Wednesday, June 4, 2014

ZIMBABWE: HOW TO RUN AN ECONOMY INTO THE GROUND!


In case you missed it Zimbabwe, after a few years of recovery is in danger of descending into deflation, the opposite of inflation, where there is not enough money to buy the goods produced and forcing a collapse in prices and dampening economic growth.

You have to fill for the people of Zimbabwe.

The economy was just beginning to grow again after eight years of contraction and bringing their hyperinflation under control. I don’t think Hyperinflation describes what Zimbabwe went through. It is estimated that inflation peaked at 500 billion percent in 2008. This means that average prices in the once food basket of southern African were rising at least 150 times a second!

So between the time you punched the amount you require from your ATM and the money actually being spat out it would have become literally worthless. 

It comes as no surprise that in the darkest days of the Zimbabwe economy the largest denomination note was for the Z$100,000,000,000,000 or a hundred trillion Zimbabwe dollars – that is 14 zeros for you!

"The situation got so bad that the country was forced to abandon the Zimbabwe dollar and adopted a basket of currencies including the South African Rand, US dollar and Chinese Yuan as legal tender in the country, which was ironic because President Robert Mugabe always want to make out that his country is the last bastion of anti-colonial resistance... 

Well using other people’s currencies to run ones economy is the ultimate capitulation to the “colonialists” and their evil schemes to take over your economy.

So how did a revolutionary leader sell his country down the river like this? How did a once vibrant agricultural and industrial economy come to this?

Mugabe came to power at the head of a struggle for majority rule in Zimbabwe. The grievances of the people were the usual clamour for the right to self-determination and a need to redress wealth inequalities, which meant mainly land redistribution.

With black self rule in the bag came the sticky issue of land redistribution. Sticky because the white owners had raised the productivity of the land to the highest probably on the continent and it would not do to destabilise that part of the economy.

As often happens early land distribution was hijacked by the “revolutionary” which meant the majority still had little or no access to land while a new class of black middle class or super rich emerged.

So the white farmers went on with their business while for the new black nouveau rich life had never been better and the black everyday man wondered whether what they had signed up to by supporting the “revolutionaries” as their collective lot had not improved, and in many cases even deteriorated since 1980.

Fast forward to 2000 and the government decided to give tacit approval to the landless to forcefully takeover the commercial farms of the white farmers.

In Uganda we need no explanation to what came next. The blacks unable to sustain the commercial concerns – I don’t think they even tried, regressed into subsistence farming and that was the end of Zimbabwe as a net exporter of food.

Lowered productivity affected tax collections and donor inflows forcing government to print money to sustain itself and meet its obligations – a clear recipe for inflation. Inflation happens when there is too much money – government money printing presses were working overtime, chasing too few goods – production had collapsed.

So to redress the issue the revolutionaries had to swallow their vomit, ditch their currency and adopt foreign currencies, as this column had predicted they would in 2008 ( we take no credit for that it was the inevitable conclusion to Harare’s total disregard for basic supply-demand economics).

This had two immediate effects one, it meant inflation had to drop because Harare could not print the foreign currencies even if it wanted to but the other consequence was that it became harder and harder to find the money to make critical imports of medicine, fuel, plant and machinery needed to jumpstart the economy after all exports had collapsed.

Which brings us to the current threat of deflation. 

How does Zimbabwe punch its way out of this downward economic spiral? 

For beginners the politicians need to put a lid on this uncalled for talk of indeginisation of foreign companies. There is a strong case for increasing the equity holding in these immensely profitable companies but there are structured ways that this can be achieved without affecting the long term economics of the company. Of course seeing how the government treated the white farmers capital is not going to wait around to see how Mugabe and his cronies will go about redistributing these company stakes. The proof of this is that factories are closing.

Zimbabwe needs to produce and export to earn the foreign currency that will jump start the economy.
Zimbabwe is a 21st century test case of what happens when bad politicians come up against the economy. We should take heed!

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