Zimbabwe: the Hollow State

Mugabe celebrates his triumph over the economy

The situation three weeks ago was this:

1. The Zimbabwe dollar was worth less than the paper it's printed on
2. Zimbabwe is short of everything and produces virtually no food on some of the most productive farmland in the world
3. 80% of the population depends on the informal sector for jobs and support
4. Operation Murambatsvina shut down most of the informal sector, left 700 000 homeless and secured the Zimbabwe economy for the Chinese
5. 3.5 million of Zimbabwe's most educated and productive citizens are in exile and working in the UK and South Africa
6. 4 million people need food aid; the average life-expectancy of Zimbabweans is 37 for men, and 34 for women
7. Official inflation is approaching 3 700% and informal inflation is around 11 000%

The descent from horror to more horror

Since then the following has happened:

1. Mugabe unilaterally declared that all prices must be halved; the immediate run on goods emptied stores and transferred all goods to the informal sector where prices are much higher than they were
2. More than 2 000 business owners were arrested for non-compliance with the order even though compliance would put them out of business
3. Import duties on imported goods have been increased with a view to stopping the cross-border trade with South Africa (and favour China)
4. Mugabe announced yesterday that he intends remaining president and that mass nationalisation of remaining firms will now take place, including dual-listed international firms like Old Mutual.
5. Official inflation is approaching 5 000% and informal inflation is ... unknown.

How he intends implementing expropriation of foreign-listings is anyone's guess. What he intends to do with valueless shares is another matter. The result is that the only formally employed people left in the economy are working for the state as teachers, policeman, bureaucrats, street sweepers and the like. Most formal businesses are closed as they have no capital to purchase stock and, in any case, won't buy goods they are then forced to sell below their cost. The number of refugees streaming in to South Africa numbers around 3 000 per day.

I did say, however, that Zimbabwe is already a failed state.

This truth makes any future intervention into Zimbabwe extremely difficult.

Unwinding the Hollow State

Zimbabwe is an empty but convenient warehouse where people choose to meet for the purpose of trade and exchange. Sellers bring their goods, buyers bring their money. The bulk of that cash arises from donations from exiled Zimbabweans supporting loved-ones at home. There is no productive capacity in the warehouse, it is simply a trade-space. It isn't even eBay since the warehouse has no tools to facilitate that trade. The future of Zimbabwe is bound by these constraints:

1. Productive capacity has left Zimbabwe: skilled farmers, engineers, scientists and businessmen are in exile or have had their capital stolen from them - they may no longer have the capacity or interest to start again in a land that has eaten them.
2. Infrastructure constraints: the general exile of capacity has degraded everything from sanitation, to water to power production, restoring this will take years.
3. Revenge: the desire to revenge past injustice will fall most heavily on government workers in the police and parts of the bureaucracy that enforced Mugabe's rules; these are also critical departments for restoring the state - the failure of Iraq was punishing people most able to restore stability.
4. Informal market efficiency: the extent of informal cash transfers home as well as importation of low-cost goods from China and South Africa undermines any investment into new capacity in Zimbabwe.

The latter point is the most explosive. Zimbabwe's manufacturing was always less efficient that China's and was in trouble before. Restarting it will require massive new investment and retraining. There are few entrepreneurs willing to take that on in Africa.

Without exceptionally careful and extremely pro-business legislation few new businesses will be attracted to Zimbabwe except as importers and distributors. The likelihood is that, as the donations back home unwind, Zimbabwe will empty out as people seek work opportunities in South Africa and abroad.

The long-term success of Zimbabwe depends not only on removing Mugabe and restoring the rule of law, but in creating possibly the most business-friendly, liberal economy in Africa. It would almost have to be a tax-free haven with a minimal state.

Many may argue that this will not address the poverty of the masses, but investors have lost more than enough in Zimbabwe already. Much of the Zimbabwe's assets have already been pledged to Libya and China in exchange for support for Mugabe. The legal status of these agreements is in doubt but further degrades the investment climate.

Any future legal environment must look to the rapid attraction of productive capacity back into Zimbabwe in such a way that overcomes the expense of that investment. Infrastructure is degraded, power is limited, and the costs of investment are high. The market is perilously poor and there is little to attract exiled Zimbabweans home.

Whythawk has been benchmarking the Zimbabwean informal economy precisely with this in mind. It is essential to know what is already happening - how individuals are solving their immediate needs - before negotiations over the future take place.

Investment is essential if Zimbabwe is not to become an albatross in the Southern African region. That means that investors must have a greater than normal say in what they need to return.