via Zimbabwe: The high price of instability 02/06/2014 by Eddie Cross in NewZimbabwe
Stability and freedom are inextricably intertwined in national affairs; you cannot have the one without the other. The instability that has taken a grip on the countries of North Africa has profound implications for everyone – Europe especially as they are in the front line for the millions who are being displaced; just as South Africa has been the main recipient of the millions of people who have been displaced by two decades of instability in Zimbabwe.
The instability can be caused by economic, political and armed conflict problems. In our case it is a mix of economic and political instability, in North Africa military conflict is playing a key role. China has chosen a path characterized by market freedoms but retains a repressive political system holding power firmly in the hands of the Chinese Communist Party. How they justify that intellectually I simply do not understand as market freedom is totally incompatible with Marxist ideology.
In our case, the wheels fell off in Zimbabwe when we allowed the Reserve Bank to assume the role of a parallel Government and to take macro and monetary policy away from the Ministry of Finance. The result was a sustained economic implosion, starting in 1997 and peaking in 2008 when inflation was doubling prices every few hours and the capital assets accumulated over 100 years of enterprise and modern government were simply wiped out. When the madness was curbed by the GPA and then corrected by the GNU in early 2009, we were in a terrible state – all banks, building societies, insurance funds and other financial institutions were bankrupt. 70 per cent of our population was being fed by the international community led by the USA and our schools, universities and hospitals were either closed or barely functioning.
The collapse was not just due to the errant behaviour of the Reserve Bank but also due to decades of managed micro economic fundamentals – exchange controls gave the State the capacity to manipulate the value of the local currency and thereby insidiously to strip the private sector of its assets and profits. At its peak the Reserve Bank extended this process to quite simply just taking what was not theirs and replacing it with local, worthless currency.
The Government exacerbated this with radical price controls – they ordered companies to cut their prices by half – not once but several times, leading to the wholesale collapse of companies who had been in business for many decades and who watched helpless as their retail and wholesale outlets were stripped bare. My personal losses at this time ran into millions, our business has never recovered.
It is no wonder that the business community in Zimbabwe views any discussion on the return of the Zimbabwe dollar with apprehension and horror. They see this as the first step on the road back to the conditions in the first decade of the 21st century that had destroyed what was left of the formal economy. At the slightest hint of any return to the bad old days, capital flight assumes new momentum and the formal sector retreats into the informal economy.
If Zimbabwe is to find its way back into the interactive global world and to be able to resume its efforts to raise living standards and become self-supporting, it has to accept that the observance of macro-economic fundamentals and market freedom are not optional extras but are the very foundations of a progressive and rapidly growing State.
The bounce back which occurred between 2009 and 2012 was on the basis of three policies – the adoption of foreign currencies as the means of exchange, the abolition of price controls and the lifting of exchange controls. Just to highlight the importance of the latter, the production of gold in Zimbabwe fell to very low levels in 2008, after lifting all controls on the sale of gold and lifting restrictions on the ability of people to own and market their own gold, output has reached an estimated 40 tonnes per annum worth US$2,2 billion. Recent attempts to reintroduce controls, have led to the immediate withdrawal of gold from local formal sector markets.
Macro-economic policy sounds very complicated but it’s not really, it just involves not spending money you do not have, living within your means. Managing personal finances is just the same. If you are going to run a deficit on current account – you must keep it below the average growth rates being achieved in the economy at large. Micro-economic policy is much the same – but governs policy at the household level and involves markets prices and interest rates.
We have an efficient and effective taxation system managed by a relatively competent authority in the form of ZIMRA. This collects a very high percentage of our GDP as revenue to the State at a relatively low cost (7 per cent of revenue). Our main problem therefore is not related to the capacity to collect what is owed to the State in the form of taxation, but to curb our State driven expenditure. Our Civil Service is just too big; our armed forces are too large for our security or defence needs. We simply cannot fund our bloated government and need to expand our economy by at least three times before this relationship can be brought into balance.
The use of foreign currency as the means of exchange imposes a harsh form of discipline on the State and this is the main problem. It means they cannot spend more than they earn unless they incur credit on local and international markets and anyone who sells anything to the State here on credit is going to have to wait for their money and may never be paid. We have to show that we can be trusted with the management of our macro-economic fundamentals and our own currency before the use of other currencies as a means of exchange can be eased.
Further we have to recognise that market freedom and economic stability is also critical to long term growth. Any attempt to curb economic freedoms will fail and be counterproductive; imposing controls on gold sales and production will shrink or go underground. Any attempt at price controls over anything, will simply result in the product disappearing and queues for everything.
I hear lots of loose talk of import controls to protect local industry; I think that would be disastrous in the long term. What we need to identify is what we can do profitably and in competition with the world markets. We should import the rest and take advantage of the intense competition that exists “out there” for everything that mankind produces and consumes. Prosperity lies in engagement and competition and not isolation and protection.