5 April 2019

Zimbabwe: Why Property Rights Matter for Zim's Economic Recovery

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analysis

The current debate on payment modalities for tobacco farmers and the subsequent usage of the earned foreign currency by the farmers has brought to the fore the aspect of property rights in Zimbabwe.

On March 15 2019, the Reserve Bank of Zimbabwe (RBZ) and the Tobacco Industry and Marketing Board (TIMB) communicated that tobacco farmers will be paid 50% of their net earnings in foreign currency, while the remaining 50% will be paid in Real-Time Gross Settlement (RTGS) dollars at a rate of RTGS $0,50/kg delivered up to RTGS $300.

In terms of foreign currency withdrawal, the communique says that smallholder farmers (growers of two hectares and below) are entitled to US$10/kg per sale. This has not gone down well with farmers across the board who feel that their property rights are being violated as they are being denied access to their hard-earned foreign currency for a crop which earned the country US$892 million through export receipts in the 2018 season.

What is worth mentioning is that farming is a business and farmers invest in it with a view to earning profits and being able to utilise those earnings in the manner and time they see fit. Failure to respect this fundamental right may have disastrous consequences on the amount of crop to be delivered to the auction floors this season and upcoming seasons. It applies to other economic sectors too.

One of the key measures to the ease of doing business and investment climate in any country is the respect for property rights. This is largely because investment, economic prosperity and property rights are inextricably linked. The economy grows through investment (domestic and foreign), while investment can only grow if the investor is guaranteed access to property and the commercial benefits that come from using or owning it.

Property rights refer to the legal ownership of a resource or economic good, either tangible or intangible and how it can be used by the owner(s). The owners (entities) may be people, companies, charities, governments, trusts etc. Property rights can be viewed as an attribute of an economic good and the attribute has four broad components often referred to as the bundle of rights.

These are the right to use the resource, the right to earn an income from it, the right to transfer it to others and the right to enforce property rights on it. In economic development, property rights form the basis for all market exchange, and the allocation of property rights in a country affects the efficient of resource use. Property rights give the owner or right holder the ability to do with the property what he/she chooses. That includes holding on to it, selling or renting it out for profit or transferring it to another party.

Section 71(2) of the constitution states that every person has the right in any part of the country to acquire, hold, occupy, use, transfer, hypothecate lease or dispose of all forms of property either individually or in association with others. The property rights component is an assessment of the ability of individuals to accumulate private property (wealth) for economic gain, secured by clear Zimbabwean laws that are fully enforced by the state. It measures the degree to which a country's laws protect private property rights and the degree to which the government enforces those laws. There are immeasurable benefits to secure property rights in Zimbabwe and these include:

Improvements to property

If a property owner enjoys a legal claim to their property which is protected by the rule of law, then they can be able to make improvements to that property and enter into secure long term contracts with other parties to improve output. This ultimately benefits the economy and the society at large through employment creation in the value chain, infrastructure modernisation and tax payments on output or disposal of that property.

Without this legal claim or secure property rights, investors adopt a wait-and-see attitude to the Zimbabwean market.

At bestinvestors make piecemeal commitments which are based on certain milestones or economi c outlook at that time. It also becomes very difficult for investors to secure funding from financial institutions who naturally look at precedence on how the government handled similar investments in the country. Trust on the part of foreign and domestic investors that their investments are safe from potential expropriation is very key to investment.

Cases such as the raiding of foreign currency accounts (FCA) by the central bank in 2009 and arbitrary acquisition of land belonging to Zimplats, African Distillers, ZimAlloys, RioZim, diamond mining companies in Chiadzwa and others, set bad examples to potential investors on how the Zimbabwean government deals with property rights.

Agric productivity and food security

When farmers have a formal claim to their land, they are more likely to invest in it by installing irrigation systems, building structures and secure funding to increase

production.

Those that have capacity to produce can also acquire the land and make long term financial commitments on it.

Even though the agrarian reform programme was a necessary step in income redistribution in Zimbabwe, the manner in which it was done and failure on the part of the Zimbabwean government to compensate former owners on the developments done on the land dented agricultural productivity.

The current 99-year leases are also not transferable and the government reserves the right to withdraw the lease in future if it deems fit. The current conditions render agricultural land dead capital and may not be conducive for large-scale production. Security to land tenure gives land a commercial value for investment purposes and guarantees food security.

Economic incentives

Economic incentives broadly refer to return on investment and profits that emanate from entrepreneurship. Lack of security leads to low levels of investment especially from foreign investors who have other options on the African continent. Investment shies away from countries with insecure property rights because they lack foreseeable guarantees to economic incentives. Zimbabwe's peers in Sadc (Mozambique, Zambia, Namibia, Angola, Botswana and South Africa) have reaped billions of FDI from their resources due to secure property rights and in part through learning from Zimbabwe's bad examples.

Secure property rights vastly improve economic productivity through guarantees to economic benefits, in the short and long term. Therefore there is a cost of having complicated or insecure property rights. And for Zimbabwe, the cost has been lack of economic development and investment.

Private investors have not been willing to commit their capital to the local economy even in public-private partnerships (PPPs), joint ventures or other giveaway deals from the Zimbabwean government largely because of tainted respect for property rights. Where ownership right to land and other assets are insecure, businesses, especially small businesses, are often undercapitalized, operating as part of a large informal economy.

As a result, income and output of those firms is lower than it otherwise could be. The difference between individual prosperity and poverty is in the nation's economic property. Nations prosper when property rights are well defined, respected and enforced.

Bhoroma is a business and economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe. -- vbhoroma@gmail.com or Twitter @VictorBhoroma1.

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