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.
