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Volume 1, Issue 1 Download Issue PDF download

Exclusives articleThe Failing Economy of Zimbabwe

Amid the harsh economic times that global markets are experiencing, the word ‘economy' has come to be closely associated with concepts of money. What is often forgotten is that the science of economics is a much broader field that encompasses how scarce resources are disbursed throughout a population. This differentiation…

Introduction

Amid the harsh economic times that global markets are experiencing, the word ‘economy' has come to be closely associated with concepts of money. What is often forgotten is that the science of economics is a much broader field that encompasses how scarce resources are disbursed throughout a population. This differentiation is important when looking at the current global economic crisis because giving more money to certain countries will not necessarily put that country in a better economic position. These countries suffer from certain inefficiencies that are embedded in their infrastructure.

This article will take a close look at the current economic conditions in Zimbabwe and
reason why their economy is on the brink of failure. It will break down the fundamental
problems stemming from the agricultural industry, hyperinflation, and the health care
system to show how each problem is affecting the overall economy. It is important to
emphasize that Zimbabwe is not just a country that is experiencing a normal recession
amid a global economic crisis. It is a country with severe market inefficiencies that has
been in a recession for the past 10 years1.

Agriculture

The foundation for any economy is the ability to support itself by utilizing its natural resources, usually from the agricultural sector. If a country cannot supply itself, or trade for food, then there is no need for gold or electronics. According to the World Heath Organization, about half of Zimbabwe is starving to death2 due to the failing agricultural sector.

Prior to 2000, agriculture was the backbone of Zimbabwe's economy, but there was a scarcity of useful farming land and a great disparity between the quality of land owned by black and white Zimbabwean farmers. White Zimbabweans had controlled a majority of the arable land (which only accounts for 8.24 percent of the total land in Zimbabwe3) since Zimbabwe was colonized by Britain. The land was used for both private and commercial purposes, but the commercial sector was a huge proponent to Zimbabwe’s agricultural stability. Black Zimbabwean farmers, however, were living on land that was arid and infertile. Because of the social and economic inequalities, the Zimbabwean Government was faced with growing discontent amongst the population.

Beginning in 2000, President Mugabe instituted the Land Acquisition Act, which was supposed to remove thousands of white Zimbabwean farmers from their lands so that it could be redistributed and given to black farmers. The plan was supported by Kofi Annan, then the U.N. Secretary-General, who voiced his agreement by saying, “the equitable distribution of productive capital, such as land, is not only economically important, but also essential to ensure peace and stability”4.

There were numerous problems with Mugabe's land reform. First, it was never properly
funded. The plan called for every removed farmer to receive a 'fair compensation' for his
property, but the government was never able to produce the capital required. As delays ensued, many black Zimbabwean farmers began to feel as if their government had lied to them.

A second problem arose in 2001 when the government amended the Land Acquisition Act so that white farmers would be immediately forced from their lands. As white farmers began to oppose the new legislation, black farmers started to take matters into their own hands, resulting in an outbreak of violence. The police were not able to stop the outbreak of violence in which dozens of white farmers were beaten and murdered.

A third problem stemming from the Land Acquisition Act was that the government replaced a class of knowledgeable workers with a group of farmers with far less experience without implementing a system to maintain agricultural production. The new farmers, who now controlled the more fertile land, did not have the knowledge to produce the same levels of output as the white farmers had. The relocated white farmers, however, quickly learned that their skills and knowledge, which worked on fertile land, yielded poor crops on the barrens lands to which they were relocated.

Mugabe's Land Acquisition Act only amplified a food shortage crisis that is still one of
Zimbabwe most prevalent problems. The World Food Program of the United Nations recently reported that seven million people (about half of the population) in Zimbabwe would
require food handouts during the first half of 2009, although funding problems are forcing them to make drastic cutbacks2. If Zimbabwe cannot provide itself the basic elements of survival, such as clean water and food, there is very little prospect of any economic development.

Hyperinflation

The currency in Zimbabwe has been experiencing a rapid decline in value for the past eight years. Because of the hyperinflation, the largest denomination of the former Zimbabwean dollars was not able to buy a loaf of bread. Earlier this month, the Reserve Bank of Zimbabwe (RBZ) announced that the high inflation rate (of 231 million percent) has forced the bank to remove 12 zeros from its paperbacks.

Over the past decade, Zimbabwe has accrued the largest public debt in the world, amounting to 240 percent of their GDP6. As the deficit has grown, the government has been
paying it off by continually printing out money, leading to an exponentially increasing inflation rate. Since 1995, the inflation rate in Zimbabwe has risen annually from 22.5 percent, to 58.5 percent in 2000, to 6,723.7 percent in 2007, to 231 million percent in July of 20086. The only other instance of this level of hyperinflation was the Hungarian currency in 1946.

In any economy, as you print more dollars, the value of each dollar decreases resulting in inflation. An inflation rate of 240 million percent means that the price of goods doubles at least once a day. The hyperinflation that Zimbabwe is currently experiencing is crippling the economy. Money has three functions; to act as a store of value, a medium of exchange, and a unit of account. Hyperinflation negates these functions.

The Zimbabwean dollar has lost its aspect of being a store of value because the value of any biodegradable good will decrease slower than the value of the money that was used to buy that good. If you are a farmer, you are better off holding on to your goods than exchanging them for money. The currency cannot serve as a medium of exchange because businesses are refusing to use it, favoring foreign currencies instead. Lastly, the currency cannot serve as a unit of account because it cannot properly measure the value of the goods in the market; they are changing too rapidly.

Until recently, businesses had to receive permission from the government to make transactions in foreign currencies. Earlier this year, Parliament had opened the use of foreign currency to all businesses. The reaction to this has been an exile of the domestic currency by domestic businesses.

What has been even more problematic is that the government, which is the country’s biggest employer, has been paying its workers in Zimbabwean dollars7. If local businesses are keeping prices relatively stable by using foreign currencies, then hyperinflation is essentially reducing the pay that each worker gets by half every day. Teachers in the capital city of Harare can no longer afford to pay for public transportation to and from work8.

Trade unions, such as the Zimbabwe Congress of Trade Unions, have been pushing for the government to pay its civil servants in foreign currency so that the government's infrastructure does not completely collapse. Numerous teachers, doctors, and policemen have opted to strike, claiming that it was more expensive to work than to not work. Newly inaugurated Prime Minister Morgan Tsvangirai, recently announced that the government will start to pay its civil servants by the end of the month9.

Health Conditions

The failure of the agricultural sector has been attributed to falling trade. Because the government cannot generate the revenue needed to support its infrastructure, the practice of printing out money to pay off the deficit has left the entire economy broken. Evidence of the economic distress is evident by looking at the health conditions in Zimbabwe.

Zimbabwe currently has a fairly high birth rate of 3.72 children born per woman7, but the country is still experiencing negative population growth because the people are dying just as fast as they are being born. One of the major reasons why Zimbabwe has such a high death rate (the 13th highest in the world) is because the health care system has completely broken down. Almost 25 percent (or 1,800,000 people) of the total population is infected with either HIV or AIDS and 170,000 of those people will die each year7. Zimbabwe is also battling a cholera epidemic that has killed almost 4,000 people since August and has infected another 65,000. The WTO expects that 100,000 people will be infected before the disease is contained.

Health conditions are directly related to the poor economy. If a nation is facing severe health problems, as Zimbabwe is, then there is a double-edge sword that cuts away the promise of any economic achievement. On one side, the economy is impaired because sick workers are not able to work as much or as productively. General labor markets will be less efficient, ergo, the market would not be able to produce as much. Consequently, the economy will produce far less per-worker than a similar healthy economy. This is evident in Zimbabwe by the low participation rate that is just over 35 percent, as opposed to 51.08 percent in the U.S. or 51.97 percent in Japan.

The second disadvantage is that any foreign aid that is given to the country has to be diverted to health care, rather than be used to supply the country with food and other resources. According to the United Nations Office for Coordination of Humanitarian Affairs (OCHA), "The infrastructure for delivering basic social services is seriously affected, resulting in unprecedented levels of disease incidence and prevalence throughout the country” 8.

Current Conditions

Many countries, such as the U.S. and Britain have partially withheld financial support
for Zimbabwe, stating that reform needs to take place before any additional aid is
offered.

The recent actions of Parliament are promising signs that Zimbabwe is finally taking radical measures to fix the market system. The allowance of businesses to use foreign currency has only helped to exile the country's currency, but it will serve to remove the country's dependence from a failing monetary system. The legislation that installed Tsvangirai as Prime Minister will serve as a check of power against President Mugabe, which should greatly improve the legitimacy of the government.

Zimbabwe’s economy still has many fundamental problems that will need to be addressed before any type of economic development can take place. The first problem that must be addressed is the development of the agricultural sector. This will be extremely difficult
because the land conditions in Zimbabwe are so poor. The change in government should provide the incentive for foreign nations to provide additional foreign aid to temporarily assist Zimbabwe in this area.

Zimbabwe must also reform its banking system. The hyperinflation in Zimbabwe has all but
killed the Zimbabwean dollar. In order to stabilize the economy, the RBZ must become
dependent upon a more stable currency.

Fixing those two problems should help limit the damage that is being done to Zimbabwe's
infrastructure. This will allow the health care system to develop, although it may be too
little and too late.

Lastly, Zimbabwe needs to undergo extensive political reform. For years, President Mugabe
has been the nation's leader and the accusations of the tampering the election of 2003 have only tainted the people’s perception of their government. The addition of Tsvangirai will help move Zimbabwe in the right direction, but there is no guarantee that Tsvangirai will not abuse his power, as Mugabe was accused of doing.
















I. Bloomberg Press, “LonZIm to Report 'Big' Zimbabwe Acquisitions, Director Says”; 12
February 2009
II. Associated Press,
http://www.google.com/hostednews/ap/article/ALeqM5jvH1BWK2PJ_MJtp186vLY_yrXRoAD969FH281
III. BBC News, “Court banks Mugabe land reforms”; 4 December, 2001
IV. United Nations Publications, “Africa Recovery”; Vol 12 #3; December 1998
V. Thompson Reuters, “Zimbabwe Farm Revival Hinges on New Government”; 29 January, 2009
VI. CIA World FactBook
VII. The Zimbebwe Independent, “Pay us in Hard Currency or we Strike, Workers Warn”; 22
January 2009
VIII. Bloomberg Press, “Zimbabwe Teachers Can't Afford to Report for Work”; 29 January
2009
IX. Agencie AngolaPress, “Tsvangirai to Pay Civil Servants in Foreign Currency”; 12 February, 2009

Content Of Volume 1, Issue 1
1.Pirates of Somalia
2. The Failing Economy of Zimbabwe