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Zimbabwe Economy: Past, Present, and Future

Elisa Beltran, Elizabeth Buse, and Kimberly Chase

BIZ 203 Macroeconomic Foundations for Business Planning, Section 1 Dr. Matsuda

February 21, 2010

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Zimbabwe Economy: Past, Present, and Future

Abstract Zimbabwe is a country in dire need of help. The people are suffering, and the government is struggling. By understanding what has taken place within the country in the past and where the country stands now, plans can be made for the future. Solutions have been offered from all parts of the world, but the one thing most can agree on is that there is no simple fix to this country’s issues. Introduction Zimbabwe: the past. To understand the current state of Zimbabwe’s economy, it is important to grasp the nation’s historical events that have led them to this point. The source of the problems which Zimbabwe is currently facing can be traced all the way back to the 19th century. The area was settled by the British in the late 1800s. Cecil John Rhodes, leader of the British South Africa Company, colonized the land which was named “Southern Rhodesia.” Until about 1980, the white British control of the region caused many challenges for those native inhabitants (British Broadcasting Corporation, 2010). In the 1920s and 1930s, white power rose and the British South Africa Company dissolved, while the implementation of the Land Apportionment Act restricted access to land for many blacks (Central Intelligence Agency, 2010). Following this time, opposition to white colonial rule began to grow and many nationalist groups formed to resist this power (British Broadcasting Corporation, 2010). In the 50s, Southern Rhodesia was combined with several neighboring regions to create the Central African Federation, which was under British rule. Two of these regions, presently known as the countries of Zambia and Malawi, were able to free themselves from the federation, leaving Southern Rhodesia as the only member of the federation (British Broadcasting Corporation, 2010). In the 1960s, independence for Britain was fought for and was granted. However, the country remained under white minority rule for many years to follow. An intense civil war and opposition against minority rule only grew through the next decade. Attempts at negotiations and peace agreements were only met with further opposition (British Broadcasting Corporation, 2010). In 1980, Robert Mugabe emerged as a pro-independence leader and was named prime minister. Finally, independence for the area of Southern Rhodesia was declared under the name Zimbabwe (British Broadcasting Corporation, 2010). From the beginning of Mugabe’s administration, many changes were made in the government structure and leadership. Throughout the 80s, violence continued in many areas due to conflict between political parties. Near the end of the decade, Mugabe initiated a merge of conflicting parties which would end much of this violence (British Broadcasting Corporation, 2010). The late 1980s saw positive, promising changes in constitution and leadership. However, by the 1990s, an economic crisis began to emerge due to the nation’s involvement in a nearby country’s civil war. In the year 2000, Mugabe ordered the seizure of many white-owned farms

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in an attempt to regain what had been taken when the British first settled the region (British Broadcasting Corporation, 2010). Unfortunately, poor weather and a lack of experience in new farmers resulted in a major food shortage, further adding to the state of crisis in Zimbabwe (Central Intelligence Agency, 2010). As the decade progressed, the economic and food crises intensified. Mugabe’s power hungry nature resulted in large amounts of government spending on his extravagant lifestyle and expensive campaigns, in addition to external involvement in war. To respond to this high spending, the government ordered increased money printing, which has led to hyperinflation (Central Intelligence Agency, 2010). Zimbabwe: the present. Economy in Zimbabwe. The government of Zimbabwe is currently experiencing a wide variety of problems and economic struggles. These struggles include fiscal deficit, an overvalued official exchange rate, hyperinflation, and empty store shelves (Central Intelligence Agency, 2010).

Fiscal Deficit. Fiscal deficit refers to when a government’s total expenditures exceed the revenue that it generates. As of the year 2008, the government’s revenues were $153,700, and their expenditures were $179,300. These figures indicate that the government was operating without an income. Since 2008, the government of Zimbabwe has continued to generate more in expenditures than in revenues. This deficit continues to continuously cause problems and increases the country’s debt.

Overvalued Official Exchange Rate. Political turmoil and hyperinflation rapidly eroded

the value of the Zimbabwe dollar to eventually become one of the least valued currency units in the world. The use of the dollar as an official currency was effectively abandoned on April 12, 2009 as a result of the Reserve Bank of Zimbabwe legalizing the use of foreign currencies for transactions in January 2009 (Mccarthy, 2008). Currently, foreign currencies such as the South African Rand, Botswana Pula and the United States Dollar are widely used instead for nearly all transactions in Zimbabwe. Hyperinflation. Hyperinflation in Zimbabwe began in the early 2000s and has continued to increase exponentially. The main cause of this rapid inflation is a massive increase in the amount of money in circulation. The problem arises from a growth in money supply that is not supported by a growth in output of goods and services. As a result, inflation increases and erodes the monetary worth of the dollar, causing money to continuously lose its intrinsic value (Muponda, 2009). Records from 2008 estimated Zimbabwe's annual inflation rate at 89.7 sextillion percent and is a still-growing crisis.

From an economic standing point, since inflation has decreased the real value of money by so much, it has also had an effect on an increasing unemployment rate. As of 2009, Zimbabwe had an estimated unemployment rate of 94 percent. The cause of such a high unemployment level may be that high inflation makes hiring and retaining employees too costly for businesses. Therefore, businesses let go of their workers because they cannot afford them.

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Empty Store Shelves. Zimbabwean store shelves normally stocked with staples such as corn meal, cooking oil, and sugar have gone empty as the government threatened to take over manufacturers and retailers who failed to slash prices by half (Zimbabwe store shelves empty, 2009). As a result, many stores ran out of stock and shut down completely. Those businessmen who refused to cut their prices were arrested. Politics in Zimbabwe. The politics of Zimbabwe take place in a framework of a semi-presidential republic, where the President is the head of state and the Prime Minister is the head of government. Currently, the president of Zimbabwe is Robert Mugabe, and the Prime Minister is Morgan Tsvangirai. Robert Mugabe represents the Zimbabwe African National Union – Patriotic Front (Zanu-PF) political party, and Morgan Tsvangirai represents the Movement for Democratic Change (MDC) political party. Zimbabwe African National Union – Patriotic Front. The Zanu-PF political party is responsible for most of the economic and social distress that is present in Zimbabwe. Zanu-PF printed excess money which caused the current state of hyperinflation, and they also created a violent political environment by using the military to enforce their power over the nation. This political party has abused many human rights and silenced their opposition by using force. Some who oppose have declared this political situation to be a secret genocide (Howden, 2006). Movement for Democratic Change. The MDC political party is the opposition party to Zanu-PF. MDC has a vision that includes the extension of freedom, opportunities for people, and the realization of the ideals of the liberation struggle. This party has an appreciation and a desire for change regarding the key issues facing Zimbabwe and the people (Movement for Democratic Change, 2009). Currently, Zimbabwe’s opposition party agreed to form a unity government. The unity government is an attempt to respond to the country’s humanitarian and economic crisis. However, despite the unity government, there is still a volatile and violent political environment due to the strong opposition between parties. Present life in Zimbabwe. The humanitarian and economic crisis has had a devastating effect on the people of Zimbabwe.

Starvation. Children are starving, and families are turning on each other. Meanwhile, farmers are killing their own livestock in order to survive. As a form of income, villagers have been panning for gold in rivers. The small amounts they find serve as a commodity that they can trade for food, though very limited. There is no food growing in the fields, and with farmers effectively destroying their livelihood, the situation continues to worsen.

Opposition. Opposition also becomes very dangerous in Zimbabwe’s current state. People who oppose are often beaten to submission, arrested, and some even killed (Tran, 2009). This devastating reality continuously silences those who are willing to speak out against the abuse occurring within the country, also allowing the problems to worsen.

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HIV and AIDS. HIV and AIDS in Zimbabwe have also had a powerful impact on the people. Zimbabwe is now the world’s most infected country. Approximately one out of every four adults is infected with the virus. This number is even higher in urban areas of the country. Due to the economic struggles, many who suffer from the virus cannot afford treatment. Therefore, the life expectancy in Zimbabwe continues to decrease (Davis, 2009). Zimbabwe: The Future Zimbabwe’s situation does not emulate success. Africa could potentially be considered the poorest continent, but few would argue against the statement that Zimbabwe is the poorest country. The country cannot continue in this condition. Zimbabwe needs to make some extreme changes, or it will cease to exist.

Presentation of others’ solutions. Many have offered their opinions on what they believe could be the right solution for Zimbabwe. Most opinions offered for fixing economies are based on basic macroeconomic knowledge rather than individually executed surveys, studies, and experiments. The ones for Zimbabwe are no different. Prime Minister Morgan Tsavangirai has offered his own musings on the subject. He has been quoted as saying, “The choice is: do you re-engage Robert Mugabe, or do you continue to alienate him” (as cited in Dugger, 2009). Conceding that neither had worked, he was hoping that President Obama would have some ideas. In June 2009, the two met to discuss the current situation as reported in the New York Times (Dugger, 2009). Tsavangirai has maintained that he is not begging, but it was clear that he and his party hope that strong Western democracies, including the United States, will offer aid to rebuild the devastated Zimbabwe economy. Prime Minister Tsavangirai clearly believes that the result will come from the monetary support of the West. Secretary of State Hillary Clinton in August 2009 conducted a seven-nation trip across Africa. One of her most important stops was in the biggest economy of this poor continent, South Africa. The Obama administration, it would seem, has made Africa a foreign-policy priority but wishes to rely on “the central leadership role that South Africa plays,” as reported by the Associated Press (as cited in Childress, 2009). Clinton spoke with South Africa’s current president, Jacob Zuma, on the humanitarian situation in Zimbabwe to strengthen the “reform movement” and “mitigate against negative effects of the continuing presidency of President [Robert] Mugabe,” as she stated (as cited in Childress, 2009). The Obama administration, thus, has made it clear that it is relying on other African countries to resolve the issue. The African Union, a partnership of African leaders, is a firm believer in African solutions to African problems as stated by the South African Institute of International Affairs’ researcher George Katito (2009). In fact, this statement is considered the mantra of the group. This group along with the Southern African Development Community, headed by the former South African President Thabo Mbeki, brought about the power-sharing agreement in Zimbabwe between President Mugabe and Prime Minister Tsavangirai. This group continues to believe that Africa will provide continued solutions to the crisis in Zimbabwe. Steve H. Hanke (2008), a professor of applied economics at Johns Hopkins University in Baltimore, offered his own opinion in an article of a United Kingdom newspaper. He believes the worst problem Zimbabwe has is its hyperinflation, fed by the workings of the Reserve Bank of Zimbabwe. The solution he offers is the elimination of central banking as a whole and the

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introduction of a different monetary system. To him, central banking is a failed experiment that took away the country’s once successful system. His suggestions of alternatives includes dollarization, which is the replacement of the current monies for a foreign currency, as well as free banking, which involves minimum government regulation.

Presentation of our solutions.

Solution one – first thought. It is easy to see that the government of Zimbabwe has made some major mistakes. Even with the newly established unity government, no progress has been made. Truly, anyone’s first thought on how to fix the situation is to start over from scratch. A larger country would need to forcefully remove the current government; then, rebuild it from the ground up. President Mugabe would have to be removed. His entire political hold would have to be severed. Potential issues. There are issues involved with taking this option. The most pressing would be finding a country willing to undertake this responsibility. The situation in Iraq is still at the forefront of many minds. Zimbabwe quite possibly could have the same reactions to a takeover. Mugabe has many followers. This is demonstrated by the violent acts committed against those who are publicly opposed to the current rule. Causing war will not bring resolution to the country of Zimbabwe, so this option should be discarded.

Solution two – second thought. Because it will cause many complications to remove the current government, the only solution is to work with President Mugabe’s administration to produce a better future. There is no single fix-it action. In order to resolve this economic situation, multiple steps must be put into action. Step one – investment in the tourism industry. Zimbabwe’s main industry has been agriculture for many years. This industry has suffered greatly under Mugabe’s land reforms, so although it is unwise to completely shift away from the industry, there is a need for something new. Tourism could step up to meet this need. Zimbabwe has a plethora of sites that are perfect for tourism. More than eleven percent of the country’s land has been set aside for parks and wildlife. Harare is the capital of the country and a commercial and industrial center, while also offering parks and contemporary architecture. The country contains three mountain ranges with “deep valleys, gorges, bare granite peaks, pine-forested slopes, and bubbling trout streams rolling down steep cliffs,” as described by the iExplore company on its website (2010). Other sites include the largest ruins in Africa besides the Egyptian pyramids, one of the last elephant sanctuaries in Africa, and Victoria Falls, the largest waterfalls in the world. With this many sites, the country could bring a large amount of revenue in by investing in tourism. Improving these sites would create jobs for those who are suffering. People need only to hear about what Zimbabwe has to offer in order to get them to travel. Tourism is essentially a Zimbabwean gold mine waiting to be discovered and utilized. Step two – redistribution of currency. The old currency was just not working. It reflected the ruined Zimbabwe economy and all of the country’s issues. One hundred trillion as a

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denomination of money is idiotic. The money is not even worth the paper it is printed on. Although foreign currencies have been declared legal tender in the country, there is still a call for redistribution. This is the one area where it is okay to start over from scratch. The central bank needs to redesign currency, then figure out what each old Zimbabwean dollar will equal in the new currency. This will be followed by the county’s people visiting banks to have their money exchanged. It is a step in the right direction, installing confidence in the Zimbabwean people that the government is trying. Step three – temporary enactment of a monetary policy stand still. The interaction between the Mugabe administration and the Reserve Bank of Zimbabwe is one of the major causes of the entire crisis. Based on what is known of the United States’ system and how well it works, they should not be interacting to decide policy. The current administration should control fiscal policies, meaning the receipts and disbursements of the government, while the Reserve Bank should control monetary policies, meaning the supply of money. In the past, the Reserve Bank has printed money to meet the spending needs of the administration. Until there is a definite separation between these two, money printing should cease.

Figure 1. Graphic representation of the money market with a constant money supply (Ms). Even if money demand (Md) were to change, the supply would stay the same. Step four – enactment of expansionary fiscal policies. The current gross domestic product (GDP) of the country is extremely low in comparison to the rest of the world. A recovery priority needs to be increasing this. Aggregate output (income), i.e. GDP, is equal to government spending, business investment, and consumer spending. By enacting expansionary fiscal policies, there will be an increase in the aggregate output (Y). The government needs to increase its spending (G), by selling securities or through loans from other countries, as well as decrease taxes. If the government increases its spending (G), potentially through a stimulus package to the people, it will increase the aggregate output (Y). If the government decreases taxes, it will increase consumption (C) and investment spending (I), thus increasing aggregate output (Y).

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Figure 2. Graphic representation of the effect an increase in government spending (G) would have in the goods market. The same effect would happen with a tax decrease. This increase seems substantial in comparison to where the aggregate output (income) started, but there is an interaction between the goods and money market that can offset this large of a change. When aggregate output (income) increases, the demand for money (Md) increases as well. If the money supply (Ms) is constant, there will be an increase in the interest rate (i), causing a decrease in consumption (C) and investment (I) spending. These decreases will result in a decrease in aggregate output (Y), which will shrink the original substantial increase. This is known as the partial crowding out effect.

Figure 3. Graphic representation of a money demand (Md) increase when the money supply (Ms) is held constant.

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Figure 4. Graphic representation of the partial crowding out effect. Step five – implementation of policies to fight inflation. Currently, because Zimbabwe’s aggregate output (Y) is very low, expansionary fiscal policies can be extremely effective without increasing the price level (P) too much in the short run.

Figure 5. Graphic representation of the effect an increase in aggregate output (Y) will have on the price level (P) in Zimbabwe’s current state. It is very likely that a time will come when Zimbabwe’s output enters the steep incline of the short run aggregate supply curve (SRAS). When this happens, a slight increase in aggregate output (Y) will cause a sharp increase in the price level (P). The Reserve Bank will need to be prepared to take action. The Reserve Bank should enact contractionary monetary policies in order to decrease the level of currency in the system to prevent high inflation.

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Step six – long range growth policies. Because the long range aggregate supply curve (LRAS) is vertical, expansionary fiscal policies will not have an impact on the equilibrium output level in the long run. As soon as aggregate output reaches the full employment level (YF), expansionary policies whether fiscal or monetary will only increase the price level (P).

Figure 6. Graphic representation of the effect an increase in aggregate output (Y) will have when started at full employment level (YF) and when long run aggregate supply curve (LRAS) is vertical. The Zimbabwe government can easily set long range policies in two of the three main areas that will alter where the long range aggregate supply curve (LRAS) falls. First, it needs to invest in technological progress, i.e. in universities and education. A part of the increase in government spending mentioned in step four could go towards this. Second is the amount of the labor force. Many of the Zimbabwean people have emigrated elsewhere because of the economic situation. By implementing the steps above, the government could inspire confidence that the country is in a turn around and potentially cause people to return, thereby, increasing the labor force.

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Figure 7. Graphic representation of the effects of long term growth policies on the full employment level of output (YF) and the price level (P). Summary and Discussion The recovery is not going to be easy. Any one of the suggested plans could hit snags. Whether because of no cooperation from the government or from a lack of resources for implementation or there not being a country in the world willing to lend the Zimbabwe government money to offer a stimulus to its people and wait for the country to get back on its feet to be repaid, the country is going to continue to struggle. Too many obstacles need to be overcome before this country will see success again. It needs a long term effort from the government as well as other countries to fix this damage.

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References

British Broadcasting Corporation. (2010, February 3). Timeline: Zimbabwe. Retrieved February 5, 2010, from http://news.bbc.co.uk/2/hi/africa/country_profiles/1831470.stm

Central Intelligence Agency. (2010, January 5). Zimbabwe Economy 2010, CIA World Factbook. Retrieved February 7, 2010, from ITA - Information Technology Associates Immigration USA: http://www.theodora.com/wfbcurrent/zimbabwe/zimbabwe_economy.html

Childress, S. (2009, August 8). U.S. Asks South Africa to Help Ease Zimbabwe Crisis. Retrieved January 27, 2010, from Wall Street Journal Online: http://online.wsj.com/article/SB124964586093614173.html

Davis, E. (2009, May 11). Zimbabwe struggles against Aids onslaught . Retrieved February 7, 2010, from BBC News: http://news.bbc.co.uk/2/hi/health/background_briefings/aids/339974.stm

Dugger, C. W. (2009, June 12). Zimbabwe Divisions Pose A Quandary for West. Retrieved January 26, 2010, from New York Times: http://www.nytimes.com/2009/06/12/world/africa/12zimbabwe.html?_r=1

Hanke, S. H. (2008, July 13). Kill Central Bank to Fix Inflation in Zimbabwe. Retrieved January 22, 2010, from The Times: http://www.cato.org/pub_display.php?pub_id=9553

Howden, D. (2006, November 17). Robert Mugabe and his zanu PF have hijacked Zimbabwe. Retrieved February 7, 2010, from Zimbabwe Fact Sheet: http://www.zanupfpub.com/index1.html

iExplore. (2010). Where to Go in Zimbabwe. Retrieved January 26, 2010, from http://www.iexplore.com/dmap/Zimbabwe/Where+to+Go

Katito, G. (2009, February 2). A stitch out of time? Africa's solution to the Zimbabwean crisis. Retrieved January 22, 2010, from South African Institute of International Affairs: http://polity.org.za/article/a-stitch-out-of-time-africas-solution-to-the-zimbabwean-crisis-2009-02-02

Mccarthy, A. (2008). Zimbabwean Dollar. Retrieved February 7, 2010, from Fotopedia: http://www.fotopedia.com/en/Zimbabwean_dollar

Movement for Democratic Change. (2009, November 20). At a Glance. Retrieved February 7, 2010, from Movement for Democratic Change: http://www.mdc.co.zw/index.php?option=com_content&view=article&id=121&Itemid=113

Muponda, G. (2009, November 12). How Zimbabwe lost control of inflation. Retrieved February 7, 2010, from New Zimbabwe: http://www.newzimbabwe.com/pages/inflation180.17386.html

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Zimbabwe store shelves empty. (2009, November 12). Retrieved February 7, 2010, from New Zimbabwe: http://www.newzimbabwe.com/pages/prices3.16626.html