Economic history of Zimbabwe
The economic history of Zimbabwe began with the transition to majority rule in 1980 and Britain's ceremonial granting of independence. The new government under Prime Minister Robert Mugabe promoted socialism, partially relying on international aid. The new regime inherited one of the most structurally developed economies and effective state systems in Africa.
Initially the government followed a corporatist model with government management of the economy, maintaining policies first instituted by the previous government to deal with UN-sanctions imposed in 1965. The state already had ownership of utilities and agricultural marketing agencies. The new government added to this by buying out more private companies. The government also extended existing protectionist policies.
The government propagated a whole range of new economic policies, introducing a minimum wage and virtually eliminating the right to fire workers. Total spending on education nearly tripled (from Z$227.6 million to Z$628.0 million), as did government spending on healthcare (from Z$66.4 million to Z$188.6 million), between 1979 and 1990. Expenditure on public-sector employment rose by 60%, and on the civil service by 12% per annum over the course of the 1980s. Central government expenditure tripled and increased its share from 32.5 percent of GDP in 1979 to 44.6% in 1989. Interest rates were artificially capped.
The consequences during this time were rather mixed. Economic inequality within the population decreased and provision of education and healthcare became more widespread. During the 1980s GDP per capita increased by 11.5%. During the same time period the US had a 38% increase in GDP per capita. Thus the relative poverty of the country rose in relation to the United States during this period. There was an exodus of white Zimbabweans, skilled workers during this period.
There were several reasons for middling to low performance of the economy. Protection sustained existing high cost companies, but discouraged exports by raising the costs of inputs to exporters, leading to a critical shortage of the foreign exchange needed to acquire imported technology. Foreign companies were not allowed to remit dividends, and new foreign investment was actively discouraged. The need to get permission and licenses for new investment and the dismissal of individual workers imposed heavy time and transaction costs. Repressed interest rates discouraged saving and the state's high propensity to borrow reduced the supply of capital to all but favoured borrowers, and also stoked inflation. The regime did not encourage, and even suppressed, the development of independent new African businesses because of the threat they were thought to offer to ZANU's political monopoly.
Public spending skyrocketed, particularly in the areas of civil service employment, spending on social services, drought relief, and subsidies for government owned companies. This in turn generated a chronic budget deficit, a high tax regime, and a rapid increase in public debt – all of which created a drag on the economy. Private investment was crowded out by shortages of credit stemming from the fiscal deficit, high taxes and the shortages of foreign exchange. The overall effects of these constraints favoured existing capital-intensive producers, biasing the economy against areas labour-intensive activities. Compounding the problem, all companies were effectively discouraged from employing new workers because of controls over wages and employment.
This had two politically significant consequences. First, it suppressed the emergence of a genuinely entrepreneurial African business class and reduced the political support of those that did make their way despite these problems. Second, it turned unemployment into a major threat to the legitimacy of the regime, especially in urban areas. In real terms, wages declined over the decade.
By the end of the 1980s there was increasing agreement amongst government elites that new economic policies needed to be implemented for the long term survival of the regime. The new policy regime designed by the government and its advisers set out to encourage job-creating growth by transferring control over prices from the state to the market, improving access to foreign exchange, reducing administrative controls over investment and employment decisions, and by reducing the fiscal deficit. It had wide local support and was introduced before economic problems had gone out of control. A 40 percent devaluation of the Zimbabwean dollar was allowed to occur and price and wage controls were removed.
The austerity plan in Zimbabwe was followed by economic problems of increased severity. Growth, employment, wages, and social service spending contracted sharply, inflation was not reduced, the deficit remained well above target, and many industrial firms, notably in textiles and footwear, closed in response to increased competition and high real interest rates. The incidence of poverty in the country increased during this time. On the positive side, capital formation and the percentage of exports in GDP increased and urban–rural inequality fell.
The new policies were undermined by extremely unfavorable conditions. Drought reduced agricultural output, exports, public revenue, and demand for local manufacturing. Growth during three drought-affected years (1992, 1993, and 1995) averaged 2.6 percent; during three good years (1991, 1994, and 1996) it was 6.5 percent. The new ANC regime in South Africa cancelled its trade agreement with Zimbabwe at this time and subjected its exports to punitiv tariffs, just as Zimbabwe reduced its own, contributing significantly to deindustrialisation.
The government's failure to bring the fiscal deficit under control undermined the effectiveness of those elements in the program that were followed through. This led to growth in public borrowing, sharp increases in interest rates, and upward pressure on the exchange rate just as local firms were exposed to intensified foreign competition. Many firms failed, many others were forced to restructure, and new investment was discouraged in both the formal and increasingly important informal sector. The limited cuts that were made concentrated on the social services and led to serious reductions in the quality of health and education.
The government's austerity plan coupled with a relatively weak and highly protected economy came far too quickly. Uncompetitive industries were eliminated and overmanning was reduced, but in a such a sudden and disruptive manner as to cause economic chaos. Similar problems occurred in certain Eastern European countries after the collapse of Communism. The government's management of the its transition to capitalism was much better. The public reaction to the disaster only further undermined the economy perpetuating a vicious cycle. By the mid-1990s, there were signs of improvement. However, the patience of both the government and the people was exhausted, and a new direction was taken.
In 1998 Mugabe's intervention in the civil war in the Democratic Republic of the Congo (Kinshasa)—purportedly to protect his personal investments—resulted in suspension of international economic aid for Zimbabwe. This suspension of aid and the millions of dollars spent to intervene in the war further weakened Zimbabwe's already troubled economy.
In part through its control of the media, the huge parastatal sector of the economy, and the security forces, the government has managed to keep organised political opposition to a minimum through most of the 1990s.
By 1990 there were increasing demands for greater native African participation in ownership of the economy on the basis of continuing racial inequalities in the post-colonial economy. For example, by 1991, 50% of the population received less than 15% of total annual incomes and about 15% of total consumption, while the richest three percent of the population received 30% of total incomes and were responsible for 30% of total consumption. The government-controlled economy of the 1980s tried to redistribute wealth to the black majority while emphasising racial harmony. With the increasing economic problems at the end of the 1990s and the reforms of the 1990s, new complaints were heard about the unequal racial distribution of wealth. For the ruling party, there was also a political imperative as the emergence in the late 1980s of opposition parties such as the Zimbabwe Unity Movement and the Forum Party had demonstrated the potential for political opposition from disconcerted sections of the African middle class. This emphasis on redistribution of wealth from whites to blacks was a policy that the government began to directly pursue in the mid-1990s.
Zimbabwe's economy has consistently shrunk since 2000, in an atmosphere of political turmoil, capital flight and mismanagement. Inflation has spiraled out of control and the underpinnings of the economy in agriculture and industry have been dissipated.
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