Collapse In Zimbabwe: From Cornucopia To Bleak Dystopia In Thirty Years Or Less

INTRO TO MACROECONOMICS

Collapse in Zimbabwe From Cornucopia to Bleak Dystopia in Thirty Years or Less

Scott Armato

JULY 2009

I

n 1980, the sun finally set on the British Empire as Rhodesia gained independence as the new nation of Zimbabwe. With miles of fertile farmland and rich in such raw materials as gold and chromium, Rhodesia had long been considered the jewel of Africa. The rule of law was

secure as much of the population trusted the police and believed in equitable treatment in the courts. With low crime, strong banking, a sophisticated manufacturing base, and booming tourism; real GDP growth averaged a strong 4.3% (Richardson 1). Prior to independence, Rhodesia had been administrated by Great Britain during the late 19th century’s Race for Africa as part of the British South Africa Company. The Colony of Southern Rhodesia was created in 1923, granting self-rule to the white colonists, while leaving blacks disenfranchised (Wikipedia). In 1930, Rhodesia enacted the Land Apportionment Act, forbidding land ownership for blacks outside of tribal reserve areas (Republic 2). During that time, the British built an agricultural empire in the colony, developing one of the most sophisticated water delivery systems in Southern Africa. With only 7% of the land, Rhodesia had 86% of the area’s dams and 93% of the reservoir surface area at the time of independence, serving an agricultural sector that was the backbone of a thriving economy: strong enough to feed all of its seven million people and export the rest to the world (Richardson 2). For over a century, 70% of Rhodesia’s vast commercial farmland had been run by about 4,500 white farmers, producing such cash crops as tobacco and cotton (Zim). The white-owned farms supported a flourishing banking sector, loaning funds for machinery, seeds, tools, and, most importantly, the water delivery system. The farms employed some 350,000 black workers and provided money for local schools and clinics (2). With the Zimbabwean dollar replacing the Rhodesian dollar at par and trading for US$1.59 (Rukuni 1), the economic future looked bright for the fledgling democracy of Zimbabwe. That is, until Robert Mugabe came to power. Mugabe rose to prominence in the 1960s as Secretary General of the Zimbabwe African National Union – a militant organization that fought the British in the Rhodesian Bush War throughout the 1970s. In a nation where blacks outnumbered whites 22 to one, Zimbabwe hadn’t seen blacks in a position of power until 1979 – and then only in lower ministerial positions. The ZANU fought this inequitable bi-racial rule

Collapse in Zimbabwe |Armato |2 side by side with the Zimbabwe African People’s Union – comrades in arms united only by their desire to expel the British from their country. Once that end had been achieved, the two groups had divergent philosophies about the governance of the country: Mugabe’s group had Maoist beliefs, while the ZAPU was Marxist (Wikipedia). When the war concluded in 1979, Mugabe was hailed as a national hero, and won election to the post of Prime Minister in the first election following independence. Since then, the two opposing groups have been embroiled in a bitter civil war for control of the nation, with Mugabe’s ZANU retaining control through force, intimidation, and outright murder. Elections are held from time to time; the results are usually rigged by the ruling ZANUs. In 1987, the position of Prime Minister was abolished, with Mugabe seizing new powers relegated to the position of Executive President of Zimbabwe and effectively becoming Dictator (Wikipedia). While Rhodesia’s white-owned farms thrived, as a result of the Land Apportionment Act some 840,000 black farmers were crowded into eroded and over-farmed land unconnected to the irrigation grid, producing corn, groundnuts, and other staples. This land was without title, and squabbling over land rights between villagers was rampant (Richardson 2). As part of the Lancaster House Agreement – the nation’s independence agreement with Britain – the subject of land redistribution was blocked until 1990. Mugabe sought to institute land reform, with the goal of redistributing the white-owned farms to black farmers. The nation’s constitution forbade the seizure of land without proper compensation, and the electorate rejected a 1999 referendum to amend the constitution to allow it. In early 2000, Mugabe’s advisors at the Reserve Bank of Zimbabwe, the nation’s central bank, attempted to dissuade him from land reform, saying that his proposals would result in a pullout of foreign investment, defaults on farm bank loans, and a massive decline in agricultural production (2). Mugabe should have listened. He didn’t. Between 2000 and 2003, Mugabe seized nearly all of the nation’s 4,500 white-owned commercial farms. While the original goal was to divide the farms into thousands of smaller parcels for the nation’s black farmers, the land that isn’t used as Mugabe’s personal domain has ended up in the hands of his political

Collapse in Zimbabwe |Armato |3 cronies – many of whom haven’t the slightest idea of how to farm – or sit entirely denuded of crops (Republic 3). As predicted, this had devastating repercussions. Inflation in 2000 was reported at 55.2% – a staggering number by any estimation. In the next four years, as a result of Mugabe’s land reforms, the economy began to implode, shrinking faster than any other economy on the planet in 2003. Inflation was near 500%, and the Zimbabwean Dollar lost more than 99% of their real exchange value (Richardson 2). Financial investors have fled the country, concerned that other businesses may go the way of the farms, with foreign direct investment falling 99% between 1998 and 2001. Since there were no more land titles, there was no collateral for bank loans, causing dozens of banks to collapse. The farmland lost an estimated threequarters of its value between 2000 and 2001, amounting to $5.3B in losses. The collapse of the farmland led to widespread famine and, since it no longer had any owners, the prized irrigation system was dug for scrap, some being melted for coffin handles – one of the few growth industries left in the country (2).

Agricultural Output 1980-2005 Millions of 1980 ZW$ (UN) 900 800 700 600 500 400

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

300

Figure 1

As Figure 1 shows, agricultural production declined sharply, with 2005 output being only slightly above 1992 – one of the worst drought years on record. For years afterward, Mugabe used this drought to

Collapse in Zimbabwe |Armato |4 explain the drop-off in production. Real GDP followed agriculture, as could be expected in a primarily agrarian economy (Figure 2). In 2007, it returned to the level it had been at independence 27 years earlier.

Real GDP 1980-2007 Millions of 1980 ZW$ (IMF) 450 400 350 300 250

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

200

Figure 2

Following the drought of 1992, the government of Zimbabwe began receiving loans from the International Monetary Fund. As can be seen in Figure 3, repayment of these loans had been relatively steady until 2000, when the confiscation of farms and the subsequent slowdown of production caused the government to fall behind in its payments. The following year, in response to the deteriorating political and economic situation in Zimbabwe, President Bush signed into law the Zimbabwe Democracy and Economic Recovery Act of 2001, enacting sanctions against the nation by instructing the US Treasury and US members of international financial institutions to oppose the extension of any loans to Zimbabwe. As a result, the IMF declared Zimbabwe ineligible to access Fund resources and suspended the remaining payment support (Chengu 1). Mugabe and the government of Zimbabwe have repeatedly cited these sanctions as the primary cause of their economic collapse. In 2004, due to their inability to repay the loans, Zimbabwe was expelled from the IMF, and repayments effectively ceased (IMF).

Collapse in Zimbabwe |Armato |5

Outstanding Loans, IMF 1992-2009 Millions of SDRs (IMF) 160 140 120 100 80 60

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

40

Figure 3

In the first few months of 2000, the Mugabe government began an aggressive money-printing campaign with ZW$30B, hoping to use the newly-minted money to purchase foreign currency to pay the IMF arrears (Fidelity), as well as to fund massive amounts of government spending. Figure 4 charts the money supply of Zimbabwe since independence – note the logarithmic scale. Monetary production remained relatively linear until a veritable explosion in 2000, flooding the monetary supply and causing hyperinflation the likes of which hadn’t been seen since Weimar Germany in the 1920s. As the quantity theory of money – and common sense – tells us, the result of this excess printing with GDP in decline was that the value of the Zimbabwean dollar collapsed exponentially. As a result, the cost of living skyrocketed in tandem with the monetary supply. In the thirty years of independence, the cost of living has increased by a factor of 97,072,150,785.138%, and 2,152,473,377.841% since January of 2000 (IMF). (For comparison, the United States CPI has increased 274.68% since 1980 and 126.69% since January of 2000.) Estimates vary to the extent of this hyperinflation, as measuring such a behemoth has become all but

Collapse in Zimbabwe |Armato |6 impossible. In November of 2008, prices were doubling every 24 hours (Hanke 2). The calculation of the CPI in Zimbabwe is an extremely precarious endeavor, as many of the goods in the basket are nowhere to be found. Supermarket shelves once full of meat, grain, and supplies have become completely empty (Chakuria). Residents of Zimbabwe have taken to substituting whatever is available for the disposable goods they once purchased: instead of using newspapers for fire kindling, residents use the abundance of worthless banknotes; instead of using toilet paper, residents have again taken to banknotes (Kransdorff). It is literally cheaper to wipe one’s ass with money than it is to buy toilet paper.

Monetary Supply and CPI 1980-2008 (IMF) 100,000,000.0

1000

10,000,000.0

100

1,000,000.0

10 1

10,000.0

0.1

1,000.0

0.01

100.0

0.001

10.0

0.0001

1.0

0.00001

0.1

0.000001 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Millions of ZW$

100,000.0

Index 100=Aug, 2007

1,000,000,000.0

Money and Quasi-Money

CPI

Figure 4

To keep up with this rampant inflation, the methods used for computing the exchange rate have changed rapidly. For the first several years of independence, the official exchange rate was determined by a differing number of factors, until March of 1999 when it was pegged at 38 against the US dollar. Not long after, the black market emerged as the primary economy of Zimbabwe, determining the actual value of the currency at levels much lower than those maintained by the government. This was disastrous for the official economy, as the participants of that economy – primarily agriculture, mining, and the government – were

Collapse in Zimbabwe |Armato |7 forced to use the official rate. In the first half of the 21st century, Mugabe’s government tried several exchange rate policies in an attempt to keep a check on rising prices, none of them coming particularly close to the parallel black market rate (Makochekanwa 11-12). In November of 2003, the official rate was pegged at 853 (IMF), while on the black market US$1 was fetching 6,000 Zimbabwean dollars (Makochekanwa 12).

Exchange Rate 2006-Present Un-redenominated ZW$ (Millions) to US$ (Makochekanwa)

1E+22 1E+21 1E+20 1E+19 1E+18 1E+17 1E+16 1E+15 1E+14 1E+13 1E+12 1E+11 1E+10 1E+09 10000000 10000000 1000000 100000 10000 1000 100 10 1 0.1 0.01 2006

2007

2008

Official Rate

Figure 5

Parallel Rate

2009

Collapse in Zimbabwe |Armato |8 As a result of increasingly worthless bills, Mugabe’s government has been printing ever larger denominations. In 1980, denominations of 2, 5, 10, and 20 dollars were printed, with the addition of a $50 banknote in 1994 and a $100 note in 1995. When inflation started becoming problematic, $500 notes were introduced in 2001 and $1,000 in 2003. When inflation started becoming systemic, denominations up to $100,000 were introduced in 2006 – and by July, these were trading for less than US$0.20 on the black market. When inflation started becoming endemic, the central bank of Zimbabwe issued a $10,000,000 bill in January of 2008 – at the time insufficient to buy a hamburger in a Harare restaurant (Mail Online). It was followed by a $100,000,000,000 note in July of 2008 (Zimbabwe introduces), and a $100,000,000,000,000 bill – the world’s first – in January of 2009. At the time of its issue, it was worth about US$30 (Zimbabwe rolls) – a stark contrast to the $1.59 the Zimbabwean dollar was worth at independence – and no cash register on the planet is capable of ringing up so many zeroes (Philp 2). Figure 5 charts the exchange rate since 2006, again in a logarithmic scale. In August of 2006, Mugabe’s government undertook the first of several redenominations of the Zimbabwean dollar, removing three zeroes: ZW$1,000 was now ZW$1 (Zimbabwe devalues). At the same time, Mugabe’s government pegged the exchange rate at ZW$250, though this lagged behind the parallel rate of 550. In July of 2008, the government redenominated the dollar once again, this time removing ten zeroes (Zimbabwe to revalue), followed by the removal of another 12 zeroes seven months later (Zimbabwe revalues). Had the Zimbabwean dollar not been redenominated, as of July of this year, one would need 37,338,000,000,000,000,000,000,000 – 37 septillion, 338 sextillion – Zimbabwean dollars to equal one United States penny (xe.com). This is a number over 4 quadrillion times the size of the aggregate real GDP of Zimbabwe since independence. Expressed in grams, this number is almost twenty times the mass of Jupiter. As one might imagine, Mugabe’s monetary policies have been phantasmagoric for the people of Zimbabwe. Having previously enjoyed one of the highest standards of living in all of Africa, unemployment is currently at 80% (#3 in the world), and life expectancy has dropped to near 40 after a high of 62 in 1992. In a country where one of the most common minerals is gold, the percentage of the population living below the poverty line tripled between the years of 1990 and 2002 (CIA). This country, once a net exporter of grain

Collapse in Zimbabwe |Armato |9 and considered the “breadbasket of Africa”, has been reduced to a nation where the highest denominated bill is insufficient to buy a loaf of bread. While the nation may be in rubble, Zimbabweans as a people steadfastly refuse to give up hope. Through the chaos, they’ve been able to maintain one of the highest literacy rates in Africa. With 90% of the population able to read and write (CIA), the people of Zimbabwe may be down, but they are far from being out. In the past few months, Zimbabwe has abandoned its currency, now allowing all commerce to transact in a currency other than the Zimbabwean dollar (Zimbabwe abandons). This had been happening illicitly for several years, due to Mugabe’s reluctance to admit to himself and to the world that his monetary policies have been completely disastrous. As a result, Zimbabwe is now experiencing some much-needed deflation, -1% in June of this year (ZimOnline). Within their discipline, economists are constrained by the inability to perform an experiment to prove the theories they write. The situation in Zimbabwe can be considered an experiment – an outrageously expensive one – in reverse. The quantity theory of money? Proven. Monetary neutrality? Quod erat demonstrandum. In one broad incompetent swoop, Mugabe has proven nearly every macroeconomic theory posited since Smith. As for the immediate future of Zimbabwe, that is truly anyone’s guess. The country would be smart to adopt another nation’s more stable currency – any other currency on the planet will safely fit that description – and allow the economy to settle down for a few years. While some may consider this a step backward, these past few months have seen Zimbabwe do precisely that. A step backward, yes, but as Kurt Vonnegut wrote in Player Piano, “A step backward, after taking a wrong turn, is a step in the right direction.” Ousting Mugabe and dragging him to The Hague to stand trial for crimes against humanity should be top priority, but seeing as how he’s objectively lost the past few elections without relinquishing power, this is substantially more difficult than it might appear. At a conference last year, the South African leaders asked Mugabe and his delegation to leave the room while the subject of Zimbabwe was discussed. Mugabe refused (Harare diary). How can you force him to give up a country when you can’t force him to give up a chair?

C o l l a p s e i n Z i m b a b w e | A r m a t o | 10 Zimbabwe’s economic disaster is entirely due to one obstinate man under the mistaken belief that running a government equates to a license to print money, while the people of Zimbabwe have repeatedly called out for a change in regime. Their cries apparently fall on deaf ears as the international community busies itself securing a constant flow of petroleum, meting economic disaster with economic sanctions. This mad dichotomy will have an eternal outcome: the endurance of a ruthless dictator who was once the hope of a nation, the destruction of a nation that was once the hope of a continent, and the devastation of a people for whom hope is their last and most cherished possession. For most Americans, Africa is not much more than a large landmass south of Europe with unpronounceable country names and problems even more incomprehensible. Add Zimbabwe to the list that names Darfur, Ethiopia, Lesotho, Somalia. On Judgment Day, these names will be our legacy, our downfall, and our ultimate undoing. The Race for Africa has never really crossed the finish line; no winners have been declared, nor will there be in the foreseeable future. Instead, an entire continent has been lost.

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Secondary Sources Chakurira. Addmore. "Inflation - no deflation here: price increases," Zim Independent 24 Jul 2004. Web.6 Jul 2009. . Chengu, Garikai. "The Zimbabwe Debate." The African Executive 04 Mar 2009 Web.6 Jul 2009. . "Harare

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