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The Incidental Positive Effects of Economic Sanctions: A Case of

Zimbabwe

A thesis submitted to the Bucerius/WHU Master of Law and Business Program in partial fulfillment of the requirements for the award of the Master of Law and Business (“MLB”) Degree

Godfrey Mugari July 16, 2010

12,690 words (excluding footnotes) Supervisor 1: Professor Matthias Busse

Supervisor 2: Professor Hans-Bernd Schaefer

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Table of Contents

1. CHAPTER ONE – INTRODUCTION ................................................................................................. 1

1.1 Introduction ........................................................................................................................................... 1

1.2 Background Information ....................................................................................................................... 2

1.2.1 The Zimbabwean Case ....................................................................................................................... 3

1.3 Motivation ............................................................................................................................................. 4

1.4 Aims and Objectives ............................................................................................................................. 5

1.5 Research Questions ............................................................................................................................... 5

1.6 Benefits .................................................................................................................................................. 6

1.7 Assumptions .......................................................................................................................................... 6

1.8 Contributions ......................................................................................................................................... 6

1.9 Scope of Research ................................................................................................................................. 6

1.10 Structure of Thesis ................................................................................................................................. 7

2. CHAPTER TWO – LITERATURE REVIEW ..................................................................................... 8

2.1 Introduction ........................................................................................................................................... 8

2.2 Economic Sanctions .............................................................................................................................. 8

2.3 Effectiveness of Economic Sanctions .................................................................................................11

2.4 Sanction Busting – Adaptability ..........................................................................................................16

2.5 The Case of Zimbabwe ........................................................................................................................18

2.6 Reasons for Sanctions .........................................................................................................................18

2.7 Nature of Sanctions against Zimbabwe ...............................................................................................20

2.8 The Effects of Sanctions on Zimbabwe ...............................................................................................22

3 CHAPTER 3 – RESEARCH METHODS ..........................................................................................25

3.1 Introduction .........................................................................................................................................25

3.2 Research Type .....................................................................................................................................25

3.3 Data Collection ....................................................................................................................................25

3.3.1 Primary Data Collection ...................................................................................................................26

3.3.1.1 Questionnaires ...............................................................................................................................26

3.3.1.2 Interviews ......................................................................................................................................27

3.3.2 Secondary Data Collection ...............................................................................................................27

3.4 Sampling ..............................................................................................................................................28

3.4.1 Target Population .............................................................................................................................28

3.4.2 Sampling Methods ............................................................................................................................28

3.5 Reliability and Validity .......................................................................................................................29

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4. CHAPTER FOUR – FINDINGS........................................................................................................31

4.1 Introduction .........................................................................................................................................31

4.2 Findings ...............................................................................................................................................31

4.2.1 Revenue Collection ..........................................................................................................................32

4.2.2 Indigenisation and Economic Empowerment Act of 2008 ...............................................................34

4.2.3 Manufacturing ..................................................................................................................................35

4.2.4 Tourism ............................................................................................................................................36

4.2.4 Diaspora............................................................................................................................................37

4.2.6 Financial Institutions ........................................................................................................................38

4.2.7 Look East Policy ..............................................................................................................................41

4.2.8 Cultural Changes ..............................................................................................................................43

4.2.9 Mining ..............................................................................................................................................45

4.2.10 Structural Changes ..........................................................................................................................46

5. CHAPTER FIVE – CONCLUSION AND RECOMMENDATIONS ..............................................47

5.1 Introduction .........................................................................................................................................47

5.2 Conclusions .........................................................................................................................................47

5.3 Recommendations ...............................................................................................................................50

Further Researches……………………………………………………………………………51

Bibliography…………………………………………………………………………………..53

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List of Acronyms

DRC: Democratic Republic of Congo

GDP: Gross Domestic Product

GNU: Government of National Unity

IMF: International Monetary Fund

MDC: Movement for Democratic Change

RBZ: Reserve Bank of Zimbabwe

RTGS: Real Time Gross Settlement

SADC:Southern African Development Community

UK: United Kingdom

ZESA: Zimbabwe Electricity Supply Authority

ZIDERA: Zimbabwe Democracy and Economic Recovery Act

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1. CHAPTER ONE – INTRODUCTION

1.1 Introduction

Sanctions are „the penalty imposed to ensure compliance with the law‟.1 However, the

country or institution coming up with sanctions has several options on its hands to use on

the target or subject to ensure compliance, and these options are diplomatic, economic or

military means. The focus of this research is on economic sanctions, which are defined as,

„an attempt to achieve a political end, namely a change in policy, via an economic means,

namely alterations in trade, investments and other economic relationships‟2.

It has been that „African countries have to respond to the needs of globalisation by

rearranging their tariff structures and export administration, but also related macro- and

sector policies. Important is the cross-border and international traffic infrastructure…‟3.

Not much attention is given to such statements by the same governments for which it is

written. During a period of economic sanctions, however, a country id forced to make

institutional and structural policy changes that affect the legal, political and economic

systems of that country as it tries to adapt to life under sanctions. It is the contribution of

these policy changes towards the growth and development of a country after the removal

of the sanctions that form the basis for this research thesis.

This Chapter will provide the background information to this research, including the

background to the imposition of sanctions on Zimbabwe. The motivation, aims and

objectives will then be outlined after which the researcher will provide the questions

arising from this research. This Chapter will also show the benefits of conducting this

1 Renwick (1981), p1

2 Blumenfield (1987), pg190

3 Wohlmuth (2000), p539

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research as well as the contributions that the research will have towards scholarly work.

Assumptions and the scope of this research paper will also be outlined, and lastly, the

structure of this research paper will be presented.

1.2 Background Information

Economic Sanctions are meant to maximise economic damage to the to the target in order

to coerce it to change its trade or foreign policies as well as the human rights issues4.

However, the economic performance of most of the countries that go through sanctions is

much better than that of the neighbouring countries after the lifting of sanctions, despite

the amount of economic damage inflicted during the period under sanctions.

An upward trend was observed in the general economic activities just after the lifting of

sanctions in Libya5. He specifically states that this upward trend was as a result of

„political changes in the political field, in particular the modified economic policies and

exchange rate measures‟. Additional impulses and favourable tendencies could also be

noticed in the coming years. The premise, therefore, would be that policies made during

periods of sanctions actually work for the country once the sanctions are removed. Naylor

(1999)6 is in total agreement with this notion and he writes that „the embargoes encourage

target states to create their own production capacity with the result that today, countries

incapable of providing electricity to their masses can shock their neighbours with

successful intermediate range missile tests‟. He goes on to say that once the war is over,

the supporting infrastructure remains in place, „simply democratising its client base‟

Zimbabwe, currently under economic sanctions from USA, Britain, the European Union

and other western countries like Australia and New Zealand, has also made several policy

4 Miljkovic (2002), p1

5 Strunz and Dorsch (2000), p559

6 Naylor (1999), p386

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changes in its attempt to bust the sanctions, which have been in place since 2000. This

research thesis intends to develop a theory on the positive effects of economic sanctions

on the target, though not by intention. The approach is to note the policy changes that the

country have come up with and analyse the positive effects on the growth and

development of the country, after the sanctions are removed, that these policy changes

have.

1.2.1 The Zimbabwean Case

Zimbabwe, a former colony of Britain, took independence from the British rule in 1980.

In 2000, the government of Zimbabwe embarked on a controversial land acquisition

policy, in which land was taken away forcibly and without compensation from the

minority white country farmers, who numbered about 4000 and occupied about 70 % of

the land. This land was reallocated to the majority black population. The land was taken

forcibly after Britain reneged on its previous pledge to fund the land acquisition process,

and this came out after the Donors Conference of Land held in Harare in 1998. 7

The reaction of the world was that of anger as they interpreted this move by the

government of Zimbabwe as expropriation and disrespect of private property. As a result,

economic sanctions were imposed on the country with the objective to „restore democracy

and normalcy‟8. USA enacted ZIDERA which instructed the executive directors to each

of the multinational financial institutions to vote against any loan, credit or guarantee to

the government of Zimbabwe. No reduction or cancellation of any debt owed by the

government of Zimbabwe was allowed under this Act. The European Union and its allies

also impose restrictive economic measures on Zimbabwe.

7 Chingono (2010), p067

8 Chingono (2010), p067

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In response to the economic sanctions from all quarters, the Zimbabwean government

embarked on a number of legal, political and economic policy changes in an attempt to

keep the economy going. Effects of the sanctions have been and are still being felt as the

country experienced some of the worst economic factors in the world like the hyper-

inflationary rates as well as interest and exchange rates that are more unrealistic than

realistic.

1.3 Motivation

The motivation for this research comes from the realisation that most countries that have

been put under sanctions have done well than the neighbouring countries once the

sanctions are removed.9 During the period of economic sanctions, so many undesirable

effects are noted such as the severe damage to the economy, the increased suffering of the

general populace, the limited cooperation of the government in power with regards to

humanitarian efforts and the prioritisation of the government towards consumption of the

remaining resources at the expense of the government.

However, once these sanctions are removed, there is a tremendous growth in the

economies of these previously sanctioned countries. This growth is different to the catch-

up effect and leads to the level of development in the previously sanctioned country

surpassing that of the neighbouring countries. Notable countries that have been sanctioned

and have done much better than the neighbouring non-sanctioned countries include South

Africa, Libya, Israel, Nigeria, Japan and Rhodesia.10

This research intends, therefore, to

develop an idea why some of the countries that are put under sanctions end up doing much

better than the neighbouring countries, despite that the their economic growth is

suppressed during the periods of sanctions.

9 http://data.worldbank.org/data-catalog/world-development-indicators

10 http://data.worldbank.org/data-catalog/world-development-indicators

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1.4 Aims and Objectives

The aim of this thesis is to prove that even though the imposition of economic sanctions is

meant to coerce the target country to alter its trade or foreign policies or human rights

issues through maximising economic damage11

, an opportunity is created for the target

country to improve its working culture, institutional structures and policies. Focus would

be on the growth-stimulating policies that a country can come up with for more effective

results in the economy. The research also aims to show that these improved policies

provide the platform for the sanctioned countries to perform much better than the

neighbouring unsanctioned countries once the sanctions are removed. Most researches

have been focusing on the negative effects of economic sanctions on a target and not

much have been written on the positive results that can be achieved by a country that

works hard to bust the sanctions imposed on it by implementing a lot of policy and

institutional changes.

1.5 Research Questions

i. What measures (legal, political or economic) did the government of Zimbabwe take

to overcome the economic sanctions since their imposition in 2000?

ii What effects do these policy changes have on the future economic performance of

Zimbabwe, after the lifting of the economic sanctions?

iii Do sanctions have any positive effect on the growth and development of a country

after the lifting of the sanctions.

11

Naylor (1999), p4

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1.6 Benefits

Most countries do not simply give up when imposed with economic sanctions. The normal

reaction by the governments on which sanctions are imposed is to suppress their people

and accumulate wealth. The most benefit of this research, therefore, is to enlighten

governments that working on policy issues that stimulate growth in a country will build a

much stronger economy in the future after sanctions are lifted.

1.7 Assumptions

a. It is assumed that any benefits to be reaped from any policy changes espoused in

this research will only start accruing once all the economic sanctions against

Zimbabwe are lifted.

b. The policies under review are those that were made as a survival strategy, and

would not likely have been introduced if the sanctions were not imposed.

1.8 Contributions

This thesis will contribute to a new theory in addition to the existent theories on economic

sanctions. The new theory focuses on the positive effects that can be realised through

initiatives made during period of sanctions as a country tries to adapt for survival.

1.9 Scope of Research

The research will be focusing on the country of Zimbabwe, and therefore will be restricted

to the policies that have been made only in the country. The policies under consideration

are those that were made in response to the economic sanctions, and whose likelihood of

having been introduced are low had sanctions not been imposed. People to be investigated

upon are the economists, government departments and economic advisors in the country.

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1.10 Structure of Thesis

This chapter introduced the research and outlined the background information, the aims

and objectives, the questions that need answers as well as the benefits of conducting such

a research. Assumptions considered for the research are also spelled out. Chapter 2 of the

thesis focuses on Literature Review so as to provide an in-depth understanding of the

subject area and what other authors have written on economic sanctions. Chapter 3

outlines how the research was carried out and the different factors that were considered

for any particular choice or instruments to be made. Chapter 4 presents the findings of the

research whilst Chapter 5 is on conclusions and recommendations.

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2. CHAPTER TWO – LITERATURE REVIEW

2.1 Introduction

Policy Makers have been increasingly using economic sanctions as a way of trying to

change the behaviours and policies of the target countries to those that are globally

acceptable. A lot of scholarly material has been written on this subject as analysts tried to

share views on the same. In this Chapter, the researcher will review the literature that has

been written regarding the subject of Economic Sanctions. This includes an area that has

been so much debatable, and that is the effectiveness of the sanctions, why the rate of

economic sanctions has been low and why they are continuously being used despite that

fact. The research also looks at the substantial capacity of the target to adapt to these

sanctions.

Since this research is focusing on a case of Zimbabwe, it is important to understand what

has happened in Zimbabwe for sanctions to be imposed and what the nature of these

sanctions are. There have been different views regarding the nature of sanctions in the

country, depending on the perspective from which one is analyzing the issue. The research

will therefore review what has been written on the sanctions and lastly, the research will

look at specific cases of economic sanctions from around the world.

2.2 Economic Sanctions

The broad meaning of the term sanctions is 'an economic or military coercive measure

adopted usually by several nations in concert for forcing a nation violating international

law to desist or yield to adjudication'.12

It was observed that sanctions can be classified

12

http://www.merriam-webster.com/dictionary/sanction

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loosely into military, diplomatic and economic.13

This research focuses on economic

sanctions as a tool to coerce the target to behave in a manner acceptable to the country or

institutions imposing the sanctions. Economic sanctions have been described as an

alternative to using military force and it has been stated that they provide a low-cost

alternative method of punishing undesirable behaviours and resolving conflicts.14

However, Mr Pattison15

, do not agree and described economic sanctions as a distinct tool

that is not used as an alternative.16

The definition for economic sanctions is derived from its objectives, and most scholars

agree on these objectives. Economic sanctions are characterised by imposition of

economic pain with the objective of influencing of the target nation.17

They can also be

defined as defined as 'an instrument of policy to induce an offending government to

change its conduct and thereby resolve or help to resolve the international problems'.18

Miljkovic (2002) agrees with the previous authors and defines economic sanctions as 'the

measures that one (sovereign government(s) or a body under the jurisdictions of different

sovereign governments) uses to influence another party'.19

He explains the 'influence' to

refer to trade, foreign policies and human rights issues. Many scholars agree with these

two since the general objective of sanctions is to enforce international morality and force a

target to reconsider its political options20

. Economic sanctions are therefore used for

behaviour modification, retribution or punishment, or as a signal to the target or to other

13

Brown (1985), p1

14 Gordon (1983), p188

15 Mr. Pattison is the Director in charge of International Security at the United Kingdom Foreign Office

16 Pattison (2006), p21

17 Nincic & Wallensteen (1983), p4

18 Renwick (1981), p1

19 Pg1

20 Naylor (1999), p2

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third country states.21

Economic sanctions are used 'to demonstrate resolve both at home

and abroad, express outrage, to punish or to deter'.22

There is a general agreement among scholars on what kinds of actions constitute

economic sanctions, and these include financial asset blocking, freeze orders and export

controls.23

In fact, the scope and nature of economic sanctions varies. It has, therefore,

been agreed that sanctions come at a cost, both to the sender and to the target, and the cost

comes from the loss in trade as well as the resources involved in the effective monitoring

and policing of the embargoes.24

The Washington Post (1982)25

estimated that the trans-

Siberian embargo on Russia cost the US and its subsidiaries about $2.2 billion in

cancelled contracts. In fact, according to Hufbauer (1997), economic sanctions cost

United States an annual amount of $18 billion. It is, therefore, the ability of a nation to

absorb the costs associated with the imposition of the sanctions that has resulted in

economic sanctions only being imposed by rich developed nations. The underdeveloped

countries, not being able to absorb the associated costs, find themselves assuming the role

of targets in most situations where sanctions are imposed.

As a result, scholarly interests have been aroused and questions have been asked whether

the imposition of economic sanctions really produce the intended results or not.26

There is

also little understanding of the political and economic nature as well as the mechanisms

and consequences of policies on sanctions, even by those who advocate and employ

them.27

Questions have been asked, as a result, if economic sanctions must ever be used as

21

Alexander (2009), p10

22 Hufbauer, Schott, & Elliot, (1990), p92

23 Alexander (2009), p10

24 Blumenfeld (1987), p191

25 pA15

26 Miljkovic (2002), p1

27 Blumenfeld (1987), p190

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an instrument of policy.28

This policy debate has been a result of the upsurge in the use of

economic sanctions as a coercive tool by many institutions and countries.

2.3 Effectiveness of Economic Sanctions

Many scholars have questioned the effectiveness of economic sanctions as a behaviour

modifying tool.29

It is important to understand the prerequisites for the success of

economic sanctions first, and these are:30

a) Well defined narrow goals – this has been the reason for success in most situations

where the objectives foe the sanctions were explicitly defined, for example, in the

Libya case, the main objective was the handover of the Lockerbie suspects. Some

authors believe that explicitly spelt out objectives are not always better than vague

ones.31

b) The costs associated with the imposition of sanctions – Effectiveness of sanctions is

constrained to a greater or less extent by the costs associated with imposing the

sanctions.32

c.) Multilateral cooperation – economic sanctions being imposed by several countries, as

well as international institutional like the UN, tend to be more effective than those

imposed by single countries.

28

Brown (1985), p1

29 Brown (1985)p1, Renwick (1981) p3, Miljkovic (2002) p2, Green (1983) p4

30 Oxford Analytica Daily Brief (21/02/2006)

31 Miljkovic (2002), p2

32 Blumenfeld (1987), p193

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d.) Allies and Adversaries – sanctioning allies would be more effective than sanctioning

adversaries. This is because there is much to lose from the existing relationship for an

ally.

e) Sanctioning elites – the normal reaction by a government is to shift the burden of

sanctions to the general population and, therefore, effectiveness of sanctions is

increased when the elites are sanctioned within a country.

Even with the knowledge of these preconditions, economists are not able to prove using

rational arguments if the sanctions would be successful. It is also surprising that the failure

rate is still high even with the knowledge of what is needed for economic sanctions to be

successful.

Most researches that have been done have come to the conclusion that economic sanctions

have a high rate of failure. Economic sanctions, whether operated within the UN or

outside, have never had a high rate of success.33

Ten cases studied where comprehensive

trade sanctions were imposed realized only a 20% success rate.34

The most comprehensive

studies on the effectiveness of economic sanctions were done by Hufbauer et al (1990),

and they came to the conclusion that economic sanctions were effective in only 34% of

the 115 cases under study.35

Wallensteen (2000) also noted that 'only two of the eleven UN sanctions initiated during

the 1990s had been lifted by the end of the decade (i e. December 31, 1999), where the

initiator has stated that the target country changed behaviour'.36

The assumption here was

that the two successful cases had resulted in the lifting of sanctions due to the initially

33

Wallensteen (2000), p5

34 Nincic & Wallensteen, (1983), p124

35 P93

36 P6

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stated objectives being achieved. The non-lifting of sanctions, on the other hand, in the

other cases mean that the objectives for which these sanctions had imposed had not been

achieved. As a result, the success rate was just below 20%, which were almost similar

previous studies. Drezner (2003) however argues that these studies underestimate the

effectiveness of the threat of sanctions. As a result, he maintains that if the threat of

sanctions, whose success rate was much higher than that of imposed sanctions, were taken

into consideration then the rate of success of sanctions will be much higher.37

Dr Howells, a member of /parliament for the British House of Commons, answered that

there was no realistic hope of economic sanctions succeeding in Zimbabwe when asked by

the Sanctions Committee about sanctions against Zimbabwe, but he still maintained that

sanctions should still persist.

It is surprising that, with most of these studies concluding the ineffectiveness of economic

sanctions, there has been a continued increase in the use of the same as a means of

coercing the targets to revisit their policies that are considered undesirable by the senders.

37

P653 - 4

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Table 1

Number of instances in which sanctions were imposed

1920 - 1929 2

1930 –1939 5

1940 – 1949 10

1950 – 1959 12

1960 – 1969 21

1970 – 1979 34

1980 – 1982 11

Source: Brown (1985)38

Why then is the world experiencing an increased use of sanctions considering the rate of

ineffectiveness of these sanctions to achieve the intended objectives? One of the reasons is

that it is well known that there are costs associated with imposition of sanctions which

results in the economy being crippled, especially over a longer period of time. There is

thus a general belief that the more prolonged the sanctions, the greater the damage, and

the more likely the target is expected to give in. Some authors dispute and argue that the

longer periods allow the target to adapt to the conditions prevailing during the periods of

sanctions.39

38

P2 39

Wallensteen (2000), p5

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The other reason for using sanctions against a state is as a means of punishment or with

the objective of weakening the state militarily or otherwise. Davis and Engerman (2003)

wrote that '...sanctions were typically deployed to disrupt military adventures...‟.40

Sanctions are often imposed not primarily for instrumental purposes of inducing the target

to comply with the sender's demands but instead for expressive or demonstrative

purposes.41

Thus, in that case, there is disregard of the effectiveness of the sanctions. 'The

economic effects, in other words, are means

to achieve ends, not ends in themselves'. He further goes on to explain that success is

separated from the effects of the economic sanctions, whose effects are regarded as a

necessary sacrifice for a higher cause.

The other reason for increasing the use of sanctions even in the wake of their insufficiency

to meet outlined objectives is that 'they can they show that the international community

takes certain norms seriously, such as democratic governments, human rights and fight

against terrorism'.42

The idea behind this move is that, imposing sanctions in such

situations has no regard to success, but is meant to curtail repeat behaviour regarded

unacceptable. What this means is that the sanctions are not necessarily used for specific

objectives but are being put to a wider use for a wider set of purposes. When a military

action is ruled out for some reason, there is need to show the offending nation that the

sender of the sanctions disapproves of offensive policies.43

In this case, the sanctions 'do

not serve instrumental purposes but have expressive functions', though he also points out

that this is an expensive way of doing so.

40

Davis & Engerman (2003), p188

41 Galtung (1983), p380 - 1

42 Wallensteen (2000), p7-8

43 Galtung (1983), p48

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Closely related to the reasons above is the proposition by Drezner (1998), who brings in

the concept of conflict expectation.44

He argues that a country will impose sanctions on

the behest of any slight conflict if it anticipates more frequent conflicts in the future. This

is done even when the sender herself also incurs a lot of costs. The objective is to signal to

the target that any conflict will be costly to both of them and the sender is prepared to

incur such costs. The effect, therefore, is that the target will try to avoid any conflict in the

future because of the associated costs. Drezner goes on to explain that the sender would

naturally try to avoid imposition of sanctions where she does not expect frequent future

conflicts and would only impose such sanctions if 'they incur minimal costs and the target

would suffer significantly'. It was observed that, frequently, the purpose for economic

sanctions is to 'deter objectionable future policies by demonstrating an ability to retaliate

rather than to modify extant behaviour'.45

There are so many theories of thought regarding why nations and international

organizations continuously use sanctions even when researches point that they are

ineffective. Most of them, however, concur that it might not be correct to consider

sanctions to be ineffective on the basis of not meeting their intended objectives because

there are various levels of success.

2.4 Sanction Busting – Adaptability

There are three ways that a country can bust sanctions and these are adaptation to

sacrifice, restructuring the economy to absorb the economic shocks, and smuggling.46

The

economic restructuring usually occurs at the level of the government through

implementation of policies. This research paper is more concerned with the restructuring

44

Drezner, (1998), p711

45 Miroslav & Peter, (1983), p6

46 Galtung (1983), p31

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of the economy the effects of the restructuring will be used in the future after the lifting of

the sanctions. Since economic sanctions usually target imports and exports in its quest to

cripple the smooth operation of the economy, there is a greater tendency to be more

innovative within the country's industrial sectors. As a result, there is an increase in the

target country's ability to enforce import substitution. International sanctions, therefore,

promote domestic cohesion and adaptation which allow the target state to weather the

economic costs.47

Predictions were made that the Rhodesian companies would come out of the sanctions

with a greater share of the home markets, which was the incentive for the companies to be

more inventive.48

He pointed out that hidden forces can be activated when a target society

is hurt and the opposite of what is intended will then be the outcome.49

Imposition of

sanctions on Italy resulted in it cutting back on its imports, which effectively resulted in

the improvement in the trade balance.50

In Rhodesia, he noted that companies found it

difficult to remit dividends to their parent companies abroad and this resulted in an

increase in liquidity in the banking system. He also points out that there was significant

diversification in the economy to such an extend that 'the Rhodesian economy was

transformed from virtually total dependence on the importation of manufactured goods in

exchange for raw materials to a remarkable degree of self sufficiency in most areas...'.

States are also able to survive through sanctions due to assistance from other third party

states. Even though there was unanimity at the United Nation for comprehensive

economic sanctions towards Rhodesia and import and export of important products had

been banned between this country and other nations, there were still lots of trading taking

47

Green (1983), p62

48 Galtung (1983, p34

49 Galtung (1983), p46

50 Renwick (1981), p85

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place in the underworld.51

He specifically mentions over 100 violations detected by the

Security Council Sanctions Committee involving powerful nations like New Zealand,

Australia, West Germany, France, Japan and many more. Beside the assistance received in

the trading arena, Rhodesia was also receiving assistance from South Africa to fight the

black revolutionary groups.

2.5 The Case of Zimbabwe

Zimbabwe has been chosen as a case for the analysis of the effects of economic sanctions

on a country. The country has been trying to survive under difficult conditions that include

one of the highest inflation rates in the history of mankind and has been coming with a lot

of legal, economic and political policy changes. It is these policy changes, which are

expected to have an impact in the future economy without sanctions that are the reason for

this research paper. Zimbabwe is an interesting case in the sense that the sanctions are still

in place and the research will come out with findings that can be verified in the future.

2.6 Reasons for Sanctions

As espoused by many writers that reasons for sanctions are always different depending on

the perspective of the sender or the target, it also is the same with the Zimbabwean case.

However, there is a part that both parties concur to and that is the background leading to

the imposition of sanctions.

Zimbabwe, a former colony of Britain, took independence in 1980. One of the central

issues before and after independence was the issue of land. The Zimbabwean government

viewed the distribution of the land at the time as highly skewed since only 4500 white

farmers occupied 70% of the land, or 11 million hectares of the country's prime farming

51

Green (1983), p78

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land, which constituted 21% of the total land.52

This issue received little attention since

independence until the late '90s when the war veterans started demanding the government

to act on it. The Zimbabwean government, after an impasse at the 1998 Land Donors

Conference in Harare, legalized the acquisition of land from the white commercial farmers

without compensation through the amendment of section 16 of the country's

constitution.53

On the 24th

of May 2000, Mugabe54

invoked the presidential powers temporary measures

to sign regulations55

that would enable the government to start acting on the acquisition of

land as provided by the Land Acquisition Act. In September 2000, the government then

embarked on a ' fast track' land reform that was characterized by the forceful acquisition

of land from the white to commercial farmers without any compensation. Since there was

no planned strategy in the acquisition of the land, the whole process was marred with

violence as most of the war veterans took it upon themselves to chase the white

commercial farmers from the land.

The reasons for the sanctions include:

a) The violent acquisition of land without compensation, which was interpreted by the

west as expropriation and disrespect of private property.56

However, Mugabe's

government argues that the land ownership at the time was unfair and his government was

simply redressing a colonial past.

52

Taylor & Williams (2002), p549

53 Chingono (2010), p067

54 Robert Gabriel Mugabe is the President of Zimbabwe

55 The Presidential Powers Temporary Measures, Land Acquisition Regulations

56 Chingono (2010), p67

20 | P a g e

b) The Zimbabwean army's involvement in the DRC was also an issue with the

international community as this was viewed as an unnecessary expenditure. The economy

of Zimbabwe was on a downfall with unemployment rate of 50%, a falling GDP and

skyrocketing inflation rate when Zimbabwe intervened in the DRC conflict.57

The

international community did not see any rationale since Zimbabwe did not have any

substantive 'national interest' in the country.

The Zimbabwean government on the other hand feels it was operating within the

framework of SADC principles.

c) The other reasons for sanctions were the disrespect for human rights, lack of good

governance, suppression of opposition politics and the lack of freedom of speech. The

government of Zimbabwe, on the other hand argued that it was the one that brought

democracy to Zimbabwe and has been upholding it since 1980 by conducting free and

fair elections.58

In general, the Zimbabwean government felt that sanctions were unfairly being imposed

on them due to the politicization and internationalization of the land issue, which was

supposed to be a bilateral issue with Britain. It also claimed that the West was bent for a

'regime change' in Zimbabwe and was using human rights violations, elections and land

issue as a scapegoat

2.7 Nature of Sanctions against Zimbabwe

There has been differences between the senders' and the target's interpretation of the exact

nature of sanctions against Zimbabwe59

. The senders in this case include Britain, USA and

57

Maclean (2002), p522

58 Chingono (2010), p69

59 Chingono (2010) , p67

21 | P a g e

the rest of European Union60

as well as New Zealand and Australia.61

According to the

senders, the sanctions are 'targeted', 'smart' or 'restrictive' and specific to Zimbabwean

officials who had “formulated, implemented or supported policies that have undermined

Zimbabwe's democratic institutions”, whilst the Zimbabwean government considered

them to be 'economic' and comprehensive in nature since the 'impact of these sanctions

stretch on the economy to infinite causing untold suffering to the unintended people, the

general population'.62

The Zimbabwean government derives its argument from the US enactment of ZIDERA

200163

, which gives a directive to the Secretary of State to instruct every US executive

director of an international financial institution to oppose and vote against:

1. any extension by the respective institution of any loan, credit or

guarantee to the Government of Zimbabwe; or

2. any cancellation or reduction of indebtedness owed by the Government

of Zimbabwe to the United States or any international financial

institution.64

International financial institution in this case means the multinational development banks

like African Development Bank, African Development Fund, the Inter-American

Development Fund, and the International Bank for Reconstruction and Development, and

the International Monetary Fund. Any move contrary to this instruction can be made only

with a certification from the President. The US also instituted travel restrictions on

60

Brooks & Shin (2006), p1

61 Chingono (2010), p72

62 Chingono (2010), p67

63 http://law.justia.com/us/codes/title22/22usc2151.html

64 Section 4( c )

22 | P a g e

selected individuals from the Government of Zimbabwe, along with the EU, Australia,

New Zealand and Switzerland.65

The EU, on the other end, only instituted travel restrictions and assets freezes on the assets

of selected members of the Zimbabwean government. In total, £160,000 belonging to

Zimbabwe was frozen in UK. There are also 126 people on the sanction list restricting

people from travelling throughout the EU. There are no trade sanctions on Zimbabwe,

though the British government observed a decline in trade between the two countries, a

fact attributed to unattractive business environment in Zimbabwe.66

2.8 The Effects of Sanctions on Zimbabwe

Economic sanctions had very serious economic and sociological effects on Zimbabwe.

Most of the effects experienced in the country were interrelated. The major impact was on

the rate of inflation, which officially toped 231 million % on average and the highest in

the word.67

Most people believe that the actual inflation rate was much higher than the

reported one. Inflation resulted from the fact that the country is a net importer and the

economic sanctions had put restrictions on the flow of foreign currency to Zimbabwe

resulting in a serious shortage of the same in Zimbabwe. This affected all the industries in

Zimbabwe, and as the companies and the government all tried to mop the foreign currency

in the market, the rate was raised tremendously. This had a direct effect on the inflation

rate as this directly impacted on prices of goods.

65

House of Lords (1987), p4

66 House of Lords (1987), p4

67 Gono (2008), p14

23 | P a g e

Most companies failed to access the foreign currency due to the shortage and this resulted

in shortage of goods and services, which led to retrenchments. The unemployment rate

stood at 80% in 1998. As more people got into the informal sector to survive, there was an

increase in the level of criminal activities, particularly fraud and corruption. The effects

had ripple effects on every part of the economic and social fabric of the economy. Gono

(2009)68

summarises the effects as:

i. Hyperinflation

ii. Shortage of foreign currency for critical imports

iii. Interest rate and exchange rate distortions

iv. High unemployment levels

v. Declining levels of domestic and foreign investments

vi. De-industrialisation and negative economic growth rates

vii. High levels of corruption

viii. Prevalent levels of greed and speculative behaviour, including falsification of

accounting records

ix. Lack of unity of purpose among Zimbabweans, as well as political, social and

economic polarisation, all which led to a depressed operating environment.

x. High levels of suspicion and mistrust among Zimbabweans in general

xi. Drying up of credit lines

68

Gono (2008), p122 - 123

24 | P a g e

xii. Malfunctioning parastatals and local authorities.

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CHAPTER 3 – RESEARCH METHODS

3.1 Introduction

Given the limitation in time and finance, the research had to be structured in a way that it

does not exclude important information during the research process. It is also important to

note that this is a research which concentrates on a particular case, a case of Zimbabwe,

and as a result of that, challenges result from the physical distance created between the

researcher and the source of information. In this chapter, the researcher will focus on the

methodology used, concentrating on the methods used for of data collection and sampling

and the justification for usage of those specific methods.

3.2 Research Type

This is a qualitative research, which uses an inductive approach, and whose objective is to

contribute to the economic sanctions theory. An inductive approach is „a theory building-

process, starting with observations of specific instances, seeking to establish

generalisation about the phenomenon under investigation‟.69

Although theory exists with

regards to economic sanctions, there is another line of thinking that has not been

developed, and that is the positive effects of economic sanctions. The objective of this

research is to contribute this unexplored part of the economic sanctions theory.

3.3 Data Collection

The researcher concentrated on primary data collection since the area of research has not

been explored. Positive aspects of economic sanctions have not been the focus of

69

Wilson (2010), p7

26 | P a g e

researches done before and as a result not much is written on the subject. However, the

research also employed secondary data collection from newspapers, internet articles and

policy documents. A number of articles were written, especially on Zimbabwe, as the

country defied the economic sanctions imposed on it.

3.3.1 Primary Data Collection

„Primary data is the data that the researcher collects by himself or herself through a range

of collection tools such as interviews, observation, and questionnaires, rather than simply

relying on existing data sources‟.70

The main reason why the researcher mainly focused

on primary data collection is that there are limited articles written on the subject of

positive aspects of the economic sanctions. Most of the articles written on economic

sanctions focus on the nature and effects, mostly negative, of economic sanctions. This

method of collecting data has its own challenges like time and financial constraints and

inability to access one‟s subjects, in some cases. There is, however, a greater contribution

to the area of research.

The research made use of interviews and questionnaires.

3.3.1.1 Questionnaires

Given the physical distance between the researcher and the subjects, a questionnaire

became an important tool for data collection since it is also cost effective and reliable.

This tool enabled the researcher to get accurate information from different sources

through structured questions that were self-administered. Both open ended and closed

questions will be asked. For the convenience of both the researcher and the respondents,

70

Wilson (2010), p136

27 | P a g e

the questionnaires were administered through email. This provided a cost-effective and

quick way of communicating and was able to reduce the distance between the two parties.

3.3.1.2 Interviews

Interviews were also very important for this research, especially for the collection of data

from people who are or were in decision-making positions during the period of sanctions

in Zimbabwe. Their perception towards the usefulness and effectiveness of some

economic, political and legal changes they made were of paramount importance to the

effective conclusion of this research.

One main advantage of interviews over the other data collection tools is that the

researcher will also get verbal and non-verbal communication from the respondent.

However, due to the distance involved as well as time and financial constraints, face to

face interviews were not possible and therefore the researcher was limited to telephone

interviews. The main advantage is that this method provides for a wide geographic

coverage.

3.3.2 Secondary Data Collection

Secondary data „are data that has been collected by other researchers‟.71

There is a lot of

information that has been written on Zimbabwe and the economic sanctions imposed on it.

A lot of information has also been provided on how the economy has changed over the

years including some changes in the legislative and economic framework. However, not

much analysis has been done on the effects of some of these changes on a future

Zimbabwe without sanctions, which is the basis of this research. An important source of

71

Wilson (2010), p170

28 | P a g e

secondary information was the book72

written by Dr. Gono73

. In this book, he explains the

policies he made and how they were able to impact on the country‟s economy. The same

information was however used for analysing the impact the same policies will have on the

economy once sanctions are lifted. Other important sources of information were

governmental policy documents that were released by the government outlining some of

the measures it was taking to arrest economic decay.

3.4 Sampling

Sampling is important in the sense that one cannot target the whole population. By the

same token, the research targeted certain individuals in Zimbabwe who provided the

required data.

3.4.1 Target Population

The research targeted those individuals who are knowledgeable about the effects of

decisions made during the period of sanctions and the potential effect they have on the

economy. This group of people include Bankers, Economists, Lecturers, and officials

from the ZIMRA, RBZ and the Ministry of Finance.

3.4.2 Sampling Methods

Different sampling methods were used for different respondents in order to have

appropriate representation. The respondents all came from Harare, which is the capital

city and economic hub of the country. The main advantage is that the city effectively

represents the whole country since it accommodates the majority of the experts sought for

72

Gono (2008)

73 Dr. Gideon Gono is the Governor for the Reserve Bank of Zimbabwe

29 | P a g e

the research. The only exception was the universities, which are spread throughout the

country. The following methods were used for the respective targeted respondents:

a. Banks – Simple random sampling method was used to come up with the banks

from which the personnel to provide information required for the research came

from.

b. Bank Officers – Due to the need for expert opinion on the subject topic, purposive

sampling method was used. The bank‟s Economists or the Directors for Banking

Systems were targeted to provide the required information for the research.

c. Ministry of Finance – the purposive sampling method was also be used in this case

and the senior officers in the Ministry were specifically targeted.

d. Tax Authorities – senior members of staff were also be targeted, therefore

purposive sampling method will be used in this case.

e. Reserve Bank of Zimbabwe – Purposive sampling was employed with the focus on

senior management of the central bank.

f. Universities - Simple random sampling method was used to come up with the

universities from which the personnel to provide information required for the

research came from.

g. Academics – The economics departments of the universities will be purposively

selected whilst the academics within those departments were selected randomly.

3.5 Reliability and Validity

This research focuses on a topic that requires expert knowledge and there has been need

for the inclusion of only experts in the respondents list. The data from this research is

30 | P a g e

valid and reliable since the respondents are either experts in the field or are the actual

persons who crafted the policies. The research was also made to span throughout the many

sectors of the economy, which makes the information provided more reliable.

31 | P a g e

4. CHAPTER FOUR – FINDINGS

4.1 Introduction

This Chapter presents the findings of the research. The research received a wide range of

responses on policy changes that have occurred in Zimbabwe since the inception

sanctions. There has been also a lot of selectivity on the sanctions presented hereunder

since the focus is on policies whose likelihood of change or introduction would have been

very low had sanctions not have been imposed. This is meant to maintain the premise that

those policy changes were influenced mainly by imposition of sanctions, a premise which

can be highly debatable. The research also focused on the theoretical effect of these policy

changes as understood from an economic point of view without any focus on the

calculations of the expected impact

4.2 Findings

The sanctions against Zimbabwe included BOP support withdrawal, which put the country

in a very precarious position considering that it is a net importer. For the most part of the

period under sanctions, the country has been operating with an import cover of less than a

month. It can be noted that one part of the policies that the country had to come up with

were to either generate foreign currency or preserve the little that was already in the

country in order to satisfy the import requirements, and the other part was concerned with

generation of revenue within the country, for the satisfaction of the local needs of the

government. All this happened before the introduction of multiple currencies that included

the US dollar and the South African rand. After the introduction of the multiple

currencies, both local and foreign commitments could now be satisfied from the same

sources, which resulted in combined efforts to generate and preserve revenue collections.

32 | P a g e

Selections had to be made on policies and policy changes that qualify for the purpose of

this research, that is:

1. Policies and changes that were made as a result of the imposition of sanctions

and

2. Policies and changes that would be enable the country to perform better than

other similar countries once the sanctions are lifted.

As a result, there are policies whose benefits have already been felt, such as the

introduction of multiple currencies that resulted in stabilization of inflation rate at less

than 1% and led to the increase in production from 10% to more than 35%, but will not be

considered as appropriate policies for this research. The main reason is that the multiple

currencies system is a short term policy and would not have any great impact on the

economy after the lifting of sanctions.74

Other policies that were not considered as

appropriate, even when they will benefit the country after sanctions are lifted, are those

related to current trends, such as modernization and computerization of systems. The

assumption is that, sanctions or no sanctions, the country was going to introduce such

changes because they go in line with the trends being observed all over the world.

4.2.1 Revenue Collection

With regards to revenue collection, the government of Zimbabwe made major strides

through commercialization and amalgamation of the Department of Taxes `and

Department of Customs and Excise in ZIMRA in 2001. This was meant to increase

effectiveness and efficiency in resource allocation and utilization, and the country is

already enjoying the benefits of the move. ZIMRA has been surpassing its targets since

74

The multiple currencies system is in place until 2012.

33 | P a g e

inception. Besides, ZIMRA has also introduced a lot of innovative ideas and policy

changes, which has led to the increase in the revenues collected. Some of the changes,

which also qualify for policies introduced as a result of sanctions as the country tries to

survive, include:

a) Presumptive Tax – this legislation was introduced to broaden the revenue base in

view of the increase in informal business activities. One of the effects of sanctions

was the increase in the rate of unemployment to about 80% as most people were

either retrenched or found employment not rewarding due to high levels of inflation

and ending up joining the informal sector, which was more rewarding, for survival.

ZIMRA did not have a way to tax the informal sector before and the introduction of

this tax was meant to ensure the participation of this sector towards the national

revenues. Some of the individuals and companies taxed include omnibus operators,

driving school companies, informal traders and goods vehicles.

b) Toll fees – Zimbabwe is centrally positioned in Southern Africa and as a result is a

transit route for foreign motorists linking up with other countries. Due to

unavailability of funds under the sanctions, the roads had become dilapidated and

responsible for many accidents. ZIMRA spearheaded the introduction of twenty -

two toll gates throughout the country in 2009 as a way of widening revenue

collection. More than US$600,000 was earned within the first two weeks. The

revenue is meant to be used to maintain and upgrade the country's dilapidated road

infrastructure.

c) VAT – In 2004, ZIMRA abandoned the Sales Tax and replaced with the VAT.

Since there is recovery of any added value, there is less likelihood to come with

ways to evade paying tax as in the case of Sales Tax.

34 | P a g e

d) Anti-Smuggling activities – one of the effects of economic sanctions is the increase

in criminal activities75

, and this was the case in Zimbabwe. A lot of leakages were

observed as companies, traders and individuals cost the country in lost revenues as

a result of smuggling of goods. ZIMRA responded by initiating a number of

activities that included road blocks, border patrols, site visits, post-importation

audits, scanners and whistle blowing. Incentives were given for whistle-blowing

resulting in 10% of the amounts recovered under Anti-smuggling activities being

accounted under the whistle-blowing activity.

e) The Income Tax Bill – ZIMRA has spearheaded the crafting a Bill to replace the

current Income Tax Act. This bill is expected to come into effect in 2011. The

notable changes that will also improve the country's revenue collection include the

departure from source-based income to residence-based income, enhanced anti-

avoidance rules as well as the streamlining of deductible allowances to those

expenses incurred in the production of income only. The benefits of the intended

Act are enormous considering that Zimbabwe has one of the largest list of tax

exemptions

4.2.2 Indigenisation and Economic Empowerment Act of 2008

The Government of Zimbabwe has enacted a very controversial legislation, the

Indigenisation and Economic empowerment Act. This Act makes it mandatory for all

foreign companies with capitalization above US$500,000 to dispose 51% of their

shareholding to indigenous Zimbabweans. Controversial as it may be, this Act, if properly

implemented have the capacity to positively impact on the economy. The most obvious

contribution of this act is increased participation of indigenous people in the economy,

75

Naylor (1999), p4

35 | P a g e

which results in the reduction of poverty. However, the most important contribution of the

indigenising 51% shareholding in most foreign companies is the reduction in the amount

of dividends paid out of the country, which effectively results in an increase in liquidity in

the economy.

An increase in the liquidity means that the banks will have an increased ability to lend to

companies and individuals. This will also mean low interest rates making debt affordable

to all and sundry at more than 75% and most people participating in the informal sector,

availability of funding will go a long way to stimulate the economy and reduce poverty

through projects at the grassroots. The background to the introduction of this Act is that

there was a lot of externalization of funds through declaration of dividends, and the

Government, being in need of the foreign currency, introduced the Act to ensure funds

stay in the country.

4.2.3 Manufacturing

Manufacturing used to 20% towards the country's GDP in 1996 and this fell an average

contribution of 7.5% during the periods under sanctions. The government recognizes the

importance of this sector in the recovery of the economy and as a result came up with a

number of policies that were meant to ensure speedy recovery. Since there is need to

minimize the expenditure of foreign companies, the government came up with a fund to

support all those companies that were involved in import substitution. The companies that

ensure import substitution allow the country to save a lot of foreign currency. The fund

was meant for different sectors like beverages, food processing, motor industries and

pharmaceuticals.

Most companies in this sector are SMEs and, as expected, the most contributions come

from the same. SMEs are also the major employers in this sector when combined together.

36 | P a g e

These SMEs get a lot of assistance from two government-related entities that are meant to

promote the operations of these type of companies. One of these quasi-government

entities, SIRDC, was recapitalized last year to enable it to provide more support to the

SMEs in terms of loans for working capital and as well as machinery and equipment. The

capitalization of the other institutions supporting SMEs, ZIMTRADE, is still on the cards

and is meant to provide even more support in terms of expansion of the export base,

import substitution and access to new technologies and markets. There has been a serious

focus on international market access with ZIMTRADE organizing a lot of trips to

exhibitions for SMEs.

The SMEs have traditionally been the backbone of this sector in terms of contributions to

the national income and employment but there was no due recognition until the country

suffered foreign currency shortages. On the other hand, the larger manufacturing

companies had always had the capacity to innovate and contribute to import substitution

but there has been no support, both from the government and the financial institutions.

The shortage of foreign currency therefore enabled the whole sector to be realised as

critical to the operation of the economy.

4.2.4 Tourism

Zimbabwe boasts of a number of very competitive tourist attractions such as the mighty

Victoria Falls, the world's largest falls. The country also offers some of the best hunting

grounds in the world, with the much sought for big five. The tourism industry had risen to

be one of the major contributors to the GDP before the 'land reform' program. At the

height of the economic sanctions, this industry became one of the most affected.

The country of Zimbabwe suffered a lot of bad publicity since the government embarked

on this controversial 'land reform', which resulted in the white commercial farmers losing

37 | P a g e

their land for no compensation. This has been viewed by the whole international

population as lack of respect for private property and absence of rule of law. This was

worsened by the inter-party fights between the ZANU PF supporters and those of the

opposition, MDC during the elections of 2000 and 2002. So many western countries

including the US, UK, Australia and New Zealand as well as the EU black issued travel

warnings to their citizens against traveling to Zimbabwe.

In 2009, the government of Zimbabwe embarked on an aggressive “Visit Zimbabwe

Campaign” meant to re-market Zimbabwe as a preferred destination. This campaign

covers the domestic, regional and International clients and is managed by the Ministry of

Tourism and the Zimbabwe Tourism Authority. The campaign has seen the country

hosting an annual Tourism event to showcase what the country offers for tourists76

. The

Campaign has gone further than just attracting visitors from the traditional tourist supplier

countries and has now infiltrated the Asian market, particularly China and Iran. The

efforts have already begun to show some fruits with the country being able to attract one

of the most sought after soccer national teams, Brazil, to come and play against Zimbabwe

during the World Cup finals.

4.2.5 Diaspora

Zimbabwe is the second placed country in Africa in terms of literacy rates and its

education system is highly regarded. According to IMF, 'Zimbabwe is ranked near the top

third of countries for the quality of its education system'. This is attributable largely to the

importance granted by the government to education since independence. At the height of

economic sanctions, a lot of professionals that included doctors, teachers, economists and

accountants among others left the country to offer their services in foreign countries,

76

The Sanganai/Hlanganani World Travel and Tourism Africa Fair

38 | P a g e

mainly South Africa, UK, Australia and New Zealand. As the government dried up in

terms of foreign currency, it started recognizing the presents of its professionals in the

Diaspora and the amounts of contributions they could make to the economy. Most of these

professionals in the diaspora sent their money back to Zimbabwe but this would form part

of the black market.

Formal efforts were made to encourage these professionals to repatriate foreign currency

to Zimbabwe in 2005 when the RBZ Governor, Dr Gideon Gono, travelled around the

world in countries where Zimbabweans are located. The RBZ formed a subsidiary called

Homelink Private Limited, which later went defunct. There were several policy changes

with regards to trying to entice the professionals in the Diaspora to send foreign currency

through formal channels and that recognition of that these people could contribute to the

economy was the most important. With the enactment of the new Income Tax Act, that

seeks to shift from source-based income to residence-based income, there are expectations

that the professionals in the diaspora can now be formally taxed, with their contributions

enabling the country to realize an increased rate of growth once the sanctions are

removed.

4.2.6 Financial Institutions

The financial sector is central in the operations of any economy because it provides

intermediary services for different players in the market. This sector allow for the smooth

flow of business and exchange of transactions between the many parties that are

stakeholders in this sector. As a result, it is important that the participants abide by the

rules and regulations that apply within the sector.

39 | P a g e

There were seventeen Asset Management firms in Zimbabwe and these were regulated by

the Ministry of Finance, which did not have the capacity and resources to monitor the

activities of these firms. Because of the hyper-inflationary environment, one of the more

pronounced effects of the economic sanctions on Zimbabwe, a lot of financial institutions,

including these Asset Management firms, tried to hedge against this inflation through

acquisition of fixed assets such as motor vehicles and houses. When Dr. Gono took over

as the Central Bank Governor in December 2003, he immediately put these Asset

Management firms under the regulatory authority of RBZ, and required them to register

with the same. It was through this process that it was discovered that one of these Asset

Management firms did not have any liquid assets and had invested in fixed assets valued

at Z$61 billion.

This had a ripple effect throughout the economy. As the RBZ continued with their

assessment of the Balance Sheet positions of the financial institutions, they discovered

that most banks had hedged themselves with fixed assets and did not meet the minimum

liquidity positions. The banks which faced liquidity problems were realized to have

indulged in speculative activities through hedging in fixed assets to preserve value, against

the principles of banking. Out of thirty-two banks, four were liquidated and ten were

placed under curator-ship in what is known as the Banking Crisis in Zimbabwe. This was

all blamed on poor corporate governance and risk management practices, and weak

regulation and supervisory frameworks.

After these events, the RBZ went on a recruiting mission and adequately staffed its

supervisory arm of the Central Bank. It also addressed several issues to do with

governance and risk management in order to bring sanity to the sector, and this involved:

40 | P a g e

a. Streamlining of operations to enhance role clarity and the establishment of structures

that ar relevant to the business thrust,

b. Enhancing coordination and communication within the various departments in the

troubled institutions.

c. Restructuring the balance sheets

d. Disposal of assets held for speculative purposes

These moves not only assisted with bringing discipline during the time of hyperinflation

but they also assisted in coming up with the proper framework to regulate and supervise

the banks.

The economy, mainly characterized by hyper-inflation, interest and exchange rate

distortions and high levels of unemployment, among others, meant that people were

always on the lookout for opportunities to exploit. In 2008, the country was hit by another

spate of fraudulent activities as individuals instructed their brokers to purchase shares

against unsecured positions and only disposing the unsecured shares to fund their

purchase, effectively pocketing the profit from no investment. This further fuelled the rate

of inflation as it became a new source of money creation.

This led to RBZ coming up with a number of measures77

to curtail these activities and this

included:

i. that all the trades on the ZSE be supported by the actual credit balances confirmed by

the buyer's bankers,

77

Gono, (2008), p83

41 | P a g e

ii. that any party who failed to settle any stock exchange obligation due to lack of

funding be automatically blacklisted on Zimbabwe's whole banking system,

ii. that any bank not reporting any suspicious banking transactions be liable under the

anti-money laundering law.

However, the most important step taken towards the stabilization and providing investor

confidence of the ZSE was the introduction of the Securities Commission. This was meant

to regulate the activities on the capital and securities markets, with the effect of reducing

the risk of market manipulation and ensuring transparency, professionalism and integrity.

4.2.7 Look East Policy

As a net importing country, Zimbabwe was experiencing painful economic and social

difficulties. The inflation rate was spiralling out of control, the country was dry of any

foreign currency, unemployment rate was at unprecedented levels, health, education and

transport infrastructure were collapsing, and so many other economic and social ills were

being experienced. With the IMF and the /world Bank holding back any balance of

payment support towards Zimbabwe, the country was left with no choice but to look for

alternative sources. The country was one of the first African countries to have a 'Look

East Policy'. This has had an effect on the ability of the country to keep afloat as the

country enjoyed a lot of benefits.

Zimbabwe declared the 'Look East Policy' in 2003 initially with Malaysia and then went

on to sign a trade and cooperation agreement with China. Whilst the country's tourism

industry was shrinking by 36% compared to the previous year, and this was the third time

in a row the industry had declined, it was actually enjoying a 245% increase in Chinese

visitors. The Chinese now comprised 7% of the total visitors. The reason why the country

was enjoying so many visitors from China is that the Chinese government had granted

42 | P a g e

Zimbabwe an 'Approved Destination Status', at a time when the western governments

were issuing travel warning against the country.

The people of Zimbabwe approved the presence of the Chinese because they could now

access cheap clothes, shoes and other textile. The Chinese were also active in the

construction industry and had also invested in a cement manufacturing company. The

Government of Zimbabwe granted the Chinese prospecting rights for several minerals as

well as oil in the Zambezi escarpment, which was previously reported to have oil, though

not in large enough quantities to warrant commercial production. The Chinese invested

US$10 million towards this prospecting. The Chinese Government also provided two

MA60 aeroplanes for use in domestic and regional flights. They also signed agreements

with the Air Zimbabwe to have direct flights to China twice weekly.

Zimbabwe's energy company, ZESA, received transformers worth US$110 million and

the two governments signed an agreement of US$2.4 billion for more equipment and the

expansion of Hwange Power Plant. Within the same agreement, there were provisions for

development of domestic capacity to manufacture transmitters and distribution worth

US$40 million and US$140 million. The Chinese Government also donated 4,500tons of

maize and US$241 million towards agricultural land reform. China has become the single

most importer of Zimbabwean tobacco. There are three tobacco companies operating in

Zimbabwe, and their strategy is assisting the farmers with inputs on the guarantee that the

farmers will not sell to any other buyer except to their financiers, who are the Chinese

tobacco companies in this case.

The Chinese Government has also been supporting the Zimbabwean government

militarily, through sell of arms and ammunition. In 2008, there was a worldwide outcry

regarding military deals between the two governments after China tried to sell a whole

43 | P a g e

shipment of arms and these could not be allowed to pass on to the landlocked Zimbabwe

from either the South African, Mozambican, Namibian and Angolan ports.

This 'Look East Policy' was only initiated by the Zimbabwean Government after the

country had been abandoned by its traditional financiers, that is, the IMF and the World

Bank. The policy has been hailed as one that allowed Zimbabwean to keep afloat and

assisted in easing the pain inflicted by economic sanctions on Zimbabwean people

4.2.8 Cultural Changes

Besides the policies formulated by the Government of Zimbabwe, there also has been a

change of culture of doing things among the business circles and the general population.

These changes were aimed at either earning more income or reducing the costs.

a. Toll Manufacturing

The manufacturing sector, faced with closure due to lack of raw materials and foreign

currency to import those raw materials, embarked on toll manufacturing. This is a

process where the client brings his or her own raw materials and the company

manufactures on behalf of that company, charging a small amount as the margin. Most

companies have always had the capacity to include toll manufacturing during good

times but would not consider that until they were faced with closure from lack of

business.

b. Transport

One of the areas that were severely affected by the sanctions was the transport sector.

This sector faced a lot of disruptions during the periods when the country could not

purchase fuel as a result of shortage of foreign currency. The people who bore the brunt

for such disruptions were the commuters whose fares changed at any time. Even now,

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with the use of the US dollar as the official currency, the commuters still find it

difficult to make it to and from work daily. In order to reduce this cost from the

commuters, most companies have bought buses that transport their workers to and from

work. Even the government, which is the largest employer in the country, has also

bought buses to transport the civil servants. Such initiatives have resulted in most of

these companies being able to retain their employees.

c. Financial Sector Initiatives

The financial sector is one of the sectors that were most innovative and were able to

record profits even when most sectors were recording record losses. One of the areas

where they were innovative was regarding the use of RTGS. This is a real time system

which is meant to ensure quick transfer of money from one bank to the other through

passage over SWIFT. Now, since 1980's, the RTGS system was meant to route through

a server in Belgium, and every transaction costs foreign currency. Even when

Zimbabwe was suffering from severe shortage of foreign currency, it was in the top

five of the RTGS users. As a result of this, the RBZ requested for a local solution,

which was nowhere to come. The banks, in order to reduce costs of transferring money

among themselves, improvised a system where they would batch transactions, and then

transfer on one lump-sum through the Belgian server. They would then send the

physical copy to the bank on how to split the total amount sent through RTGS. In this

way, the bank reduced the cost of foreign currency paid at bank and at country level

through provision of RTGS.

Each bank also operated a card system. The bank would be responsible for printing the

bank cards as well as own the POS machines. The banks were now accumulating the

costs associated with servicing the POS machines and this also had a foreign exchange

45 | P a g e

component. The banks then decided that they would refocus their business to the

production of the bank cards only whilst outsourcing the operations of the POS

machines. This has also impacted positively on the costs side of the bank's expenses

since the costs associated with outsourcing are much lest than operating the systems.

d. Entrepreneurship

The Zimbabwean people showed entrepreneurial skills that they had never shown

before during the period of sanctions. There were times when the shelves in the shops

would be empty but still people would be having their daily requirements. 80% of the

population was unemployed and had joined the informal sector. There was an increase

in the number of cross border traders and all the food stuffs and groceries that were in

short supply in the supermarkets would be found in the black market. This is how many

families were able to survive and continue with their lives in Zimbabwe. The

government appreciated this spirit of innovation and gave a commitment to continue

supporting such endeavours

4.2.9 Mining

Mining has traditionally been one of the major contributors to the GDP, after agriculture

and manufacturing. There are many small-scale miners in Zimbabwe and most of them

were facing serious viability problems as a result of the economic sanctions. The

government responded by providing a fund that could be accessed by these miners to buy

machinery and equipment. But even with that kind of assistance, the miners were still

faced with viability problems as the amount of money offered by the governmental

institutions that buy minerals was way below the market values. This was especially so

with the small scale gold miners, and as expected, these miners started smuggling the gold

into other markets. The Government then realized that there was a lot of pilferage going

46 | P a g e

on and responded by introducing a policy that has been hailed as the best they could do.

The RBZ allowed the gold miners to sell their gold anywhere they want and then

repatriate the profits. This ensured that the government also increased its revenue base as

the miners then complied with the RBZ directive to register the gold before leaving for

sell to ensure the repatriation of funds to Zimbabwe.

4.2.10 Structural Changes

One of the most prominent events that came to being as a result of sanctions was the union

between two fiercely opposed parties in Zimbabwean history, that is, the MDC and ZANU

PF, after both parties failed to gunner enough votes to get into power. There was supposed

to be a run-off, which could not take place after reports of intimidation and political

violence against each other's supporters. The crisis was then settled through negotiations

which gave birth to the GNU through the GPA. This GNU resulted in changes in the

structures of the government, which changes allow for a more efficient system.

The most important component of the GNU was the introduction of the position of the

Prime Minister, who effectively diluted the President's power. The Prime Minister's main

duty is to ensure the formulation and implementation of the policies decided by the

Cabinet. He also holds executive powers and chairs the Council of Ministers whilst he is

the Deputy Chairperson in the Cabinet. These structural changes have led to an improved

performance by the Ministers.

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5. CHAPTER FIVE – CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

Conclusions can be drawn from the research results presented in the previous chapter. The

researcher is now in a better position to know whether the information gathered from the

responses is enough to conclude that indeed there are incidental positive benefits in

sanctions as previously premised. This chapter, therefore, will present the conclusions that

can be derived from the research findings. With those conclusions, the researcher will be

in a better position to come up with recommendations. Lastly, the researcher will outline

areas that for which room has been left for further research.

5.2 Conclusions

It has been noted that in some cases, the country of Zimbabwe has been able to realize

positive outcomes from the implementation of the changes thy have made, whilst they are

ye t to receive any benefits from some of the policies. It therefore can be concluded that:

a. The country has always had potential

As has been noted, the country has always had potential to do better that it has been

doing. The people of the country also had the potential and the skill to do better.

Precisely, the people of Zimbabwe had the education level and knowledge to engage

and succeed in entrepreneurial activities but did not bother to do so. The government

also had the potential to come up with extra efforts to market itself as a tourist

destination of choice, not only to the traditional countries that have been touring the

country, but also to new countries with little knowledge of Zimbabwe, for example,

China. The country also had the potential to promote activities of income generating

and economy stimulating sectors such as the small scale miners, the SMEs, the cross

48 | P a g e

border traders and the innovative companies. The country also had the potential to

enhance its incomes through privatization and commercialization of some of its

departments and parastatals, for example the Department of Taxes and the Department

of Customs and Excise, which later combined to form ZIMRA.

Zimbabwe had potential to diversify its economic relationships with other countries

other countries. As a member of the Commonwealth, the country mainly related

economically with the western countries particularly Britain. The country also had

potential to reduce leakages through the borders by increasing their monitoring

capacity. It also had the potential to to increase the staffing at the Central Bank in order

to ensure proper monitoring mechanisms for the financial sector. Zimbabwe has always

had and is still abound with potential to improve a lot of things within its political,

economic and legal systems.

It is, however, interesting to note that most of the changes presented in the previous

chapter were only made when Zimbabwe was under economic sanctions, when it is

difficult to ensure the ultimate success of the policy changes. None of these changes

came to being before the imposition of the sanctions against the country.

b. Zimbabwe did not invent any concept

The people and the Government of Zimbabwe did not invent any economic or social

concept. Commercialization of government departments has always been there. VAT

has always been in use It has always been known that support is supposed to be given

to those sectors that stimulate the development of an economy. Import substitution is an

economic concept that has always been used by many countries. The Zimbabwean

people have always been in existence and have always been the indigenous. They also

had all the opportunities to be entrepreneurial time immemorial. There are many

49 | P a g e

Zimbabweans who have always been living in the diaspora for a long time and these

have been ignored also for a long time as well. Countries have been engaged in

aggressive marketing of their countries to new tourists and they have been able to

receive substantial support in terms of response.

The question that then arises is, ' If a country has the potential to change into or

introduce effective policies, and if the options of policies available are known, why

then do counties fail to effect any policy changes?'

c. Sanctions provide incidental positive effects.

In response to the question posed in the previous section, it can be noted that most

countries are in the comfort zone and would stay in that zone if nothing happens to

change their status. In the case of Zimbabwe, the country had a lot of potential to grow

and become one of the successful stories of Africa, given its resources both physical

and human. However, because it enjoyed a stable economy characterized by stable

exchange rates, interest rates and inflation among other benchmarking factors, it did not

recognize the need to make any changes.

Zimbabwe only formulated some changes in the economy after the imposition of

economic sanctions. Naturally, every country would want to give a fight after being

imposed with economic sanctions and the fight include some structural and policy

changes. The country would only give up after the changes have failed to lift it to

sustainable levels of livelihood, but all the same, there are changes that are now in

place as a result of the sanctions. A country is only willing to make gradual changes to

its policies, and the „gradualism can in theory smooth the adjustment process and

reduce short-term costs of restructuring but it bears the danger of watering down

reforms that are urgently needed‟. The conclusion, therefore, is that economic sanctions

50 | P a g e

induce a country to make policy and institutional changes that are beneficial to the

growth of a country's economy.

d. Post-Sanctions Zimbabwe.

The neighbouring countries to Zimbabwe are not formulating and implementing

institutional and policy reforms at the same rate as Zimbabwe. When sanctions are

removed, it means that the country has satisfied the minimum requirements for which

the sanctions were imposed in the first place. It means the country can be regarded as

having rule of law and respect for property rights. It means that there is now freedom of

speech and association, and naturally, the environment is now conducive for

investments. It is therefore expected that the country will grow at a significantly higher

rate to surpass the cumulative growth that has been accumulating in the neighbouring

countries when Zimbabwe was under economic sanctions.

5.3 Recommendations

Revenues in Zimbabwe have recovered following the implementation of 2009 short-term

recovery program. This, however, is necessary but not sufficient. From the findings and

the conclusions, the following recommendations are offered:

a. Ensure sustainability

It has been noted by Rohm and Halback (2001) that the process of coming up with

reforms beneficial to the country 'is usually not free of pain and bears fruit only after it

has been sustained for several years'.78

The most important phrase here is 'sustained for

several years'. The reforms that the Government of Zimbabwe has come up with, have,

in some circumstances, been proven to be effective and there is therefore need for

78

P679

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willpower to sustain the same reforms. Any laxity in the formulation and

implementation of the said policy changes will only work to slow down progress or

even cannibalize on the achievements achieved. The government therefore needs to

keep on being innovative and making more policy changes, with the background

knowledge that the country has some unfulfilled potential. The hard work and the

ability to reform should be carried over even after the sanctions are removed.

b. The economy operates in totality

The Government of Zimbabwe should know that the economy operates in totality. In as

much as it has tried to address a number of pertinent issues, it is still important to

consider other policies over and above the ones that have been considered so far. The

country should work towards the restoration of an environment that is acceptable to the

international community for the full benefits of the policy changes to work. The tag of

an unlawful, undemocratic and oppressive government should be done away with.

c. Stop cannibalization of benefits

The Government of Zimbabwe has been regarded as one of the governments with the

highest expenditures, especially those relating to remuneration of civil servants. This

only serves to reduce the benefits of all the hard work done. Lack of discipline on the

part of the government's expenditures will cancel out all the positives created by the

institutional and policy changes and the net effect in those circumstances is zero.

5.4 Further Researches

There is room for the improvement of the theory herein alluded. The focus was only on

one country that is still under economic sanctions and therefore, it is difficult to assess the

actual impact of these sanctions. Research therefore needs to be carried out on those

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countries whose imposed sanctions have been lifted. At least in such circumstances, there

is an ability to measure the precise information. Metrics need to be done to understand the

real impact of sanctions and the levels that induce certain types of behavioural changes.

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