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Zimbabwean economy simplified

08 Jan 2020 at 13:10hrs | Views
Issues concerning the economy are vital for any given country's revolutionary and evolutionary path since they are at the core of all movements. Most importantly an economic policy justifies the transformation a people aspire, desire and fight to achieve in their revolutionary and evolutionary journeys.

When a nation or a people engage in a revolution or seek an evolution the key motives are mainly economic. The fight over the control of resources, distribution of wealth, domination and well being of the lowest members of society are all key and economic in nature.

In this article I hope to deal with this subject relating it to Zimbabwe's current evolutionary deficit. The aim here is to help shed light on how individuals, by making simple but day to day decisions, can harm or improve the economic well being of Zimbabwe. This article is for all of us Zimbabweans regardless of class and power as these issues affect everyone.

Let me start by saying that economics is a subject of complex wording, models and graphs.
In light of the predicament of complexity, wording and concepts, in this text I hope to give clear guidance to all Zimbabweans on how to make better economic decisions in day to day living.

They are various ways out there for defining Economics but I choose to say that it is a subject driven by human needs and wants, which then lead to civilized communities striving to satisfy them through the provision of goods and services in a sustainable manner. The total needs and wants of a particular country for finished goods and services for the population's satisfaction over a given time period is termed as the Aggregate Demand. The other variable of meeting these demands by producing finished goods and services is what is called the Aggregate Supply. In general to then have a balanced economy the total demand for finished goods and services must also be equal to the total that the economy is supplying (Aggregate Demand = Aggregate Supply).

Another important type of good to highlight for economies found in Africa is the intermediate good (commodities). These are goods and resources used in the production of final goods for example flour which is used in the production of bread, a final good. Intermediate goods are in the form of resources that Africa mines and farms to produce raw materials used in the production of final goods.  
 
In most countries there is the further division of the economy into regions of small economies of populations that produce goods and services according to their resources, capabilities and strengths termed as economic regions. It is highly unlikely for an economic region to produce the necessary goods and services needed by its inhabitants for the satisfaction of their needs and wants alone. Situations were economic regions are not totally depended give rise to the concepts of specialisation and internal country trade.

In specialisation, economic regions look at producing goods and services that are favourably placed in relation to their environments. The central government's aim is for all economic regions to produce goods and services were raw materials, labour force, climate and the general competitive advantage is greater than for peer regions. As I shall explain much further, it is the duty of the central government to ensure that all economic regions have some form of competitive advantage in the provision of certain goods and services to have a balanced economy were everyone has some form of activity.

In economies with this mode of specialisation, next comes the phenomenon of internal country trade. Internal country trade is where goods and services move from one economic region where they are favourably produced to the next region in need, in exchange with those the receiving economic region favourably produces. It is also the duty of the central government to ensure that all economic regions are producing goods and services that are sufficient in meeting the total needs and wants of the population. The central government must also ensure internal country trade is favourable to all regions, ensuring that rewards from trade are balanced thus ensuring overall economic growth and well being.  
   
For internal country trade to be possible economies use a medium of exchange which is in the form of money. Initially for firms to produce goods and services there is need for capital (money), which they acquire from banks and financial institutions in the form of loans and investments. The firms then produce and gain incomes through sales (money) they make to the population. From these sales firms then reward labour force involved in the production of goods and services through salaries and wages (money). The labour force then use these incomes, (money) to buy goods and services from the various firms around to satisfy their needs and wants. The income the labour force is not intending to use is saved in financial institutions as savings (money). The banks then use these savings (money) to provide loans to firms intending to produce goods and services. This process repeats itself giving rise to the concept of what is known as the circular flow of income in an economy.

In the circular flow of income concept the movement of money from one class of entity to the next must result in an overall balance of money within a particular economy. The goods and services being produced must also be equal to the money circulating in the circular flow of income for a country to have a balanced economy.

In the same case as the regional economic difference, at country level there also the same differences of resources, climate and capabilities. It will be rare for individual countries to have all resources and capabilities for producing goods and services needed in the satisfaction of their populations. These situations give rise to the need for international trade. Like in the case of internal economic trade, countries with comparative advantages to produce certain goods and services due to the fact of being favourably placed also come to play. Goods and services will move from one country to the next in exchange for values of goods and services produced by its trade partners. International trade organisations must have the responsibility of insuring the trade between countries has some form of balance. Their duty must be to insure that all countries operate viably thus ensure overall balance in the world economy. This responsibility is different from the current position of thought towards a free trade world as this position is open to the vast exploitation and migration crisis that exists in the world today.

For an individual country like in the case of Zimbabwe the most important variable to guard against in international trade is the balance of payment. The balance of payment is the difference between the value of goods and services being exported to other countries in comparison to the values being imported into the country to satisfy the needs and wants of the population. If a country is exporting more goods in value than what it needs from other nations then its wellbeing will be well-off since the population's needs are being comfortably met. If then a country needs more in value than what it offers to other nations then this might lead to unsustainable borrowing to meet unsatisfied needs from its production and trade. The country also risks failing in the satisfaction of its population altogether.

Building on from these basic principles of economics, I hereby embark on the analysis of Zimbabwe's old and new economy. I will not go into much detail about figures and results as these are not the focal areas but rather I will focus on the rationale behind major economic decisions and their economic impacts.

From the onset of the post independent Zimbabwe (1980 -1989), the economy enjoyed steady growth rates in GDP and was seen as the star of Africa. Although there were still challenges of resource ownership on the part of the indigenous black population; a growing class of the middle class citizen mainly constituted by the majority black population was present.  

The Zimbabwean economy then was divided into five economic regions referred to as the five natural regions. These divisions were based on the terrains, rainfall patterns, cultural and mineral reserves of the different areas. The central government through the ministry of finance operated a relatively effective social program to ensure that all economic regions produce goods and services needed in the satisfaction of the total population. The government ensured that all regional players, the farmers and firms operated for the provision of specified goods and service designated for these particular regions. It created facilities that ensured comparative advantages for producing these selected products in regions was possible. The government did create and supported facilities like research stations, training centres, transport networks, marketing centres in these regions to assist these players. The program also assured the farmers and firms would receive an even reward for efforts and also protected them from foreign product importation through the imposition of tariffs. Mechanism like the subsidies programs were the government could even buy products from the farmers and firms at higher than the market price to ensure this balance of reward, were administered.

The regional solidarity and workmanship was further enhanced by a series of social enhancement programs which economic regions engaged in. These social enhancement programs included sporting teams which were based on economic areas such as towns, cities and companies. Also a series of cultural events where held that promoted economic regional success and pride thereby showcasing products produced in these region. Companies within regions sponsored soccer teams, golf tournaments and many of these activities. The resulting effect was total commitment on the part of the economic areas' population towards regional solidarity and in the end national solidarity. This was possible since the system enabled active participation from every member of society and did not deny the majority of basic needs.

In this period Zimbabwe even had excess production capacity which it exported to its neighbouring countries in the form of goods and services. 
The economic aims then were for everyone to have some form of activity, for products needed in the satisfaction of the population that could be produced locally to be produced in the country and rewards for everyone's effort to have some form of equity thereby stimulate overall economic growth. This was done through one of government's key policy statement called the fiscal policy (Budget Statement).

The fiscal policy is an important driver to any economy as it determines what a country produces, by whom and at what price will these goods and services be produced at. The policy has with it taxes that help redistribute value differences to give even rewards for efforts, tariffs that protect local production from importation; government spending that helps in the creations and maintenance of facilities needed in economic regions to maintain production levels. In the period 1980-1989 the fiscal policy was used to this effect in Zimbabwe to provide a social economic based program that assured and ensured the majority of the population access to basic needs. These needs included housing, healthcare, food, education and most importantly a chance to participate economically through providing jobs.  
       
At the end of the first decade of independent Zimbabwe, towards the 1989 years economic cracks started to emerge. A growing educated population can through the well resourced but non-initiative education system with issues of large scale unemployment growing. The educated population was reliant on government and foreign investor business initiatives to which the system did not impart the skills to its graduates. The government had to act to give some form of activity to these growing levels of dissatisfaction. A social and political time bomb was developing and government had to act.         
 
The government had to do something and did decide at the turn of the decade to engage the International Monetary Fund (IMF). The economy of Zimbabwe was never to be the same again after this engagement.  In 1990 Zimbabwe received international loans (Investments) from the IMF that aimed to modernise industry and create the much needed employment for the masses. In line with this move Zimbabwe had to remove inefficiencies on its social based economic model by implementing the Economic Structural Adjustment Programs (ESAP) set by the IMF.

Since the country had acquired these International loans in foreign currency it had to modernise industry to make it more efficient thus export more goods and services in value than before. By exporting more the IMF and the government had aimed for the economy to gain the much needed foreign currency to repay the initial outlaid investments. To have goods and services compete internationally the true values had to be reflected hence the need for ESAP. Measures like the removal of the subsidise programs, removal of tariffs that protected local production, removal of price control systems and  the cutting of the civil service were all meant for locally produced goods and services to posses their true value of production and make industry efficient. The IMF loans (investments) were thus intended to create competitive advantage for Zimbabwean industries to produce products that were of better quality that were also cheaper than those in the regional and international markets. The first downfall of the policy program was the way the funds were spent in the first place.

Borrowing funds (investments) from outside sources is one other variable which I now introduce to the circular flow of income I had earlier talked about. It also can be termed as injections into the circular flow of income. It enables a nation to buy equipment, rights, machinery to which it does not have the capacity to produce on its own. Borrowing can also be used in years of disasters, were a country does not have the capacity to provide for its own needs due to factors like droughts, floods and earthquakes although grants are more ideal in such situations. When a country borrows it is obliged to pay back its debt that is the principal plus interest. The phenomenon of paying back the loan balance and compounded interest when it comes to the circular flow of a country is classified as leakages to the economic monetary circular flow of income.

Critically when a country borrows funds at a certain interest rate and fails to invest those funds to produce returns that are above that rate of interest the probability of default will be very high. In those years Zimbabwe was still using a local currency, the Zimbabwean Dollar while loans were in foreign currencies, so the repayments also had to be in this foreign currency. This meant Zimbabwe had to export more goods and services to then acquire the foreign currency needed for making repayments.

This brief incites on issues concerning debt are important because debt finance was pivotal in the events that led Zimbabwe to engage the IMF in 1990 for the (ESAP) program.

At the country's birth in 1980, Zimbabwe had to inherit the Rhodesian government's debts, to the tune of about USD 700 Million. These were illegal loans made to the Rhodesian government by some European government in support of the white minority governments' defence through the outlay of funds required in the purchase of fire arms used during the Chimurenga movement in the 1970's. These loans were extended to the white settler government despite sanctions that had been levelled against it for unilaterally declaring independence from the British monarchy. At independence the black majority government had to inherit and repay this unjust loan.

The disaster of the farming seasons in 1981 and 1982 were drought ravaged the country were other blows to the new Zimbabwean administration financially. The government did borrow funds from international lenders rather than asking for grants to cover for the food deficit by importing. If the country had applied for grant money for drought relief it would have not been required to pay back the outlaid funds as compared to loans were it was now required to pay back the principal plus interest. The government realised later on after activating the IMF loans that it could have simply applied for grant money. It was too late to reverse this arrangement and this meant that Zimbabwe was locked into paying back this growing debt repayment bill into the future.

The economy managed to recover in the years succeeding the drought with food stocks increasing and industry regaining momentum. In the Southern African region, Zimbabwe received the honours of being called the bread basket of the region in the years following the drought.

On the financial front a series of poor decisions on the government's part and external force interference persisted. The country continued to be extended with further lines of loans by western countries and international lenders. What was worrisome about these loans was the dubious nature that aligned them to projects that had little or no economic value to ordinary Zimbabweans. For example the IMF loans for the planting of exotic trees in the pretence of stating that the trees are to be used as firewood by the population. This was when the county had plenty of indigenous forests at its disposal. Another example of a poor financial decision was the loan from Britain to the government to fund the purchase of Land Rover (Santana) vehicles for the police. The conditions of the deal were that for the Zimbabwean government to purchase these vehicles from British companies. What the Land Rover deal meant was that money just moved from one account to the next within Britain without adding any capacity for Zimbabwe to repay this debt. The Zimbabwean government had to repay these loans and a series of other dubious financial arrangements that did so little in adding to the productive capacity of the country in enabling it to have the ability to repay these debts.

Although the stated reason for engaging the IMF in the 1990's ESAP program was for the facilitation of modernisation of local industries, the other hidden reason was to fund the foreign currency debt repayment burden that had developed over the period. In the year 1990 Zimbabwe's debt repayment value was now about 22% of the total export value of goods and services. This situation was dangerous as the country by engaging these lenders started to use more debt to finance debt repayments (borrowing Peter to pay John). More debt plus accumulated interest being used to pay previous debt left the country in a dangerously unsustainable position. In the end no actual investments were made towards modernising the production processes. The country however went on to implement the ESAP policies of the IMF. The program left the country vulnerable to foreign imports and reduced the aggregate demand for production as it left many in the civil service without jobs (no incomes).

The ESAP program aimed for a market based economy where government had little ability to influence; prices of products through price controls, labour minimum wage rates and movement of goods and services inside or outside the country. These policies backfired to a larger extend as the first problem was the lack of investment made to industries themselves as a major chunk of these loans went on to payback previous debts.

On the social front what it meant was many of these industries that were located in different economic regions that relied on government's subsidies and government spending for comparative advantage were left in the cold. They now had to cover for all of their costs of production for themselves. The country was now open to cheaper and inferior quality products from outside the country. Countries like South Africa and Zambia could now bring in their own goods and services as the country stopped using trade tariffs.

The division of the country into economic regions that were tasked with the provision of certain goods and services was also at treat as many industries and companies in these different regions could no longer cope with their labour force numbers, costs of production and thus had to cut down on production or close down due to this program. Since government had lost its ability to redistribute value differences to all sectors, migration from regions that had lost their productive capacity to regions like Harare were most of the industries were now located was high.

Government spending on major projects like electrification, water projects was also cut leaving a dent on the economic and social gains that had been made in the first decade. Gains on cutting down poverty and registering moderate economic growth were lost.

The distribution of income levels became unbalanced as industry lost its lower floor of wages and salaries as the minimum wage rate was removed by the ESAP policies.

In a progressive economy that is not innovative led the aim is to have some form of equality of incomes across all sectors and within companies. This aim is for the attainment of a marginal propensity to consume for the population that simulates overall economic growth. In simple terms if some sectors or top management staff and executives are heavy paid as compared to the lower staff, local aggregate demand patterns will be uneven. In a less productive economy like ours the higher than normal the wage rates for top executives the less demand for locally produced products thus causing major leakages to the economy.

The ESAP reforms continued throughout the 90's with the country experiencing other drought years in 1992 and 1993 that further dampened the financial position. The government continued to be extended with extra lines of loans to cover for foods imports. Under the contracts of the IMF's ESAP loans the government still had to export maize despite the country experiencing these drought years.
 
In the middle of the 90's years the government started printing more of the local currency to cover its expenses without matching this added money supply to production of goods and services.

The debt repayments grew and the countries' reduced export values meant that the country was at great risk of default on its loan repayments.

Social problems like unemployment and poverty worsened as a result of the cuts made to the public sector and liberalisation of trade that was not matched to efficiency in industry that had been hoped by implementing ESAP.

In 1997 to help ease pressure from the generation that had participated in the liberation struggle of the country that was now subject to market forces and unable to cope with the pressures the government introduced a social program to compensate these war veterans by providing then Z$50 000.00. This sudden increase in money supply led to the Zimbabwean dollar to devalue by about 40% on a single day (black Friday). More inflation followed as the dollar weakened. International money moved out and more jobs were cut. The worsening situation persisted throughout the decade leading the government to make its first default on its international loans in 2001. The country could no longer cope with making debt repayments as imports had surpassed exports and Zimbabwe had lost its productive capacity altogether.

Other downfalls in production were caused by the land resettlement program which saw white farm owners being displaced from farms by the black majority. Farming was a major industry that contributed around 40% to Zimbabwe's economy. Like in the ESAP program government again went along with the program without fully assessing its impact. The resettled farmers' capabilities to maintaining production levels thus ensure economic wellbeing were not assessed initially.

The economy continued to fall throughout the years of 2001 to 2008 with inflation reaching record figures. In year 2008, the worst year in Zimbabwe's existence were drought and the economic ills of the now less productive Zimbabwe culminated in the total economic collapse of the country as the local Zimbabwean dollar currency crushed. The disputed election in that year and the economic woes led to a global political agreement between the main political parties to share power. The new administration resolved to abandon the use of the countries' local currency. Government resolved to use a multi currency system with the United States Dollar and the South African Rand as major the mediums of exchange.

A lot did change in the multicurrency era economically. Initially the multicurrency era brought about stability to the economy as it managed to remove the major problem of inflation which had been unmanageable over the years. International money and remittances could now move into the country freely and be used to drive aggregate demand and production demand.

The years of the multicurrency were also tied to the recession of the American and European economies. The United States dollar was the main currency used in Zimbabwe and when it fell in value many decided to invest in minerals to which Zimbabwe had discovered diamond reserves and regained gold production. Mineral products in gold and diamonds had their prices at record highs during the period 2009-2012 as investors sought an alternative to holding on to the United States Dollar that continued to fall in value.

The revenue flows of Zimbabwe grew and the then finance minister Tendai Biti exercised fiscal discipline.  The cash budgeting policy was used efficiently by Biti with governments' financial policy being on applying to expenditure only the revenues that had been raised by the government with less borrowing. With time the GPA started to weaken with the prospects of elections mid 2013.  Government according to its party divisions stated to act disjointedly.

Deals with international lenders and foreign governments that had placed Zimbabwe in an economic dire state in the 90's started to emerge. These were loans made for projects that had little or no economic value to ordinary Zimbabweans, for example the loan to fund the building of the defence college. This and other arrangements tied the country into paying off with its mineral resources for investments that had little benefit to ordinary Zimbabweans. These deals neither adding on to incomes of ordinary citizens nor to goods and services needed in the satisfaction of the population and employment prospects.

To add to the discourse period of the GPA an industrial revolution took place were the indigenisation policy was enacted. The policy was for international companies to transfer their controlling interests' to the black indigenous population. This further dampened the productive capacity.

This policy meant that foreign investments became lower at a time when the hunger for foreign products rose at a faster rate than local production owing to a lack of investment to industry and lack of capabilities to direct and manage industry.
 
After the GPA the situation has even worsened with industrial capacity at its lowest levels ever. The aggregate demand has also been forced down as the employment rate continues to go down since government's policies are not geared on promoting local production.

The balance of payment continues to widen as government has failed to make bold steps to cutting down on imports. Government has in many instances failed to make decisions to at least assemble some products, pull together resources or even cut down on international services. In the next chapter I will explain on issues involved in international trade much further.

To end my review I will go down to my views and opinions on each decade in Zimbabwe's existence. The first decade which is the 1980 -1989 years; Zimbabwe was a relatively industrialised country that was able to provide for all its basic needs internally by self production. How Zimbabwe had acquired this industrial capacity were sanctions that had been levelled on the then Rhodesia by the British monarchy for unilaterally declaring independence from the monarchy in 1965. Since Rhodesia was now under sanctions it saw it as an opportunity to invest in infrastructure, industry and its own mechanisation since it had lost the benefits of being a colony. The investments made by the Rhodesian authorities throughout the 70's were the ones that propelled the economy of Zimbabwe in the first decade.

The second decade of Zimbabwe's existence the 1990-1999 years were quite different. One principle to economics stated in my definition earlier is that of sustainability. What sustainability means is that decisions made today must possesses a future orientation, they must bear the next generation in mind. This means that economic plans must always have foresight of future patterns for demand, supply, capacity, usage and expandability. As an economic planner you will not build for example roads to just cater for the population at present without considering the projected population patterns for the coming years or decade.

That's all I can say about the 1990-1999 decade were poor strategic foresight in the first decade of Zimbabwe led to the economic woes of this decade. Education was on a rise in the first decade and economic policy failed to accommodate this future demand for employment much earlier. The education system itself was also poorly designed to this effect owing to its intensions when it was designed for us black in the colonial years.

The Chinese did not wishfully wake up as the leading industrialised nation they are today from nowhere. China invested in the right type of education that was geared on teaching students on being solution oriented through provision of goods and services at a tender age. As I reflect on the documentaries on Chinese's teaching methods when I was still young, toys and other small products we played with here were all assembled and made by students our age back then. No wonder why as we look at the greater percentage of products we consume today are still being made by the same Chinese's generation our age. The same people who at that tender age were taught the importance of provision of goods and services have developed an industrialised mentality towards provision of goods and services. Our education system is clueless on this area as it only imparts knowledge. This was the problem of the 90's years were many came through the education system but still job creation and provision was left as the responsibility of the state. Government decided to throw money at the problem but the situation even got worse since you can only take up international loans for people who know what they want to invest those funds in. In the end government was required to pay back the international loans regardless of how they had poorly invested the funds.

The third decade to now that is the 2000-2014 periods featured the land and industrial revolution, downfall in the economy and political crises. Economically the state of affairs is quite shocking at the moment with a lack of concrete policy formulation, direction and implementation of stated policy. One of the aims in strategic formulation and planning is assessment of capabilities that must tie up to a chosen policy directions. It is my opinion that the Zanu PF led government has on many of its chosen policies for the past decades lacked in this assessment of capabilities for chosen policy programs. Even though it found out that it lacked on capabilities it acted slowly to ensure it acquired the necessary skills and competences needed for self provision. The ESAP program, land resettlement and industrial revolutions lacked to this regard of capability analysis.

Even in the sanctions period faced in the aftermath of the land resettlement government's reactions were limited to just complaining rather that sorting and acting towards self provision of goods and services that it depended on. This reaction was quite different to the days of Rhodesia which also was placed under sanction in the 70's years but sort to build its own industrial capacity during the period not just complain about the situation since it knew the implications of the policy direction it had chosen.
 
Stay Blessed
Terence Simbi
An extract from - The Next Zimbabwe


Source - Terence Simbi
All articles and letters published on Bulawayo24 have been independently written by members of Bulawayo24's community. The views of users published on Bulawayo24 are therefore their own and do not necessarily represent the views of Bulawayo24. Bulawayo24 editors also reserve the right to edit or delete any and all comments received.

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