Govt must stabilise business environment

Source: Govt must stabilise business environment – The Zimbabwe Independent September 9, 2016

For months on end, Zimbabwe has been facing a crescendo of social uprising, with the peak widely believed to be July 6 when #ThisFlag and #Tajamuka/Sesijikile staged a massive stay-away that swept all and sundry out of town, including civil servants. While it has not been easy to quantify the loss of earnings on the day, what is very clear is that millions of greenbacks were lost.

Daniel Ngwira,Chartered Accountant

Violent encounters between the citizens and the police were to follow, resulting in damage to property worth several hundreds of United States dollars. Subsequent calls for stay-away have not been as successful as participants count the real economic loss which they suffered as a result of the July 6 stay home. Reality is that at the end of the month bills still need to be paid regardless of whether the cause of the sit-at-home strike model was noble or not.

While it is a fact that unemployment is very high, believed to be sitting at 90%, reality is that a plethora of people are engaged in some form of economic activity which need to be supported by a stable and conducive economic environment. There cannot be a debate as to whether the current situation needs to be bettered or not because even the government knows that. They have evidence in that they have seen a delay in revenue collection leading to failure to fund operational expenses especially the wage bill. It will be made worse as government has further decided to expand its workforce by employing additional primary school teachers, who, ceteris paribus, will be eligible for bonus should the current policy of remuneration persist. While the move will lessen the unemployment burden, it raises questions as to how government will pay the additional staff. Maybe they are banking on the bond notes which they are determined to introduce.

There is no doubt that government has failed to create a conducive business environment, however, a nation of protests, stay-aways and disproportionate use of force against the protesters only worsens an already bad situation.

The protesters have a good cause for demonstration. It is now up to government to open a channel for communication so that matters can be resolved amicably. In the snippets that follow, I have tried to demonstrate reasons why I think government should open doors for dialogue by looking at the Arab Spring first and other cases in both ancient and modern history.

Civil disobedience has always been a popular way of showing discontent with the establishment in many parts of the world. Even the great Martin Luther King used non-violent civil disobedience to advance civil rights in the US in the 1950s and 1960s. His assassination on April 4 1968 when he was planning the “Poor People’s Campaign”, an occupation of Washington DC, resulted in riots across US cities. The use of civil disobedience has, in the past and the present, risen because of a lack of amicable discourse between the subjects and the rulers.

Whereas in the past it was not easy to organise protests, in this information age, it is now being lubricated by the social media and ease internet accessibility. In the twenty first century democracy, the right to demonstrate has been enshrined in constitutions. This is best practice. Zimbabwe has not been spared. Suffice to say that while it is enshrined in the constitutions, a plethora of the rulers who have a half heart into democracy do not cherish it and would therefore do whatever they can to suppress their subjects, taking advantage of the fact that it is a qualified right.

Social unrest in the Middle East and North Africa recently swept across some countries in a contemporaneous manner. The wave was so strong that it became known as the Arab Spring. Muammar Gadaffi expressed concern over the Spring and understandably so as it subsequently resulted in both his fall and brusque death. The Spring started in Tunisia in 2010, ironically ignited by a street vendor in the town of Sidi Bouzid.

On December 17 2010, Faida Hamdy, who was a female council inspector, confiscated the vegetables of a street vendor who protested by setting himself on fire by the council offices. Several days later, the young man died, sparking outrage in Tunisia. What followed was ferocious anti-government protests which resulted in former president Zine el Abidine Ben Ali fleeing Tunisia after over two decades of rule. No one could have imagined that the death of a street vendor who set himself alight could spark so much anger.

This is what happens when there are some underlying issues at hand, something called pent-up fury. It is fury which builds inside for a long time due to suppression but waits for an opportune time to burst. It is the fury which we are witnessing today in Zimbabwe where scores of unemployed youths and adults are taking to the streets to protest government-induced poverty.

The Arab Spring resulted in regime change in Tunisia, Libya, Egypt and Yemen. It resulted in an undying civil war in Syria; a war that has further divided world powers like Russia and the US. The mood of the Russian and US presidents soon after their side meeting on Syria at the G20 Summit in China was enough to describe how divisive Syria is. The terrorists, ISIS, took advantage and complicated an already difficult puzzle.

Today, all the countries which changed regimes in a Spring type of approach are no better off. The lessons we learn include that there was a better way and often the one with the upper hand is the establishment, who has access to state apparatus to silence discerning voices by persuasion or force.

When a government does not give an ear to its citizens and sustained protests occur, they result in political instability. Max Weber avers that political instability hinges upon “the government’s legitimate use of physical force. If the government cannot ensure the basic services it provides for people, such as security and the possibility of procuring food and shelter, it loses the power to enforce laws and political instability ensues.

Political instability is associated with the concept of a failed state.”

Political instability has a negative impact on economic activity and therefore output growth. Capital flies out of politically unstable environments while it avoids them as destinations. Labour migration is heightened and good skills are the easier ones to move out in search of comfortable pastures to grow and develop careers as well as to raise families decently. At the turn of the millennium, we have witnessed this in Zimbabwe.

As the economic situation worsened and as the unstructured land reform took its toll, the country lost its vital skills to the neighbouring countries as well as to the far lands. What is worrying for Zimbabwe is that there has also been a huge migration of unskilled labour into neighbouring countries. A new form of undesired employment was created by the border posts wherein the strongmen facilitate undocumented migration especially into neighbouring South Africa and Botswana.

In addition, foreign direct investment became harder to get despite countless visits by ministers to areas of higher cash concentration and despite loud calls shouting for investors to come over, even despite our efforts to market the country through bringing high-profile artistes. It should worry government that the country has not benefited much from the rise of China despite being flaunted as an all-weather friend and despite government claiming to have a Look East policy.

Ironically, China dines with the developed countries Zimbabwe seemed to walk away from when the government was vigorous with the look China policy. It is interesting to note that state-owned Chinese companies will own 33,5% stake in the Hinkley Point C nuclear power plant which will gobble over 18 billion pounds in construction cost. The plant capacity will be 3,2GW and it will power 5,8 million homes. It will employ over 5 000 people on site and create over 20 000 downstream jobs. While there have been security reservations by the British MI5, the Chinese are so keen on the deal. I am sure they could be pushing hard to invest such kind of money in Zimbabwe if the environment was good for business.

There is an interaction between political stability and economic performance. When the economy fails to perform, manifesting its poor performance in a lack of job generation, rising cost of living or acute deflation which creates economic inefficiencies, then social and political unrest may follow. The situation is equally bad when an economy has a semblance of stability in prices but has shortages of commodities, including basics.

Zimbabwe has gone past this era which Venezuela is suffering today. The tension in Venezuela between its citizenry and the establishment is because there is a shortage of basics. Further, where there is both real and perceived inequality, the citizens on the lower end will have a higher propensity to engage in civil disobedience. Either way, the outcomes are not good for business.

In an IMF Working Paper titled The Dynamic Effect of Social and Political Instability on Output: The Role of Reforms, Bernal-Verdugo, Furceri and Guillaume, noted the work of Alesina et al, 1996, Rodrik, 1991 and Cukierman et al, 1992 that political instability has three major effects. Firstly, that it leads to lower economic growth, secondly, that it reduces investment by the private sector, and finally, that it increases the general price levels and volatility.

The authors of the IMF paper confirmed, through their research, that political instability has a negative impact on output growth in the short term. In addition, they noted that “… countries that improve their levels of governance after periods of conflict experience, over the medium-term, output growth that is significantly higher than in those countries that do not improve their governance. Interestingly, the same conclusions can be drawn, although to a lesser extent, regarding structural reforms aimed at improving the product and labour markets …”.

The Institute for Economics and Peace notes that an “… analysis of the macroeconomic components of GDP during World War II and in subsequent conflicts show heightened military spending had several adverse macro-economic effects.

These occurred as a direct consequence of the funding requirements of increased military spending. The US has paid for its wars either through debt (World War II, Cold War, Afghanistan/Iraq), taxation (Korean War) or inflation (Vietnam).
In each case, taxpayers have been burdened, and private sector consumption and investment have been constrained as a result. Other negative effects include larger budget deficits, higher taxes, and growth above trend leading to inflation pressure. These effects can run concurrently with major conflict or via lagging effects into the future.

Regardless of the way a war is financed, the overall macroeconomic effect on the economy tends to be negative”.

The observation by The Institute for Economics and Peace shows that an extreme case of political instability, which is war, has extreme negative effects on economies. Despite that the US is the biggest, strongest and richest economy in the world, its participation in foreign wars is noted to have had a negative impact on its economy. She has spent trillions of dollars on wars since 1941.

The moral of the discussion is that Zimbabwe stands to lose more by being politically unstable. Modern businesses become jittery with unclear or threats of unclear broad policies. What if we add a political instability dynamic in the basket? It gets worse. We saw how markets tumbled in the aftermath of Brexit.

While they have stabilised, the British pound has to date lost 15% of its value while corporates remain unsure of their continued stay in the UK thereby adding to the uncertainty.

As late as this week, Japan warned that Japanese companies could desert the UK. The Japanese ambassador to the UK Koji Tsuruoka said Japan would want to be a good partner to the UK that is why they have indicated that Japanese companies could leave UK. There are over a thousand such companies, including Nissan which has a huge presence in UK’s Sunderland. UK has always been regarded as a gateway to the European single market.

So what should the government of Zimbabwe do for the benefit of business in Zimbabwe? It should primarily separate politics from business. Government should reignite the social partnership with labour, civil society and business.

The problems being faced by the country will not go away because there is a Statutory Instrument 101a banning demonstrations. They can only go away if the four arms of society can engage in constructive discourse.

Incessant demonstrations can only dampen investor confidence as they are seen as a precipitation of a worse outcome of either sustained social unrest or civil war which essentially make the business landscape unmanageable. We should learn from the Arab Spring. None of the countries which had those movie-style uprisings benefitted from that. They are all worse off. The reason is they lacked dialogue. Government, which has access to instruments of coercion, should exercise restraint and thus come to the negotiating table for the good of the economy and, ultimately, the country.

Ngwira is a chartered accountant, former bank treasurer and former university lecturer. He holds finance and business qualifications. — daniel.ngwira@gmail.com, +267 73 113 161.