruptive effects,specifically in developing new growthengines – mining, tourism, financialservices – to replace large-scalecommercial agriculture.

• It will take several years for thehangover effects of hyperinflation andthe collapse of the currency to be workedout of the system.

• Investor confidence – both domestic andforeign – will not return overnight, whiledomestic savings levels will be depressedfor as long as a decade because of thetrauma of hyperinflation.

• Public sector capability has beenprogressively eroded to the point whereit will take decades to rebuild once-strong institutions.

For all these reasons it will be important notjust to carefully manage expectations but toimplement the prudent and stable fiscal andmonetary policies necessary to re-establishbusiness and investor confidence, both athome and abroad. The five percent projectedannual growth in per capita GDP is almostcertainly at – probably beyond – the upperbound of probability, given that Zimbabwe issusceptible on average to climate setbacksevery three years and that, with the declinein commercial farming, the agriculturalsector is now more vulnerable to drought thanpreviously. If the potentially adverse effectsof global climate change are also taken intoaccount, then a long-run per capita growthrate of less than four percent looks morerealistic, thereby extending the catch-upperiod by another four to five years.

ASSUMING ANNUAL

PER CAPITA

INCOME GROWTH

OF 5 PERCENT

ANNUALLY IT

WOULD TAKE UNTIL

2024 TO ACHIEVE

THE LEVEL OF PER

CAPITA THAT,

WITHOUT THE

CRISIS, WOULD

HAVE BEEN

REACHED BY 2008

47

Multilateral and bilateral aid to the countrydecreased sharply as the crisis in Zimbabwedeepened after 2000. In a number of areas,such as agriculture and land resettlement,international assistance virtually ceased.The Organization for Co-operation andDevelopment (OECD) donors have,however, continued to support the poorestand most vulnerable elements of societywith the provision of vaccines, prophylactics,anti-retroviral drugs to fight HIV and AIDSand, crucially, food. Limited funds have alsobeen channelled towards local community-based recovery initiatives, as well as insupport of work in the areas of governance,democracy and human rights. It isnoteworthy that, in stark contrast toprevailing international trends, and as a resultof the estrangement between the Zimbabwegovernment and Western governments, suchaid has been channelled outside governmentsystems directly to beneficiaries throughUnited Nations (UN) agencies or Non-governmental Organizations (NGOs).

The downturn in official developmentassistance coming into Zimbabwe coincidedwith a global rethink in the way in which aidwas being delivered. A general disappointmentwith economic structural adjustment pro-grammes and the ‘Washington Consensus’ inthe 1990s, as well as the increasingdependence on aid, especially in Africa, gaverise to new principles, structures andprocesses in international aid delivery. Mostnotably, these were captured in the ParisDeclaration of 2005. As Zimbabwe has notbeen involved in or privy to these processes,its institutional memory of aid is based onolder practices, such as the dominance ofproject-based aid delivery mechanisms. In apost-crisis scenario, and in light of theemphasis now placed on national ownershipand a likely high degree of dependence onaid flows, Zimbabwe must take the initiative

Chapter 4

Aid Flows and Management Systems

– with the assistance of donors – to define itsown priorities, design its own developmentprogrammes, and build an institutionalstructure to significantly improve theeffectiveness of aid.

4.1 AN OVERVIEW OF AIDDELIVERY

4.1.1 The effectiveness of aid

The effectiveness of official developmentassistance in achieving economic develop-ment and broader development objectivescan be divided into the process of deliveringaid and the impact of aid in achievingdevelopment objectives. The process orefficiency of delivering aid relates to howvarious actors – especially the recipient anddonor countries – can strengthencoordination mechanisms, reduce trans-action costs for partner countries, improveaid predictability, and support home-growndevelopment plans. The impact of aidrelates to the current evidence of theefficacy of aid in achieving intendedobjectives and outcomes. Process andimpact issues are closely correlated: thegreater the efficiency of delivery, the morelikely that aid will have the desired impact.

4.1.2 The impact of aid on growth

Following a number of studies, mainly byWorld Bank economists, the emergingconsensus was that aid could have a positiveimpact on growth in ‘good policy environ-ments’ (Dollar and Svensson,1998; Burnsideand Dollar, 2000). But a follow-up study byEasterly et al., (2003) could not find supportfor this conclusion. Other studies showeddiminishing returns to aid, and that it had noeffect on growth when it reached 8 percentof the recipient country’s GDP; additional aid

AS ZIMBABWE

HAS NOT BEEN

INVOLVED IN OR

PRIVY TO THESE

PROCESSES, ITS

INSTITUTIONAL

MEMORY OF AID

IS BASED ON

OLDER PRACTICES,

SUCH AS THE

DOMINANCE OF

PROJECT-BASED

AID DELIVERY

MECHANISMS

48


thereafter was found to have a negative effecton growth (Easterly, 2006). This does notnecessarily imply that aid in any one particularcountry cannot be effective, but it doessuggest that donors and recipient countries,such as Zimbabwe, need to manage their aidflows – the process of delivering andabsorbing aid – very carefully if the benefitsof poverty reduction and growth are to befelt.

4.1.3 The efficiency of aid

International experience has shown that aidefficiency may be compromised for anumber of reasons:

Ownership

When the government of Zimbabwelaunched economic reforms in the early1990s, the Minister of Information told thelocal press, ‘They’re not our reforms, they’rethe IMF’s. We had to do them’ (Collier, 2007:109). This was indicative of the failure ofgovernments, especially in Africa, to acceptresponsibility for economic reform measuresimposed upon them by the internationaldonor community. In a review of its policyrecommendations, the World Bank has beeninstrumental in suggesting more participatoryapproaches to economic growth anddevelopment with a view to increasingnational ownership (World Bank, 2005).

An additional problem which has oftenemerged, particularly in highly aid-dependenteconomies, is a situation in which nationalleaders became more accountable to thedonors who provide their governments withessential revenue than to their own citizens.This dependence on external aid flows alsoacts as a disincentive in terms of domesticrevenue collection efforts and underminesdomestic accountability systems. Seniortechnocrats and politicians become orientedtowards convincing the aid agencies to keepthe aid flow going rather than listening totheir domestic population and focusing on thelocal development agenda. Sectors becomeaccountable to multiple donors and not centralgovernment or parliament (Kanbur, 2003).

Disparate donor policies

Each donor country has its own agency fordevelopment cooperation that is managed interms of principles and policies developedby its government, including developmentagendas and priorities, modalities, disburse-ments and conditions – including tied aid. Itis often the case that multiple projects areimplemented without consideration of therecipient country’s own priorities, policies andstrategies and, as a result, undermine thepartner country’s systems.

Fragmentation

Each donor agency also follows its own rulesof planning and disbursement of funds, andthese often do not coincide with the budgetaryand planning processes of the recipientgovernment. Apart from imposing their ownconditionality and reporting requirements,donors appoint serial consultancy missionsfor planning and evaluating their ownprogrammes. All in all, this imposes hugetransaction costs on a recipient country’salready severely stretched administration.

The donors’ focus on funding multiple stand-alone projects in various sectors of thecountry, often led to perverse outcomes.Governments found it increasingly difficultto sustain recurrent expenditure onceprojects had run their course. The difficultyof meeting recurrent maintenance costs forinfrastructure projects, and personnel costsfor social service delivery projects, wascompounded by a brain drain from the publicsector to the donor sector. Project-based aiddelivery ultimately undermines the recipientgovernment’s incentives and its ability toperform a number of key functions, such asrevenue collection, planning and budgeting,executing programmes, and monitoring andevaluation.

The micro–macro paradox

There is an apparent contradiction betweenthe positive impact reported by evaluationsof individual projects and the continueduncertainty regarding the net aggregate

49

Chapter 4 – Aid Flows and Management Systems

impact of these projects on growth. In 1989the World Bank’s Operations EvaluationDepartment produced a report that containedevaluations of 2,000 projects over a 15-yeartime-frame (World Bank, 1989). Eighty-onepercent of all projects were judged to haveperformed satisfactorily, with an averageeconomic rate of return estimated at 16percent per annum. However, micro andmacro analyses seemed to yield differentresults, with many successful projects havingno perceptible lasting effect on economy-wide growth rates. The suspicion was thatmany evaluations were flawed by significantdata problems, subjective judgement, andmethodological inadequacies. To this shouldbe added the strong possibly that self-evaluations led to self-serving conclusions.There were strong incentives for evaluationsto reach positive conclusions where theincome and livelihoods of donor staff andrecipients were dependent on future funding.

Asymmetrical partnerships

Despite the lip-service given to the principleof partnership, it seemed clear that thedominance of the donors progressivelyweakened the ability of, and incentivesfor, recipient countries to take greaterresponsibility for their own development.Donors have more recently been calling forgreater ownership by the recipient countries,greater oversight, participatory approachesand enhanced communication by improvinginformation flows between donors andrecipients.

4.1.4 Paris Declaration on AidEffectiveness

In view of the aforementioned problems andthe persistence of poverty, especially inAfrica, there was a growing realization ofthe need to reform aid delivery to improveits effectiveness. In March 2005, a meetingin Paris of developed and developing country

officials resolved to take far-reaching andmonitorable action to reform the way inwhich aid is managed and delivered.1 TheParis Declaration called for developingcountries to have national development planswith clear strategic and budgeted priorities.It recommended that both donors and partnercountries should move away from stand-alone project aid to programme aid. Morespecifically, it called for progress in five majorareas: ownership, alignment, harmonization,mutual accountability and managing forresults.

Ownership

Partner countries, meaning the recipients ofaid, agreed that they should exerciseeffective leadership over their developmentpolicies and strategies, and coordinatedevelopment actions. Donors, on the otherhand, agreed to respect a partner country’sleadership and help develop and strengthentheir capacity to manage the aid flowseffectively.

Alignment

Alignment has two crucial elements. Thefirst is that donors should align their supportaround their partner country’s nationaldevelopment strategy document, such as aPoverty Reduction Strategy Paper (PRSP),and link their funding to a single frameworkof conditions and performance indicatorsderived from the PRSP. In particular, thismeans untying their aid and synchronizingtheir pledging and disbursement cycleswith national planning and budgetingcycles. The second is that donors shouldalign themselves to their partner country’sinstitutional structures, systems and pro-cedures, by strengthening them and workingthrough them. The objective for Zimbabwewould be to work towards aligning thepreferences of donors with those of thegovernment.

1 See <http://www.oecd.org/document/18/0,2340,en_2649_3236398_35401554_1_1_1_1,00.html>.

50


Harmonization

The donors also agree that – amongstthemselves – their actions should becomemore harmonized, transparent andcollectively effective. In effect, they agreedto common arrangements for planning,funding (joint financial arrangements),disbursements, monitoring and evaluation,and reporting. They also agreed to move toincrease their use of programme-based aidand to reduce the number of separate,duplicate missions. Harmonization alsomeans that donors agree to delegateresponsibilities to ‘lead donors’ who are seento have a comparative advantage or specialexpertise in a particular sector or area. Thiswould reduce transaction costs considerably,because the recipient country would be ableto deal comprehensively with one lead donorin a particular area who would be acting onbehalf of several others. For Zimbabwe, withgreatly weakened capacity, rapid movestowards harmonization would significantlylighten the burden on a post-crisisadministration.

Managing for results

This requires donors and partners to jointlyplan and manage aid flows in such a waythat they focus on the intended objectives,and to use information derived frommonitoring to improve the impact of aid. Fordonors, this means linking their programmingand resource flows to specific results andaligning them to their partner’s performanceassessment framework (PAF). Donors alsoagree to harmonize their own monitoring andreporting requirements with partnercountries and move towards commonformats for periodic reporting. Partnercountries, for their part, have agreed todevelop assessment and reporting systemsthat reflect key objectives of their PRSP orother medium-term development plans, andto translate these into annual and multi-yearbudgets to facilitate multi-year pledging andaid predictability.

Mutual accountability

This Paris principle makes both donors andpartner countries jointly accountable forresults. Partner countries commit tostrengthening parliamentary oversight ofgovernment actions and to reinforcingparticipatory approaches by involving abroad range of development actors indesigning and monitoring the implementationof national development and povertyreduction strategies. Donors, for their part,recognized the need to provide timely andcomprehensive information on aid flows toenable partner countries to prepare compre-hensive budget information to theirparliaments and citizens.

4.2 APPLYING THE PARISPRINCIPLES TOZIMBABWE’S RECOVERY

4.2.1 Zimbabwe’s responsibilities

In terms of the Paris Declaration,Zimbabwe’s responsibilities would be toexercise effective leadership over itsdevelopment policies and strategies, and tocoordinate development actions. Morespecifically, they would have to:

• Develop national development plans,such as a PRSP, with clear strategic andbudgeted priorities.

• Develop jointly with donors a per-formance assessment framework andagree on a single set of conditions thatare derived from the PRSP.

• Translate a PRSP into a Medium-TermExpenditure Framework (MTEF) withannual and multi-year budgets tofacilitate aid predictability.

• Strengthen Zimbabwe’s institutionalstructures, systems and procedures tofacilitate the alignment and harmonization

51


of donor support so that they cansynchronize their pledges and disburse-ment cycles with national planning andbudgeting cycles.

• Strengthen parliamentary oversight andreinforce participatory approaches byinvolving non-state actors – the privatesector, labour and civil society – in theprocess of developing a PRSP.

Leadership in national development

In accordance with the Paris principles, theZimbabwe government will be required totake ownership and the lead in its owndevelopment agenda. The developmentprocess should be premised on openengagement, both internally and with donors,in order to build mutual trust and confidence.Through these consultation processes, thegovernment would draw up a PRSP inwhich multi-sectoral strategies are clearlyprioritized, sequenced and costed. Roles andresponsibilities would be clearly attributedand linked to an MTEF, with progressindicators reflected in a monitoring andevaluation system. Moreover, the govern-ment would be committed to the reform ofpublic institutions, particularly strengtheningpublic financial management, accountingand reporting systems, and specificallybudgetary processes and oversight. It isexpected that these measures will build donortrust and allay their concerns aroundfiduciary risk. This, in turn, will allow fordonor harmonization and assist donors toalign themselves with Zimbabwe’s owninternally generated national priorities andstrategies. It will also enable donors to moveswiftly to direct budgetary support.

Building capacity to manage aid

The first priority will be to develop andstrengthen the Zimbabwe government’sinstitutional capacity to lead the developmentprocess and manage aid flows effectively.

Experience from other countries suggeststhat a special agency or a department fordevelopment cooperation needs to beestablished as a ‘one-stop shop’ for all aid.This could either be a dedicated agency thatreports to the Ministry of Finance, or adepartment within the Ministry.2 The mainbenefit of a parastatal agency is that it canimmediately reduce fiduciary risk – a keyrequirement for donor alignment, harmo-nization and direct budgetary support – byrecruiting professional staff and engagingreputable auditors. On the other hand, theprincipal benefit flowing from such anagency being housed in the Ministry ofFinance is that it would be more closelylinked into the government’s financial andbudgetary system. Either way, it needs tobe linked and supported by other governmentagencies, such as the budgeting department,the economic policy and planning department,the Reserve Bank and the Central StatisticalOffice. Its key roles and responsibilities, onbehalf of the government of Zimbabwe,would be to:

• Draw up a national aid policy frame-workcontaining guidelines and procedures soas to provide a coherent framework forgovernment–donor interactions. If sorequired, this could include any new legalframeworks.

• Engage with the international donorcommunity to build trust and confidenceby ensuring the highest standards oftransparency and accountability in orderto reduce fiduciary risk.

• Develop a computerized managementinformation system to track, trace andaccount for all aid flows, and disseminateinformation on aid to those who requireor request it.

• Collect information and data, incooperation with the Central StatisticalOffice, to carry out analysis and draw

2 Examples that might be looked at include Afghanistan’s Assistance Coordination Authority which, while initiallysemi-autonomous, was subsequently moved to the Ministry of Finance.

THE DEVELOPMENT

PROCESS SHOULD

BE PREMISED ON

OPEN

ENGAGEMENT,

BOTH INTERNALLY

AND WITH

DONORS, IN

ORDER TO BUILD

MUTUAL TRUST

AND CONFIDENCE

52


up frameworks, strategies and plans inconsultation with local stakeholders andinternational donors.

• Contribute to the design of a PRSP inconsultation with key non-state stake-holders and donors, which establishesclear priorities for donor support that arelinked to the MTEF and as a basis fornegotiating debt relief.

• Develop a PAF based on a monitoringand evaluation system that eliminatesindividual bilateral conditionality.

• Encourage donors to align themselveswith the government’s PRSP and itssystems and procedures, help them tomove quickly towards providing directbudget support, and increase the pre-dictability of aid flows in order to enablemedium-term planning.

This aid management department should alsobe trained to undertake debt sustainabilityanalysis (see below).

Development of a PRSP

As a pre-condition for foreign debt relief, apost-crisis Zimbabwe will have to start workon developing a PRSP. It should be notedthat a significant level of effort will berequired, particularly in light of humancapacity constraints due to the brain drain,and the need for national actors to rapidlycatch-up with the state of the art in the areasof poverty analysis and the design ofpoverty reduction programmes. Internationalexperience would indicate that the averagetime to develop a full PRSP currently standsat an average of 20 months, and thereforethis is an undertaking that should be initiatedas soon as possible in a post-crisis scenario.The quality and speed of the final document,which will have to be approved by theBretton Woods Institutions, will depend on:

• The quality of existing poverty data

• National planning capacity

• The level of integration of governmentstructures (especially between lineministries and the Ministry of Finance)

• The current status of consultationmechanisms between government andnon-state actors.

The development of a PRSP in consultationwith national constituencies and theestablishment of an agency or departmentto manage aid should settle the question ofZimbabwe’s ‘ownership’ of its own policiesand processes. The main elements of aPRSP should include:

• A more fully integrated strategy thatmatches social sector plans with plansfor the productive sectors. There will bea need to balance investment in the socialsectors with the more difficult and longerterm restructuring of economies todeliver pro-poor growth. This has beena key lesson learned in the course of theglobal experience with PRSPs, with theso-called ‘2nd generation’ PRSPs. Incontrast to the social sector bias evidentin many ‘1st generation’ PRSPs, morerecent PRSPs grant much more attentionto the centrality of robust growth ratesin order to sustainably reduce nationalpoverty levels on the basis of pro-poorgrowth models. These ‘2nd generation’PRSPs also highlight the role of theprivate sector in growth and what canbe done to improve its performance, withmany now also including analyses ofareas such as trade, the financial sectorand regulatory reforms.

• A sound analysis of the various trans-mission channels between growth andpoverty reduction, as well as the impactof macroeconomic policies on bothgrowth and poverty reduction.

• An analysis of the sources of growth,and the need for productive investmentin other areas such as infrastructure andrural development.

53


• Addressing the tensions between fiscalstringency requirements for macro-economic stabilization and the need forincreased poverty-reducing social sectorspending.

Once a PRSP has been developed locally,the staff of the World Bank and IMF willconduct a Joint Staff Assessment (JSA) ofthe PRSP as a basis for further HighlyIndebted Poor Countries (HIPC) debt reliefand future concessional assistance. JSAsallow the Bretton Woods Institutions’ boardsto exercise due diligence and providefeedback to the country on how the PRSPmight be improved.

Performance Assessment Frameworks

Zimbabwe should also establish ajoint monitoring framework, known as aPerformance Assessment Framework(PAF), which is a multi-annual matrix ofpriority targets and indicators derived fromthe PRSP. The PAF would be subject to anannual, joint review process by the Zimbabwegovernment and donors. Given clear annualand multi-year targets and indicators againstwhich progress can be monitored, donorsshould be more willing to make commitmentsfor the following years in a coordinatedmanner, and hence help address problems ofaid predictability. And, by undertaking touse the PAF as the single conditionalityframework for budget support, donors wouldhelp reduce bilateral conditionality andtransaction costs substantially. Furtherprogress could be made by donors improvingtheir mutual accountability by agreeing to beassessed under a Programme Aid Partner’sPerformance Assessment Framework(PAPs-PAF) which normally involves anindependent assessment of donor progress interms of their adherence to Paris Declarationprinciples.

Moving quickly to budget support

By aligning themselves to a PRSP, donorsshould find it easier to move gradually awayfrom stand-alone project delivery to direct

budget support modalities. The move tobudget support will enable:

• a larger share of public expenditure tocome under government oversight, i.e.,on budget;

• greater public scrutiny throughparliament; and

• greater accountability to donors.

Direct budget support will make fungibilitymore difficult, and it will contribute to a moretransparent understanding of the impact ofadditional donor resources. Therefore,through a PRSP, it is hoped that donors willmove quickly to provide budget supportthrough:

• Sector-wide approaches that support asingle-sector policy-implementation andexpenditure framework that is imple-mented through a three-year MTEF ora sector investment plan.

• General budget support to the country’sfinancial management system based onan overarching, mutually agreed nationaldevelopment strategy.

Drawing on experience from other countries,Zimbabwe should consider establishing aninternational budget support programme forits PRSP that includes:

• A mechanism for dialogue betweendonors and the government.

• A disbursement schedule linked to thecountry’s budget cycle.

• A common set of benchmarks forassessing progress based on a PAF.

Disbursements might be based on a two-tranche system:

• A base payment that is made at thebeginning of the financial year againstsatisfactory performance in terms ofmacroeconomic management criteriacontained in the PAF.

54


• Performance payments based onprogress made in terms of key sectorindicators, and policy and institutionalreforms.

One key benefit both to Zimbabwe anddonors is likely to be reduced demand onZimbabwe’s national capacity, which hasbeen eroded over the past decade, and lowertransaction costs for both sides. Furthermore,it is likely to bring about improvements interms of the integration of Zimbabwe’s ownbudgeting, accounting and planningsystems, as well as strengthening the mutualaccountability of the Zimbabwe governmentand donors. In addition, a key considerationwhich will thereby be addressed is the needto enhance the accountability of theZimbabwe government to parliament andother domestic constituencies.

Addressing donor fiduciary-risk concerns

National systems must be sufficiently reliableto address donors’ fiduciary risk concernsand their need to answer to domesticconstituencies in terms of the effectivenessof their aid. Zimbabwe should address theseconcerns by strengthening the country’spublic financial management systemsand procedures, and by improving theadministrative and oversight capacity ofParliament, the Ministry of Finance, theComptroller and Auditor-General, and theTender Board.

If it is decided to form a separate agencyfor managing aid flows, then a firm of auditorsacceptable to both donors and thegovernment should be appointed to ensurethe highest standards of transparency,accountability and probity.

Consultations and oversight could more easilybe exercised by civil society through the

formation of a review group made up of anetwork of local NGOs and otherorganizations with a special interest inmonitoring aid effectiveness. This would notonly include oversight in terms of policies,programmes and procedures, but ensuringthat aid is delivered to where it is needed,when it is needed.

4.3 DEBT RELIEF ANDBUILDING NATIONAL DEBTMANAGEMENT CAPACITY

4.3.1 The Highly Indebted PoorCountries Initiative (HIPC)

The chapter on stabilization deals withZimbabwe’s debt situation in 2005 – basedon an IMF Staff report (IMF, 2007) – insome detail. Since then, however, it has notbeen possible to determine Zimbabwe’s debtsituation with any accuracy, or to makeanything resembling a reliable or sensibleprojection. One of the first tasks for a post-crisis administration will be to undertake anaudit of outstanding debt.

Zimbabwe would normally be eligible fordebt relief under the HIPC initiative if it hada debt to exports ratio of 150 percent. In2005, based on end-2004 data, the IMFestimated that Zimbabwe’s debt/export ratiostood at 215 percent. In addition, the issueof Zimbabwe’s need to be reclassified as anIDA-only country (i.e., with access to theWorld Bank’s long-term interest-free loansand grants wing), which is a World Bankpre-condition for access to HIPC debt relief,would have to be addressed. Due to poorcredit worthiness, Zimbabwe has, for anumber of years, been a ‘notional blend’country i.e., with notional access to both IDAand the IBRD funds at the end of 2004.3

3 The date of end of 2004 is of importance given that in December 2006 the Boards of the IMF and World Bankinvoked the ‘sunset clause’ which had been extended a number of times since 1998. Over time the Boards hadexpressed concern with ‘moral hazards’ i.e., that continual extensions of the HIPC initiative may provideperverse incentives for countries to increase their borrowings in order to avail themselves subsequently of debtrelief. As of December 2006 therefore, only countries that had already been assessed (or were assessed in thefuture) to have met HIPC income and indebtedness criteria based on end-2004 data, and that met policyperformance criteria and adopted a IMF-WB supervised programme, were to be allowed into the HIPC stream.

NATIONAL

SYSTEMS MUST BE

SUFFICIENTLY

RELIABLE TO

ADDRESS DONORS’

FIDUCIARY RISK

CONCERNS AND

THEIR NEED TO

ANSWER TO

DOMESTIC

CONSTITUENCIES

IN TERMS OF THE

EFFECTIVENESS

OF THEIR AID

55


Given its current extremely low per capitaincome levels, this should allow it to bereclassified as a Low-Income Country andtherefore also as an IDA-only country. Withthe necessary political support from the IMF/WBI boards, a technical case could bedeveloped which would make it eligible forHIPC.

If Zimbabwe’s eligibility were thereafterconfirmed, it would then need to take anumber of measures to reach a decisionpoint in order to trigger debt relief. First, itmust reach agreement to clear outstandingarrears. Secondly, it should draw up andpursue an adjustment and reform programmefor at least six months to demonstrate a trackrecord of macroeconomic stability. Thirdly,it will need to develop an interim PRSP thatnot only outlines the nature and scope ofpoverty, but demonstrates a commitment andstrategy to tackle poverty. And, fourthly, itwould need to prepare a timeline and processfor preparing a full PRSP, a three-year policymatrix, and a macroeconomic framework.This would include a strategy to use freed-up funds for national poverty reduction andsustainable pro-poor growth in the contextof the PRSP.

After the IMF and World Bank have takena decision to grant debt relief, all othercreditors, such as the Paris Club, the AfricanDevelopment Bank and others, wouldcommit themselves to providing sufficientassistance by a designated completionpoint.

4.3.2 Concessional fundingassistance

Zimbabwe must then maintain macro-economic stability with the assistance ofthe IMF Poverty Reduction and GrowthFacility and carry out structural and socialreforms. When this happens, full debt reliefis then granted. The time between decisionpoint and completion point can take fromseveral months to several years.

4.3.3 Debt Sustainability Analysis

Zimbabwe should carry out a debtsustainability analysis (DSA). This analysistries to arrive at a level of debt that wouldenable Zimbabwe to service its debt throughexport earnings, aid and capital inflows. Thiswould require working with criteria used bythe Bretton Woods Institutions and wouldneed to integrate various risk scenarios.Normally three-year averages are used toeven out volatility in export earnings andrevenues. However, in Zimbabwe’s case,other predictors may need to be used.

4.3.4 The dangers of ‘slippage’

As Zimbabwe moves into debt reliefprocesses, it must take congnisance of thefact that debt relief, in and of itself, is not apanacea. Further measures will be required.These should include export diversificationso as to strengthen the capacity of theeconomy to cope with external shocks suchas sharp deteriorations in its external termsof trade or fluctuations in the exchangerate. The dangers of this are very real. In11 of 13 ‘post completion point’ countriesfor which data were available in 2005,external debt sustainability had deteriorated.Since completion point, eight of thesecountries were once again above HIPCthresholds.

It is worthwhile recalling that, in addition toexternal shocks and the lack of a diversifiedexport base – which lay behind the build-up of unsustainable debt during the 1980sand 1990s for many developing countries –poor debt management was also a majorcontributing factor. Zimbabwe is noexception. The dangers of slippage, i.e., areturn to unsustainable debt levels afterboth rescheduling and debt stock reductionhave been granted, should be countered byrapid progress in terms of strengtheningdebt management capacity. The latter is keyto ensuring more prudent future borrowingand, in particular, that strong controls areexercised over who, including parastatals,

THE DANGERS OF

SLIPPAGE, I.E., A

RETURN TO

UNSUSTAINABLE

DEBT LEVELS

AFTER

BOTH

RESCHEDULING

AND DEBT STOCK

REDUCTION HAVE

BEEN GRANTED,

SHOULD BE

COUNTERED BY

RAPID PROGRESS

IN TERMS OF

STRENGTHENING

DEBT

MANAGEMENT

CAPACITY

56


is entitled to borrow and what kinds of debtsthey contract. Enhanced informationdisclosure and public oversight will beessential components of this process ofstrengthening the country’s debt manage-ment capacity.

4.4 AID FLOW MANAGEMENT

4.4.1 Aid flows andmacroeconomic management

The substantial increase in aid flowsanticipated in the post-crisis period willrequire careful management to maximizetheir beneficial impact on the economy.Normally it is argued that a hyperinflationaryenvironment coupled with negligible foreignreserves necessitates a gradual scaling upof aid-financed spending. But Zimbabwe’scase is atypical. Substantial aid inflows willbe needed to finance the budget and providethe foreign exchange required to loosen thebinding constraint on economic performance– foreign currency.

The spending of aid and its absorption arenot one and the same. Typically, donors makeaid payments to a country’s central bank.These are then used by the government toincrease domestic spending, while the centralbank sells the aid dollars in the foreign-exchange market to finance imports.Experience shows that in countries wherethere is a sudden increase in aid, spendingoften exceeds absorption. Supply-sidebottlenecks may account for this, or thegovernment may spend the funds faster thanthe central bank sells the dollars to increaseimport supply. Whatever the reason, thereis a net injection of spending power into theeconomy that increases import demand,exerts downward pressure on the currencyand upward pressure on inflation. It is crucialthat this scenario be avoided during theimmediate post-crisis stabilization period.

In the short-term, aid will affect the economyin three mains ways:

Imports

Foreign currency disbursed by donors willbe used to finance essential imports. InZimbabwe’s case this will include food, fuel,electricity, medical supplies, inputs andcapital equipment required by the productivesectors. The net effect is an increase inimports, funded either by aid transfers onthe current account of the balance ofpayments or by aid inflows on the capitalaccount.

Government expenditure

Aid provided in the form of budget supportto the Ministry of Finance increasesgovernment expenditure and the budgetdeficit, thus raising the level of aggregateexpenditure in the economy. Imports willincrease as a result of this governmentspending (though, to the extent that theseare funded from aid grants in foreigncurrency, there should be no adverseeffects). But any increase in domesticaggregate demand not satisfied by increaseddomestic supply will add to inflationarypressure by creating excess demand forgoods, services and skills. Because supplyin Zimbabwe will continue to be constrainedby the scarcity of foreign exchange and skillsas well as infrastructural bottlenecks, thereis a risk that increased aid disbursements willundermine the stabilization strategy aimedat reducing inflation dramatically over an 18-month to 2-year period.

However, provided aid inflows are used notto increase public spending, but rather toreplace some of the quasi-fiscal expenditureof the central bank – currently financedthrough credit creation – the net impact willbe to reduce deficit spending and slowmoney-supply expansion, thereby mitigatinginflationary pressures in the economy. In anyevent, government expenditure mustcontract dramatically relative to GDP, boththrough the budget and the quasi-fiscaloperations, to create space for private sectorrecovery. If the government can maintaincontrol on its expenditure, aid is unlikely topose a threat to macroeconomic stability.

57


An element of foreign aid will have to beused to retire domestic debt, therebystrengthening the financial system andinstitutional investors, who are the holdersof such debt, mostly in the form of treasurybills. This will enable banks to resumeintermediation – lending to customers –rather than being forced to hold governmentpaper. This in turn will contribute to therecovery of the private sector.

Exchange rates

It is conceivable that aid inflows will giverise to exchange rate appreciation, therebymaking Zimbabwe exports uncompetitive, theso-called Dutch Disease.4 In Zimbabwe’scase this is unlikely because of balance-of-payments fundamentals, and because the gapbetween Zimbabwe’s expected inflation rateand that of its trading partners is likely tomean ongoing currency depreciation over theshort term.

Much of the policy advice on scaling-up aidflows to low-income countries is based oneconomies with undeveloped credit andcapital markets. This is not the case inZimbabwe, where there are strong,diversified, financial and capital markets,and where the absorptive capacity remainsgreater than in most other low-incomecountries in Africa. Accordingly, Zimbabweis better placed than many, perhaps most,sub-Saharan African economies to useforeign aid efficiently.

4.4.2 Timing the surge

In transitional situations, it is often the casethat big surges in aid take place at thebeginning of a post-crisis situation – that is,they are ‘front-loaded’. It is arguable thatthe effectiveness of such large flows is oftencompromised by weak national systems, bethese public financial management systems,the dearth of reliable data with which toimprove targeting, or the lack of soundnational/sectoral policy frameworks. A post-

crisis Zimbabwe should seek to negotiate thetiming of such a surge with donors in orderto allow it time to ensure maximumabsorptive capacity so that the longer termutility of such aid flows is maximized.

4.4.3 Managing the transition fromreliance on aid to sustainableeconomic growth

Translating depleting resources intosustainable pro-poor economic growth

In the pursuit of rapid economic growth,developing countries often destroy theirnatural wealth base – for example, bymining. Because minerals are graduallydepleted, a part of the income they generate,i.e., the royalties, should be saved andreinvested to build a sustainable anddiversified economy. The problem is thatcountries with relatively high mineral wealth,such as Zimbabwe, often have a large poorpopulation. The inclination, therefore, is forsuch governments to spend all royaltyincome from a depleting resource onconsumption rather than saving and investingit for sustainable future growth. The wiseroption, which has been followed by countriessuch as Botswana, Malaysia and Norway,is to use their royalties as an important sourceof development finance for investment ininfrastructure, schools, hospitals or pro-grammes of economic diversification.

A wealth fund

To make the best use of its resources,Zimbabwe should adopt a portfolio-manage-ment strategy that is designed to ensure thatits exhaustible mineral assets are channelledinto production and profitable investments.This requires that:

• Estimates be made of the annual rate ofresource depletion due to mining andother activities (see chapter 8 on manu-facturing, mining and tourism).

4 See chapter 3 on stabilization.

THE INCLINATION,

THEREFORE, IS

FOR SUCH

GOVERNMENTS

TO SPEND ALL

ROYALTY

INCOME FROM

A DEPLETING

RESOURCE ON

CONSUMPTION

RATHER THAN

SAVING AND

INVESTING IT FOR

SUSTAINABLE

FUTURE GROWTH

58


• Revenues collected by government bedeposited into a specific fund to com-pensate for depletion.

• These revenues from the fund areearmarked for reinvestment inproductive assets and intangible capital,both within the mining sector andbeyond.

The creation of such a fund needs to be‘ring-fenced’ through appropriate safeguards,possibly legislation, against an incumbentgovernment appropriating these funds forother purposes. Such a fund is also morelikely to reduce the risks of Dutch Disease:an over-valuation of the currency and itsdistorting effects on the economy. Above all,a transparent ‘wealth-fund’ strategy requiresthe state to take explicit cognizance ofresource-depletion issues, thus makinggovernment revenue mobilization andspending patterns much more rational andstrategic.

4.5 CONCLUSIONS

Given the extent of regression that has takenplace over the last decade – exemplified bya collapsed economy, severely degradedinfrastructure, a heavy internal and externaldebt burden and a precipitous decline in thecountry’s human development indicators –it is clear that external assistance will berequired in order for the country to recoveron all these fronts within a reasonable time-frame. Yet at the same time it would beessential for Zimbabwe to avoid becominganother highly aid-dependent economy.Inflows of aid must be managed in such away as to ensure that there is in-builtobsolescence of such flows, and that at theend of a period of intense internationalassistance, Zimbabwe is able to become aregenerated and international competitiveeconomy, with a sound human and fixedcapital base, and thus able to move aheadon the basis of its internally generatedwealth.

IT IS CLEAR THAT

EXTERNAL

ASSISTANCE WILL

BE REQUIRED IN

ORDER FOR THE

COUNTRY TO

RECOVER ON ALL

THESE FRONTS

WITHIN A

REASONABLE TIME-

FRAME. YET AT THE

SAME TIME IT

WOULD BE

ESSENTIAL FOR

ZIMBABWE TO

AVOID BECOMING

ANOTHER HIGHLY

AID-DEPENDENT

ECONOMY

59

There is now an overwhelming body ofempirical evidence that financial-sectordevelopment matters for economic growth,and that the financial sector plays a criticalrole in the mobilization of savings in theeconomy, and in providing resources requiredfor investment (World Bank 2007;McKinnon, 1973 and Shaw, 1973). Theservices of the financial sector in reallocatingcapital to the most efficient user andredistributing risk are a crucial catalyst foreconomic growth and hence development.Healthy and competitive financial marketsare therefore an effective tool in spreadingopportunity and fighting poverty.

The ‘Blue Book’ of the UNDESA andUNCDF (2006) observes however, that inmost developing economies financialservices are available only to a minority ofthe population. For instance, about 60 percentof the population in Southern Africa have noaccess to financial services. Financial-sectordevelopment strategies have largely focusedon strengthening overall financial stability andincreasing the availability of services tomajor economic actors – large firms, thegovernment and wealthy households –leaving out the small-scale sector thatconstitutes the majority of economic actors.The Blue Book therefore recommends aninclusive financial-sector developmentstrategy that makes financial servicesaccessible to the low-income groups andsmall enterprises.

It is against this background that this chapterevaluates the requirements for recovery ofthe financial sector of Zimbabwe. Firstly, ittraces the performance of the sector overthree periods – the pre-reform period of the1980s, the reform period of the 1990s, andthe reform-reversal period of the 2000s. Oneconstant feature throughout the post-independence period is that the financialsector lacked inclusiveness and hence failed

Chapter 5

Recovery of the Financial Sector

to cater adequately for the needs of the poorand the marginalized small-scale sector.Secondly, the chapter provides a situationalanalysis of the current status of the financialsector, highlighting constraints andchallenges. In particular, the role of theReserve Bank of Zimbabwe (RBZ) infuelling hyperinflation through quasi-fiscalactivities funded by printing money is givenprominence. Furthermore, it is observed thatfrom 2002 onwards price distortionsemanating from government controlsbecame so severe that in many instancesanalyses of official statistical data produceperverse outcomes. More specifically,official inflation and GDP are found to beunderestimated as a result of highlyquestionable data sets. Finally, the chapterproposes sustainable and inclusive recoverypolicies and pathways for the sector.

5.1 OVERVIEW OF THEFINANCIAL SECTOR

5.1.1 Development afterindependence

At independence in 1980, Zimbabwe had amuch more sophisticated sector than anyAfrican country other than South Africa.Throughout the 1980s (as beforeindependence) the financial sector wastightly controlled and highly oligopolistic,with multinational banks (Barclays Bank andStandard Chartered Bank) dominating thesector; market entry was restricted andcompetition limited. Operations weredistorted by ceilings imposed on lending anddeposit rates, portfolio restrictions,government-directed lending programmes,selective credit policies and exchangecontrols. Insurance and pension funds wereessentially captive government-debt marketsthrough the prescription of assets they could

HEALTHY AND

COMPETITIVE

FINANCIAL

MARKETS ARE

THEREFORE AN

EFFECTIVE TOOL

IN SPREADING

OPPORTUNITY AND

FIGHTING

POVERTY

60


hold. Small firms and low-income groups hadvirtually no access to credit. Those withsmall savings in the rural areas could onlyinvest with the Post Office Savings Bank(POSB), which used the funds for on-lendingto government. There was no lendingwindow for these savers.

During the IMF-sponsored EconomicStructural Adjustment Programme (ESAP)of the 1990s, financial reforms were initiatedwith a view to the removal of controls andwidening the scope of services. Initially, thereforms led to the growth of the financialsector at an average rate of three percentper annum when other sectors of theeconomy were contracting. While foreignbanks still dominated the market, newentrants – new commercial banks, merchantbanks, finance houses, unit trusts, leasingfirms, exchange bureaux, venture capitalcompanies, formal and informal micro-finance institutions – emerged that createdcompetition. However, the reforms did notaddress the structural causes that deterredfinancial inclusiveness. The formal bankingsector continued to serve prime clients, as ithad done for more than a century, leavingthe small-scale sector unbanked1. Forinstance, the majority of new entrantspreferred to go into merchant and discountbanking rather than into commercial bankingin order to engage in trading risk-freegovernment securities.

Notwithstanding their failure to achievefinancial inclusiveness, empirical evidencehas shown that financial sector reforms couldnot have worked because the macro-economic environment was not stable (Boydet al. , 2001). With inflation rates inZimbabwe averaging 32 percent per year

during the reform period of the 1990s –double the critical threshold of 15 percent,2

inflation had already started to adverselyaffect the productive sector. Therefore, it ishardly surprising that neither existing banksnor new banks were in a position to servicethe untried small-scale sector, but competedfor government business and establishedcorporate customers. Hence, not muchfinancial deepening3 took place. Neverthe-less, government interpreted this marketfailure as reflecting reluctance by banks toservice the small-scale sector. Instead ofproviding an enabling environment, thegovernment’s response was to increase theresources for subsidized schemes such asthe Small Enterprise DevelopmentCorporation and the Capital GuaranteeCorporation, initiatives that conflicted withthe market orientation of the reforms. Theseschemes were not sustainable and by endof the 1990s were struggling to obtainfinancial resources.

It is noteworthy that the Zimbabweanfinancial sector was subjected to extendedperiods of financial repression4, with theexception of the reform period that lastedless than a decade. Empirical evidenceshows that long periods of financialrepression results in structural changes toeconomic activities (McKinnon, 1973). InZimbabwe, the sectors that could not obtainfinance from commercial banks becameincreasingly reliant on government inter-vention, producing a dependency syndromethat is evident to this day. This could partlyexplain why the country is trapped in avicious circle of controls, reforms for a shortperiod, and a return to controls withpervasive government intervention.

1 The term ‘unbanked’ means having no access to financial services, especially to the credit facilities of commercialbanks.

2 This is the inflation-rate threshold beyond which inflation starts to undermine the development of the financialsector (Boyd et al., 2001).

3 The term denotes increased usage of financial services.4 The term describes a state of the financial sector characterized by controls on interest rates, market entry,

competition, reserve requirements and lending to favoured sectors.

61

Chapter 5 – Recovery of the Financial Sector

5.1.2 An overview of the currentstatus of the sector

Presently, the financial sector comprises theReserve Bank of Zimbabwe (RBZ) at theapex, discount houses, commercial banks,merchant banks, finance houses, buildingsocieties, the People’s Own Savings Bank(POSB), insurance companies, pensionfunds, venture capital companies, assetmanagement companies, developmentalfinancial institutions, the Zimbabwe StockExchange, microfinance institutions andmoney transfer agencies (that intermediateremittances). The banking sub-sectorcurrently comprises fifteen commercialbanks, of which three have some degreeof state ownership and the others are whollyprivately owned, six merchant banks, threediscount houses and four building societies.Four of the private commercial banks –South African-owned Stanbic Bank Limitedand the Merchant Bank of Central Africa(MBCA), and British-owned StandardChartered Bank and Barclays Bank – aremultinational banks with a majority offoreign ownership. Collectively, thesemultinational banks command 55 percent ofthe commercial bank market share. Thesebanks however, face the prospect of losingtheir majority foreign ownership as a resultof the new Indigenization and EconomicEmpowerment Act (No. 14 of 2007) thatrequires them to indigenize 51 percent oftheir shareholding.

The three local banks that have a degree ofstate ownership (CBZ Bank, ZB Bank andZABG)5 have been gaining market sharethrough preferential treatment from the state,indicating an unfair playing field. While mostinstitutions have the majority of theirbranches in major towns, there is a relativespread of branches throughout the provincesof the country, with the POSB and CentralAfrica Building Society (CABS) havingnetworks that extend to rural and remote

areas. Lack of infrastructure such as reliableenergy supplies, telecommunications androad network has however, hindered ruralpenetration.

The insurance sub-sector comprises nine lifeinsurance firms, twenty-six generalinsurance firms and six re-insurers. Pensionfunds and insurance companies are requiredto invest at least 40 percent of their totalasset portfolio in risk-free government papersuch as treasury bills or bonds. Sincegovernment paper earns negative real ratesof return due to hyperinflation and controlson yields, pension and insurance payoutshave become very low and are unable tosustain the livelihoods of their beneficiaries.The only profitable avenue for them isinvesting on the stock exchange where assetvalues, in addition to moving in tandem withinflation, are exempt from capital gains taxof 5 percent. However, whatever gains aremade from investments on the stock marketare wiped out by highly negative returnsearned from government securities.

In summary, the pension and insurance sub-sector is characterized by the followingproblems:

• High prescribed asset ratios in favourof government that earn highly negativereturns and limit their investment.

• Many people are being retrenched andseeking payment of their pensions, as aresult of the unstable macroeconomicenvironment.

• Both pension and insurance payouts areon the increase as a result of the HIVand AIDS pandemic.

• Payouts are on the increase, while theinvestment base is declining, so the saleof assets to meet payouts is not matchedby new inflows of savings.

5 CBZ Bank was formerly known as the Commercial Bank of Zimbabwe, ZB Bank as Zimbank, and the ZABG isan acronym for Zimbabwe Allied Banking Group.

62


• Excessive regulation that from 1 August1993 (but not yet aggressively enforcedby government) set local shareholdingat 51 percent.

Under normal conditions, the financial sectorshould be able to offer a wide spectrum offinancial services that range from mortgagefinance, leasing, hire purchase, internationaltrade finance, retail banking, investmentbanking, corporate finance, microenterprisecredit, short-term and long-term capital andsecurities. However, the majority of availablefinance is short term to medium term,ranging from one to five years. The stockmarket, insurance companies and pensions,provide medium- to long-term capital in theform of company shares, debentures,government stock, local government andquasi government bonds. In line with thecontinued decline of the formal sector since2000, the microfinance sector that serves thesmall-scale sector and the informal economyhas experienced phenomenal growth. Theexpansion of this sector, while a symptomof the malaise afflicting the formal sector, ishowever a welcome development becauseit provides financial services to thetraditionally ‘unbankable’ poor and henceplay a role in poverty reduction.

5.2 OVERVIEW OF PASTPERFORMANCE

From the 1980s to the late 1990s Zimbabwe’sfinancial sector appeared quite sound, eventhough it was not inclusive in the sense that itlargely served prime clients, ignoring small anduntried clients. In response to the collapse ofa merchant bank in 1998, the Reserve Bankresponded by increasing the capital-adequacyrequirement for the country’s banks to 13percent, a figure in excess of the inter-nationally accepted minimum of 8 percent.

However, weaknesses in the banking sectorinvolving newly established local banks were

encountered during the last quarter of 2003.The International Monetary Fund (IMF,2005) cited these weaknesses as poorstandards of corporate governance;inadequate risk management, and the use ofdepositors’ funds for speculative invest-ments; pervasive self-dealing, includingunreported insider transactions; the use ofsubsidiaries and affiliates to evade prudentiallimits; the use of RBZ liquidity advances tosupport group companies; and deliberatemisreporting to the RBZ to conceal lossesand overstate capital. The IMF mission alsonoted inadequate supervision by the RBZ,arising both from a deficiency in the numberof supervisory staff and the level of skills.

The IMF, (2007) further observed that,although the banking sector was reportingprofits in nominal terms, profitability haddeclined in real terms and the sector facedliquidity risks. Bank balance sheets wereshrinking in real terms owing to losses on aninflation-adjusted basis, arising largely fromhighly negative real returns on governmentsecurities and high levels of statutory reserves.

Factors that have since exacerbated liquidityrisks include frequent ad hoc changes ininterest rates, the lengthening of maturity ofTreasury Bills at highly negative real interestrates, and the requirement that end-of-dayexcess bank liquidity be converted to long-term bills at highly negative real interest rates.The banking system has however, limitedexposure to systemic risk because it isdominated by multinational banks. However,this stabilizing domination is now underthreat from the Indigenization and EconomicEmpowerment Act. Foreign-exchange riskin the sector is subdued because of limitedforeign-currency-denominated business.

On a scale of 0 to 10, ranging from poor toexcellent, of the World Bank’s DoingBusiness Report, Zimbabwe is given a scoreof 6.0 in its index of Legal Rights ofBorrowers and Lenders for 2006.6 While

6 World Bank, Doing Business; Getting Credit Category: Methodology & Surveys <http://www.doingbusiness.org/MethodologySurveys/GettingCredit.aspx>

63


this score is higher than the median of 4.0for low-income sub-Saharan Africancountries, it is lower than that of Zimbabwe’sneighbour, Zambia, with a score of 7.0. Ofparticular concern, and indicative of lack ofcredit assessment infrastructure, is the factthat in terms of the rules that affect thescope, accessibility and quality of creditinformation available through either publicor private registries, the World Bank givesZimbabwe the lowest score of 0.0 on itsindex of Credit Information depth.7

5.2.1 The monetary policy of theReserve Bank

Among the functions of the Reserve Bankof Zimbabwe (RBZ) is the responsibility forthe formulation and implementation ofmonetary policy in its pursuit of pricestability.8 The RBZ does not, however, haveoperational independence in carrying out thisresponsibility, as it is required by statute toconsult the Ministry of Finance. The processof achieving this objective of price stabilityentails the identification of a monetary policytransmission process (through which itsactions are transmitted efficiently) towardstargeted goals.

Essentially, the evolution of Zimbabwe’smonetary policy framework may be brokendown into four periods:

• the control regime of the 1980s, whenmonetary policy was inactive;

• the shift in monetary policy strategy fromcontrols towards monetary targeting ofthe early 1990s, whereby the operationaltarget was net domestic assets9 as amovement towards active monetarypolicy;

• the shift in monetary policy strategytowards reserve-money10 targeting inthe mid-1990s; and

• the current monetary policy regime,beginning in December 2003 anddetailed below, that accelerated thereversal of earlier financial reforms.

5.2.2 The current monetary policyregime (from 2003)

The reversal of earlier financial reformscould be regarded as having started in 2001,when the government manipulated TreasuryBills to reduce interest rates in an endeavourto bring down a rising fiscal deficit. The 90-day Treasury Bill rate that was at around 48percent in early January 2001 dropped to 10percent by the end of April 2001 whenannual inflation was running at 70 percent,plunging real interest rates into negativeterritory. The monetary system of indirectmonetary control that had been adopted in1998 was abandoned. Since then monetarypolicy actively promoted fiscal expansion.The situation became severe when the newcentral bank governor, who took office inDecember 2003, fundamentally changed thefunctions of the RBZ. Increasingly, theReserve Bank usurped the fiscal operationsof the Ministry of Finance. In addition, itassumed some of the functions ofcommercial banks in that it engaged in directlending to the private sector in a verysignificant manner.11 The central bankexhibited ‘mission creep’ as it began toundertake private sector and public sectorfunctions outside its domain that included,among others, agricultural activities,manufacturing and retail activities (e.g.,operating people’s shops). As a result the

7 <http://www.doingbusiness.org/Documents/CountryProfiles/ZWE.pdf>.8 In terms of the Reserve Bank Act [Chapter 22:15].9 This involved regulating central bank lending to government with a view to achieving price stability (controlling

inflation), but the central bank could not control inflation because it could not control government borrowing.10 Reserve money comprises currency issued by the central bank and bank reserves held by the central bank. Under

reserve money targeting, the central bank fixes the level of reserve money consistent with the targeted level ofmoney supply.

11 Reserve Bank data show that the share of RBZ lending to the private sector increased from 0.6 percent in 2004to 43 percent by the end of 2007.

THE CENTRAL

BANK EXHIBITED

‘MISSION CREEP’ AS

IT BEGAN TO

UNDERTAKE

PRIVATE SECTOR

AND PUBLIC

SECTOR

FUNCTIONS

OUTSIDE ITS

DOMAIN

64


RBZ has acquired a conglomerate structureand hence failed to focus on its corebusiness. The Reserve Bank Act [Chapter22:15] does not accord the RBZ theindependence to carry out monetary policyand neither does it give it monetary policygoals. This has resulted in the RBZ operatingon directives from the executive arm ofgovernment instead of adhering to a bindinglegal mandate.

Since 2004 the RBZ has engaged in quasi-fiscal activities that are funded by printingof money. Basically, these activities involveproviding credit at derisory nominal interestrates to favoured sectors whose prospectsof repaying are so low that these creditsshould more properly be viewed as subsidies.Huge losses are being incurred by the RBZin connection with these quasi-fiscalactivities. The main sources of these lossesinclude subsidies,12 realized exchangelosses, interest cost on RBZ securities, andunrealized losses on foreign-exchangeholdings. The RBZ records these losses usingan accounting method that is notrecommended by the IMF. Typically, itexcludes realized and unrealized exchangelosses and realized valuation losses from itsprofit-and-loss accounts but records them ina separate asset account, thereby overstatingits net annual profits and capital.

Furthermore, despite operating in a hyper-inflationary environment, the RBZ does notemploy inflation-accounting but useshistorical-cost accounting, thereby misstatingthe true economic position. In fact, thefinancial statements of the RBZ might notreflect a fair and true picture of the state ofaffairs; indeed, they have even been qualifiedby their auditors in recent years. The IMF(2007) reported discrepancies between thebudget financing requirements and financingdata from banking and other sources. Thelatest published data in the IMF’s Govern-ment Finance Statistics Yearbook are for1997, and no recent data have been provided

for publication in its International FinancialStatistics. These shortcomings suggest someweakening of technical capacity within thecentral bank.

The quasi-fiscal activities have com-promised control of the monetary targets.The RBZ has lost control of monetarymanagement and is caught in a viciouscircle. First, it engages in quasi-fiscalfinancing. Then, it endeavours to mitigatethe effect of this financing throughsterilization using RBZ bills. The sterilizationof monetary expansion has, in turn, resultedin increased losses, as nominal interestpayments on RBZ bills increase rapidly withrising inflation. In addition, rising interestpayments have increased the financingrequirement of central government, therebycreating further monetary expansion.Ultimately, the effectiveness of sterilizationusing RBZ bills is weakened. Since quasi-fiscal activities are not being consolidatedin the national fiscal budget, the budgetdeficit as a percentage of GDP has beenunderstated. Figure 5.1 shows the trend ofa declining budget deficit as a result of theexclusion of the quasi-fiscal activities.Coorey et al., (2007) have re-estimated thefinancing requirement after adjusting forquasi-fiscal activities to show the trueposition, which is illustrated in Table 5.1.

Notably, there is a widening gap betweenthe primary balance and the financingrequirement, indicating the magnitude ofquasi-fiscal activities and possibly hiddenexpenditures under contingencies.

Munoz (2006) has illustrated that theescalation of inflation since 2004 was fuelledby rapid reserve-money growth emanatingfrom the RBZ’s quasi-fiscal activities. Table5.2 shows contributions of individual balance-sheet items to changes in reserve money.Quasi-fiscal losses, indicated as ‘other itemsnet’, are evidently major contributors.

12 These involve free foreign exchange to public enterprises, price supports to exporters to partially compensatethem for an overvalued exchange rate, and subsidized credit to troubled banks, farmers and public enterprises.

THE QUASI-FISCAL

ACTIVITIES HAVE

COMPROMISED

CONTROL OF THE

MONETARY

TARGETS. THE RBZ

HAS LOST

CONTROL OF

MONETARY

MANAGEMENT AND

IS CAUGHT IN A

VICIOUS CIRCLE

65


Table 5.2: Contributions to changes in reserve money*

2003 2004 2005 2006

Reserve money 10.6 6.7 13.8 20.2

Net foreign assets –4.1 –7.1 –43.2 –1.4

Claims on banks 4.2 2.3 0.6 1.8

Net claims on government 4.3 –0.1 –3.3 –0.2

RBZ securities 0.0 –21.5 –32.2 –32.4

Other items net 6.2 33.1 91.9 52.4

Of which:

Subsidies 4.0 13.9 20.3 15.4

Realized exchange losses 1.2 11.4 0.6 7.7

Interest cost of RBZ bills 0.0 5.1 40.4 41.0

* Change since end of previous year, as a percent of annual GDP

Source: Munoz (2006)

Source: Derived from RBZ statistics

Figure 5.1: Trend of central government budget deficit (excluding quasi-fiscals)

Table 5.1: Adjusted fiscal position

2004 2005 2006a 2007passive scenariob

Percentage of GDP

Central government

Revenue 33.8 43.7 51.3 40.1

Expenditure 41.5 49.6 58.6 66.6

Of which: Wage bill 15.3 18.1 17.1 16.1

Overall balance –4.7 –3.1 –5.4 –25.6

Primary balance –1.7 3.7 2.3 –13.9

Adjusted fiscal position

Primary balance –26.9 –17.2 –24.7 –40.2

Financing requirement –29.9 –64.3 –80.3 –88.0

a Estimate. b Conservative estimate

Source: Coorey et al., (2007)

0

-2

-4

-6

-8

-10

-12

-14

-16

-18

-20

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Deficit as a percentage of GDP

66


Analysis of the trend of reserve money as apercentage of GDP since 1980 shows a sharpincrease since 2004 (Figure 5.2) meaning thatthe monetary policy of targeting reservemoney had been abandoned in favour ofprinting money.

Predictably, the printing of money by theRBZ has led to hyperinflation, with inflationrising from an annual average of 386percent 2003 to over 11.2 million percentby mid-2008. Accordingly, the domesticcurrency has been rendered worthless andhave been redenominated twice in a spaceof two years. First, in order to make ever-rising denominations manageable for thepublic and business, three zeroes wereremoved in August 2006 when annualinflation averaged 1,017 percent. Second,ten zeroes were removed on 1 August 2008when annual inflation was officiallyestimated at over 11.2 million percent. Inan unprecedented move, the RBZ re-intro-duced old coins (which literally had becomesouvenirs) that had been demonitized in2002 (incidentally when average annualinflation was 135 percent) as legal tenderat their face value. The implication of thisunpreceded move was that the RBZcompletely lost track of its monetary basebecause it could no longer track notes andcoins in circulation. Without an accurate

grasp of notes and coins in circulation whenthe printing press is in overdrive meant thatfighting inflation became a wild goosechase.

Rising inflation has seen the value of thedomestic currency against other currenciescontinuously declining. Since the currencycrash on 14 November 1997, the exchangerate has been overvalued and a managedfixed peg characterized by multiple exchangerates. In addition to adversely affectingexport competitiveness, the overvalued fixedexchange rate resulted in an informal parallelforeign-exchange market where agents buyand sell foreign currency at arm’s length ratesthat approximate market rates. The foreign-exchange market was partially liberalized on5 May 2008 for private agents while thegovernment continued to access foreignexchange at a tiny fraction of its marketvalue.

The informal parallel foreign-exchangemarket was further aided by RBZ controlson foreign currency deposit accounts whichhad thrived since the mid-1990s. The resultwas that people held foreign currency outsidethe domestic banking system. Migrantremittances were also intermediated on theinformal market and there were no incentivesto deposit them with banks.


Figure 5.2: Trend of reserve money over years

1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

30

25

20

15

10

5

0

Reserve money as a percentage of GDP

67


5.2.3 The banking sector

The performance of the banking sector isanalysed over three periods: (1) 1980–1990,when it was under explicit financialrepression; (2) 1991–1999, when somefinancial reforms were initiated; and (3)2000–2007, when there was a reversal ofreforms and a return to controls. Theperformance of the country’s agriculturalfinancing mechanisms is also covered in thenext section.

Analysis using the basic indicator of financialdeepening, i.e., the ratio of money supply13

(M3) to GDP, yields a dichotomous result.First, as expected and illustrated in Figure5.3, financial deepening has a downwardslope during the 1980s when there wasfinancial repression. During the reformperiod the ratio first stagnated at lower levelsthan in the pre-reform period, indicating thelimited impact that reforms had on financialdeepening. Thereafter the ratio started todecline in the last years of the 1990s.

The ratio shows a different trend after 2000.The financial-deepening ratio shows an

upward trend such that by 2003 it hadreached its level at independence in 1980.Incidentally, this is the period when manynew domestic banks entered the sector, andthese included Time Bank, Kingdom Bank,Metropolitan Bank, Century Bank, BarbicanBank, Trust Bank, Royal Bank, as well asnumerous asset-management companies.However, after 2003 the ratio of moneysupply to GDP declined sharply, from 70percent to 40 percent by the end of 2004.This was to be expected, given thecontemporaneous shake-up in the sectorwhich resulted in the collapse of many ofthe new entrants.

A puzzling trend began to emerge after 2004.The financial-deepening ratio took an upwardtrend in defiance of fundamentals. The rationo longer reflected healthy financialdevelopment but rather the printing of moneyand possible underestimation of prices in themeasurement of GDP and the informalizationof the economy. USAID, which hascomputed the ratio as an average of broadmoney supply to GDP over the whole period(rather than normally as at end of period),produced similar results (USAID, 2007).


Figure 5.3: Financial-deepening ratio (money supply as a percentage of GDP)

13 Money supply measures are as follows:

M1 includes currency held by the public, plus travellers’ cheques, demand deposits and other checkable deposits.

M2 includes M1 plus time deposits other than large certificates of deposit.M3 includes M2 plus all large time deposits, institutional money-market funds, short-term repurchase agreements,and other deposits at institutions that are not banks.

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

100

90

80

70

60

50

40

30

20

10

0

%

68


The upward trend in the financial-deepeningratio after 2004 coincided with the explosionof quasi-fiscal operations. The share of non-earning assets emanating from quasi-fiscalactivities rose from 22 percent in 2003 to46.5 percent in 2004, 70.3 percent in 2005and 83.3 percent by October 2006 (IMF,2007). It was during this period that privatesector lending by banks declined, falling fromover 80 percent in 2002 to 34 percent in 2006.It is noteworthy that the average for sub-Saharan Africa is 76 percent, while theaverage in conflict economies is 44 percent,meaning that Zimbabwe is performing worsethan countries in conflict. At the same time,government spending as a percentage ofGDP rose from 25 percent in 2003 to 65percent in 2006 against the rise in thefinancial deepening ratio from 40 percent to90 percent. Figure 5.4 shows a trend thatindicates that government expenditure isactually driving the perceived financialdeepening. In fact, what is happening is notfinancial deepening but money creation bythe central bank, which is funding fiscal andquasi-fiscal activities through the printing ofmoney.

USAID (2007) estimated that the realinterest rate on bank loans averaged –27.7percent in the five years to 2005. This is incontrast to an average of 10.7 percent for

low-income sub-Saharan African countries,5.6 percent for South Africa and 7.7 percentfor Zambia. The critical role that interestrates play as a price mechanism forscreening out inefficient or unproductiveinvestments is completely negated by thesehigh negative real interest rates. Borrowersare in more favourable positions than saversbecause they repay banks less than theamount borrowed after adjusting for inflation.There is an increasing incentive to borrowas inflation accelerates.

A broader picture is obtained when thecurrency (notes and coins) in circulation inthe whole economy is analysed as a ratio ofGDP, as illustrated in Figure 5.5.

In line with countries with developedfinancial systems, the ratio of the currencyin circulation to GDP had remained below 5percent until 2002, when it started to riseexponentially, reaching 20 percent by 2006.In South Africa the ratio is well below 5percent, an indication of a well-developedfinancial sector and a trend towards acashless economy, where ‘plastic money’ ismore widely used than cash (Akinboade andMakina, 2006). Thus Zimbabwe is retro-gressing to a position similar to countries(usually failed states) with very weak financialsectors that operate largely on a cash basis.


Figure 5.4: Evolution of government spending and financial deepening

100

90

80

70

60

50

40

30

20

10

01980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Government spending as a % of GDP Financial-deeping ratio

69


Given concerns about the underestimation ofGDP owing to price controls and the fact thatthe larger part of the economy has becomeinformal, the ratio of narrow money (M1) tobroad money (M2) could give a better pictureof the retrogression of the financial sector.The M1 to M2 ratio should be inversely relatedto a country’s level of financial developmentwhen there is increasing usage of financialservices. If this ratio decreases, financial-sector development will be occurring becausesavings deposits would be increasing morerapidly than transaction (demand) balances.When there is a preference for liquidity, as iscurrently the situation, demand deposits havean abnormal weight in the total deposits. Aratio of 100 percent would suggest that all

deposits are on a sight (demand) basis. Figure5.6 shows that the ratio in Zimbabwe has beenmoving towards 100 percent since 2003,meaning that most deposits are on a sightbasis. In sum, this means that there istremendous pressure for the withdrawal offunds from the banking sector. Controls onwithdrawals are holding back a run-down ondeposits. Ironically, quantitative controls onwithdrawals by the Reserve Bank might havecontributed to the stability of the bankingsector in that they are preventing capitalflight: otherwise the present hyperinflationaryenvironment could have precipitated a run ondeposits for conversion to foreign currencyand commodities or investments on the stockexchange in order to preserve their value.


Figure 5.5: Currency in circulation in the economy as a percentage of GDP


Figure 5.6: Ratio of M1 to M2

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

25

20

15

10

5

0

100

90

80

70

60

50

40

30

20

10

01979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

%

70


5.2.4 Agricultural financingmechanisms

Both before and after independence,commercial banks provided short-termcapital to farmers on the strength of theircollateral, i.e., freehold title. In addition,lending (that included long-term) to agri-culture was undertaken by the AgriculturalFinance Corporation (AFC). In the 1970s itextended its lending to African small-scalecommercial farmers to whom governmenthad granted freehold tenure in speciallydesignated areas, the African PurchaseAreas, which had been in existence since1930.

After independence, lending to farmers incommunal and resettlement areas wasboosted. Brownbridge and Harvey (1998)reported that there was a sharp increase inborrowers in the communal and resettlementareas, from 4,400 in 1980 to 70,000 by 1984.However, this represented only 8 percent ofan estimated 850,000 farming households,meaning that access to credit for the small-landholder sector was minimal. Notwith-standing the small size of the communalfarmers’ loans, their repayment record waspoor for several reasons. These includeddroughts – especially in 1982/3, 1984/5, 1987/8, and even more seriously in 1992/3 andbecause loans were guaranteed by thegovernment, there was no incentive for theAFC to recover debts. Because of the poorloan-repayment rates, smallholder credittailed off considerably. Even in 1985, at thezenith of smallholder agriculture production,only 8 percent of farmers receivedagricultural credit from the AFC. During the1989/90 cropping season only 44,000 small-scale farmers received loans, a drop of over40 percent from the peak 1985 levels(Rohrbach et al.,1990).

In 2000 the AFC was commercialized andnamed Agribank so that it could operate as

a sound financial institution, able to mobilizesavings that allocated credit to projects thatwere judged financially sound on the basisof market criteria. However, its intendedcustomers, the resettled small landholdersand communal farmers, had becomeaccustomed to low, subsidized interest ratesand government intervention, both in loandelivery and salvage from the non-paymentof loans. This practice, inherited from theAFC, has been perpetuated by Agribank,despite it having been commercialized. Thefast track land reform programme set inmotion in 2000 has severely affected theperformance of its lending, as subsidizedloans were disbursed without considerationof their repayment.

Some innovative financing arrangements –that included out-growers’ schemes operatedby Olivine and Consolidated FarmingIndustries (CFI) and input schemes operatedby the Cotton Company of Zimbabwe(Cottco) and later on by Cargill Cotton –have had a fairly good repayment record.Box 5.1 gives an example of one inputscheme that does not require beneficiariesof credit to have title deeds to the land theyare working on.

It must be noted however, that since theintroduction of the fast track land reformprogramme, commercial bank lending to theagricultural sector has been limited, becauseexisting collateral arrangements, including therecently introduced 99-year leases, do notprovide adequate security of land tenure(Coorey et al., 2007). 14 The Gazetted Land(Consequential Provisions) Act [Chapter20:28], which came into force in December2006, made it an offence to occupy thesefarms without government authority, i.e., anoffer letter to ‘new farmers’ or leases toexisting farmers. In November 2006President Mugabe handed over 125 leasesto A2 farmers,15 but no further moves havesince been made to provide leases – which

14 ‘Report of the Presidential Land Review Committee on the Implementation of the Fast Track Land ReformProgramme, 2000–2002’ [Chairman: C. M. B. Utete], 2003. Unpublished.

15 See chapter 9 on agriculture.

SINCE THE

INTRODUCTION OF

THE FAST TRACK

LAND REFORM

PROGRAMME,

COMMERCIAL BANK

LENDING TO THE

AGRICULTURAL

SECTOR HAS BEEN

LIMITED, BECAUSE

EXISTING

COLLATERAL

ARRANGEMENTS,

INCLUDING THE

RECENTLY

INTRODUCED 99-

YEAR LEASES, DO

NOT PROVIDE

ADEQUATE

SECURITY OF LAND

TENURE

71


in any case, do not provide sufficientcollateral for loans. The point is that there isno land tenure security, and not even leasesfor most occupiers. The government canissue and withdraw ‘offer letters’ at will. Forexample, in February 2008, the governmentreported that it had ‘taken back’ 1,449 farmsthat had been allocated to A2 farmers.

5.2.5 The stock exchange

The Zimbabwe Stock Exchange (ZSE) is arelatively well-developed stock market, with80 trading firms, which achieved a marketcapitalization of over 70 percent of GDP in2005, ahead of the median of 14.3 percent oflow-income sub-Saharan African countriesbut still lower than South Africa’s, which is

over 200 percent. USAID (2007) noted,however, that this could be an overestimationbecause of the underestimation of GDPcaused by the spread of black-markettransactions and unrecorded inflation.Nevertheless, the exchange is relativelyvibrant in raising new capital for companies,as well as in providing a liquid secondarymarket. Imara Asset Management reportedthat the ZSE had gained 225,000 percent innominal terms by the end of November2007.17 Real (i.e., US dollar) returns wereachieved. This has made the ZSE a usefulavenue for investors to protect their capital inreal terms, without which savings wouldalready have been wiped out by hyperinflationand the economy could have been sub-stantially smaller than it is.

Box 5.1: Cotton Input Scheme

In the 1980s Zimbabwe’s commercial farmers accounted for about 80 percent of cotton production, and sincethey had access to commercial credit, there was no need for a special input-credit scheme. The need for aninput-credit scheme was felt only in the 1990s, when the share of small-scale farmers rose to 60 percent of totalproduction. This scheme was introduced following the drastic 1991/92 drought season. The average yield ofsmall-scale farmers had fallen dramatically and it was clear that the small farmers would not have the cash topurchase inputs for the next crop. Credits extended by the World Bank and the IMF were used to launch a newcredit scheme which proved very successful. Within a year the production of small farmers was back to pre-drought levels.

When the Cotton Marketing Board was abolished in 1995, subsidies to the textile sector were reduced; theleast efficient mill closed down, and the share of fibre (cotton lint) that had been sold at a discount to domestictextile mills fell from 40 percent to 20 percent. When the producer prices improved as a result of competitionbetween buying companies, particularly following the entry of Cargill, the successor to the Cotton MarketingBoard, Cottco decided to extend the operations of the input-credit scheme. When in 1999 Cottco took overCotpro, a relatively smaller player in the market, it captured 75 percent of the market share, and this wasattributed mainly to its efficient input-credit scheme.

The input-credit scheme is a group scheme in which farmers, organized into a close-knit group, are giveninput credits individually, but the continuity of the facility is dependent on the whole group’s ability to repay theoffered credit at the end of each season. In the event of one individual in the group defaulting, all the othermembers of the group will not be extended credit in the next season. Because of this typically Grameen Bank-style scheme16, the pressure is on all the members of the group to support each other during the season andto minimize the possibility of default. As a result the scheme has been successful, and Cargill, the next largestplayer in the Zimbabwean cotton market, later started its own input-credit scheme. The downside of thescheme is the temptation for individual farmers to engage in ‘side-marketing’, i.e., sell their cotton to ‘poachers’who are normally small buyers who announce more attractive prices, which they can afford by not clearinginput credits. To limit ‘poaching’, Cottco screened farmers more carefully and rewarded the most creditworthyby granting them the status of ‘Gold Club Members’.

16 This is a group lending scheme, whereby lending is done to a group of individuals that is collectively liable forrepayment, popularized by Grameen Bank, a Bangladeshi microfinance institution. Repayment is enforcedthrough peer pressure, so no physical collateral is required by the bank.

17 Investment Notes, December 2007.

72


Imara further observed a close correlationbetween the amount of money that is createdby the RBZ and the ZSE. Since its MonetaryPolicy Statement in October 2007,18 theRBZ has been flooding the money marketwith BACOSSI and ASPEF public funds inaddition to government and quasi-fiscalfunds.19 While these funds may not directlygo into the stock market, the liquidity of thebanking system is increased as corporateand personal bank accounts are credited withthe new monies from the RBZ. On the otherhand, banks would need to invest these fundsin new loans very quickly in order to avoidsurplus liquidity being swept up into thecompulsory 270-day, low-yielding bills of theRBZ. This scenario has led to the wholeeconomy having access to low-interest loansfrom banks eager to lend to clients. Havingobtained these loans, the borrowers need tospend the funds very quickly, or to investthe funds into the stock market, in order topreserve the real value of their capital.Alternatively, they buy foreign currency topreserve its value. When the borrowersrequire the funds, either for production orfor consumption, they dispose of part of theirstock-market holdings, or sell part of theirforeign-currency holdings, and channel themoney back into the banking system. Inessence, the BACOSSI and ASPEFsubsidized funds meant to boost productivityin the private sector are being diverted tospeculative activities, a problem which themonetary authorities have themselvesacknowledged (RBZ, 2008).

5.2.6 The microfinance sector

Microfinance institutions emerged in theearly 1990s and have experiencedphenomenal growth: there were 309registered microfinance/moneylendinginstitutions by the end of 2007. While someattract donor funding, the majority are

privately owned, operating on a commercialbasis. To a large extent their growth was areflection of the failure of the bankingsector to cater for the small-scale borrower.Their growth has also been correlated withunemployment, deteriorating livingstandards, deepening poverty, and thegrowth of the informal sector. By providingfinancial services to the ‘unbanked’ poorcommunities, they have played a facilitationrole in economic development through theprovision of credit and the creation ofemployment. Microfinance institutions havethe potential to provide for the ‘missingmiddle’ in the financial sector.20

Despite the microfinance sector undergoingphenomenal growth, its performance hasfaced a number of constraints: although thegovernment has recognized the role ofmicrofinance in development, it has notcreated a proper regulatory environment.Currently, the sector is regulated under theBanking Act [Chapter 24:20], which isinappropriate for the unique features of thesector, especially the fact that they areprohibited from accepting deposits. Licensingprocedures are burdensome and the licensesare issued for one year only, creating theuncertainty of renewal and hence deterringlong-term funding commitments.

The Money Lending and Rates of InterestAct [Chapter 14:14] that stipulates theinterest rates that the sector must charge isout of date, so the official lending rates arecompletely sub-economic. As a result,microfinance institutions that are licensedand regulated by the RBZ are threatenedwith closure, while those that operateinformally thrive. The unstable macro-economic environment characterized byhyperinflation has not spared theiroperations. Out of the total of 309 registeredinstitutions, only 150 were still operationalby mid-2008, with the majority having

18 < http://www.rbz.co.zw/pdfs/2007mid/mpsmidyear011007.pdf>.19 BACOSSI, an acronym for Basic Commodities Supply Side Intervention, is a subsidized lending scheme of the

RBZ to the private sector for the purpose of producing basic commodities such as bread, mealie-meal, sugar,cooking oil, etc. ASPEF stands for Agriculture Sector Productivity Enhancement Facility, which is another RBZsubsidized lending scheme for the working capital needs of farmers.


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ceased operations and surrendered theirlicences due to viability constraints.

Nevertheless, information about the sector isscant and because there is burdensomeregulations, many institutions that thriveoperate informally in order to evade controls.In the absence of this information, it is difficultto identify and define the role of the sectorvis-à-vis small- to medium-scale enterprises.There is a diversity of microfinance institutionsin terms of ownership structure, size, location,products offered, sophistication and targetmarkets. Hence, authorities accustomed to a‘one size fits all’ policy find it difficult todevelop appropriate policies. In addition, therole of the state and the central bank inmicrofinance development has not yet beenclarified.

5.2.7 The diaspora remittancetransfer mechanism

From 2004 the Reserve Bank designatedmoney transfer agencies (MTAs), some ofwhich are separate units of commercialbanks, as the legal vehicles to provideremittance transfer services from thediaspora. The Reserve Bank also establishedits own MTA, Homelink (Private) Limited.Homelink was formed primarily to channelforeign currency from the diaspora togovernment instead of to the parallel market.

At the time of writing, there are only fourbanks that have business units registered asmoney transfer agencies (MTAs). Many

barriers to entry to the remittance markethave prevented more financial institutionsparticipating in this market. The servicesoffered by MTAs are restricted – they arenot, for instance, allowed to conduct bureaude change functions. The operating environ-ment is both a barrier to new entrants andtoo stringent for those already operating. Fora start, the minimum capital required ofUS$100,000 is a huge barrier to entry. Otherspecific operational restrictions that need tobe addressed are the following:

• The MTA is not allowed to purchaseforeign currency from any person orinstitution under any circumstances.

• The MTA is not allowed to demand anyfees, commissions or charges from therecipient customer but instead will bepaid an agency’s commission inZimbabwe currency by the RBZ.

The first prohibition prevents MTAs fromcompeting with the informal remittance sectorand thus makes them unattractive businesspropositions. The second reduces MTAs tobeing simply agents of the RBZ. As a resultMTAs do not operate as independentbusinesses. Furthermore, the RBZ has givenHomelink the responsibility of supervisingother MTAs, which set-up allows it to be bothreferee and player as it has the power torecommend de-registration of competitors.

Generally, the performance of MTAs hasbeen sub-optimal as Table 5.3 illustrates.

Table 5.3: Foreign-currency receipts (US$), 2006–2007

Type 2006 Contribution 2007 Contribution(%) (%)

Export proceeds 847,766,400 62 648,608,172 62

Free funds 256,298,697 19 195,572,974 19

Gold receipts 126,773,818 9 93,517,127 9

Loan proceeds 102,930,006 8 83,371,326 8

Income receipts 24,264,596 2 16,737,628 1

MTAs 5,201,138 0 14,049,674 1

Capital investments 1,214,917 0 4,478 0

Total 1,364,449,572 100 1,051,861,379 100

Source: Reserve Bank of Zimbabwe

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The official statistics show that remittanceschannelled through official channels, MTAs,constitute an insignificant percentage of totalforeign–currency receipts. Using incompletedata, the International Fund for AgriculturalDevelopment (IFAD) has estimated thatdiaspora remittances to Zimbabwe in 2006amounted to US$361 million, constituting 7.2percent of GDP.21 However, some estimatesput annual remittance flows (both informaland formal) at between US$500 million toUS$1 billion, constituting between 7 percentand 10 percent of GDP (Makina, 2007;Orozco and Lindley, 2007).

The problem of measurement is severebecause remittances are being intermediatedthrough informal channels. A survey studyconducted in South Africa found that only 2percent of Zimbabwean migrants use formalchannels and that 98 percent use a varietyof informal channels, as Figure 5.7 illustrates.

The result is that the government is unableto leverage remittances for development.This means that efforts need to be directedto removing the impediments to remittancesbeing intermediated through formal bankingchannels so that they can be measured andbecome an input into policy formulation.

Remittances sent home by migrants areviewed as having a development impact thataddresses issues related to the distributionof wealth and overall improvements inpeople’s quality of life (Orozco and Fedewa,2006). Policy recommendations haveaccordingly linked the financial inter-mediation of remittances as key to thembeing harnessed in order to strenghten theirdevelopment impact. Financial intermediationof remittance flows can provide both sendersand recipients with access to asset buildingwhich is just as essential to development asis education and health. It can lead todevelopment because money transferredthrough financial institutions can also pavethe way for senders and recipients to gainaccess to other financial products andservices. Remittances give banks anopportunity of reaching out to both unbankedrecipients and recipients with limitedfinancial intermediation. The bankingrelationship that ensues affords recipientsthe ability to establish credit histories thatfoster access to credit.

The poor performance of MTAs has beenattributed to the Reserve Bank’s ever-shifting policies, particularly with respect tothe payment of receipts in local currency or

Source: Makina (2007)

Figure 5.7: Mode of remittance transfer from South Africa

Taxi/bus drivers Friends/relatives Official channels Other channelsvisiting home

80%

70%

60%

50%

40%

30%

20%

10%

0%

21 IFAD, Sending Money Home, Worldwide Remittance Flows to Developing Countries, 2007: < http://www.ifad.org/events/remittances/maps/index.htm>

THE RESULT IS

THAT THE

GOVERNMENT IS

UNABLE TO

LEVERAGE

REMITTANCES FOR

DEVELOPMENT.

THIS MEANS THAT

EFFORTS NEED TO

BE DIRECTED TO

REMOVING THE

IMPEDIMENTS TO

REMITTANCES

BEING

INTERMEDIATED

THROUGH FORMAL

BANKING

CHANNELS

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foreign currency and inappropriateexchange-rate policy. When they wereestablished in 2004, MTAs were allowed topay recipients in foreign currency. TheReserve Bank however, changed this policyin 2005 and recipients were paid in localcurrency using the (controlled) foreign-exchange auction ruling rate. As a resultMTAs experienced a decline in remittancesand consequently operations becameunprofitable. The difference between theofficial exchange rate and the parallelexchange rates forced Zimbabweans abroadto seek alternative means to send money totheir families or other beneficiaries. Thefrequent changes in policy resulted in mostMTAs’ volume of business dropping tounsustainable levels and leading to thederegistration of many of them. In 2007,recipients were again given the option ofreceiving their money in local or foreigncurrency, as a result of whichthe volume of remittances increasedsignificantly, as reflected in Table 5.3.

Corrective measures would therefore needto be directed at having a favourableexchange-rate policy and providing aconducive environment for MTAs to operatein.

5.3 CONSTRAINTS FACINGTHE FINANCIAL SECTOR

5.3.1 Macroeconomic environment

Hyperinflation has eroded people’s savingsand the capital of financial institutions becausethe regulations governing financial institutionsforce them either to purchase governmenttreasury bills that yield highly negative realinterest rates or to make deposits at the RBZthat pay no interest. Very high statutory-reserve requirements have effectivelycurtailed the financial sector’s capacity to

intermediate savings and investment tosupport economic growth. They have inflatedthe spreads between lending and deposit ratesas the cost of borrowing has increased, andpassed it on to borrowers, further dampeninggrowth, depressing returns on deposit andhence providing a disincentive for savings.The ever-growing rules and restrictionsemanating from the RBZ have added to theadministrative burden of both borrowers andbanks.

The Indigenization and Economic Empower-ment Act, which requires foreign-ownedfinancial institutions to dispose of 51 percentof their shareholding to indigenousZimbabweans,22 has added furtheruncertainty to the operating environment.

5.3.2 Legal environment andgovernance

The regulatory environment is fragmentedand characterized by ever-shifting andunpredictable policies. The Banking Act doesnot take into account the fact that otherbanking institutions – such as buildingsocieties, the POSB, asset-managementcompanies and microfinance institutions –have been directed by the Minister ofFinance to be regulated under the Act, despitetheir having their own administrative Acts.The current situation has therefore resultedin financial institutions having to operateunder multiple Acts: for instance, the POSBis governed by both the POSB Act and theBanking Act.

A by-product of a fragmented regulatoryenvironment has been excessive regulation.Since the financial turmoil of 2003–2004, theauthorities have tended to over-react, evenwhere systemic risk to the financial systemhas not been evident. Excessive regulationis hampering the development of self-regulatory structures that complementofficial regulation. Self-regulatory structures

22 Indigenous Zimbabwean is defined in the Act to mean ‘any person who, before the 18th April 1980, wasdisadvantaged by unfair discrimination on the grounds of his or her race, and any descendant of such person, andincludes any company, association, syndicate or partnership of which indigenous Zimbabweans form the majorityof the members or hold the controlling interest’.

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such as industry associations are critical formoral suasion to be effective. Whileauthorities must insist on transparency,financial institutions should be given somefreedom to determine their own policies onmatters for which they are held responsible.

The fact that much operational reliance isbeing placed on ministerial notices and RBZdiscretionary directives shows that legislationgoverning the financial sector is inadequate.This is actually, as an example, crippling themicrofinance sector. The sector is beingburdened by interest-rate caps emanatingfrom the outdated Money Lending and Ratesof Interest Act.

5.3.3 Unfavourable operatingenvironment for mobilizingdiaspora remittances

As mentioned above, diaspora remittances,which could have been a significant sourceof foreign currency, have largely beenintermediated outside the formal bankingsystem. This is because of the absence of anenabling operating environment for institutionscharged with mobilizing remittances. Thefollowing factors have acted as constraints:

• An inappropriate exchange-rate policy.

• Shifting policies on the currency (localor foreign) that recipients of remittancescan receive.

• The capital requirement of US$100,000for an entity to enter the remittancetransfer market, which is a barrier toentry for many would-be players.

• The operating guidelines and prohibitions(discussed earlier), which reduce theexisting money transfer agencies to beingsimply agents of the RBZ.

5.3.4 Institutional constraints

In addition to usurping some Ministryof Finance functions and engaging inquasi-fiscal activities, the RBZ has alsoencroached into the activities of the

commercial banking sector: it has become asignificant direct lender to the private sector.Private commercial bank lending is beingcrowded out. In addition, the RBZ is usurpingmundane commercial bank activities, suchas managing the foreign-exchange accountsof clients.

In the agricultural sector, the new land tenurearrangements act as a constraint tocommercial bank lending. The commercialbanking sector was accustomed to thefreehold tenure system with regard to thefarming sector; the existence of many smalllandholders without security of tenure is anovel and unresolved challenge.

5.3.5 Infrastructure constraints

Compounding the problem of servicing smalllandholders scattered in rural or farmingregions is the lack of adequate infrastructureto achieve meaningful financial servicesoutreach. The expansion of financial servicesrequires well-functioning ‘hard’ infrastructure:telecommunications, electricity supply androads. Power and telecommunicationsservices are currently erratic and adverselyaffect the smooth functioning of the financialsector.

Furthermore, the absence of ‘soft’ infra-structure, such as credit data bureaux thatmonitor credit-risk profiles, is a deterrentto improving work ethics and businessconduct. While there are mechanisms forassessing the credit profiles of prime clients,this is not the case for Small or Medium-sized Enterprises (SMEs) and smalllandholders who constitute the ‘missingmiddle’ in terms of access to financialservices.

5.4 SUSTAINABLE RECOVERYPATHS AND POLICYRECOMMENDATIONS

Given that the causes underlying the financialsector’s malaise include the lack of strongcredit cultures and governance mechanisms

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in financial institutions, and pervasive officialinterference in financial markets (summedup as financial repression), the strategicaction required entails both financial andinstitutional reform. The reform regimeshould, inter alia, address the shortcomingsof the reform efforts of the 1990s and inparticular, the failure to provide financialinstitutional capacity to service the small-scale sector.

The major strategic thrust must thereforebe the development of an inclusive financialsector. The UNDESA and UNCDF BlueBook (2006) recommends that the govern-ment could play a supportive role by settingan overall policy stance, a regulatoryframework, and legal structures thatencourage responsive financial services forthe poor.

5.4.1 Addressing the legal andregulatory environment

Legislation governing the RBZ, the ReserveBank Act, does not give it operationalindependence and hence it is subject topolitical interference. This shortcomingshould be eliminated through a constitutionalamendment that confers independence to thecentral bank so that Parliament has directoversight of the RBZ, thus attenuating thescope for political interference by theExecutive. Furthermore, the conglomeratestructure of the RBZ requires to bedismantled so that it focuses on its corebusiness.

With regards to the overall regulatoryenvironment, the UNDESA and UNCDFBlue Book (2006) recommends the designingof regulatory structures in tiers to recognizethe differences in the structure of ownership,governance, capital, funding and risks facedby different financial institutions so as tokeep regulations appropriate, simple andstraightforward. This approach should beadopted to correct the current fragmentedregulatory environment in Zimbabwe.

Cognisant of the fact that many financialinstitutions have evolved into financial groups

undertaking a number of activities such asasset management, banking, propertymanagement, broking services, etc., a newapproach to regulation is required. There aretwo options that could be followed. The firstis to centralize regulation by establishing aFinancial Stability Committee comprising thethree regulators – the central bank, theInsurance and Pensions Commission and thenew Securities Commission – that would betasked with setting up the modalities forsupervising financial groups. A second optionwould be to adopt the partially integratedapproach, as practised in South Africa. Inthis approach, a Financial Services Boardunder the Ministry of Finance is establishedto supervise the pension, insurance andsecurities industries. The central bank wouldbe responsible for the systemic andprudential regulation of banks, while a self-regulatory banking council conducts businesssupervision. The advantage of such anapproach is that it beneficially combines bothofficial and industry regulation.

5.4.2 Restructuring the financialsector

Restructuring should start with the RBZreturning to its core business on the basis ofa well defined legal mandate. The quasi-fiscal activities currently being undertakenby the Reserve Bank should be incorporatedinto the national fiscal budget. It should notbe the business of the Reserve Bank to lenddirectly to public enterprises. Publicenterprises should submit their bids forfunding through their relevant ministrieswhich are consolidated by the Ministry ofFinance for Parliament to approve. Ifactivities are funded through Treasury, fiscaldiscipline is directly enforced in the sensethat they will impact on the fiscal budget thatis monitored by the ParliamentaryCommittee on Budgets. This would in turn,force public enterprises to raise finance fromthe market on their own, thus minimizing theirreliance on government subsidies.

Furthermore, subsidized direct lending to theprivate sector by the RBZ through facilities

THE REFORM

REGIME SHOULD,

INTER ALIA,

ADDRESS THE

SHORTCOMINGS

OF THE REFORM

EFFORTS OF THE

1990S AND IN

PARTICULAR, THE

FAILURE TO

PROVIDE

FINANCIAL

INSTITUTIONAL

CAPACITY TO

SERVICE THE

SMALL-SCALE

SECTOR

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such as BACCOSI and ASPEF should bestopped. As explained earlier, these facilitiesare contributing to money creation in thesame manner as the quasi-fiscal activities.The RBZ should desist from ‘mission creep’,and allow commercial banks to conduct theirlending to the private sector at marketinterest rates. The same applies to inter-ventions in the diaspora remittance transfersector; this is best done by private operators,and in this regard Homelink should beprivatized.

Technically, the main banking sector is wellmanaged and the key requirement thereforeis one of changing the macroeconomic andmonetary policy environment. After all, it isdominated by multinational banks such asBarclays, Standard Chartered Bank, Stanbicand MBCA, whose shareholders maintaintight controls in ‘protecting the franchise’,so systemic risk in the financial system isvery limited. This limitation of systemic riskis now under threat from the Indigenizationand Empowerment Act and the governmentwell need to repeal this legislation with a viewto making it investor-friendly. The GrowthCommission Report of the World Bankemphasizes that one way to speed upfinancial sector development is to attractforeign financial firms to invest in the sector.It observes that the entry of foreign banksbrings expertise just as other forms ofForeign Direct Investment (FDI) do, andhelps domestic banks to be robust throughthe transfer of technology and best practices.

There is also a need to restructure andrecapitalize weak institutions and state-owned institutions. Agribank is an obviousexample of a state bank whose restructuringis long overdue so that it can achieve itsmission of being the leading commercialbanker for the agricultural sector. Ideally,market-driven consolidations, i.e., mergersand acquisitions, are preferable to state-ledconsolidations. Agribank would best serveits market as a privatized institution, free frompolitical manipulation.

5.4.3 Liberalizing the financialsector

The banking sector is still dominated by afew multinational banks, so there is scopefor both foreign and local entrants in orderto stimulate competition and the diver-sification of services. For this to happen,barriers to entry, including prescriptions onthe level of foreign ownership of financialinstitutions, should be removed.

Liberalization would entail allowing a greaterrole for market forces through the relaxationof interest-rate controls and reserverequirements, curtailing directed lending, andthe removal of exchange controls and freeingthe exchange-rate regime. This would enablethe sector to be in a better position to supportthe productive sector as it would allow it toallocate resources efficiently.

The growing mismatch between the maturityof government securities and short-termdeposits poses a serious liquidity threat forthe banks, especially at a time whenconfidence in the sector is low and depositorsprefer to withdraw their money at everyopportunity. This poses problems becausethe RBZ fixes Treasury Bill rates at negativereal values and forces banks to hold themfor a minimum of a year. As a resulthyperinflation is eroding the assets of banks.In order for banks to meet the withdrawalsof depositors and preserve confidence in thesector in the short-term, the central bankshould relax reserve requirements and shouldissue more short-term bills at market ratesso that the asset composition of the banksshifts towards short-term, low-risk securities.

Going forward, reform would be requiredregarding the structure of domestic publicdebt. Presently, 95 percent of domestic debtis held by the banking sector on an involuntarybasis23. This should be curtailed throughbinding fiscal rules so that majority of domesticpublic debt is gradually moved outside thebanking system once real interest rates moveinto positive territory, i.e., with firms, private

23 RBZ Half Year Monetary Policy Statement, 30 July 2008, p.19.

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pension funds, insurance companies andforeign investors, on a voluntary basis.

5.4.4 Harmonizing monetary andexchange-rate policy

Monetary policy should be guided by indirectmonetary control measures, which include,among others, open market operations thatincorporate anticipatory repurchase agree-ments, and statutory reserve averaging.

Open market operations that incorporateanticipatory repurchase agreements wouldenable the banking sector to be proactive inmanaging liquidity and in the marketdetermination of interest rates. Imple-mentation of reserve averaging will ensurethat liquidity ratios are determined byprudential requirements to be met over timerather than at any specific moment. The ideais to give more scope to financial institutionsto manage their liquidity and eventuallyreduce reserve requirements.

A new exchange-rate policy should be put inplace through liberalizing the exchangeregime by unifying the exchange rate andremoving restrictions on current internationalpayments and transfers. The IMF (2007)recommends a substantial devaluation of theinter-bank exchange rate (official rate) andthe elimination of all multiple exchange rates.In the first instance, balance of paymentssupport needs to be secured to smoothexchange-rate volatility and capital flight,especially during the stabilization period.Normalizing relations with the IMF and WorldBank would be crucial for the success of thisremedial action. The inter-bank exchange ratecould then be depreciated steadily and movetowards the parallel market rate. When fiscaland monetary policy regimes have beenharmonized (inconsistencies removed) theexchange rate should be allowed to bedetermined by the market.

A flexible exchange-rate regime, coupled withelimination of RBZ quasi-fiscal activities,would enable a monetary-based anchor as anoperational target to reduce inflation andinflation expectations. Such a monetaryanchor would enable the RBZ to buildforeign currency reserves at appropriatetimes when the exchange rate is favourable.

5.4.5 Providing an enablingenvironment for microfinanceinstitutions and small banksto thrive

While many microfinance institutions havedeveloped successfully without officialintervention, the government can still playan important role in building an inclusivefinancial sector. This can be achieved by anumber of actions which include thefollowing, among others:

• Bringing together all inclusive financeinitiatives under the authority of oneministry or office as recommended bythe Blue Book;

• Providing an appropriate legislativeframework that recognizes the uniquefeatures of microfinance and that fostersupscaling to a financial systems approach(i.e., enabling the mobilization of savingsin addition to provision of credit);

• Re-visiting the Moneylending and Ratesof Interest Act that controls interest ratesto be charged with a view to allowingmicrofinance institutions to set marketinterest rates commensurate with theircost structure;

• Facilitating ‘smart subsidies’24 to fundthe start-up of new institutions to covercapitalization and operating shortfalls;and

• Providing a user-friendly regulatoryenvironment.

24 As observed in the Blue Book, p.104, this is the concept of maximizing social benefits while minimizingdistortions and mistargeting. Smart subsidies are rule-bound, time limited, and are usually implemented throughthe use of performance-based contracts.

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Cognizant that the microfinance sector hasunique features, the best approach will be tosupport industry self-regulation in the sector.Associations of the sector (e.g., theZimbabwe Association of MicrofinanceInstitutions) could be charged with, amongother things, the design of appropriateregulations for the sector rather than thembeing imposed by the RBZ. Ideally, the RBZshould regulate only those microfinanceinstitutions that have grown to the extent oftaking deposits.

Cognisant of the many risks involved inextending loans to the small-scale sector, thegovernment should encourage risk-sharingpartnerships between commercial banks,NGOs, microfinance institutions and savingsand credit cooperative societies. Suchpartnerships would enable commercial banksto provide retail banking services to the poor.The involvement of NGOs in microcreditactivities as part of their development agendahas raised the question of how they shouldinterface with the traditional bankinginstitutions. This becomes imperativeconsidering that these organizations lackadequate liquid resources, economies ofscale and expertise to carry out sustainablelending operations. It has been long arguedthat NGOs that have embraced the provisionof microfinance to disadvantagedcommunities as an add-on to their otherdevelopment programmes could do soeffectively in association with banks withina financial-systems framework. Aryeeteyand Nissanke (1998), Schoombee (2000),and Makina (2006), among others, haveproposed risk-sharing relationships involvingbanks, informal institutions, NGOs and othersemi-formal institutions.

In the same vein, there should also be adeliberate policy to promote competitionamong microfinance institutions. TheEconomist (2007) has reported that wherethere is healthy competition in microlending,as in Bosnia and Peru, interest rates havetended to fall substantially so that interest-rate caps become unnecessary.

5.4.6 Promoting innovativeagricultural financing models

Bearing in mind that the fast track landreform programme has destroyed thecollateral traditionally used for financing theagricultural sector, it is recommended thatinnovative financing models be promoted forsmall landholders.

By building good infrastructure in the ruralareas, it is possible to encourage the settingup of microfinance institutions that servicethe needs of small landholders. The POSBshould be restructured so that it can engagein lending to small landholder farmers. Italready has an extensive rural and urbannetwork of branches, so it can easily achievethe required outreach. Agribank is also aready candidate for restructuring so that itoperates on commercial principles withregard to lending to farmers.

An enabling environment should be providedfor more private actors to become involvedin contract financing for agricultural produce,as is being done by Cottco, Cargill andothers; out-grower and input schemes havehad a good measure of success to bepromoted.

Another possible approach is to request thata portion of donor aid be channelled throughmultilateral financial institutions for thefollowing purposes:

• Providing set-up costs for microfinanceinstitutions that service small landholdersin rural areas.

• Providing seed capital for farmers witha track record who have beendispossessed.

• Covering transaction costs for Agribank,in particular, and any other commercialbanks that are willing to lend to smalllandholders on commercial terms (atmarket rates of interest to avoid theintroduction of distortions).

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• Providing concessional lending tomedium to large commercial farmers forcapital development (e.g., offering graceperiods for such loans).

5.4.7 Improving credit-informationinfrastructure

Financial exclusion is linked to the absenceof verifiable credit profiles of borrowers.This critical information constraint needs tobe addressed through the establishment of

credit bureaux charged with the effectivedistribution of high-quality creditinformation. This will be very important forfacilitating the expansion of bank credit tosmall-scale borrowers beyond the primeclients currently being served by thetraditional banking sector. The creation ofa credit-information infrastructure shouldideally be an industry initiative, as it is acommon good for the whole sector thatoffers financial services.

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Chapter 6

Private Sector Development

Economic recovery in Zimbabwe will haveto be driven by private sector activity,necessitating far-reaching business- andinvestment-friendly initiatives and reforms.Ever since the Unilateral Declaration ofIndependence in 1965, private sectordevelopment (PSD) has been hampered byinterventionist state policies, especially in thefields of foreign-currency management,investment, pricing and employment. Overthe 28 years since Independence, policytowards private enterprise has turned fullcircle – from a command economy designedto create a Marxist-Socialist state, througha flawed and poorly implemented structuraladjustment liberalization programme(ESAP), and back to a dirigiste economy,where state actors have increasingly becomeobstructionist rather than facilitators.

The brief period of policy reversal (ESAP)during the 1990s soon foundered in the faceof intense political pressure, and the degreeof government intervention has now reachedunparalleled levels, as reflected in the Indexof Economic Freedom compiled annually bythe Heritage Foundation and the Wall StreetJournal. On this index Zimbabwe had a scoreof 29.8 in 2008 compared with a score of48.5 in 1995.1

By 2008 business confidence, which startedthe Independence era in a fragile state, hasalso turned full circle and is now arguably atits lowest ebb, reflecting not just the burdenof state intervention and controls but alsothe pervasive uncertainty created by acombination of erratic, volatile andinconsistent policies and persistent threatsagainst private enterprise.

At all levels – large domestic andmultinational companies, the formal SMEsector and the informal sector – PSD iscurrently constrained primarily bymacroeconomic instability, policies inimicalto growth, and a raft of unnecessary andcounter-productive administrative red-tapeinterventions that stifle private initiative. Areturn to orthodox macroeconomic policies,albeit with a pro-poor bias, designed toreduce inflation, curb the budget deficit,stabilize the exchange rate and restorebusiness confidence, would remove many –though not all – of the constraints on PSD.The restoration of macroeconomic stabilityis a necessary but not sufficient conditionfor a vibrant private enterprise sector. It mustbe accompanied and followed by far-reaching microeconomic and structuralreforms of the Investment Climate andDoing Business variety.

6.1 THE PRIVATE SECTOR IN2008

There is no single measure of the size of theprivate sector in Zimbabwe. UnpublishedNational Accounts suggest that the publicshare of value-added (GDP) declined from26 percent in 2000 to 20 percent in 2005.Almost all of this contribution to GDPemanated from parastatals in the servicessector, especially electricity, water, transportand communications, but also fromgovernment-provided services in education,health and public administration. The state’sshare of agricultural and manufacturingvalue-added is shown to be tiny, while thatfor mining is zero.

1 The Index of Economic Freedom is a systematic analysis of ten economic freedoms deemed necessary foreconomies to grow and prosper. The ten freedoms include business, trade, fiscal, labour, monetary, financial andinvestment freedom as well as freedom from corruption. The index also incorporates a measure of propertyrights and the size of government. See <http://www.heritage.org/index/country.cfm?id=Zimbabwe>.

PSD IS CURRENTLY

CONSTRAINED

PRIMARILY BY

MACROECONOMIC

INSTABILITY,

POLICIES INIMICAL

TO GROWTH, AND

A RAFT OF

UNNECESSARY AND

COUNTER-

PRODUCTIVE

ADMINISTRATIVE

RED-TAPE

INTERVENTIONS

THAT STIFLE

PRIVATE INITIATIVE

84


In fact, this is a substantial understatementof the size of the public sector because boththe majority and minority stakes in mines,industrial companies and the financial sectorare treated as part of the private sector inthe national accounts. A more realisticmeasure is that of the RBZ, which estimatesthe size of the public sector at 40 percent ofGDP.

Employment figures are not disaggregatedby sector (public or private), and while banklending figures – a widely used measure ofthe freedom of the economy and the extentof private sector participation – are available,these too are suspect since, once again,majority state-owned entities are treated asprivate sector operations and only thenarrowly defined public enterprise sector,with 100 percent state-ownership, is treatedas public.

Table 6.1 shows that since 2000 the shareof bank credit going to the private sector hasbeen only marginally above 50 percent. Thedefinition of private sector credit is unusualbecause of the abnormal situation inZimbabwe whereby the central bank hasincreasingly become a major lender to theprivate sector. Prior to 2004 the RBZ’sprivate sector loans were negligible, but in2005 the central bank accounted for 16percent of total bank lending to the privatesector, rising to 20 percent in 2006 beforedoubling to 43 percent in 2007.

The striking feature of the table is the rapidexpansion of RBZ lending to the privatesector, thereby supplanting the role of private

banks and reducing the role of the privatesector. By 2007 central bank lending to theprivate sector accounted for no less than onethird of total bank credit. Before 2004 theprivate sector’s share of total bank creditaveraged 76 percent compared with 24percent going to the public sector, therebyillustrating the dominance of private sectoractivity. But since 2004 the public sectorshare has doubled to 50.6 percent while theprivate sector’s share has fallen below half(49.4 percent).

6.1.1 Economic freedom

A telling yardstick of the significance, roleand scope for growth of a country’s privatesector is the Index of Economic Freedommentioned above. Figure 6.1 illustrates howZimbabwe’s index score has fallen some 39percent since it was first ranked in the indexin 1995.

In its first listing in 1995, Zimbabwe’seconomy was more than 50 percent free inall of the ten indicators used, save one –corruption. By 2008, the economy was lessthan 30 percent free, and the highest scoreattained (57 percent) was for trade freedomwhile for monetary freedom the score waszero. The lower the measure of a country’seconomic freedom, the greater is the role ofthe state and the smaller is that of the formalprivate sector. Similarly, the more economicfreedom is restricted, the greater is the roleof the informal sector because high levelsof economic controls are correlated withrising informality.

Table 6.1: Private sector share of bank credit

Public Private (of which) RBZ lending RBZ lending to private sector(% share) (% share) to the private sector as share of total credit

(% share) (% share)

2000 40 60 – –

2003 20 80 – –

2004 31 69 0.6 0.4

2005 55 45 16.0 8.0

2006 41 59 20.0 15.0

2007 55 45 43.0 34.0

Source: Reserve Bank of Zimbabwe: Monthly Bulletin (various issues)

THE MORE

ECONOMIC

FREEDOM IS

RESTRICTED, THE

GREATER IS THE

ROLE OF THE

INFORMAL SECTOR

BECAUSE HIGH

LEVELS OF

ECONOMIC

CONTROLS ARE

CORRELATED WITH

RISING

INFORMALITY

85

Chapter 6 – Private Sector Development

6.1.2 The informal sector

Although Zimbabwe has a large, rapidlyexpanding informal sector,2 there are noreliable hard data on its size and scope. In2000, the informal sector was estimated tocontribute 59 percent of GNP, making it thelargest among 23 African nations for whichcalculations were made (Schneider, 2002);the average for Africa was estimated at 42percent. The figure for Zimbabwe looks tobe a substantial exaggeration, and a moremeaningful estimate is the survey conductedfor USAID, which found that in 1998 therewere some 860,000 informal sector businessestablishments employing 1.6 million people,or approximately a quarter of the country’sworking-age population (McPherson, 1998).Ayyagari et al., (2003) estimated that 15percent of the total workforce was engagedin formal SME activity and 34 percent in theinformal sector.

During the liberalization phase (1991–1996)the number of informal businesses in urbanareas was estimated to have risen 30percent, partly offset by a 14 percent declinein rural informal-sector establishments.Informal-sector urban employment rose52 percent, while in rural areas there was a

9 percent increase. The largest number ofbusinesses were in the retail trade (44.6percent), followed by manufacturing (42.4percent), with textiles (20.1 percent) the mainindustrial activity. Some three-quarters of thefirms operated from home.

Although there are no hard data on recentdevelopments in the sector, both the UN andthe Zimbabwe government believe that since2000 informal-sector growth has accelerateddramatically, reflecting the downturn informal-sector activity (United Nations, 2005;Zimbabwe, 2006). The contribution ofinformal-sector business income to totalfamily income doubled between 1995 and2003 to 15 percent from 7 percent.

Informal-sector enterprises engage in low-technology, low-productivity activities, withvery little capital and virtually no access toformal banking channels. Management ispoor, workers are underpaid, staff turnoveris high and businesses have a very highmortality rate. The majority of thoseemployed are own-account workers (67percent), with only 14 percent beingpermanent, paid employees. Most of the restare seasonal or non-permanent workers.

Source: Heritage Foundation and the Wall Street Journal (2008)

Figure 6.1: Index of economic freedom

2 The informal sector is defined as the loose aggregation of firms and activities outside the regulatory frameworkof an economy.

60

50

40

30

20

10

01995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

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Government policy towards the informalsector has been lukewarm and, in manyrespects, contradictory. For much of the post-Independence period, when formal sectoremployment was expanding, albeit too slowlyto absorb the annual influx of job-seekers,the informal sector was seen as aninconvenient reality that would disappearwith economic modernization. Althoughpolicy discouraged informal activity, theinformal sector was tolerated rather thanharassed by the authorities, until OperationMurambatsvina (‘Restore Order’) in 2005when some 32,500 SMEs were demolishedand around 700,000 people lost their shelter,sources of livelihood, or both (UnitedNations, 2005: 32).

There has never been a formal policyframework for the informal sector – thenearest approximation to one being theoutdated Small, Micro and Medium Enter-prises Policy and Strategic Frameworkcovering the period 2002 to 2007 (Zimbabwe,2002b). There is a government ministrycharged with SME development, whosemandate also covers the informal sector, butits prime focus has been assisting the formalsmall-scale sector. As a result, policy towardsthe informal sector is in limbo, with respon-sibility diffused across no fewer than sixgovernment ministries. This absence ofpolitical commitment and of a legislativeframework for addressing the needs of theinformal sector have left it prey to ad hoc,piecemeal measures, devoid of any clearpolicy goals and strategic thrust.

It is no coincidence that informality in turn,is correlated with economic backwardness– the larger the informal sector, the lowerproductivity is, and therefore, the lower percapita income and the higher the povertyheadcount (Lewis, 2004).3 Although thereare no official data to confirm it, it is commoncause that Zimbabwe’s informal sector,starting from a high base, has grown rapidlyas measured GDP has fallen since 1998.

The causation therefore runs from growingstate intervention in the economy to decliningeconomic freedom, an expanding informalsector, falling government revenue (becauseof the near-impossibility of taxing informalactivities), declining productivity and lowerincome per head. As economic freedomshrinks, so obstacles to doing businessincrease. Indeed, many of the yardsticksused in measuring economic freedom areidentical to those used in assessing the easeof doing business in a country.

6.2 CONSTRAINTS TO PRIVATESECTOR DEVELOPMENT(PSD)

A number of constraints currently hinder thedevelopment of the private sector:

• A weak institutional framework forsustaining growth, with a raft of over-lapping, conflicting and contradictorygovernment controls covering mostaspects of business activity.

• The absence of a conducive businessenvironment for the needs of PSD.

• Poor physical infrastructure – especiallypower, transport, water and tele-communications.

• An acute and worsening skills shortage,especially in technical fields.

• The absence of an appropriate frame-work for public–private cooperation ininfrastructure, environmental and socialactivities.

• The absence of effective policies andinstitutions designed to foster micro,small and medium-scale businesses.

• Weak, underfunded private sectororganizations.

3 The poverty headcount is the proportion of the total population estimated to be living in ‘extreme poverty’,defined as having less than US$1 a day.

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6.2.1 Obstacles to doing businessin Zimbabwe

Even when macroeconomic conditions areleft out of the calculation, conditions inZimbabwe are not conducive to privatesector development. In the World Bank/IFCDoing Business 2008, Zimbabwe is ranked152nd out of 178 countries, down from 145thout of 175 countries two years earlier.4

Almost all the countries below Zimbabwe inthe rankings are low-income African statesthat are poorer than Zimbabwe, while allZimbabwe’s competitors in the SouthernAfrican Development Community (SADC),

with the exceptions of two recent conflictstates, Angola and the Democratic Republicof Congo (DRC), have higher rankings(Table 6.2).

Nor can any reassurance be taken from thefact that, Mauritius, Kenya and Tanzaniaexcepted, all the countries in the table slippeddown the league table between 2006 and2008. In other words, in terms of the easeof doing business, the entire region, with ahandful of exceptions, is becoming lesscompetitive globally. That Zimbabwe is notonly near the bottom of the pile but alsoregressing is a matter of serious concern.

Table 6.2: Ease of Doing Business rankings 2006 and 2008: Zimbabwe and comparators

Country 2006 (out of 175) 2008 (out of 178)

Mauritius 32 27

South Africa 28 35

Namibia 39 43

Botswana 44 51

Kenya 80 72

Swaziland 67 95

Zambia 92 116

Uganda 103 118

Lesotho 116 124

Malawi 106 127

Tanzania 150 130

Mozambique 137 134

Zimbabwe 145 152

Angola 155 167

DRC 175 178

Sources: World Bank and the International Financial Corporation: Doing Business Report (2007 and 2008)

Table 6.3: Zimbabwe: Rankings by individual obstacles to doing business

I tem Rank out of Procedures Time Cost Minimum capital178 countries (number) (days) (% income (% income

per head) per head)

Starting a business 143 10 96 21.3 54.6

Dealing with licences 172 19 952 11,799 n.a.

Registering property 79 4 30 25 n.a.

Enforcing contracts 74 38 410 32 n.a.

Closing a business 151 n.a. 3.3 22 Recovery rateyears (% of estate) (cents in the dollar)

0.1

Paying taxes 144 52 payments 256 hours Total tax rate n.aa year a year 53% of profit

Source: World Bank/IFC: Doing Business Report (2008)

4 <http://www.doingbusiness.org/Documents/CountryProfiles/ZWE.pdf>.

EVEN WHEN

MACROECONOMIC

CONDITIONS ARE

LEFT OUT OF THE

CALCULATION,

CONDITIONS IN

ZIMBABWE ARE

NOT CONDUCIVE

TO PRIVATE

SECTOR

DEVELOPMENT

88


Zimbabwe features amongst the worst tencountries out of 178 in several differentaspects of Doing Business:

• Dealing with licences: Zimbabwe isranked 172. The cost of licences is thethird highest in the world, while the timetaken to obtain them, almost three years,is the third longest in the 178 countriessurveyed.

• The cost of retrenching labour: 446weeks salary – is the highest in theworld.

• Cost of property registration:Zimbabwe is third from bottom with aregistration cost of 25 percent of theproperty value.

• Cross-border trade: Zimbabwe, ranked169, is one of the ten countries in theworld where it is most difficult to engagein foreign business. Businesses need toobtain thirteen documents to importgoods – only three countries requiremore.

• Closing a business: Zimbabwe has thesecond-lowest recovery rate in the worldin respect of claims by creditors, taxauthorities and employees.

Table 6.4 shows that Zimbabwe’s corporatetax rates are uncompetitive. In the comparatorcountries only the DRC (229.8 percent) andAngola (53.2 percent) have higher tax takes.The total tax rate measures the amount oftaxes and mandatory contributions payable bya business in the second year of operation,expressed as a share of commercial profits.This covers profit and corporate income tax,vehicle and fuel taxes, turnover taxes andsocial contributions and labour taxes.

Numerous research studies show a close(inverse) correlation between the level ofregulation in an economy and economicperformance. The World Bank argues thatimproving a country’s Doing Businessindicators to the level of the top quartile ofcountries is associated with a 9 percent

reduction in the share of GDP accountedfor by informal activity – an importantconsideration for Zimbabwe, which has alarge, growing informal sector.

6.3 POLICY FOR PRIVATESECTOR DEVELOPMENT

Zimbabwe has never had a strategy forPSD but, in the light of the anomalous andheterodox development path it has followedsince UDI in 1965, the country clearly needsone now. Prior to 1980, the private sectorwas left largely to its own devices, thoughorganizations such as the IndustrialDevelopment Corporation were set up toremedy perceived market failure andcounter economic sanctions by undertakinginvestments that private enterprise foundunattractive for reasons of cost or risk.

This preoccupation with market failurepersisted after 1980 with the proliferation ofofficial interventions designed to closeinvestment and enterprise gaps left by theprivate sector’s shortcomings while alsoestablishing the primacy of the state as partof the overarching strategy of economic

Table 6.4: Total corporate tax take

Country Percentage of profits

Zambia 16.1

Botswana 17.2

Lesotho 20.8

Mauritius 21.7

Namibia 26.5

Malawi 32.3

Uganda 32.3

Mozambique 34.3

Swaziland 36.6

South Africa 37.1

Tanzania 44.3

Zimbabwe 53.0

Angola 53.2

DRC 229.8*

*A tax take of over 100% arises where non-profittaxes (vehicles, fuel, labour) and profit taxesexceed total profits.

Source: World Bank/IFC, Doing Business Report(2008)

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transformation. During the post-Independence period, two strands of PSDstand out:

• Measures to empower indigenousbusiness, culminating in the 2007Indigenization and EconomicEmpowerment Act.

• Half-hearted, poorly implementedinterventions designed to boost SMEsthat seldom graduated beyond piousstatements of intent. Thus, the 1997Industrial Policy Draft (1996 to 2006)5

recommended the use of ‘appropriatefiscal measures and other incubationarrangements’ to encourage informal-sector SMEs to ‘graduate into theformal market’. The stated objectivewas to double estimated formal SMEemployment to 1 million jobs by 2006.‘Government sees support for theSMEs as an important vehicle toreverse increasing urban poverty ... anda vehicle for relatively inexpensive jobcreation in urban areas through self-employment, using inexpensive capitalequipment. Measures will be put inplace to encourage SMEs to enterexport markets.’

This preoccupation with job creation to thedetriment of efficiency and competitivenessconsiderations captures official policytowards SMEs. Their attraction was – andis – their perceived potential for absorbingunemployed school-leavers or dropouts fromthe formal sector. The policy thrust is thatof seeking to help emergent businesses toget ahead through a variety of incentives,inducements and subsidies, thereby insulatingSMEs from competitive forces and usingtaxpayers’ funds to keep failing firms alive.

Yet Klein (2003: 22) found that, globally,

‘...every year around 5 to 20 percentof all firms enter the market and asimilar number of older firms go out

of business. Most new firms are smalland some 40–60 percent go out ofbusiness within five years afterentering. Data from developingcountries suggest that the average newentrant is a little more productive thanfirms exiting the market. In mosteconomies, the turnover of firms helpsincrease productivity.’

The distinguishing features of a competitiveeconomy are the freedom of firms to enterand exit markets. The state’s role should bethat of eradicating entry barriers to newbusiness formation while ensuring as level aplaying field as possible for SMEs, withoutkeeping inefficient firms alive at the expenseof the taxpayer and economic and socialefficiency.

As noted above, prior to the Indigenizationand Economic Empowerment Act (2007) thenearest approximation to a PSD strategywas the 2002 framework for Small, Microand Medium Enterprises (Zimbabwe, 2002b),which is more an appendage than a main-stream national policy for the integration ofthe informal sector into the modern economy.Existing policy has left intact existing biasesagainst SMEs and informal-sector activities,and while there are instances of proactivefirms outsourcing or sub-contractingoperations to SMEs, these have oftenwithered on the vine over time partly becausethey were never central to governmentdevelopment policy.

6.3.1 Prerequisites

• Macroeconomic stability.

• Good governance – political account-ability, transparent and democraticpolitical processes, legal framework,independence of judiciary, freedom ofinformation, and an administration thataims at efficiency and effectiveness.

• Investment in physical infrastructure.

5 Produced by the Ministry of Industry and International Trade (mimeo).

90


• Investment in soft infrastructure,including human capital, skills develop-ment and ICT.

• Structural reforms designed to improvethe efficiency of markets.

• Investment Climate and Doing Businessreforms to eradicate bureaucratic, red-tape obstacles to new business formations

Taken together these six prerequisitesembody the state’s core business as afacilitator of PSD – creating the appropriateenabling environment for private enterprise,in part by maintaining macroeconomicstability, in part by direct investment in hardand soft infrastructure, in part through theimplementation of structural reforms and theimprovement of governance, and in partthrough private–public partnerships.

6.3.2 Structural reforms

Structural reforms include policy measuresdesigned to remove impediments to theefficient allocation of resources (IMF 2008a).Often these are ‘free market’ in character,implying reduced state intervention in theeconomy across a broad front – theelimination of price, wage and interest ratecontrols, the abolition of state-ownedmonopolies and liberalization of foreigntrade and capital flows.

Structural reforms also have a role to playin tackling market failure, where it exists,such as natural monopolies by introducingeffective regulatory mechanisms. The IMFpoints out that those countries with well-supervised banking systems also score highlyin the banking liberalization index, eventhough such supervision is a departure fromthe ‘laisser faire’ market norms.

There are four main categories of structuralreforms:

(a) Trade Reforms (see below) – tariff andcurrent account balance-of-paymentsliberalization;

(b) Capital Account Reforms (see chapter3 on stabilization);

(c) Domestic Financial Reforms (seechapter 5 on financial sector); and

(d) Product Market Reforms (see chapter 10on public sector restructuring, chapter 8on manufacuturing, mining and tourism,and chapter 9 on land policy andagriculture) – including reduced publicintervention in agriculture, the phasing outof administered prices and exportmarketing boards. This category alsocovers liberalization of the telecom-munications and electricity markets.

IMF data show that real productive andfinancial sector reforms have helped boostgrowth in emerging economies, with the mostobvious positive results secured as a resultof financial sector liberalization, tradeliberalization and reduced state interventionin agriculture. Appropriate reforms haveachieved improved access to credit,enhanced inflows of foreign direct invest-ment and better decision-making by firmsand governments because of improvedallocative efficiency (see chapter 11 on howthe state does business).

6.3.3 Trade policy

Export performance

Zimbabwe’s export performance since 1990,can best be described as lacklustre and haslargely been dependent on the outcome ofthe rainy seasons and global commodityprices. The output trends of the agriculturalsector have tended to have pronouncedeffect on the economy, despite the relativelylarge contribution of the manufacturingsector to GDP. This is because the lattersector was largely dependent on the formerfor inputs.

As shown in chapter 2 on the macro-economic situation, the performance ofZimbabwe’s foreign trade sector, both interms of values and volumes reached its peak

91


at the end of ESAP period (1996-1997) andthereafter started to decline steadily in thepost 1997 period. Given the multifacetedfactors that explain Zimbabwe’s poor exportperformance as shown above, trade policyobjectives should link deeper macro-economic policy reforms to specific upfrontreforms that will trigger both quick reactionsof the private sector and sustained mediumto long-term growth.

Short-term policy initiatives:

While the necessary improvement in theenvironment will take time to come fullyinto effect, immediate measures to bolsterthe competitiveness of Zimbabwean firmswill include reversing the ills inherited fromthe current administration. These willinclude:

• eliminating all forms of poor economicgovernance such as uncontrolledexpansion of the money supply andendemic fiscal imbalances;

• reducing inflation and stabilizing theexchange rate;

• restoring Zimbabwe’s credibility andbusiness confidence through revita-lization of the markets which in turn willreallocate resources to the newer andmore productive businesses;

• resuscitating the country’s transportsystems: rail transport system, airtransport, and expanding container-handling facilities;

• restoring reliable supplies of coal,electricity, liquid fuels and water;

• ensuring supply of all other inputs toproduction, including access to foreigncurrency for imported raw materials andintermediate goods;

• overcoming telecommunications con-straints and reinvigorating postal services;

• improving the operation of duty rebateschemes and reviewing the efficiency

of the Value Added Tax to furtherimprove the indirect tax regime forexporters.

Medium to long-term initiatives:

Export commitment: Rebuilding exportconfidence is essential for Zimbabwe toachieve the levels of imports necessaryfor self-sustained growth. A post-crisisadministration’s trade policy should committo a stable and predictable export-orientedenvironment, maintaining a competitiveexchange rate rather than having specificexport incentives. Bureaucratic hurdles toexporting should be eliminated, and all armsof government sensitized to the importanceof assisting exporters.

Tariffs and regional trade policy: Suchan administration should work with globalalliances to shape international economic andtrade agreements to the country’s advantage.Particular attention should be paid at theregional and continental level to maximizingthe gains for Zimbabwe from participationin COMESA and SADC trade and regionaleconomic integration regimes. At theinternational level, the negotiations withthe European Union (for new EconomicPartnership Agreements under Cotonou) andat the World Trade Organisation (the DohaRound) should be pursued in tandem withthe country’s regional partners.

By aligning its production and tradingstructures, Zimbabwe could, in the mediumterm take advantage of regional policyinstruments which are meant to merge intoa single customs territory, ranging from:

• duty-free and quota-free trade amongstthe constituent customs territories;

• a common method of valuing tradablegoods (common customs valuationsystems);

• a common level of protection CommonExternal Tariff (CET), a common tradepolicy against imports from outside theCustoms Union; and

TRADE POLICY

OBJECTIVES

SHOULD LINK

DEEPER MACRO-

ECONOMIC POLICY

REFORMS TO

SPECIFIC UPFRONT

REFORMS THAT

WILL TRIGGER

BOTH QUICK

REACTIONS OF

THE PRIVATE

SECTOR AND

SUSTAINED MEDIUM

TO LONG-TERM

GROWTH

92


• a common administrative structure tomanage trade policy, customs operationsand revenue collection.

Zimbabwe should also review its position vis-à-vis all bilateral partners and the GeneralSystems of Preferences by:

• establishing a business environment inwhich individual firms can build on theircompetitive advantage;

• investing in and encouraging far-sighted,sustained public sector building ofcompetitiveness through supportivepolicies in the area of education, training,human-resource development, industrialrelations and taxation;

• adopting a coordinated approach toindustrial development and its environ-mental impact to ensure sustainabledevelopment;

• improving infrastructure, and acquiringup-to-date technology and technologysupport to the industrial and the servicessectors;

• encouraging flows of foreign directinvestment, particularly in industries andservice sectors where the foreigninvestor brings specialized skills ormarket access;

• support to beneficiation so as to add valueto agricultural and mineral raw materialsand promoting the exploitation of valuechains and systems to strengthen back-ward and forward linkages within andbetween firms and sectors to maximizegrowth and employment creation; and

• deepening and diversifying the country’sindustrial base, in part through theconcerted development of industrialclusters.

Under a post-crisis government, internationalcompetitiveness should be underpinned by astabilized macroeconomy, providing firmswith a predictable environment in which toformulate coherent competitive strategies

and back these up with investments orientedto both the domestic and export markets. Inthis context, Zimbabwe’s industrial and tradepolicy will be implemented through partner-ships with the private sector and supportinstitutions, including NGOs, in the followingareas:

• Development of integrated national tradeand industrial clusters characterized byincreased specialization and growinginterdependence within and amongsectors (industry, agriculture, transportand infrastructure, education, technology,etc.).

• Fostering of linkages between industryand agriculture, thus engenderingefficient and diversified production ofgoods and services for export and thedomestic market.

• Attraction of foreign direct investmentwhich creates synergies for the develop-ment of the clusters and creates jobs.

• A proactive strategy for structuringfinance for export industries.

The fostering of entrepreneurship in theindustrial sector and promotion of small andmedium-scale manufacturing enterpriseswould be a central component of a post-crisisadministration’s industrial policies, includingspecific small-scale enterprise (SME)measures.

6.3.4 A focus on competitiveness

The Achilles heel of PSD policies in thosesub-Saharan economies that are trying toimplement them is the absence of a specificcommitment to competitiveness. In anincreasingly globalized world economy thereis no hiding place for inefficient, low-productivity, low-technology firms. Fosteringsuch businesses in the ‘national interest’ asso-called National Champions, ultimatelypenalizes the community.

Zimbabwe’s recent experience is a reminderthat countries cannot devalue or spend their

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way to competitiveness, defined as a ‘set ofinstitutions and policies supportive of highrates of economic growth’.6 A competitivecountry improves the living standards of itspeople through higher productivity.

Depending on resource endowments,geography and path dependence,7 policy-makers in emerging markets are confrontedby two distinct roads to global competitive-ness:

• A low road that implies stagnant, ordeclining, real wages, static or outdated,technology, technological downgrading,as in the subsidization of small-scaleagriculture and SMEs, and a reliance onthe exploitation of natural resources andlow-wage labour.

• A high-road strategy that depends on acountry being able to develop new andmore efficient ways of producing andselling goods and services using state-of-the-art technologies, professionalmanagement, competitive domesticmarkets, efficient infrastructure andstrong institutions.

When ESAP was launched in 1990, itseemed feasible for Zimbabwe to graduateover time to a high-road strategy, butZimbabwe’s failure to move upmarketduring the past twenty years, and theretrogression in infrastructure, skills,technology and industrial clusters, especiallysince 1997, has created a new type of pathdependence that will make it extremelydifficult, over the medium term, to implementa high-road strategy.

There is no such thing as a competitiveeconomy – only an economy comprisingcompetitive firms of all sizes. Competitive-ness in business is a two-tiered concept –comparative or national advantage andcompetitive or strategic firm-level advantage.

Aside from factor endowments, Zimbabwe’scomparative advantage depends on macro-economic stability, good governance and asound, well-maintained and efficientlymanaged physical infrastructure. Unlessthese three conditions are met, enterprises ofall sizes will be unable to become, and remain,competitive.

At the same time, firms do not becomecompetitive purely on the basis of anaccommodating macroeconomic environ-ment. Structural reforms are needed toimprove the efficiency and flexibility ofmarkets, underpinned by the development of‘soft’ infrastructure and the eradication ofbureaucratic regulations that stifle entre-preneurial drive and initiative.

During the crisis period, Zimbabwe’scompetitiveness has declined both absolutelyand relatively to the point where today it isranked third from bottom of 131 countries inthe World Economic Forum’s GlobalCompetitiveness Index.8 Fortunately,however, it is ranked higher on the BusinessCompetitiveness Index (105th out of 127countries), meaning that the efficiency andcompetitiveness of the country’s privatesector is constrained by macroeconomicinstability and bad governance (WorldEconomic Forum, 2007). This is fortunatebecause it means that even after thedepredations of the last decade, the countrystill has a solid platform for PSD.

6.3.5 A three dimensional approach

There are three distinct, but interlocking,dimensions to PSD:

• Foreign direct investment.

• SME development through clustering andnetworking – the promotion of intra-business linkages, including intra-SMElinkages and linkages between small and

6 World Economic Forum Global Competitiveness Report, 2007–2008.7 Path dependence means that a country’s future growth path is influenced substantially by past investment in

infrastructure, skills and technology.8 See <http://www.gcr.weforum.org>.

THERE IS NO SUCH

THING AS A

COMPETITIVE

ECONOMY – ONLY

AN ECONOMY

COMPRISING

COMPETITIVE

FIRMS OF ALL

SIZES

94


large business, domestic and foreign,including participation in globalizedproduction networks.

• Rebuilding and recreating the privatesector’s ‘missing middle’ (see 6.3.8).

6.3.6 Foreign Direct Investment(FDI)

Even before the onset of deep crisisZimbabwe had a dismal track record inattracting foreign private capital. Over the20 years to 2000, there was a net outflow ofprivate capital, funded largely by the inflowof foreign aid, and in 2006 Zimbabwe’sinward stock of FDI was estimated atUS$1.4 billion or less than one percent ofthe total for sub-Saharan Africa (Unctad,2007). In the light of that statistic, it isremarkable that indigenization should playso prominent a role in government policy.

Even with the resumption of aid inflows,Zimbabwe will remain a capital-scarceeconomy, especially given the probable needto restructure the financial sector owing tothe impact of lasting hyperinflation. In thissituation, and given the urgent need torehabilitate the physical infrastructure, it willbe essential to facilitate FDI rather thandeter it, which is the inevitable consequenceof indigenization in its current legislativeform.

Facilitation does not imply however, the useof incentives to attract FDI. Indeed, the poorperformance in Zimbabwe (and in manyother countries) of explicit FDI incentives,such as Export Processing Zones, taxholidays and preferential access to foreigncurrency, confirms the view widely heldinternationally, that such incentives areunlikely to attract foreign investors.

In an increasingly globalized internationaleconomy multinational companies makeFDI decisions on strategic criteria: market

size and growth, locational attractions interms of geography, natural-resourceendowment, skill levels, the availability oflow-wage labour, the ease of doing business,political stability, and a country’s suitabilityas an export platform or as a site for off-shoring9. In modern economies the crucialattraction of FDI is that it is the most efficientchannel both for the transfer of technologyand for entry to global value chains (GVCs),possibly in the form of off-shoring.

Zimbabwe’s weak FDI performance sincethe establishment of the Zimbabwe Invest-ment Centre in 1990 suggests that thisshould be restructured as a purely pro-motional entity, removing its authority tolicense new investors, though this will notbe possible should government proceed toimplement the indigenization legislation.There is a case for monitoring investmentsinvolving the depletion of mineral resourcesand land ownership by foreigners or thosethat are a potential source of environmentaldegradation.

6.3.7 SME development –networking and clusterformation

In contrast, there is a much stronger casefor selective official interventions designedto promote SME development. Individually,SMEs cannot compete for marketopportunities that require large productioncapacities, homogeneous standards andregular supply. They are unable to achievethe higher productivity levels thatspecialization and economies of scaleprovide. Since SMEs are often the mainsource of employment, income, skills andconsumable products for poor people, theconstraints to SME growth and productivityenhancement act as further constraints topoverty reduction in general and thus to therealization of Millennium DevelopmentGoal 1 (MDG)10 .

9 Off-shoring is the outsourcing of productive processes or links in a firm’s value-chain to firms in other countries.10 Global value chains arise from the offshoring of manufacturing and service operations to different countries

where value can be added more cheaply or efficiently.

95


There is considerable evidence that SMEsunderperform, not because of their size butbecause of their isolation. The ‘collectiveefficiency’ generated by clusters or bygovernment-provided business parks andfactory shells are likely to both improveSMEs’ access to funding and enhance theirsurvival and growth prospects.

Clusters11 are therefore an ideal mechanismfor enhancing SMEs’ performance, reducingnew-firm failure rates, and extending both thelife cycle and growth potential of SMEs.Isolation is best tackled not by the use ofsubsidies, protection, tax-breaks or guaranteedpreferences for state contracts but by system-wide initiatives aimed at enhancing collectiveefficiency. Policy should therefore target notthe individual firm, but the network of firmsin the knowledge that clusters of SMEsovercome the disadvantages of isolation byexploiting scale and scope economies thatare external to the individual SME but internalto the cluster. Clusters enable firms to sharelearning and experience effects whileincreasing flexibility through inter-firmcooperation and specialization. By facilitatingcluster formation, policy enhances collectiveefficiency through collaboration.

Despite the economic potential for SMEs togrow into the bedrock of the sub-SaharanAfrican economies, they are left as anabsorber of displaced labour from theshrinking formal sector. It has been arguedelsewhere that ‘the policy of supporting valuechains linkages between large-scale firmsand SMEs cannot be left to spontaneousoutcomes by isolated companies but shouldbe part of expanding the current formalsector activities into the rest of eachcountry’s national economy’ (Ndlela,2006:101–4).

Unfortunately, from a policy viewpoint, thereis general agreement that it is ‘difficult ornearly impossible for public policyintentionally to create clusters where they

do not already exist. Most successfulclusters have evolved serendipitously.Although public policies have occasionallybeen a catalyst to cluster growth, their effectsare as likely to be inadvertent as intentional’(Cortright, 2006: 48).

The best public policy advice for creatingclusters is a focus on establishing a business-friendly environment – institutions supportiveof knowledge creation, a business culturethat supports entrepreneurship, eradicatingbarriers to new firm formations and readyaccess to capital (ibid.).

Cortright provides four policy guidelines:

• Cluster development is not a public policyactivity. Ultimately it is private sector firmswhose conduct and strategies determinewhether clusters evolve.

• Clusters cannot be treated as a single orseparate activity. There is no case for a‘Ministry for Clusters’. Cluster policiescut across different government depart-ments and entities, and must involvedialogue with the private sector.

• Governments can – and should – play asupporting role, but cannot createclusters where none exist. It is not a caseof governments ‘picking winners’.

• There is no single ‘cluster model’. Clustersdevelop differently in different regionsand industries, though there are lessonsthat the Zimbabwe tourist industry couldlearn from the Cairns tourism cluster inAustralia (Cortright, 2006: 52)

Cluster development aside, there is a strongpro-poor case for interventions designed topromote SME development. In Zimbabwethis has been confined largely to providingfinance, either through the Small EnterprisesDevelopment Corporation or more recently,through special preferential interest-ratefunds from private sector banks.

11 Clusters are ‘geographic agglomerations of companies, suppliers, service providers and associated institutions ina particular field linked by complementarities of different types’. (World Economic Forum, 2007)

DESPITE THE

ECONOMIC

POTENTIAL FOR

SMES TO GROW

INTO THE

BEDROCK OF THE

SUB-SAHARAN

AFRICAN

ECONOMIES, THEY

ARE LEFT AS AN

ABSORBER OF

DISPLACED

LABOUR FROM THE

SHRINKING

FORMAL SECTOR

96


In Zimbabwe, as elsewhere, the pay-offfrom such interventions has been meagre,and there is an ongoing debate as to whetherSMEs play a special role in economicdevelopment and thereby merit special policyprivileges. Though there is no consensus onthe issue, some recent macroeconomicevidence casts doubt on the claim that SMEsare ‘especially important for growth andpoverty reduction’ (World Bank, 2005).

For this and other reasons governments anddonors are developing new and differentprogrammes designed to support SMEs,shifting the focus from support for individualSMEs to more system-wide approaches thatinvolve:

• addressing market failures that createcost disadvantages for SMEs andrestrict their access to markets;

• improving transactional efficiency infinancial, product and input marketsrelevant to SMEs;

• reforming public policies and regulationsthat discriminate against SMEs or thatproduce fixed costs that create acompetitive disadvantage for small firms;and

• investing in public goods that open upmarket access and enhancecompetitiveness (infrastructure, ICT,transport, water and power).

Hallberg (2000) contrasts these modernapproaches with the more traditional stancethat relied on direct and subsidized provisionof financial and non-financial support toSMEs. Targeted interventions and institutionsmight still be required to improve SMEs’access to finance, business-developmentservices and business-linkage opportunities,but these should be demand-driven, market-oriented and provided by private firms, non-profit intermediaries or private–publicpartnerships. The recent rapid growth inmarket-oriented methods of deliveringmicrofinance services to SMEs is a goodexample of this new policy stance. The role

of the state should be that of reducingbarriers to entry and risks associated withlending to SMEs.

Such Doing Business reforms often benefitsmall businesses more than large-scale firms,who can afford to invest in generators wherepower is not available and who are betterable to access expensive legal or advisoryservices. This does not mean that SME-promotion programmes should be abandonedbut that they should be restructured on thebasis of best practice internationally, ratherthan on uncritical acceptance of the beliefthat the main constraint to SME developmentis finance. Furthermore, a striking featureof vibrant economies is the high birth rate(and death rate) of new enterprises. Low-cost finance tends to perpetuate SMEs thatshould be left to go under.

6.3.8 The missing middle

There is a growing consensus that manysub-Saharan African countries have adisconnect between their large corporatesectors and weak formal and informalenterprises (SMEs). Despite ongoing effortsto strengthen the SME sector, thesebusinesses face a number of stifling financialand regulatory barriers, as a result of whicha striking characteristic of African economiesis the failure of small firms to graduate to‘middle economy’ status, thereby leaving avacuum in the form of a ‘missing middle’.

One of the features of the Zimbabweeconomy in the post-ESAP period has beenthe gradual declustering of the economy –in clothing and textiles, tobacco, foodprocessing, gold mining and tourism – as aresult of which many of the small andmedium-sized businesses, once the bedrockof commercial agriculture, mining,manufacturing and commerce, no longerexist.

While accepting that SMEs may have thepotential to play a critical role in filling themissing middle gap, their capacity to do sodepends on the elimination of the many

A STRIKING

CHARACTERISTIC

OF AFRICAN

ECONOMIES IS THE

FAILURE OF SMALL

FIRMS TO

GRADUATE TO

‘MIDDLE ECONOMY’

STATUS, THEREBY

LEAVING A VACUUM

IN THE FORM OF A

‘MISSING MIDDLE’

97


constraints currently inhibiting the growth ofsmall formal-sector enterprises and thetransformation of progressive informal-sector business units into viable formal-sectoroperators. Yet again, there is a central rolefor the removal of red-tape obstacles to newbusiness formation, in both the formal andinformal sectors.

6.3.9 Business partnershipprogrammes

Long-term survival and profitability requiresenterprises to improve their performancecontinuously to stay ahead of competitors.The successful participation of SMEs inliberalized domestic and global marketsdepends heavily on their capacity to innovateand thereby to enhance their productivity.In this process, the economic networks andvalue chains in which a firm operates arekey determinants. Multinational corporationsare often major drivers of innovation,disseminating technological know-how andfacilitating market access. In a globalizingeconomy it is vital that SMEs becomeattractive partners, e.g., as subcontractorsor suppliers, for large firms. The integrationof SMEs into global value chains is onedimension of the kind of global partnershipscalled for under MDG 8 that can lead to thetransfer of know-how, skills and expertise,and contribute to their sustainable develop-ment, not only with regard to their economicbut also to their environmental and socialperformance.

6.3.10 Private–public partnerships

There is an unanswerable case for closeprivate–public cooperation and consultation.‘Discovery’ in business is a two-facetedprocess. Entrepreneurs need to discovermarkets, processes and products that arecompetitive in domestic and foreign markets,while politicians and bureaucrats mustdiscover what is holding industry back and

how public policy can be used to eradicateconstraints and bottlenecks.

6.3.11 Global Value Chains (GVC)1212121212

Few doubt that participation in GVCscontributes positively to industrial develop-ment and poverty reduction but, as withclustering, there is a question mark over therole of public policy and the extent to whichit can facilitate GVC entry, becoming asupplier or contractor and therebyparticipating in the value chain. ForZimbabwe, the major obstacles includegeography (its landlocked status and theproximity of a major industrial player, SouthAfrica), the state of the infrastructure, theskills exodus, decades of official ambi-valence (if not outright hostility) towards FDI,and a lack of understanding of the realitiesof global production networks.

The literature – and experience – of publicpolicy in facilitating GVC entry is hardlyreassuring. Resource endowment drivers –cheap labour or energy – are majorinfluences, as also are the corporatestrategies of buyer-driven value chains.Evidence from all around the world suggeststhat government investment incentives – taxbreaks, labour law derogations, subsidizedutilities, guaranteed dividend and profit-repatriation rates, often embodied in ExportProcessing Zone legislation – have a minimalimpact on industrial location, offshoring andoutsourcing decisions.

The decision-makers are private sectormanagers who are more likely to beinfluenced by Doing Business conditions thanspecial – and potentially temporary –incentives. In any event, in a globalizedeconomy multinational investors, producersand buyers think and act in strategic terms.Attractive tax rates or subsidized electricitytariffs will not influence investment oroutsourcing decisions in Zimbabwe if

12 Global value chains (also global production networks) are ‘interregional networks clustered around one commodityor product, linking households, enterprises and states to one another within the world economy’ (Gereffi andKorzeniewicz, 1994).

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corporate headquarters has decided that, forstrategic or logistical purposes, South Africaor Kenya is the most appropriate Africanlocation.

This, too, is a ‘discovery’ issue. Over time,firms will discover that there are new andadditional value-chain links that they canprovide. Arguably there is a role for the statein funding research and development to‘enable’ the discovery process. Aside fromsuch interventions the state’s main functionsshould be investing in infrastructure, pushingthrough enabling environment reforms, andmaintaining a constant dialogue with privatesector entrepreneurs aimed at identifyingbottlenecks and overcoming them.

From a narrowly pro-poor viewpoint entry-level activities within GVCs are desirablebecause they create new, usually low-income and low-technology, positions.However, as firms move up the value chaininto more knowledge- and capital-intensiveactivities, the direct pro-poor impact isdiluted, but to the extent that such GVCprogression leads to increased exports andfaster growth, per capita incomes rise,thereby reducing poverty.

6.3.12 Infrastructure

It is common knowledge that insufficient,inefficient infrastructure in developingcountries remains a major constraint,limiting access to basic services such as asteady electricity supply, clean water, androad and telecommunication networks. In theZimbabwean case, the infrastructure sectorshave faced persistent underinvestment, asituation that now threatens to bring entiresupply systems to a halt.

6.3.13 Information services

The rapid advances in information andcommunication technologies (ICTs) have far-reaching effects on both industrial governanceand business systems. Successful institutionsand enterprises use ICTs to improve theirproductivity and to apply new knowledge. In

particular it is essential for the SME sector tohave access to adequate information toenhance productivity and facilitate marketaccess. However, in most developingcountries, the sector is suffering frommarket failures in the provision of businessinformation, which is available only fromstand-alone institutions, is often slow andcumbersome to access, is limited in scope andnot provided for in an integrated manner.Moreover, access to information by itself isnot sufficient; SMEs need tailor-madeinformation solutions, i.e., business informationservices that assess, verify and applyinformation to a specific business problem.

In Zimbabwe, official controls have made itvirtually impossible for SMEs and the informalsector in both urban and rural communities toaccess information. Under the Postal andTelecommunication Regulatory Authority ofZimbabwe (POTRAZ), stifling regulations arethe order of the day, giving excessive marketpower to a few players in the ICT market.

6.3.14 Corporate strategies and stateintervention

For most of the post-Independence periodcorporate managers have been forced todevote an inordinate amount of managementtime to meeting government regulations andbuilding relationships with bureaucrats andparty officials. This – together with the sheervolatility and unpredictability of governmentpolicies towards business, especially in therecent past – has taken its toll on strategydevelopment while creating an ‘introverted’managerial class, preoccupied with domesticissues to the point that entrepreneurs havelost sight of the bigger picture.

A striking (contemporary) example is thetime and energy that managers are nowspending on strategizing for indigenization.Corporate restructuring that makes littlesense, either financially or organizationally,is being undertaken purely to meet, or tobypass, legislation requiring that 51 percentof all businesses be owned by indigenousZimbabweans.

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In the absence of the necessary paradigmshift, management time and effort that oughtto be devoted to the ‘discovery’ of newmarkets, new processes, new ideas andnew products, will be used to defendcorporate earnings and the corporatefranchise from political interference, withadverse consequences for industrial growthand poverty reduction. Without doubt,uncertainty over future ownership will deterfresh investment and job creation.

Decades of state intervention in the economy,and especially the experience since 2000, havecreated a business-culture divide within theprivate sector. On one side are the successfulfirms across all sectors of the economy,whose managements are convinced that stateintervention is to blame for some, perhapsmost, of their problems. Consequently, theywant to see a level playing field in post-crisisZimbabwe rather than one littered with carrot-and-stick interventions of the kind that arenow commonplace.

At the other extreme are those, mostlysmaller and newer, businesses that havegrown up in a dependency-culture environ-ment and whose success or survival dependson state assistance of one kind or another.For them, problem-solving involves seekingofficial assistance – cheap finance, fertilizer,seed, preferential access to foreign exchangeand government or parastatal contracts. Theconsequence has been the promotion of rent-seeking rather than entrepreneurialism, andthe emergence of a dependency culturewithin the private sector.

From a political-economy – and also froman inclusive-growth and empowermentviewpoint – bridging this divide will be adifficult task, not least because the paradigmor culture shift on which much of the abovediscussion is predicated would shatter thedependency culture that is becomingincreasingly ingrained in Zimbabwebusiness.

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101

7.1 INTRODUCTION

In analysing developments in labour markets,human capital and the diaspora in Zimbabwe,we will use the three periods outlined inchapter 2 – the control regime period (1980–1990), the liberalization (ESAP) period(1991–1996) and the deepening crisis period(1997–2008).

This chapter first traces the nexus betweengrowth, employment and poverty, outliningthe role of the labour market in povertyreduction/eradication. While growth is anecessary condition for poverty reductionand its eventual eradication, it is not asufficient one. The quality of growth, asmeasured by its employment intensity, is asimportant as its quantum in reducing poverty.

Zimbabwe’s past performance demonstratesthat employment growth follows outputgrowth, reflecting the fact that the demandfor labour is derived from that of output.During periods of output growth, employ-ment grows at a slower pace and likewise,when output growth declines, employmentgrowth has a lagged response, reflecting itsquasi-fixed attribute. The employmentintensity of growth, as measured byemployment elasticities of output, suggeststhat the labour absorptive capacity of theeconomy has declined over time, in line withglobal trends.

While the elasticities were positive from1991 to 1999, they became negative between1999 and 2004 as the crisis deepened. As aresult of the deepening crisis, out-migrationintensified, resulting in a significant braindrain. Whereas Zimbabwe had made

Chapter 7

Labour Markets, Human Capital and theDiaspora

considerable progress in human capitalformation since independence, as the crisisdeepened, human capital formation has failedto bridge the gap created by out-migration,creating serious human capital deficits in theeconomy. This has exacerbated a situationalready made difficult by the HIV and AIDSpandemic, which is disproportionatelyaffecting the productive age group.

The constraints to growth and recovery inthe labour markets, human capital and thediaspora include the multiplicity of institutions,policy inadequacies in addressing the needsof the economy and, in particular, sustainedemployment creation and human capitalformation, and an inability to stem the braindrain.

7.2 THE LABOUR MARKETAND POVERTY REDUCTION

Poverty reduction, and its eventualeradication, has assumed prominence in thenew millennium; in fact, the first MillenniumDevelopment Goal targets halving povertyby 2015.1 In this framework, the labourmarket, and decent employment in particular,are expected to play an intermediating role(the nexus) between growth and povertyreduction. In this regard, a developmentstrategy that fully employs a country’s humanresources and raises the returns to labour(the wage) is considered a powerful tool forpoverty reduction/eradication (Islam, 2003).

The link between growth, employment andpoverty reduction is not automatic. Growthon its own is not sufficient to generate

1 Zimbabwe and UNDP, 2004: Zimbabwe Millennium Development Goals: 2004 Progress Report.

THE QUALITY OF

GROWTH, AS

MEASURED BY ITS

EMPLOYMENT

INTENSITY, IS AS

IMPORTANT AS ITS

QUANTUM IN

REDUCING

POVERTY

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significant improvements in employment andpoverty reduction. In the context ofsustainable human development,2 growth isseen as a means, rather than an end in itself.Such an approach acknowledges that acountry may achieve high levels of growth,but that does not necessarily translate intoemployment growth and poverty reduction.Growth is therefore seen as a necessary butinsufficient condition for employment growthand poverty reduction. What matters is notjust the level or quantum of growth, but itsquality, implying that the type of growthmatters as much as its level.

The importance of employment in povertyreduction lies in the fact that, quite often,the abundant resource that the poor possessis their labour, which they can use to earn alivelihood. The extent to which the poor canuse their labour determines their incomes.Complementing their labour is the return toit, which itself is dependent on the assetsthey possess. If therefore, the quantity ofemployment and the returns to labour arelow, poverty is often the outcome. Under-employment of labour and low returns to itare proximate causes of poverty (Heintz,2006; Osmani, 2005). Thus, for growth torapidly reduce poverty levels, the forcesbehind underemployment and low returns tolabour should be addressed, in which casethree factors – the growth factor, theelasticity factor and the integrability factor– become critical.

The growth factor relates to the rate at whichthe production potential of an economy isenhanced, while the elasticity factor indicatesthe extent to which the upward shift in theproduction function raises employmentpotential (both quantity and quality). Theintegrability factor refers to the extent towhich the poor are able to integrate intoeconomic processes such that, as growthand employment expand, they can takeadvantage of the opportunities that arise toimprove the quality and quantity of their

employment. For any given expansionin growth, the employment responsedepends on three key factors: the sectoralcomposition of output, choice of techniqueand the terms of trade (relative priceof output and input). The growthprocess associated with a bigger shift inemployment– the one that is moreemployment elastic – is most helpful to thepoor. The growth elasticity of employmentis therefore an important intermediary inshaping the extent to which growth translatesinto poverty reduction. Note that a highelasticity of employment does not necessarilyentail higher incomes for the poor: it simplyexpands the opportunities. It is the attributesof the poor (their capabilities) that will enablethem to integrate fully into an expandingeconomy, determining the extent to which thepoor benefit (the integrability factor).

Broadly stated, pro-poor growth is growththat benefits the poor and provides them withopportunities to improve their economicsituation (Kakwani et al., 2004). Note thatthere are different variants of pro-poorgrowth. The most applicable definitionrefers to relative or absolute pro-poorgrowth. The relative concept applies whengrowth benefits the poor proportionally morethan the non-poor. It therefore implies arelative reduction in inequality. The absoluteconcept is such that the poor receive theabsolute benefits of growth equal to, or morethan the absolute benefits received by thenon-poor. In this context, economic growthis usually associated with a decline inabsolute inequality (Kakwani et al., 2004;International Poverty Centre, 2007).

However, employment is not the only meansof translating growth into poverty reduction.Social provisioning, especially with respectto basic services that encompass education,health, and income grants, among others, iscritical. Hence a viable employment-centredstrategy for development should alsointegrate social policies (Heintz, 2006).

2 The UNDP defines human development as ‘a process of expanding people’s choices by enabling them to enjoylong, healthy and creative lives’.

THE GROWTH

ELASTICITY OF

EMPLOYMENT IS

THEREFORE AN

IMPORTANT

INTERMEDIARY IN

SHAPING THE

EXTENT TO WHICH

GROWTH

TRANSLATES INTO

POVERTY

REDUCTION

103

Chapter 7 – Labour Markets, Human Capital and the Diaspora

7.3 OVERVIEW OF PASTPERFORMANCE INZIMBABWE

7.3.1 Growth, employment andpoverty reduction: Ananalysis of the performance

The relationship between growth andemployment

It has been shown that the extent to whichgrowth reduces poverty depends on theelasticity factor and the integrability factor.It is therefore necessary to assess the extentto which growth has been employment-intensive (the output elasticity ofemployment). Figure 7.1 illustrates themovement of real GDP and employmentgrowth rates between 1986 and 2004.

Real GDP growth, which averaged 4 percentannually from 1985 to 1990, declined to 0.8percent during the reform period of 1990–96 and to –3.7 percent from 1997 to 2004 inthe crisis period. Likewise, employmentgrowth decelerated from an annual averagerate of 2.4 percent from 1985 to 1990 to 1.2percent during the reform period and –2.8percent during the crisis period.

Clearly, therefore, even before the onset ofthe crisis, growth had already declined to avery low level. As expected, the period ofnegative economic growth (1999–2004) isassociated with negative employmentgrowth. Significantly, the rates of growth ofemployment for this period are well belowthe annual average intercensal populationgrowth of 3.9 percent from 1982 to 1992and of 1.2 percent from 1992 to 2002. Thedecline in the annual average rate of growthof the population is due mainly to out-migration and the AIDS pandemic. Whereas14 percent of the population (20 percent ofthe labour force) were employed in theformal sector in 1980, by 2004, only 10percent of the population (13 percent of thelabour force) were so employed.3 On thebasis of an estimated 700,000 employees inthe formal sector in 2007, this implies thatonly 6 percent of the population is currentlyemployed in the formal sector. Ever sincethe early 1960s, the highest proportion of thepopulation employed in the formal sectorreached 17 percent in 1975. As shown inchapter 6 on private sector development, itis the informal economy that has borne theburden of employment creation.

3 The labour force or the economically active population refers to those aged 15 years and above who are availablefor the production of goods and services for cash or in kind. It comprises the employed and the unemployed.

Source: Calculated from CSO data

Figure 7.1: Growth in real GDP and employment, 1986–2004

15%

10%

5%

0%

-5%

-10%

-15%

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Real GDP growth Employment growth

104


Figure 7.1 shows that the rate of employmentgrowth is lower than that of the overallgrowth rate when the economy is expanding.In addition, the rate of employment growthdeclines more slowly when the economy isshrinking.

The employment intensity of growth, asmeasured by the employment elasticity ofgrowth, is therefore a critical indicator of thequality of growth. Table 7.1 shows theemployment elasticities and GDP growthbetween 1991 and 2003.4

Generally, the employment elasticities ofgrowth have declined markedly during theperiod under review, implying that therelationship between growth and employ-ment generation has weakened over time.In other words the additional employmentcreated at a given level of economic growthhas fallen over time. Even studies that

calculated such elasticities for earlier periodssuggest that the elasticities for Zimbabwe’smanufacturing sector declined from 0.65 forthe period 1963–79 to 0.06 over the period1980–96 (see Heintz, 2006).

The level of employment in the formal sectorhas declined over time, and has beenworsened by the current economic crisis, inline with global trends. Those groups thathad experienced a higher level ofemployment intensity of growth (youths andmales) in earlier periods appear to be thegreatest losers during the downturn (1999–2003).

The trend in the elasticities of employmentfor Zimbabwe differs from that for the restof the world and sub-Saharan Africa (Table7.2); the elasticities of the latter two initiallyincreased between 1995 and 1999 beforedeclining. The decline experienced by

Table 7.1: Employment elasticities and GDP growth

1991–1995 1995–1999 1999–2003

Total 1.84 0.26 –0.21

Youth 4.45 0.42 –0.68

Female 1.67 0.26 –0.13

Male 1.99 0.27 –0.28

Annual GDP Growth 0.10 3.70 –6.30

Source: Adapted from Kapsos (2005: 41, Table A2.9)

Table 7.2: Employment elasticities and annual average GDP growth

1991–1995 1995–1999 1999–2003

Employment elasticity

Zimbabwe 1.84 0.26 –0.21

World 0.34 0.38 0.30

Sub-Saharan Africa 0.73 0.82 0.53

GDP growth (%)

Zimbabwe 0.10 3.70 –6.30

World 2.10 3.60 3.50

Sub-Saharan Africa 1.10 3.20 3.20

Source: Compiled from Kapsos (2005, various tables)

4 The International Labour Office (ILO) is now computing detailed employment elasticities of growth for variouscountries across the five continents which are published as part of the Key Labour Market Indicators. However,its elasticities for Zimbabwe for the period 1991–95 are questionable.

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Zimbabwe, which had the highestemployment intensity of growth between1991 and 1995, is steep. Given that the labourregime was significantly deregulated afterthe early 1990s, rigidities in the labour marketmay not be responsible for this decline,especially during the latter period. As the2007 Confederation of Zimbabwe Industries(CZI) Manufacturing Sector Survey found,the main constraint to job creation had to dowith low levels of production, with labourmarket constraints hardly featuring at all(Table 7.3). The survey (2007: 30)established that ‘while in theory, the existenceof distortions in the labour market abound,the lack of enforcement appears to havemade these ineffective’.

Table 7.3 shows the major constraints toemployment creation in the manufacturingsector in 2005 and 2006; the results suggest,as expected, that the demand for labour isderived mainly from the production process.Note that labour market rigidity is not anissue, with no firm citing NationalEmployment Council (NEC) compliance(labour standards) as a constraint. Minimumwages and security regulations act asrigidities when foisted arbitrarily by someexternal force or institution. Where these arenegotiated, as is the case in Zimbabwe, theydo not cause unemployment or inflation. Theonerous employment-security regulationsthat undermined employment creation in the1980s were deregulated at the beginning ofthe ESAP period.

Table 7.3: Major constraints to employment inthe manufacturing sector

Major constraints 2006 2005

Raw-material shortage 55 65

Low production 64 41

Foreign currency 18 29

NEC compliance 0 12

Source: CZI Manufacturing Sector Survey(2007: 30)

Average real earnings

Since pro-poor growth requires both animprovement in employment levels and thereturns to labour, it is necessary to trace thetrends in real earnings. In virtually all sectorsof the economy, average real earnings havecollapsed because wage increases havefailed to match inflation. The average realearnings index for the whole economypeaked at 120 in 1982 before collapsing to10 by 2004.5 Wage increases have thereforefailed to compensate for increases ininflation, especially during the period ofcrisis. Such a marked decline in realearnings, coupled with the decline inemployment levels, exacerbates poverty.

The 2007 CZI Manufacturing Sector Surveyobserves that the collapse in real wages ishaving adverse effects on the economy,arguing that ‘in addition to a shrinkingeconomy, this has had a multiplier effect ofseriously depleting the country’s disposableincomes. The erosion of disposable incomeas workers get poorer is shrinking demandfor products as disposable incomes wane andhence reduces business viability’ (2007: 58).

Functional distribution of income andincome differentials

Calculations based on original data suggestthat the wages’ and salaries’ share of GrossDomestic Income (GDI) declined from anaverage of 49 percent during the pre-ESAPperiod to 41.5 percent during the ESAPperiod, and to 29.9 percent during the crisisperiod of 1997–2003 (Figure 7.2). Profits,on the other hand, increased in the sameperiods from an average of 50 percent, to58.4 percent, and to 73 percent. Theincreased share of profits had not beenaccompanied by increased investmentbecause the environment was characterizedby macroeconomic instability. In fact,investment is insignificant in gross terms.Such a development undermines the attain-

5 See chapter 2 on the macroeconomic situation.

THE AVERAGE REAL

EARNINGS INDEX

FOR THE WHOLE

ECONOMY PEAKED

AT 120 IN 1982

BEFORE

COLLAPSING TO 10

BY 2004

106


ment of sound industrial relations, which arecritical for increased productivity. In thisregard, the tripartite partners, government,business and labour have been trying toredress this development through negotiatinga win-win social contract.

Figure 7.3 shows income differentials for theunskilled, skilled and managerial gradesduring the period 1995–2000. It illustratesthat unskilled workers have borne the brunt

of the current economic crisis. Thisundermines a key principle in a sustainable-earnings structure – the need for equity andstability in the differentials, especially wherethese are based on a job-evaluation exercise.

Unemployment

Unemployment is measured using bothits broad (passive) and strict (active)dimensions.6 According to the broad

Source: Derived from CSO National Accounts, 1985–2003

Figure 7.2: Gross domestic income at current prices by factor (%)

Source: PriceWaterhouseCoopers, 2001

Figure 7.3: Differential earnings for different occupations

6 The use of the broader definition started with the 2004 labour force survey following recommendations of the1998 User-Producer of Statistics symposium attended by stakeholders. CSO, 2004 Labour Force Survey, March2006; CSO, Report on the Proceedings of the User-Producer of Statistics Symposium , Kadoma Hotel andConference Centre, 8–12 November 2004, February 2005.

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

120.00

100.00

80.00

60.00

40.00

20.00

0

Fin Int Services

Profit

Rent

Wages & salaries

60,000

50,000

40,000

30,000

20,000

10,000

01995 1996 1997 1998 1999 2000

Unskilled (general) Skilled (electrician) Managerial (admin.)

107


definition, unemployment ‘refers to thepopulation age 15 years old and above whichduring the seven day reference period, didnot work and had no job or business to goback to but who were available for work’.7

The strict definition requires that thosewithout a job and are available for workactively look for work. In developingcountries such as Zimbabwe, the broaddefinition is more appropriate because of thelimited methods of job search available,especially in the rural areas, and the realitythat, with limited job opportunities, most job-seekers are already discouraged fromlooking for work. Using the data for theseven days before the survey, the rate ofunemployment using the strict definition was4.4 percent (4.3 percent for males and 4.5for females), while using the broad measure,the levels were 9.3 percent (12 percent forfemales and 6.8 percent for males). Thelevels are too low and do not reflect reality.

The Poverty Assessment Study Survey(PASS) II estimated unemployment using analternative measurement to capture theeffects of structural changes in the economyon unemployment, and to deal with theproblem of underestimation arising from useof the conventional measure (Zimbabwe,2006). Structural unemployment includesthose who were usually unemployed, thosewho were involuntarily in the informal sector,the very poor and poor communal andresettlement farmers, the very poor and poorunpaid family workers, the very poor andpoor in the informal sector, and the very poorand poor engaged in public works. Using thisalternative definition, the rate of structuralunemployment in Zimbabwe was 63 percentin 2003. Structural unemployment was higherfor females (70 percent) than for males (56percent) because of the inclusion of the verypoor and poor in agriculture and the informaleconomy, who are largely women. Ruralareas had a higher structural unemploymentrate (62 percent) than urban areas (35percent).

The Impact of HIV and AIDS

There has been a belated acceptance thatHIV and AIDS is a workplace challenge. Itposes serious threats to workers’ rights sincepeople living with HIV and AIDS are subjectto stigmatization, discrimination and hostilityin their communities and at work. HIV andAIDS has a significant impact on thecomposition of the labour force in terms ofage, skills and experience, with the productiveage group 15–49 years the most affected.Losses of human capital due to HIV andAIDS are disproportionately higher amongskilled, professional and managerial workers.The pandemic has profound adverse impactson the economy, workforce, businesses andthe infected and affected individuals and theirfamilies.

HIV and AIDS has manifested itself in theworkplace through discrimination in employ-ment, social exclusion of affected persons,distortions in terms of gender inequality,increased number of orphans often resultingin increased child labour, disruptedperformance of small enterprises and theinformal economy. It has also manifesteditself through low productivity, depletedhuman capital, challenged social securitysystems and undermined occupational safetyand health. The impact of HIV and AIDS atthe enterprise level can be broken down intothree categories, namely, direct, indirect andsystemic costs. Direct costs, which areeasier to quantify, arise from medical careand insurance costs, pension and retirementcosts, recruitment and retraining costs, andcosts of HIV and AIDS programmes.Indirect costs include reduced productivity,morbidity, and absenteeism due to illness andbereavements. The systemic costs relate toloss of skills, loss of tacit knowledge, reducedmorale and breakdown of workplacediscipline. HIV and AIDS is exacerbated bypoverty and vice versa, making it a challengeto the fundamental principles and rights atwork, and more importantly, the decent workagenda (see SAfAIDS and HIVOS, 2007).

7 Central Statistical Office, ‘2004 Labour Force Survey’, March 2006, p. 27.

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Even though government promulgatedStatutory Instrument 202 of 1998,‘Zimbabwe Labour Relations (HIV andAIDS) Regulations’, the response at theworkplace was slow, especially given thatin the early years it was almost exclusivelyseen as a medical problem. For instance, thepublic sector policy on HIV and AIDS wasonly launched in 2005 in response to theseverity of the pandemic on the provision ofpublic services. It had emerged that between1995 and 2002, the largest number of publicemployees who took sick leave of up to 90days was in the 30–49 age group, includingprofessional and technical grades, and thatmore female than male staff members hadleft the service on medical grounds.Terminations of service on medical groundshad increased from 0.05 percent in 1995,peaking at 3.23 percent in 2001 (see PublicService Commission, 2007). As the reportconcedes, before 2005, the priority on HIVand AIDS in government ministries wasperceived to be low as most managers didnot consider HIV and AIDS programmesas their core business, while others felt theywere not equipped to take a leading role inHIV and AIDS issues.

7.3.2 Developments in humancapital formation, 1980–2007

Human capital is defined as ‘the stock ofproductive skills and technical knowledgeembodied in labour’. This refers thereforeto the acquired and useful abilities of peoplethat prepare them for the world of work.Investment in human capital is mainlythrough education and training, therebyenhancing the integrability factor.

Primary, secondary and technical

Human capital formation during the colonialera was skewed in favour of whites. It hasbeen noted that 25 percent of black childrendid not start school, while over 60 percentdid not complete full primary education, andonly 4 percent completed four years ofsecondary education (Riddell, 1979).Secondary education was divided into two

systems, F1 and F2, the latter offering apractical curriculum and the former a moreacademic curriculum. This dual approachwas perceived to have a racial tone in that itwas offered only to blacks and thereforeseen to be inferior. As a result, F2 schoolswere phased out at independence andconverted into conventional schools in 1981,and an opportunity was lost to developtechnical and vocational education using theframework already in place.

A central component in skills-formation wasthe apprenticeship-training system whichwas established in 1934. According to theNational Manpower Survey (Zimbabwe,1981a), this skills-training programme wasnot only racially biased but was designed toensure that it produced only a few graduates.Of the 5,103 apprentices in February 1981,56 percent were Whites, 26 percent wereAfricans, 7 percent were Coloureds and 1percent were Asians. Whites dominated thecritical technical areas such that theyrepresented 89 percent of apprentices in theaircraft field, 84 percent in electricity, and68 percent in engineering. Intakes ofapprentices averaged only 1,000 per annumin the pre-independence period. Furthermore,the system relied on immigration to cater forskills requirements, which undermined thedevelopment of comprehensive apprentice-ship training and technical education.Consequently, at independence in 1980,blacks represented only 36 percent of allprofessional, technical and related staff,and only 24 percent of managerial andadministrative personnel.

The post-independence government soughtto reverse the racial imbalances in educationprovision and skill formation by adopting apolicy of universal primary education.Primary school enrolment became almostuniversal at 97 percent.

Tertiary

To address the racial imbalances inTechnical Vocational Education and Training(TVET), government built five additional

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technical colleges between 1980 and 1990,which were later upgraded to polytechnicsin 2001. The apprenticeship system wasrevamped to expand its catchment, and atrade-testing system was introduced in 1981to classify workers into Skilled Workerclasses 1 to 4, Class 1 being the highest. Therationalization of TVET in Zimbabwe wasdone under the comprehensive policydocument of 1990 ‘Rationalization ofTechnical and Vocational Education inZimbabwe’.8

In 2004, it became possible to upgrade TVETqualifications to graduate and post-graduatelevels. A Bill establishing the ZimbabweQualifications Authority (ZIMQA) wasdrafted in 2005 to feed into the requirementsof the SADC 1997 Protocol on Education andTraining, which envisages the establishmentof a Regional Qualifications Framework(Zimbabwe, 2006a).

7.4 THE DIASPORA

7.4.1 The size and nature of thediaspora

Since independence in 1980, emigration hasoccurred in two main waves. The first, duringthe early 1980s, involved mainly whiteZimbabweans. It was reported that from1980 to 1983 the country recorded a loss of19,300 skilled and professional workers,mostly to South Africa, Australia and theUK. This migration wave was somewhatmitigated by returning Zimbabweans withhigh qualifications but limited experience,who filled most of the vacated posts(Zinyama, 2002).

The second wave began soon after thedisputed general elections in 2000 and thecommencement of the fast track land reformprogramme. The destinations have variedfrom nearby southern African countries to

as far away as New Zealand, Australia, theUnited Kingdom and the USA. What beganas a trickle has turned into an exodus thathas bled the country of a reservoir of skillsthat neighbouring countries and those abroadhave welcomed.

From survey data it is estimated that thepopulation of Zimbabweans resident outsidethe country is at least over two million. SouthAfrica has the largest number, slightly overone million as at the end of 2007. Table 4shows an extrapolated progression since thelast census of 2001.

Table 7.4: Zimbabwe migrant population inSouth Africa

Year Estimated migrant population(year-end)

2001 131,886*

2002 175,715

2003 255,604

2004 375,935

2005 522,364

2006 763,425

2007 1,022,965

* Actual, per Statistics SA census

Source: Makina (2007)

According to the International Organizationfor Migration, the UK has the second-largestpopulation of Zimbabweans living abroad,with an estimated 200,000–500,000, whileBotswana is estimated to have between100,000 and 300,000. Other Zimbabweansare scattered throughout the USA, Canada,Australia, New Zealand as well as otherneighbouring countries.

7.4.2 Driving forces ofcontemporary migration

Economic decline and political reasons areseen as the main supply-push factors drivingmigration of both skilled and unskilled

8 Ministry of Higher and Tertiary Education (1990), Rationalisation of Vocational and Technical Education inZimbabwe, Harare.

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workers (Chetsanga and Muchenje, 2003;Bloch, 2005; Makina, 2007). By and large,Zimbabweans living abroad have nowacquired the critical feature of a traditionallydefined diaspora, i.e., a homogeneous peoplewith a common sense of displacement, bothvoluntary and involuntary, with a hope ofreturning home one day when the conditionsthat drove them into migration are removed.At least three surveys indicate that two-thirds of Zimbabwean migrants intend toreturn when the political and economicsituation improves (Bloch, 2005; Chetsangaand Muchenje, 2003; Makina, 2007). Thereis clearly therefore scope for involving thediaspora in economic recovery processes intheir home country.

7.4.3 The impact of the brain drain

Emigration survey data show that over 80percent of people migrating to South Africaand the UK are between 21 to 40 years ofage (Bloch, 2005; Makina, 2007).Information from the UK Home Office SkillsAudit on pre-migration activities of

respondent migrants provides furtherevidence on the high skills base of thoseleaving Zimbabwe for the UK, showing thata very large proportion had been inmanagement and professional jobs prior toleaving.9

The impact of the brain drain on publicservice delivery has been devastating. Forexample, in the case of health care, it isestimated that more than 80 percent of thedoctors, nurses, pharmacists, radiologists andtherapists who trained since 1980 have left.By 2003, the health sector had lost over 2,100medical doctors and 1,950 State CertifiedNurses, mostly to South Africa, Botswana,Namibia, the UK and Australia (Chikanda,2005).10 Table 5 below highlights the extentof the brain drain by 2006.

The major medical training institution, theUniversity of Zimbabwe College of HealthSciences, has also suffered from the braindrain. By March 2007, the institution had anoverall vacancy rate of 60 percent. Table7.6 shows the overall dire situation in themedical college.

Table 7.5: Staff situation at the major referral hospitals as at 31 January 2006, selected posts(Harare, Parirenyatwa, Chitungwiza, Mpilo and United Bulawayo Hospitals)11

Designation Establishment In post Vacancies Vacancyrate (%)

Doctors/ Specialist Heads of Dept 22 1 21 95%

G.M.O. 106 27 79 75%

Chief Government Pathologist 3 1 2 67%

Junior Registrar 62 0 62 100%

Chief Medical Laboratory Scientist 6 2 4 67%

Senior/Principal Medical Laboratory Scientist 4 2 2 50%

State Certified Medical Laboratory Technician 171 99 72 42%

State Certified Medical Laboratory Technician 50 3 47 94%

Registered General Nurse/Sister 2,852 1,936 916 32%

State Certified Nurse 392 284 122 88%

9 Rachel Kirk, ‘Skills Audit of Refugees’ Home Office Online Report 37/04, <http://www.homeoffice.gov.uk/rds/pdfs04/rdsolr3704.pdf>.

10 ‘A Review of National Strategies to Manage Mobility and Migration of Zimbabwean Skilled Professionals: TheHealth Sector Experiences’. A presentation by Dr O.L. Mbengeranwa, Chairman of the Health Service Board atthe ‘Strengthening National Capacities for Addressing Migration and Development in Zimbabwe’ workshop,Troutbeck Inn, Nyanga, 18–19 September 2006.

11 ‘A Review of National Strategies to Manage Mobility and Migration of Zimbabwean Skilled Professionals: TheHealth Sector Experiences’, A presentation by Dr O.L. Mbengeranwa, Chairman of the Health Service Board atthe ‘Strengthening National Capacities for Addressing Migration and Development in Zimbabwe’ workshop,Troutbeck Inn, Nyanga, 18–19 September 2006.

THE IMPACT OF

THE BRAIN DRAIN

ON PUBLIC

SERVICE DELIVERY

HAS BEEN

DEVASTATING

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The impact of this huge brain drain whichhas affected all sectors is that it will act as aconstraint on the speed of Zimbabwe’srecovery given that a high level of humancapital is one of the key ingredients fordomestic development and for attractingFDI. Miyamoto (2003) shows that enhancedhuman resources development increasesFDI by making the investment climate of acountry attractive to foreign investors. Onthe other hand, FDI contributes to humanresource development because multinationalenterprises can be active providers ofeducation and training. They bring new skills,information and technology to host countries.Thus, there is a virtuous circle betweenhuman resource development and FDI.

7.4.4 The impact of remittances

The most tangible link between migration anddevelopment is through the impact ofremittances. World Bank data show thatrecorded remittances sent home by migrants

from developing countries reached overUS$200 billion in 2006, more than double thelevel in 2001. However, the true value ofremittances, including unrecorded flows viaformal and informal channels, is substantiallyhigher. According to the World Bank,remittances through informal channels couldadd at least 50 percent to the globallyrecorded flows.

Survey data on Zimbabwean migrants alsosuggest that given opportunity migrantswould like to contribute towards businessrelated activities. Table 7.7 regardingmigrants in South Africa and the UK showsthat sending remittances ranks fourth amongways they would like to contribute to thedevelopment of Zimbabwe.

While there is a great willingness tocontribute to the development of Zimbabwe,migrants cite some critical changes thatwould help them to contribute effectively,viz.: political changes (60 percent), economic

Table 7.6: Staff situation at the University of Zimbabwe College of Health Sciences: March 2007

Designation Establishment In post Vacancies Vacancyrate (%)

1 Anaesthesia & Critical Care Medicine 16 2 14 88%

2 Anatomy 26 1 25 96%

3 Chemical Pathology 11 7 4 36%

4 Clinical Pharmacology 11 4 7 64%

5 Community Medicine 17 8 9 53%

6 Dentistry 12 6 6 50%

7 Haematology 7 0 7 100%

8 Histopathology 8 1 7 88%

9 Immunology 8 4 4 50%

10 Institute of Continuing Health Education 2 1 1 50%

11 Medical Laboratory Sciences 9 9 0 0%

12 Medical Microbiology 11 7 4 36%

13 Medicine 26 10 16 62%

14 Nursing Science 10 9 1 10%

15 Obstetrics and Gynaecology 26 14 12 46%

16 Paediatrics and Child Health 26 10 16 62%

17 Pharmacy 11 8 3 27%

18 Physiology 21 1 20 95%

19 Psychiatry 16 7 9 56%

20 Rehabilitation 10 7 3 30%

21 Surgery & Radiology 30 10 20 67%

Total 314 126 188 60%

Source: The Dean, University of Zimbabwe – College of Health Sciences

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opportunities (50 percent), voting rights (49percent) and better exchange-rate policy (47percent).

The International Fund for AgriculturalDevelopment (IFAD) reported that in 2006Zimbabwe received US$361 million inremittances excluding hand-in-handtransfers, representing 7.2 percent of thecountry’s 2006 GDP. The extent of under-reporting could be severe. An estimate ofremittances in money and kind extrapolatedusing a conservative remitting population ofone million migrants in the diaspora suggeststhat the home country could be receiving asmuch as US$500 million per year, which is10 percent of GDP and over 50 percent ofexports. The RBZ data show US$5.2 million(2006) and US$14.0 million (2007) as havingbeen transferred through money transferagencies it supervises. What is clear is thatno one knows with any degree of certaintythe exact magnitude of remittances comingto Zimbabwe because remittance flowslargely occur through informal channels andhence are unrecorded, this creates problemsfor policy making.

What is clear is that remittances play a majorrole in supporting livelihoods in contemporaryZimbabwe. A 2007 survey carried out by theHarare-based Mass Public Opinion Institute(MPOI) on survival strategies employed bythe Zimbabweans at home found thatremittances from friends and relatives rank

as the fourth most important source oflivelihood for households after salary, farmingand ‘off-farm’ and ‘extra-job’ activities.Remittances are reported to be an alternativesource in providing for food (12 percent relyon them), health care (11 percent) and cashincome (11 percent). In addition, they havebecome a critical source of foreign currencyfor the Government12 (MPOI, 2007). Anearlier study on Remittances, povertyreduction and the informalisation ofhousehold wellbeing in Zimbabwe byBracking and Sachikonye (2006) found thatin addition to reducing poverty, theycontribute to productive accumulation.Another study by Pendleton et al., (2006)confirms the extent to which remittanceshave become an essential part of householdbudgets and have reduced vulnerability atthe household level through poverty reductionin both rural and urban households. About90 percent of the 705 migrant households(i.e., households with at least one memberwho is resident outside the country) sampledthroughout the country reported that familymembers who have migrated remit cashback home regularly using both formal andinformal channels. An analysis of theimportance of remittances in meetinghousehold expenses shows that the netcontribution of remittances ranges from 80-93 percent of total household expenditure.

In an economy in which the financial systemdoes not work properly, remittances provide

12 A government minister recently acknowledged as much in a private conversation with a reporter. Asked aboutthe gravity of the economic crisis, he reportedly said: ‘What’s keeping us going is (sic) remittances fromZimbabweans who left the country. Without those, 50 percent of the people who are struggling to survive at themoment would die’ (‘Lunch with a dissident minister’ The Sunday Times (UK), 8 July 2007)

Table 7.7: Five most popular ways that respondents would like to contribute to development intheir home country

UK South Africa Total

Investment in business 62% 53% 58%

Transfer skills through working in Zimbabwe 44% 31% 38%

Transfer skills through training in Zimbabwe 44% 31% 37%

By sending remittances 32% 27% 29%

Investment in land development 34% 22% 28%

Source: Bloch (2005)

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entrepreneurs with an alternative source ofstart-up capital, particularly in the informalsector. A study on the uses of remittancesby households in rural southern Zimbabweby Maphosa (2007) shows that whileconsumption tops the list, remittances havevaried uses. Table 7.8 below illustrates theuses observed by the study.

While there is much emphasis on the beneficialeffects of remittances, there are social coststo take into account. Families have beenseparated and the standard of living in thediaspora is scaled down in order to supportthose left home. Bracking (2003) provides anexample of a migrant in Birmingham (UK)who reduced her living costs by living in ahostel with fellow Zimbabweans and walkingto work to save money for remittances. Asimilar situation obtains in South Africawhere cases of migrants living in crowdedaccommodation and informal settlements arecommon. A survey in Johannesburg found that95 percent of 4,654 respondents had relativesthey support back home, and remittancesconstituted 15–20 percent of their earnings(Makina, 2007). It is noteworthy that beforethe crisis remittances were an insignificantproportion of GDP. Recovery efforts thatemphasize return of skills need tosimultaneously focus on remittances as partof the financial start-up capital for returnees.

7.5 CONSTRAINTS TO THEGROWTH AND RECOVERYOF LABOUR MARKETS,HUMAN CAPITAL AND THEDIASPORA

7.5.1 Institutional constraints(labour administration)1313131313

The key ministries that have jurisdiction overlabour-market issues include the Ministry ofPublic Service, Labour and Social Welfare,and the Ministry of Youth Development andEmployment Creation. Other ministries, suchas Higher and Tertiary Education, Small andMedium Enterprises Development, andWomen’s Affairs, Gender and CommunityDevelopment also overlap into labour-marketissues.

In line with the ILO’s Labour AdministrationConvention of 1978, the Ministry of PublicService, Labour and Social Welfare isresponsible for coordinating and runningthe labour administration system ofZimbabwe. However, the Ministry of YouthDevelopment and Employment Creation isresponsible for issues pertaining to youthempowerment and employment creation.Clearly therefore, there are vast areas ofoverlap in the responsibilities of these two

Table 7.8: Uses of remittances

Remittance use Number of remittance- Frequencyreceiving households

Food 79 98.8%

Fees 63 78.8%

Medical expenses 52 65.0%

Livestock 47 58.8%

Building and consumer goods 25 53.8%

Agricultural inputs 43 31.2%

Business 8 10.0%

Other 31 38.8%

Source: Maphosa (2007, p.130)

13 The ‘system of labour administration’ covers public administration bodies including ministerial departments,parastatal and regional or local agencies or any other form of decentralized administration and any institutionalframework for the coordination of the activities of such bodies and for consultation with and participation ofemployers and workers and their organizations (ILO Convention 150 & Recommendation 158 of 1978).

RECOVERY

EFFORTS THAT

EMPHASIZE

RETURN OF SKILLS

NEED TO

SIMULTANEOUSLY

FOCUS ON

REMITTANCES AS

PART OF THE

FINANCIAL START-

UP CAPITAL FOR

RETURNEES

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ministries, often resulting in duplication.Furthermore, each ministry has tended toconcentrate on its own interventions, withlittle coordination with the other.

Another ministry that overlaps into labour-market issues is the Ministry of Small andMedium Enterprise Development. Thisministry was created after the 2005Parliamentary elections, prior to whichSMEs came under the Ministry of Industryand International Trade and issues relatingto the informal economy fell under theMinistry of Youth Development, Genderand Employment Creation. The Ministry ofSmall and Medium Enterprises is nowalso responsible for the promotion of theinformal economy and its integrationinto the mainstream economy. However, inspite of the SME Fund created by theReserve Bank of Zimbabwe in 2006,14 theresources available have been inadequate.The Ministry of Women’s Affairs, Genderand Community Development is responsiblefor the empowerment of women and gendermainstreaming, implying that it also overlapsinto labour-market issues. However, itremains marginalized and poorly resourced.

The major weakness of these various labour-market interventions is that they are notproperly coordinated, they are fragmented,duplicate each other, and are poorly funded.They also have a supply focus, with ministriesimplementing programmes even when theydo not have the requisite competencies (e.g.,in the area of business development).For instance, the centralized labour admin-istration system is such that decentralizedbipartite structures such as the NationalEmployment Councils, formed by unions andemployers at the sectoral level, have a verylimited role, mainly in collective bargaining.Industrial-relations management andemployment services are undertakenpredominantly by Ministry of Labourofficials.

Interviews with senior officials in the variousministries revealed a lack of clarity on thelimits of their responsibilities in dealing withlabour issues, and in particular with SMEdevelopment and employment creation. Thefrequent reorganization of these ministrieshas not helped matters. However, thetendency to create ministries to deal withspecific issues (e.g., SMEs, Indigenization,Youth Development) creates the impressionthat it is the public sector that has the primaryresponsibility for dealing with them ratherthan playing a facilitating role.

7.5.2 Legal constraints

The system of labour administration ischaracterized by a multiplicity of laws, resultingin segmentation. For instance, the Labour Act[Chapter 28:01] applies only to the privatesector;15 while in the public sector, the PublicService Act [Chapter 16:04] applies. Eventhough the Amendments of 2002 had partiallyincluded the public sector under the LabourRelations Act, Amendment No. 7 of 2005 tookthem back to the Public Service Act. ThePublic Service Act does not recognize thecollective-bargaining rights of publicemployees, and its structures for dealing withgrievances and disputes are heavy-handedand unilateral. In fact, the Public Service Actdoes not have provisions for unions, andthe various associations in existence do nothave trade union rights; although a JointNegotiating Forum was established in 1998,its role is merely advisory. The Urban CouncilsAct [Chapter 29:15] offers procedures andconditions at variance with those in the LabourAct, resulting in a conflict of laws in that aparty to a dispute may choose to take recoursevia the Labour Act or via the Urban CouncilsAct.

The Labour Act also contains draconianmeasures meant to curtail trade unionactivities, including the proscription of the

14 A ZW$16 Billion (US$29 000) Small to Medium Enterprises Revolving Fund was established following theBank’s announcement of the Mid-Term Monetary Policy Statement in July 2006.

15 Prior to 2003, the Labour Act was called the Labour Relations Act.

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right to strike. Apart from criminalizingparticipation in unlawful collective job action,Section 109 of the Act also empowers anaffected party to claim damages from anemployee or trade union for losses incurredas a result of the strike. Unions risk theirregistrations being suspended for a period oftwelve months, and cannot collect sub-scriptions during this period. Furthermore,recourse to draconian laws such as the PublicOrder and Security Act (POSA) [Chapter11:17], the Access to Information andProtection of Privacy Act (AIPPA) [Chapter10:27] and the Criminal Law (Codification andReform) Act (No. 23 of 2004) are ofteninvoked to curtail trade union freedoms. Eventhough the High Court ordered the State notto interfere with trade union meetings in2002,16 this is often ignored.

National Employment Councils, which arebest suited to dealing with disputes withregard to conditions of service in their sectors,are merely conciliatory bodies with noeffective powers, implying that they still haveto refer matters to the Ministry of Labour,resulting in a backlog of cases as a result ofthe centralized labour administration system.Despite the streamlining of the dispute/grievance procedures, and the introductionof a specialized Labour Court to deal withlabour matters, delays still characterize theirresolution, though the situation is muchbetter than in previous years.

Furthermore, the Manpower Planning andDevelopment Act [Chapter 28:02] grants theMinister of Higher Education unilateralpowers to manage the Zimbabwe ManpowerDevelopment Fund (ZIMDEF) which is thecountry’s national skills development fund ashe/she deems fit, resulting in it being run in anon-transparent and unaccountable manner.This has been a bone of contention withindustry, which feels let down by being unableto access the resources earmarked for skillstraining to which they have contributed.

7.5.3 Policy constraints

A key policy constraint is that, whileZimbabwe inherited a dual economy, withaspects of enclavity (separate existence),post-independence policies have only servedto entrench this dual structure. The weaklabour absorptive capacity of the economycan be traced to this dual and enclavestructure, where the formal sector atindependence employed only 20 percent ofthe labour force, the remaining 80 percentbeing located in the marginalized andvulnerable, mainly communal, non-formalsector. Instead of the economy beingformalized as was to be expected, aninformalization of the economy has occurred,such that the formal sector now accountsfor only around 13 percent of the labourforce.17 The majority of the labour forcetherefore continues to be simultaneouslymarginalized and excluded from the dynamicpart of the economy, the formal sector,whose labour absorptive capacity hasdeclined, as reflected in the negativeemployment elasticities of output.

While government sought to protect workersthrough labour legislation during the firstdecade of independence, that protection wasonerous, with unintended unemploymentconsequences. The determination of wagesby government, which characterized theperiod of the 1980s, undermined the role oflabour-market institutions. The period ofESAP saw a deregulation of labour laws toachieve labour-market flexibility. However,the pendulum swung to the other extreme,resulting in a wave of retrenchments. Thus,neither extreme case – over-regulation andflexibility – helped the cause of employmentcreation and poverty reduction. Finding abalance between the imperatives of flexibilityand security is an ongoing challenge thatrequires negotiation in order to arrive at aform of regulated flexibility.

16 Zimbabwe Congress of Trade Unions v. The Officer Commanding Police Harare District and the Commissionerof Police, H-H 56/2002.

17 The growth of the informal economy as the formal sector shrunk is illustrated in chapter 6 on private sectordevelopment.

WHILE ZIMBABWE

INHERITED A DUAL

ECONOMY, WITH

ASPECTS OF

ENCLAVITY

(SEPARATE

EXISTENCE), POST-

INDEPENDENCE

POLICIES HAVE

ONLY SERVED TO

ENTRENCH THIS

DUAL STRUCTURE

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With respect to human capital formation, akey policy challenge is the need to ensurethat education and training is more demand-driven: the current supply bias results in apoor fit between demand and supply. Thecurrent secondary-education curriculumdoes not develop children effectivelyaccording to their unique needs andinclinations, and does not lay a solidfoundation for employability and theintegrability of its graduates into the economy.A key weakness of the secondary-schoolcurriculum is that, having an academic bias,it is not ‘all inclusive’ and lacks a ‘pathwaysapproach’ that caters for the diverse abilitiesand interests of the pupils.

An important policy issue with respect tothe overexpansion of the education andtraining system – which has compromisedquality, resulting in lack of internationalrecognition of Zimbabwean qualificationsin recent years – is the need to ensure thatexpansion is within the limits of the availableresources. The recent expansion of theuniversity system to no less than nine suchinstitutions is a case in point. The situationis compounded by the recent paralleldevelopment whereby technical collegesare also offering degrees. The proliferationof such institutions coincides with thedecline in quality and the lack of recognitionof Zimbabwean qualifications at regionaland international levels.

7.5.4 Financial and capacityconstraints

The multiplicity of institutions involved inlabour administration, and the rapid andmassive expansion of education and trainingprovision have stretched available resourcesto the limit. With the withdrawal of cooperatingpartners after 1999, this has left a hugefunding gap, undermining quality. Because ofa lack of resources, refurbishment andreplacement, the state of infrastructure andequipment has continued to deteriorate. The

role and importance of donors, especially withrespect to technical and vocational educationand training, is demonstrated by the fact that,for example, USAID built and equippedBelvedere Technical Teachers’ College andMutare Polytechnic, while GTZ (GermanTechnical Assistance) equipped HarareInstitute of Technology, Msasa VocationalTraining Centre and Masvingo Polytechnic,and the Chinese built Chinhoyi TechnicalTeachers’ College.

There is therefore an urgent need torationalize the provision of technical andvocational education and training, and topromote stakeholder participation in funding.The lack of resources has resulted in lowand unattractive salaries in the public systemof labour administration, and in educationand training systems. Coupled with the braindrain, it has effectively undermined thecapacity of the systems to deliver an efficientand effective service.

A recent Zimbabwe National Student Unioncongress report aptly described conditionsin the education sector:

‘A review of pertinent data shows thatZimbabwe is facing a sharp decline inpublic expenditure on higher education,deteriorating teaching conditions,decaying educational facilities andinfrastructure, perpetual student unrest,erosion of university autonomy, ashortage of experienced and welltrained teaching staff, lack of academicfreedoms and an increasing rate ofunemployment among collegegraduates.’18

7.5.5 Constraints to returnmigration

Empirically, constraints to the developmentof human resources and immigration couldbe gleaned from survey data which examineconditions migrants require for them to return

18 Financial Gazette, 31 January 2008.

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to Zimbabwe. The conditions for return aregood proxy indicators for constraints thatinhibit immigration, human resource develop-ment and retention. A survey in the UK andSouth Africa produced results illustrated inTable 7.9.

It is not surprising that economic and politicalconsiderations top the list of constraints orconditions for return as these are the mainreasons cited as reasons for migrating.

7.6 SUSTAINABLE ANDINCLUSIVE RECOVERYPATHWAYS AT THE LEVELOF STRATEGIC THRUSTSAND DETAILED POLICYRECOMMENDATIONS

7.6.1 Strategic objectives

On the basis of the foregoing analysis, thekey strategic objectives will be to:

• Rationalize the labour administrationsystem to create a unitary, decentralizedsystem.

• Reorganize Technical and VocationalEducation and Training to make it moredemand-driven and responsive to theneeds of the economy, including theinformal economy.

• Promote sustainable and inclusiverecovery ‘pathways’ in the labourmarket, and in education and trainingprovision (promoting integrability).

• Promote a shared approach to financing.

• Remove constraints that deter returnmigration (i.e., return of skills).

• Develop a manpower recovery plan forthe public sector.

• Develop strategies that maximize thedevelopmental potential of the diaspora.

• Mainstream HIV and AIDS as aworkplace challenge.

7.6.2 Sustainable and inclusiverecovery pathways

Rationalization of the labouradministration system to create anintegrated, coordinated and inclusivedecentralized system

Global trends indicate that labouradministration systems are being stream-linedin line with ILO Convention 150 andRecommendation 158 of 1978. The Con-vention provides detailed functions of acoordination unit of the labour administrationsystem (the competent authority), which isusually the Ministry of Labour. It emphasizes

Table 7.9: Conditions for return to Zimbabwe by country of residence (%)

Condition for return South Africa UK All

Improved political situation 72% 87% 80%

Improved economic situation 76% 83% 80%

Improved security 48% 72% 60%

Better health care 48% 64% 57%

Better employment prospects 47% 53% 50%

Better education for children 42% 51% 47%

Improved infrastructure 36% 43% 40%

After saving enough money 27% 39% 33%

To retire 28% 36% 32%

Offer employment 28% 31% 30%

Better education for myself in Zimbabwe 30% 25% 28%

Other 3% 3% 3%

None 6% 1% 3%

Source: Bloch (2005)

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consultation, cooperation and negotiationbetween the public authorities and the mostrepresentative organizations of employers andworkers as essential at local, national andregional levels and within the various sectors.

In consultation with other social partners, thecompetent bodies should:

• Develop, adopt, apply and review labourstandards, including all relevant laws andregulations.

• Regulate terms and conditions of employ-ment through collective bargaining.

• Ensure free exercise of employers’ andworkers’ right of association.

• Put in place programmes to promotelabour relations that encourage pro-gressively better conditions of work andworking life, respecting the right toorganize and bargain collectively.

• Provide advisory services to enhancelabour relations, promote the fulldevelopment and utilization of machineryfor voluntary negotiation.

• Provide conciliation and mediationfacilities appropriate to nationalconditions to resolve disputes.

• Coordinate employment services,employment promotion and creationprogrammes, vocational guidance andtraining programmes, and unemploy-ment benefit schemes.

• Promote methods and procedures ofconsulting employers’ and workers’organizations on employment policiesand promote their cooperation in theimplementation of such policies.

• Share responsibility for the managementof funds created to counter under- andunemployment or assist in the employ-ment of certain categories of workers.

• Constantly review the structures of thenational system of labour administration,in consultation with social partners.

Thus, labour administration plays its full rolein development, if:

• It contributes to the maintenance of ahealthy social climate that promotesdevelopment;

• The services that it offers are effectiveand correspond to the needs of users;

• The services and products contribute tothe design of development strategies; and

• The social partners participate.

In the case of Zimbabwe, the first challengeis to reorganize the system of labouradministration so that a unitary system iscreated under the Ministry of Labour. Themultiplicity of institutions dealing withlabour issues should be rationalized into onein which key social partners are consulted.When labour-market policy falls under oneauthority, it is easier to create conditions fora coordinated effort and to develop acommon vision. The involvement of workersand employers creates a culture of jointresponsibility, which promotes a long-termcommitment to problem-solving.

A second challenge is the need to decentralizethe system, especially by empoweringNational Employment Councils at sector leveland works councils at shop-floor level, whichare currently focusing almost exclusively oncollective bargaining. These structures arebetter placed to play an active role in labour-relations management, employment servicesand training, among other functions, to avoidthe current centralization and its attendantsupply bias.

Reorganizing Technical and VocationalEducation and Training to make it moredemand-driven and responsive to theneeds of the economy, including theinformal economy

There is a need for the education and trainingsystems to be re-oriented from their currentsupply focus towards more flexible, demand-driven systems, in line with global trends:

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‘cooperation between the government andthe private sector is the cornerstone of theprocess through which the government rolechanges as development proceeds’(Middleton et al., 1993: 129). As they saylater,

‘The challenge is to move from policiesdominated by social and supplyobjectives and programs financed andprovided by governments to policies andprograms that respond to market forcesand promote employer and privatetraining, and that establish appropriatecomplementary and supportive roles forthe state.’ (253)

Bureaucracy and inflexibility may be reducedby allowing stakeholder participation in thegovernance structures at all levels. Given thisnew thrust, whereby training is viewed as ashared responsibility, there are implicationsfor the governance structure of the publiclyrun vocational education and traininginstitutions. The key issue here will be howto transform the supply-driven, centrallycontrolled and bureaucratic public institutionsto make them more responsive to marketforces.

According to the World Bank, ‘to respondto the needs of the economy demands adegree of freedom from short-termbureaucratic control that is difficult toachieve in line ministries. National trainingauthorities (NTAs) have been found to beeffective in this respect in several countries’(1991: 23). Although the structure ofsuccessful organizations varies, the crucialaspect is a structure of governance thatinvolves the various stakeholders (employers,unions, etc.) and creates adequate and stablefunding, freedom to use resources flexibly,and a high level of professional capacity(World Bank, 1991; Middleton et al., 1993;Zimbabwe, 2006a).

The implementation of the two-pathwayspolicy at the secondary level of educationshould be accelerated, with the requisiteequipment provided through partnerships with

the private sector and other stakeholders (e.g.,students/parents). To promote inclusiveness,curricula should be redefined so as to meetthe specific demands of the non-formal(including informal) and small-scale sectors.Skill requirements of the SME and informalsectors might be addressed within the formaleducation and training systems, along thelines taken by the Informal Sector Trainingand Resource Network (INSTARN) projectin Zimbabwe, the Mubarak-Kohl initiative inEgypt, the Open Apprenticeship system inNigeria, or the learnership programme inSouth Africa. In addition, mechanisms forcost-sharing between government,enterprises, parents and students should beput in place to enhance the sustainability ofeducation and training provision and achievehigh standards of quality (in terms of bothinputs and outputs).

The delivery patterns in Technical VocationalEducation and Training (TVET) worldwidereflect a variety ranging from school-basedprovision to non-formal trainingarrangements, or a combination of the two.In response to globalization, the trend favoursa more market-oriented approach since skillsare required to respond flexibly to rapidlychanging demands. The restructuring ofTVET systems worldwide suggests thefollowing trends:

• Exclusive government-controlled TVETsystems are opening up to a linkage withprivate TVET institutions and skills-development providers (includingcompany-based training), sometimes co-financed from national budgets.

• Entrepreneurship in TVET and skillsdevelopment is encouraged throughmicrofinancing.

• Greater autonomy is being granted toTVET institutions.

• New financing and certificationmechanisms are envisaged.

• The curricula for the training of trainersand apprenticeship are being revised.

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• Dual forms of training are promoted(UNESCO-UNEVOC, 2004).

Developing a national employment policyframework

So far, the country has not implemented acoherent employment strategy. This is notrestricted to Zimbabwe, as the MillenniumSummit of Heads of State and Governmentadopted the need to put employment creationat the centre of development policies,resulting in the establishment of the YouthEmployment Network (YEN) at the globallevel. To implement this global challenge,the Heads of States and Governments inAfrica met in Ouagadougou, Burkina Faso,in September 2004 and directed RegionalEconomic Communities (RECs) to assistcountries develop national plans of actionon employment creation and povertyreduction.19

Promoting sustainable and inclusiverecovery ‘pathways’ in the labour market,and in education and training provision(promoting integrability)

To sustainably address the challenges posedby unemployment, under-employment andwidespread poverty, it is necessary to fullyintegrate the non-formal sector into themainstream of the economy by tackling thedual and enclave structure of the economyand to consciously integrate disadvantagedand vulnerable groups such as youths, women,people with disabilities and mainstreamingHIV and AIDS as a workplace issue.

One way of achieving this integrative,transformative agenda is to facilitate theevolution of backward and forward linkagesthrough the exploitation of value chains andvalue systems among firms and sectors viathe removal of constraints identified by theprivate sector. Broadening the scope of afirm or industry’s influence, and facilitatingthe establishment of firms and sectorswith coordinated value chains, can lead

to a broad-based, more inclusive andemployment-intensive growth path. A goodexample is the case of Kondozi horticulturalfarm that established extensive linkageswith its hinterland in such a manner that,apart from direct employment in theconcern, the communities were developedinto out-growers (see chapter 9 on landpolicy and agriculture). Until its takeoverby government, Kondozi provided anexcellent example of exploitation of thevalue chains and systems of an individualentity in a virtuous manner. Useful exampleshave emerged in recent years in sectorssuch as tea/coffee growing, textiles andclothing, furniture, poultry, fish farming andamong others. The role of the State shouldbe restricted to facilitating such develop-ments by removing constraints and creatingan enabling environment.

An active labour-market approach, withsome of the following interventions, will helpto integrate and mainstream hithertomarginalized groups and sectors to enhanceintegrability:

1. Employability

The following should be established:

• Training and skills-developmentprogrammes, such as apprenticeshipprogrammes.

• Vocational training programmesdesigned and implemented inpartnership with the private sector.

2. Employment creation

Areas for job creation include thefollowing:

• SME promotion and development;

• Labour-based public works wherethe State can use its resources topromote employment-intensiveinfrastructure development.

19 The original RECs in Africa have now been confirmed by the AU, i.e., ECOWAS, AMU, ECCAS, COMESA(including EAC) and SADC.

TO SUSTAINABLY

ADDRESS THE

CHALLENGES

POSED BY

UNEMPLOYMENT,

UNDER-

EMPLOYMENT AND

WIDESPREAD

POVERTY, IT IS

NECESSARY TO

FULLY INTEGRATE

THE NON-FORMAL

SECTOR INTO THE

MAINSTREAM OF

THE ECONOMY

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• Business linkages.

• Self-employment programmes.

• Programmes targeting people withdisabilities and other vulnerablegroups.

The choice of technique of production iscritical for improving labour intensity in theeconomy, and this can be influenced throughmacroeconomic policies. For instance, realexchange-rate depreciation is a powerful toolfor changing relative prices in favour of thetradable goods sector. It raises the price ofimported capital relative to labour, thusproviding an incentive for the more intensiveuse of labour.

Promoting a shared approach to funding

Globally, the culture of supply-drivenprogrammes funded by the public sector isincreasingly giving way to a shared approachto funding. Users of the service areincreasingly playing an important role infunding arrangements to ensure sustain-ability. In this regard, the private sector isnow playing a more active role in fundingtraining programmes. This is particularlycritical in the context of Zimbabwe, wherepublic funds are limited and the anticipatedstabilization programme will entail significantcuts in expenditure.

However, given the imperative of developingthe skills needed, cooperating partners andother stakeholders, and especially the privatesector, will have to play a more visible role.The participation of the private sector in skillsdevelopment in Zimbabwe is not a new issue.Many of the older training institutions,including technical colleges in Harare,Bulawayo and Kwekwe, were actually builtand equipped by the private sector. Themining and hospitality sectors have taken alead in this regard, having taken over therunning of the mining and hospitality schoolsthat used to be part of the BulawayoPolytechnic. Other sectors, such as themotor industry, are moving in this direction.Mutare Technical College is working in

partnership with the forestry sector inManicaland and is now offering a degreeprogramme in wood technology.

Amendment of the Manpower Planning andDevelopment Act to allow the private sectorgreater influence over the use of ZimbabweManpower Development Fund (ZIMDEF)would release resources for skills develop-ment.

Facilitating the return of skills

Cognisant of the impact of the brain drainthrough migration, the government wouldneed to participate in programmes ofvoluntary assisted return. Furthermore, itshould engage in co-development pro-grammes with countries that have a highconcentration of Zimbabweans, focusing onmigrants’ return or the ‘return potential’ asa development factor. The governmentshould harness the potential for returnmigration by entering into beneficialarrangements with selected countries inorder to formulate appropriate migrationpolicies aimed at facilitating the mobility ofskilled workers in ways that are beneficialto both the destination and sending country.

Immigration policies

Zimbabwe needs to put in place policies thatmake immigration compatible with economic,demographic, social and developmentobjectives. It is necessary to design and adoptpolicies that incorporate into the country’sproductive activities foreigners whosetechnical knowledge and expertise areindispensable for current and future economicand social development programmes,whether in government or in the privatesector. This requires the introduction offlexible immigration policies. Lessons learnedelsewhere broadly classify such policies intothree categories: selective immigrationpolicies, directed immigration policies andspontaneous immigration policies.

Selective immigration policies would targetforeign professionals, scientists, techniciansand skilled workers. There are examples of

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countries that have successfully implementedsuch policies. Since 1984, Australia has hadan immigration policy that has been attractiveto skilled workers whereby candidates areselected according to their prospectivecontribution to the Australian economy. NewZealand, the UK, Canada and the USA haveadopted a similar approach and haveincreased the share of highly educated peopleamong selected immigrants. In mainlandEurope, Germany has introduced a flexiblemigration policy that allows for bothtemporary and permanent labour migrants.Zimbabwe should adopt similar policies inorder to accelerate development.

Directed immigration policies, on the otherhand, would target the entrance of peopleand groups who will be channelled to plannedareas for development. It is an approachquite often applied in Africa. Zimbabwe hasapplied the approach with regard to medicaldoctors from Cuba, who are recruited towork in the rural areas. In a situation wherethe brain drain has occurred across the board,it is necessary to widen the categories ofskills to which this policy applies.

Spontaneous immigration policies are verysuitable to a developing country that cannotcompete with developed countries inattracting skills. Such policies would allowthe entry of those foreigners who comevoluntarily at their own expense as long asthey have the means to support themselvesand are able to contribute to the developmentof the country. Zimbabwe would be advisedto adopt this approach as part of itsimmigration policies.

Allow dual citizenship

Under the current laws of Zimbabwe, anemigrant who acquires citizenship of anothercountry, or alternatively, who stays outsidethe country for seven years consecutively,loses his or her Zimbabwean citizenship. Inaddition, Zimbabwe migrants lose voting

rights when resident outside the country. Inorder to tap the developmental potential ofthe diaspora effectively, these laws need tobe changed to allow for dual citizenship andaccord voting rights so that the attachmentof the diaspora to the homeland becomespermanent.

Updating data

The last major surveys, such as the populationcensus, the Poverty Assessment StudySurvey (PASS) and the labour force surveywere last conducted in 2002, 2003 and 2004,respectively.20 Much has happened sincethen, requiring new surveys to provide moreaccurate up-to-date data. It is thereforeproposed that a major survey combining thethree should be undertaken in 2009 so thatpolicy is informed and based on accuratedata. A detailed Labour Market InformationSystem (LMIS) should be developed as partof the labour administration system.


In conjunction with the overall and rapiddecline in macroeconomic indicators, thischapter has clearly shown how develop-ments in labour markets, human capital andthe diaspora have promoted anti-pooroutcomes, namely, declining levels ofgrowth, employment, real incomes andincreased out-migration. Constraints in termsof the multiplicity of institutional arrange-ments, the supply bias of interventions,especially in human capital formation, policiesthat have entrenched the exclusion of variousgroups and sectors, inadequate resourcesand declining capacity have compounded thedeteriorating situation.

There is a need to rationalize the institutionalarrangements to promote a better-coordinatedand decentralized labour administration andan education and training structure that ismore demand-driven. Shared approaches to

20 Central Statistical Office (CSO), 2002: Census 2002 National Report, CSO, Harare. Central Statistical Office(CSO), 2006: 2004 Labour Force Survey, March.

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funding are a critical aspect of ensuringsustainable, efficient and effective delivery.Furthermore, the need to put in placemechanisms to turn the ‘brain drain’ into a‘brain gain’ by, among other things, facilitatingthe return of skills, participating in schemes

to assist returning migrants, allowing dualcitizenship, and adopting more strategicimmigration policies. All these measures willhelp to ensure that, over time, Zimbabwe hasthe human capital base necessary to supportlong-term recovery.

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125

Chapter 8

Reviving Manufacturing, Mining and Tourism

A pervasive theme of this report is that thedisconnect between developments inZimbabwe over the past decade and thosein the regional and global economies willaffect the future structure, direction andperformance of the economy. This chapterassesses three sectors critical to Zimbabwe’seconomic future, manufacturing, mining andtourism.

8.1 MANUFACTURINGINDUSTRY

8.1.1 Introduction

Arguably, prior to the pre-occupation withland reform at the end of the 1990s,industrialization was at the head of theeconomic policy agenda because of the needto diversify from undue dependence onprimary products, especially commodityexports, and the fact that – as sub-SaharanAfrica’s second most industrialized countryafter South Africa – policymakers believedthat a platform for accelerated industrializationwas in place. In the event, however, as Table8.2 shows, the economy deindustrialized withthe share of manufacturing value added(MVA) declining well before the setbacksassociated with the Fast Track Land ReformProgramme (FTLRP).

The most widely-used measure of industrialprogress is manufacturing value added perhead of population. In Zimbabwe, becauseboth the value-added numbers and the

population estimates are subject to significanterror – especially in recent years – MVAper head figures should be used with caution.Figure 8.2 shows that in both the 1980s andthe 1990s – when the estimates were morereliable than those in recent years – MVAper head declined, fractionally in the 1980s,but some 10 percent in the 1990s. After 1999the decline accelerated and MVA per headhas virtually halved since then.

During the 1980s control regime period,growth was constrained by scarce foreignexchange and an overvalued exchange rate,as a result of which the main drivers ofindustrial growth were domestic demand andimport substitution. Gross Domestic Product(GDP) (at constant 1990 prices) grew 4.4percent annually during this period whilemanufacturing value-added grew 3.4 percenta year. As a result, manufacturing industry’sshare of GDP declined significantly to 20.5percent in 1990 from 23.3 percent a decadeearlier.

During the Economic Structural AdjustmentProgramme (ESAP), MVA growth morethan halved to 2.1 percent annually, reflectingthe combination of a sharp slowdown in GDPgrowth to 1.9 percent a year, associated withtwo severe droughts in 1991/2 and 1994/5,as well as the rapid liberalization of theeconomy including the dismantling of blanketimport controls.

After peaking in 1990, MVA per head halvedover the next decade, during which periodGDP fell 30 percent. The process of

Table 8.1: Growth of GDP and MVA (1980–2006)

Phase Years GDP growth MVA growth MVA share of MVA share of(% p.a.) (% p.a.) GDP start period GDP end period

1 1980–1990 4.4 3.4 23.3 20.5

2 1990–1996 1.9 2.1 20.5 19.7

3 1997–2006 –4.2 –7.1 19.2 13.0

Source: Central Statistical Office, Harare: National Accounts (2006)

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deindustrialization that took hold in the 1990saccelerated after 2000, and the decline inMVA since 1990 outstripped similar falls inGDP, as well as those in mining andagricultural value-added.

Although MVA has fallen further and fasterthan in any other sector of the economy, de-industrialization started well before the onsetof the land-reform crisis in 2000. Indeed,during the 1990s, output volumes increasedin just four of eleven sub-sectors of theindustrial sector. By 1999, production hadrisen 25 percent in clothing, 185 percent inwood and furniture, 15 percent in non-metallic minerals and 7 percent in chemicals.Declines ranging from 30 percent in transportequipment to 4 percent in beveragesunderline the extent to which the fabricof the manufacturing sector had beenweakened even before the steep post-2000decline in economic activity.

8.1.2 Current situation

Although manufacturing industry was notderailed by a single exogenous shock, itsuffered setbacks across a number ofdifferent fronts – ESAP, the severe 1991/2

drought, the maturation of import substitutionindustries, the overvalued exchange rate, theinability to grow manufactured exports andthe FTLRP– that had the cumulative effectof virtually halving its contribution to GDP.

Unquestionably, because the sector was soclosely integrated with commercial agriculture,the most devastating shock was the knock-on effect of the FTLRP. In the mid-1990sover half the inputs into agriculture – fertilizer,stockfeeds and insecticides – were suppliedby the manufacturing sector, while in thereverse direction 44 percent of agriculturaloutput was sold to the manufacturing sector,some 95 percent being supplied by thecommercial farming sector and the balanceby small-scale communal growers. Anestimated 62 percent of commercial outputand 29 percent of communal production wassold to manufacturing industry.

All industrial indicators reflect the steepdecline experienced over the past decade:manufacturing employment in 2004 was 26percent below its peak in 1998. Exports of‘pure’ manufactures1 halved between 1997and 2004 while the number of productsexported declined and export concentration

Source: Central Statistical Office, Harare, National Accounts (various editions)

Figure 8.1: Manufacturing value added per head, 1980–2006

1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006

500

450

400

350

300

250

200

150

100

50

0

1 i.e., excluding ferro-alloys, cotton and steel.

Z$

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Chapter 8 – Reviving Manufacturing, Mining and Tourism

increased in terms of both markets andproducts. The 2006 survey of manufacturingby the Confederation of ZimbabweIndustries (CZI) found that four regionalmarkets – Zambia, South Africa, Botswanaand Malawi – absorbed 80 percent ofmanufactured exports, while the number ofexport firms declined by 15 percent overthree years.

According to the July 2008 CZI Manu-facturing Sector Survey, industrialproduction declined 59 percent between2005 and 2007 and by the end of 2007,output in surveyed firms was less than 30percent of its 2003 levels. Capacityutilization collapsed to less than 20 percentin 2007 with only 4 percent of firmsoperating at over three-quarters of installedcapacity. At the other extreme, 75 percentof industry was operating at less than 50percent capacity utilization.

The survey estimated that ‘most workers’were not earning a living wage, with unskilledemployees earning less than US$20 amonth. Only 2 percent of respondentsdescribed themselves as optimistic (4.8percent in 2006) while 70 percent said theywere pessimistic.

Interviews with industrialists conducted inmid-2007 confirm CZI survey findings thatindustry was operating at approximately one-third of its installed capacity and that outputhad halved since the onset of the crisis in2000. Most industrialists interviewed warnedthat a significant proportion of existingcapacity was theoretical rather than actualin the sense that substantial new investmentwould be needed to renovate and update

existing plant and machinery, a great deal ofwhich was obsolete. Most said too, that theyhad been unable to keep pace withcontemporary developments in technologyand that efficiency had been undermined byinadequate maintenance, partly the result ofshortages of both skills and imported sparesand components.

Because of the price-control regime itwould take companies up to two yearsto restore cash-flow viability, according toone multinational. His company’s chiefcompetition – and he believed this to be thecase for many manufacturers in Zimbabwe– is South Africa. The South African businessmodel for consumer goods producers wasbuyer-driven, with South African corporatesestablishing strong retail chains in SouthernAfrican countries (Botswana, Mozambique,Zambia, the DRC and Tanzania), whichmade it very difficult for Zimbabwean firmsto compete in regional export markets,especially because – for the most part – SouthAfrican brand recognition is far stronger thanthat of Zimbabwe manufacturers.

Almost all those interviewed identified theloss of skills and the deterioration in thecountry’s training and education infra-structure as the most important singleproblem that industry will face in a post-crisisenvironment. An executive with the largesttrainer of artisans in the country said thathis company was losing about half of itsqualified artisans each year.

It has become increasingly difficult tomaintain quality standards. Operating costsare higher where there are no ‘experienceeffects’ (learning-curve effects) as a result

Table 8.2: The current state of manufacturing

% 2005 2006 2007

Capacity utilization 35.8 33.8 18.9

Output –29.0 –18.0 –28.0

Employment n.a n.a –12.0

Business confidence(% pessimistic) 54.0 77.4 70.0

Source: CZI Manufacturing Sector Survey (July 2008)

ALMOST ALL

THOSE

INTERVIEWED

IDENTIFIED THE

LOSS OF SKILLS

AND THE

DETERIORATION IN

THE COUNTRY’S

TRAINING AND

EDUCATION INFRA-

STRUCTURE AS

THE MOST

IMPORTANT SINGLE

PROBLEM THAT

INDUSTRY WILL

FACE IN A POST-

CRISIS

ENVIRONMENT

128


of high rates of staff turnover and the factthat employees do not stay long enough toaccumulate experience. Firms have resortedto poaching skills from one another, leadingto wage inflation. Personnel previouslycategorized as technicians are now gradedengineers, reflecting a downgrade ofindustrial capability across the board.

Some industrialists said that ‘skewed pricingsystems’ were causing severe problemsbecause they had inflated demand bothlocally and regionally. A Coca-Cola bottlersaid that, in US dollar terms, Zimbabwe has‘the cheapest Coke in the world’, which bothfosters smuggling and strains foreign-currency reserves because of the highimport content of the product. A cigarettemanufacturer concurred, saying that pricecontrols had encouraged regional smugglingand that cigarettes manufactured inZimbabwe were being sold in regionalmarkets at ‘dumping’-level prices. Cigaretteprices in Zimbabwe are less than half theworld average.

For most manufacturers however, demandhas been depressed since 2000, as a resultof which manufacturers are unable to exploitscale economies. Because of the overvaluedexchange rate it has been impossible to offsetdomestic market shrinkage by penetratingexport markets. Consequently, manu-facturers have been forced to ‘downtrade’– producing smaller packs, skimping onquality, and aiming at the low-incomemarket. This in turn, has undermined exports,except for low-technology and low-qualityitems, which are often produced morecheaply in regional markets.

Without exception, all executives stressedthe need for ‘massive’ new investment inalmost all aspects of infrastructure, butespecially electricity, water and transport(particularly roads and railways). Almost allsaid that costs were inflated by the need tooperate stand-by generators, while one foodmanufacturer said that all water had to bepurified because it fell below requiredstandards.

Most executives said that exports were aresidual rather than a core activity, but one ofthe country’s largest industrial exporters saidthat his company was losing orders of someUS$4.5 million monthly owing to a variety ofconstraints, the most important beingelectricity supply, rail transport and skills.One paint manufacturer said that, because ofhigh import content (approximately 80percent), South Africa is a much cheapersource of supply and that neighbouringcountries could source imports from SouthAfrica both more cheaply and more reliably– given infrastructure and skills constraints –than from Zimbabwe. Others said that theyhad lost their export markets because regionalor global headquarters had elected to serveSouthern and East African markets fromSouth Africa or Kenya.

All executives agreed that industry was under-investing, attributing this to market shrinkage,excess industrial capacity, the inability toaccess foreign exchange, and the high costof securing new imported equipment. Viewsof future investment prospects were mixed,though most stressed the urgent need torefurbish and replace existing plant. Mostthought that foreigners would be reluctant toinvest unless and until they were given firmassurances in respect of property rights andindigenization proposals.

One multinational manager said that hedoubted whether major multinationalswould renew their interest in Zimbabwe:‘The market is too small, it makes better senseto serve Zimbabwe from South Africa, oreven as far afield as Kenya, using CommonMarket for Eastern and Southern Africa(COMESA) trade preferences’. He expectedpost-crisis Zimbabwe to attract corporateventurers and ‘buccaneer’ investors ratherthan mainstream multinationals like his own.

8.1.3 Constraints on recovery

Table 8.3, compiled from the 2007 CZISurvey of Manufacturing Industry, illustratesthe two main constraints to short-termindustrial recovery: access to foreign

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exchange, and the partially overlappingproblem of the difficulty of sourcing rawmaterials. The latter is only a partial overlapbecause it refers to the drying up of domesticsources of supply and not just importedinputs. Weak demand, both domestically andin export markets – adversely affected bythe overvalued exchange rate for theZimbabwe dollar – was identified as anothermajor constraint to increased production.

Table 8.3: Major constraints on industrialproduction

2006 2005

Foreign currency 69.4 79.7

Raw materials 58.9 70.9

Working capital 9.7 8.9

Demand 26.4 41.9

Power outages 8.3 6.3

Fuel availability 6.9 8.9

Source: CZI Survey of Manufacturing Industry(2007)

Interview evidence largely confirmed thesurvey findings, with one major difference– the rapidly deteriorating supply of technicaland professional skills. Four major constraintsstood out from the interviews:

• Policy uncertainty and unpredictability,especially in the fields of property rights,indigenization and pricing.

• Access to foreign exchange and rawmaterials, especially agricultural rawmaterials previously produced locally.

• Skills.

• Infrastructure – especially electricity,telecommunications, rail transport, roadsand water.

8.1.4 Future strategy

Strategy for industrialization

Although on the surface it might appear thatthere are many similarities in the situationfaced by manufacturing industry in post-

crisis Zimbabwe and those that existed bothat independence and at the time of ESAP(1991), policy towards industry in the post-crisis era cannot be simply extrapolated fromcurrent and past performance.

In theory, post-ESAP deindustrializationsince 1992 ought to have created the spacefor a revival in the manufacturing sector. Inpractice however, far-reaching structuralchange in the Zimbabwe economy, includingthe steep decline in domestic purchasingpower and the contraction of large-scalecommercial farming, has created a verydifferent situation. In the past too, Zimbabwecould rely on a skills base unparalleled in sub-Saharan Africa, certainly in relative terms.

Unlike the situations in 1980 and 1990, thereis substantial excess capacity in manu-facturing, and while this will make it feasibleto expand output very substantially withoutadditional industrial investment, there are fourserious drawbacks:

• A large – but unknown – proportion ofthe industrial capital stock is ageing orobsolete, expensive to operate, environ-mentally unfriendly, and well withintechnology frontiers, as a consequenceof which productivity levels fall far shortof state-of-the-art levels.

• A severe and rapidly worsening shortageof skills is raising operating costs whilerestricting the ability of firms to installand utilize state-of-the-art equipment.

• Infrastructural constraints – electricity,water, telecommunications, rail transport– are far more severe now than at anytime in the post-Independence history.

• The announced commitment to anindigenization strategy – specificallytargeting mining, manufacturing andfinance – raises numerous questionsconcerning elements crucial to anindustrial revival such as Foreign DirectInvestment (FDI) and access to tech-nology, brand names, patents andmarkets.

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Globally, the dynamics of industrial develop-ment have changed radically over the pasttwenty years, while in southern Africa, SouthAfrica’s strong resurgence from decades inthe economic wilderness marks a major shiftin regional dynamics. The emergence andrapid development of global – and, to a muchlesser extent, regional – value chains hasinfluenced the foreign investment strategiesof multinational companies, who are muchless inclined to invest in small markets, suchas Zimbabwe, than was the case twentyyears ago.

Moreover, while Zimbabwe’s economy hasbeen shrinking, those of its regional neigh-bours have expanded rapidly. The countrythat in 1980 was the second largest inSouthern African Development Community(SADC) is now the second smallest, and theDRC is now the only SADC country whereincome per head is lower than in Zimbabwe.

At a time when manufacturing industryworldwide is becoming more skills- andknowledge-intensive, Zimbabwe has fallenbehind technologically. In 1980 Zimbabwewas ranked 35th out of 93 countriesin UNIDO’s Competitive IndustrialPerformance (CIP) index,2 just ahead ofSouth Africa. By 2000 – the most recentfigure available – Zimbabwe had slipped downthe rankings to 57th position, while on the newenlarged CIP index for 2000, covering 155countries, Zimbabwe was ranked 76th. Overthe twenty-year period Zimbabwe’s CIP indexdeclined from 0.248 to 0.213, chiefly reflectingthe decline in manufacturing’s share of GDPand of manufactured exports in total exports.

Any meaningful strategy for the future ofmanufacturing industry must take account ofthese realities rather than assuming that anindustrial sector, which at Independence in1980 appeared to have considerable potential,will be able to pick up from where it left off inthe late 1990s. Post-crisis policy-makers willneed to factor into their strategies the factthat the Zimbabwe industrial model had run

out of steam well before the crisis created byland redistribution.

Because the world, the region and especiallyZimbabwe itself have changed, the pre-crisisbusiness model cannot be replicated in the21st century. A post-crisis strategy must startwith acceptance of this reality, acknowledgingthat the constraints on industrial policy, implicitin the new world order of the 21st century,are more restrictive than was the case duringZimbabwe’s period of rapid industrialization,while the range of opportunities has changed,and quite possibly narrowed, flowing fromthe ‘path dependence’ implications ofmanufacturing evolution, especially since1990.

8.1.5 The manufacturing sectorfrom 2008

Assumptions

1. GDP growth will resume in 2009following political changes in 2008 anda gradual normalization of relations withthe international community.

2. Property rights will be restored andindigenization programmes rationalized.

3. Mining, construction and services will bethe lead growth sectors of the economy,driven by investment in mining andinfrastructure as well as foreign aidinflows.

4. Manufacturing will grow well above itstrend rate as spare capacity is utilized,but industrial growth will be constrainedby the shortage of skills, infrastructuralcapacity and domestic agriculturalproduction.

5. Agriculture will restructure with theresumption and expansion of some large-scale commercial farming activities andgrowth of corporate farming, partly relianton contract farming by small-scaleproducers.

2 UNIDO, Industrial Development Report, 2004.

POST-CRISIS

POLICY-MAKERS

WILL NEED TO

FACTOR INTO

THEIR STRATEGIES

THE FACT THAT

THE ZIMBABWE

INDUSTRIAL MODEL

HAD RUN OUT OF

STEAM WELL

BEFORE THE

CRISIS CREATED BY

LAND

REDISTRIBUTION

131


6. Growth in all sectors will be constrainedby scarce skilled and unskilled labourwith agriculture being most affected bythe shift from a labour-surplus to alabour-scarce economy.

7. Manufacturing will restructure over themedium term as foreign direct invest-ment revives.

8. Industry restructuring will be substan-tially influenced by regional economicintegration, including the establishmentof a free trade area in the SADC region.

9. Entry by major multinationals is unlikelybut FDI by middle-rank multinationals,mostly from South Africa and Asia isprobable.

10. Manufacturing value-added will continueto decline relative to gross outputreflecting increased reliance on importedinputs and a dilution of linkages withdomestic agriculture.

11. Government policy will prioritize Smalland Medium Enterprise (SME) develop-ment in all sectors.

12. Initial official efforts to revive ExportProcessing Zones and rural growthpoints will eventually dissipate.

Scenarios for industrial development in thepost-crisis era cannot be simply extrapolatedfrom current and past performance for threemain reasons:

1. First, the extent to which the economyover-industrialized during the period ofindustrial autarky (1965 to 1990)highlights the fact that Zimbabwe didnot follow a typical developing countryindustrialization path. It is thereforeessential that in the post-crisis environ-ment, policymakers should learn fromthe mistakes of the past, graphically

illustrated in the IMF’s CountryStudy of Zimbabwe in its 1998 ESAFEvaluation Report.

2. Because Zimbabwe’s industrial structureat the start of the 1990s was ‘peculiar’,economic reform in Zimbabwe was‘more analogous to that in the transitioneconomies than in the rest of Africa’.This was because the industrial autarkyregime had given birth to a ‘very largeand diversified industrial sector servinglargely the domestic market’.3

As should have been appreciated at thetime, the ESAP reforms were substan-tially responsible for the steep 18 percentdecline in MVA between 1991 and 2000,while the strong growth in manufacturedexports generated by economic liberali-zation quickly ran out of steam reflectingexchange rate overvaluation, the ongoingscarcity of foreign exchange andmounting investor unhappiness at theslow, but inexorable, policy reversals, inparticular, from 1997/8.

This failure of ESAP industry policy wasdoubly unfortunate. Not only did itdiscredit economic liberalization in theeyes, not just of government but of manyin the private sector, but it strengthenedthe hand of those demanding increasedstate intervention in the economy, startingwith land resettlement and directmanagement of the exchange rate andthe country’s foreign currency earnings.

3. On the surface it appears that there aremany similarities in the situation facedby manufacturing industry in post-crisisZimbabwe and those that existed atindependence in 1980 and at the time ofESAP (1991). In theory, post-ESAPdeindustrialization since 1992 ought tohave created the space for a revival inthe manufacturing sector.

3 IMF: Zimbabwe Country Study for ESAF Evaluation Report. Jan 1998 (page 171)

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In practice, however, far-reaching structuralchange in the Zimbabwe economy, includingthe steep decline in domestic purchasingpower and the decline, if not the demise, oflarge-scale commercial farming, has createda very different situation. In the pasttoo, Zimbabwe enjoyed a labour-surpluseconomy, which is no longer the case.

8.2 THE MINING INDUSTRY

8.2.1 Introduction

Because the bulk of output serves exportmarkets, the mining industry is less sus-ceptible to the vagaries of domesticeconomic policy than manufacturing.Globally, corporate decisions to invest inmining exploration and development aredriven by demand, cost and market con-siderations rather than by changes ingovernment policies, though legislationlimiting the extent of foreign ownershipinfluences exploration and investmentdecisions adversely. Although there has beena resurgence of resource nationalisminternationally since the onset of the primarycommodities price boom in 2002/3, miningcompanies have become less risk-averse andmore willing to invest in politically fragilelocations because resources are short andprices are high.

For most of the post-Independence periodin Zimbabwe exploration and investmentwere constrained by sluggish world marketsfor primary metal products. At the sametime, during the control regime period (1980–1990), mining development was hamperedby industry perceptions of official hostilityto FDI, and specifically to foreign ownership,allied with viability concerns attributable tothe government’s commitment to a controlledand over-valued exchange rate. Accordingly,with depressed metal prices in internationalmarkets, the incentive to invest in Zimbabwewas muted.

Two events improved the exploration andinvestment environment for mining in the

1990s. ESAP promised a more competitiveexchange rate, less state intervention anda more hospitable investment climate.Secondly, the discovery of rich platinum-group metal deposits – second only to SouthAfrica in known reserves – and subsequentlyof diamond deposits, attracted the attentionof both mining majors and juniors around theworld.

Unfortunately, the high hopes associated withESAP were short-lived. Far from fosteringa more hospitable investment climate formining companies, government policy movedinitially towards the negotiation of miningleases on a case-by-case basis – as withBHP-Billiton’s abortive Hartley platinumventure, now Zimbabwe Platinum, owned byImpala Holdings of South Africa – andsubsequently to new ownership and fiscalregimes for mining, partly captured in the2007 Mines and Minerals Amendment Billthat has since lapsed.

Because this coincided with the presentcommodity-price supercycle since 2002,investor interest in Zimbabwe’s miningpotential actually increased, despite theserious deterioration in the country’s political-risk profile, its macroeconomic policy stanceand the threatened compulsory sale of 51percent of the shares of mining companies.


The official volume-of-production indexcompiled by the Central Statistical Office(CSO) depicts a stagnant industry, withthe volume of mining output having peakedin 1998. Although production stagnated overthe 1980–2004 period – growing just 0.32percent annually because prices (measuredby the unit value index) grew 47 percent ayear – the Zimbabwe-dollar value ofproduction increased dramatically, driven bycurrency devaluation, particularly since 2000.

Data from the Chamber of Mines show avery different picture, with output peakingmore recently (2003), driven by strongvolume growth in low-value base minerals

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(limestone, black granite, quartz andchromite), but this production has sincedeclined steeply with the result that, by 2006,the volume index was only half its 1980 level.

The volume figures show that, with theexception of platinum, production in 2006was well below peak levels. Gold output,which peaked at 27.1 tons in 1999, had fallenback to its 1980 levels by 2006 and in 2007declined further to 6.8 tons – its lowest levelin more than a century. In the first quarterof 2008 gold production declined even moredramatically, while asbestos output hasslumped more than 60 percent from peaklevels, nickel production is down 42 percentand coal 60 percent.

The structure of the mining industry haschanged radically since 1980, with a declinein the number of mines and an associatedfall in the output and employment shares ofsmall mines. In 1979 over half the mines (105

out of 200) employed no more than 50 people;by 1995, this number had fallen to 33 (35percent of the total). Output has becomeincreasingly concentrated in the hands oflarge producers so that by 1995, 17 mines(18 percent of the total) with upwards of500 workers each accounted for almost 86percent of employment compared to a thirdin 1979.

Anecdotal evidence suggests that since themid-1990s the trend towards a concentrationof activity in the hands of medium- to large-scale mines has intensified at the expenseof the ‘missing middle’4 in the form of small-to medium-scale formal mining operations.At the same time, there has been anexplosion in the number of informal-sectorartisanal miners, though there are nostatistics because their operations areessentially illegal in that they are outside boththe tax and currency-control nets. Recently(2006/7) it appears that there has been a

Table 8.4: Mining production (1980–2004)

Period Volume index Growth rate Unit value index Growth rateaverage (% p.a.) average

1980–1989 92 +0.65 51.00 +13.00

1990–1999 108 +1.23 390.00 +26.00

2000–2004 95 –1.11 79,534.00 –

1980–2004 100 +0.32 16,083.00 +47.00

Source: Central Statistical Office, Harare

Table 8.5: Main commodities (% share by value)

1980 1990 2000 2006

% share by value

Gold 36.6 38.6 51.6 27.9

Asbestos 17.7 11.0 16.0 2.4

Nickel 14.0 18.0 4.7 17.9

Chromite 4.7 4.6 4.6 7.6

Coal 7.0 12.4 14.0 5.9

Ferrochrome n.a. n.a. n.a. 14.8

Platinum-group metals n.a. n.a. 4.4 21.7

Total 80.0 84.6 95.3 98.2

Note: Items do not add up to 100% because other minerals are excluded.

Source: Chamber of Mines of Zimbabwe

4 See chapter 6 on private sector development

ANECDOTAL

EVIDENCE

SUGGESTS THAT

SINCE THE MID-

1990S THE TREND

TOWARDS A

CONCENTRATION

OF ACTIVITY IN THE

HANDS OF MEDIUM-

TO LARGE-SCALE

MINES HAS

INTENSIFIED AT

THE EXPENSE OF

THE ‘MISSING

MIDDLE’4 IN THE

FORM OF SMALL-

TO MEDIUM-SCALE

FORMAL MINING

OPERATIONS

134


sharp decline in such artisanal activity,reflecting operational difficulties (access toinputs), increased efforts to control black-market activities by the authorities, andtechnical mining problems. Specifically, in thelast few years, informal-market miners haveexploited the ‘easiest’ gold-panning andalluvial-diamond opportunities. Today morecapital and know-how is needed and,because these are often not available,industry sources believe that artisanal activity,certainly in gold, has peaked for the time-being.

Mining’s chief contribution to the economy,especially in recent years, has been itscapacity to generate foreign exchange, evenwith falling output. Since independence in1980, mining has accounted for almost 40percent of total exports, dominated by gold,with the other important contributors beingferrochrome, nickel and latterly, platinum,which will shortly become the country’smajor export. Since the start of thecommodity boom in 2002, the share ofminerals in total exports has averaged 45percent. The recent growth in the share ofmineral exports in the total reflects thedecline of agricultural and manufacturedexports as well as the post-2002 surge inmetal prices that has offset substantiallyfalling production volumes.

8.2.3 Employment and skills

Chamber of Mines data show that, afterfalling by a third between 1980 and 2000,employment has since recovered and is nowsome 25 percent (14,000 jobs) higher thanat independence. However, this is entirelydue to the quadrupling of employment insmelting and refining. Zisco, a loss-makingparastatal, accounts for 30,400 jobs (86percent of employment) in these industries,and it has increased nearly six-fold since1980, despite a collapse in output over theperiod. The figures exclude informal/artisanal mining activities for which there areno hard output or employment data.

The Chamber estimates that more than halfthe industry’s skilled personnel emigratedfrom the country in 2007 and that in early2008 there were 1,116 vacancies forprofessional and technical staff. In anunpublished report for the ZimbabweChamber of Mines (August 2007), Prof.Keith Viewing paints a picture of a severeand rapidly worsening skills shortage,exacerbated by the precipitous decline in thecountry’s capacity to regenerate skills.

Citing data provided by nineteen miningcompanies, Prof. Viewing estimates graduatevacancies to be between 166 and 233,including 48 mining engineers, 28 geologists,

Sources: Central Statistical Office, Harare, the IMF and the Reserve Bank of Zimbabwe

Figure 8.2: Value of mineral exports and share in total, 1980–2007

60%

50%

40%

30%

20%

10%

0%1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007

Export share %Value (US$ millions)

US$ millions

900

800

700

600

500

400

300

200

100

0

135


30 metallurgical engineers, 34 mechanicalengineers, 12 electrical engineers, 5 surveyorsand 7 in metallurgical assay. Vacancies fortechnicians are estimated at over 700,excluding the iron-and-steel sector, the cementindustry and Chemplex, which producescritical chemicals and explosives used inmining.

The number of university graduates neededin mining disciplines is estimated to bebetween 480 and 550, but the maximumcapacity of mining-related departments at theUniversity of Zimbabwe (UZ) is 124students per year, meaning that it will takefour to five years to supply existing needs,let alone provide for the anticipated recoveryand growth of the industry in a post-crisisenvironment.

A survey undertaken by the government, theNational Human Resources Survey (2006)concluded that as many as 70 percent of1,519 graduates surveyed indicated a wishto emigrate – 76 percent for graduates and86 percent for postgraduates. UZ itselfestimates that, of 2,800 students whograduate each year, only about 700 wish tostay in Zimbabwe.

The Viewing report sets out a number ofdetailed proposals for remedying thesituation, virtually all of which requiresubstantial injections of funding, both inlocal and foreign currency, as well as thenormalization of relationships with theinternational community so that many moreZimbabwean students can be trained abroad,more expatriates recruited, and there can beincreased resort to inter-company transfers.The unequivocal message of his report is thatthe shortage of skills will be a bindingconstraint on mining exploration, investmentand development in the future.

8.2.4 Mining exploration andinvestment

The primary criteria influencing mininginvestment are mineral potential and

infrastructure, according to a World Banksurvey (1992). The survey of forty inter-national mining companies from NorthAmerica, Europe, Australia, South Africa andJapan found that a guarantee of miningrights before starting exploration was ‘anessential precondition’. Other critical factorsare a well-established mining code, con-tractual stability, profit repatriation, aguaranteed fiscal regime and access toforeign exchange. Accelerated depreciationand amortization and realistic exchange ratesare important but ‘less essential’.

The survey found that respondent companieswere generally not prepared to work incountries with mandatory local-majorityparticipation, either government or private,though some companies saw minority-localparticipation and mandatory training ofnationals as positive factors. Mandatoryprovision of social services, restrictions onwage negotiations and limitations on expatriatepersonnel were ‘minor disincentives’.

There is greater concern about political riskand corruption than about macroeconomicstability because mining projects are export-oriented and partially de-linked from thedomestic economy. Higher risk premiums arerequired to justify investment in emergingmarkets, with an average return on equityof 25 to 30 percent and a payback period of2 to 4 years compared with a return of 20percent and a payback period of 5 to 6 yearsin industrial economies.

While mining houses are confident of beingable to cope with market and technical risks,they have concerns about three main areasof political risk:

• Restrictions on a company’s ability to dobusiness – obtaining exploration andmining rights, securing ready access toforeign exchange, being allowed toexport directly rather than through astate-owned market authority, and therisk of losing mining rights or legal titleas a consequence of host governmentaction.

136


• The ability to control costs and maintaincompetitiveness: the risk of unilateralchanges to the tax regime; the risk ofprice-control imposition or controls oninputs or output; the requirement thatcompanies undertake marginal value-adding investments that may not beprofitable; the requirement to carry outinfrastructure or community or socialinvestments not prescribed in the originalinvestment agreement; and the risk ofemployment quotas set by the state.

• Ready access to foreign exchange tofinance inputs and offshore payments formanagement fees, debt service, capitalrepayments and dividends.

Geological assessments suggest thatunderinvestment in exploration and pro-duction and not mineral potential have beenthe main factors limiting mining developmentin Zimbabwe. This is not a new phenomenonand pre-dates the onset of the political andeconomic crisis at the end of the 1990s. In1992, the World Bank identified Zimbabwe,along with the DRC and Namibia, as‘Category A’ countries5 requiring the highestlevel of exploration investment amongstAfrican states of US$100 million over a five-year period ($20 million annually). In all threecountries mining exploration had beenconstrained by political and economicuncertainty, with mining houses reluctant toinvest in a country with a track record ofpolicy unpredictability, especially in termsof property rights and exchange-ratemanagement.

However, while the mining investmentclimate has improved in most Africancountries over the last decade, the oppositehas been the case in Zimbabwe, as under-lined in the Fraser Institute Annual Surveyof Mining Companies.6 This shows that,since its first inclusion in 2002, Zimbabwe’sposition in its Policy Potential Index7 hasdeteriorated dramatically, both in absoluteand relative terms. Zimbabwe’s scores of 2(2006) and 3 (2007) – a decline of 86 percentsince 2002 – are the two lowest scoresrecorded for any jurisdiction since the launchof the survey in 1997.

Contemporaneous data (since 1997) on grosscapital formation by sector are not available,but figures for the 1973–1996 period showinvestment in mining averaging 25 percentof output (both at current prices). However,these figures are seriously distorted by theabortive BHP Hartley Platinum project in1995/6,8 as a result of which the investment-output ratio rose steeply from a 26-yearaverage of 15.6 percent to 25 percent,because of investment of 44 percent of grossoutput in 1995 and 47 percent in 1996.

Were contemporary data available, theywould show a steep decline in mineralinvestment since the late 1990s, with veryfew new projects, other than in platinum, andfalling exploration expenditure, especiallysince 1998. Over the long haul, since 1968,the investment to gross-output ratio isestimated at between 10 and 12 percent.

5 The World Bank (1992) report defined a Category A country as one requiring exploration spending of US$20million a year for five years.

6 See <http://www.fraserinstitute.org>.7 The Policy Potential Index is a composite index measuring the overall policy attractiveness of the 65 jurisdictions

in the most recent survey (2007). It measures the effects on mining exploration and investment of governmentpolicies including uncertainty concerning the administration, interpretation and enforcement of existingregulations; environmental regulations; regulatory duplication and inconsistencies; taxation; uncertaintysurrounding indigenous land claims and protected areas; infrastructure; socioeconomic agreements; labour issues;the geological database; political stability and security.

8 Australian mining group BHP Billiton invested an estimated US$450 million to develop the Hartley PlatinumMine. The project ran into a number of technical problems and was subsequently abandoned. The miningproperty and assets were sold to Zimbabwe Platinum (Zimplats).

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Assuming a very conservative depreciationfactor of 10 percent, the industry’s capitalstock peaked in the early 1980s. The capitalstock increased substantially during the1970s, followed by a decline and then amarked recovery when platinum investmenttook off in the mid-1990s. Although thereare no data for the post-1997 period, miningcompanies say that, outside the platinumand diamond sectors, investment in bothexploration and new capacity has beenminimal, with no new exploration licencesbeing issued since 2003 despite the fact thatcompanies had applied for new exclusiveprospecting orders.

In sum, because both production andinvestment have declined, the industry is inan ‘immature’ state, which means thatabove-normal levels of investment in bothexploration and productive capacity will berequired during the post-crisis period.

8.2.5 Constraints on miningdevelopment

• A difficult, indeed increasinglyhostile, business environment: Sincethe late 1990s the operating environmentfor mining companies has becomeincreasingly uncertain, with questionmarks over the royalty and tax regime,exchange-rate management and mostrecently, the ownership regulations. A Billtabled in Parliament in 2007 requiredforeign-owned mining companies todivest 51 percent of their equity stakesto indigenous Zimbabwean investors.9

Of this, 25 percent must be allocated tothe state, which will pay for its stake inthe mines from future dividends. How-ever, this Bill has since lapsed, but itremains the intention of the presentgovernment to reintroduce it in the nextparliamentary session.

• Deteriorating physical infrastructure:Erratic availability of electricity and ofrail transport has hindered production andincreased operating costs.

• Scarce foreign exchange: Restrictedaccess to foreign currency has stifled newand expansion investment projects andincreased downtime on the mines, therebyundermining productive efficiency andraising operating costs.

• Exchange-rate mismanagement: Thelong-run strategy of maintaining an over-valued exchange rate has deterred newinvestment and curbed output growth.

• The skills exodus: With mining skills inscarce supply internationally, Zimbabwehas become a substantial exporter ofskilled mining personnel – geologists,engineers, technicians and managers.

• Declining international competitive-ness: The combination of rapidly risingoperating costs, deteriorating infra-structure, scarce skills and an over-valued exchange rate has underminedcompetitiveness.

8.2.6 Strategy for miningdevelopment

Mining should be treated differently fromother sectors for two main reasons:

• Because mineral resources are beingdepleted, it is essential that some of theproceeds of mining activity are recycledinto investment in produced assets,such as infrastructure, and intangiblecapital.10

• Mining sector projects are unique in anumber of respects, and this justifiesan industry-specific policy regime,especially as regards taxation.

9 Mines and Minerals Amendment Bill [H.B. 14, 2007] Gazetted 16 November 2007.10 Intangible capital is accumulated investment in people in the form of education, training, skills development and

health facilities as well as investment in institutions, management systems and research and development.

BECAUSE MINERAL

RESOURCES ARE

BEING DEPLETED,

IT IS ESSENTIAL

THAT SOME OF THE

PROCEEDS OF

MINING ACTIVITY

ARE RECYCLED

INTO INVESTMENT

IN PRODUCED

ASSETS,

SUCH AS

INFRASTRUCTURE,

AND INTANGIBLE

CAPITAL

138


A strategy for mining in post-crisisZimbabwe should take into account fivemain considerations:

• Fostering investment, both domestic and(especially) foreign in major projects.

• Encouraging investment in value-addedoperations that will increase both exportrevenues and mineral rents.11

• Ensuring that mining rents are mobilizedby the state for investment in producedassets and intangible capital, therebyensuring that wealth per capita is noteroded by resource depletion.

• Providing an appropriate social environ-ment in terms of worker welfare,including health and safety considerations.

• Environmental protection.

This is a classic trade-off situation in thesense that policy measures adopted to fosterinvestment limit the scope and extent ofmeasures aimed at maximizing mineral rentcollection by the state.12 Similarly, social andenvironmental policies are likely to reduce thereturn on capital invested, thereby possiblydeterring investment and reducing mineralrents. However, by establishing a clear andstable mining policy regime, the state canimprove the investment environment, therebylowering the risk premium and returnsrequired by mining houses, lenders andinvestors.

All of this means that a mining strategy musttake the form of a delicately balancedcompromise between the measures takento achieve the five goals outlined above.Policies change with global market conditions.Recently, as foreign direct investment inresource industries around the worldhas increased, so policies have become

increasingly nationalistic. The bargainingpower of resource-rich countries hasincreased relative to that of mining explorationand development companies.

Mining companies, especially foreign groupswho are long term players, need to be ableto take a 10- to 20-year view, possibly longer.They are understandably wary of obsolescingbargain considerations, illustrated by thedispute between Zambian mining companiesand the government, which raised taxes toextract the windfall rents flowing fromrecord copper prices.

For their part, governments prefer flexibilitybecause as recent global experience showsall too clearly, the mining industry issusceptible to boom-and-bust pressures,reflected in underinvestment in the 1980s and1990s resulting in a price boom since 2002and in all probability, overshooting of bothprices and investment in new capacity.

Available geological evidence suggests thatZimbabwe is unlikely to become a minerals-driven economy in the same way asBotswana, Zambia or the DRC. This isbecause Zimbabwe is a minerals-diverseeconomy as distinct from a minerals-richone, which in turn means that some, perhapsmuch, of the scope for mining investmentlies in small to medium projects rather thanin the mega-projects characteristic of theDRC, Zambia or South Africa. But, givenappropriate business-friendly policies, themining sector could – indeed, should –reverse the decline of the last twenty years.It could easily become the fastest-growingsector of the economy, the largest singlecontributor to exports by some distance, andan important source of public revenue to beused not to finance government consumptionspending but job creation, diversification ofthe economy and poverty reduction efforts.

11 Mineral rents or mining rents are defined as the surplus earned by a particular factor of production, such ascapital or labour, over and above the minimum earnings necessary to induce that factor to do its work. Such rentsarise from the scarcity of minerals like gold, diamonds or platinum, from windfalls due to sudden price increases,from monopolistic profits earned by a company able to corner the market (as in diamonds) from locationaladvantages (a mine being well situated to supply a nearby market), etc.

12 Mineral rent collection refers to the use of taxes or royalties by governments to secure a share of surplusearnings (rents).

IT COULD EASILY

BECOME THE

FASTEST-

GROWING SECTOR

OF THE ECONOMY,

THE LARGEST

SINGLE

CONTRIBUTOR TO

EXPORTS BY SOME

DISTANCE, AND AN

IMPORTANT

SOURCE OF PUBLIC

REVENUE

139


8.2.7 Mining industry prospects

Mining is seen by some as the sector mostlikely to drive Zimbabwe’s economicrecovery. There are three major snags tothis thesis – the first is that the industry hasmissed out on the current commodity boom.Exploration spending will resume at a timewhen the global industry may well haveentered a consolidation phase, whileexpansion will be seriously constrained bythe global scarcity of mining industry skills.

The second concerns the lengthy gestationperiod of mining projects, especially in anenvironment where exploration spending hasbeen abnormally low. When account is takenof infrastructural, financial and ‘sentiment’constraints, it is likely to take a minimum ofthree to five years to bring new projects onstream.

The third is that mining accounts for nomore than 5 percent of GDP. While itsexpansion will help to ease Zimbabwe’ssevere balance-of-payments constraint, it isunlikely to have a major impact in terms ofdirect employment and direct povertyreduction. Its main contributions will beforeign currency and inward foreign directinvestment, assuming the adoption ofinvestment-friendly policies and tax regimes.

These drawbacks notwithstanding, thepotential does exist for a rapid rebound, mostlyas a result of increased utilization of sparecapacity. Due to energy and foreign currencyconstraints and erratic exchange-rate policies,the country’s largest gold producer is operatingat 16 percent capacity. Many other smallproducers are in a similar position and couldincrease production over the short term.

Zimasco which earns in the region ofUS$200 million annually in foreign exchangehas already embarked on a US$30 millionexpansion project which will boost output andexports. Rationalization and regularization ofdiamond operations would channel fundscurrently being sold through informal andillegal channels into the formal bankingsector. Similarly, coal and coke production

would be re-activated. Taken together these– and other – short to medium term measureswill improve foreign currency earningssignificantly and help bridge the gap beforelonger-term projects, especially but not onlyin platinum, are brought on stream.

8.3 TOURISM

8.3.1 Introduction

Tourism is a relatively new player in theZimbabwe economy coming to prominenceonly after the economic reforms of the early1990s. In 2006/7 its contribution to GDP wasofficially estimated at 4 percent, while itaccounts for some 13 percent of foreigncurrency earnings, with a net contributionof 5 percent after adjusting for tourism-related imports. Since 2003, tourism’s shareof formal sector employment has averaged6 percent.

Tourism contributes significantly to economicgrowth through the linkages with otherindustries such as agriculture, manufacturingand services. Backward linkages are by farthe more important reflecting the industry’srole as a purchaser of goods and servicesfrom other sectors, though these haveweakened in recent years as the industry’simport propensity has risen alongsidedeclining domestic productive capacity.Typically, in tourism, forward linkages aremodest.


Although the Zimbabwe Tourism Authority(ZTA) established by the government as apromotional and regulatory authority collectsand publishes a broad range of touriststatistics, their reliability has been called intoquestion, especially recently when some ofthe data point to a strong industry-wideupsurge that is not reflected in most otherindicators.

Tourism earnings stagnated during the 1980s,averaging some US$40 million annually but

140


the industry took off in the first half of the1990s benefiting from the ESAP reforms,especially in the field of exchange-ratemanagement. Figure 8.3 shows foreigncurrency earnings trebling between 1990 and1996/7, which were the peak years withearnings in excess of US$200 million.Thereafter, as political problems proliferatedand exchange and currency controls werereimposed and tightened progressively,earnings fell steeply to below US$61 millionby 2003 (Chart 1).

Revenue estimates for 2004/07, excludedfrom Figure 8.3, show a remarkable andinexplicable surge in revenues that conflictswith other data, including balance-of-payments figures and hotel occupancies. Itis not obvious whether this is the result ofexchange rates used for conversion purposesor whether it takes the form of diaspora andtrading income declared as spending bytourists.

Whatever the explanation hotel occupancyand average spend data as well as the reportsof hotel and tour operators suggest that theZTA revenue statistics are substantiallyinflated. Room occupancy figures show thatin 2007, when revenue was estimated atUS$365 million, occupancies averaged 43percent, less than in 2003/4 (44.5 percent)

when revenues averaged US$127 million.Similarly, bednights sold declined 18 percentover this period from 39 percent utilization to32 percent and while tourist arrivals increased11 percent between 2003 and 2007, tourismreceipts are said to have increased sixfold. Afurther inexplicable statistic is the reporteddecline in the industry’s workforce between2004 and 2007, at a time when both arrivalsand revenues were reportedly rising strongly.For these reasons, the published data,especially for recent years, must be treatedwith extreme caution.

Figure 8.4 shows the trend in tourist arrivalsin Zimbabwe during the period 1990 to 2007while Table 8.6 provides an analysis oftourist arrivals, demonstrating that over halfof total arrivals is classified as ‘visitingfriends and relatives’ rather than payingtourists in the sense of staying at hotels orlodges and visiting tourist attractions. Only27.7 percent of the arrivals in 2007 (25.8percent in 2006) indicated that they wereon holiday.

Room occupancy rates underline thechanging structure of the industry. In 2007,domestic tourists accounted for 89 percentof the total reflecting the steep decline inforeign visitors. Far and away the mostimportant reason for this is the country’s poor

Source: Central Statistical Office, Harare

Figure 8.3: Zimbabwe: Tourist earnings 1980-2003 (US$ millions)

1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

250

200

150

100

50

0

US$ millions

141


image internationally and, since the adventof the crisis, the proliferation of countryTravel Warnings that has decimated the touroperator business. When national govern-ments issue the most severe travel warnings(Level One or Two), insurance cover iswithdrawn and tour operators pull out of themarket.

This bodes well for future prospects becauseit means that once the political and economicsituations normalize, travel warnings will bewithdrawn and international tourism willrevive, especially from countries whereZimbabwe’s political travails have beenclosely followed. Such countries include theUK, which until recently was Zimbabwe’slargest international market along withGermany, the Nordic states, Australia andNew Zealand.

8.3.3 Source markets

The Zimbabwe tourist market is a three-tiered one – domestic, regional and inter-national. The international market,traditionally by far the most lucrative, hasshrunk during the crisis period, leaving theother two tiers to take up the some of theslack. Ostensibly, the regional market hasgrown – in 2007 African arrivals accountedfor over 91.3 percent of the total – but, asthe depressed room occupancy numbersshow, many of these are not tourists in theaccepted sense of the word but people fromthe diaspora visiting relatives, business-people, shoppers, day-trippers, those intransit and those attending educationalinstitutions. Of the 3.34 million arrivals in2006, 56 percent were holidaymakers, 28percent were in transit, 12.5 percent

Source: ZTA (2007)

Figure 8.4: Trend in tourist arrivals in Zimbabwe, 1990-2007

Table 8.6: Tourist arrivals by purpose for visiting, 2006 & 2007

Purpose 2007 2006 % % of % ofchange total 2007 total 2006

Holiday 695,044 589,929 18 27.7 25.8

Visiting Friends& Relatives 1,411,151 1,197,734 18 56.2 52.4

Business 361,707 363,531 –1 14.4 15.9

Education 17,005 29,064 –41 0.7 1.3

Shopping 11,308 62,728 –82 0.5 2.7

Other 12,040 43,586 –72 0.4 1.9

Total 2,508,255 2,286,572 10 100.0 100.0

Source: Calculated from ZTA (2007)

1990 1992 1994 1996 1998 2000 2002 2004 2006

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000

0

No.

of

arriv

als

No. of arrivals

142


business visitors, and the balance of over 3percent came for education or toshop.

Regional arrivals are predominantly SouthAfrican – two-thirds of arrivals, excludingtransit visitors and day-trippers – whileanother 18 percent came from Zambia,Botswana, Malawi and Mozambique. TheUS is the largest single international market(1.5 percent) followed by the UK and Ireland(1 percent). Ironically given all the publicityattached to the Look East policy of touristpromotion, the numbers have fallen some 40percent from their peak in 2003 and the totalAsian share is 1.5 percent, of which a thirdis from Japan and quarter from China andHong Kong.

The steepest declines are from theOrganization for Co-operation and Develop-ment (OECD) markets – the UK, continentalEurope, Australia and New Zealand – wheresensitivities about political events in Zimbabweare greatest. The North American market hasheld up, partly reflecting the popularity ofhunting – also popular with visitors fromSpain, Portugal and Italy.

Room occupancy (bed occupancy) at 45percent (31 percent) in 2007 is below the levelof 54 percent (42 percent) achieved in 1999,and the industry now relies heavily on thedomestic market, which in 2007 accountedfor 89 percent of occupancies, compared with11 percent for foreign visitors. This applies toall the Zimbabwean tourist resorts except the

Table 8.7: Source markets (1996 and 2006)

Region 1996 number 1996 % share 2006 number 2006 % share

South Africa 572,000 35.8 1,612,000 67.0

Zambia 448,500 28.1 150,400 6.2

Botswana n.a. n.a. 105,360 4.4

Mozambique 161,200 10.1 76,350 3.2

Malawi n.a. n.a. 88,600 3.7

UK and Ireland 85,000 5.3 21,600 0.9

North America 38,700 2.4 36,630 1.5

Australia-NZ 36,100 2.3 20,560 0.8

Other Europe 147,000 8.7 78,300 3.2

Asia 21,400 1.3 36,500 1.5

Other Africa 77,000 4.8 171,000 7.1

Source: CSO Harare

Source: ZTA (2007)

Figure 8.5: Trend of room and bed occupancy, 1999-2007

1999 2000 2001 2002 2003 2004 2005 2006 2007

60%

50%

40%

30%

20%

10%

0%

Room occupancies

54%

42% 40%

29%

43%

31%

49%

36%

46%

36%39%

43%

30%

43%

25%

45%

31%

Bed occupancies

28%

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Victoria Falls, where foreigners constitute 78percent of the clientele (ZTA, 2007). Anotheradverse impact of the crisis is reflected in thedeteriorating trend in the tourism receipts,particularly between 1999 and 2003 and 2005(ZTA, 2007).

8.3.4 Administration

Tourism policy and policy formulation fallsunder the Ministry of Environment andTourism, while policy implementation restswith the Zimbabwe Tourism Authority(ZTA). The latter was established by theTourism Act of 1995. ZTA has also assumedextra responsibilities which include collectionof tourism levies, the registration, grading andinspection of tourism facilities.

The Authority’s main brief is to implementtourism policy as enunciated by the parentministry with due regard for environmentaland ecological issues, the marketing ofZimbabwe as a tourist destination, thepromotion and establishment of standards,training, and human resource development.In recent years however, the ZTA hasincreasingly become control-oriented ratherthan an industry facilitator to the point whereZTA approval is required for a tour operatorto import a new motor vehicle.

Two steps are necessary, one of which, thestrengthening of the private sector ZimbabweCouncil for Tourism and its transformationinto a Tourism Business Council along thelines of the successful Business Council inSouth Africa, is already underway, the secondis the restructuring of the ZTA itself. The ZTAneeds to revert to its core business – marketingand promoting Zimbabwe as a touristdestination, managing hotel standards andcooperating with other stakeholders in theprovision and upgrading of training facilities

8.3.5 Private sector services

Zimbabwe’s tourism development is theprerogative of the private sector, withgovernment mainly playing a regulatory role.The private sector provides the various

services such as accommodation, touring,entertainment, transport, catering, etc. Thevarious sub-sector associations representingthe diverse interests in the sector include:the Hotel Association of Zimbabwe (HAZ),the Zimbabwe Association of Tour andSafari Operators (ZATSO) and theAssociation of Zimbabwe Travel Agents(AZTA). The umbrella body of the varioussub-sector associations in the industry is theZimbabwe Council for Tourism, soon to beconverted into the Tourism Business Council.

8.3.6 Competitiveness

Although Zimbabwe’s tourism potential isnot in doubt, currently it fares very poorly interms of competitiveness with the 2008Travel and Tourism Competitiveness Report(World Economic Forum, 2008) ranking thecountry 117th out of 130 countries. Thereport describes this as ‘a low ranking for acountry with such natural endowments suchas the famous Victoria Falls. Indeed,Zimbabwe is ranked 33rd for naturalresources overall, with a number of WorldHeritage natural sites, much protected landarea, and rich fauna’.

But despite these strengths, the country hasan extremely low overall ranking – wellbelow that of regional competitors such asSouth Africa (60), Botswana (87), Tanzania(88), Namibia (93), Kenya (101) and Zambia(107). The World Economic Forum says thishighlights Zimbabwe’s weaknesses in allother areas assessed. Its policy environment(128) is amongst the worst in the world andit is ranked bottom for both law related toforeign direct investment and property rights.Safety and security are ‘major concerns’(123) as are health indicators (128). Thereport concludes that better governance ‘isimperative to get the country back on trackfor improved Travel and TourismCompetitiveness’.

8.3.7 Strategy and structure

Zimbabwe has never been a standalonetourist destination for long-haul international

THE ZTA HAS

INCREASINGLY

BECOME

CONTROL-

ORIENTED RATHER

THAN AN INDUSTRY

FACILITATOR TO

THE POINT WHERE

ZTA APPROVAL IS

REQUIRED FOR A

TOUR OPERATOR

TO IMPORT A NEW

MOTOR VEHICLE

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tourists though it is one for regional visitorsfrom nearby countries. It is part of theSouthern African market and along withBotswana, Namibia and Zambia, is an ‘add-on’ for overseas visitors to South Africa, withJohannesburg as the regional hub.

Typically in the past, international, as distinctfrom regional, tourists would fly into Harareand then spend approximately six to eightdays in the country, visiting Zimbabwe’spremier tourist attractions at Kariba, theVictoria Falls and – sometimes – Bulawayoand Great Zimbabwe. There was also anumber of niche markets ranging fromgolfing tours, especially to Nyanga and theFalls, canoeing on the Zambezi, houseboatingon Lake Kariba as well as hunting andphotographic safaris.

Since 2000 the industry structure has evolvedwith the Victoria Falls taking on the mantleof the Zimbabwe tourist hub, partly becausein its post-2000 marketing strategy theindustry set out to deliberately rebrand theVictoria Falls as a standalone destination,not tarnished by political events in the restof the country. In the process, Harare lostits hub role – though many business visitorsto Harare still visit the Falls. Because it isby far Zimbabwe’s most important – andmost profitable – tourist attraction, theVictoria Falls has managed to avoid muchof the adverse publicity that has tainted therest of the country.

Despite this, the Victoria Falls has lostsubstantial market share to Zambia, butZambia is not as attractive a location interms of actually viewing the Falls andZambian hotels and tour operators havesought to exploit this political marketwindfall by raising hotel tariffs to the extentthat the Zimbabwe industry is convinced thatgiven a level playing field politically it willquickly recapture its lost markets.

Unfortunately, infrastructure, especially airtravel capacity, poses a serious snag to thisoptimistic scenario underlining the necessityfor expanding and revamping the VictroriaFalls airport. On a cost competitiveness

basis, even with hyperinflation, Zimbabweremains a relatively cheap destination,certainly when set against Kenya, Mauritius,South Africa, Botswana and Zambia, all ofwhich are more expensive destinations. Insome cases, room rates on the Zambian sideof the Falls are double those on theZimbabwe side. For this reason, touroperators have already indicated plans toreturn to the Zimbabwe market once thepolitical crisis is resolved.

The key to enhanced performance is anextension of the period that tourists stay inthe country. The typical 6-day visit of thepast is now closer to two days. Accordingly,the challenge for the industry is to extendthe period of tourist stay by broadening anddiversifying the services and activitiesavailable. A one night extension in theaccommodation period increases earnings bya quarter. At present Zimbabwe is a veryshort-duration destination – two days pervisitor. The industry has set itself the targetof raising this to three days.

8.3.8 Constraints on tourismdevelopment

Until the end of the 1990s, areas of touristattractions in Zimbabwe were reasonablyaccessible as the country had a welldeveloped transport and communicationsnetwork. The major resorts were well servedby road, air and rail transport. In the secondhalf of the 1990s, the national airline, AirZimbabwe, was complemented by twoprivately owned airlines in order to cope withinternal tourist traffic. Zimbabwe Expressand Expedition Airways had daily flightsfrom Harare to Kariba, Bulawayo andVictoria Falls. Smaller but important touristdestinations like Masvingo, Chiredzi, andBuffalo Range were serviced by ExpeditionAirways. The Victoria Falls was also servedby air directly from Johannesburg in SouthAfrica, while Harare International airportwas served by leading European carriers.However, as the crisis deepened, so bothinternational airlines and local airlinesretreated or disappeared altogether.

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Today, airline infrastructure is the single mostimportant constraint. Because of thechanging structure of Zimbabwe’s touristmarket, with the tourism hub having shiftedfrom Harare to the Victoria Falls, the crucialbottleneck is the handling capacity of theFalls airport. Even if all flights to the VictoriaFalls – both domestic and international –were completely filled with tourists, the roomoccupancy rate would be no more than 40percent. Unlike the airport at Livingstone onthe northern side of the Zambezi River, theVictoria Falls airport is too small to cater forlong-haul wide-bodied aircraft. To exploit thearea’s tourist potential to the full, the runwaymust be lengthened and the airport buildingenlarged or rebuilt altogether.

Tourism would benefit from the imple-mentation of an ‘open skies’ policy (chapter10 on infrastructure) that might attract backsome international carriers which haveceased providing services to Zimbabwe. Airtransport will be a key component of theshort-term revival strategy, generatingforeign currency as well as helping to boostemployment.

The airline constraint could be eased alsoby requiring the national carrier to enter intocode-sharing agreements with other airlines.This would immediately open up the numberof landing slots available to internationalairlines and, provided it is accompanied bythe extension of the runway and expansionof the Victoria Falls airport, it would increasecapacity substantially.

In recent years, skills have become a majorconstraint. Ahead of the 2010 Football WorldCup in South Africa, Zimbabwe has beenhaemorraging tourism skills, in part becauseZimbabweans have a superior work ethicbut also because their better education, andespecially language skills, attract SouthAfrican employers.

Although Zimbabwe currently has fivetertiary institutions – of variable quality – thatoffer hotel/tourism training, this is an areathat will require special attention in thefuture. There has been a steep decline in

industry standards, especially in the smallerhotels and destinations that rely on domesticbusiness and that are unable to accessforeign exchange. As a result, they areunable to provide even the most basicservices in terms of food, beverages,accommodation and transport.

Other serious constraints are those that aregeneric to the current economic situation:

• Macroeconomic distortions, includingan overvalued exchange rate whichundermines the competitiveness of thesector;

• Inadequate and deteriorating infra-structure;

• A much increased reliance on importedinputs, reflecting weaker backwardlinkages, and

• Infrastructure, mainly water andelectricity.

Accommodation: Although many lodgesand tourism camps have either closed downor are in a low maintenance state, Zimbabwegenerally still boasts of a wide variety ofaccommodation for international, regionaland local tourists. These range from thesimple camping sites through the ruggedcamps in the bush, luxury and exclusive safaricamps and backpacker lodges to up-marketfive star hotels and lodges. Though the lattergroup of facilities are still in good conditionand can readily accommodate visitors, thereis need for a face lift of these premises andsupportive systems.

8.3.9 The future

The Zimbabwe tourist industry of the futurewill be very different from that of the 1990s.The hub has already moved from Harare tothe Victoria Falls and this is unlikely to bereversed. The use of small aircraft to ferryvisitors to different destinations – Kariba,Bumi Hills, Hwange Game Park and GreatZimbabwe – will change the nature of thetourist package, especially as currently

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Zimbabwe provides these services morecheaply than its rivals in Botswana, Namibia,Zambia or Kenya.

Much has been made of the potential gainsfrom the 2010 Football World Cup. Thisshould be seen in perspective, There willcertainly be an increase in the number oftourist arrivals to the region, but an unknownproportion of those will be substitution orreplacement visitors. In other words, manytourists who might otherwise have come toZimbabwe will go elsewhere to avoid theWorld Cup crowds. From Zimbabwe’sviewpoint, possibly the main plus from theWorld Cup will be the opportunity to re-establish the country as an attractiveSouthern African tourist destination. It willbe more of a promotional opportunity than asource of immediate growth.

The main strategic objective of a recoveryand development policy for the tourism sectorshould be the removal of the variousdistortions that impede its recovery andsustainable growth and to develop andstrengthen the backward and forwardlinkages between the tourism sector andother sectors of the economy.

By marketing Zimbabwe as a new and safetourist destination, a post-crisis Zimbabwewill reinforce the dividends of politicalrecovery under a new improved securityenvironment with proactive programmes toincrease domestic, regional and internationaltourism. This is because tourism and securityare positively correlated, the more secureZimbabwe becomes, the more it will be ableto attract tourists.

8.3.10 Sustainable recovery policies

The overall goal of Zimbabwe’s tourismpolicy will be to realize the country’s tourismpotential in an integrated approach thatemphasizes local participation and bene-ficiation. Tourism will be an increasinglyimportant element of the economy, utilizinglocal resources and mainly domestic capitalto generate employment and foreign-

currency benefits for the nation as a whole.Compared to some of the economic initiativesthat will be implemented, a rejuvenatedtourism sector provides the quickestturnaround because it is not capital intensive.

The specific measures to be deployed willbe:

• An international campaign to advertisethe post-crisis Zimbabwe under the newand secure environment will offerdifferent tourism expectations.

• Active participation in regional andcross-border tourism initiatives, includingthe Great Transfrontier Park project withMozambique and South Africa.

• Diversification of tourism into culturaltourism, village-based tourism,ecotourism, conference and incentivetravel, and sports and recreation(particularly golf). These strategies willextend the employment and incomebenefits of tourism to a much widerrange of Zimbabwean workers.

• Encouragement of a value chainapproach with strategies to encouragetourists to buy Zimbabwean productswhile visiting the country, particularlycrafts and works of art, gold andjewellery.

• Identification of zones for theaccelerated development of tourisminfrastructure.

• Strategies to enable more Zimbabweansto enjoy national tourist destinations.

• Provision of clear mandates andadequate resources to institutionsresponsible for the promotion of tourismwithin Zimbabwe.

• Careful consideration of tourism in thefinalization of land reform, includingstopping the current depletion of wildlifeand other natural resources and thedestructive effects of gold-panning.

THE STRATEGY

THEREFORE

SHOULD BE

BALANCED, NOT

FOCUSING JUST

ON JOBS OR

COMMUNITY

TOURISM, BUT

ENHANCING THE

LINKAGES AND

LOCAL ECONOMIC

DEVELOPMENT

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8.3.11 Pro-poor tourism

Pro-poor tourism increases the positiveimpacts of tourism on poor people. Theapproach seeks to increase participation ofpoor people at many points in the sector andaims to increase their economic and socialbenefits from tourism while reducing thenegative impacts on the poor. Communitytourism is an example of pro-poor tourism.The tourism supply chains also have to extendfar into the local economy – not just benefitingtour operators, hoteliers and transportcompanies, but encompassing workers andentrepreneurs from different sectors. Thestrategy therefore should be balanced, notfocusing just on jobs or community tourism,but enhancing the linkages and local economicdevelopment (Ashley, 2006).

Tourism export industry as part of anoverall national export strategy: AsJAMPRO (2005) highlighted, the tourismsector provides a ‘domestic export market’in that: i) its clients are mainly foreign, ii) it isan earner of foreign exchange; iii) it providesthe opportunity to showcase local productsand testing their international acceptance,thus providing an intermediate exportmarket; iv) it is a testing ground for theexport market to determine export readinessof local producers; v) it creates demand forexports; and vi) enhances competitivenessof exports as producers have to meet theinternational quality standards. The tourismsector is therefore an integral part of theexport sector and hence it should be part ofan overall national export strategy.

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149

The roots of Zimbabwe’s land policy and itsagricultural development lie in the historicaldivision of land according to race and thesubsequent evolution of a dual agrarianstructure.1 At independence in 1980, thisstructure was characterized by two distinctagricultural systems: a predominantly whitecommercial farming sector, and a traditional(communal) farming sector. The governmenttherefore embarked on two ambitiousprogrammes. The first was to correct thehistorical imbalance in land occupation byresettling households on underutilizedcommercial farms in order to decongest theovercrowded communal areas. The secondwas a development plan to reorganize landuse within the communal areas in order toreduce rural poverty.

Progress with both the resettlement pro-gramme and the Communal Land Develop-ment Plan, however, proved disappointing.By the late 1990s, less than half the targetednumber of families had been resettled, andthe number of households living in thecommunal areas had swelled to over onemillion. The Communal Land DevelopmentPlan had faltered and then petered out. Inan effort to revive the resettlementprogramme, a donor’s conference on landwas convened by the UNDP in September1998. Although agreement was reached, theZimbabwe government decided instead toacquire commercial farms compulsorily forresettlement and to transfer responsibilityfor compensation to Britain in a new draftconstitution.

When the government’s draft constitutionwas defeated in a referendum in February2000, it embarked on a Fast Track LandReform Programme (FTLRP) in 2000,

Chapter 9

Land Policy and Agricultural Recovery

leading to the occupation of thousands ofcommercial farms. Though it may havecorrected the historical imbalance of landownership, the implementation of theprogramme was neither just nor sustainable.The cost to the economy and the people hasbeen devastating. Zimbabwe is thereforeagain faced with the need for an equitableand sustainable resettlement programme andpolicies to reduce poverty in the communalareas. Fortunately, agriculture has thepotential to become a primary source ofgrowth and bring about poverty reduction ina future recovery programme (Mellor, 2000).Such potential, however, is predicated on afundamental reorientation in land policy.

9.1 OVERVIEW OF PASTPERFORMANCE: 1980–1997

9.1.1 Zimbabwe’s inheritance

Farm sizes and farming potential

At independence in 1980, the Zimbabwegovernment inherited a patently unfairdistribution of land as well as deep andpersistent poverty in the communal areas.About 5,600 white commercial farmers hadaccess to 15.5 million hectares of land, whileover 780,000 smallholder farmers had tosubsist on 16.4 million hectares of land.Whereas the average size of a commercialfarm was over 1,000 hectares, the averagesize of a communal farm was less than 10hectares. At that time, large and fecundwhite commercial farms lay alongside poolsof communal poverty, where thousands ofblack smallholders had to subsist on tinyholdings.

1 Dualism was initially created and maintained by the entry of foreign capital or colonization into the pre-capitalist indigenous economy (Ndlela, 1981: 24).

AT INDEPENDENCE

IN 1980, THE

ZIMBABWE

GOVERNMENT

INHERITED A

PATENTLY UNFAIR

DISTRIBUTION OF

LAND AS WELL AS

DEEP AND

PERSISTENT

POVERTY IN THE

COMMUNAL AREAS

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There were also significant variations in theagricultural potential in the two farmingsectors.2 Table 9.1 shows that the mostproductive land, in Natural Regions I and II,was held by commercial farmers, while mostof the poorer communal farming areas fellinto Natural Regions IV and V, which havevery limited agricultural potential. One of theobjectives of post-independence land policywas, therefore, to acquire more commercialfarmland in Natural Regions II and III forresettlement.

State marketing and agricultural researchorganizations

Parastatal organizations dominated themarketing of agricultural commodities in1980. These had given the state leverageover agricultural prices and production whenpursuing an import substitution strategy inthe face of international sanctions imposedafter UDI.3 The major agricultural marketingboards established before independenceincluded the Grain Marketing Board, the ColdStorage Commission, the Dairy MarketingBoard, the Cotton Marketing Board, and theAgricultural Marketing Authority. Zimbabwetherefore inherited a highly regulated andmonopolistic agricultural marketing structurein 1980.

The state also had a sizeable stake inthe country’s research establishments.

Significant advances had been made in thedevelopment of hybrid seed maize for thehigher rainfall regions, as well as shortseason varieties for the drier communalareas. Research into cotton, wheat, tobaccoand oilseed production saw impressive gainsin productivity and yields. Despite thisimpressive contribution of agriculturalresearch to national development, it focusedmainly on high input technologies that werebeneficial to commercial producers ratherthan to smallholders. After independence,therefore, agricultural research focusedmore on the smallholder sector whileattempting to maintain the technology gainsin the commercial sector.

9.1.2 Socialist transformation,1980–1990

The imperatives of land redistribution andpoverty reduction

The priorities at independence were tocorrect the historical imbalance in landthrough an orderly, transparent andsustainable land redistribution programme,and to reduce poverty by relieving thepressure of population and livestock oncommunal land. The Zimbabwe Conferenceon Reconstruction and Development(ZIMCORD) was held in March 1981 togarner international donor support to meet

Table 9.1: Percentage of land allocated across Natural Regions and land categories (1980)

Land categoryNatural (farming) regions

I II III IV V

Large-scale commercial farms 71 69 45 28 26

Communal areas 13 21 39 50 49

Small-scale farming areas – 4 4 4 2

State land 16 6 12 18 23

TOTAL PERCENTAGE 100 100 100 100 100

Percentage of total area 1.8 15.4 17.5 36.4 28.9

Source: Zimbabwe (1986a: p.96, Table 4)

2 Vincent and Thomas (1961) used rainfall patterns and soil characteristics to define five Natural Regions (I–V),which correspond to different zones of agricultural potential in Zimbabwe.

3 Rhodesia unilaterally declared independence from Britain in November 1965. Soon afterwards, the UnitedNations imposed international economic sanctions against the Rhodesian regime.

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Chapter 9 – Land Policy and Agriculture Recovery

these national objectives (Zimbabwe, 1981c).The conference document reiterated thegovernment’s three key land and agriculturalpolicies:

• To intensify agriculture in the communalareas to increase productivity.

• To create a more equitable distributionof land through resettlement.

• To reduce population pressure in thecommunal areas by encouraging ‘non-farming’ families to migrate to urbancentres.

The new government’s developmentphilosophy, articulated in its TransitionalNational Development Plan, 1982–1985,foresaw the introduction of socialist propertyrelations through cooperative enterprises andstate participation in production, distributionand allied services (Zimbabwe, 1982). In itsagrarian vision, peasant associations wouldstimulate the collective spirit and organizethemselves into centralized villages. Thepredilection of government was therefore tocontrol land through direct participation inagriculture, through land acquisitions,government leases and permits and, even-tually, nationalization.

Agricultural intensification

In the 1980s, the state used variousapproaches to intensify agriculture: researchand training, pricing policies and subsidizedmarketing outlets, and a communal landdevelopment programme. Research wasrestructured to cater for smallholderproduction by the initiation of programmesof on-farm research and extension, thedevelopment of new varieties of traditionalsmall-grain food crops that were suitable forthe semi-arid regions, and the use of hardyindigenous cattle and sheep for meatproduction. The government also maintained

the parastatal marketing and financingsystem, which initially helped smallholdersto achieve production levels in maize andcotton in the mid-1980s that surpassedcommercial production. Attractive producerprices, the expansion of maize collectiondepots throughout the country by theGrain Marketing Board (GMB), and loansprovided by the Agricultural FinanceCorporation saw stocks of maize reachrecord levels. In 1986, the Communal LandDevelopment Plan was presented as anagrarian reform strategy based on ‘clearlydefined land use patterns, more intensive useof land, thus resulting in higher productivity’(Zimbabwe, 1986a: 54). Its central conceptwas the reorganization of land use within aconsolidated village, with clearly demarcatedresidential and cropping areas according tominimum farm sizes. Land was to be heldon the basis of a government lease.

Resettlement and migration

An ‘intensive’ resettlement programme waslaunched in 1980 to resettle 18,000 house-holds from the overcrowded communalareas onto 1.1 million hectares of formercommercial farmland over three years.This programme was superseded by an‘accelerated’ resettlement programme,initiated as part of the TransitionalNational Development Plan. This called forthe resettlement of 162,000 families on 9million hectares of underutilized commercialfarmland over three years (Zimbabwe, 1982).A third development strategy was tofurther decongest the communal areas byencouraging migration to towns and cities.In a bid to reduce the number of householdsin the communal areas to their estimated‘carrying capacity’ of 325,000 households,235,000 communal families were expectedto join their family breadwinner who wasworking and living in an urban centre(Zimbabwe, 1981a).4

4 The ‘carrying capacity’ of the communal areas was the estimated number of families whose livelihoods could besustained within the communal areas.

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Evaluation of strategies

By the end of the 1980s, the implementationof these strategies had proved disappointing.As Table 9.2 shows, although over 56,500families had been resettled, this fell well shortof the target, and the programme lostmomentum.

The slowdown was particularly noticeableafter 1985. Only 14 percent of the total landtargeted for resettlement was acquiredbetween 1986 and 1990. This period alsoaccounted for 27 percent of the householdsresettled compared to 70 percent during thepreceding five-year period. Nor had thecommunal land reorganization programmegained traction. One study found thatbetween1986 and 1991 plans had been drawnup for only four out of ninety villages in theUMP district5 (Doré, 1993). By the 1990sthe plan had been shelved. In the meantime,the expected migration of households totowns and cities had not materialized. Ratherthan the communal areas being decongestedto their target population of 325,000households, the number of households hadincreased to about one million by 1990.

The limits of intensifying smallholderagricultural production had also been felt.Smallholder maize production levels, whichhad peaked in 1985 at 1.7 million tonnes,declined during the four following years tobelow 1.35 million tonnes. Investigationsrevealed that the increase in maize productioncame from just 10 percent of farmers in thebetter agro-climatic areas (Natural Regions

II and III). Generous pricing policies had by1986 created an oversupply of maize, whilemarketing support and subsidies saw largeand unsustainable budget deficits develop.Meanwhile, owing to poor loan repaymentrates, smallholder credit tailed off con-siderably. The number of small farmers whoreceived loans during the 1989/90 croppingseason had dropped by over 40 percent fromits peak in 1985 (Rohrbach et al.,1990).

9.1.3 Economic liberalization,1991–1996

The commercialization of the agriculturalmarketing authorities

As part of Zimbabwe’s economic structuraladjustment programme (ESAP), changeswere made to the constitutions of theagricultural marketing boards in 1991 thatgave them greater autonomy in pricing andbusiness decisions. The Dairy MarketingBoard was commercialized in 1993 and thenprivatized as Dairiboard Zimbabwe Ltd in1996. The Cotton Marketing Board wasgranted formal managerial autonomy in1991, and its monopoly in purchasing, ginning,marketing and exporting cotton was removed.The Cotton Company of Zimbabwe (Cottco)was launched in 1994 to replace the CottonMarketing Board. It was then privatized in1997. The monopoly of the Cold StorageCommission was also broken in 1991, whenbeef marketing on the domestic market wasliberalized. Private abattoirs were licensedand the Commission was rebranded as the

Table 9.2: Land acquisition and resettlement

Financial year Land acquired (ha) % of total No. of families settled % of total

1979 87,000 3 1,971 3

1980–1985 2,298,000 83 39,364 70

1986–1990 395,000 14 15,183 27

Total 2,780,000 100 56,518 100

Source: Mhishi (1995)

5 UMP stands for the communal areas Uzumba, Maramba and Pfungwe that constitute the district. UMP lieswithin Mashonaland East Province.

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Cold Storage Company, but it still retainedits monopoly on exports. The Grain MarketingBoard was commercialized and the agri-cultural commodity exchange (ZIMACE)provided the benchmark for prices. By 1996maize marketing and prices were completelydecontrolled on the domestic markets. Maizetrading throughout the country was freed andall subsidies removed. The decontrols wereparticularly effective because they wereaccompanied by the lifting of foreigncurrency and import restrictions, thus allowingthe purchase of vehicles, processingequipment and other inputs (Muir-Lerescheand Muchopa, 2006).

Land policy and resettlement

In 1990 the ‘willing seller – willing buyer’land acquisition restrictions imposed by theLancaster House Constitution expired. InJuly of that year the government unveileda new national land policy. Amongother measures, 5 million hectares ofcommercial farmland was to be acquired(over and above the area already settled) inorder to resettle a further 110,000 families.6

Prices paid for land were to be fixed at a‘realistic’ level. To make these new targetspossible, the government set about clearingthe constitutional and legal hurdles for full-scale resettlement. In 1992 the ‘willing buyer– willing seller’ principle and the paymentof market prices for land were dropped.Instead, a substantially reworked LandAcquisition Act [Chapter 20:10] allowed forthe compulsory acquisition of land based ona complex set of fifteen principles to derivea ‘fair’ price for compensation. Even so, thepace of resettlement remained stubbornlybelow 2,500 households per annum between1990 and 1993 (Mhishi, 1995).

In May 1994 the resettlement programmebecame mired in controversy. It becameapparent that land earmarked forresettlement had been allocated to seniorgovernment officials, including ministers

and military officers. In almost all cases,properties were received at well belowmarket value. Although the President latercalled for the leases to be cancelled, seniorofficials continued to receive large tracts ofland. Many never paid for the leases or, sincethe prices were never adjusted for inflation,paid derisory low rates. The manner in whichleases were allocated and the lack of atransparent system to advertise the avail-ability of farms led to concerns about theprocess as a whole (International CrisisGroup, 2004).

Despite the passing of the Land AcquisitionAct (to speed up the resettlement process)and constitutional amendments (to preventfarmers from challenging ‘fair’ com-pensation in the courts) the total number offamilies resettled by 1997 had risen to just71,000 on 3.5 million hectares. Only 17,000poor families – against the target of 110,000– had been settled since 1990. But, ratherthan back-tracking, the President used theBritish government’s reticence to fund landredistribution to galvanize support for his1996 electoral campaign, threatening to seizethe land of white commercial farmers withoutcompensation (International Crisis Group,2004).

9.2 CURRENT SITUATIONANALYSIS, 1997–2008

9.2.1 The emerging crisis, 1997–1999

When the Zimbabwean President was unableto persuade the British Prime Minister toprovide substantial funds for land acquisitionin October 1997, he ordered his agricultureminister to identify and list 1,500 commercialfarms covering 4 million hectares for rapidacquisition. He also made it clear that heexpected Britain to pay:

6 This approximated the original target of 162,000 households on 9 million hectares, minus the households andthe area that had already been settled.

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‘We are going to take the land and weare not going to pay for the soil. Thisis our set policy. Our land was neverbought and there is no way we couldbuy back the land. However, if Britainwants compensation, they should giveus money and we will pass it on to theirchildren.’7

In an effort to broker a solution, the UNDPcalled for a donor’s conference on land withthe participation of Zimbabwean stake-holders. The Zimbabwe government’sproposal for Phase II of its Land Reformand Resettlement Programme suggestedresettling over 90,000 families over a periodof five years at a cost of US$1.9 billion.Eventually the conference agreed to a set ofprinciples, including compensation for land,and to establish a UNDP Technical SupportUnit. The unit’s role was to assist in carryingout a two-year inception phase based on theacquisition of 118 farms on a ‘willing seller –willing buyer’ basis.8 By early 1999 thegovernment had done little to follow up onthe donor conference’s recommendationsand its focus had shifted. The Presidentappointed a Constitutional Commission todraft a new constitution for the country.Inserted into the final draft constitution wasa clause that allowed the government toacquire farms without paying compensationfor land. Instead, this responsibility wasshifted to the ‘former colonial power’ –Britain.

9.2.2 The Fast Track Land ReformProgramme, 2000–2008

Land occupation and allocation

Following the rejection of the government’sdraft constitution in a referendum in February2000 – the ruling party’s first popular defeatsince coming to power in 1980 – action wastaken to shore up support before the

parliamentary elections scheduled for June2000. Central to the strategy was a newradicalized approach to land reform that couldsecure the rural areas ahead of the elections.In a process marked by considerablecoercion, thousands of party-sponsoredsettlers occupied commercial farms. Thenumber of farms listed for acquisition roseto over 3,000 by the end of July 2000, bywhich time at least 1,600 farms had beenoccupied. The occupation of commercialfarms was legitimized through changes in theconstitution and legislation, and confirmed bythe publication of People First in July 2001,the formal document of the FTLRP. Twomodels of resettlement were proposed: aModel A1, in which each household wouldbe allocated at least 3 hectares of arableland, but with shared grazing; and Model A2schemes based on small, medium and large-scale commercial farms with 99-year leases(Zimbabwe, 2001).

9.2.3 The re-imposition of statecontrol over pricing

In July 2001, maize, maize products, wheatand wheat products were declared controlledproducts. This made it illegal to buy, sell ormove these products within Zimbabwe, otherthan to the GMB. ZIMACE was officiallysuspended. These restrictions were furthertightened in December 2001 when farmerswere compelled to deliver maize and grainstocks to the GMB no later than 14 days afterharvest. In early 2002, the holding of all grainstocks by farmers was banned and grainsupplies were seized, leaving the livestockindustry and farm-workers facing a crisis.Some smallholder farmers had grain stocksseized and all existing grain contracts werecancelled. By September 2006, governmentcontrols and food subsidies had led to bizarreprice distortions. For example, the governmenthad fixed the producer price of maize atZ$33,000 per tonne which the GMB, as the

7 The Guardian (London) 15 October 1997.8 Communiqué issued at the end of the International Donors’ Conference on Land Reform and Resettlement in

Zimbabwe, 9–11 September, Harare, 1998.

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sole lawful dealer in maize, sold to millers atZ$600 per tonne, representing a 98 percentsubsidy.

9.2.4 The decline of agriculture

Commercial agriculture – prior toZimbabwe’s current political and economiccrisis – was the largest formal sectoremployer in the country and made significantcontributions to national income and exportearnings. Since the onset of the FTLRP in2000, however, over 200,000 workers havelost their jobs and total commercial agri-cultural production has more than halved.Table 4.3 shows that, for a selection ofcommercially produced commodities,aggregate output in 2007 was only 42 percentof output in 1998. Before 2000, in a ‘normal’non-drought season, the commercial sectorwould complement communal production toproduce a national total of about 2 milliontonnes of maize to meet the country’s needs.Today, the country is struggling to producemore than 1 million tonnes. Likewise, wheatproduction has declined from about 270,000tonnes in 1998 to 62,000 tonnes in 2007 –falling well short of the national requirementof 350,000 tonnes.

However, there is wide variation in thedecline in production levels of variouscommodities. Tea and sugar plantationsremain at 83 percent and 69 percent of their1998 levels, respectively, while maize,tobacco and beef production is down to abouta third of previous levels. Coffee productionhas virtually ceased, and cotton is no longerproduced by large-scale farmers.

The right-hand side of Table 9.3 shows theproportion of the commodities still beingproduced by commercial farmers. Forexample, although there has been asubstantial decline in wheat and dairyproduction, the proportion produced bycommercial farmers has actually increased.This suggests that smallholder production ofthese commodities has declined. Conversely,the proportion of maize and beef producedby commercial farmers declined significantly,suggesting that any downturn in smallholderproduction has been less severe. Cotton isan interesting case. Whereas Table 9.3shows that cotton production on commercialfarms has shut down, Figure 9.1 shows thatsmallholder production overtook commercialproduction in the 1980s and maintainedproduction levels after 2000 – largely due to

Table 9.3: Decline in commercial agricultural production for selected commodities between1998 and 2007

Percent Proportion of PercentCommercial of 1998 commercial production of 1998

Category Crop production levels in total production levels

Tonnes (000) % % %

1998 2007 1998 2007

Food Maize 521 160 31 36 23 63

crops Wheat 270 62 23 90 96 106

Soyabeans 113 64 57 99 95 96

Export Cotton 77 0 0 28 0 0

and Tobacco 210 65 31 97 88 92

Plantation Coffee 10 1 10 99 98 99

Tea 18 15 83 99 97 98

Sugar 553 384 69 97 96 98

Livestock Dairy 184 86 47 93 98 105

Beef 350 120 34 67 48 72

TOTAL 2,306 957 42

Source: Commercial Farmers Union

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cotton marketing corporations supplyinginputs for growers and providing them witha ready market for their produce.9

More generally, Zimbabwe’s agriculturalperformance can be measured by the percapita value added. Figure 9.2 shows that ithas declined from its peak in 2001 to abouthalf that level in 2006. This drop is explainednot only by the impact of the FTLFP oncommercial production, but also by criticalinput constraints. At a meeting of the

Parliamentary Portfolio Committee on Landand Agriculture in September 2007, it wasreported that agricultural supply constraints(due to foreign exchange shortages) hadbeen exacerbated by government price cutson goods throughout the country in June 2007,in an exercise known as Operation DzikisaMutengo (Operation Reduce Prices). Arepresentative for the fertilizer companiesreported that costs of producing fertilizerwere running at six to ten times thegovernment controlled selling price, while the

Source: UNDP (2008a)

Figure 9.1: Commercial and communal cotton production: 1980–2006

9 See Box 5.1 in chapter 5 on the financial sector.

Source: Central Statistical Office, Harare, National Accounts (various editions)

Figure 9.2: Agricultural value added per head (constant 1990 prices)

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

300

250

200

150

100

50

0

Tonn

es (t

hous

ands

)

Commercial

Communal

1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

450

400

350

300

250

200

150

100

50

0

Z$

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capacity to produce fertilizer had beencrippled by power outages at thephosphorous producing mines. Seed maizecould not be secured from growers becausethe prices offered were only one-fifth of thecost of importing seed. Acute shortages offuel and equipment were also reported.

Indices of overall agricultural production,such as those in Figure 9.2, disguise the widedisparities between commercial and com-munal producers, as well as betweensmallholder farmers themselves. Averagemaize yields in the commercial sector areabout four tonnes per hectare in a normalseason (without drought), while communalareas manage to produce only about onetonne per hectare.

Table 9.4 shows the very wide disparities inagricultural production within the communalareas, with the bottom 25 percent producingless than one-tenth of the top 5 percent ofsmallholder farmers. Many householdswithin the communal areas – especially thoseafflicted by HIV and AIDS – remain highlyvulnerable to external shocks, such asdroughts, input constraints and politicalunrest. The household food insecurity andvulnerability picture for the 2006/07agricultural season was dire. One-third ofthe population, or 4.1 million people, neededfood aid through to April 2008 (FAO/WFP,2007). Worse was to follow. The most recentFAO/WFP Crop and Food Supply Assess-ment Mission estimated that about 5.1 millionpeople in both the rural and urban areas

would need food aid at the height of the‘hungry season’ between January andMarch 2009 (FAO/WFP, 2008).

9.2.5 The adverse impact of theFast Track programme

Underutilization of land

In part, the decline in agricultural output canbe attributed to the underutilization ofcommercial farmland that had been acquiredbut not settled. The Presidential Land ReviewCommittee, commissioned in 2003 under thechairmanship of Dr Charles Utete, confirmedthat only two-thirds of the applicants forthose commercial farms divided up for A2resettlement took up their offers of land.11

This translates into 2.8 million hectares, or 7percent of Zimbabwe’s total land area, thatremained unutilized.12 Anecdotal evidencesuggests that the level of land use andintensity of production has remained low, andthat significant portions of once highlyproductive commercial farms remain idle(FAO/WFP, 2008).

Loss of farming skills

The reduction in output can also be attributedto the displacement of skilled and experiencedcommercial farmers and their workers. In2000, an estimated 320,000 farm-workers,representing about 25 percent of Zimbabwe’stotal work force (in formal employment), wereemployed on commercial farms. In theaftermath of the land invasions over 200,000

Table 9.4: Income distribution from agricultural production for communal households in Uzumbacommunal area

Percentiles of TOP Percentiles BOTTOM

annual crop income 5 10 25 50 25 10 5

Crop income (Z$)10 2,859 1,857 1,079 616 268 98 55

% of top 5% (100) (65) (37.8) (21.5) (9.4) (3.4) (1.9)

Source: Doré (1993)

10 The official exchange rate at the time of the survey was approximately Z$5 to US$1.11 Zimbabwe (2003: 39) Table 212 Zimbabwe (2003: 42) Table 5

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farm-workers and their families – anestimated one million people – lost theirlivelihoods and homes, as well as access tofarm schools and other social amenities(Sachinkonye, 2003).

Subdivision of land into sub-economicunits

The process of subdivision of farms did nottake sufficient cognizance of the farms’layout and structure. The infrastructure ofcommercial farms was based on a homesteadand centralized farm operations that includedmachinery, workshops, sheds and barns, aswell as an irrigation system that wasdependent upon a single water source and asystem that branched out across the farm.The new subdivisions, however, cut acrossthis infrastructure. As a result, many of thenew farms do not have access to the formerfarm’s resources and facilities, making themless efficient and viable.

9.3 CONSTRAINTS TOAGRICULTURAL GROWTHAND RECOVERY

Land policy – regarding the controversialresettlement programme and the stagnatingcommunal areas – has been the key under-lying constraint to agricultural growth andrecovery. The other major constraints havebeen the fragmentation of nationalinstitutions and a trade regime that lackscompetitiveness.

9.3.1 Resettlement

Governance constraints

Under Zimbabwe’s constitution, thePresident has wide-ranging powers to makeappointments throughout the public service,including the judiciary. When the judiciaryacted to constrain executive powers after2000, extra-judicial means were applied to

overrule the decisions of the Bench. InNovember 2000, the Supreme Court ruledthat the FTLRP was illegal because properprocedures had not been observed. Ittherefore ordered the removal of illegalsettlers. The following month, Supreme Courthearings on the land invasions were disruptedby ruling party supporters. On 21 December2000, when the Supreme Court found theland programme to be ‘entirely haphazardand unlawful’, ruling party supporters calledon Chief Justice Gubbay to resign or riskassault. The Chief Justice then took earlyretirement and the President used his powersto expand the bench from five to eight seats.The Supreme Court subsequently reversedits decision, pronouncing the FTLRPconstitutional (International Crisis Group,2004).

More recently, the President has relied onsupport from his service chiefs in the armedforces and trusted advisers, who meet asthe Joint Operations Command (JOC). Thepurview of JOC goes beyond the purelymilitary and now includes economic policydecisions, such as Operation DzikisaMutengo (Reduce Prices). JOC’s mainintervention in agricultural affairs wasOperation Maguta,13 initiated in November2005 to increase maize production withthe help of the military on underutilizedcommercial farmland (see Box 9.1). Farmsaround the country were identified wherearmy units could be deployed to producefood. Levels of land use and food productionhave, however, not recovered.

Financial constraints

In the Zimbabwean nationalist narrative,articulated by the President, ‘The liberationstruggle was principally about recovering ourland from British colonial settlers who hadexpropriated it from us’ (Zimbabwe, 2001:1). Today, the President, on behalf ofthe state, acts as the de jure custodian ofthe communal lands. He also acts as the de

13 Maguta is a Shona word that means ‘I am full’ or ‘satisfied’ after eating.

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facto custodian of the ‘lost lands’ in thecommercial farming sector. In post-colonialZimbabwe, land was not transferred fromwhite commercial farmers to blackZimbabweans, but purchased by the stateon a ‘willing seller – willing buyer’ basis interms of the Lancaster House Constitution.This was justified because the targetedbeneficiaries of the resettlement programmewere mainly landless and poor householdsfrom the communal areas who could notafford to buy land. According to thenationalist discourse, there was no reasonto pay for land that they believed was ‘stolen’in the first place. This meant, however, thatthe huge financial burden of meeting the costsof land – and then giving it away – had to beshouldered by the government. Indeed, thefinancial burden went far beyond the costof land to include a costly administrativesystem of assessing the ‘fair’ value of land,as well as meeting the massive costs ofproviding infrastructure and administeringthe resettlement schemes. The land reformand resettlement programme was thereforefounded on a financially flawed model: themore land that was acquired for resettlementthe greater the fiscal burden.

Legal constraints

It is arguable that the unsustainable fundingmechanism of the resettlement programmelay at the root of the government’s motivationto erode the constitutional and legal rights ofwhite farmers to avoid paying them for ‘lostlands’. The process began with ConstitutionalAmendment (No. 11) in 1990, which requiredthe state to pay only ‘fair compensation withina reasonable time’, rather than ‘adequate andprompt compensation’. Then, in 1992, theLand Acquisition Act dropped the ‘willingbuyer – willing seller’ principle in favour ofadministratively determined or ‘fair’ com-pensation for land. When this was contested,the government passed ConstitutionalAmendment (No. 13) in 1993, preventingfarmers from seeking redress through thecourts. By 1997, the President had signalledhis intention not to pay compensation for landacquired for resettlement. This foundexpression in Constitutional Amendment (No.16) in 2000, which made Britain responsiblefor paying compensation to white farmers.

The Land Acquisition Act was then amendedin 2000,15 which staggered the payment of

Box 9.1. The Fate of Kondozi Estate

A high-profile case that demonstrates the limitations of the command approach to agricultural production wasthe government’s acquisition of Kondozi Estate in Odzi in 2004. Kondozi, which employed 5,000 workers (aswell as out-growers in the communal areas), had established export markets for vegetables and flowers inEurope and Canada valued at about US$15 million per annum. Leading Zimbabwean banks had investedheavily in the project. After its seizure, the management of Kondozi estate was handed over to the Agriculturaland Rural Development Authority (ARDA), a parastatal organization. The lucrative export markets were soonlost and the farm’s assets were systematically stripped, leaving the estate derelict. In an effort to resuscitateproduction, a deputy army commander was charged with running the estate in 2005. Rather than restoringKondozi’s former export potential, maize was planted to boost food production under Operation Maguta.Sorghum was also planted on the former out-growers’ land, the army retaining one third of production. Ittranspired however, that only 40 hectares of the 224-hectare estate had been utilized for food production, theremainder lying idle. The military’s inability to use the prime farm productively prompted government to handpart of the estate over to Bonnezim (Pvt) Ltd., an agro-processing arm of the government-owned IndustrialDevelopment Corporation. The company was expected to lead a consortium of indigenous businessmen torevive part of the Kondozi Estate. The other part had been allocated to a senior Zimbabwe government minister.14

14 ‘Minister takes over huge parts of Kondozi Estate’, ZimOnline 13 January 2007 <http://www.zimonline.co.za/Article.aspx?ArticleId=729>.

15 Act No. 15 of 2000.

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compensation for ‘improvements’ (but notland) in cash, bonds or other securities overfive years. Other amendments continued toerode the legal rights of farmers, but theLand Acquisition Amendment Act (No. 1 of2004) went much further. It stated that thegovernment would no longer adhere tothe FTLRP land acquisition criteria. Itconfirmed that the government – now intenton acquiring over 11 million hectares – couldseize any remaining farms owned by whites,as well as plantations, agro-industrialproperty, export-processing zones andwildlife conservancies. By this stage, anynotion of compensation for land andimprovements had given way to confis-cation. The Acquisition of Farm Equipmentand Materials Act (No. 7 of 2004) providedfor the seizure of the evicted farmers’equipment and material. Then, in 2005,Constitutional Amendment (No. 17)nationalized all farmland that had beengazetted for resettlement. Finally, theGazetted Land (Consequential Provisions)Act (2006) made it illegal for farmers toremain on their own farms (now state land)unless they could secure a state lease fromgovernment.

The major implication of the nationalizationof commercial farms was not simply thatlaws eroded farmers’ compensationsignificantly, or that the farmers lost theirfarms and any security of tenure, but that,by removing an economic value from land,it ceased to be treated as a factor ofproduction. There was little incentive forthose who did not pay for their farms to earna return on land or capital, because therewas no investment in the first place. Theconstraint imposed by the constitutional andlegal changes was to convert land from aneconomic resource to a political resourcethat could be used by the government as aninstrument of power, control and patronage.

White commercial farmers have sincecontested the Zimbabwe government’sconstitutional and legislative changes bylodging an appeal with the Southern AfricanDevelopment Community (SADC) Tribunalin Namibia. They argue that the land-acquisition process was racist and illegalunder various international legal instruments,including the SADC Treaty and the AfricanUnion Charter. Their application sought anorder from the Tribunal declaring that thechanges to the constitution violate theirhuman rights protected under Article 6 ofthe SADC Treaty.16

Institutional and capacity constraints

The resettlement programme has beenhampered by institutional and capacityconstraints since the 1980s. The maincriticism has been the over-centralization andlack of coordination of the programme. InFebruary 1993, the Comptroller and Auditor-General reported that programme imple-mentation had suffered owing to interferenceby politicians and the lack of governmentcapacity to coordinate implementation.Furthermore, it was reported that productivitygains through resettlement had not beenrealized and that land acquired for resettle-ment remained unused. Equally disturbingwas its conclusion that resettlement wouldhave no impact on decongestion in thecommunal areas.17 A later review of theresettlement exercise by the Commission ofInquiry into Appropriate Agricultural LandTenure Systems, under the chairmanship ofProf. Rukuni, found ‘no evidence of seriouseffort on the part of key ministries for strategicplanning and effective implementation ofthe resettlement programme’ and thatthe administrative institutions were‘uncoordinated and sometimes corrupt’(Zimbabwe, 1994: 63). This was a seriousindictment of the programme whose ‘superior

16 Zimbabwe Government representatives walked out of the SADC Tribunal on 18 July 2008 when the farmers’lawyer applied for the Government of Zimbabwe to be declared in breach of the Tribunal’s order. Ruling partymilitia had abducted and brutally assaulted the appellants, who the Tribunal had allowed to remain on theirproperties. Judgment on the main appeal had not been passed at the time of writing.

17 The Daily Gazette, 26 February 1993.

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body’ for coordination was the CabinetCommittee on Resettlement.

The Cabinet Committee has been in placesince at least 1985 (Zimbabwe, 1985). Its role,however, remains unclear when the variouscommittees, working parties, task forces andcommand centres (depicted in Figure 9.3) areadded to the organizational structure for landidentification, acquisition and settlement. Thisorganization chart – derived primarily fromthe FTLRP document, People First – shows

the centralized nature of decision-making, thedifficulty of defining responsibilities for landpolicy and implementation, and the problemof deciphering the actual decision-makingprocess. As a result, most decisions are takenoutside the confines of formal governmentinstitutional structures. The Utete Committee,for example, uncovered a process that did notfollow official procedures at all. Many of thosewho had been allocated farms had no farmingexperience and were in full-time employment,often as civil servants. In general, the problem

Figure 9.3: Land acquisition and resettlement: Structure and processes

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of district officials acting ultra vires wascompounded by the activities of those persons,who, though lacking any official status orauthority, nonetheless proceeded to allocateland, mainly in districts adjacent to the maintowns and cities. The Committee’s reportconcluded that ‘the multiplicity of allocatingauthorities gave rise to double allocations,multiple allocations, and favouritism in landallocations’ (Zimbabwe, 2003: 106).

Land tenure security constraints

The pre-2000 resettlement tenure system wasbased on three permits: a permit to reside, apermit to cultivate, and a permit to de-pasturestock (Zimbabwe, 1985). These permitsaccorded broad rights to the state, but providedfew rights for the settler. The permit to reside,for example, specified that on expiry orrevocation of the permit no compensationwould be payable for improvements. As theWorld Bank remarked, ‘It would be difficultto imagine a less secure form of tenure:uncertain duration, broad powers oftermination on the part of the Ministry, andfew rights to compensation for investments’(1991b: 78). However, despite flagrantbreaches in the conditions of the permits bysettlers, the state had neither the inclinationnor the capacity to enforce the conditions ofthe permit (Doré, 1995).

Land tenure security has not improved since2000. A1 settlers were to be issued withtemporary occupation licences, which wereexpected to be converted into proper leases.However, it remains doubtful whether theselicences were issued or converted to leases.With regard to A2 lease agreements, theUNDP found that they offered little securityto settlers. It concluded that ‘one mustexpect substantial insecurity of tenure in theresettlement areas’ which would ‘defeat theproductivity goals of the resettlementprogramme’ (2002: 30). The state grantsvirtually all the powers and rights to itself

and most of the obligations and duties to thelessee. Apart from 125 leases issued to A2farmers by the President in 2006, it remainsuncertain whether the government hascontinued to issue them. As a result, theoccupation of commercial farms is legitimizedby an ‘offer letter’ issued by the Minister ofLands, Land Reform and Rural Resettle-ment. These offer letters however, do notguarantee secure tenure. In August 2006,the President advised those who had beenallocated farms to start producing food,otherwise the government would take themback.18 In early February 2008, thegovernment revoked the allocation of 1,449farms that had been allocated to A2 farmersbecause they had not been occupied orbecause they were lying idle.19

The government’s abiding preference for99-year state leases over agricultural landreaches back to the Communal LandDevelopment Plan of 1986. The plan hadproposed a 99-year inheritable lease, claimingthat it gave security of tenure that wasalmost as good as freehold. Twenty yearslater, when most commercial farms werenationalized, the remaining farmers wererequired to receive state leases to continueoperating. When issuing such leases to A2and commercial farmers, it was claimed thatthey guaranteed security of tenure. Stateleases may, however, actually exacerbateinsecurity of tenure for a number of reasons:

• The state has been inclined to imposeonerous lease conditions on farmers.

• The state has neither the capacity tomonitor and enforce the conditions ofleases, nor the administrative capacityto set lease fees and update them.

• The state would face an insurmountableadministrative burden of collecting rents,adjudicating disputes and enforcingevictions.

18 The Financial Gazette, 16 November 2006.19 The Cape Times, 5 February 2006.

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Furthermore, it is unlikely that state leaseswould be acceptable collateral to privatefinancial institutions because state propertycannot be alienated to third parties.

9.3.2 The communal areas

Capacity constraints

The state has consistently relied on centralizedforms of decision-making and programmeimplementation. This applied as much to theimplementation of the Communal LandDevelopment Plan as it did to the resettlementprogramme. Despite the Department ofAgricultural and Technical Extension Services(AGRITEX) being instructed to prioritize theimplementation of the Communal LandDevelopment Plan (1986) in the late 1980s,the Rukuni Commission reported littleprogress:

‘The main reason is the over-centralization of government with therelevant technical ministries using top-down methods of planning and imple-mentation. The second problem is thepoor coordination of the technicalministries who continue to exhibitterritorial behaviour with no evidenceof a well thought-out coordinatedstrategy.’ (Zimbabwe, 1994: 35)

As the 1980s drew to a close, less and lesswas heard of the programme until, by themid-1990s, it had been forgotten.

Economic and environmental constraints

Under conditions of population pressure, thetraditional system of agriculture tends to distortthe allocation of factors of production, creatingperverse incentives that undermine rurallivelihoods and degrade the environment onwhich households depend. The system notonly entraps families in poverty, but does not

offer any mechanism through which moreefficient farmers can acquire more land toconsolidate their holdings into larger, moreviable units. Most importantly, perhaps, thetraditional system does not offer a mechanismto decongest the communal areas. It does notprovide any incentive for families to embarkon a ‘migration of hope’ that allows them toimprove their prospects by pursuing non-farmemployment opportunities in urban centres.

The traditional system entraps householdsin poverty by allowing them free accessto land and natural resources, therebyexternalizing costs and subsidizing theirliving expenses.20 This provides a perverseincentive for people to remain in thecommunal areas and so adds more pressureto land and natural resources. As thepopulation builds up, land is continuallysubdivided into smaller and less viable farmsizes. As Figure 9.4 shows, risk-aversehouseholds with smaller farms (1.2–4.7acres)21 tend to be entrapped in subsistenceagriculture, producing maize for their ownconsumption. Conversely, cotton productionbecomes possible as farm sizes increase(6.6–14.6 acres). The inability of thetraditional system to increase farm sizes thusfrustrates national efforts to commercializesmallholder production and reduce poverty.

The administrative allocation of land bytraditional leaders to every eligible familycreates a profusion of tiny plots, eachgenerating insufficient surpluses to reinvestin the capital improvements – cattle,equipment and inputs – that are required tooff-set the diminishing marginal productivityof labour. Without labour-saving capitalinputs, labour becomes critically short at peakperiods in the agricultural calendar. This givesrise to the ‘labour paradox’ – that, althoughthere is unsustainable pressure of populationon the land, there is at the same time, a criticalseasonal shortage of labour. But the process

20 An externality is a cost to society, such as environmental degradation, when individuals benefit from using apublic good: for example, communal grazing areas. The cost is internalized when the user rather than societybears the costs of use.

21 2.471 acres = 1 hectare.

UNDER

CONDITIONS OF

POPULATION

PRESSURE, THE

TRADITIONAL

SYSTEM OF

AGRICULTURE

TENDS TO

DISTORT THE

ALLOCATION OF

FACTORS OF

PRODUCTION,

CREATING

PERVERSE

INCENTIVES THAT

UNDERMINE RURAL

LIVELIHOODS AND

DEGRADE THE

ENVIRONMENT ON

WHICH

HOUSEHOLDS

DEPEND

164


does not end there. As land shortages are felt,households start extending their fields intograzing areas, thus reducing feed resourcesfor livestock. Overgrazing and environmentaldegradation ensue, but cattle – smallholderassets, par excellence – are graduallysqueezed out of the system. As a result, thereare too many cattle for the environment tosupport, but too few to meet smallholders’cultivation requirements. This is known as the‘cattle paradox’ (Cliffe, 1988).

The process of overstocking and environ-mental degradation is also attributable to the‘non-excludability’ of common propertyresources. But they are also ‘subtractable’(or rivalrous): if one person uses them,another’s access is diminished. Becausecommunal grazing land is a free and indivisiblepublic resource – carrying no opportunity costto the user – livestock owners have a strongincentive to add more livestock to commonpastures. This incentive, however, becomesperverse when households continue to addmore livestock to already degraded grazingareas, thus quickening the pace towardsenvironmental decline – and eroding the veryresource base on which their livelihoodsdepend (Hardin, 1968).

Institutional constraints

After independence, three distinct types oflocal governance institutions emerged in thecommunal areas: the traditional, the political,and the developmental. Alongside thetraditional authorities, the ruling party hadcreated and maintained its own politicalstructures – both during and after the war.To complicate matters, the Prime Ministerthen issued a directive in 1984 for locallyelected village and ward developmentcommittees to be established. As these werebased on a centralized bureaucratic system,their jurisdiction cut across traditionalboundaries that had been based on kinship,historical ties and natural features, as wellas the resources they encompassed. Thisinstitutional complexity was compounded bythe fact that local leaders simultaneouslyoccupied different positions within the threeseparate structures. They were thus able toplay multiple roles by drawing on differentsources of legitimacy – the traditionalauthorities, the ruling party, and the local-government development structures.Although the development structures werein place, they were often subordinated to andcrowded out by the more powerful political

Note: The figure for 2007 is an estimate

Source: Doré (1993)

Figure 9.4: Household maize and cotton production by farm size

1.2 2.7 4.7 6.6 8.6 10.7 14.6

300

250

200

150

100

50

0

Maize

Cotton

Farm size (acres)

Out

put (

Z$)

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and traditional organizations and so remainedweak, ineffectual, and largely ignored(Zimbabwe, 1994).

9.3.3 National institutionalconstraints

Land and agricultural ministries

Overall there are five ministries responsiblefor land policy and agriculture. Land policyis covered by the Ministry of Lands, LandReform and Resettlement and the Ministerof State for Special Affairs responsible forthe Land Reform and Rural ResettlementProgrammes. It remains unclear, however,how the responsibilities of the two ministersare divided. Agricultural matters are dealtwith by three ministries: the Ministry ofAgriculture; the Ministry of AgriculturalEngineering, Mechanisation and Irrigation;and the Ministry of Water Affairs andInfrastructure. Yet, it is not these ministries– with their fragmented roles and overlappingresponsibilities – that take the lead inagriculture, but the Reserve Bank ofZimbabwe (RBZ). The RBZ, which hasassumed supra-ministerial powers, hasplayed a pivotal role in the provision ofagricultural credit, farm inputs and foodthrough its quasi-fiscal activities. It channelscredit to farmers through the AgriculturalBank of Zimbabwe (Agribank) and theAgriculture Sector Productivity EnhancementFacility (ASPEF). Through its largessefarmers are provided with agriculturalmachinery, principally tractors, but alsosubsidised fuel and fertilizer.

Economic constraints on agriculturalresearch

The Ministry of Agriculture is divided intoten different departments, each with its owndirector. However, their functional capacityhas been severely weakened. The intractableproblems faced by Zimbabwe’s agriculturalresearch establishments, for example, cannotbe disguised. As government fundingbecame increasingly constrained, the realearnings of researchers declined. The firstcasualties were qualified researchers who

were attracted abroad or by the privatesector, further weakening government’sresearch capacity. The next casualty wason-farm adaptive research because of thehigh travel and subsistence costs. The thirdcasualty was the decline in capitalexpenditure, which fell to just 5 percent ofrequirements – far less than the depreciationof the infrastructural research base. By theend of the 1990s, meaningful researchprogrammes were sustained only withinternational donor assistance (Tawonezviand Hikwa, 2006). Now, even these havebeen suspended.

9.3.4 Trade and competitiveness

The overvaluation of the exchange raterepresents an implicit tax on agriculturalexporters (because farmers receive less indomestic currency for their produce), whichlowers their incentives to invest, produce andexport. The degree to which a governmentsubsidises or taxes an agricultural commodityis measured by its ‘nominal rates ofassistance’ (NRA). Table 9.5 shows largenegative NRAs (i.e., taxes) for maize, cottonand tobacco up to 1990.

Table 9.5: Nominal rates of assistance forselected agricultural products, 1966–1990

Zimbabwe Maize Cotton Tobaccoaverages

1966—1979 –22.0% –27.3% –20.1%

1980—1984 –16.6% –38.7% –32.4%

1985—1990 –18.4% –42.6% –37.9%

Source: Jansen and Rukovo (1992)

Ndlela and Robinson (2006) – who stressthat the main macroeconomic influence onNRAs is via exchange rate overvaluation –confirm these distortions. For almost allagricultural crops in the 1980s they foundNRAs well below zero. These, they say,arose from government’s desire to maintainthe multiple objectives of national food self-sufficiency, food security, low-priced foodfor consumers and access to marketingchannels for all farmers wherever they were

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located. Surprisingly, they found that themore liberalized regime of the 1990scontinued to show high levels of negativeNRAs to agriculture. They suggest that thiswas largely explained by the unreconstructedGMB, which continued to exercise astatutory monopoly and monopsony overboth domestic and international marketingof maize and other major food crops.

They also found that farmers were taxedmost heavily in the final five-year period ofthe Fast Track programme. Although, from2004, massive direct subsidies to agriculturereversed these disincentives, agriculturalproduction declined significantly due to acritical shortage of inputs.22 As soaringinflation and a fixed exchange rate madeexports unviable, growers lobbied for specialdispensation.

9.4 SUSTAINABLE RECOVERYPOLICIES AND PATHWAYS

Strategic Objectives

• Establish institutions for the effectiveadministration of a new land policy basedon secure tenure and land markets.

• Bring the land reform programme toclosure and the commercial and resettle-ment farming areas to their fullproductive potential.

• Reform the communal land tenure andadministrative system to reduce poverty,improve environmental management,and commercialize smallholder pro-duction.

• Dissolve the dual economy and createpathways out of poverty by a processof migration and structural trans-formation.

• Increase and sustain agriculturalproductivity and growth.

9.4.1 Strategic Objective 1

Establish institutions for the effectiveadministration of a new land policy basedon secure tenure and land markets

Establish a Land Commission

There is wide consensus on the need toestablish a Land Commission. The ideaarose from the Rukuni Commission’srecommendation for an independentNational Land Board to advise governmenton land policy issues (Zimbabwe, 1994). Itis therefore proposed that an independentLand Commission that reports directly toParliament (through the appropriateParliamentary Portfolio Committee) beestablished under a comprehensive LandAct. The Land Commission should bevested with clearly defined powers and theauthority to:

• Build consensus on a national land policybased on wide consultation and bestinternational practice.

• Plan and coordinate the implementationof an equitable, transparent andsustainable land reform and settlementprogramme.

• Plan and coordinate a land adjudication,demarcation and registration programmein the communal areas throughdemocratic community assemblies.

• Develop a legal and institutionalframework to support the systematicregistration of land to improve tenuresecurity and create an efficient landmarket.

• Establish a land tax to encourage the fullutilization of agricultural land, dampenland speculation and raise revenues.

22 The NRA for the crops was -48 percent in 2004, while the direct rate of assistance was +49 percent.

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• Work towards integrating the varioustenure systems into a single legal andregulatory framework and land admin-istration system.

• Over time, oversee the transformationof the dual agrarian structure into asingle ‘unimodal’ structure of variablefarm sizes that provide a ladder ofopportunity.

The Land Commission should draw up a landreform programme for all agricultural land,defining priorities, coordinating imple-mentation, supervising the programme, andmonitoring its progress.

Establish a Land Fund

The UNDP (2002) first mooted the idea ofa Trust Fund. It was then adopted as arecommendation by the Utete Committee(Zimbabwe, 2003). The most recentendorsement of a Land Fund came fromthe Zimbabwe Institute (2007). It istherefore suggested that a Land Fund beestablished, with a separate board, toservice the Land Commission and otherland and agricultural programmes. The Fundshould be accountable to Parliament forexpenditure, to donors for their funding, andto international financial institutions for theirinvestments. A reputable firm should carryout annual audits to ensure a level ofaccountability and transparency that willreduce fiduciary risk to attract funds andinvestment.

Oversight and constraints on power

Policy oversight should be exercised byParliament. The Land Commission shouldconsult widely to formulate a sound landpolicy that is sanctioned by Parliament. Inaddition, the Land Commission should reportannually to Parliament on its progress andfuture proposals, including a budget. Legaloversight should be provided by a LandTribunal. The Land Commission will needto develop detailed rules, criteria andarbitration procedures to arrive at practicaland fair decisions on the selection of settlers

and the allocation of land. Where it is unableto resolve disputes, aggrieved parties shouldbe able to appeal to the Land Tribunal.Financial and operational oversight of theCommission and the Fund should be providedby the Office of the Auditor-General which,by custom, also reports directly toParliament.

Building capacity for secure tenure andefficient markets

The development of an efficient land marketis premised on a sound legal and regulatoryframework, supported by competent landadministration institutions. The two maininstitutions used for land administration arethe Deeds Registry Office, which handlesinformation on land ownership and trans-actions, and the Surveyor-General’s Office,which maintains the land survey databaseand maps (cadastre). Both these institutionsshould, in future, be located within the LandCommission.

State-led land reform to achieve market-led agricultural development

The trade-off between the need for stateintervention and the efficiency of marketsin national and agricultural developmentpolicy emerges from Zimbabwe’s recenteconomic and political processes. A con-sensus seems to be emerging, however, thatcountries do best where the public sectorprovides maximum support to the privatesector to ensure that the legal and institutionalframeworks support the development ofmarkets that work in favour of thepoor (Borras and McKinley, 2006). InZimbabwe’s case, state-led reform, primarilythrough the Land Commission, shouldcomplete a process of land redistribution andreform as the basis for establishing vibrantmarkets that ensures rapid future growth inthe agricultural sector. As the state playsa key role in implementing land policyfor sustainable, pro-poor agriculturaldevelopment, strengthening its capacity tofunction effectively should be a primary goalof any recovery strategy.

THE DEVELOPMENT

OF AN EFFICIENT

LAND MARKET IS

PREMISED ON A

SOUND LEGAL AND

REGULATORY

FRAMEWORK,

SUPPORTED BY

COMPETENT LAND

ADMINISTRATION

INSTITUTIONS

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Bring the land reform programme toclosure and the commercial andresettlement farming areas to their fullproductive potential

The major goal for the land reform andresettlement programme should be to bringthe commercial and resettlement farmingareas to their full productive potential bybringing the land question to closure. Themain policy recommendations are thereforeto:

• Carry out a land audit to gather land andagricultural data and undertake a legalstudy as a basis for redesigning theresettlement programme.

• Revise the current land laws to conformto the post-crisis land policy and theagricultural recovery strategy.

• Replan settled farms to ensure theirviability.

• Establish an equitable and transparentsettler selection process based on needand ability.

• Provide all new settlers with securetenure and suitable financing arrange-ments to ensure that agriculture is placedon a sustainable growth trajectory asearly as possible.

• Arrange compensation to those who losttheir farms, homes and livelihoods.

A land audit

As a first step, the Land Commission shouldgather information from a survey or audit tomake well-grounded policy decisions. Thisaudit could consist of three interlockingstudies:

• a farm acquisition and settlementsurvey to document the acquisitionprocess, the occupation of commercialfarms, and the pattern of settlementunder the FTLRP.

• a legal study to bring an authoritativejudicial opinion to bear on the legality ofthat possession and settlement.

• a physical and production survey todetermine the state of farm buildings andequipment, the extent to which the farmshave been productively utilized, and theresource requirements to restore theirproductive potential (Zimbabwe Institute,2007).

It is essential that the audit be conductedin a rigorous manner by independentresearchers to ensure that its impartiality andcredibility are never in doubt.

Revisiting current land laws

Zimbabwe’s constitutional and legal pro-visions governing land are currently underreview by the SADC Tribunal. However, itwill be necessary for Zimbabweans them-selves to revisit their land laws with a viewto, first, providing secure tenure to encourageagricultural investments to bring land to itsfull productive potential; and, second, toprovide for the building of institutions thatenable the efficient operation of a landmarket. In general, new land laws shouldempower the Land Commission to carry outland tenure reform expeditiously.

Selection of settlers

The fundamental principle is that every citizenshould enjoy the same rights in the acquisitionand protection of their property, and thatevery Zimbabwean is entitled to earn theirlivelihoods from farming or be eligible forsettlement, regardless of their gender, race,ethnic origin or political opinions. However,the state has a duty, to ensure that land, as anational resource, is used for the benefit ofsociety as a whole by maximizing itseconomic use and social benefit. This meansthat agricultural land must be distributedfairly and transparently to those who canmake the most productive use of it, such asmaster farmers, and those who have no othersource of livelihood, such as communal

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farmers or farm-workers. A fair andtransparent selection process thereforerequires that all applicants have confidencethat their application will be processed fairlyaccording to agreed criteria and laid-downprocedures.

Secure land tenure

A moratorium needs to be placed oncontested agricultural land, allowing thosewho presently occupy farms to continueoperating until the Land Commissionhas carried out a land adjudication andrationalization exercise. Based on thefindings of the land audit, this would entail(on a farm-by-farm basis or by dealing withcategories of farms) reconciling on-the-ground realities of farm occupation with theprinciples of legitimacy, ability and need. TheLand Commission’s decision would besubject to appeal through a Land Tribunal.

Once the issue of ownership of the farm hasbeen settled or a farm has been offered to aselected settler, the Land Commission wouldneed to verify whether the boundaries ofthe subdivided farms have been clearlydemarcated. It would also need to checkwhether the subdivisions of the original farmmake the most rational and efficient use ofthe farm’s resources. If not, it could call fora revised farm plan to modify farm sizes andboundaries before making a final deter-mination and allocation.

The next step would be to replace the existingresettlement permits, offer letters or leaseswith a more secure form of tenure. Whileformal registered title offers the most securetenure to obtain farming loans, this would notbe feasible at present. Apart from being toocostly and time-consuming, Zimbabwe doesnot currently have the capacity to carry out aformal land survey and registration exercise.An alternative approach, recommended bythe Rukuni Commission, would be to use low-cost surveying techniques based on the latestelectronic and GPS technologies for the lessprecise but less expensive surveying ofboundaries. Once the Land Commission had

entered into a farm purchase agreement withthe settler, it would confer ownership by issuingthe settler with a land registration certificate– which could be a stepping-stone towardsformally surveyed and registered freehold titlein future.

Financing arrangements for landacquisition and farming loans

New farmers would not only need to enterfinancing agreements to acquire their farms,but to capitalize them with building andequipment, and to negotiate loans for workingcapital to finance seasonal inputs – seed,fertilizer, fuel, labour, etc. Depending onfactors such as the size of the farm, thefarmer’s ability, resources available, and thepreparation of a farm production plan,farmers could be eligible for a combination ofmoratoriums on repayments, concessionaryloans and flexible repayment periods. Thiswould give new farmers a reasonable timeto establish themselves and repay their loans.The collateral for these loans would be thesettlers’ land registration certificates, whichwould be lodged with the financial institutionnegotiating and issuing the loans, such as theLand Fund or Agribank. Once the farm andany outstanding credit had been repaid, thecertificate of registration would be returnedto the farmer, who would be entitled to rentor sell his or her farm on the open market.Alternatively, the farmer could apply for theirfarm to be surveyed and upgraded to fullregistered title and to use the farm as collateralfor loans with private financial institutions.

Those farmers who fail to meet therepayments on their loans could (with theagreement of the Commission) either rentor sell their land to repay their loans. Wherethe total loans outstanding exceed therealizable value of the farm, the Commissionwould be required to repossess and resell(or auction) the farm to recoup part of theoutstanding loan, and write off the balance.The balance written off might include an ‘exitpackage’ so that the farmer is not leftdestitute and could make a fresh start inanother venture.

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Farmer support for planning and extensionservices

In order to give newly settled farmers everyopportunity to succeed, there is a need forstrong technical advisory and extensionsupport, as well as the provision ofinfrastructure, facilities and social services– from roads and water, to schools and clinics– that should be established within designatedrural service centres.

Initially, one of the key areas of support willbe planning and production, especially iffarmers are to make the best use of credit,which must be repaid. Planning is neededinitially to rationalize the layout anddemarcation of those farms that form partof a subdivided whole. Where resettled landhas been allocated to communal grazing, thisshould be incorporated into individual self-contained family farms that are sufficientlylarge to accommodate some livestock. Thiswill be essential to internalize the inevitableenvironmental costs. There will also be aneed for production plans for crops andaccess to credit for the timely purchase ofequipment and ordering of inputs.

Experienced commercial farmers who havebeen displaced, but do not wish to continuefarming, could also play a valuable role inthe farming sector by entering into agree-ments with new farmers in a number ofinnovative ways: by providing extensionadvice and services; by forming syndicatesto realize greater efficiencies and economiesof scale for the purchase of inputs and themarketing of produce; and by providingcentralized processing of capital-intensivecrops, such as tobacco or coffee, foroutgrower settlers. The Commission, withthe support of the Land Fund, could alsocontract former commercial farmers tomentor new farmers by assisting them withthe demarcation and planning of their farms,the management of their farm operations,and providing them with sound agriculturaladvice. It would also serve to buildbridges between new aspiring farmersand experienced, successful commercialfarmers.

Pay compensation for land acquisition andlosses

Most previous bilateral and multilateraldocumentation, including UNDP’s report in2002, emphasize the need to compensatefarmers for land acquired for resettlement.However, it raises vexing questions. The first,mentioned in chapter 3 on stabilization, iswho should be compensated. Many otherZimbabweans – who had their pensionswiped out, their homes razed duringOperation Murambatsvina and morerecently, who had their rural homes setablaze – could also be legitimate claimantsfor compensation. The second is how muchshould be paid. The Movement forDemocratic Change estimated that totalclaims for compensation by displacedfarmers could exceed US$8 billion – greaterthan Zimbabwe’s GDP (MDC, 2007). Thethird is who will pay the compensation. Thenational coffers are empty and donors willbe asked to forgive large debts and help withZimbabwe’s recovery and reconstruction.Thus, while in principle all those whose landwas illegally seized should be compensated,the cost of full compensation is probably wellbeyond the means of both the state andsympathetic donors.

Set against these limitations, the payment ofcompensation would demonstrate thegovernment’s commitment to the principleof well-protected property rights. Inparticular, it would restore internationalconfidence by sending a strong signal toinvestors that their capital would not only bewelcome to help drive Zimbabwe’seconomic recovery, but reassure them thattheir assets were secure under Zimbabwe’slaws.

Ethical considerations aside, Zimbabwe willbe in no position to raise taxes to paycompensation and will therefore have torely on the goodwill of the internationalcommunity. The Government of Zimbabwe– and the Land Commission in particular –will need to engage with donors and farmers’representative organizations, such as theCommercial Farmers Union and Justice

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for Agriculture, in order to negotiatecompensation proposals that balancecompeting needs. On the one hand, there isa need to resolve historical injustices in theallocation of land and bring economicrecovery to the agricultural sector. On theother, there is a need to respect theconstitutional rights of all Zimbabweans andbring some relief to farmers who havesuffered the loss of their homes, propertyand livelihoods. This will require a policy ofreconciliation and healing to build goodwilland confidence between white and blackZimbabweans.

Given the inevitable funding constraints tomeet compensation claims for land withoutjeopardizing Zimbabwe’s economic andsocial recovery, it is incumbent upon theLand Commission to devise innovative waysof dealing with the issue of compensationpaid to farmers. These may include:

• Allowing those commercial farmers whoare still operating to remain on theirfarms; while allowing those whose farmshave been acquired, but not occupied,to return to their farms.23

• Offering another unoccupied farm ascompensation to those commercialfarmers who still wish to farm, butwhose land has been occupied forsettlement.

• Partially compensating commercialfarmers through a recovery programmeby assisting them to refurbish theirproperties and bring them back into fullproduction.

• Returning those farms that have not beenoccupied to their original owners, who,if they do not wish to farm, can eitherrent or sell their properties on the openmarket.

• Allowing those Zimbabweans who wishto retain the farms they have occupiedunder the FTLRP, and who have the

means to pay for them, to negotiate thepurchase of the farm from the previousowner through the Land Commission.

• Recouping the cost of settlement throughfarm purchase agreements between thenew farmers and the Land Fund. Aportion of these funds could be repaid tothe original owner of the farm ascompensation.

• Allocating a portion of the savingsrealized through debt relief to paysome compensation to retired farmers– possibly identified by commercialfarmers’ organizations – who findthemselves in impecunious circum-stances.


Reform the communal land tenure andadministrative system to reduce poverty,improve environmental management andcommercialize smallholder production

Safety nets and poverty traps

Although the communal areas capturehouseholds in a low-level equilibrium trap,they nonetheless provide a safety net for thepoor and the unskilled. When populationpressure builds up, the traditional systemallows for the continual subdivision of land,thus providing at least ‘something foreveryone’ and hence, enabling poor familiesto survive. Such limited security, however,comes at the expense of all existingcommunal households, who, when thecommunal land frontier is reached, mustmake do with less land and, hence, lowerincomes. The communal areas are thereforeas much poverty traps as safety nets.

The long term problem is that the wholetraditional system of agriculture will stagnateand incomes will decline even further underthe weight of population pressure. Theperverse incentives that limit capital inputsand productivity will see poverty deepen. So

23 The definition of whether a farm is occupied or not would be left to the legal study of the land audit to decide.

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too, will the problems of deforestation,extensive cultivation, overstocking andecological decline. In short, the system is notsustainable. At some point, change mustinevitably come, and, like so many reforms,the later it is left, the more painful it will be inthe future. While such reforms involve greaterrisk, they also bring with them innovation,opportunities and pathways out of poverty.

An evolutionary approach to land tenurechange may however offer a trade offbetween the security of customary tenure andthe risk of market opportunities. In some areas,where land values are relatively high and landmarkets are emerging, a community maychoose to move fairly rapidly towards buildinglocal democratic institutions and a simpleland administration to enable local land tenurechanges and land transactions. On the otherhand, there are remote areas where thepopulation density is relatively low, wherecustomary law still holds sway, and wherethe cost-effectiveness of modifying thetraditional tenure system would be hard tojustify. This suggests a demand-led approach,where the direction and pace of change isdetermined (within a national policy and legalframework) by communities themselves.

Policy framework

This long term objective could be achievedby a series of steps that are initiated as partof a medium term recovery programme:

• The establishment of modern, democraticcommunity assemblies, nested within aunitary and hierarchical administrativesystem.

• The transfer of de jure land ownershipto communities.

• The establishment of a legislative andregulatory framework that allowscommunity assemblies to initiate landtenure reforms themselves based onincentives, informed consent, the will ofthe community, and their participation inthe land reform process.

• The adjudication and demarcation ofward, village and land use boundaries.

• The demarcation and issue of landregistration certificates for residentialand arable land which, subject torestrictions imposed by the communityassemblies, enable informal rental andsales markets to operate.

• The establishment of a simple local landadministrative system within a nationalinstitutional structure.

In addition, land registration certificatesshould be issued for ‘common propertyregimes’ and held in trust by communityassemblies. These should have opt-outmechanisms to lease or to convert commonproperty to other land uses or tenuresystems.

Create unitary and democratic localgovernance institutions

A single local democratic institution at thegrassroots level is required as a basis formaking legitimate decisions regarding landissues on behalf of the community. As a firststep, ownership of communal land that vestsin the state should pass to the people whouse it, invest in it, and whose livelihoodsdepend upon it. Communities, for their part,should form themselves into democraticvillage assemblies that can, within a broadregulatory framework, decide for themselvesthe path and pace of change in land tenurearrangements.

Priority for land tenure reform should be givento those communities that have met certaincriteria, such as establishing their owngovernance and administration structures,that have reached agreement on villageboundaries, and that have decided to proceedwith a land-reform programme. Such arequirement would be both an incentive anda measure of a community’s commitment andability to embark on the slow and rocky pathtowards land tenure reform.

AN EVOLUTIONARY

APPROACH TO

LAND TENURE

CHANGE MAY

HOWEVER OFFER

A TRADE OFF

BETWEEN THE

SECURITY OF

CUSTOMARY

TENURE AND THE

RISK OF MARKET

OPPORTUNITIES

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Building local land administration capacity

A local capacity to administer village landaffairs, which is nested in higher levels ofland administration, should be established atward level. The World Bank (2003) arguesthat local institutions are needed to reducered tape and resist powerful vested interests.According to an earlier World Bank report,

‘The creation of effective local land

administration institutions is a

precondition for serious planning for

change in land administration in the

communal areas ... If there is no effective

implementation in these new, lower level

institutions, it will do little good for

central ministries to indulge in excessive

planning. This applies to both tenure

and land use planning.’ (1991b: 69)

In order to meet the costs of its administration,the ward assembly should be empowered toraise revenue by levying a small tax on landor a unit (flat) tax on households. This tax isboth a participatory and a pedagogical devicethat not only enables and sustains sub-districtadministration, but it empowers poor citizensby giving them a voice in village affairs. Itwill therefore make village authorities moreaccountable for their decisions and actions.

Increase security of tenure to facilitaterental markets

While customary land rights are generallysecure, they cannot be traded and exchangedbeyond the community. But, while formaltitle may be legal in traditional settings, it maybe neither cost-effective nor legitimate. InKenya, for example, foreclosure on smallfarmers may be legal, but it has lacked locallegitimacy (Alden Wily, 2006). Moreover, theunderlying value of small pieces of land maynot warrant the high survey, administrativeand enforcement costs in circumstanceswhere legal title may not be legitimate. Analternative, suggested earlier for resettlement,is the use of certificates of registrationbecause they offer many of the benefits offormal rights, but at much lower cost. They

could be used, for example, as collateral withstate institutions and the informal creditmarkets, but with reduced transaction costs.But the key attribute of certification and theincrease in tenure security is that they wouldopen up the potential to commercialize thecommunal areas through rental markets andcreate opportunities for migration.

Economists generally credit short-term landrentals with considerable potential to enhanceagricultural productivity because they allowmore productive farmers to acquire more landat lower transaction costs. This permits otherlandowners to leave the communal areas inorder to participate more fully in the non-farmeconomy, or to use their rental income as apension. Unlike land sales, rents require a morelimited capital outlay, thereby leaving moreresources for farm inputs. Evidence thereforesuggests that temporary land transfers havea positive impact on equity, being generallypro-poor and beneficial for women (Place,2002). Rental markets would require theestablishment of a simple low-cost localadministrative system, discussed earlier, toregister informal transfers and rentaltransactions. Over time, as the rental marketmatures, the more productive farmers maywish to consolidate their holding by buyingland that they previously rented. Given thatthe underlying value of the consolidatedlandholding rises, it may prove worthwhile forfarmers to upgrade and upgrade their land tofreehold title. This would not only give greatersecurity of tenure, but the farmer would haveaccess to formal credit markets for loans.

Financing for farmers

The collateral benefits of greater land tenuresecurity on smallholder financing will takesome time to develop. Alternative financialarrangements will therefore be necessaryduring the immediate post-crisis recoveryperiod. To overcome the acute shortage offarm inputs, lines of credit could be openedfor the private sector to ensure that adequatesupplies of seed and fertilizer are madeavailable to commercial farmers. Donorfunds could then be channelled through the

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Land Fund (or similar revolving fund) toexisting financial institutions, such asAgribank, that have a history of providingconcessionary loans to small-scalecommercial and A2 resettlement farmers.24

With regard to smallholders, it may provenecessary to use the existing network ofNGOs, known as C-Safe, to distribute seedand fertilizer packs with the food aid theyprovide to poor communal and A1 resettle-ment farmers. Alternatively, small cashgrants could be made to these households.In effect, this would be a cash transfer toallow households to not only buy farminputs, but possibly food, medicine or othernecessities, bringing relief from the generaldeprivation that they have suffered recently.This would also provide an injection of capitalinto rural areas, where multiplier effectswould stimulate the rural economy.

As the country begins to recover, differentapproaches to financial support to small-holders in the communal areas could beconsidered. For example, conditional cashtransfers or basic income grants could bemade to rural households to prevent themfalling into destitution (Kakwani, et al., 2005;Ferguson, 2007). Other recommendations,given in the chapter on the financial sector,include the development of commercialmicrofinancing enterprises and commer-cializing the People’s Own Savings Bank toprovide agricultural financing for small-holders. The most promising proposal,however, is the provision of credit and inputsfor smallholders through corporate out-grower (contracting) schemes that couldcover commodities from cotton, tobacco andhorticulture to commercial forestry, poultryand ostrich farming – and much more.

In the medium to long term, land tenurereforms should begin to make themselvesfelt and farmers could begin to use their landas collateral. Both local informal creditmarkets as well as formal private financialmarkets could play an increasing role in

providing different types of loans to suit thevarious investment requirements of farmers.

Establish common property regimes overnatural resources in communal areas

The medium term prescription for openaccess to natural resources and theexternalization of costs is to convert theminto ‘common property regimes’. Central tothis process is the exclusive control by arelatively small group of users over specificand bounded natural resources to encouragegreater common responsibility for land useand resource management (Bromley, 1989).A common property regime requires a smallgroup of users to enforce rules overresources within a particular area. Costs canbe internalized by imposing a user fee, suchas a stumping fee, or by a ‘cap and trade’mechanism whereby the number of livestockto be grazed on a particular pasture is limitedand the right to graze can be traded.

Unfortunately, these common propertyresource-management schemes arenotoriously difficult to implement effectively.As there is no mechanism to determine, apriori, whether the ‘correct’ (shadow) pricehas been set for user fees (or the cap onlivestock numbers), the inclination is to setthem too low. This means that externalitieswill not be properly internalized, and theresource will continue to be depleted. Despitethese problems, the common property regimeremains an important first step in the eventthat a community should decide to transformthe common property scheme into moreindividualized land rights. In this case it wouldbe essential that the decision is consciouslytaken by the assembly, which must have clearand transparent mechanisms for making thechange (World Bank, 2003). In Mexico, forexample, a 75 percent majority of the ejidoassembly can decide which of thecommunity lands should be parcelled out toindividuals and which should be held incommon property (World Bank, 2002).

24 Scrupulous oversight would be necessary to ensure that any previous biases in providing loans have been eliminated,and that every loan application is treated fairly and transparently on its own merits.

AS THE COUNTRY

BEGINS TO

RECOVER,

DIFFERENT

APPROACHES TO

FINANCIAL

SUPPORT TO

SMALLHOLDERS IN

THE COMMUNAL

AREAS COULD BE

CONSIDERED

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Dissolve the dual economy and createpathways out of poverty by a process ofmigration and structural transformation

Policy imperatives

The objective of reducing rural poverty ispremised on gradually releasing morefarmland to smallholders by decongestingthe communal areas. A twin-track strategy

for alleviating pressure on communal landtherefore rests, first, upon land tenurereforms that increase tenure security tofacilitate a process of migration to non-farmemployment opportunities in towns andcities (push factors). The second is strongeconomic growth to create non-farm jobsin rural centres and towns (pull factors).Box 9.2 illustrates these lessons fromChina.

Box 9.2: Lessons from China

When China started to reform its collective agriculture, it was largely a rural country in which 80 percent of itsvast population lived in the rural areas. Today, only 60 percent do so. It is estimated that 200 million peoplehave relocated from the rural to the urban areas. The first lesson that China provides is that this process ofstructural transformation is driven strongly by very high rates of economic growth in the urban-based industrialsector of the economy. Although its agricultural sector notched up impressive rates of growth of 6.3 percentannually between 1991 and 2005, it still lagged behind industry, which grew consistently above 10 percentper annum. This large productivity gap acted as a centripetal force, pulling rural migrants into higher productivityurban employment. Because they are now more productive and earn more, they have been an importantsource of growth and poverty reduction for China. The share of the population living beneath the ‘cost of basicneeds’ poverty line in China declined from over 60 percent at the beginning of economic reform in 1978 to just7 percent in 2007 (Dollar, 2008). 25

These powerful pull factors are sometimes seen as sufficient conditions for structural transformation, suggestingthat policy makers can ignore the need for rural land tenure reform. Here, again, China’s experience is instructive.The Chinese government disbanded its agricultural collectives by introducing a ‘household responsibilitysystem’ that created family farms and strengthened farmers’ land tenure rights. But, despite having privateproperty rights enshrined in its constitution in 2004, and the passage of a new property rights law in March2007, farmers land rights remain limited to renewable 30 year land-use leases. According to one commentator:

This new law will not bring the full property rights revolution China’s development demands. Indeed,it will not meet the most crying need: to give peasants marketable ownership rights to the land theyfarm. If they could sell their land, tens of millions of underemployed farmers might find productivework. Those who stay on the farm could acquire bigger land holdings and use them more efficiently.Nor will the new law let peasants use their land as security on which they could borrow and invest toboost productivity. Nor, even now, will they be free from the threat of expropriation.26

Indeed, it was large-scale expropriations of farmland for housing and factory construction that rendered millionsof farmers landless, while enriching those who acquired it. As a result, land disputes have become a leadingcause of social unrest, sparking thousands of protests across China by poor farmers outraged at the expropriationof their land for negligible or no compensation. The main reason for the widespread opposition within China tothe property rights law was that it allowed continued expropriation of the farmer’s land, while entrenching andprotecting the rights of those who had appropriated it. The other lesson from China, therefore, is to initiate theprocess of granting farmers land rights at the earliest stages of reform in order to protect their land rights andto allow them to benefit from them.

25 The World Bank’s ‘cost of basic needs’ poverty line is based on the minimum consumption that a person needs;2,100 calories per day plus other basic necessities of life.

26 The Economist, 8 March 2007. Leader: ‘China’s next revolution’ (p.11).

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Create pathways out of poverty bydecongesting the communal areas

It was shown earlier (Figure 9.4) that thereis a strong and robust statistical relationshipbetween the amount of land available to ahousehold and its income from farming.When farms are very small, the household’spriority is to meet its subsistence require-ments by growing maize. As farms get bigger– towards 10 acres (4 ha) – more land isavailable for cash crops, such as cotton.Commercialization begins to emerge as thearea set aside for growing food is minimizedand household food security is based on theincome from crop sales. More land musttherefore be made available to thosesmallholders committed to farming if povertyin the communal areas is to be reducedsignificantly. However, this is more likely ifthose households who are interested inalternative (non-farm) livelihoods areallowed to convert their rural assets (land)into urban assets (land and capital). Thisrequires that the underlying value of the landmust be unlocked by communal land reformsthat grant households more secure tenureover their land, which allows them to eitherrent or sell it. In the words of the WorldBank:

‘As opportunities in the non-farmeconomy increase, land markets allowhouseholds to engage in migration,specialization, investment, and inter-generational land transfer, therebyimproving productivity andparticipants’ earnings. Householdswith low agricultural skills are likelyto be able to obtain higher incomesfrom off-farm employment than fromfarming, and thus will be better off ifthey rent out some or all of their landfor others to cultivate.’ (2003: 86)

These push factors from the communal areasmust be matched by pull factors from ruralcentres, towns and cities: that is, strongeconomic growth to create employment

opportunities in micro or small enterprisesand in the formal sectors of the economy.Without this solid growth households willsimply substitute rural poverty for urbanpoverty in a ‘migration of despair’ (OECD,2006). While sound economic policies are anecessary condition, they are not sufficient.They must be supported by social policiesthat channel non-farm activities intosustainable urban livelihoods, address theneed for secure and affordable housing, andprovide social services and utilities that rootfamilies in the urban environment.

Create a ladder of opportunity and amissing middle

A ladder of opportunity is presented by anagrarian structure where the smallestproducers can gradually expand their farmingoperations, either through consolidation –for example, when they buy smallerneighbouring farms – or by buying a biggerfarm elsewhere. There are two majorconditions for this to apply:

• A land rental and sales market mustallow farmers to transfer secure landrights from one person to another.

• The agrarian structure must consist ofmany farms of different sizes, so thatthe smaller producers can afford totake a series of small steps over time(up the ladder) to expand their farmingoperations.

Neither of these conditions currently prevailin Zimbabwe, which is characterized by adual structure, with many tiny plots in thecommunal farms alongside large commercialfarms. Although the FTLRP has perverselybroken the mould of the dual agrarianstructure to some extent, the absence ofsecure tenure precludes land transfersthrough a market. The objective thereforeis to establish institutions and mechanismsfor a land market to operate and create a‘missing middle’27 so that, according toHayami:

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‘...the agrarian structure of developingeconomies will gradually shift from thepresent bifurcated system to a unimodalstructure where the middle class isdominant and in which even thelandless labourers have a chance toascend.’ (1989: 753)

The task ahead, therefore, is to transform theagricultural sector by gradually dissolving thedual agrarian structure by facilitating theconsolidation of the many small communalland plots, while encouraging the subdivisionof larger underutilized commercial farms.Eventually, a unimodal agrarian structure witha range of different farm sizes – but mostlymedium-sized farms – should emerge. Thefirst imperative, therefore, is for a land tenurereform programme in the communal andresettlement areas to provide secure tenureas a basis for a land market. It is this landmarket that will provide the mechanism forthe amalgamation of very small plots intolarger more viable units. The secondimperative is to facilitate correspondingsubdivisions of large underutilized commercialfarms into smaller, more intensively utilizedunits through a land tax, discussed later in thischapter.

Growth centres as focal points fortransformation

As communal and resettlement farmersbegin to consolidate their holding and increaseproduction, their earnings and their demandfor a range of goods and services will rise.These goods will include agricultural inputs,such as improved hybrid seeds, fertilizer andcapital equipment to improve productivity.They will also begin to include financialservices, such as banking facilities forsavings and loans. A growing prosperityamong farmers would also place ademand on improved social services andinfrastructure: better schools and healthservices, along with communications, roadsand water supplies. Increased local agri-cultural production would also open upopportunities for the private sector toestablish marketing outlets or agro-industrial

processing plants, whose size andsophistication could vary from small-scaleprocessing plants, such as grinding mills, tomore complex processing plants for theexport of high-value goods. In this way, ruralcentres could become the focal point for thesupply of goods and services for farmers,as marketing and processing centres fortheir production, and as destinations formigrants to live and work. Migrants couldeither find jobs or manage micro and smallenterprises: trading, making goods orproviding services.

This structural transformational scenario,however, is conditional upon:

• The evolution of communal land tenuresecurity and land markets, both withinthe communal areas and rural centres.

• Land-use planning of rural centres toallow for the provision of infrastructureand social facilities.

• A commitment by government to planand supply infrastructure and socialservices to growth points and other ruralcentres.

Along with these conditions is the need fora democratic local government frameworkthat facilitates the growth of a civic culture.

While the synergetic effects of private, localauthority and government investment wouldaugment and concentrate rural skills andincomes in rural towns, communal landwould be consolidated into ever largerholdings. Eventually, the complementarygrowth linkages between farm and townwould result in a spatial metamorphosis asthe distinction between farms and ruralcentres becomes more sharply defined. Asthe development of the symbiotic economicrelationship between centre and hinterlandmatures, farm incomes should continue torise and higher order goods demanded. Theurban response would be to draw in moreresources and diversify its activities, therebyincreasing the town’s functional complexityand lending it a self-sustaining polarity. Over

THE TASK AHEAD,

THEREFORE, IS TO

TRANSFORM THE

AGRICULTURAL

SECTOR BY

GRADUALLY

DISSOLVING THE

DUAL AGRARIAN

STRUCTURE BY

FACILITATING THE

CONSOLIDATION

OF THE MANY

SMALL COMMUNAL

LAND PLOTS,

WHILE

ENCOURAGING

THE SUBDIVISION

OF LARGER

UNDERUTILIZED

COMMERCIAL

FARMS

178


time, this process will allow rural centres todevelop into small towns that have theessential services to support a vibrantfarming community.


Increase and sustain agriculturalproductivity and growth

Restructure land and agriculturalinstitutions

Sustainable agricultural growth will bedependent on efficient and effective publicagricultural institutions. The establishment ofa Land Commission will include the functionsof land reform and resettlement, obviatingthe need for a ministry to perform the samefunctions. It seems evident, too, that the threeagricultural ministries will need to berationalized and restructured to increasetheir coordination and effectiveness. Oneobvious solution would be to create a singleMinistry of Agriculture that incorporates thefunctions of the Ministry of AgriculturalEngineering, Mechanisation and Irrigationand the Ministry of Water Affairs andInfrastructure. The current Ministry ofAgriculture, with its 10 departments, alsoneeds a simpler organizational structure. Itcould probably be reduced to four depart-ments: veterinary services and livestockdevelopment; agricultural research andextension; agricultural water resources andirrigation; and finance and administration.Agricultural economics and engineeringcould fold into the department of AgriculturalResearch and Extension (AREX). Clearly,any final organizational structure will needto be discussed within the Ministry itself andbe decided by the government.

Effective research and extension services

Zimbabwe needs to develop a demand-led,farmer-centred agricultural research andextension programme, as well as strengthenlinks between public, international and privateresearch organizations. In their review ofresearch in Zimbabwe, Tawonezvi and Hikwa

attribute past successes, first, to long term,focused and uninterrupted programmes;secondly, to strong and consistent governmentsupport and funding; and, third, to the activeparticipation by farmers pressing for the typeof research and extension that would benefitthem most. They also believe that, ‘It isnecessary now more than ever to involveuniversities, the private sector and farmers inorder for research to be demand-driven’(2006: 209). Funding for research, forexample, could be augmented by contributionsfrom farmers’ unions, commodity associationsand agricultural companies. If research is tobe pro-poor, it should not only examine howfarmers within the traditional agriculturalsystem can become more technicallyefficient, but how the system itself can betransformed and commercialized.

The private sector should play a key auxiliaryrole in extension. Companies, eager tomarket their products – such as seed,fertilizer, chemicals and equipment – areexcellent extension vehicles for disseminatingagricultural information that could comple-ment government efforts. The seed andfertilizer companies have, in the past, beensuccessful agents of technological changethrough innovation diffusion by the supplyof their products to communal area farmers.Cotton and tobacco marketing companieshave, through contract schemes, also beenadvising growers on the use of new varietiesand techniques to improve yields for theirmutual benefit. For its part, the governmentshould move away from its sprawling, costlyand inefficient organizational structure anddevelop a more professional, cost-efficientand focused approach to extension, applyinginnovative techniques and working closelywith the private sector and farmers.

Allow greater flexibility in farm sizes

Zimbabwe’s resettlement programmes havein the past been based on standard farmsizes. In 1999 the government specified themaximum farm sizes allowed for differentNatural Regions. According to Bruce,however, scale ‘will vary not only by crop,

ZIMBABWE NEEDS

TO DEVELOP A

DEMAND-LED,

FARMER-CENTRED

AGRICULTURAL

RESEARCH AND

EXTENSION

PROGRAMME, AS

WELL AS

STRENGTHEN

LINKS BETWEEN

PUBLIC,

INTERNATIONAL

AND PRIVATE

RESEARCH

ORGANIZATIONS

179


but by land capability, and capital and labourendowments of the farm firm’. Becausefarm size varies with a multitude of factors,‘any attempt to stipulate it will necessarilyinvolve substantial inefficiencies’ (1990: 25).In economic terms this means that it is moreefficient to allow factor markets to reflectscarcities through the price mechanism sothat they are allocated efficiently on the basisof their relative marginal costs. Zimbabweshould therefore move away from the rigid,centrally imposed A1 and A2 resettlementmodels, based on standardized farm sizes,and opt for a more flexible approach. Yet itmay be necessary, at least in the short term,to continue with administratively determinedfarm sizes to bring order to the disarraycaused by the FTLRP. Once markets beginto operate, farms – aided by a land tax –should stabilize at their optimum sizes.Similarly, single-farm ownership shouldcontinue to apply for a prescribed period –of say, seven to ten years – after which datethis limitation could be lifted.

Productivity gains from a land tax

A land tax has many advantages over ceilingson farm sizes set by bureaucrats. As aprogressive land tax does not distortcommodity prices, it is generally favouredby economists because:

‘Conceptually, progressive land taxeswould be more appropriate for reducingthe tendency to hold landunproductively than land ownershipceilings. Taxes could reduce the scopefor land speculation and induce largelandowners to sell out or to use theirland more intensively.’ (World Bank,2003: 168)

It encourages the full utilization of landbecause those wishing to hold agricultural landwould have to ensure that returns from farmingoutweigh the tax paid on the land. Anotheradvantage of a land tax is that, unlike mostagrarian reforms that tend to impose a financial

burden on the state, a land tax generatesrevenue. Despite these advantages, land taxeshave two major drawbacks: they are difficultto introduce and costly to administer. Thewatchword for introducing a tax is, therefore,simplicity. Policy-makers have suggestedinnovative methods of making the land taxadministratively more simple and effective.For Zimbabwe, Doré (1993) proposed a simple‘insurance’ tax evaluation method based onself-assessment.

To make a land tax more politicallyacceptable, a proportion of the proceedsshould be allowed to accrue to villages andother local authorities. This could strengthenlocal capacity for land administration andtransfers, as well as improve delivery of publicservices and the provision of infrastructure.Evidence presented by the World Bank(2003) suggests that greater local autonomyin setting tax rates can be highly desirable.Taxes on land provide an ideal mechanismfor encouraging the more effective use ofland, while the authority to set rates enhanceslocal fiscal responsibility by making officialsmore accountable, thus strengthening thevoice of the local population.

Pro-poor growth

As we argue elsewhere, it is the level ofemployment that defines the extent to whicheconomic growth can be considered ‘pro-poor’.28 Mellor (2000) investigates threemajor sources of employment growth inagriculture: (i) yield-enhancing technology;(ii) increased land area; and (iii) a change inthe composition of output to high-valuecommodities. As yield-enhancing technologyhas a relatively low elasticity of employment,and because land frontiers are reachedrelatively quickly, he argues for greateremphasis on the production of high-valuecommodities – particularly horticulture andlivestock. This, he believes, can generatestrong growth of between 4 and 6 percentper annum. And, because the agriculturalsector in low-income countries (like

28 See chapter 7 on labour markets.

180


Zimbabwe) are so large, it adds immensepurchasing power to small farmers. It is theexpenditure of this increased income onlocally produced, labour-intensive, non-tradable goods and services – expandedhousing, personal services, increasedprimary education, health services and localtransport – that drives employment creationin the non-farm sector, underpining broad-based poverty reduction. With this spurt inemployment growth, labour markets tightenquickly in the local non-farm sector, causingreal wages to stir and rise. That is why, claimsMellor, poverty declines so rapidly withincreased agricultural output.

Improved market access for smallholders

Improved market access begins with ruralinfrastructure – roads, transport and com-munication networks – as conduits foragricultural supplies and commodities, as wellas market information. The second require-ment for smallholders is to secure invest-ments in low-cost irrigation schemes basedon appropriate technologies to produce high-value crops with both strong local demandand export potential. Groundwater supplies(boreholes, wells) and surface-watersupplies (dams) should be developed orupgraded for productive purposes once thesmallholders have established a maintenancemechanism for the scheme. An environ-mental plan would also help prevent siltingand thus preserve the economic value ofa water resource, such as a dam. And,third, smallholders can improve their accessto higher-value export crops throughcorporate–smallholder partnerships (alsoknown as contract farming or out-growerschemes). There are many examples ofsuccessful smallholder corporate partner-ships in Africa. These vary from dairyprojects in Kenya, forestry projects in SouthAfrica, and tobacco production in Malawi.In Zimbabwe, models have been developedfor smallholder partnerships in such diverseareas as horticultural and cotton production

and ostrich farming. In the initial phases,smallholders could provide land, water andlabour for production, while the finance,extension services and marketing would beprovided by corporations. Over time, assmallholder production develops, the morelucrative higher-level activities (further upthe value chain) could be entered into bygrowers themselves.29

The private sector’s role in supplyinginputs and marketing

Only a small proportion of smallholderproduction can be geared to produce high-value crops. Their production of other crops,such as maize, will benefit from moreconventional agricultural input and marketingservices. In order to avoid an unsustainabledependence on subsidies, a preferablealternative would be to develop marketswhere companies compete for the farmers’production, as well as the farmers’ customfor their supplies of seed, fertilizer, chemicalsand machinery. Through effective marketingthe Seed Company was able to diffuse theirhybrid seed to nearly all communal farmersduring the 1980s. Fertilizer companies haveestablished warehouses for smallholderswhere it was profitable to do so, while othershave promoted their products through ruralagents and outlets. These warehouses couldalso serve as commodity collection points.

Recruit, retain and develop farming skills

The success of agriculture is criticallydependent on retaining the technical andmanagerial skills of experienced farmers anddeveloping the skills of new farmers.Opportunities should also be created for themany former students who have passedthrough Zimbabwe’s agricultural trainingschools. Those farmers and workers whowere displaced by the FTLRP should beencouraged to return and lend their skills andexperience to the rebuilding of agriculture.

29 This has been achieved by forestry plantation growers in South Africa, including smallholders.

181


9.5 SEQUENCING OF LANDREFORM ANDAGRICULTURALRECOVERY POLICIES

Each of the five strategic thrusts, discussedabove, focused on policy imperatives ratherthan the sequencing of recommendations.This section therefore briefly prioritisesactivities for recovery and reconstruction,starting with ‘quick wins’ from emergencypost-crisis assistance, to short and mediumterm recovery strategies, to long term andgenerational objectives, such as structuraltransformation. Caveats are in order. First,brevity dictates that these categories arebroad, incomplete, notional and flexible.Second, some activities are crucial at theearlier stages if long term and generationalchanges are to come to fruition. Third, it isnot so much the pace of change that is critical,but the direction of change. And fourth,emphasis is placed on immediate activitiesrather than more distant ones.

9.5.1 Emergency relief andproduction (12 months)

Immediate measures will be needed to bringemergency food relief and get agriculturalproduction underway. Food security is thetop priority. The government must seek thesupport of the humanitarian community tosecure food for distribution through the WorldFood Programme (WFP), C-Safe and otherNGOs. The objective must be to fulfil theirprogramme of food distribution to anestimated 5.1 million people by April 2009.Concurrently, restriction should be lifted onprivate sector trading to allow imports offood and trade between surplus and deficitdistricts, thus ensuring that households withpurchasing power can access food throughthe markets (FAO/WFP, 2008). Competitivefood markets would also help bring the costof food down.

The second imperative is to get agriculturalproduction moving. Seed and fertilizer packs,dipping chemicals to control tick-bornelivestock diseases, and/or cash transfers

could be distributed through C-Safe’snetwork to boost smallholder agriculturalproduction. Donor funds could also bechannelled through a special fund to Agribankto provide concessionary loans to small-scalecommercial and A2 resettlement farmers fortheir farm inputs needs. Lines of credit tothe private sector should make seed, fertilizer,fuel, chemicals and equipment available tocommercial farmers through commercialbanks at market prices. Balance of paymentsupport will be needed to tackle Zimbabwe’senergy crisis, primarily fuel for tractors, coalfor curing tobacco, and electricity forirrigation and the manufacture of fertilizers.It is not just fertilizer factories thatdesperately need power, but the phosphatemines on which fertilizer factories depend.

9.5.2 Short term measures(1–3 years)

Food aid, as it is now delivered, should bewound down and phased out while moresustainable approaches to food security areput in place. These include:

• Liberalizing the trade in food, bothdomestically and internationally, andallowing farm input and commoditymarkets to operate competitively.

• Improving famine early warning systemsand the targeting of beneficiaries, andestablishing clear emergency fooddistribution mechanisms.

• Promoting smallholder productionthrough improved extension services,well-maintained infrastructure, andwidening the scope of corporate-smallholder outgrower (contractfarming) schemes.

In addition, the government should undertakea comprehensive review of the relativebenefits, feasibility and sustainability ofconditional cash transfers and basic incomegrants as possible methods for improvedhousehold food security, social protection anddevelopment.

IT IS NOT SO MUCH

THE PACE OF

CHANGE THAT IS

CRITICAL, BUT THE

DIRECTION OF

CHANGE

182


Any announcement of pre-planting prices asa crop production incentive is meaninglessin a hyper-inflationary environment. Analternative approach – preferably in the first2 years only – could be to express pre-planting prices in US dollars or rand (setapproximately at purchasing power parity),but payable in Zimbabwe dollars at the timeof delivery. Once the imperative of macro-economic stability has been achieved, pre-planting prices could be quoted in Zimbabwedollars until such announcements areabandoned in favour of more market drivenapproaches.

The key short term measures – that will allowthe process to unfold, and therefore need tostart immediately – are the legislativechanges to create the institutions whoseactivities are crucial for getting recoveryunderway. Foremost amongst these is theenabling legislation for the creation of a LandCommission, whose most urgent task will bea thorough land audit. Until this audit hasbeen completed, it will be difficult to moveforward and rationalize the occupation offarmland, provide loans for rebuilding farmsinfrastructure, and provide secure tenure tofarmers. Concurrently, a Land Fund andTribunal should be established, while theoversight functions and mechanisms ofParliament and the Office of the Comptrollerand Auditor-General should be strengthened.The Ministry of Agriculture will need to berestructured so that the task of buildingcapacity, especially in agricultural researchand extension, can be resumed as soon aspossible.

9.5.3 Medium term recovery(3–5 years)

Gradually, the government should moveaway from announcing pre-planting andminimum support prices, and allow themarket to govern commodity prices. In a bidto reduce volatility in staple food prices andprotect the poor, the government, through arestructured and commercialized GMB,could enter the market in surplus years, whenprices are depressed, and sell onto the

market in deficit years, when prices are high.This would dampen price volatility, enablethe government to maintain a sufficient levelof buffer stocks in case of emergencies, earna profit on its transactions, and export itssurpluses.

This phase of recovery should also consolidatethe gains of restructured agriculturalinstitutions. A solid foundation should havebeen laid for robust and sustainable agriculturalgrowth based on more competitive input andcommodity markets, as well as agriculturalresearch and extension. Likewise, the newland institutions – the Land Commission, theLand Fund and the Land Tribunal – shouldhave moved beyond legal, organizational andfunding concerns, to the planning of asustainable land reform programme, imple-menting a transparent settler selection andfarm allocation programme, and introducinga land tax in the commercial areas. It shouldalso see the stirring of a land market, thebeginnings of innovative financial arrange-ments based on secure tenure, heightenedfarm investment and greater productivity inthe resettlement and commercial farmingareas.

Once the land reform programme isunderway, the Land Commission should turnits attention to establishing the legal andregulatory framework for land tenure reformin the communal areas.

9.5.4 Long term strategies andreforms (5–15 years)

Land tenure reform would begin by trans-lating communal land policies into a workablelegal and institutional framework. Anunfolding programme would legislate thetransfer of de jure ownership of thecommunal areas into the hands of communityassemblies, which would have jurisdictionwithin adjudicated and demarcatedboundaries. These steps could then befollowed by the establishment of commonproperty regimes and the registration ofresidential and arable land using low costtechnologies. At the same time, a land or

183


unitary tax levied on smallholders wouldcontribute to local administrative mechanismsto register land and the transfer of landthrough rental and sales markets.

By this stage, investments in rural social andphysical infrastructure should have helpedboost agricultural production and put it firmlyon a path of sustainable growth. Smallholderfarmers and small-scale enterprises are likelyto have been weaned off subsidized statefinancing by restructuring in the financialsector. Agricultural loans would havebecome available through various channels,such as a restructured POSB, Agribank,contract farming, and microfinancinginstitutions. Informal credit based on thecollateral value of communal plots shouldhave become more common. Food handoutsand other social protection measures for themost vulnerable households may have beenreplaced by conditional cash transfers orbasic income grants, possibly administeredthrough the POSB.

9.5.5 Generational change andstructural transformation(15–50 years)

Over the coming decades most residentialand arable land in the communal areas shouldhave been registered. As the land marketstarts to develop and operate, small farmscould be consolidated into larger holdings,while other families decide to migrate tourban centres in search of jobs andemployment opportunities. Gradually, thelarger and more profitable communalfarms are likely to opt for freehold title;communities may decide to convert theircommon property regimes into individual landrights; and the communal areas will slowlydecongest. As registered title becomes thenorm, formal private sector financing basedon the collateral value of land should becomemore common. Eventually, a unimodalagrarian structure should start emerging inZimbabwe, with farm sizes ranging from thevery small to the very large, but consistingmainly of medium-sized family farms. At thispoint, growth points and rural service centres

should have been transformed into smalltowns.

If this transformation process seems too far-fetched, we need only think of China, whosereforms started 30 years ago. Zimbabwe isnot China, and is unlikely to follow China’spath or its heady pace of development andmodernization. But Zimbabwe has the human,capital and natural resource potential to growand develop steadily into a transitionaleconomy and shed its dependence on aid.


Most of the recommendations in this chapterare not new. They are broadly a continuationof the seminal work of the Land TenureCommission chaired by Rukuni (Zimbabwe,1994). It was the Commission that suggestedthat village assemblies be elected incommunal areas; that villages be surveyedand mapped; that all communal arable andresidential land should be issued with landregistration certificates; that resettled farmsbe replanned and given title; and thatfreehold tenure should be maintained for allcommercial farms. It was the Commissionthat first recommended that a Land Boardor Commission be established together witha more decentralized system of governanceand land administration. And it was theRukuni Commission that suggested thatall laws on land be consolidated andstreamlined, and that an agricultural land taxbe introduced. It also recognized theimportance of promoting rural centres andgrowth points in a process of migration andrural transformation.

There is also much to commend the Zimbabwegovernment’s own suggestions in June 1998,when Phase II of the resettlement programmewas being planned (Zimbabwe, 1998a). It, too,took on board recommendations from theRukuni Commission and the advice of itsfriends within the international community: thatthe identification of settlers would followformal criteria which would be made publicprior to the selection process; that A2 settlers

184


would be better-off smallholder farmers withdemonstrated competency in farming, suchas master farmers and agricultural graduates;that disputes between farmers and thegovernment should be settled through anadministrative land court; and that agriculturalland-use plans would be prepared to facilitatedemarcating, surveying, and the granting oftitle. And, crucially, the government’s reportreiterated the principles that resettlementhad to be implemented in a transparent, fairand sustainable manner and that compensationhad to be paid to farmers whose land wasacquired.

Naturally, this chapter has also suggestedsome changes. Whereas the RukuniCommission foresaw resettlement areasbeing granted state leases on farms with anoption to purchase, it has been argued here

that these leases do not provide secure landtenure, nor do they unlock the collateral valueof the land. An alternative has thereforebeen proposed. Drawing on a recent WorldBank review of land policy and the work byAlden Wily for the UNDP, a two-stageprocess of providing secure tenure wasrecommended for both resettlement andcommunal areas (World Bank, 2003; AldenWily, 2006). This has the added advantageof facilitating rental markets and migrationto non-farm opportunities in rural and urbancentres in a process of economic structuraltransformation. In essence, therefore, thechapter has tried to recapture the broadconsensus reached on land policy before thecrisis deepened after 2000. This, it is hoped,will provide a solid foundation to construct away forward that brings economic and socialrecovery for the benefit of all Zimbabweans.

185

This chapter focuses on the restructuring ofpublic enterprises, and the infrastructure andhousing sectors in Zimbabwe. An overviewof global trends is provided, highlighting thefact that privatization, the main form ofrestructuring peaked during the 1990s andtapered off thereafter. It is argued that therehas been an over-emphasis on the benefitsof privatization, and the pendulum has sinceswung back to a more cautious approach,especially with respect to infrastructure. Theglobal emphasis is no longer on pursuingprivatization from a doctrinaire perspective,but rather taking a more eclectic approach(World Bank, 2004 and 2005; OECD, 2004;Nellis, 2006; UNDP, 2007; Gomez-Ibanez,2007). According to Kikeri and Nellis (2004:87)

‘Mounting empirical evidence ofprivatization’s benefits coincides withincreasing dissatisfaction andopposition among citizens andpolicymakers. This dissatisfactionreflects the growing questioning of thebenefits of privatization, the generaldownturn of global markets in the pastfew years and the resulting swing ofthe pendulum back toward increasedgovernmental supervision, the over-selling of privatization as a panaceafor all economic problems, and theconcern that privatization does notproduce macroeconomic anddistributional gains equivalent to itsmicroeconomic benefits.’

The public enterprise, infrastructure andhousing sectors in Zimbabwe are thenanalysed, tracing their past performance andexperiences with restructuring. Even thoughpublic enterprise reforms were a centraltenet of the reform period beginning in 1991,the process was characterized by inertia

Chapter 10

Restructuring of Public Enterprises,Infrastructure and Housing

and serious implementation challenges,resulting in limited progress. The lack ofmaintenance, replacement and new invest-ment in infrastructure resulted in a markeddeterioration in its quality, and the neglectof the housing sector has created seriousshortages of shelter and prohibitive rentaland housing prices. The constraints to pastgrowth and future recovery arethen considered, and include legal andinstitutional aspects (overlapping andunclear roles and functions), policy,capacity (physical and human capital) andpolicy constraints.

Key broad strategic objectives are identifiedand strategic thrusts derived from them. Foreach of these a set of policies – a policypackage – that includes measures forrecovery, is advanced.

10.1 OVERVIEW OF GLOBALTRENDS

The post-World War II period, and especiallythe 1950s and 1960s, saw governmentsaround the world actively direct and controltheir economies (dirigisme). The scope ofthe public sector was expanded during thisperiod, especially through the establishmentof public or state-owned enterprises andparastatals. However, results did not matchexpectations, as political considerationsoverrode economic ones, resulting in publicenterprises becoming a drain on the fiscusand being kept afloat through subsidies.

Owing to the widespread failure of publicenterprises, a new market-oriented thrustreplaced the hitherto popular statistapproaches, finding political expression withthe coming to power of Margaret Thatcherin the UK in 1979 and Ronald Reagan in the

THE GLOBAL

EMPHASIS IS NO

LONGER ON

PURSUING

PRIVATIZATION

FROM A

DOCTRINAIRE

PERSPECTIVE, BUT

RATHER TAKING A

MORE ECLECTIC

APPROACH

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USA in 1981. This marked a period of neo-liberal revival that is unprecedented in recenthistory. The process of rolling back theState gathered momentum, with waves ofprivatization sweeping across continents.Structural Adjustment Programmes (SAPs)adopted by the World Bank and theInternational Monetary Fund (IMF) in the1980s insisted that loan recipients privatizepublic enterprises. The pendulum swungdecisively in favour of a minimalist state, witha focus on market (private sector) leddevelopment.

Over the period 1990–1999, global proceedsfrom privatization amounted to US$850billion, rising from US$30 billion in 1990 toUS$145 billion in 1999. Proceeds fromprivatizations were lower in the newmillennium, at US$282 billion between 2000and 2006.1 Latin America and the Caribbeanaccounted for the bulk of privatizationproceeds at 55 percent (the largest salesemerging from the sale of infrastructure andenergy firms in Argentina, Mexico and Brazil),followed by Eastern Europe and Central Asia(21 percent), East Asia and the Pacific (14percent), South Asia (4 percent), the MiddleEast and North Africa (3 percent), and sub-Saharan Africa (3 percent). In sub-SaharanAfrica, sales of state enterprises rose from175 in 1990 to more than 400 in 1996 and tomore than 2,200 by 1998, concentrated mainlyin Mozambique, Angola, Ghana, Zambia,Kenya, Tanzania and Guinea. Sales fromAfrica accounted for 3 percent of total salesfrom developing countries during the period1990–1999 (Kikeri and Nellis, 2004).

For the period 1990–1999, privatizationrevenues were estimated to be US$9 billionfor 37 sub-Saharan African countries, lessthan that realized by sales in New Zealandalone, and under a third of what was realized

from two auctions of Braziliantelecommunications companies in the mid-1990s. A total of 979 privatizations occurredin sub-Saharan Africa between 1988 and2003, with a total value of US$11.7 billion,compared to privatization receipts amountingto US$195 billion in Latin America over thesame period (Nellis, 2006). More recent datashow that, during the period 2000–2006, sub-Saharan Africa raised $8.3 billion, 3 percentof the total for developing countries. Mostprivatization initiatives in sub-Saharan Africahave been at the behest of the Bretton WoodsInstitutions. It has been observed that 70percent of all SAPs during the 1980scontained a privatization component (Cookand Kirkpatrick, 1995).

10.2 PUBLIC ENTERPRISES,INFRASTRUCTURE ANDHOUSING PROVISION INZIMBABWE

10.2.1 The public enterprise sectorin Zimbabwe

At the advent of independence in 1980,Zimbabwe inherited a large number ofparastatals. These were present in all sectorsof the economy, notably agriculture, mining,transport, energy, communications andfinance. According to the State EnterprisesRestructuring Agency (SERA), in 2006 therewere 76 public enterprises.2 More than 60percent of the parastatals had been inheritedfrom the Rhodesian administration. Thus,unlike the experience in most Africancountries after independence, Zimbabwe didnot expand its parastatal sector throughnationalization and expropriation but ratherthrough the creation of new bodies.3

According to the Reserve Bank of

1 Detailed data on privatization transactions and proceeds for the period 2000-2006 are available at <http://rru.worldbank.org/Privatization>. The data do not include non-cash transactions such as the use of vouchers.

2 The Privatization Agency of Zimbabwe (PAZ), established in 1999, changed its name to the State EnterprisesRestructuring Agency (SERA) in 2005. See <http://www.sera.co.zw>.

3 In Zambia for instance, nationalization saw the number of public enterprises increasing from 14 at independencein 1964 to more than 150 by 1986, constituting 80 percent of the economy. The level was even higher inTanzania.

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Chapter 10 – Restructuring of Public Enterprises, Infrastructure and Housing

Zimbabwe (RBZ) (2007), the parastatals andlocal authorities sector accounts for at least40 percent of Gross Domestic Product(GDP), and their contribution to the economyis even greater given their backward andforward linkages with the rest of theeconomy.

The major public enterprises, in whichgovernment has 100 percent shareholdingand those in which government has a stakethrough RBZ shareholding, are reported inTable 10.1.

Public enterprise restructuring inZimbabwe

The restructuring of public enterprises, andin particular privatization, came to thefore in Zimbabwe following the shift ineconomic strategy from the highly inter-ventionist approach of the first decade ofindependence (1980–1990) to a more market-based strategy under the Economic StructuralAdjustment Programme (ESAP) in 1991. Inthe government reform blueprint entitled,‘Zimbabwe: A Framework for Economic

Table 10.1: Major public enterprises

A. Those with 100 percent government shareholding

1. National Railways of Zimbabwe (NRZ)

2. Zimbabwe Electricity Supply Authority (ZESA)

3. Zimbabwe Iron and Steel Company (ZISCO)

4. Cold Storage Company (CSC)

5. National Oil Company of Zimbabwe (NOCZIM)

6. Zimbabwe National Water Authority (ZINWA)

7. District Development Fund (DDF)

8. Grain Marketing Board (GMB)

9. Air Zimbabwe

10. Agricultural and Rural Development Authority (ARDA)

11. Tel*One

12. Net*One

13. Industrial Development Corporation (IDC)

14. Zimbabwe Mining Development Corporation (ZMDC)

15. Minerals Marketing Corporation of Zimbabwe (MMCZ)

16. Central Mechanical Engineering Department (CMED)

17. Zimbabwe Defence Industries (ZDI)

18. Zimbabwe Development Corporation (ZDC)

B. Those with a government stake through RBZ shareholding

Enterprise RBZ shareholding (%)

1. Astra Holdings 66

2. Cairns 65

3. Tractive Power Holdings 65

4. Fidelity Printers and Refineries 100

5. Export Credit Guarantee Company 100

6. Aurex 100

7. Sirtech 60

8. St Lucia Park 50

9. Homelink 100

10. Old Mutual 8

11. Dairibord 21

12. Cotton Company of Zimbabwe 7

13. Infrastructure Development Bank of Zimbabwe 16.75

14. Tuli Coal 70

Source: Reserve Bank of Zimbabwe (2007: 3–4)

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Reform 1991-95’ the negative impact ofparastatals on the fiscus was highlighted. Thelargest of the public enterprises, the fouragricultural marketing boards,4 the NRZ,ZESA, ZISCO, NOCZIM, the Posts andTelecommunications Corporation (PTC) andAir Zimbabwe were singled out as the mostdependent on the fiscus. A key objective ofESAP was the reduction of the budget deficitfrom 10 percent of GDP to 5 percent by 1994/95. To achieve this, government sought, amongother measures, to eliminate the largebudgetary burden caused by subsidies bymaking the public enterprises operationallyefficient and more commercially oriented.Subsidies to public enterprises were targetedto decline from Z$629 million (US$231million) in 1990/91 to Z$40 million (US$4.5million) in 1994/95.

For the period 1986–1991 the country’slargest parastatals received from centralgovernment subsidies and advancesexceeding Z$2 billion (US$1.6 billion), whichcontributed to the high budget deficit thatwas in excess of 10 percent of GDP by 1991.The question is then, whether with suchsupport, these public entities performedeffectively. The total losses of publicenterprises, which had declined between1986/87 and 1987/88, increased by 48percent in 1988/89 compared to the level in1985/86. Clearly, the performance of stateenterprises left a lot to be desired. As theESAP blueprint document stated, ‘not onlydo public enterprises absorb a large pro-portion of recurrent budgetary expenditurein direct subsidies, grants and advances fromgovernment, but as a group they producevery small returns, if any, on capital invested’(Zimbabwe, 1991: 1, Annex 1).

The ESAP blueprint identified the causes ofthe poor performance of parastatals as follows:

• Government pricing policies did not allowa number of public enterprises to covertheir costs.

• Various Acts required government tofinance public enterprises’ deficits fromthe national budget, even when thesedeficits were due to mismanagement.

• Government usually failed to pay for thecosts of investment or activities carriedout by public enterprises for purely socialreasons.

• The capital base of many public enter-prises consisted largely of loans, resultingin a heavy debt-service burden.

• Boards of directors and managers lackedautonomy and accountability. Lineministries were involved in day-to-daydecision-making in the areas of personnel,salaries, investment and purchasingdecisions.

• Corruption and mismanagement.

• Internal financial control systems andexternal monitoring systems for publicenterprises’ performance wereinadequate.

• Their boards did not always includethe expertise needed for effectivemanagement.

When the economic reforms wereimplemented, the major objectives of publicenterprise reform were not dissimilar tothose applied elsewhere:

• Efficiency improvements and economicdevelopment through the attraction offoreign investment, technology andknow-how and the harnessing andencouragement of local entrepreneurialskills.

• Generation of revenues through salesand leases.

• Use of a full range of options, includingoutright sale of shares and assets, leasing

4 The Grain Marketing Board (GMB), the Cotton Marketing Board (CMB), the Dairy Marketing Board (DMB),and the Cold Storage Commission (CSC).

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and management contracts, andcontracting out of services.

According to the reform blueprint, thespecific action to be taken regardingprivatization or commercialization woulddepend on the category into which aparastatal fell. These entities were groupedas follows:

• Category 1(a): Enterprises to be retainedbecause of their social functions(the Forestry Commission and GrainMarketing Board).

• Category 1(b): Enterprises to be retainedbecause of their promotional functions(such as the Zimbabwe BroadcastingCorporation and the Zimbabwe TourismAuthority).

• Category 2: Enterprises to remain whollyowned by the government for strategicreasons (such as ZISCO and ZimbabweDefence Industries).

• Category 3: Enterprises carrying outcommercial functions (such as the DairyMarketing Board, the Cotton MarketingBoard and the Cold Storage Commission).

According to the ESAP document, thoseparastatals in Categories 1 and 2 would onlyundergo commercialization, while those inCategory 3 would be privatized.

When government adopted economicreforms in 1991, public sector and parastatalreform featured prominently. In fact, thereform blueprint emphasized the importanceof ‘frontloading’ this aspect so as to reducepublic expenditure quickly, thereby reducingthe budget deficit. Frontloading such reformsalso made sense in terms of sequencing the

reforms in that, without stabilization,measures to deal with adjustment would notwork. This sense of urgency was echoed inall subsequent economic strategies,5

including the budget and monetary-policystatements presented since ESAP. In spiteof such concerns raised at the highest level,nothing of significance has taken place withregard to public sector and parastatal reform.

Performance of public enterprises sincethe onset of the reforms

Despite the reform programme emphasizingthe need for privatization andcommercialization, it was not until 1994 thata policy paper on the subject was preparedby an inter-ministerial Cabinet committeeestablished in October 1994.6 Box 10.1reports on the few stories of success inrestructuring public enterprises in Zimbabwe.

Ten years after the government firstannounced its policy to privatize andcommercialize parastatals, they continued tomake huge losses. In fact, the target ofreducing the budget deficit to 5 percent ofGDP by 1994/95 was missed by a widemargin, with the out-turn at 13.5 percent ofGDP. This was explained partly by thecontinued deterioration in the overallperformance of public enterprises, whoselosses amounted to Z$2 billion (4 percent ofGDP) in 1993/94, and which in the 1997/98financial year had reached Z$11 billion (8.6percent of GDP). The major loss-makerswere NOCZIM (50 percent of the totallosses), ZESA (20 percent), the Cold StorageCompany (8 percent), NRZ (6 percent) andZISCO (6 percent). The State EnterprisesRestructuring Agency observed that therecent performance of public enterprisessuggests a progressive decline (SERA,2008).

5 The Zimbabwe Programme for Economic and Social Transformation (ZIMPREST), 1996-2000, and theMillennium Economic Recovery Programme (MERP), 2001–2002, referred to public enterprise reform as‘unfinished business from ESAP’. Annex 2 (pp. 51–55) of ZIMPREST provides a timetable for thecommercialization and privatization of 52 public enterprises. A similar timetable appears in MERP, with over 40public enterprises to be privatized/commercialized.

6 Inter-Ministerial Committee on Commercialization and Privatization (IMCCP), ‘Privatization andCommercialization Policy and Strategy Paper’.

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Box 10.1: Some Success Stories in Restructuring Private Enterprises in Zimbabwe

The domestic marketing of agricultural products was gradually liberalized. Initially, the three main agriculturalparastatals, the Dairy Marketing Board (DMB), Cotton Marketing Board (CMB) and Grain Marketing Board(GMB) were, in 1994, converted into companies wholly owned by government, i.e., corporatization. In January1995, government took over the accumulated debts of these boards to enable them to start with a clean slate.

Dairibord Zimbabwe Limited (DZL) was fully commercialized and registered under the Companies Act in July1994, with government retaining 100 percent equity. Having been run for four years from 1994 to 1997, DZLwas privatized through its listing on the Zimbabwe Stock Exchange in September 1997, with the counteroversubscribed. DZL has been a success story, as exemplified by the following:

i) The company is highly profitable and well capitalized through its own funds.

ii) DZL achieved real growth in sales volumes, both on the domestic and export markets: the company is a netearner of foreign currency.

iii) Government is collecting corporate tax from it, and not subsidizing its operations.

iv) Employee motivation is high as the company can now afford market-related conditions of service (RBZ,2007: 9).

The CMB was commercialized in 1992. Cottco was registered in 1994 and realized profits in 1995, culminatingin its privatization in 1997. The introduction of competition in 1995 allowed new cotton trading companies intothe market, enhancing efficiency in the sector. Thus, Cottco is also a success story, as evidenced by thefollowing:

i) It is now one of the blue-chip companies listed on the Zimbabwe Stock Exchange.

ii) The company is one of the top exporters of cotton.

iii) The opening up of the cotton sector has enhanced competition resulting in increased cotton output and faircompensation to growers (RBZ, 2007: 10).

The government raised over Z$2 billion (US$100 million) through the sale of Dairibord Zimbabwe Limited, theCotton Company of Zimbabwe, the Commercial Bank of Zimbabwe (1997), the Zimbabwe ReinsuranceCorporation (1999) and the Rainbow Tourism Group (RTG) (1999). The main method used in these privatizationswas a public share offering (in the case of Dairibord, Cottco, CBZ and RTG). Other methods used in conjunctionwith the public share offering included Employee Share Ownership Plans (ESOPs) in the cases of Dairibord,Cottco and RTG, in which management and employees participated.

As a result of their deterioratingperformance, public enterprises haveexperienced a high staff turnover, especiallyin critical technical and financial areas, whichhas undermined their operations. It is oftenthe case that staff remain in an actingcapacity in key executive positions for longperiods. Some public enterprises go for longperiods without boards, effectively being runfrom the parent ministry. An example of theskill shortages at the public enterprise levelis illustrated by the human resources auditof the National Railways of Zimbabwe(NRZ) in 2007 (Table 10.2).

Low salaries and poor working conditionshave affected morale, and hence productivity,in the parastatal sector. This has beenexacerbated by the lack of technicalexpertise on boards, which tend to beappointed on the basis of political criteria.

Much of the infrastructure in the publicenterprise sector is antiquated and constantlybreaking down. Loans under the PublicSector Investment Programme (PSIP) havedeclined drastically, which has resulted in thenon-replacement of plant. For instance,ZISCO is experiencing low plant capacity

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utilization, with a monthly production averageof 12,473 tonnes which is less than thebreak-even production output of 25,000tonnes per month.

Currently, ZESA is generating 49 percent ofthe total power requirements owing to lowplant availability. Air Zimbabwe has verylimited capacity in two B767s, three B737sand three MA60s.

The slow progress of public enterprise reformsis also related to a fear of strengthening thegrip of foreign capital on the economy. Thiswas exemplified by the emergence of anindigenization lobby in the 1990s, culminatingin the government Policy Framework for theIndigenization of the Economy (24 February1998).7-8 Issues of indigenization continueto take centre stage, as witnessed by thepassing of the Indigenization and EconomicEmpowerment Act (No. 14 of 2007) byParliament in 2007, which came into force on17 April 2008.

Lack of political will and commitment, theunpredictable political and macroeconomicenvironment, and a lack of investor and donorconfidence have also been identified as keyconstraints. An often ignored factor is thecredibility of the government itself as anagent of change. This credibility is relatedto the extent to which the governmentenjoys the support of the populace. It isinconceivable that public enterprise reforms

can work in an environment characterizedby mistrust, where business, labour and socialgroups are vilified as unpatriotic and agents’provocateurs. In such an environment ofhostility and policy failure, public enterprisereforms are as much a casualty as any otheraspect of the economy. Since a central tenetof public enterprise reforms is to unleash thediscipline of markets, it is impossible toenvisage its success in a generally anti-business environment.

SERA (2008: 2) itself identified the followingas the causes of the poor performance ofpublic enterprise reforms:

• Viability deficiencies as a result ofthe prevailing harsh macroeconomicenvironment, characterized by a highinterest-rate regime and high inflationlevel.

• Under-capitalization.

• Inappropriate operating and financialstructure.

• Leakage and abuse of resources owingto poor and ineffective management.

• A huge debt overhang in a high-interestrate environment.

• Serious deterioration of infrastructureowing to limited resources for bothmaintenance and new investments.

7 It was revised in 2004. See <http://www.indigenisation.gov.zw>.8 Zhou (2000) observes that the Z$400 million allocated to the NIT since its formation in 1996 was diverted to

pay gratuities to war veterans in 1998 (see The Herald, 1 October 1998).

Table 10.2: Human resource audit of the National Railways of Zimbabwe, 2007

Category Actual 2007 budget Shortfall Actual–budget (%)

Managerial 93 182 89 51.1

Engineers 48 81 33 59.3

Artisans 529 771 242 68.6

Others 6,591 8,950 2,359 73.6

Apprentices 282 362 80 77.9

Total 7,543 10,346 2,803 72.9

Source: Chenyika (2007: 7).

IT IS

INCONCEIVABLE

THAT PUBLIC

ENTERPRISE

REFORMS CAN

WORK IN AN

ENVIRONMENT

CHARACTERIZED

BY MISTRUST,

WHERE BUSINESS,

LABOUR AND

SOCIAL GROUPS

ARE VILIFIED AS

UNPATRIOTIC AND

AGENTS’

PROVOCATEURS

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• Shortages of foreign exchange, whichhave constrained the importation ofessential spares.

• No access to external lines of credit.

Since the appointment of a new Governorof the Reserve Bank in December 2003, hehas provided probably the most scathingattack from a government official on publicenterprises, which he saw as a ‘drag’ and‘the critical missing link’ for economicrecovery.9 The RBZ unveiled an 18 to 24months ‘Parastatal and Local AuthoritiesReorientation Program (PLARP) in January2005 designed to spearhead the restructuringof public enterprises and local authorities.10

It was projected that the government wouldcease providing allocations from the budgetfrom 2006. PLARP therefore sought to movepublic enterprises and local authoritiestowards sound corporate governance,efficiency, profitability and sustainable longterm growth.

A review by SERA of the post-PLARPperformance of public enterprises as at 30June 2007 points to some positive develop-ments. Perennially loss-making parastatals– such as ZISCO, GMB, CSCL, NOCZIM,Tel*One, Net*One and ZESA Holdings –had made some profit, with the exception ofZINWA, which realized a loss of Z$15.6billion (US$52,000). Chenyika (2007)indicates that, following the NRZ’s adoptionof a turnaround strategy with the involvementof its social partners, its fortunes improvedmarkedly, with the annual tonnage rising from3.7 million in 2005 to 5.4 million in 2006.However, analyses from the RBZ and SERAsuggest that the recovery is still fragile. Whenone considers what might have happened inthe absence of support from PLARP, itbecomes clear that the results are artificial.The RBZ has admitted that the funding

comes from printing money, which suggeststhat under normal conditions theseenterprises would not have received suchhighly inflationary support. The Governor ofthe Reserve Bank reasoned: ‘We are awareof the inflationary impact of printing moneyto fund infrastructure development, but whatgood will it do to us to have zero inflationand have people dying due to rail accidentsas we have recently witnessed in VictoriaFalls?’11 Thus, even though the ReserveBank had identified the year 2006 as the yearit committed itself to attending to theunfinished business in the sector to achievea turnaround, this was not achieved.

10.2.2 Current status of infrastructurein Zimbabwe

In the 1980s and into the 1990s, the viewwas frequently expressed that there wasadequate investment in Zimbabwe’s infra-structure and that it was well maintained.The supply of infrastructure services wastherefore adequate to support productivesector investments and provide relativelyhigh coverage of the needs at least of theurban dwellers, if not of the rural population.This generalization may have had somevalidity in relation to the maintenance aspectsof transport, energy and water, butcertainly did not apply to information andcommunications technologies (ICT), wherepoor maintenance of publicly owned facilitiesand underinvestment was very evident in asector which was becoming increasinglyimportant as a potential source of economicgrowth. In fact transport, energy and wateralso suffered from under-investment, but theeffects only became really obstructivetowards the end of the 1990s. In the post-2000 crisis, not only has there been a totallack of replacement and new investment, butreal expenditure on maintenance has fallento derisory levels.

9 See, for instance, the Monetary Policy Statement for the Fourth Quarter of 2005 presented on 24 January 2006:<http://www.rbz.co.zw/inc/publications/legaldept/rbzpdfs/Monetary%20Policy%202006.pdf>

10 See <http://www.rbz.co.zw/inc/publications/legaldept/rbzpdfs/Supplement4.pdf>.11 Quoted in The Herald, 16 September 2006, p. 11.

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The resulting deterioration in the state ofinfrastructure has been marked:

• Tarred roads in urban areas as well ashighways are visibly deteriorating,while many rural roads are becomingimpassable. This has occurred despite asharp decline in road transport due tothe limited availability of fuel.

• The rail track has deteriorated signifi-cantly with a growing proportion of mainlines having to operate under speedrestrictions. Locomotive availability ispoor and locomotive reliability is downto 16,000 km between failures, againsta standard of 100,000 km. Wagonavailability was 59 percent in 2005 andhas continued to decline.

• Water supplies in urban areas havebecome erratic and quality uncertain, thisbeing due to the unavailability of spareparts for pumps and other equipment andshortages of electricity and waterpurification chemicals.

• In the energy sector, fuel is in constantshort supply and extremely expensivewhen available (in part due to rapidincreases in the international price ofpetroleum products); electricity supplieshave become extremely erratic, theeconomic costs of blackouts beingexacerbated by the lack of planning ofoutages.

• In the telecommunications sector, thereis a large backlog in both fixed line andcellular phone connections. Servicequality is extremely poor, with callcompletion rates between mobile net-works for example, being estimated tobe less than 10 percent.

In all the above (except road transport),public enterprises (PEs) are the dominantsuppliers of services and suffer from all ofthe problems identified above. These include

massive deficits on current operations andthe accumulation of significant levels of debt.Another issue of particular concern whenconsidering recovery strategies is the lossof skilled personnel at all levels.

The challenge of restoring Zimbabwe’sinfrastructure base is one of the most urgentreconstruction tasks and one that will be mostdemanding of investment resources. As iswell known, the costs of rehabilitation ofinfrastructure are many times higher thanthe costs of regular maintenance. Theeconomic cost of the recent neglect ofmaintenance, compounded by the legacy ofpast under-investment in infrastructure, willplace a considerable burden on the countryat the start of the recovery period (see WorldBank, 2006 and 2007).

10.2.3 Housing provision

The UN Covenant on Economic, Social andCultural Rights considers housing (shelter)as a basic socioeconomic right, and yetthis is seldom acknowledged and reflectedin national policy and in practice.12

Furthermore, housing developmentgenerates strong forward and backwarddemand linkages, setting up powerfulmultiplier effects within the economy. Thebackward demand linkages for buildingmaterials, electrical and sanitary ware,roofing, and so on, will encourage theproduction of a wide range of manufacturedproducts. Similarly, once a dwelling has beenbuilt, the occupants will want to furnish it,install electrical appliances, and need manyconsumables to maintain their homes. It istherefore not just the process of producinghouses that would create employment, butthe derived demand for labour for everyproduct required by prospective and newhomeowners. If the housing policy facilitatesthe construction of ultra low-cost housing forthe urban poor, then employment created bymicro and small-scale enterprises would bestrongly pro-poor.

12 This right is also enshrined in the UN’s Universal Declaration of Human Rights; the Convention on theElimination of All Forms of Discrimination against Women; the International Convention on the Eliminationof All Forms of Racial Discrimination; and the Convention on the Rights of the Child, among others.

THE ECONOMIC

COST OF THE

RECENT NEGLECT

OF MAINTENANCE,

COMPOUNDED BY

THE LEGACY OF

PAST UNDER-

INVESTMENT IN

INFRASTRUCTURE,

WILL PLACE A

CONSIDERABLE

BURDEN ON THE

COUNTRY AT THE

START OF THE

RECOVERY PERIOD

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Following the attainment of independence inZimbabwe, the new Government quicklyrecognized the challenge of meeting thehousing needs of the urban population. Ahousing crisis had emerged following the influxof people into the urban areas during the warof liberation, which had resulted in themushrooming of squatter camps. Thus, theMinistry of Public Construction and NationalHousing (MPCNH) was empowered by theHousing and Building Act, 1979 and theHousing Standards Act (Chapter 205) toformulate and administer the National HousingPolicy. The policy was founded on home-ownership in order to address the housingshortage, tenurial insecurity, and encourageprivate investment in housing.

As a first step, the Government allowed theoccupants who rented municipal houses tobuy them, promoting home-ownership,secure tenure, and reducing the localauthorities’ housing maintenance costs. Theintroduction of ‘state sponsored self-helphousing’ was made possible by assistancefrom the United Nations, the WorldBank, the Commonwealth Corporation andUSAID. Under these schemes, site develop-ment and the provision of services wereundertaken by private sector contractors,who completed the civil engineering worksand the physical infrastructure. Servicedstands were then allocated to those on thehousing lists, who built their own houses usinglow cost, labour intensive methods. Asopposed to building brigades, aided self-helpwas the most popular and cost effectivemethod.

The government maintained the minimumstandards embodied in the Model BuildingBy-laws of 1977. While this improved thequality of high-density housing, the govern-ment was immediately faced with increasedconstruction costs. As Auret observes:

‘Historically, the housing deliverysystem has been characterised byunrealistically high standards forhousing structures, infrastructure andpublic facilities – determined by theGovernment.’ (1995:114)

Private sector participation in low costhousing included the provision of mortgageloans from building societies; employerassisted housing schemes, private individuals,real estate developers and NGOs.

During the ESAP period, housing was to beprovided on a cost recovery basis. TheMPCNH channelled funds into i) theNational Housing Fund; ii) the Housing andGuarantee Fund; and iii) the Civil Servants’Fund. Rentals were paid to the Ministry’soffices. The government launched the ‘Payfor Your House Scheme’ in 1992. Individualsmade monthly payments into a fund. Whentheir contributions reached half theconstruction cost, flats were built. TheMPCNH was responsible for acquiring theland, preparing the plans and the eventualconstruction of the units. The scheme sawthe building of flats and houses in Harare,as well as smaller towns. The major strengthof the scheme was that it did not rely onbudget allocations or subsidies.

However, as the government provision ofhousing stalled, the waiting lists lengthened.Government often found itself implementinginterventions at odds with its statedobjective of providing housing for all. Forinstance, ahead of the Queen’s visit at theCommonwealth Heads of GovernmentMeeting in Harare in 1991, many house-holds were forcibly removed from informalsquatter settlements, carted off to PortaFarm (on the outskirts of Harare), and hadtheir homes bulldozed. Auret found theGovernment’s action ‘extraordinary inthe light of the enormous shortage ofaccommodation’ (1995:71). It wasdiscovered that many squatters who hadbeen moved to Porta Farm were income-earners who had been driven to live ininformal squatter settlements by theshortage of accommodation and the highlodging costs charged by house-owners inHarare’s high-density suburbs.

‘In the last five years’, wrote Auret,‘Government, acting apparently with noforesight or planning, has in fact increased

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the number of homeless by evicting severallarge groups of people who were at the timeadequately housed’ (1995:73). By the mid-1990s, there were an estimated 1.5 millionpeople without adequate housing and therewere an estimated 100,000 people living insquatter settlements in and around Hararealone (Auret, 1995:1). Overcrowding wasubiquitous as illustrated by the fact thatinstead of one family occupying 300 squaremetres, four families shared 100 squaremetres of land and one toilet.

Even though an average of over 4,000 standswas allocated between 1994 and 1996, thewaiting lists stood at over 100,000. In realityhowever, the housing needs were far morecritical than the waiting list reflected. Manyof those in lodgings had not bothered toregister, either through ignorance or as aresult of a sense of hopelessness (Auret,1995:26). As the relationship betweengovernment and the donors deteriorated inthe late 1990s, USAID, World Bank andother donor-supported housing projectscame to an abrupt end, worsening thehousing situation as demand outstrippedsupply.

Clearly therefore, the huge backlog inhousing started well before the crisis period.The National Housing Delivery Policy of2000 acknowledged a cumulative backlogof over one million housing units, while theNational Housing Programme of 2003 notedthat actual production of houses had beenbetween 15,000 and 20,000 units per annumbetween 1995 and 2000 as compared withan annual target of 162,000 units. Thesituation was worsened by the governmentsystematically demolishing at least 93,000houses during Operation Murambatsvina,with few replacements being constructedin the subsequent Operation Garikai (amere 3,325 new houses in the first year,according to a survey by AmnestyInternational). The setting up of the NationalHousing and Infrastructure DevelopmentBank of Zimbabwe in recent years has nothelped as it was grossly undercapitalized.

10.3 CONSTRAINTS TOGROWTH AND RECOVERY

10.3.1 Public enterprises

The legal, institutional and policyframework

The literature on public enterpriserestructuring points to the importance of thefollowing:

• The depth and quality of the programmedesign and management.

• The existence of appropriate legislation(e.g., restructuring/privatization law).

• The legal authority of the restructuring/privatization agency which allows it toundertake its work with minimal politicalinterference.

• Transparency – the steps taken to informthe public about the programme and toencourage their maximum participationin the process (see, for instance, Godanaand Hlatshwayo, 1998: 15).

As shown below, weighed against thesecriteria, Zimbabwe’s public enterpriserestructuring programme fares poorly. Theframework for public enterprise restructuringin Zimbabwe is a minefield, characterizedby a multiplicity of pieces of legislation,institutions, and at times contradictorypolicies, and even policy reversals.Zimbabwe’s institutions and procedures forrestructuring/privatization were developed inan ad hoc manner, are cumbersome andnon-transparent.

The Inter-Ministerial Committee onCommercialization and Privatization(IMCCP), established in 1994 to coordinatethe commercialization and privatizationprocess, was initially chaired by the PlanningCommissioner and later by the Minister ofFinance and Economic Development. TheIMCCP convened ministerial level meetingsto consider proposals and recommendations

THE FRAMEWORK

FOR PUBLIC

ENTERPRISE

RESTRUCTURING

IN ZIMBABWE IS A

MINEFIELD,

CHARACTERIZED

BY A MULTIPLICITY

OF PIECES OF

LEGISLATION,

INSTITUTIONS, AND

AT TIMES

CONTRADICTORY

POLICIES, AND

EVEN POLICY

REVERSALS

196


of line ministries; if satisfied with theirproposals, and made recommendations toCabinet. Following the change from PAZ toSERA in 2005, the IMCCP was renamedthe Inter-Ministerial Committee onCommercialization and Restructuring ofPublic Enterprises (IMCCR). Since 2005,when the Ministry of Finance and EconomicDevelopment was split into two, the IMCCPhas been chaired by the Minister of EconomicDevelopment.

To drive the privatization process, the PAZwas established in September 1999 followingcriticisms of the piecemeal approach that hadresulted in little progress. It was a semi-autonomous institution in the Office of thePresident and Cabinet and derived itsauthority from Cabinet. Its functions wereset out as follows (RBZ, 2007: 8):

• To assist, support and accelerate theprivatization process, working closelywith the public enterprises and with lineministries, which have had responsibilityfor the various public enterprises.

• To facilitate a smooth flow from initiationthrough to approval by the Inter-Ministerial Committee of the privatizationplan.

• To lead to an eventual successfulprivatization process.

• To contribute to job creation, and toincrease Zimbabwe’s foreign-exchangeearnings.

Renamed the State Enterprises RestructuringAgency in 2005, it now falls under theMinistry of Economic Development and itsdirector reports to the Secretary forEconomic Development through thePrincipal Director for Economic Affairs;however, its authority derives from Cabinet.In conjunction with the relevant enterpriseand its line ministry, SERA prepares an initialcommercialization and restructuring plan,giving the overall rationale for restructuringand privatization, suggestions on the methodof privatization, etc., and submits the plan tothe IMCCR for approval. The IMCCR thenreviews the plan, and accepts, modifies orrequests modification and resubmission.When accepted the plan is submitted by thechairman of the IMCCR to Cabinet forapproval; the Cabinet may request furthermodifications or amendments before finalapproval. Once Cabinet approval has beengiven, SERA is responsible for implementingthe plan. The agency is charged withselecting and appointing professional

Source: Adapted from Zhou (2000: 182)

Figure 10.1: The institutional set-up for the commercialization and restructuring of privateenterprises

197


advisers (consultants, lawyers and, asappropriate, merchant or investmentbankers) to make any necessary preparationsfor the commercialization and restructuringof the enterprise, prepare the documentation,and execute the transaction. Figure 10.1summarizes the institutional structure.

However, SERA clearly lacks autonomousexistence: almost all the staff of PAZ werereassigned, resulting in the recruitment ofnew staff at SERA. It employs thirteenpeople, seven of whom are technical staff.A change agency such as SERA needs tobe strategically positioned and empoweredto be autonomous and make independentdecisions. Locating it under a ministry,reporting to a Principal Director, does notgive it real ‘clout’.

Players, structures and processes

At least 12 actors are involved in thecommercialization and restructuring of publicenterprises, creating confusion and therebypromoting clientelism, patronage and thepursuit of rent-seeking activities. Theagencies involved in the process at differentlevels and in different capacities are:

• Management and board of the entity tobe commercialized/restructured.

• The parent ministry.

• Ministry of Finance.

• Ministry of Economic Development.

• Department of State Enterprises andParastatals in the Office of the Presidentand Cabinet.

• Inter-Ministerial Committee onCommercialization and Restructuring.

• State Enterprises Restructuring Agency.

• The Vice-President with a specificmandate on public enterprises.

• RBZ and its PLARP facility.

• Cabinet.

• Various regulatory bodies/authorities insome of the sectors.

• The ruling party and aligned lobbygroups.

The restructuring/privatization programmetherefore hinges on the commitment andefficiency of these key players. The role ofSERA is reduced to implementation and notdecision-making, which has resulted inbureaucratic inertia and hence the lack ofprogress.13

The institutional set-up is also clouded by theexistence of specialized departments andministries in charge of parastatals. Theseinclude the Department of State Enterprisesand Parastatals in the Office of the Presidentand Cabinet and the Ministry ofIndigenization and Empowerment. Thisministry often makes strong pronouncementson the restructuring of public enterprises thatcontradict line ministries. With no clearpolicies on ESOPs, the under-capitalizedNational Investment Trust and evolvingempowerment initiatives, the issue ofindigenous participation has acted as a brakeon public enterprise restructuring. There isa clear conflict between the renewedfocus on immediate restructuring and theobjectives of privatizing through indigenousparticipation. Issues of economic empower-ment are not short term, and, in the contextof the crisis and paralysis in the instrumentsof indigenous participation (e.g., NIT andESOPs), no action has been taken. Further-more, the legal framework has remained aminefield, with amendments to the laws underwhich public enterprises were created

13 In other countries (such as Zambia, Uganda and Tanzania), a similar institution was established through legislation,and hence had decision-making powers, was autonomous and reported to Parliament.

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lagging behind. The amendment of laws hasbeen painstakingly slow, resulting in theabsence of an enabling legal environment.Thus, the legal framework reflects the oldcontrol mindset, which has been used totelling effect by line ministries.

The introduction of the PLARP facility bythe RBZ in January 2005 gave it direct entryinto the issue of public enterpriserestructuring. Thus, the RBZ has come outvery strongly on the subject, coming up withits own structures, unilateral time-tables andprocesses that serve only to furthercomplicate an already complex situation.SERA (2008) set out the Divestiture,Commercialization and RestructuringProgramme for 2007–2008, and producedits own list of entities for restructuring.However, little progress has been made interms of either list. It must also be notedthat listing entities and prioritizing them forimplementation has been undertaken in alleconomic blueprints since ZIMPREST(Zimbabwe, 1998b). This appears now agame of hit and miss, played with moreenthusiasm than success. More funda-mentally, however, there is no shared visionaround issues of public enterpriserestructuring, even within government, withthe current approaches being more piecemealand reactive. In addition, the existingstructure hardly promotes stakeholderparticipation in the design of the restructuringplan, and hence workers and their unionshave often resisted the reforms.

The role of the presidency and ruling partyin restructuring also deserves mention. Zhou(2000) describes Zimbabwe as a ‘presidentialstate’, in which the influence of thepresidency is widely felt. It is commonlyaccepted that most managers of publicenterprises owe their existence to politicalconnections, and hence to survive they haveto support political positions. Worse still, thesystem is such that the change of a ministeror Permanent Secretary is accompanied bychanges in the board or management of

public enterprises, highlighting the role ofpatronage in appointments. Boards havebeen removed for disregarding the views ofpowerful individuals.

As the crisis has deepened, and thecredibility of government waned, the spacefor wider participation in public enterprisesand sectors in which they have a monopolywas closed, as evidenced by the reversal ofthe opening up, even to ruling party members,of the airwaves. Thus, the predominantmind-set of controls is evident in all sectorsof the economy, and has effectively put paidto efforts to restructure public enterprises.

Capacity constraints

Virtually all public enterprises face severecapacity constraints, which have impactedadversely on their performance. One of themajor constraints is financial, whichmanifests itself in terms of poor financingand a lack of proper financial managementsystems, poor liquidity management, lack ofinvestment by the principal shareholder(government), poor financial accountability,poor pricing structures, financial mismanage-ment, and corruption. Almost all publicenterprises have failed to produce timelyaudited financial statements, an issue thathas been raised consistently by the variousParliamentary Portfolio Committees thatoversee the sectoral enterprises.

The tariffs charged are well below economiccost, resulting in most public enterpriseshaving to rely on subsidies from the state,with the RBZ bailing them out since 2005.Experiences with the PLARP facility suggestthat they have a clear dependency syndromeand an ‘insatiable appetite for free money’.As the Governor of the RBZ observed, ‘Forsome parastatals, the tragedy is that not onlyare they repeatedly coming to the CentralBank for foreign currency, mainly atsubsidized exchange rates, but also are doingso without a penny of local currency to buythe foreign exchange.’14

14 Monetary Policy Statement of 24 January 2006, paras. 12.16–12.17).

THE TARIFFS

CHARGED ARE

WELL BELOW

ECONOMIC COST,

RESULTING IN

MOST PUBLIC

ENTERPRISES

HAVING TO RELY

ON SUBSIDIES

FROM THE STATE,

WITH THE RBZ

BAILING THEM OUT

SINCE 2005

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10.3.2 Infrastructure

Policy, institutional and regulatoryframework for recovery

In 2006–2007, the World Bank commissionedinfrastructure studies and stakeholderdebates in the following sub-sectors:roads, railways, water, energy and tele-communications.15 The resultant reportsprovide recommended action plans over 3time-frames: short term (6 months), mediumterm (2 years) and long term. The mainelements of these action plans addresschanges that are required in the legal andinstitutional framework to facilitate thelarge investments necessary to restore thesesectors and give assurances of sustainableinfrastructure services thereafter (adequatemaintenance systems and cost recoverytariffs being key elements).

Summarizing and adding to therecommendations of the infrastructuredialogue, the main policy, planning, legal andinstitutional changes which are needed toovercome existing constraints are as follows:

• Roads: Articulation of a NationalTransport Policy and preparation of aNational Road Development Plan,reinforcement of the Road Fund(intended to finance road maintenancevia the fuel levy), establishment of theState Highways Authority (to carry outmajor road maintenance) and of acommunity rural road maintenancesystem.

• Railways: Articulation of a NationalTransport Policy, amendment of theRailways Act to incorporate all formsof private sector participation,restructuring of the National Railwaysof Zimbabwe (NRZ) to shed non-corebusinesses and introduce Public ServiceObligation Contracts for NRZ’s core

business, with subsequent outsourcingand concessioning of rail transport.

• Water: Preparation of a Policy Frame-work Adjustment Note and a Water andSanitation Sector Capacity DevelopmentStrategic Plan, amendments to the WaterAct, establishment of a Water andSanitation Tariff Regulation Commissionand a system of community basedmanagement of water schemes in ruralareas, restructuring of the ZimbabweNational Water Authority (ZINWA).

• Energy: Reform of the ZimbabweElectricity Regulatory Commission(ZERC) so that it fulfils its intendedfunctions, reversion to the pre-2000institutional reform strategy in theelectricity sector, preparation of a revisedSystem Development Plan; in thepetroleum sector, the creation of a fairand transparent system for predominantlyprivate sector fuel importation, with thefunctions and assets of the National OilCompany of Zimbabwe (NOCZIM)being restructured.

• Telecommunications: Reform of thePostal and TelecommunicationsRegulatory Authority of Zimbabwe(POTRAZ) and the Universal ServicesFund so that they fulfil their intendedfunctions, review of the dominance ofTel*One in fixed line services andexpansion of the training available in thesector.

One of the cross-cutting themes is the needto involve the private sector more intensivelyin the provision of infrastructure services.Scarce public investment resources are bestdirected to urgent needs in the social sectorsand to housing. If properly managed,encouraging the private sector to engage inthe infrastructure sectors should bringefficiency gains as well as investmentresources.

15 World Bank (2006): Zimbabwe Infrastructure Investment Note for Roads, Railways and Water Sectors, and WorldBank (2007): Zimbabwe Infrastructure Dialogue in Roads, Railways, Water, Energy and TelecommunicationSub-Sectors, Africa Transport Sector, Washington DC.

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It would be useful for a framework law onpublic private partnerships (PPPs) to bepassed. This would facilitate the structuringof PPPs in the public interest in all sectorswhere private participation might beconsidered. The main pre-requisite foreffective private sector participation ininfrastructure would be the establishment ofindependent, professional regulatoryagencies. These are required to protect theinterests of consumers, particularly in respectof being charged ‘fair’ prices forinfrastructural services, while at the sametime assuring investors of a predictable andimpartial environment in which tariffs andother crucial parameters affecting theirbusiness viability will be set. Theinfrastructure regulators established so farin Zimbabwe – POTRAZ and ZERC – area caricature of what is intended, havingneither the professional competency that isrequired nor any vestige of autonomy inmaking key decisions in respect of licensingand tariff-setting.

Given the size of the Zimbabwe economy,the high level of skills required for world-class infrastructural regulation to be achievedand the limited pool of people to draw on, asingle infrastructure regulatory authorityshould be considered for transport,telecommunications, water and energy.Successful multi-sectoral regulators are inoperation in countries such as Ghana,Rwanda and Jamaica. Water is a specialcase, in that there are two major aspectsrequiring regulation: water as a naturalresource, which is best handled as part ofan environment regulator, and water as aninfrastructural service, which has manysimilarities to electricity and similar services.It is the latter aspect which could be includedin a multi-sector infrastructure servicesregulator.

10.3.3 Housing provision

Constraints to efficient and effective housingdelivery included the following:

Onerous minimum housing standards andInappropriate Policies

The government maintained the minimumstandards embodied in the Model BuildingBy-laws of 1977, which proved not onlyonerous, but also costly. The United Nationscommission for Human Settlement in 1989endorsed a new Global Shelter strategy,whose focus was to reduce government’srole as a direct provider of housing, urgingGovernment to concentrate on resourcemobilization. Yet, in 1992, the MPCNH,contrary to its own policy of encouragingprivate sector participation and in defianceof a policy agreement with the World Bank,began to directly intervene in theconstruction of houses.

Poor planning and coordination

In March 1991 ‘the Harare City Council wasin danger of losing funding from the WorldBank to establish 3,653 stands because theland had been planted to maize and the‘Councillors refuse to take action out of fearof losing votes’ (Auret: 1995:39). Thisproblem persisted for a further four years.According to Auret, ‘The current criticalhousing shortage can be attributed to a largedegree to the lack of commitment on the partof the Government to low cost housing’(1995:109).

Unsupportive macroeconomic framework

Macroeconomic instability saw the cost ofhouses soar. Erratic supply of inputs, thecollapse of the various housing schemes asa result of the withdrawal of donors,prohibitive interest rates, and suspension ofmortgages, among other causes,exacerbated what was already a serioushousing crisis.

Bureaucratic inefficiencies and corruption

The bureaucratic chain of authority involvedin the process of housing delivery was long,cumbersome and fraught with potential

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obstacles. Such a complex procedureinvariably led to long delays and increasedcosts.

10.4 REMEDIAL ACTIONS ANDPOLICY MEASURES

10.4.1 Strategic objectives

Two broad strategic objectives should informthe process of restructuring public enterprisesin Zimbabwe:

Economic objectives

• Improve the overall efficiency of theeconomy.

• Improve the efficiency, productivity andprofitability of firms.

• Improve the quality of products andservices, including affordable housing.

• Attract foreign investment, technologyand know-how.

• Promote public-private partnerships inservice provision.

Fiscal objectives

• Reduce government subsidies to publicenterprises.

• Raise money from the sale of publicenterprises.

• Increase tax revenue from privatized orcommercialized enterprises.

The main aim of a housing policy should beto significantly increase the national housingstock for a variety of types of houses to meetthe need for shelter of all Zimbabweans. Anincrease in housing stock will lower houseand rental prices through a housing marketthat will benefit the poor significantly. Thegovernment, municipalities and other publicagencies should facilitate the construction of

a mix of housing types, from high qualityhousing in low density areas, to low costhousing in high density areas, and ultra-lowcost dwelling in specially designated areas.A wide range of house prices would createa ladder of opportunity whereby the pooresthouseholds could enter the market at thelowest level, but with the possibility of movingup market when their circumstances andresources allow.

10.4.2 Strategic thrusts

While the broad objectives of restructuringare widely shared, the methods by whichthese can be achieved remain ‘contestedterrain’. However, there is an emergingconsensus that a ‘one-size-fits-all’ ideologicalapproach to restructuring will not work. Aswith the emerging wisdom with respect todevelopment discourse, there are keyprincipal success factors on which consensushas emerged:

• There is need for broad-basedparticipation at all levels, from policydesign/formulation to implementation,monitoring and evaluation to ensurenational ownership.

• Institutional structures for broad-basedparticipation are essential to avoid ad hocconsultations.

• There is a need to ensure universalaccess to basic services, especially inutility provision (water and sanitation,electricity, etc).

Lessons from experience suggest that, whilesome methods of restructuring are suitablein some cases (e.g., privatization wherecompetitive markets work); other cases stillrequire the active role of the state and thepromotion of public–private partnerships(e.g., basic utilities and infrastructure). Thisrepresents a shift from a doctrinairepromotion of ownership change. As theauthors of a World Bank Working Paperrightly observed: ‘Given the record,

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moreover, it is difficult to recommend specificSOE [state-owned enterprise] reformstrategies with great confidence’ (Gomez-Ibanez, 2007: 49). The World Bank (2005:195) also reported: ‘The 1990s experienceshows how difficult both privatization andregulation are. There is no universallyappropriate reform model. Everyrestructuring and privatization program needsto consider explicitly the underlyingeconomic attributes and technology of eachsector and its institutional, social, and politicalcharacteristics.’ And Nellis (2006: 9)observed that ‘given the recent shift awayfrom dogmatic promotion of ownershipchange, perhaps caution was the correctcourse of action, particularly regardinginfrastructure’. The IMF (2007: 18) seemsto be taking a similar position with respectto reform of public enterprises in Zimbabwe,placing an emphasis on putting publicenterprises on a commercial footing, whichincludes possible privatization. In this regard,a case-by-case approach is recommendedto take account of the specific situations ofevery public enterprise.

The importance of developing social-dialoguemechanisms to allow the voices of allstakeholders to be heard is a critical successfactor in public enterprise restructuring (ILO,1999). A restructured SERA should be theplatform from which this recategorizationis done in a participatory way, involving allkey stakeholders. This categorization seemsto be supported by latest thinking on thesubject:

‘Nevertheless, any effort at prescriptionshould begin by dividing firmsaccording to the degree of conflictbetween their commercial and non-commercial objectives and the level ofdevelopment of their country’s market,administrative and politicalinstitutions. Infrastructure enterprisesoften suffer from serious conflictbetween commercial and social goalsonly if because access to infrastructureservices is considered so important tomodern life. But in some firms this

conflict may be less severe if, forexample, tariffs have never beenallowed to fall too far below costs,over-staffing has never been tooexcessive or the potential technicalefficiency gains are large enough tocompensate customers or laid-off staff.’(Gomez-Ibanez, 2007: 49)

Thus, the strategy should be to begin withthe ‘low-hanging fruit’, dealing withgovernment shareholding in private entities,the cases where the enterprises are incompetitive segments or where they do nothave a sustainable role, such as ZINWA,NOCZIM, Tel*One and Net*One, amongothers. Where for instance, a publicenterprise performs both commercial andsocial roles (e.g., Grain Marketing Board),there is need to separate these roles, withthe social role reverting to a ministry.

In a nutshell therefore, restructuring shouldinclude both divestiture and non-divestitureoptions. Divestiture options involve thetransfer of ownership rights, while non-divestiture options entail the transfer ofoperating or development rights from thepublic to the private sector. Divestitureoptions include direct sale, public shareoffering, private placement with a strategicinvestor, public auctions, employee/manage-ment buy-out, mass/voucher privatizationand liquidation. Non-divestiture optionsinclude restructuring, commercialization orcorporatization, contracting out, managementand service contracts, leases andconcessions and public–private partnerships.In practice, these two methods may not bemutually exclusive as, where divestiture isappropriate; preparation for privatizationusually begins with the restructuring of theenterprise, with commercialization featuringprominently.

At the level of strategic thrusts, it isnecessary to create an agent forrestructuring that will drive the process andimplement it. Such a change agent shouldbe placed at a sufficiently high level to drivethe process without being entangled in

THE IMPORTANCE

OF DEVELOPING

SOCIAL-DIALOGUE

MECHANISMS TO

ALLOW THE

VOICES OF ALL

STAKEHOLDERS TO

BE HEARD IS A

CRITICAL SUCCESS

FACTOR IN PUBLIC

ENTERPRISE

RESTRUCTURING

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bureaucratic red tape. With respect toinfrastructure and housing delivery, it is clearthat Government on its own should notshoulder the immense responsibilities ofprovision, hence the need to promote public-private partnerships.

Giving housing high priority from the start ofthe recovery period will provide anopportunity to address one of the country’smost pressing social issues while at the sametime generating a significant level ofemployment, both directly via the actualhouse construction and upstream in theconstruction material supply industries. Theimport content of low cost housing is verylow. While the construction material supplychains include capital intensive industries(notably cement), many other items (suchas window frames, doors, bricks and roofingsheets) are amenable to production both byformal industries and by small labour-intensive enterprises. A rapid increase inlow-cost housing starts will provideconsiderable multiplier effects through theeconomy.

10.4.3 Recovery policies and policymeasures

Public enterprises

The State Enterprises RestructuringAgency (SERA)

The participatory approach to restructuringhas been promoted by the ILO through itsInterdepartmental Programme onPrivatization, Restructuring and EconomicDemocracy (IPPRED). It emphasizes theimportance of a tripartite approach inensuring a smooth transition from abureaucratic to an entrepreneurial culture.According to the ILO, ‘Public sectorreforms are most likely to achieve theirobjectives of delivering efficient, effectiveand high-quality services when planned and

implemented with the full participation ofpublic sector workers and their unions andconsumers of public services at all stagesof the decision-making process.16

A participatory restructuring culture helps totransform the public enterprises into aneffective results-oriented long term coalitionby reconciling conflicting interests (Nellis,2006). The ILO is promoting sociallysensitive enterprise restructuring (Rogovsky,2005). This approach is in line with the latestdevelopments in the development discourse,where top-down, ‘one-size-fits-all’ traditionalapproaches are being replaced by anintegrative, stakeholder approach thatemphasizes transparency and accountabilityin decision-making processes. In this regard,the shift from dogmatic blueprints toparticipatory, inclusive approaches promoteswin–win outcomes and, ultimately,sustainable human development.

SERA should be transformed into a multi-stakeholder authority – as was initially agreedat a stakeholders’ workshop organized bythe National Planning Commission inNyanga in March 1996 (Godana andHlatshwayo, 1998: 20–21) – and be re-established under an appropriate Actthat gives it autonomy as the agencyresponsible for the planning, management,implementation and control of the publicenterprise restructuring programme. This willhelp avoid the conflict of laws and the needto amend individual enabling Acts thatestablished the specific enterprises. Tofacilitate communication and reporting toCabinet, it should be linked to a specificMinistry.

Appropriate methods of restructuring

As discussed above, the method ofrestructuring to be adopted depends on thetype of enterprise, suggesting a need tocluster them on the basis of their amenabilityto the two main methods: divestiture and non-

16 Quoted in Marcovitch (1999: 5)

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divestiture. Divestiture options have themajor advantage of not requiring continueddependency on the state for resources. Thisis particularly critical in the case ofZimbabwe, where the state has no resourcesand will have to implement a deflationarystabilization programme. Given the state ofunder-capitalization that characterizes mostpublic enterprises, wherever feasible,divestiture options should be considered;where these are not feasible, as is the casewith those providing basic services, non-divestiture options will have to be employed.

Given this development, cooperating partnerswill have to play a role in providing requisiteresources. There is now a growing interestin funding infrastructure, especially given thefailure by the private sector, on its own, totake up such investments following cut-backs by international financial institutions.(UNDP, 2007; World Bank, 2005). Public–private partnerships now offer theopportunity to share the costs of suchmassive investments. In this regard, theprivate sector, whose development also relieson the provision of quality infrastructure, willhave to co-finance such investments. Thereare some interesting examples, especiallywith respect to the construction andmaintenance of road networks – for instance,the toll road option (build, operate andtransfer) in South Africa.

The strategy should be to begin with thedivestiture of shareholdings. This should alsoinclude liquidating those enterprises that maynot have any future role such as ZMDC.Water provision should be returned to localauthorities, and the private sector can easilytake over the supply of fuel, as is the case inother countries in the region and beyond. Inthose areas where competitive marketsoperate – including such enterprises as theCSCL, the IDC’s subsidiaries, and tele-communications services – divestitureoptions should be applied.

The real challenge will begin with theinfrastructure enterprises that may not besuitable for divestiture, and also in view of

their current state of under-capitalization. Insome cases, such as Air Zimbabwe, astrategic investor should be identified. Theexample of Kenya Airways is a significantone, which teamed up with KLM to turnaround its fortunes. Other enterprises, suchas ZISCO should also follow this example.

Given that the driving force of the economyin the post-crisis dispensation will be theprivate sector, it will be necessary to openup sectors where markets work, such astelecommunications, media, especially theelectronic segment, electricity and transportsectors.

There is therefore a lot of scope for privatesector involvement in all sectors of theeconomy, which should be facilitated throughthe deregulation of existing monopolies.

Infrastructure sub-sector strategies

i) Transport

The restoration of the road and rail networksneeds to be accompanied by the creation ofa competitive market for the provision oftransport services. This is particularlyimportant in road transport, but applies alsoto rail and to boat services on Lake Kariba.In respect of air transport, an ‘open skies’policy would be important in attracting backthe international carriers which have ceasedproviding services to Zimbabwe. Having arange of international and regional carriersis a vital component of reinvigorating thetourism industry and of providing the aircargo capacity for the export of horticulturaland other high value export products. Theseare key components of the short-term revivalstrategy, generating foreign currency and, asthey are also labour intensive, providing anearly boost to employment.

The restoration of affordable and reliableurban transport will also be critical in theearly stages of the recovery period.Innovative solutions to urban transportproblems need to be sought, drawing onexamples from elsewhere in the world of

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successful strategies which provide goodservices for commuters while reducingpollution and making greater use ofindigenous fuels and technologies. Optionsfor improving passenger services betweenChitungwiza and Harare should receiveparticular attention.

ii) Water

Although vulnerable to drought, Zimbabweis relatively well endowed with waterresources. However, the main problems areinequitable access to water and a failure toexploit the development potential of water,arising from poor management of waterresources in the past. A recovery programmeaffords an opportunity to establish aframework for sustainable, efficient andintegrated utilization of water resources forthe benefit of all Zimbabweans.

The main principles to be applied informulating a strategy for the water andsanitation sector are:

• integrated water resource manage-ment (IWRM): holistic management ofland and water, the importance of userparticipation, particularly of women, andthe need to treat water as an economicas well as a social good

• regulation: separation of the roles ofnatural resource regulation and infra-structural services regulation (asdiscussed in Section 10.1.2) and theintroduction of economic pricing of bothraw and treated water, with transparentsubsidy and other mechanisms to protectthe poor

• demand side management in urbanwater supplies, with other urban centresemulating the extremely successful lossreduction and water efficiency strategywhich is on-going in Bulawayo

• sanitation: provide rural and peri-urbancommunities with access to a range oftechnologies

• productive water: the MillenniumDevelopment Goals emphasize cleanwater for domestic purposes – equallyimportant is the provision of water to ruralhouseholds for enhanced agriculturalproduction so as to raise incomes (therebyinter alia making it more likely thatdomestic water schemes can be main-tained through financial resources raisedwithin the communities).

iii) Energy

The immediate challenge in the energy sectorwill be to restore normal supplies of liquidfuels, electricity and coal, but in the mediumterm the energy strategy needs to ensureuniversal access to modern forms of energy,in part through embracing resources whichhave hitherto been neglected in Zimbabwe.These include both renewable sources (solarwater heating, solar voltaics and small hydro-power schemes) as well as unexploited fossilfuel resources (coal bed methane and theextensive coal deposits which exist aroundthe country, with only Hwange’s coalreserves being mined at present).

In the electricity sector, the return to thepreviously envisaged unbundling of ZESAinto generation, transmission and distributioncompanies (without any holding company)needs to be accompanied by the progressivedevelopment of a competitive electricitymarket. Experience in other countriessuggests a three stage process:

• In the first stage, competition is intro-duced in the generation sector throughindependent power producers (IPPs)being licensed to compete with the stateowned generation company; powerpurchase agreements (PPAs) are signedwith the transmission company, whichis licensed as a single buyer (this alreadyexists in a small way with PPAs for theRusitu hydro and Hippo Valley andTriangle bagasse schemes).

• In the second stage, large ‘eligible’customers are permitted to purchase

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power directly from competitivesuppliers (wholesale competition), witha balancing market to ensure continuityof supply.

• In the final stage, a fully competitivemarket is developed, with supplierscompeting for all customers, includingdomestic customers (retail competition).This may entail further development ofthe institutional structure, including aseparate system operator and possiblyalso a market operator.

In Zimbabwe’s case, the development of aninternal competitive market will have to becoordinated with the development of acompetitive regional pool by the SouthernAfrican Power Pool (SAPP). Supplies fromSAPP have become increasingly importantin sustaining electricity in Zimbabwe in recentyears, and were maintained even when thecountry was unable to pay for its imports ofelectricity. In the recovery programme,Zimbabwe needs to restore its own generationcapacity, but with the security of supplyassociated with SAPP and the very muchlower cost associated with many of thepotential generation projects located else-where in the region, the country would do wellto consider joint venture developments ofpower stations not located on Zimbabweansoil. This strategy will bind Zimbabwe moreclosely to its partners in SADC, ensuring thenecessary support in due course for large jointpower projects such as Batoka.

iv) Information and CommunicationsTechnologies (ICT)

In the 21st century, ICT has becomerecognised as a fundamental ingredient ofeconomic growth, social development and thedeepening of democracy. The principles tobe adopted for a national ICT strategy are:

• the creation of an enabling environmentfor the growth of the ICT industry

• provision of universal service and accessto information and communicationsfacilities in rural as well as urban areas

• investment in the convergence oftelecommunications and informationtechnologies.

Zimbabwe needs to work with othercountries in Southern Africa to ensure thatthe region is able to capitalize on theopportunities that ICT is opening up. Theseinclude the export of services (finance andback-office banking services, call centres,etc.) that could become an important sourceof employment for Zimbabweans once thecountry’s international image has beenrestored.

Pre-requisites for rapid growth in housing

Three pre-requisites for a major housingprogramme to be initiated are:

• Changes in the legal, policy andinstitutional framework

The report on Operation Murambatsvina byAnna Tibaijuka, the Head of UN-HABITAT,noted that Zimbabwe has had unrealistichousing standards. ‘There is an urgent needon the part of all stakeholders and theGovernment of Zimbabwe to harmonisepolicies and strategies vis-à-vis the informaleconomy and housing for the majority of theurban population’. The Regional Town andCountry Planning Act and the HousingStandards Act need to be transformedto become ‘pro-active instruments ofenablement and empowerment rather thanexclusion’.

Housing is best managed by urban localauthorities. ‘As the sphere of governmentclosest to the people, they are in the bestposition to strike a balance between demandand supply for housing, infrastructure andbasic services. Lessons learned fromsuccessful practices in meeting the social,economic and aesthetic challenges of rapidurbanization and globalization indicate thatpositive and sustainable outcomes are indeedpossible. They depend, to a large extent, onrecognising that housing and urban develop-ment is a process, however imperfect, thatis best managed through socially inclusive

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dialogue and participatory decision-making’17 .

Critically, therefore, housing authoritiesshould focus on their core functions.

The government, municipalities and townmanagement boards are the key facilitatorsin the provision of housing. Their prime roleshould be to:

• ensure that sufficient land has beenbanked for future housing development;

• provide secure tenure, introduceinexpensive survey techniques, andmaintain a cadastre (records) of all landsurveyed and transferred;

• build professional institutional capacityto plan and control urban development,and deliver housing effectively;

• supervise the tender process, surveying,and those contractors providing keyservices and infrastructure; and

• create incentives for private sectorparticipation.

It is essential that public organizations focuson their core functions, leaving the privatesector to fund development, install infra-structure and construct houses. Given theneed to provide sufficient public funds forefficient public administration, any housingsubsidies should be justified, prioritized andtransparent. In particular, municipalitiesshould sell any ‘income generating’ invest-ments that often impose huge losses on thecity, and use the capital generated to supportits core business.

• Provision of finance for housing

Public sector funds will be needed to kick-start the housing programme. Allocations ofpublic investment funds in the national budgetshould be channelled to local councils toexpand public housing provision and provide

the stands for site-and-service andcooperative housing schemes. Home-ownersand cooperative members can undertake thesubsequent building themselves, or do theirown contracting as and when they have themeans to do so. Funding through buildingsocieties needs to be restored as part of themacroeconomic stabilization and financialsector reforms.

In the longer-term, it would be beneficial toenable institutional savings (pension and life-insurance funds) to be channelled intomortgage financing, as this would dramaticallyincrease the resources available to people toborrow for home building. To do this, legal,taxation and regulatory changes would beneeded to create an effective and financiallysound secondary mortgage market.

• Serviced stands

Because of deficiencies in other infra-structure sectors, it will be difficult initiallyfor local authorities to make availablesufficient fully serviced stands. So as to allowprogress to be made on house construction,imaginative means will have to be used toprovide stands as rapidly as possible.Provision needs to be made for some aspectsof infrastructure (such as connection towater supplies) to be connected at a laterstage, which should if possible coincide withthe completion of the construction of thedwelling.

Another strategy to overcome the initialproblem of a lack of fully serviced standswould be for local authorities to encouragedemonstration projects involving housingcomplexes with self-contained provision ofwater (from underground sources) and soak-aways for wastewater disposal. Housingestates involving innovative designs foraffordable, low-income housing using localmaterials have been proposed in the past:some trial schemes should be promoted ona pilot basis as part of the drive to achieverapid growth in housing construction.

17 Anna Tibaijuka, UN Special Envoy on Human Settlements Issues in Zimbabwe (2005): Report of the Fact-Finding Mission to Zimbabwe to assess the scope and impact of Operation Murambatsvina, Habitat, Nairobi.

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209

A recurrent theme of the sectoral andthematic analysis contained in this report isthe need for comprehensive reform of thecountry’s system of governance, or ‘how thestate does business’. The challenge ofimproving governance is not restricted to anyfield of activity but is a systemic one,requiring a reorientation of the state, achange in mindset and how it engages withthe economy and society. Any sustainablesocioeconomic recovery over the long termis dependant on this transformation. Thischapter does not set out to offer a detailedstrategy for addressing the complexgovernance challenges facing Zimbabwe,and the considerations it contains have beenrefracted largely through the prism of theeconomic analysis which lies at the core ofthe entire report. Future work on this themeis required and should be informed by thecentral question of how existing systems ofeconomic and political governance might bereformed over time in order to arrive at astate form that is effective in delivering bothdevelopment and security for theZimbabwean people.

11.1 GOVERNANCEINDICATORS

Six governance indicators estimated by theWorld Bank (Kaufmann et al., 2007) showa substantial deterioration that affects allaspects of life in the country – economic,social and political (Table 11.1):

• Government Effectiveness assesses thequality of public services, the quality ofthe civil service and the degree of itsindependence from political pressures,the quality of policy formulation andimplementation, and the credibility of thegovernment’s commitment to suchpolicies.

Chapter 11

How the State Does Business

• Voice and Accountability measures theextent to which a country’s citizens areable to participate in selecting theirgovernment, as well as freedom ofexpression, freedom of association, anda free media.

• Political Stability and the Absence ofViolence measures perceptions of thelikelihood that the government will bedestabilized or overthrown byunconstitutional or violent means,including domestic violence andterrorism.

• Regulatory Quality measures the abilityof the government to formulate andimplement sound policies and regulationsthat permit and promote private sectordevelopment.

• The Rule of Law measures the extentto which agents have confidence in, andabide by, the rules of society and inparticular, the quality of contractenforcement, the police, and the courts,as well as the prevalence of crime andviolence.

• The Control of Corruption measuresthe extent to which public power isexercised for private gain, including bothpetty and grand forms of corruption, aswell as ‘capture’ of the state by elitesand private interests.

The message of this and other chapters isthat progress in all aspects of life inZimbabwe has been constrained by poor anddeteriorating governance, leaving no roomfor doubt that in the future the state needsto do business in a more effective, efficient,equitable and transparent manner.

THE CHALLENGE

OF IMPROVING

GOVERNANCE IS

NOT RESTRICTED

TO ANY FIELD OF

ACTIVITY BUT IS A

SYSTEMIC ONE,

REQUIRING A

REORIENTATION

OF THE STATE, A

CHANGE IN

MINDSET AND HOW

IT ENGAGES WITH

THE ECONOMY

AND SOCIETY

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11.1.1 The developmental state

As noted in the first chapter, one key featureof a developmental state, a condition to whichthe Zimbabwe government arguably aspiredwhen it took office in 1980, is that it shouldactively foster economic development whileavoiding capture by particular groups. Onekey mode of interaction between states andtheir economies lies in the extent and natureof their intervention in the economy, withdevelopmental states being characterized bya capacity to implement policies that aresupportive of sustainable, broad-based andinclusive growth that over time leads to astructural transformation of the economy. Inthe case of Zimbabwe, as argued in this report,state-led development not only failed toachieve the intended results but also soon fell

into the trap of state capture, with theundesirable consequences analysed below.

11.2 DETERIORATION OFECONOMIC GOVERNANCEOVER TIME

At independence in 1980, the newgovernment inherited a highly regulatedeconomy, albeit with a strong private sectorand a mostly well-maintained physicalinfrastructure. Over the ensuing 28 years,the Zimbabwe government’s approach todoing business has turned full circle, from acommand economy approach in the 1980s,through a market liberalization phase duringEconomic Structural Adjustment Programme(ESAP), returning to a dirigiste command

Note: The greater the negative score, the poorer the state of governance

Source: World Bank (2007) Governance Matters VI, 1996–2006; Daniel Kaufmann, et al.

Figure 11.1: Aggregate governance indicators

1996 1998 2000 2002 2003 2004 2005 20060

-2

-4

-6

-8

-10

-12

Table 11.1: Zimbabwe: Governance indicators

1996 2006

Government effectiveness –0.44 –1.53

Voice and accountability –0.65 –1.58

Political stability & absence of violence –0.60 –1.18

Regulatory quality –0.73 –2.21

Rule of law –0.68 –1.71

Control of corruption –0.17 –1.36

Note: An increase in the negative score denotes a deterioration in the indicator.

Source: World Bank (2007) Governance Matters VI, 1996–2006; Daniel Kaufmann, et al.

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Chapter 11 – How the State Does Business

economy as the crisis deepened after 1997.The brief period of orthodox economicreforms (ESAP) aside, political imperativestook precedence over economic goals, mostmarked in the FTLRP but also in exchange-rate policy, the pricing policies of parastatalsand, most recently, the Indigenization andEconomic Empowerment Act. To theobserver, economic policies seem to havebeen driven by the need to secure immediateand medium term political goals, while payingscant attention to collateral social andeconomic consequences of such actions.

A number of analysts have argued thatdevelopments during the crisis periodillustrate both the extent to which the statehad been captured, but also the apparenttransition from State Capture to PredatoryState.1 The point was forcefully made byPresident Mugabe in the course of his speechduring the 26th August 2008 opening of theFirst Session of the Seventh Parliament:

‘Corruption imposes a huge cost burdenon the conduct of business….efforts torevive the country’s economy couldremain a pipedream unless they aresupported by stern and decisive actionto eradicate the scourge of corruption,which has now reached alarminglevels….There will be no sacred cowsseeking to hide behind the banner ofsocial positions or party affiliation fortheir venal tendencies.’2

This change in the orientation of the state isreflected in the government’s deep-seatedsuspicion of independent business trans-actions, particularly those that did notinvolve the government or party. Rather thanseeking to facilitate private sector businessoperations, it became official policy to make

extensive inroads into the private sector byacquiring majority or minority stakes inprivately owned firms, a strategy latterlyformalized in the Indigenization andEconomic Empowerment legislation. In apredatory state, traditional macroeconomicand regulatory policy levers are deemedinadequate and the authorities seek to securedirect control over markets and economicactors. This process of encroachment hasbeen both cause and effect of the economicdownturn.

11.2.1 Market failure and thesupremacy of the publicsector

Since independence, policy-makers havetended to assume that markets will alwaysfail and that the state’s role is to fix them.During the crisis period this focus changed,forcing the state to broaden its role fromremedying market failure to seeking tomitigate the impact on sectors, firms andhouseholds of the unintended and unforeseenconsequences of its own interventionsthrough the takeover of whole sub-sectorsof the economy.

This trend is a key explanatory variable whichaccounts for the proliferation of governmentministries, parastatals, state-owned entities,new institutions, committees and workingparties tasked with achieving specific goals –such as the state marketing of minerals tocounter perceived transfer pricing – or toimplement specific policies like price controls.Since the early 1990s government ministriesand state administrative structures haveincreased in number, seemingly in directproportion to the underlying deterioration inthe socio-economic situation. Arguably, amajor cause of the country’s economic decline

1 The concept of State Capture refers to a situation in which one group uses its disproportionate influence toexploit government policies to its advantage at the expense of society as a whole and in such a way as to securelong-lasting privileges. A predatory state consumes the surpluses of the economy, as government offices cometo be treated as income-generating sinecures (World Bank, 2005). More recently, Larry Diamond has argued thatsuch states in turn produce predatory societies where people get rich not through ‘productive activity and honestrisk-taking….but by manipulating power and privilege, by stealing from the state, extracting from the weak andshirking the law.’ Diamond, Larry, (2008) The Democratic Rollback: Resurgence of the Predatory State’ ,Foreign Affairs, 87 (2), http://www.foreignaffairs.org/20080301faessays87204/larry-diamond/the democratic-rollback.html>p.3

2 The Herald, Harare, 27th August 2008, p.5.

IN A

PREDATORY

STATE,

TRADITIONAL

MACROECONOMIC

AND REGULATORY

POLICY LEVERS

ARE DEEMED

INADEQUATE AND

THE AUTHORITIES

SEEK TO SECURE

DIRECT CONTROL

OVER MARKETS

AND ECONOMIC

ACTORS

212


has been an overblown state that has operatedinefficiently while draining the fiscus.

The combination of mistrust of markets andof the private sector is illustrated in the waythe state has managed public enterprises –insistence on control of marketing and pricingpolicies, denial of managerial autonomy toboards of directors and top management,seemingly arbitrary interventions in operationaldecision-making, and a monopoly overappointments at all levels.

The net effect has been to widen the role ofthe state, to curb economic freedom and toundermine the allocative efficiency of marketmechanisms, graphically illustrated ingovernment policy towards the pricing ofagricultural produce. In 2005, interventionbecame more direct, with the launch of amilitary-style Operation Maguta to increasefood production.

Over time an increasingly weak state –poorly resourced in terms of finance, skillsand equipment – has been called upon toundertake a widening range of increasinglycomplex, often mutually incompatible,interventions. As shown in the chapter onthe financial sector, the fact that almosthalf of bank lending to the private sectoris undertaken by the Reserve Bank ofZimbabwe – in competition with privatebanks – reflects the government’s convictionthat the ‘independent’ private sector cannot,or should not, be trusted to undertake policiesdeemed essential by the authorities.

11.2.2 Hostility towards foreigndirect investment

Partly for historical and ideological reasons,but also because of a commitment toindigenization, policy towards FDI hasalways, at best, been ambivalent. TheZimbabwe Investment Centre, purportedlycreated to facilitate both domestic and foreign

investment, has in fact acted as a filtermechanism, enabling the state to block orrestructure proposals deemed to conflict withits strategic goals in terms of indigenizationor market competition. This hostility towardsforeign investment is exemplified in terms ofpolicy towards Foreign Direct Investment(FDI) in the financial services sector. In 1981,for example, the government rejected atakeover bid from one of the world’s largestbanks (at the time), the Bank of America, forZimbabwe Banking Corporation, when thelatter’s South African parent, Nedcor, decidedto divest. Arguably, the economically efficientpolicy would have been to accept the Bankof America bid, but instead ZB Bank (thenknown as Zimbank) was nationalized andbecame a vehicle for government patronageat the expense of its local shareholders.

11.3 INSTITUTIONALSTRUCTURE ANDFUNCTIONAL OVERLAP

As noted throughout this report, Governmentministries and state administrative structureshave since the beginning of the 1990sincreased in number and have beenaccompanied by an increasing concentrationof administrative and financial powers atcentral level.

As of 2007, Zimbabwe’s governmentcomprised 25 cabinet ministers, 21 deputyministers and 8 ministers of state in thePresident’s Office. Coupled with thecountry’s 10 provincial governors who enjoythe status of resident ministers, Zimbabwehas a total of 64 ministers. Taking the case ofone core function alone, namely agriculture –and against the background of the need tocontain public expenditure – there seems tobe little justification for the existence offive ministers, all dealing either directlyor tangentially with land reform andagriculture.3

3 This core function of government is served by (a) the Minister of Agriculture, (b) the Deputy Minister ofAgriculture, (c) the Minister of State for Land Reform and Resettlement, (d) the Minister for National Security,Land Reform and Resettlement, and (e) the Minister of State for Agricultural Engineering and Mechanization.As indicated above, to this list should be added the Reserve Bank given the growing number and scope of itsinterventions in the agricultural sector.

SINCE THE

EARLY 1990S

GOVERNMENT

MINISTRIES AND

STATE

ADMINISTRATIVE

STRUCTURES HAVE

INCREASED IN

NUMBER,

SEEMINGLY IN

DIRECT

PROPORTION TO

THE UNDERLYING

DETERIORATION IN

THE SOCIO-

ECONOMIC

SITUATION

213


Although the present government structurehas 18 core functions represented atministerial level, this is arguably too largefor a country of the size of Zimbabwe,particularly one with a shrinking GDP. Notonly does this translate into heavy demandson both the fiscus and the country’sconstrained human resource base, but itgives rise to duplication, complicating thecoordination of service delivery andaccountability. State machinery, that hasweakened over time as the institutional andinfrastructural framework deteriorated, wascalled upon to do more and more with lessand less in terms of funding, resources, skillsand above all, experience.

11.4 CONCENTRATION OFPOWERS

From 1990, with the expiry of some of thespecific clauses of the 1980 Lancaster Houseconstitution, the administrative machinerywas restructured and the state began tocreate new centres of power authorized tooverride the conventional administrativemachinery of government departments,parastatals and local government. Powershifted to the presidency, the central bankand most recently, the military, as well as toa plethora of ad hoc agencies and bodiesseemingly established to create what is oftenseen as a veneer of consultation.

The presidency

The most fundamental change was theprogressive centralization and fusion ofpowers in the presidency. Since 1990, thepresident has enjoyed extensive executivepowers of appointment and veto throughoutthe civil service and public enterprises,including veto on the appointment of judgesas well as the appointment (until 2008) of all30 seats formerly reserved for whites inParliament. A strongly centralized system

and concentration of powers has become thehallmark of political governance. In addition,the frequent use of the Presidential Powers(Temporary Measures) Act [Chapter 10:20]has become the norm rather than anexception. Presidential Powers are routinelyused for a wide range of measures thatnormally and more properly should bescrutinized and approved by the legislature.The appointment of no fewer than eightministers of state within the presidency alsoillustrates the shift of power from thelegislature to the executive.

The central bank

On the economic front, a concentration ofdecision-making was also evident. In 2003for example, the president effectivelytransferred a wide range of decision-making powers from government ministries,especially the Ministry of Finance, to theRBZ. Since then, crucial economic policydecisions, including many that lie far outsidethe normal purview of a central bank, havebeen taken and implemented by the Governorof the RBZ. These include setting exchangerates, announcing changes to the tax system,providing subsidies for agriculture, exporters,manufacturers and construction businesses,and bypassing parliament via quasi-fiscalspending programmes that exceed thecentral government budget approved bythe legislature.

Joint Operations Command (JOC)

Comprising all the leaders of the securityforces, some senior Cabinet ministers andthe Governor of the Reserve Bank ofZimbabwe, the JOC came into public viewwhen it launched Operation Murambatsvinain 2005,4 the ongoing Operation Maguta toincrease food production in 2006 and, morerecently, ‘Operation Reduce Prices’ in 2007and other interventions in the economy. Thissuggests that the JOC plays an important

4 In the wake of the government’s 2005 ‘slum clearance’ campaign in urban and peri-urban areas, the UN SpecialEnvoy on Human Settlement Issues estimated that some 700,000 people in cities across the county had eitherlost their homes, their source of livelihood, or both, with a further 2.4 million directly affected (United Nations,2005).

214


role in economic decision-making, and thatit may in fact be the ‘kitchen cabinet’, withthe official cabinet relegated to a rubber-stamping role.

Other agencies and bodies

In addition, on an ad hoc basis, the govern-ment has established a plethora of agenciesand bodies outside the bureaucracy chargedwith tackling specific problems. These include:the National Economic Consultative Forum(NECF) launched in 1997; the TripartiteNegotiating Forum (TNF), that includedlabour, business and government, in 1998; theNational Economic Recovery Council(NERC) in 2006, as part of the NationalEconomic Development Priority Programme(NEDPP), a bipartite body comprisinggovernment and business; and in 2007 aNational Incomes Pricing Commission(NIPC) and a Cabinet Taskforce on Incomeand Pricing Stabilization, the latter possessinga ‘crack unit’ to implement its positions.

The net effect of this restructuring has beento erode the authority of parliament, whileundermining the professional capability andindeed the morale of the public service. Theshift to a system of direct controls, invariablyexercised without resort to the legislature,has negatively affected transparency andaccountability, denying both the legislatureand the professional public service theopportunity to carry out their tasks, at thesame time limiting media coverage of thedecision-making process, public scrutiny anddebate.

11.4.1 Policy incoherence andinconsistency

As shown in the chapter on the country’smacroeconomic situation, the governmenthas produced a plethora of turnaroundprogrammes, none of which have beenimplemented with any discernable degree ofsuccess. Coupled with the multiplication ofbodies, and no clear lines of responsibilityfor the design and implementation of policies,the current landscape is characterized by

institutions often working at cross purposes.It is in this light that the decision to createanother ministry tasked with ‘policyimplementation’ becomes understandable.Such policy unpredictability has beencompounded by an apparent move awayfrom a rule-based system towardsone characterized by the exercise ofdiscretionary powers.

With different bodies such as the militarybeing coopted for the implementation ofOperation Maguta, the conventional armsof government such as the Ministry ofAgriculture and Agribank have beenmarginalized, certainly in terms of policy-making, though they still have a role to playin terms of service delivery. For most of thepost-2004 period too, the RBZ has usurpednot only the role of the Ministry of Finance,but also that of sector-specific governmentministries, such as those responsible foragriculture, mining and transport.

11.4.2 Goal confusion

Examples of goal confusion include long-standing failures to design coherentstrategies for public enterprise reform andprivate sector development. Privatizationinitiatives have been embroiled withindigenization issues, not to mentionwidespread allegations of cronyism. Itmattered more that private enterprises beowned and managed by ‘the right people’than that they should be efficient andeffective. Similarly, privatization decisionswere driven by the need to reduce the budgetdeficit rather than the imperative ofproductivity and efficiency and delivering acheaper and better service to customers.

Conflicting goals are also evident in the fieldof monetary policy. For example, the 2001monetary policy, subsequently elaborated andexpanded after 2004, was intended to curbinflation while at the same time using interestrate controls to reduce the cost of fundingpublic sector debt and to promote specificsectors and activities – agriculture, home-building and exports. Because the goals were

SUCH POLICY

UNPREDICTABILITY

HAS BEEN

COMPOUNDED BY

AN APPARENT

MOVE AWAY

FROM A RULE-

BASED SYSTEM

TOWARDS ONE

CHARACTERIZED

BY THE

EXERCISE OF

DISCRETIONARY

POWERS

215


mutually incompatible, the strategy failed.Funding narrow state priorities was givenprecedence over fighting inflation.

11.5 HOW THE STATE SHOULDDO BUSINESS

At the end of the current crisis Zimbabwewill be characterized by a severely debilitatedeconomy, the near collapse of its infra-structure, and a deeply impoverishedpopulation that is heavily reliant on inter-national humanitarian assistance. Most of thecountry’s state institutions will be a mereshadow of their past, severely weakened interms of capacity to both design andimplement technically sound policies. Thedangers of overloading the state given itsdebilitated condition should loom large in thecalculations of both domestic and internationalactors in a recovery scenario. Managingexpectations will be an essential aspect ofsupporting sustainable recovery.

The desired shift on to a new growth pathwill have to start with the strengthening ofall aspects of governance. In parallel, theformulation and implementation of astabilization programme to coordinate fiscaland monetary interventions will be requiredso as to win back the confidence of domesticand international economic actors, leadingin turn to the implementation of a sustainableand comprehensive medium to long termrecovery strategy. But for this to happen,the orientation of government shouldbe shifted away from an authoritarian,centralized system based on a commandeconomy to an inclusive (pro-poor) marketeconomy based on democratic principles,accountability and the rule of law.

This process of reforming the State shouldbe rooted in an informed analysis of thepolitical economy of reform in Zimbabwe –which lies outside the scope of this work. Asound historical understanding of previousattempts at reforms in areas as varied ascivil service reform, administrative andfinancial decentralization processes, the role

of the judiciary, anti-corruption initiativesamongst others, will greatly enhance theprospects of success for governancereforms in the context of recovery. Inparticular, diagnostics which help to throwlight on what worked, what did not and why,will be key to designing comprehensivegovernance reform strategies that arerealistic in terms of timeframes, rooted in anunderstanding of the ‘carrying capacity’ ofZimbabwe to implement the necessaryreforms, that are properly sequenced and thathave widespread domestic support.

11.6 POLITICAL GOVERNANCE

11.6.1 Constitutional and legalreform

A reading of the recent historical experienceof the country would indicate that con-sideration should be given to the followingreforms:

• The establishment of a new constitutionthat provides for the unequivocalseparation of powers to ensure effectivechecks and balances between a freelyand fairly elected legislature, an inde-pendent and impartial judiciary and theexecutive branch of government.

• The repeal or amendment of laws thatare an affront to fundamental humanrights and the principles governingdemocratic societies.

• The rule of law must be restored byensuring that agents of the state upholdtheir constitutional duty to protect thecountry’s citizens, and that every citizenhas the constitutional right to be heardin an independent and impartial court oflaw.

• There will need to be a move towards amore functional, rule-based system ofgovernment, away from discretionaryand relationship-based systems, in orderto minimize cronyism and corruption.

THE DANGERS OF

OVERLOADING THE

STATE GIVEN ITS

DEBILITATED

CONDITION

SHOULD LOOM

LARGE IN THE

CALCULATIONS

OF BOTH

DOMESTIC AND

INTERNATIONAL

ACTORS IN A

RECOVERY

SCENARIO

216


11.6.2 Institutional reform andcooperative governance

• The independence, institutional capacityand powers of oversight vested in theOffice of the Auditor-General need tobe restored and strengthened to ensurestrict adherence to laid-down govern-ment procedures.

• Annual audited accounts and regularindependent evaluations of governmentdepartments, major projects, and para-statal organizations must be madeavailable for public scrutiny.

• The scope, efficacy and powers ofoversight vested in ParliamentaryPortfolio Committees or Select Com-mittees should be extended in order toconstrain executive power and ensuregreater state effectiveness.

• National economic statistics must bedepoliticized, and the confidentiality ofinformation collected from private sectorcompanies ensured. The creation of anautonomous Central Statistical Officeneeds to be speeded up, with independentdirectors nominated by the Ministry ofFinance, the RBZ and private sectororganizations.

• A private sector think-tank should beestablished, with private sector/donorcontributions tasked with ensuringthat private sector organizations havethe necessary research and strategyformulation capacity to maintain a robustpolicy dialogue with state institutions.This is of particular importance given theneed for a post-crisis developmentalstate to understand the microeconomicfoundations of economic policy (seebelow).

• A consultative and supportive relationshipmust be created between the public andprivate sectors, and between governmentand civil society, including labour.

• Long term, independent economicdecisions should be made without unduepolitical interference; independentinstitutions should be created and/orreconfigured with clear objectives.These should include, among others, theReserve Bank of Zimbabwe and afuture Land Commission.

11.7 DEVELOPMENTORIENTATION

11.7.1 Rebuild institutions

Institutional decay is both a cause and aconsequence of economic decline as wellas a feature of state capture. Right acrosssociety, institutions, with the signal exceptionof civil society which has become strongeras the crisis worsened, have regressed. Allwalks of life have been adversely affectedby the inability of public, and privateinstitutions, to deliver the volume and qualityof services required.

Future policy should focus on a combinationof rebuilding institutional capability, abolishingredundant bodies and, where necessary,establishing new institutions such as theLand Commission. This will be a lengthyprocess, not just because it takes years –even decades – to reestablish the credibilityand capacity of institutions undermined overa long period, but also because institutionssuch as the public service, education andhealth services and parastatals have suffereddisproportionately from the exodus of skilledprofessionals and a consequent serious lossof institutional memory. This is yet anotherinstance of the ‘missing middle’phenomenon.5 Ministries, clinics, schoolsand parastatals are excessively reliant onyouthful, inexperienced personnel becausemiddle management have either soughtgreener pastures in the private and NGOsectors, or have left the country altogether.


217


This has profound implications for theprocess of nurturing a future developmentalorientation within the state apparatus, whichin the immediate post-crisis period will nothave the capacity to perform some of thetasks that it would normally be expected toundertake. At the same time, however, therewill be a window of opportunity to ensurethat new entrants into the public service areprovided with the necessary training, andexisting civil servants are retrained, so thatthe post-crisis state plays a facilitating andsupportive rather than obstructionist anddirigiste role in relation to economic recoveryprocesses. Merit-based promotion systems,competitive salary structures, long termcareer propects, a two-way traffic ofpersonnel between the public and privatesectors, and results-based training for all civilservants, will be some of the key ingredientsin ensuring the necessary change in focus inthe state apparatus. The notion of the Statereturning to its ‘core business’, howeverZimbabwean society should over timechoose to define this concept, should informall governance reform initiatives.

11.7.2 Economic governance

• Inclusive and transparent economicpolicy-formulation processes need to beinitiated. This will help to ensure theefficiency of the process of determiningpriorities among public problems and theallocation of resources to address them.

• There must be a return to macro-economic stability as a firm foundationfor sustainable economic growth. It is inlight of this consideration that the role ofinstitutions such as the RBZ meritparticular scrutiny in order to ensure thatthe past is not repeated.

• Property rights must be secured.

• Institutions must be built that allowcompetitive markets to function fairlyand efficiently to sustain economicgrowth.

• Appropriate Doing Business andInvestment Climate reforms should beintroduced. Many of these might comeunder a set of first generation reformsin the area of economic governance, andwould include as a matter of priority theabolition of a plethora of laws whichhave accumulated over time and whichhave served to criminalize the most basicforms of production and exchange.

• Appropriate regulatory frameworks needto be developed that create incentives forthe rebuilding of the country’s lost humanand physical capital.

• Serious consideration should be given tothe imposition of a ceiling (expressed asa percentage of the budget approved byparliament) on government borrowingwithout parliamentary approval and bysetting a maximum percentage of thenational budget that may be allocated tocontingency reserves and/or donorcounterpart expenditure not expresslyapproved by parliament.

• A budget report should be presented toParliament mid-way through the fiscalyear.

11.7.3 Pro-poor policies

The various constraints, often by admin-istrative fiat, that have left much of thepopulation in a state of destitution, withseverely restricted choices and opportunitiesother than to emigrate, should be removedthrough the adoption of ‘development asfreedom’ principles.6 This involves a processof cultivating the people’s capabilities by their

6 Amartya Sen’s concept of ‘development as freedom’ is succinctly captioned by his statement: ‘What people canpositively achieve is influenced by economic opportunities, political liberties, social powers, and the enablingconditions of good health, basic education, and the encouragement and cultivation of initiatives’ (Sen, 2000: 5).

THE VARIOUS

CONSTRAINTS,

OFTEN BY ADMIN-

ISTRATIVE FIAT,

THAT HAVE LEFT

MUCH OF THE

POPULATION IN A

STATE OF

DESTITUTION,

WITH SEVERELY

RESTRICTED

CHOICES AND

OPPORTUNITIES

OTHER THAN TO

EMIGRATE, SHOULD

BE REMOVED

THROUGH THE

ADOPTION OF

‘DEVELOPMENT AS

FREEDOM’

PRINCIPLES

218


access to health and educational facilities,the freedom to exchange words, goods andgifts, and the freedom to enter markets,including labour markets. Amartya Sen(2000) identifies five instrumental freedoms,or types of rights and opportunities that helpadvance the general capability of a person:political freedoms, economic facilities, socialopportunities, transparency guarantees andprotective security. These can be seen as aprocess of expanding real freedoms thatpeople enjoy, mainly through:

• Promoting pro-poor growth, being theextent to which the opportunities foremployment, production and enhancedincomes reach the poor throughimproved access to credit and markets.

• Improved economic governance whichincludes the extent to which growthcontributes towards social developmentin health, education, housing and socialsecurity within the context of macro-economic stability.

• The relationship between pro-poorpolicy and economic growth, mediatedthrough employment creation.

11.7.4 A new focus on themicroeconomic foundationsof economic policy

A common feature of successful develop-mental states has been their deep under-standing of microeconomics. Hitherto, theprime – usually the sole – focus of policyinterventions has been at the macroeconomiclevel. The microeconomics of how marketswork has been ignored. This focus mustchange, so that policy interventions enhance,rather than hinder, market efficiency. Thechallenge is clearly set out in the 2008 reportof the World Bank’s Commission on Growthand Development:

‘The growth of GDP may be measuredup in the macroeconomic treetops, butall the action is in the microeconomicundergrowth, where new limbs sproutand dead wood is cleared away. Most

growth-oriented policies and reformsare designed to foster this micro-economics of creation and destruction,and, crucially, to protect people whoare adversely affected by thesedynamics.’ (World Bank, 2008: 2)

Markets work best where there is a levelplaying field so that all firms are treatedequally, where entry barriers to the establish-ment of new businesses are minimal, andwhere state-provided infrastructure and stateinstitutions reduce operating costs andbusiness risks. By enhancing policy clarity,predictability and credibility, governments canhelp reduce business risk and thereby fosterinvestment and job creation.

11.8 ADDITIONAL LESSONSFOR THE POST-CRISISDEVELOPMENTAL STATE

Zimbabwe’s experience underscores theneed for a new and different model ofeconomic development. Defining andprescribing the boundaries of the develop-mental state is essentially a political issuethat cannot be set by technical criteria.However, valuable lessons can be learnedfrom past experience.

Some protagonists of developmental statetheory believe that some of the dictates ofthe broad ‘good governance’ agenda standin the way of rapid economic and socialprogress and that it is enough for emergingmarkets to achieve ‘good enough gover-nance’, defined as ‘the minimal conditionsnecessary to allow political and economicdevelopment’ (Grindle, Merilee, 2004:525).

Zimbabwe’s experience is a cautionary taleand a useful corrective to, if not refutationof, ‘good enough governance’ as a develop-ment path. The combination of what donoragencies and multilateral lenders at one timeseemed to believe to be ‘good enoughgovernance’ and state-led development inZimbabwe has degenerated progressivelyinto the satisfaction of particularist rather thanbroader public interests. While accepting that

THE LESSON IS

THAT STATE-LED

DEVELOPMENT IS

UNLIKELY TO

SUCCEED WITHOUT

A STRONG

LEADERSHIP

COMMITTED TO

INCLUSIVE

GROWTH, BACKED

BY WELL-MANAGED

INSTITUTIONS, AN

HONEST AND

CAPABLE PUBLIC

BUREAUCRACY

WORKING WITH

PRIVATE

ENTERPRISE AND

CIVIL SOCIETY

219


the broad ‘good governance’ agendapresents formidable challenges to all societiessince it implies an ambitious range ofinstitutional changes in order to ensure bothsound economic and political developmentthat need to be prioritized and sequenced,the danger lies in circumscribing thisaspirational list in order to achieve morerestricted goals. ‘Good enough’ governancecan easily be gradually whittled down to‘sufficient’ governance for all time.

In sum, this second-best approach togovernance has already failed in Zimbabwe.The lesson is that state-led development isunlikely to succeed without a strongleadership committed to inclusive growth,backed by well-managed institutions, anhonest and capable public bureaucracyworking with private enterprise and civilsociety.

Developments since the late 1990s haveinculcated a deep suspicion of the statewithin the private sector, both domesticallyand internationally. Accordingly, confidence-building measures, as outlined above, will beessential. Without in any way minimizing thecrucial role the state will have to play increating the appropriate environment forrapid, sustainable and equitable growth, theprimacy of the private sector as the engineof growth must be acknowledged. In thewords of the report of the World BankGrowth Commission (2008:4):

‘Government is not the proximate causeof growth. That role falls to the privatesector, to investment and entrepreneur-ship responding to price signals andmarket forces. But stable, honest, andeffective government is critical in thelong run.’

220


221

CURRENT SITUATION

A. Macroeconomic Management

Hyperinflation officially estimated at over 11.2 million percent by mid-2008

Unsustainable budget deficits and unmanageable public sector debt, foreign and domestic

Uncontrolled monetary expansion driven by quasi-fiscal activities

Volatile and unpredictable exchange-rate systems (multiple exchange rates, rapid dollarization anda collapsing currency)

Pervasive controls in the financial sector

Central bank operating outside its mandate

Politicization of aid flows

B. Productive Sectors

Diminishing international competitiveness

Lack of secure and predictable property rights

Rapidly-worsening shortage of skills arising from out-migration

Hostile investment climate characterized by excessive, volatile and mutually-conflicting governmentinterventions and uncertainty over economic empowerment initiatives

Acute shortages of essential inputs, especially fuel, raw materials and intermediate inputs

Uncertain agricultural land rights and land tenure insecurity

Industrial and mining output down 50 percent to 60 percent since 2000 and all sectors operating wellbelow capacity levels

Production jeopardized and operating costs increased by infrastructural deficiencies, especiallyelectricity

Business decision-making undermined by volatile, often contradictory, regulatory environment

Inadequate and dilapidated productive infrastructure

Inefficient and subsidy-dependent public enterprises

C. Poverty

High levels of unemployment and decent work deficits

Growing informalization and deepening dualism in the economy

Serious and rapidly increasing social distress and chronic food insecurity

Limited access to financial services by small-scale borrowers

Fragmented state-dominated labour administration system

Supply-driven education system without a ‘pathways’ approach

Inadequate and dilapidated social infrastructure

Estrangement from traditional development partners and processes

D. How the State Does Business

Institutional incoherence and inconsistency

Contraction of the revenue base

Concentration of decision-making in the executive

Deteriorating governance indicators

Operational Framework

222


STRATEGIC OBJECTIVES AND THRUSTS

A) Establish sound macroeconomic management

Strategic Thrusts

Achieve price and exchange rate stabilisation

Carry out fiscal consolidation and exercise monetary restraint

Establish independent and orthodox central bank

Improve national management of aid flows based on Paris principles

B) Revive and restructure the productive sectors

Strategic Thrusts

Rebuild competitive markets

Establish clear property rights and land tenure security

Utilize diaspora skills and capital effectively

Implement Doing Business reforms

Ease skills constraint

Improve efficiency of public enterprises

Provide well maintained productive infrastructure

C) Ensure pro-poor growth

Strategic Thrusts

Rapidly improve human development indicators

Transform the dualistic structures in the economy

Strengthen household food security

Develop more demand-driven education and training systems

Promote employment-intensive growth within a decent work framework

Provide well maintained social infrastructure

Engage with international donor community

D) Build a developmental state and good governance

Strategic Thrusts

Reform national institutions

Expand the revenue base

Expand participation in national decision-making

Strengthen the rule of law

Transform State into a facilitator of private enterprise

223


STRATEGIC OBJECTIVE A: ESTABLISHING SOUND MACROECONOMIC MANAGEMENT

Short Term (2009–2010)

Strategic Thrust: Achieve price and exchange rate stabilization

Key Actions Responsibility

Remove interest rate controls and exchange-rate controls Ministry of Finance/RBZ

Remove capital controls on private individuals Ministry of Finance/RBZ

Reduce Statutory Reserve Ratios substantially RBZ

Strategic Thrust: Carry out fiscal consolidation and exercise monetary restraint


Eliminate quasi-fiscal activities Ministry of Finance/RBZ

Conduct public expenditure review Ministry of Finance/Parliament

Establish and publish fiscal rules Ministry of Finance/Parliament

Develop rolling MTEFs Ministry of Finance

Conduct mid-term budgetary reviews Ministry of Finance

Introduce budget caps for PEs Ministry of Finance/Parliament

Establish and publish money supply growth targets Ministry of Finance/RBZ

Strengthen public financial management, accounting and reporting systems and Ministry of Finance/Parliamentbudgetary processes

Strategic Thrust: Establish independent and orthodox central bank


Review RBZ Act 2004 Ministry of Finance/RBZ

Create Monetary Policy Committee (MPC) RBZ

Strategic Thrust: Improve national management of aid flows based on Paris principles


Undertake an audit of outstanding foreign debt Ministry of Finance/RBZ

Reach agreement to clear outstanding arrears with BWIs and Paris Club Ministry of Finance

Carry out debt sustainability analysis Ministry of Finance

Seek re-classification as IDA only Ministry of Finance

Undertake audit of public domestic debt Auditor-General/RBZ

Seek foreign aid to restructure domestic debt Ministry of Finance

Deepen understanding of key state and non-state actors in management of Ministry of Financeinternational aid flows

Develop a National Aid Policy framework Ministry of Finance

Medium Term (2011–2015)

Strategic Thrust: Price and exchange rate stabilization


Introduce an inflation targeting regime Ministry of Finance/RBZ

Review capital controls on corporates Ministry of Finance/RBZ

Strategic Thrust: Improve national management of aid flows based on Paris principles


Establish an agency or department for Development Cooperation Ministry of Finance/Ministry ofForeign Affairs

Develop, jointly with donors, a performance assessment framework (PAF) Aid Coordination Agency

224


STRATEGIC OBJECTIVE B: REVIVING AND RESTRUCTURING THE PRODUCTIVE SECTORS


Strategic Thrust: Rebuild competitive markets


Ensure compliance with the tariff structure in line with commitments to COMESA, Ministry of Finance, ZIMRA,SADC and the World Trade Organisation Ministry of Trade and Industry

Secure lines of credit for private sector inputs Commercial Banks/RBZ

Improve smallholders access to credit, inputs and higher-value export commodity Ministry of Agriculture/Producers’markets through contract farming Associations

Facilitate restructuring and capitalization of weak banks Ministry of Finance/RBZthrough private sector driven mergers and consolidations

Remove restrictions to participation of foreign banks Ministry of Finance/Parliament

Strategic Thrust: Establish clear property rights and land tenure security


Enact legislation to establish a Land Commission, a Land Fund and a Land Tribunal Parliament

Carry out a land audit Land Commission

Design a land reform programme Land Commission

Strategic Thrust: Utilize diaspora skills and capital effectively


Develop and implement a policy framework for return migration Ministry of Labour /Ministry ofEducation

Review legislation to enable dual citizenship Ministry of Home Affairs

Remove restrictions on the operation of MTAs Ministry of Finance/RBZ

Strategic Thrust: Implement Doing Business reforms


Develop strategies for key sectors (agriculture, manufacturing, mining and tourism) Line ministries

Establish a private sector think tank Private sector

Design SMEs policy framework Ministry of Industry

Strategic Thrust: Ease skills constraint


Carry out national manpower survey Ministry of Labour/CSO

Facilitate importation of skills Ministry of Labour

Strategic Thrust: Improve efficiency of public enterprises


Carry out public review of mandates of existing regulatory authorities Ministry of Finance/Line ministries

Carry out audit of PEs Auditor-General/SERA

Design strategies for privatization/restructuring Ministry of Finance/SERA

Strategic Thrust: Provide well maintained productive infrastructure


Restore national power generation capacity and water supply Ministry of Energy/ZESA/Localauthorities

Design cost-recovery and maintenance strategies for public infrastructure and Ministry of Finance/Lineservices ministries

225



Strategic Thrust: Rebuild competitive markets


Review (ongoing) tariff and non-tariff barriers to trade Ministry of Finance/ZIMRA/Ministry of Trade



Implement a sustainable land reform programme, including a transparent settler Land Commission and Landselection and farm allocation process Tribunal

Reorganize settled farms to ensure their economic viability Land Commission

Rationalize the occupation of farmland based on the land audit Land Commission

Issue land registration certificates in resettlement areas and title to commercial Land Commissionfarms

Establish the legal, institutional and regulatory framework for land tenure reform Land Commission/Parliamentin the communal areas

Transfer de jure state ownership of the communal land to communities Parliament

Introduce a land tax on commercial and A2 resettlement farms Land Commission /ZIMRAMinistry of Finance

Strategic Thrust: Increase efficiency in revenue collection


Draw up a new fiscal regime for mining Ministry of Mines/Finance/ZIMRA

Strategic Thrust: Ease skills constraint


Establish a National Training Authority Ministry of Education

Strategic Thrust: Improve efficiency of public enterprises


Enact legislation for public enterprise restructuring Ministry of Finance/Line Ministries

Long Term (2015 onwards)



Adjudicate and demarcate village and ward boundaries in communal areas Ministry of Local Government/Land Commission

Establish common property regimes Land Commission/AREX

Demarcate and register smallholders’ residential plots and arable land Land Commission/RuralDevelopment Councils

Issue land registration certificates for residential and arable land in communal areas Land Commission/RuralDevelopment Councils

Introduce a land or unitary tax on smallholders for local administration, land Ministry of Local Government/transfers and rentals ZIMRA

Upgrade land registration certificates in communal and resettlement areas to full title Land Commission

226


STRATEGIC OBJECTIVE C: ENSURING PRO-POOR GROWTH


Strategic Thrust: Rapidly improve human development indicators


Review and update all national human development strategies and action plans Relevant line ministries

Design and operationalize social safety nets Ministry of Social Welfare/UN agencies/NGOs

Update national poverty survey Ministry of Labour/CSO

Update labour force surveys Ministry of Labour/CSO

Design an Interim- PRSP Ministry of Finance/Social Welfare

Strategic Thrust: Transform the dualistic structures in the economy


Design policy framework for the informal economy Ministry of Industry

Create an appropriate regulatory framework for microfinance institutions Ministry of Finance/RBZ

Strategic Thrust: Strengthen household food security


Announce pre-planting prices as a crop production incentive during twoagricultural seasons Ministry of Agriculture

Rehabilitate AREX infrastructure Ministry of Agriculture

Strategic Thrust: Develop more demand-driven education and training systems


Establish consultation mechanisms between ministries of education and labour Ministries of Education/Labour/and private sector associations Private sector associations

Conduct long term national manpower needs projections Ministry of Labour

Review mandate and operations of ZIMDEF Ministries of Labour/Education

Strategic Thrust: Promote employment-intensive growth within a decent work framework


Rationalise institutional overlap in area of labour market issues Ministry of Labour

Carry out reviews of laws governing labour administration Ministry of Labour

Finalize the National Employment Policy Framework Ministry of Labour

Develop a comprehensive Labour Market Information System Ministry of Labour

Implement labour-intensive national public works programme Ministry of Labour

Strategic Thrust: Provide well maintained social infrastructure


Carry out social infrastructure needs assessment Ministry of Social Welfare

Prioritize urgent needs Relevant line ministries

Strategic Thrust: Engage with international donor community


Engage technical assistance to strengthen national poverty analysis capacity Ministries of Finance/SocialWelfare

227



Strategic Thrust: Rapidly improve human development indicators


Design and implement a full- PRSP Ministries of Finance/SocialWelfare

Review the relative benefits of conditional cash transfers and basic income grants Ministry of Social Welfare

Strategic Thrust: Transform the dualistic structures in the economy


Develop an integrability (active labour market) programme Ministry of Labour

Enact legislation to promote financial inclusiveness and microfinance institutions Ministry of Finance/Parliament

Improve credit information infrastructure Private sector

Strategic Thrust: Strengthen household food security


Improve targeting by national relief bodies Ministry of Social Welfare

Improve operational efficiency of emergency food delivery systems Ministry of Social Welfare/UN agencies/NGOs

Reduce grain price volatility through domestic trading and the maintenance of Ministries of Agriculture/Financebuffer stocks

Develop a demand-led, farmer-centred agricultural research and extension Ministry of Agriculture/Growers’programme associations

Strategic Thrust: Develop more demand-driven education and training systems


Design a reform programme for the education and training system Ministry of Education/Privatesector

Strategic Thrust: Promote employment-intensive growth within a decent work framework


Review existing labour administration legislation Ministry of Labour/Trade Unions/Employers’ organizations

Operationalise the comprehensive Labour Market Information System Ministry of Labour

Develop an integrated and decentralized labour administration system Ministry of Labour

228


STRATEGIC OBJECTIVE D: BUILDING A DEVELOPMENTAL STATE AND GOOD GOVERNANCE


Strategic Thrust: Reform national institutions


Review civil service pay scales Ministry of Public Service

Design civil service retention scheme Ministry of Public Service

Carry out review of inter-ministerial functional overlap Ministry of Public Service

Design a manpower recovery plan for the public sector Ministry of Public Service

Build oversight capacity of the Auditor-General Ministry of Finance

Carry out review of operations of the State Tender Board Ministry of Finance/Parliament

Create an autonomous Central Statistical Office (CSO) Ministry of Finance

Design a civil service reform programme Ministry of Public Service

Train key civil servants in results-based management and budgeting All line ministries

Strategic Thrust: Expand the revenue base


Rationalize the tax structure Ministry of Finance/ZIMRA

Increase efficiency in revenue collection Ministry of Finance/ZIMRA

Develop incentive structure for informal enterprises to be registered Ministry of Finance

Strategic Thrust: Expand participation in national decision-making processes


Review existing state/civil society/private sector consultation mechanisms Civil society umbrella groups andprivate sector organizations/Lineministries

Review current status of political, administrative and financial decentralisation Ministries Local Government/processes Finance

Build oversight capacity of parliamentary portfolio committees Parliament

Build multi-stakeholder oversight mechanisms for national minerals wealth fund Ministry of Finance/Auditor-General/Chamber of Mines/NGOs

Strategic Thrust: Strengthen the rule of law


Review laws restricting media, freedom of association and freedom of speech Ministry of Justice/Parliament

Initiate constitutional review process Ministry of Justice/Parliament


Strategic Thrust: Reform national institutions


Implement civil service restructuring Ministry of Public Service

Restructure the Investment Centre in consultation with the private sector Ministry of Finance/CZI

Strategic Thrust: Expand the revenue base


Design and implement aid obsolescence strategy Ministry of Finance/Line ministries

229


Strategic Thrust: Transform State into a facilitator of private enterprise


Train key staff in relevant ministries in the microeconomic foundations of Ministries of Finance/Trade andeconomic policy and foreign trade issues Industry

Carry out joint state/private sector growth diagnostics Ministries of Finance/Trade andIndustry/Private sectorassociations

Design and implement international competitiveness strategy Ministry of Trade and Industry/Private sector

230


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