Paddington Masamha: Foreign and Domestic policy congruence…. a key FDI ingredient
By Paddington Masamha
Economic history is pregnant with case studies of nations which have magnetized sustainable foreign direct investments through maintaining clear, consistent and harmonious foreign and domestic policies. In contrast, since the early 2000 Zimbabwean local, regional and international policies have been higgledy-piggledy. As a result, Zimbabwean foreign direct investment (FDI) has been depressed.
Fundamentally, the competition for FDI is aggressive the world over. As such, whenever foreign investors are evaluating potential investment destinations, major consideration is placed on the country’s institutions, policies (both foreign and domestic), human capital, freedom to control investments, indeginisation, empowerment and privatisation regulatory frameworks, political stability and a conducive legal framework for doing business.
Therefore, for a country to effectively and continually attract FDI, domestic and foreign policy consistency in the aforementioned areas is obligatory. Overall, Zimbabwean policies have been failing to attain the transparency (clarity), dependability (realibility) and consistency (stability) benchmarks. Such policy incongruences has thus greatly shaped the country’s FDI trends.
The post independence era has in general been dominated by policies which hinder the repatriation of profits, protection of private property rights and ensuring the general safety of investments. Having attained independence in 1980, the Zimbabwean foreign policy during the 80s was largely driven by the desire to achieve African independence (evidenced by the support given to the liberation movements in South Africa and Namibia).
Motivated by the desire to unify and uplift people of the African descent, pan-Africanism became the new policy direction of the 1990s. Having a strong belief in the Commonwealth of Nations, in 1991 Zimbabwe hosted the Commonwealth Heads of Government Meeting (CHOGM). During this period the nation enjoyed cordial relations with the West and Britain.
However, as the 2000 new millennium beckoned, the dramatic events of land invasions and fast track land-reform program signalled the anti-imperialist episode. Imperatively, the unbudgetted War Veterans Z$50 000 gratuity payments (plus the concomitant monthly pensions for life) marked the commencement of economic problems.
In brief, on the 14th of November 1997 an economic nightmare commonly referred to as “Black Friday” saw the Zimbabwean dollar loose about 71.5% of its value against the United States dollar. The subsequent 46% stock market crush was inescapable. Such a dramatic economic turn was largely blamed on government’s fiscal failures to stick to budgets (i.e. failing to live within their means).
The 1998 DRC war involvement then worsened Zimbabwean budgetary needs given that the war gobbled over a billion United States dollars. Whilst the government was saddled with a brewing economic crisis, civil society groups formed the National Constitutional Assembly (NCA) which debated political and economic reform agendas. Interestingly, in 1999 an opposition party named the Movement for Democratic Change (MDC) was formed.
Faced with an aggressive competitor, debilitating economic situation and international pariah against widespread human rights abuse, the Zimbabwean government formally announced the “fast track” land reform program in July 2000.
Through dislodging commercial white farmers and replacing them with the original land owners, the economic mantra of, “Land is the Economy; the Economy is Land” as well as, “Our land is our prosperity” transformed into a ZANU PF melody.
In an attempt to dislodge the opposition party (largely blamed as a regime change agent and a black imperialist) the anti-West crusade gave birth to a culture of political violence, abductions, intimidation and various human rights violations.
The Zimbabwean and Western country toxic relations were marked with popular Mugabe chants such as ‘Blair keep your England, and let me keep my Zimbabwe’ whilst westerners labelled the former President as a dictator. Political commentators and song writers also joined the anti-West movement where Tambaoga’s popular lyric of ‘the Blair that I know is a toilet’ evolved into a national jingle.
Sadly, the economy kept on nose-diving. Having the 2002 Presidential elections credibility challenges (obviously emanating from the voter intimidation, violence and human rights abuse), the Mugabe regime pulled Zimbabwe out of the Commonwealth in 2003. Following the human rights abuse, Zimbabwe was internationally isolated. Political sanctions under the widely known Zimbabwe Democracy and Economic Recovery Act (ZDERA) were invoked in 2003.
As a counter measure, Zimbabwe adopted the ‘Look East Policy.’ Unfortunately, the economic turmoil remained unabated. Over and above the human created conundrums which largely emanated from the episodic political blunders, the economy was plagued with recurrent droughts. The poor agricultural yields as a result of the poorly executed fast track land reform program was further aggravated by the poor international commodity prices.
Beleaguered with the strain of the mass exodus of white commercial farmers, a new migration of businesses (uprooting investments) ensued. The massive de-industrialization was largely driven by a myriad of unpalatable business operating constraints, such as excessive controls, liquidity challenges, foreign currency constraints and a generally porous regulatory system which failed to guarantee the protection of private property rights.
Together with his trusted lieutenants, the former President kept preaching the “Rambai Makashinga” gospel. Two major dramatic events further worsened the Zimbabwe’s poor human rights records. The 2003-2008 Chiadzwa ‘blood’ diamond mining attracted international spotlight. Moreover, the widely known operation Murambatsvina brought the nation’s human rights records to its lowest ebb.
Regardless of having stern warnings against promulgating populist policies meant to garner votes, the Indigenization and Economic Empowerment Act was signed in 2008. The policy gave Zimbabweans the right to take over and control 51% equity stake of the foreign-owned companies in Zimbabwe. The state of policy misunderstanding, policy confusion and policy inconsistency which accompanied the Indigenization and Economic Empowerment Act was significantly massive.
The leadership in similar fashion to the land reform program had not done due diligence regarding the practicality, feasibility and expediency of the regulation. Basically, the government’s empowerment drive was ill-timed and the 51% stake absurd given that the economy was going through an economic depression (the empowered people’s pockets were empty). Instead this scenario created a great loophole for the elite to increase their ‘financial loot’.
The political behaviour and ideologies of the ruling ZANU PF has largely shaped Zimbabwean domestic policies. For instance, emanating from a regulatory standpoint, the repressive Public Order and Security Act (POSA) and the Access to Information and Protection of Privacy Act (AIPPA) were the main instruments used to disregard basic human rights.
These policies were meant to suppress the energy of political activists and opposition leaders who were assumed to be pushing the ‘regime change’ agenda and reversing the gains of the liberation struggle. This governance system was efficacious but on the contrary, through creating international seclusion, it repelled existing and potential investors.
The Zimbabwean domestic and foreign regulatory policies have largely been restrictive. For instance, faced with a negative Balance of Payments position, protectionist policies have largely dominated the importation of goods and services. The random use of import quotas, embargoes, duties and tariffs has largely been government’s reactive measures. The regulations have thus been a source of national chaos hence the failure to meet the policy consistency and policy clarity benchmarks.
The impromptu changes have also negatively affected the Zimbabwean mining sector. The mining industry being the main target for the indigenization program, the policies governing the ownership of mineral rights and the withdrawal of company leases after exploration success has caused our under performance on the Fraser Institute’s mining risk reports. As such, the historic blatant disrespect of property rights has culminated into an FDI drought.
Habitually, domestic regulations have been incoherent. Particular mention should be given to the overnight currency regulations particularly during the Gideon Gono era. The frequency of promulgations and the unpremeditated changes of statutory reserve requirements, capital ratios and various bank lending regulations is largely the reason why banks failed to execute their main mandate of financial intermediation.
It is without a doubt that the relentless money printing (which largely exacerbated the nation’s record breaking hyperinflation) turned the Zimbabwean economy into a highly risky investment zone. Hyperinflation and the political risk twin culminated into the bank failures, massive de-industrialization, high unemployment and negative economic growth. Investors shunned the Zimbabwean market.
Historically, the rapid and abrupt policy shifts have exhibited the lack of policy rationality. Instead of learning lessons from his predecessor, the current Reserve Bank governor appears to have inherited the same stance particularly with the management of the surrogate bond notes.
The currency is deemed to be at par with the US dollar but the recent separation of RTGs/Bond note and Nostro accounts is a conflicting signal. The double standards regarding the currency issue repels meaningful investments.
Zimbabwe is not new to sloganeering. Whilst all these policy inconsistencies were commonplace, the gospel of economic liberalization has always been preached. During the years 2000-2008 Zimbabwe was at least liberalized on paper and practically under command economic management systems.
The widely known price and exchange rate controls were the order of the day. For instance, the widely known July 25 2007 price control grounded the economy. The price control distortions obviously gave birth to foreign currency and goods black markets.
Currently, Zimbabwean foreign policy largely has an economic bias. This is however largely in theory rather than in practice. The ‘Zimbabwe is Open for Business’ is a great international marketing mantra. At least in theory the message within the slogan is rational, however the domestic and local policies are signaling a contrary position. Currently, the major defining moments particularly in the year 2018 is the 1 August killing of unarmed civilians, the heavily disputed 30 July Presidential election results and the ultimate Constitutional court ruling.
In the quest for legitimacy, the current Zimbabwean President opened up the space for international election observers. However, the unfortunate post-election killings have reversed the gains of the nation’s reform agenda.
This position is further worsened by the domestic policy austerity measures which are currently lopsided towards revenue reforms instead of the much needed expenditure reducing stratagems. The new-year started badly given the unfortunate January 2019 fuel price protests. The internet shutdown, unrestrained use of power and brutal killings has attracted the attention of not only regional but international leaders.
Given that the economy is receding, the magnanimous strategy expectation was to bolster aggregate demand and then contain public sector expenditures. To encourage foreign capital investments and technology transfers, tax exemptions and tax holidays should have been the fiscal authorities’ language.
However, through their ‘Austerity for Prosperity’ mantra, overtaxing the poor is the new order. The mantra of ‘necessary pain’ is being accentuated. The proposed 5% reduction in top government official salaries is a smaller dosage to warrant any commitment to fiscal restraint. The nation’s problems emanate from persistent deficits, but reforms are predominantly revenue based.
Assuming the new leadership was serious about expenditure reforms, before the 30 July elections, the reform agenda should have focused on reducing the bloated government. For instance, Zimbabwe has 270 members of parliament, 80 senators, 20 ministers (which obviously have deputy ministers), permanent secretaries and directors for government ministries and 10 provincial governors.
One would expect such a ballooned government to record tangible success stories. Instead, the size of the public sector has traditionally been the economy’s encumbrance. The much needed fiscal consolidation and structural reforms are being neglected.
The lack of political will to institute good governance reforms is worrisome. Particularly, the new leadership will only be deemed a true ‘new dispensation’ if they adopt the public declaration of assets (meant to fight corruption), public declaration of personal annual tax returns, demilitarize government institutions, promote economic freedom, respect the rule of law and private property rights as well as introducing political hygiene. Going forward, governance and structural reforms are indispensable for the charm of ‘open for business’ to yield results.
Zimbabwe should shy away from interventionist policies. The leadership is fully cognizant of the fact that an open attitude to global competition and maintaining a favourable investment climate is the vital cog for FDI inflows.
However, like the predecessor leadership, liberal economics is only a theoretical commitment given the massive appetite for command management systems. Zimbabwe needs the free market determination of prices. The currency controls are derailing economic recovery. To attract FDI, the government should demonetize the bond note and adopt full dollarization.
The current pursuit of comprehensive economic diplomacy underpinned by re-engagement with the international community will only make Zimbabwe an attractive investment destination once domestic and foreign policies are harmonious.
The nation should distance itself from the past policy incongruences which were commonly identified with policy ‘hip-hop’ or ‘kiya kiya’ economic management policy experiments. Policy certainty and clarity forms the fulcrum of not only foreign but domestic investments.
Paddingtom Masamha is an independent Financial and Economic Analyst. He can be reached on email [email protected] and Twitter @PMasamha