Zimbabwe's Economy: Performance from 2013 to 2018

"Managing the economy is like herding cats"

  – Anthony Hopkins

Like most people, I have been struggling to reckon how the Zimbabwean economy will fare in the post-Government of National Unity (GNU) era.

My quest started by assiduously sifting through the election manifestos and economic blueprints of the chief contenders in the 2013 election. Unfortunately, that proved to be a Sisyphean endeavour; while the economic strategy documents were unequivocally pellucid about the envisaged end states, they failed to:

1. Clearly articulate how the economic visions would be operationalized; they did not satisfactorily delve into policy mechanics.
2. Enunciate or stress-test the assumptions that underpinned each economic plan.

Thus, I was left to my own devices. To scope my endeavour, I formulated three simple research questions:

• What is the minimum "acceptable" rate of economic growth?
• What are the main drivers of upswings and downswings in Zimbabwe's rate of economic growth?
• What is the probable trajectory of the Zimbabwean economy?

 In this post I will share abbreviated answers to the above-mentioned research questions.

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...What is the minimum "acceptable" rate of economic growth?

Generally, for an economy / society to remain stable, the rate of economic growth has to consistently exceed the rate of population growth. Hence, the broad answer to the question "What is the minimum acceptable rate of economic growth?" is: any rate of growth that lies comfortably above Zimbabwe's population growth rate.

Illustration 1, below, shows Zimbabwe's population growth rate from 1971 to 2013:

Illustration 1 (click on illustration to zoom in)

From Illustration 1, the following is evident:

• Zimbabwe had its highest rate of population growth, 4.058%, in 1983. The bulk of the population growth during that year can be largely attributed to: 1) A post-independence war baby boom which was engendered by increased geopolitical stability, and; 2) Increased life-expectancy which was engendered by enhanced service delivery and improvements in public healthcare delivery. Owing to the emancipation of women, a lower life expectancy, youth emigration and the spread of planned parenthood, it is highly unlikely that Zimbabwe's population growth rate would, at any point in the future, ever exceed this 1983 peak.
• In 2013, Zimbabwe's population growth rate bounced back up to its 1992 level / pre-HIV scourge level, i.e. 2.41%. 

Hence, one can assert that Zimbabwe's minimum "acceptable" GDP growth rate lies somewhere between 2.42% and 4.06%.

...What are the main drivers of upswings and downswings in Zimbabwe's rate of economic growth?

 "As sure as the spring will follow the winter, prosperity and economic growth will follow recession."

   – Bo Bennett

To unearth the main drivers of upswings and downswings in Zimbabwe's rate of economic growth, it is prudent to interrogate Zimbabwe's most recent economic history:

Illustration 2 (click on illustration to zoom in)

Illustration 2 demonstrates that:

• Between 1960 and 2013, the Zimbabwean economy had six distinct historiographical phases. They can be summed as follows: The War-Time Phase, coloured white in Illustration 1, which lasted from 1960 up to 1978; The Independence Euphoria Phase, coloured blue in Illustration 1, which lasted from 1979 to 1985; The-Unity-Accord-Drought-Austerity Phase, coloured red in Illustration 1, which lasted from 1986 to 1993; The Social Upheaval Phase, coloured green in Illustration 1, which lasted from 1994 to 1998; The Free Fall Phase, colored yellow in Illustration 1, which lasted from 1999 to 2008, and; The Government of National Unity (GNU) Phase, coloured purple in Illustration 1, which lasted from 2009 to 2012. During these time-periods, GDP upswings and downswings (above the trend line in Illustration 2) were largely driven by increases and decreases in the Perceived Geopolitical Risk of the country.
• There were four boom-bust cycles in Zimbabwe's history. They include: the 1979-1985 boom-bust cycle; the 1986-1993 boom-bust cycle; the 1994-1998 boom-bust cycle, and; the 2009-2013 boom-bust cycle. During these boom-bust cycles, booms were largely spawned by a moderation of Perceived Political Risk, and busts were caused by an admixture of; increasing Perceived Political Risk, deteriorating Food and Water Security, and Local and International Debt Cycles.

The abovementioned drivers will each be discussed in detail in the subsection below:

Key Drivers of Upswings and Downswings

Illustration 3 uses the metaphor of interlocking cogwheels (or gears) to exposition the drivers of upswings and downswings in Zimbabwe's rate of economic growth:

 

Illustration 3 (click on illustration on to zoom in)

As Illustration 3 shows the drivers include:

1. Perceived Political Risk: Upswings in Zimbabwe's GDP growth rate were associated with the following periods wherein Perceived Political Risk moderated; the Independence era (1979-1981); the Unity Accord era (1986-1989) and the Government of National Unity (GNU) era (2009-2012). During these time periods, portfolio and direct flows of foreign investment to Zimbabwe increased, tourist arrivals swelled, firms increased their headcounts and capital expenditures, and, a sense of optimism motivated people to spend more. Further, multilateral and government-to-government lines of credit were extended to Zimbabwe during these time periods. These lines of credit allowed the Zimbabwean economy to expand by employing a goverment-spending-led growth model. In aggregate, these factors boosted the nation's rate of economic growth. Downswings in Zimbabwe's GDP growth rate were associated with the following periods wherein Perceived Political Risk increased: the Dissident era (1982-1985) and the Free Fall era (1999-2008). During periods of increasing Perceived Political Risk, there is reversal of the positive concomitants of moderate Perceived Political Risk. Owing to the-said reversal, economic growth nosedives. By and large, Zimbabwe endures relative diplomatic isolation during periods of increasing Perceived Political Risk. This, in effect, decouples the Zimbabwean economy from the global economy. And, it mutes Zimbabwe's sensitivity to the reverberations of International Short term and Long term Cycles. Conversely, when Perceived Political Risk moderates, the Zimbabwean economy recouples to the global economy.
2. Water and Food Security: Downswings in Zimbabwe's economic growth rate were associated with the following periods of food and water insecurity: 1990-1992. However, it is important to stress that during this time period, Food and Water security issues intensified a downswing that had already been ignited by IMF-induced austerity measures and a "post-Cold War global geopolitical realignment". [1]
   
3. Local Credit Cycles: The Government of Zimbabwe ("GoZ") is the largest originator of securities in Zimbabwean credit markets; its borrowing needs drive local credit cycles. For instance, in 1997, the GoZ capitulated to the demands of the country's war veterans and gave them gratuities amounting to ZWD 50,000.00 per person. These gratuities were largely financed (at artificially low interest rates) using "onshore" lines of credit. Owing to the Asian Financial Crisis of 1997, Zimbabwe's economic performance was, during that time period, soft. Thus, the nation's tax inflows were anaemic; the GoZ did not have the capacity to service the additional debt. Hence, the country's reserve bank largely serviced the new debt by "printing money". This money-printing orgy was largely responsible for the precipitous decline in nation's GDP growth rate between 1997 and 1998 [4]. In the year 2000, the country defaulted on its external sovereign debt. Because of this incident, the country was shut-out of international credit markets, and it was compelled to rely heavily on "onshore lines" of credit. Together with the economic and diplomatic fallout that was triggered by the Fast-Track Land Reform initiative, this forced local-debt-binge intensified inflation, and, it set into motion a ten year struggle with stagflation (1999-2008).
   
4. International Short term and Long term Cycles: Whenever Zimbabwe's Perceived Political Risk is low, the nation links to the rest of the global economy through trade and investment flows; i.e. it couples to the rest of the global economy. When this occurs, the Zimbabwean GDP growth rate increasingly moves in tandem with the economic growth rate of world economies. For instance, in 1997, the growth rate of Zimbabwe's GDP fell (partly) because of the global economic contraction that was triggered by the Asian Financial Crisis.

From the discussion of the drivers, it is evident that the Perceived Political Risk is the preeminent driver of upswings and downswings in Zimbabwe's GDP.

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Recently, Zimbabwe's Perceived Political Risk increased owing to lack of clarity on Zimbabwe's Indigenization and Empowerment Initiative (and ongoing debates about the fairness of the 2013 elections).

Hence, it is reasonable to assert the following:

• During the GNU-era, Zimbabwe's economy recoupled to the global economy, particularly the East. In the post-GNU era, Zimbabwe will decouple from the Western hemisphere of the global economy [3].  However, she will continue to be sensitive to the gyrations of the Eastern economy, particularly China. Succinctly put, Zimbabwe will be relatively immune from any global economic shock that does not materially impact China.
• Very few multilateral institutions and offshore financial entities will be willing to extend lines of credit to the Zimbabwean government. Thus, it is reasonable to assert that the GoZ would have to predominantly rely on Zimbabwe's credit markets for its borrowing needs. This poses the following problems: 1) Zimbabwe's credit markets currently do not have the capacity to cater to the borrowing needs of the GoZ, and; 2) Debt from Zimbabwe's credit markets is more expensive to service than debt from the international markets (i.e. interest rates in Zimbabwe are relatively high). Ceteris paribus, this implies that: i) the GoZ's initiatives will be chronically underfunded, and; ii) The total debt burden of Zimbabwe will rise at an accelerated pace. If the nation's total debt happens to rise at a faster rate than incomes, it would be reasonable to expect, at some point in time, a sovereign default episode that would destabilize Zimbabwean banks and eviscerate the nation's savings.

...What is the Probable Future Trajectory of the Zimbabwean Economy?

  

"Face reality as it is, not as it was or as you wish it to be."

 – Jack Welch

According to the principles of conventional growth accounting, economic growth has the following constituent elements:

1. Growth in the Labour Participation Rate, or annual hours worked per capita; 
2. Growth in Labour Quality, or the skill level of the workforce;
3. Growth in Capital Deepening, or the amount of physical capital invested per worker; and 
4. Growth in Total Factor Productivity, or output per unit of quality-adjusted labour and capital.

Illustration 4 depicts the constituent elements of Zimbabwe's economic growth:

Illustration 4 (click on illustration to zoom in)

The elements of economic growth will each be discussed in the subsections below:

Labour Participation Rate

Owing to the following factors, Zimbabwe's labour participation rate is unlikely to register any near-term growth:

• Indigenization Uncertainty: There is a lot of uncertainty that surrounds Zimbabwe's Indigenization and Empowerment drive. During the run-up to the 2013 elections, the pronouncements that were made by 'certain political players' indicated that the initiative would, in the post-election period, increase in momentum and aggression. However, the pronouncements that have been made in the post-election period indicate that there would be some moderation in the implementation of the policy (Note: it is important to state that no specifics exist at this stage). This frequent reversal of policy stances creates a lot of ambiguities and confusion: it increases Perceived Political Risk. Hence, it is reasonable to assert that policy seesawing will curtail inward investment. The labour participation rate just cannot increase in such an environment.
• Frozen Credit Markets: In August of 2012, the Reserve Bank Governor of Zimbabwe announced that the minimum capital requirements of commercial banks would be increased from a level of USD 12.5 million to USD 100 million by December 2014. Increases in bank capital requirements, are in essence, a contractionary monetary policy tool: they mop-up liquidity from the markets. Thus, it is reasonable for one to assert that bank lending will be subdued between now and 2014. Owing to this, firms will have trouble funding their growth projects. And, the labour participation rate would remain subdued. Clearly, this does not bode well for Zimbabwe's growth prospects.
• Power and Water Shortages: Water and electricity are key inputs in agricultural and industrial processes. Thus, one can argue that Zimbabwe's labour participation rate would not register any material improvement until the availability of these critical inputs improves. Again, this doesn't bode well for Zimbabwe's growth prospects.
  

Labour Quality

The quickest way to improve Zimbabwe's labour quality would be to repatriate Zimbabwe's "lost skills".

In a March 2 2009 blog post titled Zimbabwe: Creating Prosperity I wrote and I quote: "Zimbabwe has a population of approximately twelve to fifteen million people. Currently, between three and five million (over 25% of the Zimbabwean population) of the youngest, healthiest and most skilled niche of Zimbabwe's population resides in the diaspora."

"Thus, this implies that the majority of Zimbabwe's human capital is currently in foreign lands; appreciating in value and accumulating knowledge and skills that have the potential of effecting a miraculous transformation in Zimbabwe."

As it currently stands, the Zimbabwean government has not yet implemented targeted policy measures that would facilitate the repatriation of lost skills, e.g. tax holidays, hefty relocation grants and competitive public sector wages. Further, there are no developments that hint the enactment of such policies in the near-term.

Therefore, it is reasonable to argue that an immediate improvement in Zimbabwe's labour quality is highly unlikely.

Capital Deepening

• Frozen Credit Markets: see Frozen Credit Markets in the Labour Participation Rate subsection.
• High Perceived Risk: see Indigenization Uncertainty in the Labour Participation Rate subsection.

Total Factor Productivity

By and large, Zimbabwean firms are teetering on the brink of collapse; they just don't have the free cashflows to invest in research and development initiatives. Further, the nation's frozen capital markets do not offer firms much room to manoeuvre. Furthermore, the government of Zimbabwe is chronically underfunded; it cannot support basic research.

If left unaddressed, this deficit of RnD funding will constrain the technological dynamism of the Zimbabwean economy (in the medium to long term).

To make-up for the deficit in local innovation, the Zimbabwean government would need to implement targeted policies that would allow the Zimbabwean economy to absorb productivity-enhancing technologies from the rest of the world.

As it currently stands, no such policies have been implemented. And, there are no definitive indications that suggest that the GoZ has the intention to implement such policies in the near-term.

If this situation remains unabated, there is the risk that the growth rate of Zimbabwean incomes would outpace the growth rate of the nation's productivity [2]. In the medium-to-long term, this would make Zimbabwe a chronically uncompetitive destination for investment.

Further, this would consequentially diminish the competitiveness of Zimbabwean products in the global markets.

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To recap, the answers to the research questions that I formulated can be summed as follows:

• Question: What is Zimbabwe's minimum acceptable level of economic growth? Answer: Zimbabwe's minimum "acceptable" GDP growth rate lies somewhere between 2.42% and 4.06%.
• Question: What are the main drivers of upswings and downswings in Zimbabwe's rate of economic growth? Answer (in the order of prominence): 1) Perceived Political Risk, 2) International Short term and Long term Cycles, 3) Local Credit Cycles and 4) Food and Water Security Issues.
• Question: What is the probable trajectory of the Zimbabwean economy? Answer: Owing to the increase in Perceived Political Risk, the Zimbabwean economic growth rate will fall between now and 2014. If the GoZ manages to bolster the productivity of its agricultural sector, by addressing water issues, the nation can register annual economic growth rates of anywhere between 4% and 7% per annum from 2014 to 2018. However, this is very unlikely; to refurbish the country's legacy irrigation infrastructure, Zimbabwe needs approximately USD 3 billion: as it currently stands, multilateral institutions will not lend that money to Zimbabwe, and, Zimbabwean credit markets do not have the capacity to provide the funding.

[1] In the Post-Cold War era, the US government did not have any pressure to stop the spread of Communism. And, it was less inclined to avail lines of aid to countries that were not willing to adopt the U.S.'s core values and principles of governance.
[2] The government of Zimbabwe recently reaffirmed its unconditional promise to increase the salaries of civil servants.
[3] Western players are generally repulsed by the policy direction of Zimbabwe. 
[4] Zimbabwe's involvement, under the auspices of SADC's regional stability organ, in the DRC war was also responsible for this precipitous decline.