Plain talk about the Zimbabwean economy

Speech given by Ambassador Christopher Dell At Africa University, Mutare, Zimbabwe, November 2, 2005

Good morning,
Mangwnani,
Livhukhe njani,
Muito bom dia aos todos os meus colegas de Angola e Mocambique
Honorable Governor Tinaye Chigudu, Representatives of the Business Community, distinguished guests, and Vice Chancellor Murapa,

It is an honor to be here with you today. Vice Chancellor Murapa, allow me first of all to thank you, the students, faculty, and staff of Africa University for your generosity in coming to the aid of the victims of Hurricane Katrina. Your decision to divert a donation of bedding destined for 15,000 people in Zimbabwe to New Orleans where many Americans were in desperate need in a time of crisis was greatly appreciated.  We in government appreciate the efforts made by Americans and Zimbabweans of faith to help their fellow mankind in a time of need.  The gesture was emblematic of the spirit that made the founding of Africa University possible, and which brings 300 American volunteers a year to Mutare to work on charitable projects.  I salute this distinguished institution and the fine work you are carrying out.

Since 1992, the US Embassy and Africa University have maintained a close relationship in furthering higher education in Zimbabwe and Africa.  We have helped finance the building of some of your magnificent facilities and supported the Institute of Peace, Leadership and Governance in its work developing professionals dedicated to spreading peace and democracy throughout Africa.  I commend your efforts and wish you success as you continue to develop the Institute’s programs. As a leading institution of higher education in Zimbabwe and Africa, and with a program focusing on questions of leadership and governance it is only fitting that straight talk about the Zimbabwean economy begins here.  I hope, in the spirit and tradition of academic freedom and the search for truth, that we will have open and unfettered exchange today.

Ladies and Gentlemen, no issue today is more important to the future of Zimbabwe nor has more potential to harm the region than the growing collapse of the Zimbabwe economy.  Not too long ago, Zimbabwe had a vibrant and diversified economy.  It was a land of great hope and optimism in Africa.  It had a leadership role on the continent and was a symbol for the rest of the world of what Africa could become.  Today, as you know, none of those things are any longer true and Zimbabwe is a country in deep crisis.  I know of no other example in the world of an economy that, in times of peace, has contracted so precipitously in the course of six years.

The facts and figures will be familiar to you.  I’ll mention them only briefly:  Real GDP fell by almost 30 percent from 1997 to 2003, and the trend has continued through 2004 and 2005.  That decline, I note for the record, began well before the beginning of so-called fast-track land reform and before the United States imposed sanctions in response, suggesting a problem with deep, deep roots.  Inflation is at least in the mid-triple digits and clearly on the rise.  If the government continues to print money to meet its obligations it could well drive inflation into quadruple digits by year’s end.  Manufacturing has shrunk by 51% since 1997 and exports have fallen by half in the past four years.  Almost every major economic indicator has declined significantly since 2001.  The investment and operating environment is dismal.  Foreign direct investment has evaporated from US$444 million in 1998 to US$9 million in 2004.

Agricultural production – the mainstay of the economy  - has collapsed under violent implementation of a necessary, but badly thought through, land reform.  The government, or officials of government taking advantage of their office for personal gain, has continued to expropriate commercial farms without compensation and to distribute these farms in a non-transparent manner to ruling party insiders, even though the Cabinet and Politburo formally declared the end of the process earlier this year. We now have the spectacle of a government at odds with itself as Reserve Bank Governor Gono and Vice President Msika speak out against farm invasions, while Minister Mutasa threatens commercial farmers and condones new farm invasions, often led by CIO officers under Mutasa’s control.  More recently we saw Deputy Minister Matonga help himself to a choice citrus estate only days after calling for equitable distribution of land.  Not only the commercial farm owners have been affected.  This misguided and ill-fated land grab also displaced over a million farm workers and their family members. 

The human cost of Zimbabwe’s economic crisis has been extraordinarily high.  The estimated proportion of the population living below the official poverty line has more than doubled since mid-1990s - it is now about 80 percent of the population.  At least half the country faces food shortages.  The country’s human development indicators, once the envy of Sub-Saharan Africa, have sunk to the lowest fifth percentile in the world.  Well over a quarter of the population has fled the country according to the last national census.

It was more than dismaying to read a paper published in July by the Center for Global Development in Washington on the Costs and Causes of Zimbabwe’s Crisis.  It estimated that Zimbabwe’s economic crisis has set the country back more than half a century.  The paper calculated that the purchasing power of the average Zimbabwean in 2005 had fallen back to the same level as in 1953 when the Confederation of Rhodesia and Nyasaland was established.  That’s an astonishing reversal of 52 years of progress in only half dozen years.

The flood of economic bad news has been continuous.  Most recently, the World Economic Forum published its assessment of the state of Zimbabwe’s competitiveness.  Alarmingly, it ranked Zimbabwe as the least competitive of all 117 economies studied. The facts and figures are bleak. I pose the question: What has caused Zimbabwe’s unprecedented economic descent? The government’s official position has been that the economic collapse is the result of drought and sanctions imposed by unfriendly western nations in response to land reform. 
Let’s look at these assertions one at a time.

On the face of it, it seems possible that drought could account for Zimbabwe’s precipitous fall in agricultural output, especially since so much of the economy is based on rain-fed agriculture and the region faces a regular cycle of varying rainfall.  This explanation, however, does not hold up under scrutiny.

The Cato Institute in Washington recently published an insightful paper on the collapse of Zimbabwe’s economy.  The author, economist Craig Richardson, shows that first, the “drought” of 2000/01, so often cited by government as the cause of its problems, was less severe than at least 12 other recent low rainfall periods.  Richardson studied the correlation between GDP growth rates and rainfall since 1985 based on data provided by Zimbabwe’s Meteorological Services Department from all 93 rainfall stations in the country.  He found that the historically close correlation of GDP with the rainfall cycle no longer holds after 1999.  Since 1999, even in years when rainfall has recovered, the Zimbabwean economy nevertheless has continued to decline.  Let me say this again:  since 1999, in the face of poor government policies, agricultural production has fallen even when rains have been good.

The Center for Global Development paper I referred to earlier carries the rainfall analysis one step further.  It notes that rainfall patterns are regional, affecting all or parts of Zimbabwe’s neighbors too.  Yet Zimbabwe’s decline in maize production over the past five years has been dramatically greater than either Zambia’s or Malawi’s.  In fact, Zambia’s maize production actually increased after 2002 despite low rainfall they have experienced.

Ladies and gentlemen, I don’t pretend to be an agronomist, but I do know that Zimbabwe has experienced cycles of drought since time immemorial.  Its agricultural sector adapted to the conditions and built impressive irrigation systems and dense networks of dams.  As challenging as the conditions are when rainfall is below average, let’s put the drought defense to rest.  Under scrutiny, it doesn’t sufficiently account for Zimbabwe’s agricultural collapse.

Other factors have clearly been at work.  These include misguided land reform, interventionist policies, the loss of knowledge and experience in agriculture, bad economic policies, distortions of the market, and the forex crisis resulting from government policies which have put inputs out of reach of most farmers, to name but a few factors.

Let’s also set the record straight on sanctions.  The Zimbabwe Democracy and Economic Recovery Act of 2001 is the cornerstone of U.S. policy toward Zimbabwe.  Under the Act, the United States conditions aid and financing for Zimbabwe on the government’s restoration of the rule of law, the conduct of free and fair elections, placing military and police forces under effective civilian control, and a commitment by the government to an equitable, legal, and transparent land reform program.

Until Zimbabwe meets these conditions, the United States will maintain narrowly tailored financial and travel sanctions on ruling-party and government leaders and their families.  Sanctions on specific high-level individuals and their families are the vehicle that the United States and like-minded countries use to signal international disapproval of the way that Zimbabwe’s ruling elite has trampled on democratic and economic freedoms.  The travel and financial sanctions that we have imposed target the highest-level individuals in Zimbabwe.  They restrict entry into the United States for senior members of the government, and others who formulate, implement, or benefit from policies that undermine Zimbabwe’s democratic institutions.  The financial sanctions prohibit any U.S. person from engaging in any transaction with any person or entity found to be undermining democratic institutions and processes in Zimbabwe.

Let me make it perfectly clear, ladies and gentlemen, Zimbabwean firms that are not connected to regime leaders are free to do business with American firms, and American firms are free to invest in Zimbabwe and trade with any individual except those top-level sanctioned officials.  The argument that these narrowly targeted sanctions have hurt the larger economy could only be true if the economy as a whole were entirely in the hands of the 86 government and party officials on the list and they controlled all of it.  No doubt they have a disproportionate share of Zimbabwe’s economy in their hands, including multiple farm ownership, but not even the most jaded observer believes they control the entire economy and that therefore international sanctions on them alone explains the country’s problems.  That said, one can only suspect that their constant complaints about sanctions are an indication of how much their own pocketbooks have suffered.

There is so much misinformation about sanctions being bandied about that you might be surprised to learn that Zimbabwe actually has a trade surplus with the United States.  It exports more goods and services to the U.S. than it imports.  U.S. imports from Zimbabwe were US$76.2 million in 2004; our exports amounted to US$47.3 million. Still, that’s over $100m, over $110m, in economic exchanges between us. In fact, the United States ranked fourth in 2004 among the major destinations for Zimbabwe’s exports; the U.K. ranked second.  To me this is clear evidence that, despite assertions in the press and by government officials to the contrary, there are no blanket sanctions against doing business in Zimbabwe and the effect of sanctions is confined to the senior people they are meant to hurt.

Back then to the original question: What has been the cause of Zimbabwe’s unprecedented economic descent?

As Zimbabwean economist Erich Bloch pointed out in his column in The Independent just last weekend, when recognition of any economic reality becomes unavoidable, the invariable strategy of the government has been to deny culpability, and to attribute responsibility and blame to others no matter how devoid of credibility that attribution may be.  But the real answer is really quite different and simple, as well as quite shocking:  Neither drought nor sanctions are at the root of Zimbabwe’s decline.  The Zimbabwe government’s own gross mismanagement of the economy and its corrupt rule has brought on the crisis. 

The examples of misguided economic decision making since the 1990s are manifold and well documented.  The fiscally reckless, massive, unbudgeted payout to war veterans in 1997 is often cited as the beginning of the economic decline and Zimbabwe’s costly misadventure in the Democratic Republic of Congo followed soon after. The government’s policy of land seizures and tolerance for chaotic disruptions on commercial farms led to the collapse in agricultural production.  The impact of the farm invasions has extended beyond food security, beyond Zimbabwe’s balance of payments crisis, and beyond the plight of the thousands of individual expropriated farm owners.  As a country with its own history of racially-based injustice, the U.S. recognizes the need to right past wrongs and is engaged in its own long struggle to do so.  So let me say it as openly and publicly as I can:  despite repeated assertions by the Government of Zimbabwe, the U.S. does not oppose land   reform.  But we do condemn the misguided and blatantly selfish way it has been conducted in Zimbabwe.  Above all, we are appalled that a land grab allegedly conducted on behalf of the people has, in fact, intensified the suffering of Zimbabwe’s most vulnerable segments of society – the rural and urban poor. 

Fast-track land reform, still underway, as you know, here in Manicaland, also had the ugly and debilitating side effect of spurring violence, racial mongering, and the destruction of property and livelihoods.  Attempts to get the country back on track since the onset of land seizures have been riddled with political favoritism, disregard for transparency and the refusal to admit and correct mistakes.  Farm audits and re-audits ordered by the Government of Zimbabwe and the State House, take place, but the results appear to drop into a black hole.  No wrongs are righted; the rule of law is a shambles. Multiple farm ownership by the politically powerful and their families makes a mockery of the government’s official “one man, one farm” policy.

Fiscal probity is nonexistent when the budget deficit hovers in the double-digits.  Even at Zimbabwe’s high rate of tax collection, revenue in a contracting economy cannot keep abreast of the country’s public spending.  The government’s wage bill, saddled as it also is with ghost workers benefiting from the patronage system, is an astounding 20 percent of GDP.   I ask you, are you receiving a level of service commensurate with this outlay?

Let me share a nugget of information with you that illuminates Zimbabwe’s odd-man-out status in Africa.  In 2004, only Angola and Zimbabwe in Sub-Saharan Africa had inflation rates above 20 percent.  Angola brought its rate down from 77 percent in 2003 to about 30 percent a year later.  I needn’t remind you how far out of control the cost of living is these days in Zimbabwe. Since I arrived in this country I’ve been struck repeatedly by the extent of the government’s involvement in so many far-reaching aspects of the economy.  Its urge to control, control, and control some more puts a stranglehold on economic activity that belongs solidly in the private sector.  Where else in the world does a central bank governor formulate sectoral policy?  Why do the officials fear unleashing market forces?  Do they have so much to lose personally if they were forced to compete on a level playing field with others?  Their actions provide an unmistakable answer to that question, I fear.  Moreover, it is the certainty of misguided government policies and not/not the effect of limited, targeted sanctions that have discouraged foreign direct investment.

Let me tell you something: Nothing rattles investor confidence more than the prospect of expropriation.  The constitutional amendment striking down the right to redress in the courts for victims of land expropriation sent a shock wave through the community of investors, local and international, who keep an eye on the climate in Zimbabwe.  

Ladies and gentlemen, while the Zimbabwean economy appears to be entrenched in a downward spiral, and the abandonment of sensible economic policy has shut off most foreign aid, scared away most foreign investment, and spurred an alarming rate of brain drain, there is good economic news coming out of other parts of the region.  Zambia, for example, once regarded, I understand, as Zimbabwe’s poor cousin, has been reaping the benefits of prudent economic management.

The Zambian government’s commitment to macroeconomic reform has produced a remarkable turnaround.  Zambia clearly still faces daunting challenges, but its leadership has implemented sound policy advice, received very deep-cutting debt relief from creditors and the donor community this year, and has put itself on a sustainable growth path.  I read recently that real GDP growth projections had been upped to the high single-digits marking a remarkable about face after two decades of decline.  Most interestingly, the turnaround is based on strong performance in three pillars of the economy that were once the mainstays of Zimbabwe’s prosperity: agriculture, tourism and mining.  In addition, Zambia’s turnaround has attracted a flood of grants and investment in the country. 

Botswana is a further example of a close neighbor where the sound management of natural resource wealth over many years has yielded tangible benefits. Real GDP growth there has averaged nearly 9 percent per annum, and per capita income has risen above US$3,500.  Botswana has also made impressive gains with respect to many social indicators. 

Last month the Reserve Bank Governor presented his Monetary Policy Review Statement for the third quarter.  At his presentation to the diplomatic community he called on the assembled ambassadors to do Zimbabwe a favor and portray a positive picture of Zimbabwe to investors at home.  I believe Governor Gono has misjudged diplomats’ influence on investors.  There are not many governments left in the world that can persuade or direct their business community to invest in a particular country.  In the free market, investors make their own choices.  Usually they do so based on careful research.  It can be no surprise that this, rather than vague knowledge of obscure and limited sanctions on obscure and limited foreign leaders discourages potential investors from Zimbabwe.  Investment flows to countries with sound macroeconomic policies.  Business people the whole world over – from Andorra to Germany, through Malaysia and Singapore to Zimbabwe – are more likely to invest – to risk their own money – when they have reasonable confidence in the rule of law, enforceability of contract, respect for private property and due process, all of which mean that tomorrow will more or less resemble today.  Living in Zimbabwe, I don’t need to tell this audience just how little this country resembles that picture nor how little government policies have done to foster an attractive and stable investment climate.   When the future is as unpredictable as Zimbabwe’s, investors will not take risks and in the global economy they will look elsewhere.

As an example of the wrong signals being sent by the government of Zimbabwe, I learned recently of the experience of Lazarus Zim, CEO of Anglo American in South Africa.  He related a telling story of his investment experience in Zimbabwe.    Anglo American, you might know, is a shareholder in Hippo Valley Estates, which is under threat of seizure by the government.  Mr. Zim traveled to Zimbabwe to sort out the problem and was told to talk to the new governor of Masvingo province. He approached the governor, pointing out that Anglo American, through Hippo Valley Estates, had a contractual agreement with the government to farm in Hippo Valley.  The governor alleged no knowledge of the agreement.  Mr. Zim then produced the contract, which happened to bear the governor’s own signature.  To the Anglo American executive’s astonishment, the governor blithely passed off that the contract was “open to re-negotiation.”  You can imagine the lesson Mr. Zim took back to Anglo American’s Board from this experience and the consequences it has had on Anglo American’s plans to invest further in mining in Zimbabwe.

When Minister of Transport and Communications Chris Mushohwe suggested to the Annual Congress of the Confederation of Zimbabwe Industries in early September that the government might take over white-owned firms just as it had taken over white-owned commercial farms, alarm bells rang at international banks and throughout the investor community.  They asked whether it was time to rein in the lines of credit they had extended to their clients operating in Zimbabwe.  And they certainly concluded Zimbabwe is not now “open for business”.

So what will it take for Zimbabwe to turn around?

Taking another look at economic development in the region:  I can’t help but contrast the opposite course Mozambique is on.  Back when I served there from 1991-1994, during the last years of Mozambique’s long civil war, it was a desperately poor country near the bottom of every survey of measures of poverty and suffering.  Over the past years, however, Mozambique’s strong commitment to sound macroeconomic policies and structural reform has led to a remarkable improvement in economic performance.  During the last decade, real GDP growth averaged 8 percent a year – one of the highest growth rates in Africa.  Despite a sharp increase in petroleum prices, inflation has declined to low single digits, driven by lower food prices.  Growth in traditional exports is strong. The turnaround has attracted substantial private capital and donor assistance in an outpouring of goodwill toward the country.   And all this, by the way, even though much of Mozambique has experienced the same rainfall patterns as Zimbabwe.

Circling the region, I would be remiss if I failed to acknowledge and commend South Africa as an anchor of stability and sound economic management. The economy is growing strongly, inflation is down, public finances have been strengthened and the country’s external position has improved markedly. The Broad Based Black Economic Empowerment program has made advances.  The elevation of Lazarus Zim to the top spot at Anglo American is only one example.  Furthermore, the South African government’s commitment to basing land reform on well-defined legal principles also appears to be strong. In addition to the lessons to be drawn from the examples of these two neighboring countries, I’d like to note that the US Government is committed to doing its part to foster economic growth and poverty reduction throughout Africa.  In 2000, we took a major step toward this goal by enacting a new law called the African Growth and Opportunity Act, or AGOA.  This US law offers tangible incentives for African countries to open their economies, build free markets, and embrace political pluralism.  Those countries that adopt free market principles adhere to the rule of law, and respect human rights are eligible under AGOA to export a wide range of goods to the United States duty free.  Because of this generous piece of legislation, US imports from Sub-Saharan Africa, for example, increased by over 50 percent from 2000 to 2004.  This jump in trade included a diverse list of products, among them apparel, cut flowers, and processed agricultural goods. 

Thirty-seven African nations have met the AGOA criteria and are eligible for the trade incentives.  One of them, Angola, coming out of 27 years of civil war nonetheless made sufficient progress to qualify for AGOA during my time as ambassador there.   Unfortunately Zimbabwe with all the advantages it had, is not qualified, and in fact is going even further away from qualifying.    Like Sudan and Somalia and a small number of other countries, bad policies have sidelined this country.

For similar reasons, Zimbabwe has also missed out on another major U.S. initiative to help Africa:  President Bush’s Millennium Challenge Account Initiative.  The Initiative draws on development lessons learned over the past 50 years to provide assistance to those countries that rule justly, invest in their people and encourage economic freedom.  The U.S. Congress provided nearly US$1 billion in funding for this initiative in FY 04 and US$1.5 b in FY 05.

Distinguished guests, let me not leave you with the impression that the United States has forsaken the people of Zimbabwe when their needs have never been greater.  And do not for a moment leave here with the thought that the United States is the enemy of the Zimbabwean people. We support, and will continue to support, civil society, democratically minded groups in Zimbabwe, and the sick, the hungry and the poor of this country.   In a word, we stand with the ordinary people of this country.

Despite the government’s refusal to acknowledge the widespread hunger that its policies have caused, we and other donors are helping to feed over five million Zimbabweans.  The grim irony of President Mugabe, who has presided over, led and caused this decline, lecturing the Food and Agriculture Organization was lost on no one.  The United States continues to help protect Zimbabwe’s most vulnerable populations from the disastrous consequences of this government’s policies.  Since 2002, we have spent $300 million on food assistance for Zimbabwe.  While Zimbabwe’s policy makers drive the economy to ruin, the United States has worked to keep Zimbabweans from starving. While the government of Zimbabwe plays politics with food, we remain committed to providing assistance to all who need it based solely on their needs.  While the Government of Zimbabwe denies there is hunger in the land, we are shipping food here.

Allow me also to take this opportunity to also note that the United States implements the largest HIV/AIDS program in Zimbabwe of any donor.  Despite the erosion of Zimbabwe’s formerly excellent health care system, current relatively modest HIV/AIDS programs are having a real impact. HIV prevalence is reliably reported to be falling and the United States is proud to have contributed US$24 million this year alone toward that decline. 

Ladies and gentlemen, the United States is not alone in its assessment of the dire state of the Zimbabwean economy and the measures needed to put this extraordinarily endowed and profoundly beautiful country back on track.  But without decisive and deep cutting policy action, the outlook for the next years is bleak. Zimbabwe cannot pull itself out of the hole it has dug by itself.  It simply can’t do it.  The decline has now gone too far.  Zimbabwe must re-engage with the international community to get balance of payments support and debt restructuring. Governor Gono noted in his last Monetary Policy Review that the public external debt is now over US$ 4 billion and rising.  Zimbabwe cannot service this debt on its own.  Paying down its arrears to the IMF, however, is only one of the IMF’s requirements for reengagement.  The second requirement is implementation of a comprehensive macroeconomic reform package that will lay the basis for sustained growth, low inflation, and external viability.  Ultimately it’s neither the United States nor any other government who decides the success of an economic policy. The real measure of success will be when the investor’s vote with their checkbooks and the economy once again begins to flourish. The policies undertaken by the government today fall well short of what is needed to address the economic deterioration caused, as I said before, by shortsighted and misguided government policies.

In closing, may I say that, for our part, the United States adds a third pre-condition for re-engagement.  And it goes beyond the economic realm because a dynamic economy hinges on the government representing the people’s interests.  To reiterate my remarks in clarifying the U.S. sanctions policy:
While our humanitarian assistance is generous and you can count on it to remain generous, only when Zimbabwe’s government restores the rule of law, conducts free and fair elections, puts military and police forces under effective civilian control, and repeals repressive legislation such as POSA and AIPPA will we be prepared to extend our support more broadly.  In short, real reform is the condition of engagement and that engagement offers the only real hope of turning the Zimbabwe economy around.

Ladies and Gentlemen, it is my hope that this speech will begin a series of discussions on the important issues of peace, stability and prosperity in Zimbabwe; free academic debate based on facts, not rhetoric.  It is not for the U.S. to dictate to Zimbabwe what it must do.  That is for the people of Zimbabwe to decide.  But as a friend we can provide advice.  And despite disparaging dismissal of so-called “textbook economics” by Zimbabwe’s most senior leaders, the textbook economics are in the textbooks because time and again they’ve been shown to work.  Policies of “Look East” and “indigenization”, if they are to work at all, can only succeed if they too are put in this framework.  They are not alternatives to the orthodoxy.  To argue that they are is simply what the first President Bush long ago in a very different context called “voodoo economics”.

Thank you,
Ndatenda,
Ngiyabonga,
Muito obrigado