Harare — Roots of economic deterioration lie in fiscal policy
UNTIL the mid-90s, Zimbabwe exhibited some of the best economic and social indicators in Africa. The gross domestic product (GDP) growth rate averaged a remarkable four percent per year between 1980 and 1995.
However, a combination of extreme populist policies adopted since 1996 changed the success story. Nominal GDP fell from US$70 billion to US$3.5 billion, and the annual inflation rate has risen to over 1700 percent.
The roots of economic deterioration in Zimbabwe lie in fiscal policy. The increase of five percent GDP (or US$3.5 billion) in spending on the war veterans in 1996, and the involvement in the Congo civil war two years later led to an imbalance in public funds, leading to increased money supply growth and inflation.
The situation took a turn for the worse in 2000, when government implemented its chaotic land reform that redistributed 80 percent of the commercial farms in the country within less than four years.
Government argued that productive land had been stolen by the whites during the years of colonisation. As the land re-distribution proceeded, however, production on the farms fell dramatically.
Making the situation even more critical, the government did not guarantee ownership rights to the new land occupiers, practically reducing investment incentives to zero.
The decline in agricultural output led to food shortages and a chronic mismatch in the balance of payments. As the government refused to decontrol prices of fundamental products such as fuel, fertilisers and foreign currency exchange rate, these products disappeared from the official markets.
In turn, parallel markets rose. It is estimated, for example, that 90 percent of all currency transactions in the country are now carried out through the black market. The government's aggressive subsidy schemes further increased the budget deficit, fuelling more printing of money and inflation.
What lessons can Latin America draw from the Zimbabwean experience? In general, our macroeconomic indicators and our recent history are far removed from the economic reality of Zimbabwe. However, populism is still rife in our region, exposing the current stable situation to significant risk.
Bolivia expropriated its gas production plants, provoking the collapse of production of its major source of growth. Chances of new private investments in that country have fallen because of the lack of property right guarantees and stability.
In Argentina, the government implemented an aggressive price control policy to manage inflation, while increasing fiscal expenditure through subsidies. The new leader of the continent is populist dictator Hugo Chavez, who, not by chance, is cut from the same cloth as Zimbabwe's President Robert Mugabe.
Even in Brazil, where economic practices by the Lula government are pro-market, we must be alert to signs of populist signals, especially where fiscal policies are concerned. Many Brazilians still have an aid mentality toward government expenditure, not realising that the size of the state brings major distortions -- to begin with a tax burden of almost 40 percent of the GDP -- which hinder growth. This is the sole reason why Brazil's GDP is growing at a low average rate of three percent while the average for other developing countries is over six percent.
Similar to Zimbabwe, Brazil is also grappling with the issue of agrarian reform and respect for property rights. More equitable redistribution of land is justified, but it should be implemented in a way that does not compromise productive capacity. Effecting agrarian reform in an abrupt manner without guarantees for adequate compensation for the land owners and without offering minimal title to the new occupants brings with it undesirable economic and social consequences.
Where fiscal issues are concerned, Brazil is far from the extreme situation of Zimbabwe, but Zimbabwe's experience should make us rethink collusion with abuses provoked by movements such as "Sem Terra" ("Landless") in Brazil.
The Brazilian experience has a lot to teach Zimbabweans -- they, in fact, show keen interest in our stabilisation programmes and in the establishment of the Real. At the same time, however, Zimbabwe can also provide us with a valuable lesson on how populist and radical actions can jeopardise an economic success built up over decades.
(Translated and adapted from an article that appeared in the December 19, 2006 issue of Valor Economico)
Dr Caio Megale is a partner at Maua¡ Investments and a Professor of Economics at IBMEC in Sao Paulo, Brazil. Megale visited Harare last October and presented a paper on "Brazil's experience in taming inflation"at the "Just Business" forum hosted by the American Business Association of Zimbabwe (ABAZ).