Can a free market work in Zimbabwe?

At independence in 1980, the new Zimbabwe government was committed to establishing a socialist society based on a state led interventionist and planned strategy. In order to redress the imbalances of the past colonial period, government poured huge amounts of resources into the social sphere at the expense of the productive sector of the economy.

While notable advances were made in the social sphere, overall economic growth slumped – in fact the increase in population exceeded growth of the economy. Excessive regulations and controls depressed investment, leading to worsening unemployment and poverty levels.

The economic crisis deepened as the new decade of the 1990s dawned and the government had no choice but to adopt the policy prescriptions of the Bretton Woods Institutions which basically meant adopting a free market economic system.

The main targets of the first phase of market reforms (ESAP) were:

• a reduction of budget deficit from 10 percent of GDP to 5 percent by 1995;
• complete liberalisation of foreign exchange and trade regime by 1995;
• elimination of subsidies;
• reduction of social expenditures and levying of cost recovery rates on social services;
• commercialisation and privatisation of public enterprises;
• liberalisation of prices, interest rates and the exchange rate by 1995;
• liberalisation of foreign investment regulations;
• and deregulation of the labour market by allowing for free collective bargaining and wage flexibility and by abolishing certain restrictions on retrenchments.

Throughout ESAP, budget deficits exceeded targets by wide margins. They averaged 10 percent against a target of 5 percent.

GDP growth averaged only 0.5 percent against a target of 5 percent. There was laxity on the fiscal front, with public sector restructuring not being accelerated. Parastatal losses continued to drain the fiscus. Nine of Zimbabwe’s major parastatals posted huge losses amounting to nearly $11 billion in 1998.

The financing of the fiscal deficit, largely through domestic borrowing crowded out the private sector in domestic capital markets, fuelled inflation and resulted in high rates of interest.

The domestic debt position worsened. Interest payments alone exceeded the combined expenditure of health and education ministries. At the moment, about 35 percent of total government spending is going towards interest payments alone.

But significant progress was made in economic and financial liberalisation, deregulation of foreign investment, trade and the exchange rate.

The hardships being experienced under ESAP are, however, not due to the programme, but due to failure of authorities to implement the programme in a correct manner. The whole question of synchronisation of the reforms and putting in place an appropriate institutional and regulatory framework was completely ignored during ESAP.

A market economic system can definitely work in Zimbabwe.

What we forgot in Zimbabwe is that reform programmes are integrated packages, any slippage in one area can have a profound impact on the success of actions in other areas. In particular, the growth opportunities arising from liberalisation are likely to be compromised or negated if fiscal stability is not achieved.

Failure by the government to exercise fiscal discipline is largely to blame for the current economic hardships. However, you find that the government is trying to shift the blame to market reforms and other people, particularly the Western donor community.

Faced now with increased labour and social unrest, the government is now re-imposing controls on basic goods and services.

While appreciating that economic hardships have hit hard the general population, these problems will not be resolved through price controls. Price controls are a complete reversal of the liberalisation programme and are sending wrong signals to potential investors.

Controls will prolong monopolies by discouraging new entrants into the industry because of perceived limited profit opportunities. In a nutshell, price controls will throw the economy into further stagnation.

The answer does not lie in controlling the end-price alone without controlling prices of inputs in the production process.

Recent collective bargaining resulted in wage increases of above 30 percent, most which are not linked to productivity. Indications are that wage negotiations will be tough this year because of persistent rapid erosion in real incomes.

Businesses cannot implement these remuneration adjustments without increasing prices of their products.

The business community is concerned that sometimes parastatals are allowed to raise prices when private companies are being constrained by statutory regulations. The same logic which accepts that the prices of electricity and postal services, for example, should go up needs to be applied to private companies which provide essential services and goods.

Having said that, the ZNCC does not condone any practices of profiteering on the part of private business.

It is disturbing to note that some companies have not yet looked critically at the issue of productivity, quality competitiveness, packaging and customer service to retain and expand market share in this competitive economic environment.

A free market economy certainly works in Zimbabwe. In the real world there is nothing like a 100 percent free market economy.

A mixture of free enterprise system and government intervention is the ideal situation. Government intervention is however not through imposing price controls, but through putting in place a conducive environment for business growth.

This is through an appropriate legal and institutional framework, provision of the necessary infrastructure in partnership with the private sector and the provision of a cocktail of incentives to stimulate exports for example.

Unless the scope and extent of government activities are consistent with the resources that it can reasonably expect to have at its disposal, all elements of the reform programme will be jeopardised and people will wrongly conclude that market reforms do not work.

To get Zimbabwe out of the current economic mess the following needs urgent attention:

• the acceleration of privatisation in a transparent and corruption free basis and use proceeds to retire debt, now estimated at about 95 percent of GDP;
• giving assurances to the donor community so as to secure the much needed balance of payments support (We cannot do without IMF support in the short to medium term);
• to take the necessary steps to improve stability and confidence in the financial sector: the speedy establishment of a Revenue Collection Authority;
• the promotion of exports through consistent policies, efficient administration of incentive schemes, reinstatement of corporate foreign currency accounts and tariff reform;
• and implementation of plans to use part of the additional resources arising from donor support to increase expenditure in key social areas;
• and accelerating the implementation of the land reform programme as per the agreement reached at last year’s donor conference on land.

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