Is there hope for Zimbabwe?
Last week I attended a conference held in Harare, Zimbabwe. On entering the city I travelled along Julius Nyerere Way and began to reflect on some of the policies adopted by the former Tanzanian president who ruled for some 21 years. Under Nyereres rule Tanzania went from the largest exporter of agricultural products in Africa to the largest importer. The country grew at a paltry 2.5 per cent over the 21-year period and real gross domestic product per capita grew marginally from US$139 (in 1964) to US$515 (in 1985). In his farewell speech Nyerere said, I failed. Lets admit it.
I then wondered how long it would take for president Mugabe to admit, and at the cost of how many more lives, that his policies have caused unbearable pain to the people of Zimbabwe. Under president Robert Mugabes rule, life expectancy at birth has plummeted by more than 20 years in the last decade from 56 years in 1982 to a mere 33 years in 2005. Gross national income (GNI) per capita fell from US$960 in 1980 to US$460 in 2000. For the period 2000-2004 Zimbabwes gross domestic product contracted at an annual average rate of 5.92%.
Zimbabwes inflation is estimated to be approximately 1,000% and changing money is not a simple procedure, particularly when you discover that there is no single recognised rate. Last week the official rate was approximately R1=Z$36,000, however, between Z$70,000 to Z$100,000 for a Rand was easily obtainable in the parallel market. Under such inflationary conditions it becomes impossible to make any rational economic decisions, as people are more concerned with anticipating inflation than with seeking out profitable new production opportunities.
The result of hyperinflation is that individuals spend almost all of their income on consumption and virtually no money is saved. But the importance to society of savings is critical. Savings lead to investment, which finances the purchase of machinery, equipment and research and development. These types of investments make workers more productive and result in higher wages. In the absence of savings, individuals become worse off and their quality of life declines.
In order to combat the adverse effects of inflation, Zimbabwes central bank governor Gideon Gono introduced a re-denominated currency, knocking three zeroes off the old currency at the end of last month. The 21st of August was the deadline for converting the old currency to the new. Governor Gono had also ordered police to seize cash from people holding amounts in excess of Z$100 million and companies holding more than $5 billion of the old money in cash. A local resident told me that a few of the police officers decided that this gave them a licence to seize all the old currency they found in peoples possession. In order to combat this theft, the government tasked more police officers to conduct random searches of their colleagues a process that predictably resulted in chaos.
As the deadline neared, thousands of people throughout Zimbabwe frantically rushed to urban centres in order to change their soon-to-be-worthless currency. However, many were left stranded in their attempts to offload their old cash because some of the stores refused to accept the old currency, based on the assumption that they themselves would not meet the deadline to exchange the cash.
Furthermore, the vast majority of Zimbabweans live in remote rural areas, which necessitated a journey into town in order to purchase as much as possible with their old currency, or to try and exchange it at a bank. But this journey into town is far from costless. Petrol prices in Zimbabwe are rampant, imposing major costs on the few individuals that continue to commute to urban centres. Indeed, the official petrol price last week was Z$ 335,000 a litre (approximately R9.30), but at this artificially suppressed price there is no fuel available and motorists are forced to use the black market where prices per litre vary between Z$600,000 and Z$800,000.
Inflation has negative implications for trade because it adversely affects the competitiveness of export industries and import-competing industries. The negative consequences for industries can be compensated by a depreciation of the Zimbabwean dollar but this is just a temporary remedy that raises the cost of imports and increases their prices denominated in the local currency. Zimbabwe is heavily reliant on capital and intermediate goods and the recent depreciation of the dollar serves to raise production costs and prices even further. Inflating the currency has to stop, otherwise the people will totally refuse to accept the Zimbabwe dollar and revert to bartering and insisting on payment in the currencies of neighbouring countries.
Zimbabwes only chance of economic survival is to change its current policies. This can be achieved by allowing greater economic freedom and by obtaining some help from the global community. The foundations of economic freedom are personal choice, voluntary exchange, freedom to compete and security of privately owned property, rights that have all been trampled on by the current government. Unfortunately, for the people of Zimbabwe, help from the global community will only be forthcoming once president Mugabe is out of power.
Author: Jasson Urbach is an economist with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Free Market Foundation.
FMF Feature Article/22 August 2006
Publish date: 24 August 2006
The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation. This article may be republished without prior consent but with acknowledgement to the author.