HOW NOT TO BECOME A ZIMBABWE OR VENEZUELA

Last week I came across two disturbing stories from Zimbabwe, which has just done yea since the dismissal of Robert Mugabe and Venezuela, whose economy is in rapid decline despite having the largest oil reserves in the world.

In the Zimbabwe story it had the heart breaking revelation that shortages are so total and the people so desperate that if they see a queue they just fall in line in the hope that they will be something at the end of the line. That’s just unimaginable, to me at least.

That if I was on my way to work and I turned the corner and I saw a queue had formed I would park my car or jump out of the taxi to join it. Interestingly the next ten people in the line probably wouldn’t know what they were queuing for and I wouldn’t have answers for the man behind me. That is so heart-breaking.

In Venezuela the economy is so in the toilet that the HIV/AIDS victims who only a few years ago were getting free anti-retrovirals from the state cannot get any neither the free ones or even buy at the pharmacy. As a result they go on blind fate and drink the juice from a tree known as the guasimo, whose potency scientists doubt.

For us we need to ask how did these countries, once beacons of development, get there and how can we avoid sinking into their quagmire.

Below is my four ways to avoid a Zimbabwe/Venezuela situation, in no particular order.

1.       Don’t attack the productive sectors

In the early 2000s Mugabe needed to shore up his political support and decided to forcefully redistribute the Whites Zimbabweans’ land to his cronies and a few token peasants. He was largely successful in achieving this and subsequently won the election, but it was Pyrrhic victory.

The same white farmers were the main producers of food and agricultural produce, which produce supported arguably the continent’s most vibrant agroprocessing industry, which in turn employed thousands of Zimbabweans.

"Many of the farms that were expropriated have reverted to bush, Zimbabwe now relies on the imports and donors for food and the famed agro processing industry has gone to ground. The effect of this is that exports have fallen off, hard currency receipts have plummeted and the country despite the best intentions of the new leadership is once again rolling into the abyss....

2.       Don’t try and be cleverer than the economy

In Venezuela the government of then president Hugo Chavez buoyed by oil prices that reached $140 a barrel a decade ago thought they could subvert the laws of economics. They instituted price caps on essential commodities as a way to raise the living standards of all. They imported food and sold it at less than the cost price. While the oil prices were high and the government could afford to subsidise the adventure things were good for Venezuelans. But productivity fell, after all why work hard to save costs and improve efficiencies when the government will pay you. When the government couldn’t sustain the subsidies and the producers fat on government subsidies could produce efficiently they went out of business and living standards plummeted.

When governments are flush with cash their instinct is to do the popular thing like lower the economic burden of the people in ways that are unsustainable and subject to abuse.

Surpluses should be invested in education, health and infrastructure, to improve the ease of doing business in the country, to ensure the economy’s competitiveness is maintained.

3.        Nip corruption in the bud

When you look at the fall of Robert Mugabe his corrupt cronies including his wife Grace had a lot to do with the collapse of his regime. In the last two decades or so many of these were let loose to not only take for themselves prime farmland – which was supposed to be redistributed to the lower classes, but also expropriated the revenues from state owned enterprises and mines. 

They did so without replacing parts or trying to run them as going concerns. They literally ground them to a halt.

"The corrupt are rapacious, they don’t have self-regulating mechanism to determine that enough is enough. They will keep gorging on the public funds and extorting the productive sectors, even when to do so would be to kill the geese that lays the golden eggs. And even then they won’t stop. They will begin to feed on themselves triggering instability.

4.       DO NOT PRINT MONEY!!!

At one point inflation in Zimbabwe was so bad that it was measured in thousands of percent. The story is told of the man who caught a bus to go across town to buy bread. By the time he got to the bakery the bread had run out. As if that was not enough he then found he couldn’t afford the bus fair to where he had come from because it had quadrupled in the interim.

When governments begin to print money this signals their final capitulation and desperate attempt to subvert the laws of economics. After messing up the productive sectors, letting corruption run rampant and tried all sorts of shenanigans to trick the economy to bending to their will – you can’t cane or torture the economy into shape, they resort to printing money to alleviate the immediate need for salaries, payouts to cronies and the rest be damned...

From then on you are on slippery slope which can lead to in Zimbabwe’s case where they have had to rely on US dollars or South African rand. The problem though is because you have gutted the productive sectors you are not exporting much of anything to have enough dollars to keep the economy afloat.

In Venezuela’s case they launched a crypto currency backed by their oil reserves. The problem is the oil sector is producing less than half its capacity and all the oil they export is used to pay off existing debt.