In a presentation titled "Coping with the Future" Professor Tony Hawkins highlighted the following in his speech at a British Council event recently;
Policymakers and business leaders in Zimbabwe seem to share the opinion that past policies – some that worked and many that failed, are still appropriate for the New Normal economy of the post-Global Financial Crisis world.
Global New Normal
Early in 2009 the US bond investment house PIMCO predicted a “New Normal” world economy characterized today by too little economic growth, too much debt and high unemployment, especially amongst the young
They also predicted “Shifting Growth Poles”, being that there will be a continuing, gradual shift in the centre of global economic gravity towards emerging markets, especially in Asia, excessive political polarization, and growing calls for greater social justice.
Nearly 6 years later that scenario has been proved largely accurate. Global growth has slowed from 4.2% annually in the decade before the GFC in 2008 to 3.2% since. It has been a similar story in emerging markets – growth slowing from 6.2% pre-crisis to 4.4%.
Global economic attention has moved to Ascendant Emerging Markets, and as predicted, the EM share of global GDP has increased to 56.5% from 43% while that of mature economies has fallen from 57% to 43.5%. But as EM growth has continued to slow, that of advanced countries has stabilized.
The "Slowdown" in emerging markets reflects Reform fatigue, Flawed growth models, Excessive reliance on credit creation and borrowing, often chaotic political changes and unrest and manufacturing loses momentum.
Zimbabwe’s New Normal
The global New Normal post-2009 is matched by the Zimbabwe New Normal – dollarization. Between them these two influences are forcing private sector managers to rethink their business models.
On the other hand, however, policymakers are locked into the past. They believe Zimbabwe can be rescued from long-run stagnation by an unwieldy combination of State interventionism and direction, and wholesale, growing reliance on foreign capital.
State INTERVENTIONISM includes import curbs, protectionism, state- selected “strategic” sectors, clusters and free zones are favoured, invariably without considering the global and domestic new normal reality. Repeated calls to reduce imports ignore the necessity of penetrating regional and global value chains.
BENEFICIATION includes Minerals beneficiation is not a viable industrial strategy, especially in an energy-starved economy. It has its place on a case-by-case basis, but it is not a blanket strategy, especially in a country with a massive energy deficit.
In fact, in 2014 a question-mark hangs over the viability of industrialization as a growth strategy, not just in Zimbabwe, but in sub-Saharan Africa as a whole. As economies develop so the share (in GDP & employment) of agriculture and mining falls, while that of manufacturing and services increases.
But typically, manufacturing’s share falls after some critical threshold is reached.
Recent global experience is that the downturn in manufacturing (deindustrialization) sets at lower per capita incomes ($12 000) than in the past ($22 000) and that many countries are bypassing industrialization altogether and jumping from primary industry to services.
In Zimbabwe, manufacturing peaked at around 25% of GDP in the early 1990s, since when it has halved, while the share of services has increased 50%.
There are three adverse trends, namely De-industrialization or bypassing manufacturing increases the burden of job creation on all other sectors; then Productivity declines as activity – and jobs – shifts within agriculture from high to lower productivity farms, and finally, as jobs shift across sectors from higher-productivity manufacturing to relatively low-skill, low productivity jobs in services and especially the informal sector.
The focus in the media and in debates on politics and economics tends to be overwhelmingly short-term and highly introspective as “analysts” suggest that Zimbabwe’s problems are unique. They are not – they can be found in many other emerging markets, especially in Africa.
Income in Zimbabwe is stagnating as Zimbabwe’s problems are long-run; income per head no higher today than 50 years ago. In 1960, incomes per head were 73% of the sub-Saharan average, and today it is 43%.
Policymakers and business leaders focus on immediate, near-term problems like Trade deficit and Balance of Payments gap, Budget imbalances, Domestic liquidity constraint, the fragile financial sector and the foreign debt overhang.
Yet none of these is susceptible to a quick-fix, short-run, solution. All of them – some of which have been around for decades – require long-term solutions that tackle the country’s socio-economic fundamentals, including two thirds of the population – 75% in rural areas – living in poverty, formal unemployment 60%-plus of workforce, and no new jobs created in formal (non-farm) sector since mid-1980s.
Enter ZIMASSET and Future Growth
The government’s 5-year investment plan (ZIM-ASSET) targets creating 2.2 million jobs. This would mean GDP growing 20% annually to treble formal employment, virtually an unattainable target.
Economies do not grow without investment. Since dollarization, investment has averaged only 17% of GDP. For the economy to grow at the targeted (ZIM-ASSET) 6% to 7% rate, investment of at least 30% of GDP needed.
National savings were wiped out by hyperinflation and dollarization. Since 2010 savings have been negative – averaging 11% of GDP. And inadequate investment is being funded offshore to the tune of 28% of GDP each year.
Zimbabwe must attract foreign inflows – aid, FDI, Diaspora remittances, bank loans and credit lines. But because the government is a very poor credit risk with $5.75 billion in offshore loan arrears and well over $1billion in domestic arrears, foreigners are understandably reluctant to lend.
This has forced the country into bilateral deals with China and Russia whereby an already over-borrowed country will try to borrow a further $6 billion offshore that will take the debt burden to an even more unmanageable 135% of GDP by 2018.
In this process, Zimbabwe’s future is being mortgaged because servicing and repaying these loans for infrastructure and mining projects will absorb a large and growing chunk of future exports.
Re-balancing the Zimbabwean Economy
China, the US, the Euro area and many others have to undergo – often painful –rebalancing. Zimbabwe is no exception, especially after the meltdown of the “Lost decade” (1998-2008).
There are four priorities, namely reducing the consumption share in GDP to boost savings and investment, to Rebalance Balance of Payments, then accelerate job growth relative to wage growth, and Switch government spending from wages to O & M and investment.
Zimbabwe is now a high-cost business location, as the strengthening US dollar is a serious constraint on exports and a partial explanation for the explosive growth in imports.
Products can be manufactured and supplied more cheaply from abroad and especially South Africa, which has enormous cost advantages – logistics, scale economies, infrastructure, as well as the short-run benefit of a depreciating rand.
Since it peaked in December 2010, the rand has slumped some 35% while the US dollar has strengthened by 5%.
Emerging market currencies as a group have weakened significantly against the US dollar, meaning that today Zimbabwe is uncompetitive globally as well as regionally.
The signs are that the US dollar is in the throes of a bull run that could last for some years. That is bad news for Zimbabwe where already the currency is 20% to 25% overvalued. It is far easier to slip into dollarization than to get out of it.
The game changers needed include Policy – i.e. political – change could be the game-changer needed to improve investment climate. Very tight limits on what policy change in an open economy can achieve – especially as no quick-fix solutions to economic and institutional fundamentals are available.
Immediate Future Muddle Through Economics
Business executives must be aware that the macroeconomist cannot prescribe corporate business strategies. In any case, one size strategy does not fit all industries and firms. Macroeconomic fundamentals set guidelines for business decision-making.
For the immediate future the economy will continue in muddle-through mode, as growth will be lack-lustre – 3% to 4%. Taxes and particularly borrowing will increase. Growth in both exports and imports will be very sluggish.
Employment growth will be negligible, as wages will continue to increase, albeit more slowly firms will lay off labour and curb total employment costs and mounting uncertainty will hold back investment and job growth.
GDP growth will become increasingly reliant on external events – commodity prices, the weather, global economic growth and risk perceptions, thereby underscoring the relative impotence of policymakers.
As consumption’s share in GDP falls, slower growth for consumer-dependent firms. Hopefully slower wage growth will translate into more formal employment, but modern technologies are capital/skills intensive – resulting in fewer jobs.
Interest rates must stay high to attract savings and because country risk remains high. Financial sector will restructure as banks consolidate, hence fewer banks and asset managers.
We hear a lot about the need for a Lender of Last Resort. There is one out there – the IMF. That is Zimbabwe’s lender of last resort and at some point in the not too distant future, like it or not, that is the road we will take.
Manufacturing is unlikely to be a major growth engine, though some recovery probable. Overvalued currency will keep inflation down but will also constrain GDP growth.
De-dollarization, such as going back to the Zimbabwean Dollar, is not on anyone’s policy agenda today. That doesn’t mean it won’t happen in the (distant) future. It is easy to slip into dollarization but very difficult to exit it. De-dollarization is a gradualist, long-term solution – post 2020, unless the mooted SADC single currency area by 2018 happens. It won’t!!
We are already seeing consumption-based industries growing more slowly than in the recent past (2009-2013) – DELTA, INNSCOR, etc. Those who can diversify on the back of their technologies – ECONET – are faring better.
Mining firms, under pressure to invest in uneconomic (beneficiation) projects, will struggle unless rescued by higher global prices or currency devaluation (weaker US dollar). Agriculture is recovering but is still well below its output levels of 15 years ago.
Policymakers must acknowledge that smallholder farming – especially without individual land tenure – is not a viable long-term growth strategy for the sector. Over time, especially given the potential impact of climate change, there will have to be a market in farm land leading to agglomeration of land holdings.
Zimbabwe will – eventually – adapt to the fast-changing world economy by rebalancing and restructuring. The country cannot go on living outside its means – over-consuming, under-saving and under-investing.