Working paper 6 Trade proof 2 - The Kubatana Archive...

Zimbabwe

Working Paper 6

Foreign Trade, Competitivenessand the Balance of Payments

TONY HAWKINS AND DANIEL NDLELA

United Nations Development Programme

Comprehensive Economic Recovery in ZimbabweWorking Paper Series

2009

Working Paper 6

Foreign Trade, Competitiveness and theBalance of Payments

TONY HAWKINS AND DANIEL NDLELA

Copyright © UNDP [2009]

All rights reserved

Layout and Design: Fontline International

The views expressed in this publication are those of the authorsand do not necessarily represent those of the United Nations or UNDP

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Team Members of UNDPs Working Paper Series iv

Foreword v

Executive Summary vii

Acronyms viii

Section 1: Introduction 1

Section 2: The Context: Globalization and Economic Growth 32.1 Foreign Trade and Economic Growth 42.2 Tariff Structures 52.3 Trade Liberalization in sub-Saharan Africa 62.4 Trade Liberalization and Exports 72.5 Export Diversification 82.6 Manufactured Exports 92.7 Trade Liberalization, Poverty Reduction and Income Distribution 10

Section 3: Financial Globalization and Economic Development 133.1 Domestic Capital Mobilization 143.2 Lessons for Zimbabwe 15

Section 4: Post-Independence Overview 164.1 Direction of Trade 184.2 Exports and Imports in the Context of Regional Trade 184.3 Overall Export Performance 204.4 Trade Policy Indicators 214.5 Exchange-Rate Policy 224.6 The Balance of Payments 234.7 The Balance of Payments During the Crisis (2000–2008) 24

Section 5: International Experience and Lessons for Recovery 265.1 Balance-of-Payments Adjustment under Dollarization 275.2 A Central Role for Competitiveness 285.3 Making Zimbabwe more Competitive 325.4 Structural Competitiveness and ‘Behind-the-Border’ Barriers to Trade 335.5 Firm Competitiveness and Manufactured Exports 365.6 The Macroeconomic Challenges Facing Zimbabwe’s Exporting Sector 375.7 Challenges Facing Manufacturing Sector Firms 39

Section 6: Policy Recommendations 446.1 The Corporate Strategy Dimension 456.2 Replicating Foreign Experiences 46

Section 7: Conclusion 47

Bibliography 48

Table of Contents

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Dr Dale Doré is the Director of Shanduko in Harare, a non-profit research institute on agrarian andenvironmental issues in Zimbabwe. After an undergraduate degree in Business Adminstration, hecompleted his M.Sc in Regional and Urban Planning at the University of Zimbabwe, and his D.Phil inAgricultural Economics at the University of Oxford. Prior to joining the UNDP recovery strategyresearch team, he was the coordinator of a WWF and IUCN community-based natural resourcemanagement programme in five Southern Africa countries, and later a land tenure specialist for afour country study in S.E.Asia on behalf of the Center for International Forestry Research and theFAO.

Professor Tony Hawkins is currently Professor of Economics at the Graduate School of Managementat the University of Zimbabwe, an institution which he founded. Professor Hawkins received hisB.A. in Economics from the University of Zimbabwe, was a Rhodes Scholar at Oxford where heread for a B.Litt in Economics, and a Fulbright Fellow at Harvard. He has written extensively on theZimbabwean economy with a special focus on the private sector, and consulted for a range ofinternational organizations including the World Bank, UNIDO, UNDP, UNCTAD and SADC.

Dr Godfrey Kanyenze is the Director of the Labour and Economic Development Research Institute ofZimbabwe (LEDRIZ). Prior to this he was an economist with the Zimbabwe Congress of TradeUnions (ZCTU) and statistician with the Central Statistical Office (CSO) in Harare. He currentlyalso serves as a member of the Technical Committee of the Tripartite Negotiating Forum (TNF) andthe Tripartite Wages and Salaries Advisory Board. He received his B.Sc in Economics at the Universityof Zimbabwe, his Masters at the University of Kent, and completed his Ph.D in Labour Economics atthe Institute of Development Studies, University of Sussex (UK).

Professor Daniel Makina is currently Professor of Finance and Banking at the University of SouthAfrica in Pretoria. Following his B.Acc at the University of Zimbabwe, Professor Makina completedhis M.Sc in Financial Economics at the School of Oriental and African Studies, University of London,and his Ph.D. at the University of the Witwatersrand in Johannesburg. He has also taught at theGraduate School of Management at the University of Zimbabwe, and conducted training programmesfor public servants from Sudan and South Africa in public financial management.

Dr Daniel Ndlela is a Director of Zimconsult, a consultancy firm in Harare. He completed hisundergraduate degree at the Higher Institute of Economics in Sofia, Bulgaria, and his Ph.D at theUniversity of Lund, Sweden. After serving as Principal Economist at the Ministry of Planning andDevelopment in the early 1980s, he lectured at the Department of Economics at the University ofZimbabwe. He briefly served as Deputy Dean of the Faculty of Social Studies at the University ofZimbabwe before becoming a Senior Regional Advisor at the United Nations Economic Commissionfor Africa (UNECA). He has consulted extensively for, amongst others, the World Bank, COMESA,SADC, UNIDO and UNCTAD.

UNDP Chief Technical Adviser

Dr Mark Simpson completed his B.Sc (Econ) and Ph.D at the London School of Economics, and hisMasters at the School of Oriental and African Studies, University of London. Prior to his posting toUNDP Zimbabwe, Dr. Simpson served with the UN’s Department of Peace-Keeping Operations inmissions in Angola and East Timor, and with UNDP in Mozambique.

Team Members of UNDPs Comprehensive EconomicRecovery in Zimbabwe Working Paper Series

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This working paper on Zimbabwe’s past track record and future prospects in the area of foreign tradefills a gap in UNDPs Comprehensive Economic Recovery in Zimbabwe –A Discussion Documentlaunched in 2008. The need for additional work in this area was recognized by the UNDP team ofresearchers itself, and also prompted by a number of requests from readers of the 2008 document thatpolicy-relevant analysis on trade issues be carried out by the team.

The authors have sought to both disentangle the various constraints that have impacted negatively onZimbabwe’s past export performance, and presented a menu of policy options that it is believed willenhance Zimbabwe’s international competitiveness in the context of economic recovery, therebycontributing both directly and indirectly to the country’s employment creation and poverty reductionefforts. The authors have not shied away from pointing out the extremely challenging global economicenvironment in which such recovery will have to take place, and the circumscribed room for maneuverthat the country will have as it seeks to compete in international markets. It is against this backdrop thatthe UNDP Country Office feels that the options put forward in this working paper should be the subjectof a vigorous debate between both national actors as well as international agencies interested in supportingZimbabwe’s recovery.

Dr Agostinho ZacariasUNDP Resident Representative

Mr Lare SisayUNDP Deputy Resident Representative

Dr Mark SimpsonChief Technical Adviser, Recovery StudyUNDP

Foreword

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For the forseeable future Zimbabwe’s economic development will be constrained by low levels of domesticsavings as well as by an inadequate supply of foreign exchange from exports and capital inflows.Furthermore because during the crisis phase since 2000 the domestic market contracted by two thirds (inUS dollar terms) economic recovery will have to be export-driven since domestic expenditure will remainwell below the levels of the 1990s. The impact of this market contraction will be magnified by a verylarge trade deficit, Since imports (2009–2013) are projected to average 65 percent of GDP, while theexport share will be close to 40 percent, a very substantial trade deficit of nearly a quarter of GDP will bea major drag on the speed of economic recovery. As a result, the multiplier effects of domestic expenditurewill be much diluted by the visible trade deficit.

This paper explores the implications of this scenario for economic policy and future development concludingthat going forward Zimbabwe has no choice other than to seek growth through enhanced integration withthe regional and global economies via strong export growth and an investment-friendly business climateto attract foreign capital, especially foreign direct investment (FDI). From a policy viewpoint, fixationwith trade liberalization, trade preferences and access to industrialized country markets should be replacedby a much tighter focus on domestic – behind-the-border – obstacles to export growth in the form ofmalfunctioning domestic institutions and markets, especially labour markets, weak infrastructure and lowlevels of productivity and competitiveness. Government needs to adopt and implement strategies designedto boost productivity and competitiveness by lowering transaction costs and reducing, if not eliminating,obstacles to foreign investment.

The success of any development strategy depends ultimately on the response of private sector players –entrepreneurs, investors, lenders and corporate strategists. If they are unconvinced, the strategy will notwork. Because they are a heterogeneous group, it is simply impossible for the state to devise a ‘one-size-fits-all’ strategy. Some investors may be attracted by outsourcing opportunities while others will seeclusters or participation in Global Value Chains (GVC) as profitable. The optimal way out of such apolicy dilemma is a level playing field approach, leaving entrepreneurs and investors to ‘discover’ whatthey can and cannot do.

Executive Summary

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Acronyms

AGOA African Growth and Opportunity ActBOP Balance-of-paymentsCOMESA Common Market for Eastern and Southern AfricaCD1 Customs Declaration Form No.1CZI Confederation of Zimbabwe IndustriesDAC Development Assistance CommitteeESAP Economic Structural Adjustment ProgrammeEU European UnionFDI Foreign Direct InvestmentFOLIWARS Foreign Licenced Warehouses and Retail ShopsGCI Global Competitive IndexGDP Gross Domestic ProductGNU Government of National UnityGVCs Global Value ChainsIIF Institute for International FinanceIMF International Monetary FundMFN Most Favoured NationNAFTA North American Free Trade AgreementNTBs Non-tariff BarriersODA Official Development AssistanceOECD Organization for Economic Co-operation and DevelopmentPPG Public and Publicly Guaranteed External DebtSADC Southern African Development CommunityTFP Total Factor ProductivityTNCs Transnational CorporationsRBZ Reserve Bank of ZimbabweUNCTAD United Nations Conference for Trade and DevelopmentUNECA United Nations Economic Commission for AfricaUNIDO United Nations Industrial Development OrganisationWEF World Economic Forum

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Zimbabwe’s independence in 1980 coincided witha marked acceleration in the pace of globalizationthat lasted through until the global financial crisisof 2007. Because the country’s new governmentwas committed to a strategy of ‘Marxist-SocialistTransformation’ it paid scant attention to thegrowing tempo of international trade andinvestment integration. Instead, the authorities optedfor increased government intervention, the launchof a plethora of new state-owned enterprises andcontinued reliance on the inherited inward-lookingstrategy of import-substitution.

Consequently, for much of the 1980s capital inflowswere mostly restricted to aid disbursements andoffshore borrowing by the state. As a result thecountry, which had been import-constrained formuch of the pre-independence era when theformer Rhodesia was subjected to mandatory UNeconomic sanctions, continued to be starved offoreign currency and forced to maintain the systemof foreign-exchange rationing inherited from thecolonial administration.

Towards the end of the 1980s, a number of tentativeliberalization measures were adopted culminatingin the Economic Structural Adjustment Programme(ESAP) from 1991 to 1995 during which importand current account currency controls wereprogressively dismantled, fuelling a strong surge inindustrial exports and a short-lived inflow of foreigndirect investment, mostly to the mining industry.

The government, however, seemed not to have beenfully committed to the necessary far-reachingpolicy and structural reforms, and from the onsetof the crisis in 1997 there was a gradual return todirigisme, during which period GDP growth andexports declined and the foreign-exchangeshortage intensified.

For most of the period of accelerating globalizationand, post-2003, booming commodity prices,Zimbabwe was sidelined. Neither did it share inthe rapid expansion of FDI flows to sub-SaharanAfrica. Instead the government again turned

Section 1

Introduction

inwards and sought solace in rampant domesticcredit creation that resulted in the most pronouncedbout of hyperinflation in modern history, withdisastrous consequences for output, exports, jobs,savings and investment.

There is an extensive literature on the recent exportperformance of African economies that attributesthe region’s loss of global market share to tariffand non-tariff protectionism, especially inindustrialized economies. While such influencesmay well have inhibited export growth in Zimbabwe,there can be little doubt that the prime causes wereself-inflicted. Mistaken policy choices rather thana hostile global economic environment betterexplain the stagnation, decline and growingconcentration of exports.

In 2009, the trade openness versus protectiondebate has little relevance for a small Africaneconomy like Zimbabwe with a GDP of $3 billionto $4 billion and per capita incomes in the region of$350 year. The market is just too small to protectand there is limited scope for investment in outputand job creation merely to serve the domesticmarket. Accordingly, whatever the lessons oftheory and experience, the practicalities are self-evident. In a post-crisis environment, growth inZimbabwe must not only be export-driven, butheavily reliant on foreign capital inflows becausedomestic capital and banking markets have beendecimated by hyperinflation. In a word, Zimbabwemust globalize – there is no alternative – difficultthough this may well prove to be, especially if thecurrent trend towards deglobalization accelerates.

That Zimbabwe should find itself in this situationat precisely the time when globalization is in retreatand as world trade declines by the largest marginsince the Great Depression of the 1930s, while netprivate global capital flows to emerging marketsare forecast to collapse from a peak of $888 billionin 2007 to $141 billion (a decline of 84 percent) in2009 (Institute of International Finance, 2009), isdoubly unfortunate. World trade volumes areforecast to decline 9 percent in 2009 (WTO, 2009)

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Foreign Trade, Competitiveness and the Balance of Payments

– the first such fall since 1982. Whatever the depthand duration of the global recession, Zimbabwewill be disadvantaged both in terms of exportopportunities and access to capital flows, with thepossible and temporary exception of foreign aid.

Zimbabwe’s situation has changed dramatically inone other crucial respect. Dollarization of theeconomy in the closing months of 2008 and thestart of 2009 has removed two crucial elementsfrom the economic policy debate. There is no longera role for exchange-rate management, other than

the choice between the US dollar and the SouthAfrican rand as the country’s reference currency.Monetary policy, and especially interest ratedecisions, have effectively been taken out of thehands of the Zimbabwe authorities with the netresult that after years of negative real interest rates,borrowers will have to pay high real interest rateswhich, while they could have the beneficial effectof encouraging increased domestic household andinstitutional savings, will slow the pace of economicrecovery while heightening dependence on foreigncapital.

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Over the past 50 years, world trade has grownmuch faster than output while most of the countriesthat achieved the fastest growth did so byincreasing their participation in world trade (Martin,2003). This trend accelerated in the 1990s whenworld trade volumes grew 2.5 times faster thanGDP compared with a historical average of 1.5times faster. Exports grew faster than output inevery region – with the fastest growth in East Asia(13.4 percent annually) and by the end of the 1990sexports as a percentage of GDP in developingcountries had grown to 25 percent from 15 percent.This reflected not just the opening up of economiesin the developing world but sweeping changes inthe structure of their exports as they diversifiedfirst into manufactured goods and subsequently intoservices.

In 1980 developing countries earned 70 percent ofexport revenues from primary products – mostlyagriculture and oil – but by 2007 90 percent of theirexport revenues were from manufactures, thoughin sub-Saharan Africa this share fell to 19 percentfrom 26 percent during the commodity price boom(2003–2008), compared with 80 to 90 percent inAsia and over 60 percent in Latin America.

Trade and GDP growth are closely related. Exportsare very often the main source of the foreignexchange that a developing economy needs tofinance essential imports of food, fuel, intermediateproducts, manufactures and capital equipment,without which economic growth would be stifled.

Too often, unless growth is export-driven, rapid andsustained economic growth gives rise to trade

deficits that must be financed by net capital inflowsin the form of offshore borrowing, Foreign DirectInvestment (FDI) or foreign aid. In the long run,however, few developing economies can afford agrowth model dependent on foreign capital tofinance trade deficits, without running the risk offalling into a debt trap because export growth isinsufficient to cover debt-service costs.

Since the developing world debt crisis of the 1970sand 1980s, there has been a marked shift in thetrade and industrial policies of developing countriesaway from direct intervention and inward-lookingindustrialization strategies, towards less controlledand more export-oriented regimes. As emergingmarkets embraced real globalization in the form oftrade liberalization, so they also benefited fromfinancial globalization – a huge increase in foreigncapital inflows, especially private flows of foreigndirect investment (FDI), bank loans and, in a limitednumber of cases, portfolio finance. Between 2003and 2007 net private capital flows to the emergingmarkets increased 40 percent annually from $229billion to $888 billion with the fastest growingsegments being bank lending, bond finance and FDI(Institute of International Finance, 2009).

In stark contrast, net lending by official creditors –IMF, World Bank and donors – was negative whilenet Official Development Assistance (ODA) in2007 totalled $104 billion or just ten percent of thenet private capital flows. Indeed, in the seven yearsto 2007, cumulative ODA of $670 billion was only65 percent of the net private capital inflow in asingle year, 2007 (World Bank, 2008b).

Section 2

The Context: Globalization and Economic Growth

Table 1: Global merchandize exports by sector

Sector 1990 (% of Total exports) 2007 (% of Total exports)

Agriculture 12.2 8.3Minerals 10.5 15.0Fuels 3.7 4.5Manufactures 70.5 69.8

Source: World Trade Organisation International Trade Statistics (various editions)

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sub-Saharan Africa failed to exploit these trendsto the same extent as most other developingregions. Net private flows to the region of $57 billionin 2007 – 62 percent of it in equity, predominantlyFDI and 38 percent of debt, mostly bank loans –represented a mere 5.5 percent of the global total.To make matters worse, inflows wereconcentrated in a relatively small number ofcountries, chiefly South Africa, especially forportfolio capital and the oil exporters.

Indeed, the striking feature of the pre-recession(2008) global economy was the growing relianceof developing countries on export revenues andprivate foreign capital inflows. In Sub-SaharanAfrica’s case, the current account of the balanceof payments swung from an average deficit of 4.5percent of GDP (1999–2002) to a surplus of 3.6percent of GDP (2003–2006). Booming commodityprices contributed substantially to this turnaroundbut over the same period net private capital inflowsmore than trebled underlining the shift indevelopment strategy from reliance on officialfunding to greater self-sufficiency in the form ofincreased export revenues and autonomous privatecapital inflows.

2.1 FOREIGN TRADE ANDECONOMIC GROWTH

There are few instances in recent economic historyof countries achieving sustained output andemployment growth purely on the basis of domesticmarket demand. The World Bank GrowthCommission Report (2008c) concluded that: ‘Allof the sustained, high-growth cases prospered byserving global markets. The crucial role of exportsin their success is not much disputed’ (World Bank,2008c: 48).

But there are numerous assertions to the contrary.Much of the criticism of the trade openness as apathway to growth however, focuses on inter-pretations of data that have more to do witheconometricians scoring points off one another thanwith pragmatic advice for policy-makers. Data andinterpretation disagreements notwithstanding,however, there is general agreement on two keyfindings:

(i) That trade protection is not good for economicgrowth, and

(ii) Secondly that, on its own, trade openness doesnot guarantee growth.

Openness may be a necessary condition for growthbut it is not a sufficient one. Trade openness worksto accelerate growth when other conditions are inplace – secure property rights, the rule of law, strongfinancial markets, sound physical infrastructure,open access to international markets andcompetitive domestic markets for goods, servicesand labour. Where these conditions do not applythe impact of trade liberalization may be harmful.

The lesson of recent episodes of trade liberalizationaround the world is that it is the macroeconomicand firm-level conditions that accompany theprocess of opening up economies that determinewhether the process will succeed or not. Tradeliberalization is usually interpreted to mean theabolition of non-tariff measures that restrict trade– import controls, quotas, rules-of-origin, health andsafety requirements – allied with policies that shiftthe trade regime towards neutrality. This meanseliminating any bias towards domestically-producedimport substitutes.

Neutrality is usually defined as a situation in whichthe effective exchange rate for a country’s exports– that is the nominal exchange rate adjusted forexport taxes, export subsidies or trade credits – isequal to the effective exchange rate for imports.This is the nominal exchange rate, adjusted forduties and premia resulting from quantitativerestrictions (Bhagwati, 1988). A neutral incentivesystem is desirable because it fosters the mostefficient utilization of a country’s resources.

There is no shortage of evidence of the failure oradverse repercussions of this search for neutralityin incentive systems. In Latin America – notablyArgentina and Chile in the 1980s and 1990s – tradeliberalization was accompanied by an appreciatingreal exchange rate which undermined thecompetitiveness of domestic exports with adverseconsequences for the economy. In many transitioneconomies in Eastern Europe in the 1990s, althoughtrade was liberalized, other necessary priorconditions – secure property rights and a

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Section 2 – The Context: Globalization and Economic Growth

functioning market economy – were not in place.Consequently trade reforms retarded economicperformance (Bolaky and Freund, 2004).

The above examples notwithstanding, cross-countryregressions suggest that during the 1990s realexport growth was higher in those countries thatreduced tariffs more but that also enjoyed greatermacroeconomic stability and more effectivegovernment. In the 1990s, tariff reductions were‘positively and significantly associated withdeveloping countries’ export shares’ (World Bank,2005: 138). Trade liberalization, on its own, is not adevelopment strategy for an emerging economy,though in all probability, it is a necessary, thoughcertainly not a sufficient condition.

Indeed, country experience provides convincingevidence of the role of a dynamic export sector inpropelling developing country growth. ‘On average,the fast-growing countries of the past two decadeshave seen their share of global exports rise rapidly(a three-fold increase over the past 25 years),fuelling the sustained growth that these countrieshave enjoyed’. By comparison countries in Easternand Southern Africa, including Zimbabwe, haveperformed very poorly with their global exportmarket share halving (Brenton, Hoppe andNewfarmer, 2008: 4).

Brenton et al., (2008) point out that Africancountries performed poorly in global export marketsdespite preferential access to the EU and othermarkets. They highlight the weakness of theargument that developing countries grow stronglywhere they have preferential access to protectedindustrialized country markets. In fact, preferencesdid not help African countries to integrate with theglobal economy and, as preference marginsdecrease with continuing multilateral tradeliberalization, the probability is that preferences willbe even less effective in the future.

Preferences have failed on three main counts: First,they have detracted from the vital importance oftackling supplyside constraints to export growth.Governments and policy-makers devote months,even years, of work to negotiating preferential

trade agreements, while ignoring serious domesticbehind-the-border obstacles to export expansion.Secondly, preferences are small; the value of allpreferences under Africa, Caribbean and Pacificand General System of Preferences agreementsfor all African countries, excluding South Africa,is only 2.6 percent of the value of their exports(Brenton, et al., 2008). Third, even wherepreference margins are substantial, market accessis limited by rules of origin and other regulations.

2.2 TARIFF STRUCTURES

Most Favoured Nation (MFN)1 average tariffshave fallen from 14.1 percent (1995–1999) to 11.7percent (2000–2004) and 9.4 percent in 2007 – adecline of more than one-third. In addition, asubstantial volume of trade is conducted at zeroMFN tariff rates or through preferential tradeagreements. Concurrent with this steep reductionin protection all regions and income groups haveenjoyed substantial real growth in trade with globalexport growth averaging between 7 and 9 percentover the decade to 2007. At the same time, allregions have become more integrated with theworld economy as measured by their trade-to-GDPratios with the global average rising to 97 percent(2006) from 86 percent (1995). The average forsub-Saharan Africa is 89 percent.

The World Bank’s trade policy indicators (2008d)show a strong negative correlation between acountry’s income level and the restrictiveness ofits trade regime. The lower the per capita incomeis, the more restrictive is its trade regime. Onlyone African country, Mauritius ranked 6th, is inthe top 20 least restrictive trade regime economiesglobally, while 12 are ranked in the bottom 20 outof a total of 125 countries for which data areavailable.

Trade integration, measured by the trade share inGDP, is negatively and significantly correlated withtrade restrictiveness – the more restrictive theforeign trade regime the lower the share of tradein GDP. The data show also that market access ispositively and significantly correlated with export

1 The most favoured nation clause in international trading agreements requires that any tariff concession made by one country toanother must be immediately extended to all other members, so that it is, in effect, multilateral and not bilateral.

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performance, meaning that exports grow morerapidly in those countries with the best access toforeign markets. Ironically oil and commodityexporters, along with high-income countries, enjoythe best market access conditions. There are eightAfrican countries in the top 14 in terms of marketaccess, dominated by mineral exporters (Botswanaand Namibia) and oil exporters (Nigeria, Gabon,Algeria and Sudan).

Despite the progress of trade liberalization, high-income countries maintain higher non-tariff barriersand have greater escalation and dispersion in theirtariff structures than low-income countries. Ineffect this means that they protect certain sectorsof their economy more robustly than emergingeconomies, especially those sectors of specialinterest to developing country exporters. Forexample, in low-income countries the importaverage weighted tariff on agricultural products,including preferences, is 1.4 times that of othergoods. In high-income OECD countries it is ninetimes greater.

Developing country exporters also face higherimport barriers at the upper end of the value-addedspectrum than the lower end. Most countriesescalate tariffs as value-added increases so thathigher-value products pay higher import duties, butthis trend is more pronounced in high-incomeOECD countries than in developing markets.

On average, sub-Saharan countries rank poorly onmost trade policy indicators. The region has thesecond-highest degree of trade restrictiveness afterSouth Asia with an applied tariff-weighted averageof 11 percent (down from 15 percent in 1995–1999). Zimbabwe ranks alongside Sudan, theSeychelles and Comoros as amongst the region’smost closed economies having the highestrestrictiveness indices.

The sub-Saharan region also has the worst rankingsfor governance, business environment and tradelogistic and facilitation indicators. It also has thehighest degree of export concentration of all theregions with a concentration index of 52.7, whilethe cumulative average country share of the topfive export products approximates 80 percent.Revenues from import duties account for a quarterof fiscal revenues in low-income countriescompared with 7 percent in high-income economies.

Sub-Saharan countries rely on trade taxes for 23percent of their total revenue.

2.3 TRADE LIBERALIZATION IN SUB-SAHARAN AFRICA

Prior to independence in the 1960s and beyond,sub-Saharan Africa’s trade was primarily a two-way relationship with European colonial powerswhereby primary products were exported andmanufactures imported. From the 1960s to the1980s, many sub-Saharan governments pursuedimport-substitution strategies designed to diversifyand broaden their economies. During this period,state involvement in the economy was extensiveand domestic firms were shielded from internationalcompetition by tariffs and import licensing. Tariffstructures were extremely complex with largenumbers of tariffs, very high tariffs and a highdegree of dispersion between different tariffs.Exports were restricted by strict regulation, exporttaxes and overvalued exchange rates.

During the 1980s, most sub-Saharan countriesadopted trade liberalization strategies usually underthe tutelage of the IMF and World Bank. By themid 1990s most African countries had adopted orwere implementing IMF/World Bank StructuralAdjustment Programmes that placed tradeliberalization at the heart of the economic reform,process.

Measures to liberalize imports focused on:

• Exchange rate devaluation;

• Reforming the tariff structure by lowering theoverall level of tariffs and reducing tariffdispersion; and

• Dismantling non-tariff barriers (NTBs) byreducing the list of products subject to importlicensing procedures.

On the export front, four main measures wereadopted:

• Exchange rate devaluation;

• The reduction or abolition of export taxes;

• Removal of export licensing procedures; and

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Figure 1: Unweighted average tariffs (1995 and 2006)

Source: UNCTAD (2008)

• The abolition or privatization of state-ownedagricultural marketing boards for export crops.

Some countries went further, seeking to promotenon-traditional (new) exports by establishing exportprocessing zones, introducing a variety of exportincentives, such as tax-breaks, duty-drawbacksystems and manufacturing-under-bondarrangements. Other policies included investmentin export infrastructure – roads, railways and ports– and the liberalization of investment codes. Tradeliberalization protagonists argued that tradeopenness would boost long-term growthperformance in five main ways:

(i) Increased competitiveness in the export sectorwould attract higher levels of investmentresulting in output and employment growth;

(ii) Trade liberalization would have a positive‘substitution effect’, reducing prices ofimported inputs and thereby enhancing exportcompetitiveness and profitability, shifting theincentive structure from production of non-tradables to that of tradable products;

(iii) Exposure to increased competition would fostergreater specialization and ‘learning by doing’,as a result of which there would be anincreased contribution to the growth processfrom gains in total factor productivity (TFP);

(iv) The export baskets of primary producteconomies would be upgraded and diversified;and

(v) Increased foreign trade would accelerate thepace of technology transfer, also giving rise togains in total factor productivity.

Tariffs were reformed in three stages:

(a) The first was tariff rationalization – reducingthe number of tariff rates and of ad hoc rulesand regulations;

(b) Tariff dispersion was reduced by lowering toptariff rates and increasing the lowest ones,;and

(c) The overall level of tariffs was reduced, sothat between 1995 and 2006 average(unweighted) tariffs in Africa were cut to 13.1percent from 21.7 percent, though by the endof the period African tariffs were higher thanin other emerging market regions, except SouthAsia (Figure 1).

On average, tariffs were reduced by 40 percentand by the end of the period the number of Africancountries with average unweighted tariffs of morethan 15 percent had fallen to 15 while three othercountries had average tariffs in excess of 20percent.

2.4 TRADE LIBERALIZATION ANDEXPORTS

One measure of the success of trade liberalizationis the increase in the level of imports as a percentageof GDP. This was expected to follow tariff reformand the reduction or elimination of non-tariff barriers.

South Africa Latin EastAsia America Asia

40

35

30

25

20

15

10

5

0

1995

2006

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In the event, the median ratio of imports to GDP inAfrica increased some 10 percent from 31 percentof GDP before liberalization to 34 percentsubsequently. This was much lower than the averagefor all developing countries where the import ratiorose by a third to 37 percent of GDP, while for non-African developing countries the increase was 62percent to 38.9 percent of GDP.

Similarly, Africa’s export-to-GDP ratio rose modestly(11 percent) to 25.7 percent of GDP compared witha 32 percent increase to 29.5 percent of GDP in alldeveloping countries and a 50 percent gain to 31.6percent of GDP in non-African emerging markets.Indeed, Africa’s trade balance actually worsenedafter liberalization to a trade deficit of 7.7 percentof GDP from 6.6 percent previously, and while thesame was true of developing economies as a whole,the actual trade gap in Africa was substantially largerthan that for developing countries as a whole. Innon-African developing economies the trade deficitrose to 4.9 percent of GDP from 2.7 percent, whilein emerging markets as a whole it widened to 5.9percent of GDP from 4.3 percent.

The main difference between African and Non-African developing countries was that in the latterthe 62 percent rise in the import-GDP ratio wassubstantially offset by a 50 percent increase in theexport share of GDP (UNCTAD, 2008). Thesenumbers confirm earlier research which concludedthat trade liberalization boosts both imports andexports, as expected, but that imports grow morerapidly as a result of which the trade deficit widens(Santos-Paulino and Thirlwall, 2004).

Closer econometric analysis of the data suggeststhat although the crude numbers show that non-African countries exploited trade liberalization moreeffectively than African states, the actual numbersare statistically very similar. UNCTADsinterpretation (2008) is that Africa’s exportresponse was constrained by export momentumeffects on the one hand and real effectiveexchange rates on the other.

Export momentum refers to a country’s capacityto maintain the level of its exports over time. Theexport momentum coefficient for Africaneconomies is 0.78 meaning that for every onepercentage point of GDP in exports in a given year,African countries retained 0.78 percent of GDP in

the subsequent year. This momentum effect islower than that for non-African developingcountries of 0.87.

Despite this relatively weak export momentumeffect, and the adverse effect of overvalued realexchange rates, the value of African exports grewfaster (12.4 percent annually) between 1995 and2006 than in developing countries as a whole (11.5percent). But Africa had the slowest rate of volumegrowth for developing regions of 5.8 percentcompared with 9 percent for emerging markets asa whole and 6.5 percent for overall internationaltrade. Africa’s export growth was driven primarilyby higher export prices which increased 6.1 percentannually over the period compared with 1.5 percentfor global trade and 2.1 percent for emergingmarket exports.

The regional figure masks considerableheterogeneity among African countries where thefastest export growth was achieved by oil andmetal exporters and post-conflict states. The mostimportant impact by far was the post-2003commodity price boom as a result of which exportprices rose 17 percent annually (2002 to 2006) afterhaving fallen 2 percent a year between 1995 and2001.

2.5 EXPORT DIVERSIFICATION

Even more disappointing was the failure of tradeliberalization to diversify the region’s export base.The data show that the rise in exports as a shareof GDP was primarily the result of rising oil volumesand prices, and to a lesser degree increased metalexports. In the period following trade liberalization,the export concentration index for Africa increasedby 80 percent from 0.21 in 1995 to 0.38 in 2006.National figures (2006) range from a high of over0.8 in oil exporting countries – Angola, EquatorialGuinea, Sudan, Congo, Nigeria, Gabon and Libya– to a low of 0.16 in South Africa and Moroccoand 0.19 in Kenya and Tunisia.

Table 2 shows that African export destinations havechanged radically since 1960 mostly reflecting theloosening of colonial ties, especially with the EUand the switch of destinations to North Americaand Asia, especially since the early 1990s. By 2006China, with two way trade of $32 billion, had

9


emerged as the region’s third largest trading partnerafter the US ($60.6 billion) and the EU ($56.4billion).

Table 2: African export destinations (1960 and 2006)

Destination 1960 2006(% of Total Exports)

EU 66 40NAFTA 9 24Developing Asia 6 16Africa 5 8Other 14 12

Source: UNCTAD (2008)

2.6 MANUFACTURED EXPORTS

From an African perspective, the biggestdisappointment of trade liberalization has been itsfailure, to date, to deliver growth in manufacturedexports. In the 2003–2006 period Africa accountedfor less than 1 percent of world trade inmanufactured products. Sub-Saharan Africaaccounted for 0.5 percent of world trade inmanufactures, but when South Africa is excludedthis falls to 0.23 percent.

Recent explanations for the failure of many countries,especially, but not only in Africa, to achieve exportdiversification focus on three core issues:

• Factor endowment;

• Geography; and

• Institutions.

Factor endowment militates against exportdiversification, either because the possession of richoil, gas or mineral deposits skews the structure ofincentives (the tax system and the tariff structure)and the pattern of investment in the direction ofnatural resource exploitation, or because theexistence of a large, unskilled low-productivity, low-wage workforce fosters investment in, andproduction of, low value-added, labour-intensivemanufactures. In a famous article – What youExport Matters – Hausmann, Hwang and Rodrik(2007) conclude that: ‘Countries that produce “poorcountry” goods remain poor… (so) countriesbecome what they produce’.

In other words, so long as policy-makers adhereto static comparative advantage theory – producingand exporting what they can do well today – theircountries will remain in the slow lane. In anincreasingly-competitive global economy, exportgrowth depends on moving up the value-addedladder in two respects. First, moving out of primaryproduct and labour-intensive manufactures wheredemand growth is slow, to more dynamic marketsegments in medium- and especially high-technology industries. Secondly, within industrialsectors and sub-sectors, shifting activity to thoselinks in the value chain where value-added isgreatest.

Both prescriptions are extremely difficult to satisfy.Normally, an economy is a prisoner not just of itsresource endowment, but also of its history. Pathdependency means that a country’s economicdevelopment path is a function of its history.Countries like Zimbabwe where manufacturingindustry has regressed will experience greatdifficulty in making the transition from producing‘poor country’ goods to the kind of product indemand in rich and fast-growth economies.

The role of geography is more straightforward:land-locked economies like Zimbabwe and thosedistant from large and dynamic markets aredisadvantaged because the costs of exporting aregreater, as are the costs of importing essential inputs.There is little policy-makers can do to counter theseproblems other than by investment in infrastructureand logistics accompanied by economy-widemeasures to enhance worker and capitalproductivity.

The third explanation – weak institutions, and byextension, high transaction costs – is where policy-makers really can make a difference by focusingnot on market access issues – such as preferencesand trade barriers – but on domestic behind-the-border obstacles to trade.

One explanation offered for Africa’s inability tobreak through into industrial exports is thecontinent’s very low level of industrialization. This,however, is unconvincing given that smalleconomies with backward industrial sectors likeSwaziland (manufactured exports 47 percent ofGDP in the 2000–2006 period), Mauritius (26percent of GDP) and Lesotho (35 percent of

10


GDP), have far greater manufactured exports toGDP ratios than more industrialized states. Thecomparable figure for the continent’s mostindustrialized country, South Africa, is only 13percent.

2.7 TRADE LIBERALIZATION,POVERTY REDUCTION ANDINCOME DISTRIBUTION

If trade liberalization contributes to faster outputgrowth it will also reduce poverty. The strongestevidence of this comes from the two Asian giants– China and India. Between 1980 and 2000, incomeper head grew 8.3 percent annually in China and3.6 percent a year in India while trade integration– trade in goods and services as a proportion ofGDP – doubled to 46 percent in China andincreased from 19 to 30 percent in India. Between1978 and 1998 the poverty headcount fell from 28percent to 9 percent of the population in China andfrom 51 percent to 27 percent in India (World Bank,2005).

Unfortunately, these experiences cannot readily begeneralized. For the China/India experience to bereplicated in Africa, structural transformation mustaccelerate so that unskilled workers move fromcontracting sectors of the economy (often non-tradables) to expanding sectors (tradables) thatbenefit from trade liberalization. In Africa,however, this has not happened because, with someexceptions such as Mauritius, trade liberalizationhas not yet fostered a strong expansion in thetradables sector, with the exception of oil, gas andmetals, which are beneficiaries not of trade policyreforms but of the global commodity price boom.

The impact on employment depends on themacroeconomic framework within which tradeliberalization occurs. A study of 18 countries in LatinAmerica (1970–1996) concluded that liberalizationhad a small, negative impact on employment. Theimpact was even more adverse in those countrieswhere the real exchange rate was allowed toappreciate as a result of capital flows attracted byeconomic reform (Dutch Disease effects)(Marques and Pages, 1998). In Brazil, however,(1990–1997) trade liberalization had an initialadverse effect on employment but over the entireperiod the shift to greater labour-intensity in the

economy gave rise to increased long-runemployment (Moreira and Najberg, 2000). In someAfrican economies, output and employment effectshave been significantly negative. One study ofKenya, Tanzania and Zimbabwe found that firmsresponded to increased competition from importsby contracting rather than by seeking to upgradeand enhance their competitiveness (Lall, 1999).

Latin American experience suggests that tradereform reduced employment in previously protectedindustries but fostered new job creation elsewherein the economy. Dislocations of this kind tended tohave short-run adverse effects followed by long-term gains. Chile experienced several years ofdouble-digit unemployment rates after tradeliberalization but from 1986 to 1997 itsunemployment rate was amongst the lowest in theregion (De Ferranti, et al., 2001).

Predictions that trade liberalization would reducegovernment’s fiscal revenues leading to reducedpublic social spending have not materialized. In thedecade to 1999, Kenya radically liberalized itsforeign trade environment but import duties as aproportion of GDP actually increased. Thisreflected expansion of the revenue base, areduction in the number and extent of exemptions,increased duties on some imports and a shift in thepattern of imports to higher-duty products (Winters,et al., 2004).

The lessons for poverty reduction are similar tothose of the openness-growth relationship. Thepoor are more likely to benefit from globalizationwhere appropriate complementary policies are inplace, including labour market deregulation andsocial safety nets for the vulnerable (Harrison,2005). Above all, the impact of globalization on thepoor cannot be easily generalized. A number ofstudies – Winters, McCulloch and McKay (2004),Ravaillion and Lokshin (2004) and Harrison (2005)all draw attention to the heterogeneity of outcomes.Trade liberalization may contribute to povertyreduction depending on the environment withinwhich it is implemented including the overallpackage of reforms. Where these conditions areunfavourable, trade liberalization may well increaserather than reduce poverty.

Evidence on the impact of trade reform on wageinequality is mixed. In some Latin American

11


countries the industries most exposed tointernational competition pay the highest wages butin Mexico the trebling of manufactured exportsduring the 1990s reflected accelerated productivitygrowth, increased demand for higher paid skilledworkers and an increase in wage inequality. Thus,in Mexico, trade integration through NAFTA2

reduced poverty but increased income inequalitybetween regions.

Multilateral Trade Liberalization:Implications for Zimbabwe

One, possibly the most important, objective of thecurrent long-stalled round of trade liberalizationnegotiations – the Doha Round – is the accelerationof development in poor countries. For this reasonreform of the global agricultural trading system topsthe agenda. There are three core issues foragricultural trade reform – market access,domestic support and export competition. As anagricultural exporter Zimbabwe stands to gain fromany agreement on these issues, but because its keyfarm exports other than cotton, sugar and meat,are either regional – in years when the countryproduces maize surpluses – or non-food (tobacco,horticulture) that are unlikely to be majorbeneficiaries of a Doha agreement, the impact onagricultural exports is likely to be relatively small.

Anderson, Martin and van der Mensbrugghe (2005)seek to estimate the gains from Doha Roundliberalization under different scenario outcomes, butbecause of the far-reaching changes in the globaleconomy since these estimates were made, alliedwith the many uncertainties surrounding theprogress and eventual outcome to the Dohanegotiations, means that such estimates are highlyspeculative. That said, it is clear that multilateraltrade liberalization would boost real incomes in sub-Saharan Africa, especially where it is accompaniedby agricultural reform. The Anderson et al.,analysis suggests also that the gains from tradewould be even greater where countries go beyondthe most likely Doha scenarios with unilateral tradereforms.

The African Growth and Opportunity Act

At present Zimbabwe is not eligible for member-ship of the African Growth and Opportunity Act(AGOA) that offers sub-Saharan African countriesduty-free access to the US market for substantiallyall products. The key criteria for eligibility are:

• Continual progress toward the establishmentof a market-based economy and the rule oflaw;

• Elimination of barriers to US trade andinvestment;

• Implementation of economic policies to reducepoverty;

• Protection of internationally recognized workerrights, and

• Establishment of a system to combat corruption.

Additionally, countries cannot engage in:

i) gross violations of internationally recognizedhuman rights,

ii) support for acts of international terrorism, or

iii) support activities that undermine US nationalsecurity or foreign policy interests.

Some 40 sub-Saharan countries are eligible forAGOA benefits, and 27 of them also qualify forAGOA’s apparel benefits designed to boost clothingmanufacture and exports to the US Since itsinception in 2000, AGOA has helped increase UStwo-way trade with sub-Saharan Africa. In 2007,US total exports to sub-Saharan Africa totalled$14.4 billion, more than double the amount in 2001.US total imports from sub-Saharan Africa morethan tripled during this period to $67.4 billion. In2007, over 98 percent of US imports from AGOA-eligible countries entered the United States duty-free.

2 NAFTA (North American Free Trade Agreement), a trading bloc consisting of Canada, Mexico and the USA entered into force onJanuary 1, 1994. NAFTA created the world’s largest free trade area, which now links 444 million people producing $17 trillionworth of goods and services.

12


AGOA imports totalled $51.1 billion in 2007, morethan six times the amount in 2001, the first full yearof AGOA. While petroleum products accountedfor the largest portion of AGOA imports, non-oilAGOA trade totalled $3.4 billion in 2007, more thandouble the amount in 2001. Several non-oil sectorsexperienced sizable increases during this period,including apparel, footwear, vehicles, fruits and nuts,prepared vegetables, leather products, cut flowers,prepared seafood, and essential oils (Office of theUSTrade Representative, 2008).

Assuming continued progress in the related fieldsof political and economic reform, Zimbabwe shouldqualify for AGOA membership by 2011, possiblysooner. The three main benefits would beenhanced access to the US market for exports atleast until 2015 (when AGOA expires in its presentform), increased FDI and aid for trade fromAGOAs Trade Capacity Building initiative (TCB).

Aid for Trade

‘Aid for trade’ comprises technical assistance;capacity building; institutional reform; investmentsin trade-related infrastructure and assistance tooffset adjustment costs, such as fiscal support tohelp countries make the transition from tariffs toother sources of revenue. This category isbecoming increasingly important so that by 2004some 31 percent of bilateral Official DevelopmentAssistance (ODA) was aid for trade while theWorld Bank and regional development banksallocate about half their sector programmes to tradefacilitation (OEC/WTO, 2007).

In its recovery phase Zimbabwe will need all thehelp it can get in developing modern ‘tradeinfrastructure’ – especially investment in physicalinfrastructure, including transport corridors andinformation systems to connect exporters to worldmarkets as well as modern customs facilities tomove products rapidly and efficiently acrossborders. Vital also will be the development ofinstitutions and expertise to manage a complexglobal trading system.

13

Recent literature makes a careful distinctionbetween financial globalization, defined as growingglobal linkages in the form of increasing cross-border financial flows of all kinds, including ForeignDirect Investment (FDI), portfolio investment andbank lending, and financial integration which refersto an individual country’s links with internationalcapital markets. Very broadly, emerging marketeconomies are those with strong financialintegration links and thereby more likely to attractinflows of portfolio capital and to some extent bankloans, while the broad mass of developingeconomies participate in the financial globalizationprocess mostly through the attraction of FDI butalso through bank loans. Today the two concepts– financial globalization and financial integrationare used interchangeably.

During the recent commodity boom (2002–2008)this distinction between emerging and developingeconomies became increasingly blurred as thelatter, especially but not only oil and gas exporters,have become capital exporters to financial marketsin OECD and other developed economies. Thishas increased their financial integration with theglobal economy, albeit in a paradoxical and non-traditional manner – low-income countries investingcapital surpluses in rich economies, thereby turningtraditional economic theory on its head.

The increased volume of cross-border financialflows especially since the mid-1980s reflects thecombination of both ‘push’ and ‘pull’ factors. Pullfactors have resulted from policy reforms indeveloping countries – trade and capital accountliberalization, large-scale privatization programmes,more investor-friendly investment and businesscodes and the establishment or liberalization ofstock exchanges.

Push factors include changing macroeconomic andbusiness cycle conditions in high-income countriesalong with important institutional changes such asthe growth of institutional investors in industrialcountries, including mutual funds and hedge funds,as well as the evolutionary impact of ageing in

high-income economies with all that that impliesfor domestic savings levels. These push and pullfactors resulted in a steep increase in the volumeof capital flowing to developing countries, thoughin recent years this acquired a new twist as theworld’s richest economies – as a group – havebecome net importers of capital while developinglow-income economies, again as a group, havebecome net capital exporters.

In principle financial globalization should boost acountry’s growth rate directly by augmentingdomestic savings, reducing the cost of capitaltransferring technology (FDI) and strengtheningthe domestic financial sector. Indirect channelsinclude the ‘discipline’ effects of financialglobalization in terms of forcing capital-recipientcountries to implement appropriate fiscal, monetaryand exchange-rate policies.

However, there is little support in the empiricalresearch for the theoretical view that financialglobalization boosts economic growth. The IMF(Prasad, et al., 2003) concludes as follows:

‘An objective reading of the vast researcheffort to date suggests that there is no strong,robust and uniform support for the theoreticalargument that financial globalization per sedelivers a higher rate of economic growth.’(2003: 8)

As the Fund notes, this is not surprising sinceresearch suggests that the main explanation fordifferent rates of per capita income growth isdifferences in total factor productivity (TFP)explained by ‘soft’ factors like governance,property rights and the rule of law. Accordingly,while financial globalization may lead to increasedcapital inflows, these only translate into higherrates of GDP growth where other pieces of thegrowth puzzle are in place.

In fact, the evidence suggests that financialglobalization, in combination with goodmacroeconomic policies and good governance is

Section 3

Financial Globalization and Economic Development

14


conducive to growth. The research shows thatcountries with a strong human capital base andgood governance do better at attracting FDI, which(usually) boosts growth. Less convincing is theevidence that corruption is strongly negativelycorrelated with FDI. In Africa a number ofcountries that are seen to suffer from high levelsof corruption have attracted very large inflows ofFDI because they are oil-rich – a considerationthat outweighs corruption concerns.

Rogoff et al., (2006) stress the crucial contributionof collateral benefits – positive side-effects offinancial globalization. Collateral benefits includedevelopment of the domestic financial sector,institutional improvements in the fields ofgovernance and the rule of law and bettermacroeconomic policies. The argument is that thebeneficial impact of financial integration on outputand employment growth may take time to showup because the process operates through indirectchannels rather than just directly through financingdomestic investment. Indeed, these ancillarybenefits could turn out to be more important infostering growth than the external financing ofdomestic investment.

Although the empirical research does not providerobust support for the view that capital inflowswill accelerate economic growth, several studiessuggest that different types of inflows may havedifferent growth impacts. Reisen and Soto (2001)examine six different types of capital inflow –FDI, portfolio equity, portfolio bonds, short-termbank borrowing, long-term bank borrowing andofficial (aid) flows. Only two of the six, FDI andportfolio equity are positively associated withhighest subsequent growth rates. Bosworth andCollins (1999) found that increased FDI and banklending were associated with higher levels ofdomestic investment, a finding confirmed by theWorld Bank’s Global Development Finance report(2001) leading to the relatively solid conclusionthat FDI, in particular, is likely to boost countrygrowth rates.

The contrast between the gains from tradeopenness and financial openness is significant,with the evidence suggesting that gains from tradeare easier to secure than gains from financialglobalization where the entry bar is higher. (Prasad,

et al., 2003). While, as noted above, it is difficultto find a robust relationship between levels ofcapital inflows of all kinds and subsequenteconomic growth rates, there is evidence tosuggest that ‘threshold effects’ can be significant.As noted above, the effect of FDI on growthdepends, in part, on the size and quality of acountry’s human capital stock (Borenzstein, DeGregorio and Lee, 1998). As with foreign aid, theconcept of absorptive capacity applies with theevidence suggesting that a country’s capacity toabsorb and exploit foreign capital, of all kinds,depends not just on its human capital stock, butalso on macroeconomic policies, the strength ofinstitutions, the state of governance and the depthof domestic capital and financial markets.

3.1 DOMESTIC CAPITALMOBILIZATION

A recent IMF study found that in a sample of 51emerging markets, those that relied less on foreignfinance grew faster in the long run. In other words,countries with balance-of-payments surpluses oncurrent account grow faster than those with deficitsthat rely on capital inflows. This is another paradoxbecause it suggests that if capital flows to countriesthat have good investment opportunities, there mustbe a correlation between rapid growth and acurrent account deficit. In fact, the evidence givesa different correlation – one between national(domestic) savings and GDP growth. Countries thathave higher savings ratios for a given level ofinvestment experience higher growth. The evidenceshows that countries with higher levels ofinvestment fare better than those with low levelsof investment. But countries that had highinvestment ratios and lower reliance on foreigncapital (lower current account deficits) grew faster– on average, by about one percent a year – thanthose that also had high investment but relied moreon foreign capital. One possible explanation is thathigher growth is associated with – in fact causes– higher domestic savings. In other words, fast-growing countries may need less foreign capital.The snag with this explanation is that as countriesget richer so they spend more on consumption(South Africa) and also invest more, because thereare more investment opportunities. Accordingly,they should have a Balance-of-Payments (BOP)

15

Section 3 – Financial Globalization and Economic Development

deficit on current account and need more – notless – foreign capital.

3.2 LESSONS FOR ZIMBABWE

Policy-makers in Zimbabwe can glean little fromsub-Saharan and developing world experience oftrade liberalization, because while it is true thatZimbabwe still maintains very high levels of overallprotection at this stage in its development,Zimbabwe has no option other than to seek growththrough enhanced integration with regional andglobal economies, especially in the form of exportgrowth and openness to foreign capital inflows ofall kinds.

A decade ago the debate on trade policy inZimbabwe would have been very different, but tenyears of accelerating economic decline, and thedecimation of firms, jobs and savings, havedramatically narrowed the range of policy options.Dollarization too has narrowed options, forcing theauthorities to impose deflationary policies sincecurrency devaluation is no longer on the agenda.In this environment the debate over protectionversus openness pales into insignificance. In itsplace, policy-makers must focus not on whethertrade liberalization is desirable, but on the mechanicsof its implementation to ensure that the impact isbeneficial. The debate is not about whether, noreven when, but how.

16

Table 3: Foreign trade 1980–2008

Growth rate Controls period Liberalization peroid Deepening crisis% p.a. (1980-1989) (1990-1996) (1997-2008) 1980-2008

Exports (US$ millions) 2.2 6.7 -4.5 0.4Imports (US$ millions) 5.2 6.5 -4.0 0.3Exports/GDP 24.5% 27.4% 32.9% 29.3%

(1980-2006)Imports/GDP 27.4% 35.5% 35.8% 32.8%

(1980-2006)Current account balance -3.8 -5.2 -7.0 - 6.0(% of GDP – average) (1997-2005) (1980-2005)Terms of trade 111.0 107.0 116.5 111(1980 = 100)Memoranda Item:Growth 1980–1997 (% p.a.) Exports 4.6 Imports 5.8 – –

Sources: World Bank: African Development Indicators (various editions). IMF Regional Economic Outlook for sub-SaharanAfrica (various editions) and World Economic Outlook Database (2008); Reserve Bank of Zimbabwe: QuarterlyMonetary Policy Statements (various editions) and the Central Statistical Office, Harare: Quarterly Digest ofStatistics and National Accounts (various editions).

Section 4

Post-Independence Overview

Throughout the post-independence period, foreigncurrency has been a major constraint on economicgrowth. Table 3 shows export growth (in USdollars) of 0.4 percent annually for the 1980–2008period, while imports grew 0.3 percent a year. Bothpeaked in 1996 and 1997 since then exports havehalved while imports have declined 58 percent.Prior to the onset of economic decline, exportgrowth averaged 4.6 percent a year, below thelong-run growth rate of world exports (1980–2007)of 7.3 percent annually, while that of importsaveraged 5.8 percent.

At their peak in 1996, exports of goods and servicesaccounted for 35 percent of GDP, while the importshare in its peak year (1997) was 40.5 percent.During the liberalization period, both ratios increasedas the economy was opened up, a process thatcontinued after 1997 when the share of foreigntrade in GDP rose further. Exports per head ofpopulation declined and stagnated during the 1980sbefore recovering strongly in the ESAP period topeak in 1997, since when they have halved. Figure2 shows that per capita exports have declined bymore a third since 1980. Per capita imports peaked

Figure 2: Exports and imports per head of population (1980–2007)

Source: Central Statistical Office, Harare

350

300

250

200

150

100

50

01980 1990 1996 1998 2000 2002 2004 2006

Exports per head

Imports per head

17

Section 4 – Post-Independence Overview

Figure 3: Index of export volumes and prices

Source: Central Statistical Office, Harare and the International Monetary Fund

at the start of the period 1981, before falling steeplyduring the period of import-constrained growth inthe 1980s. As with exports there was a strongrecovery during the liberalization phase, but by 2007imports per capita were 35 percent lower than atindependence.

Even more striking is the weak performance ofexport volumes. These peaked in 1987, a 28percent increase on the figure for 1980. But, asFigure 3 shows, by 1990 volumes had fallen by athird from their record 1987 levels and when exportsreached their 1996 high in value terms, volumeswere only four percent higher than in 1980. Indeedin only 6 of the 25 years for which volume dataare available were exports greater than in 1980.By 2004, export volumes were one-third below 1980levels.

Figure 3 also shows that export revenues weresustained by strong export prices, which to someextent offset falling volumes, especially during thecommodity price supercycle in 2003–2008. At theend of the 25-year period (1980–2004) however,export prices (in US dollars) were only modestlyhigher (up 9.5 percent) than at the start. Indeedfor most of the period export prices were below1980 levels. Despite this, however, Zimbabwe’sterms of trade (1980=100) averaged 111 over theentire period (1980–2007) reflecting the fact that,although for most of the period export prices weredepressed, import prices were even more so.

No single factor explains Zimbabwe’s weak exportperformance. Figures 2 and 3 suggest that muchof the blame rests with a weak supplyside responseespecially during the crisis period when exportvolumes and revenues have declined despitebuoyant international commodity prices. Threeother explanations stand out:

• Deteriorating competitiveness as measured inthe World Economic Forum’s GlobalCompetitiveness Index and the World Bank’sDoing Business indicators.

• An overvalued exchange rate during both thecontrol period of the 1980s and the 2000–2007crisis period (Figure 4), and

• A quality and value-added deterioration inZimbabwe’s export basket with growingreliance on mining exports and commodityexports generally and the decline in exports ofmanufactured goods, especially medium andhigh-tech manufactures.

Table 4 shows that exports of manufacturesreached their peak in terms of market share in thelate 1990s and have since declined as also has thatof agriculture, mostly due to the sharp contractionin the value of tobacco exports. The mining industrynow accounts for just over half total exports,reflecting the combination of the metals price boomand the expansion of platinum.

200

180

160

140

120

100

80

60

40

20

01980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2001 2002 2003 2004

Volume

Unit value

18


Table 4: Structure of exports (1981–2008)

% Shares 1981 1990 1996 2000 2008 (provisional)

Agriculture 42.3 43.5 46.1 51.1 29.3Mining 37.0 40.6 30.1 30.5 52.8Manufacturing 9.9 14.1 21.0 15.5 11.3Main ExportsTobacco 22.0 20.1 30.5 30.6 13.9Gold 7.5 13.8 12.3 12.1 5.7Ferrochrome 7.8 9.0 7.0 8.6 9.2Cotton 6.3 6.5 4.7 7.4 6.9Platinum n.a. n.a. n.a. 0.5 29.1

Sources: Central Statistical Office, Harare and the Reserve Bank of Zimbabwe

4.1 DIRECTION OF TRADE

Recent direction of trade data are not availableexcept on an incomplete basis which precludesready comparisons with previous years. Over time,South Africa has become the country’s dominanttrading partner by far, accounting for 43 percentof imports (Table 5) and 19.4 percent of exports.In the two most recent years for which data areavailable (2003/04), South Africa’s import shareexceeded 50 percent while its export shareaveraged more than 25 percent.

As South Africa’s import share has grown from38 percent in the mid-1990s to 50.5 percent in 2004,so the EU share has shrunk from a quarter to 9percent (Central Statistical Office, Harare, 2008).Similarly, the share of Zimbabwe’s exports goingto industrialized countries fell to less than 30

percent in 2004 from over 52 percent in 1995, whileSouth Africa bought 30 percent of Zimbabwe’sexports in 2004, up from only 12.5 percent in 1995.The figures do not reflect a major boom in tradewith China. Indeed in 1995/06 China bought 3.25percent of the country’s exports and by 2003/04this had risen to 4 percent – in US dollar terms anincrease of less than $10 million.

4.2 EXPORTS AND IMPORTS IN THECONTEXT OF REGIONAL TRADE

As shown in section 4.1 above, South Africa is byfar the most important export and import destinationof Zimbabwean products in the region. Once SouthAfrica is removed from SADC, trade with the non-COMESA SADC countries becomes insignificant.3The remaining SADC member states (DRC,

3 The only SADC countries which are not also members of COMESA are Angola, Botswana, Lesotho , Mozambique, Namibia andTanzania.

Table 5: Zimbabwe’s main trading partners (2000–2004) (Percent of total trade, exports and imports)

Country Rank Total trade Exports Imports

South Africa 1 31.1 19.4 43.0UK 2 5.5 7.7 3.2Germany 3 4.3 6.2 2.4Japan 4 4.0 6.0 2.0Switzerland 5 – 4.4 –China 6 – 4.2 –US 7 3.3 3.7 2.7Botswana 2.6 2.4 2.8Zambia 2.2 3.1 1.4EU (other) 11.5 4.2SADC (other) 4.6 n.a

Source: Central Statistical Office, Harare

19


Madagascar, Malawi, Mauritius, Swaziland, Zambiaand Zimbabwe) are also members of the COMESA,with a current membership of 19 countries.

Overall, intra-COMESA trade has grown from atotal of $3 billion in 1997 to a figure of $9 billion in2007 (Figure 4). This high percentage of intra-regional trade growth is partly attributed to theincreased demand of intra regional products in

recent years. Intra-COMESA trade grew by 35percent in 2007 over 2006 levels, which was abovethe 8 percent increase recorded in 2006 over 2005(COMESA Merchandize Trade Statistics 2008:Bulletin 7). In 2007, Zimbabwe imported maizeworth $32 million from Malawi, which was 42percent of her COMESA imports. DRCs majorintra-COMESA import in 2007 was tobacco fromZimbabwe worth $50 million (Ibid).

Figure 4: Intra-COMESA trade, 1997–2007

Source: COMESA Merchandize Trade Statistics (2008), Bulletin No.7

Table 6: Intra-COMESA trade, 2007 (values in US$ millions and % share)

Rank Exporter Value % Share Rank Importer Value $ Share

1 Kenya 1,114.3 28.2 1 Congo DR 665.8 14.62 Zambia 612.2 15.5 2 Uganda 515.9 11.33 Egypt 494.3 12.5 3 Sudan 441.1 9.74 Uganda 367.2 9.3 4 Kenya 428.3 9.45 Zimbabwe 258.6 6.5 5 Zambia 394.6 0.76 Swaziland 191.1 4.8 6 Egypt 312.2 6.97 DRC 188.1 4.8 7 Zimbabwe 312.2 6.98 Malawi 183.7 4.7 8 Libya 278.5 6.19 Libya 153.5 3.9 9 Rwanda 264.9 5.810 Ethiopia 123.8 3.1 10 Ethiopia 213.7 4.711 Mauritius 75.4 1.9 11 Burundi 175.4 3.912 Rwanda 50.7 1.3 12 Malawi 140.0 3.113 Burundi 36.6 0.9 13 Madagascar 122.8 2.714 Madagascar 31.7 0.8 14 Mauritius 120.8 2.715 Djibouti 31.7 0.8 15 Djibouti 108.0 2.416 Sudan 29.7 0.8 16 Seychelles 26.0 0.617 Eritrea 6.3 0.2 17 Swaziland 25.5 0.618 Seychelles 0.7 0 18 Eritrea 4.9 0.119 Comoros 0.2 0 19 Comoros 2.8 0.1

Total 3,949.9 100 Total 4,553.5 100

Source: COMESA Merchandize Trade Statistics (2008), Bulletin No.7

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

10,000

9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

Total exports Imports Total trade

20


As argued in Section 2.6, one explanation offeredfor Africa’s inability to break through into industrialexports is the continent’s very low level ofindustrialization. In the case of the African region,this translates into low or poor quality of thesecountries’ manufactured products. In a recentsurvey of manufactured firms in Zimbabwe, 65percent of the companies mentioned finance andquality of products as their main problem followedby human resources (51 percent), infrastructure(44 percent) and government policy (37 percent)(COMESA, 2009). Only a year ago in 2008, 90percent of the same companies perceived theirnumber one problem as government (pricecontrols), followed by foreign currency (80percent), and raw materials (64 percent). Thus untilall the poor policy indicators discussed in Section4.4 are attended to and corrected, Zimbabwe isunlikely to improve her export performance at boththe regional and international levels.

4.3 OVERALL EXPORTPERFORMANCE

Both agricultural and manufactured exportsdeclined steeply over the period (Figure 5). Mostof the decline in agricultural exports wasattributable to the collapse of tobacco production,partly offset by firmer prices as part of the globalcommodity price boom. Tobacco export volumesfell from a peak of 195 million kilograms in 2001 to71 million by the end of the period, while horticultureexports also fell sharply – by almost three-quartersto $33 million in 2008 from over $125 million in2000. Citrus volumes declined 90 percent andflower volumes 70 percent.

Cotton exports were highly volatile, rangingbetween a peak of $156 million in 2000 and a lowpoint of $53 million in 2002 – a reflection both ofclimatic conditions and fluctuating global prices aswell as of the general dislocation of agriculture.By 2008 they had recovered to $114 million.Exports of ‘pure manufactures’ – defined toexclude semi-processed raw materials likeferrochrome and cotton lint – fell 80 percent withboth clothing and engineering exports recordingsteep declines.

Exports were sustained, however, in the latter yearsby the commodity price boom and the expansion ofplatinum production. From a low of $380 million in2002 prior to the commodity price upswing, miningexports more than doubled to $865 million in 2008.Given that gold earnings more than halved to lessthan $100 million in 2008 while asbestos exportswere down 90 percent over the period to a mere $6million, this was a remarkable performance primarilyattributable to the doubling of prices for ferrochromeand nickel, a three-fold rise in the price of gold anda 67 percent increase in platinum prices. Volumegrowth in platinum, was dramatic – from a mere12,000 ounces in 2002 to 580,000 ounces by 2008.

4.3.1 Imports

The most striking aspect of the structure of importswas the six-fold increase in food imports from 3.2percent to 17.5 percent of total imports. Fuelimports peaked to $447 million in 2006 (23 percentof total imports) before declining to $290 million in2008 (15 percent of total imports).

Figure 5: Exports 2000–2008

1,200

1,000

800

600

400

200

02000 2001 2002 2003 2004 2005 2006 2007 2008

Agriculture

Mining

Manufactures

21


Table 7: Imports 2000 and 2008

I tem 2000 2008(% of total) (% of total)

Food 3.2 17.5Fuels 16.3 15.0Electricity 3.2 2.7Chemicals 16.3 21.0Capital goods 18.6 11.9Transport equipment 7.2 6.7Manufactures 22.2 16.4Raw materials 6.6 4.1Other 6.4 4.7

Source: Reserve Bank of Zimbabwe

The decline in capital goods and transportequipment reflect the shrinkage of the economyas as well as the lower volumes of manufacturedgoods and raw materials. Aside from rising foodimports the standout item is the increase in chemicalimports.

Tables 9 and 10 underscore the necessity for thecombination of strong export growth andsubstantially higher net capital inflows. In the lightof gloomy IMF forecasts (IMF, 2009) of a lengthyrecession and a weak recovery, the challengesfacing Zimbabwe are formidable. The signs arethat post-recession export growth will be sluggishand that the combination of the worst globalfinancial crisis since the 1930s and uncertaintiesregarding foreign aid inflows will constrain thecountry’s capacity to finance the imports necessaryfor recovery and recapitalization.

4.4 TRADE POLICY INDICATORS

Table 8 illustrates Zimbabwe’s poor trade policyratings relative to the region as a whole, which isthe second most restrictive in the world.Zimbabwe’s applied trade-weighted average tariff

Table 8: Trade policy indicators: Zimbabwe and comparators

Applied Rest of the Ease

Country TTRItariff world of

LPIMarket Export

trade- applied Doing access concentrationweighted tariff Business index index

Sub-Saharan Africa 11.8 11.0 3.0 135.8 2.3 5.4 52.7Zimbabwe n.a 14.3 2.7 152.0 2.3 n.a 22.3SACU 8.3 8.8 4.0 69.6 2.7 1.2 41.2South Africa 5.7 4.9 1.9 35.0 3.0 15.6Botswana 9.0 9.4 0.1 51.0 n.a 0.1 72.5Zambia 8.5 n.a. 2.5 116.0 2,4 3.7 68.4Kenya 8.1 9.9 2.6 72.0 2.3 5.1 18.8Tanzania 9.0 8.1 2.4 130.0 2.1 6.0 35.3Comesa* 12.6 12.1 2.1 130.8 2.4 5.4 49.3

* Excluding East African Community countries

Notes:

TTRI – Trade Tariff Restrictiveness Index summarises the trade restrictiveness of a country. It is expressed as a percentas if it were a tariff rate, meaning that the higher the rate the more restrictive the tariff structure.

Applied tariff (Trade weighted) is the average of most-favoured-nation tariff rates applied by each country, includingpreferential rates.

The rest-of-the-world applied tariff is the average of applied tariff rates imposed by a country’s export partners,including preferential rates, expressed as a percent.

The Ease of Doing Business ranking represents a broad measure of a country’s business environment. The countriesand regions are ranked out of a total of 178 countries – the higher the ranking score, the worse the business environment.

LPI is the country’s Logistics Performance Index. It measures the overall perception of a country’s key seven logisticsbased on over 1000 surveys of logistics information. The categories include the efficiency of customs and borderprocedures, the quality of transport and technology infrastructures.

The market access index summarizes the trade restrictiveness of a country’s trading partners. It is expressed as apercent as if it were a tariff rate.

The export concentration index measures the degree to which a country’s export trade is concentrated in a relatively fewproducts. The higher the index the greater the degree of concentration.

22


is higher than the regional average for sub-SaharanAfrica for COMESA, of which it is a member,and for leading regional trading partners such asSouth Africa, Botswana, Zambia and Tanzania. Ithas the worst score in respect of Doing Businessindicators, but along with Kenya and South Africahas a much more diversified export basket thanthe regional average and those of most of itsregional trading partners.

Zimbabwe is also one of a relatively small numberof countries to have increased its traderestrictiveness in recent years. Zimbabwe’s simpleaverage Most Favoured Nation (MFN) tariff wasreduced from 27.4 percent (1995–1999) to 17.4percent (2000–2004), but subsequently increasedto 20.1 percent in 2007.

Using 2006/07 data, Zimbabwe ranks as theworld’s worst performer (number 170) in termsof expanding its share of global exports. Thecountry’s share of the global export market isestimated to have declined some 96.6 percent,meaning that during a period when global tradeexpanded very rapidly Zimbabwe lost ground inboth absolute terms (falling export volumes andvalues) and relative terms (the 96.6 percentdecline in the country’s share of the world exportmarket).

In the World Trade Organisation’s data base,Zimbabwe’s average tariff (unweighted) for allproducts in 2007 was 20 percent, 25.4 percent foragricultural products and 19.2 percent for non-agricultural items. The country was ranked 121out of 184 countries in terms of exports and 139for imports. Its share of global exports was 0.01percent and imports 0.02 percent.

4.5 EXCHANGE-RATE POLICY

Figure 6 shows that the real effective exchangerate (REER)4 for the Zimbabwe dollar depreciatedfrom 158 at independence in 1980 to 100 ten yearslater. During the 1990s, the REER depreciatedfurther to average 84 over the decade, suggestingthat Zimbabwe’s exporters were considerably morecompetitive during this reform decade than underthe control regime of the 1980s – the more so giventhe fact that Zimbabwe’s export prices were morefavourable than the sub-Saharan average over thedecade.

The REER was massively overvalued during the2001–2003 period and while it returned tocompetitiveness in 2004/05 as hyperinflation tookhold, the real rate escalated alarmingly to reach anestimated 1,074 in 2007 (IMF, 2008).

Figure 6: Zimbabwe Real Effective Exchange Rate (1980–2006) (1990=100)

Source: World Bank: African Economic Indicators (various editions) and the International Monetary Fund RegionalOutlook for sub-Saharan Africa (various editions)

400

350

300

250

200

150

100

50

0

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

4 The Real Effective Exchange Rate measures movements in a country’s real exchange rate (adjusted for inflation) in terms of aweighted average of the exchange rates of trading partners.

23


4.6 BALANCE OF PAYMENTS

For most of the pre-crisis period, Zimbabwe ran avisible trade surplus that was more than offset bythe deficit on invisible transactions, leaving a currentaccount deficit averaging some 5 percent of GDPin the first half of the 1980s, which subsequentlynarrowed to 0.8 percent in the latter half of thedecade. During the 1990s, the current-accountdeficit averaged 6 percent of GDP, narrowing to3 percent in the 2000 to 2005 period.

On their own such figures are largely meaninglessto the extent that they disguise the underlyingmacroeconomic and institutional factors at work.In the early 1980s imports were constrained bylimited access to foreign currency and highlybureaucratic import licensing and allocationsystems. Liberalization after 1990 led to a short-term surge in imports (1991–1997) followed by thetransformation in the structure of imports as thedemand for capital goods and intermediates fellaway during the crisis period to be partiallyreplaced by increased food, electricity, fuel andmost recently, consumer imports.

The current account figures also camouflagechanging capital account profiles. Throughout theperiod, Zimbabwe attracted very little ForeignDirect Investment (FDI), especially when the$450 million Hartley Platinum project is excluded.Bank lending was negative while foreign aiddisbursements were volatile, partly reflecting foodcrises (1982/83, 1992/94 and 2002 onwards) andsince 1997, deepening donor unhappiness with thepolicies of the Zimbabwe government (Table 9).

Since independence in 1980 there has been a smallnet inflow of private sector finance of $269 million,mostly in the form of Foreign Direct Investment(FDI) of $688 million, which partly offset bankingand trade finance outflows of $548 million. RBZdata has been used to calculate the reported netinflow of bank and trade credit in the 2006–2008period – a marked reversal of the previous outflowsreported by the World Bank.

Arguably, the most remarkable feature of the RBZfigures is the dominance of aid. During the post-2000 period, the net inflow of aid funding averaging$250 million annually exceeded the $195 millionannually received during the 1980s underlining thedegree to which aid flows and dependence have infact increased during the period of deepening crisis.

Table 9 shows that over the entire post-independence period foreign aid accounted forsome 97 percent of the net inflows meaning thatsince 1980 Zimbabwe has been almost whollyreliant on official inflows of some $8.1 billion. Withthe drying up of capital flows since 1997,Zimbabwe’s external debt profile deterioratedrapidly, and the country ran up arrears in excessof $3 billion, including the ‘pipeline’ of currenttransfer payments for the year 2007 alone of $450million. In fact the real extent of externalindebtedness is unknown, partly because of thecontingency liabilities of the government and thecentral bank in respect of offshore loans for whichthey have provided guarante as well as the fullextent of the current payments pipeline, and alsobecause details of loans from non-OECD and non-DAC (Development Assistance Committee)countries such as China, India, Iran and Venezuelahave not been released.

Table 9: Aggregate net resource flows

US$ millions FDI PortfolioBonds, bank

Foreign aid Total& trade finance

1980-1989 -115 0 -115 1,950 1,7201990-1999 420 100 -610 3,950 3,8602000-2005 226 1 -112 935 1,0502006-2008 157 -62 379 1,309 1,783Total 688 39 -458 8,144 8,413% Shares 8.2% 0.5% -5.5% 96.8% 100%

Source: World Bank Debt Tables and Global Development Finance (various editions), the Reserve Bank of Zimbabweand OECD (Development Co-operation Report, 2009)

24


4.7 THE BALANCE OF PAYMENTSDURING THE CRISIS(2000–2008)

Zimbabwe’s balance of payments during thedeepening crisis period since 2000 make grimreading. Over the 9-year period (Table 10) thecountry was living beyond its means to the tune of$2.65 billion – the accumulated current accountdeficit between 2000 and 2008. Approximately$900 million of this was the trade gap, while thenet deficit on invisibles (non-factor payments andinvestment account) contributed a further $3.4billion, partially offset by positive net privatetransfers, dominated by diaspora remittances of$1.65 billion.

The RBZ shows official grants (foreign aid) as abelow-the-line item on capital account rather thancurrent account, which is unusual. The cumulativefigure shown of some $400 million is way belowthe actual donor estimate of $600 million in 2008alone.

The capital account numbers defy interpretationin the sense that, as the situation worsened, soZimbabwe moved from an accumulated capitalaccount deficit of $1.4 billion (2000–2004) to acapital account surplus of $400 million between2005 and 2008. In particular, the RBZ figures showthat foreign direct investment of $10 million a yearbetween 2000 and 2004 increased sixfold to $65

million annually in the 2005–2008 period. It seemsunlikely that the accelerating pace of economicdecline would have translated into increased inflowsboth of FDI and long-term loans.

Interpretation is further bedevilled by the very largefigures for errors and omissions totalling $1.3 billionover the period. This too is difficult to believe sincenormally in an economy coping with the twinproblems of hyperinflation and collapsing output,capital flight is much more likely than unrecordednet capital inflows. It is, however, possible thatunrecorded diaspora inflows account for a largeelement of this inflow, though it is not at all clearjust why it should have turned hugely negative in2008, unless this is simply attributable to theprovisional nature of the figures for that year. Ofconcern too is the fact that the gaps in, and theopaque nature of, the official balance-of-paymentsfigures conceal even greater offshore obligationsin terms of loan obligations and arrears than thosemade public previously.

Balance-of-Payments: Prospects

Forecasts made in the first quarter of 2009 suggestthat the economy will be import- and foreign-currency constrained over the medium term (2009-2013). The current account deficit is projected toaverage $1.1 billion annually or 23 percent of GDP,while the visible trade deficit is estimated at almost

Table 10: Zimbabwe: Balance-of-payments summary (2000–2007) (US$ millions)

I tem 2000 2001 2002 2003 2004 2005 2006 2007 2008p

Exports 2,192 2,108 1,794 1,662 1,671 1,588 1,721 1,803 1,652Imports 1,907 1,791 1,821 1,778 1,989 1,994 1,966 1,899 1,941Trade balance 284 317 -26 - 117 - 318 -406 -244 -95 -289Non-factor services (net) -164 -186 -181 -216 -108 -109 -28 -72 -94Income (net) -404 -337 -246 -191 -208 -197 -209 -245 -202Private transfers (net) 137 114 228 169 204 163 115 154 363Current account(Excl official transfers) -147 -93 -225 -355 -430 -549 -367 -258 -222Grants 53 40 38 38 24 27 57 42 73FDI 16 0 23 4 9 102 40 66 52Portfolio -1 -68 -2 4 2 -12 -34 -28 0Long-term capital (net) -256 -285 -281 -228 -211 -204 -121 12 -145Short-term capital (net) -126 -90 -10 -39 -57 90 145 53 181Capital account -313 -403 -233 -221 -234 3 88 146 161Errors & omissions 290 302 78 79 432 342 88 80 -381Overall balance -171 -194 -380 -497 -219 -205 -191 -33 -441

Source: Reserve Bank of Zimbabwe

25


24 percent of GDP. The IMF projects a fundinggap of 20.6 percent of GDP after allowing for amodest increase in FDI and the quadrupling ofportfolio investment inflows.

No provision is made for debt forgiveness, as aresult of which net interest payments average 7.5percent of GDP. Arrears in respect of external debtare projected to increase from $3.77 billion at theend of 2008 to $6.58 billion by end-2013. The clearmessage from Table 11 is that as well as robustexport growth, Zimbabwe needs debt forgivenessalong with a substantial increase in net capitalinflows, both on private and public account.

Table 11: Balance-of-payments outlook (2009–2013)

I tem $ millions % of GDP

Current account deficit 5,555 22.3Trade deficit 5,638 23.7Exports 9,795 41.1Imports 15,410 64.8Non-factor services (net) -477 -2.0Investment income (net) -2,337 -9.8Private Transfers –including transfers to NGOs 2,952 12.4Net capital -587 -2.5Financing gap 4,911 20.6Export growth ($) 8.3 percent n.a.

per annumImport growth ($) 5.4 percent n.a.

per annum

Source: IMF: Zimbabwe- Staff Report for the 2009 ArticleIV Consultation

Foreign Debt

The IMF describes Zimbabwe as a country in ‘debtdistress’ (IMF, 2009). On the basis of relativelyoptimistic assumptions on policies and the externalenvironment, the present value of the external-debt-to-exports ratio is espected to persist above250 percent for almost a decade. Under the DebtSustainability Analysis, carried out by the IMF andWorld Bank, the baseline scenario projects publicand publicly-guaranteed external debt (PPG)indicators to ‘remain far in excess of thecorresponding thresholds for a low-income country’(IMF, 2009). Debt ratios begin at levels three tofive times above the threshold and would declineto threshold levels only after 20 or even 30 years.Public debt is projected to decline gradually frommore than 200 percent of GDP in 2010 to about150 percent in 2020. This is an unsustainablesituation, meaning that debt-forgiveness will haveto be an essential component of any medium-termrecovery strategy.

Figure 7: Foreign debt and arrears (2000–2013 projected)

250

200

150

100

50

02000 2002 2004 2006 2008 2010 2012

Foreign debt

Arrears

% o

f GD

P

26

Section 5

International Experience and Lessons for Recovery

Going forward the import coefficient of growth canbe expected to rise sharply over the medium term,reflecting high levels of import-intensive investmentin infrastructure and in the rehabilitation, upgradingand expansion of productive capacity. Thissignificant increase in the import-to-GDP ratio willhave to be funded in part from export expansionalong with capital inflows of Foreign DirectInvestment (FDI), offshore borrowing and foreignaid.

The savings drought in the economy will necessarilyimpact on wider economic policy issues than justthe management of the balance of payments.Private-public partnerships, commercialization andprivatization will have to be part of the policy agendaalong with far closer attention to broad InvestmentClimate and Doing Business concerns that havebeen neglected in the past. It will be essential tooto revisit existing foreign investment legislation,specifically those aspects relating to indigenizationand foreign ownership.

During the crisis period Zimbabwe not only failedto capitalize on the commodity price boom but alsoon the global surge in FDI. In the decade to 2007,FDI flows to emerging markets more than trebledfrom $150 billion in 1997 to $500 billion ten yearslater. Over the same period, FDI inflows to sub-Saharan Africa increased seven-fold to $33 billion.

Figure 8 shows that over the entire post-independence period Zimbabwe attracted only $800million of FDI, half of that for one project, theChegutu platinum mine. The country’s share ofFDI flows to sub-Saharan Africa was a mere 1.1percent.

The three main explanations for this poorperformance are firstly, government ambivalencetowards FDI captured in the conflict between itsoft-expressed enthusiasm for foreign investmentespecially recently from Asia, notably China, andits active promotion of indigenization, which requiresthat Zimbabwe nationals own at least 50.1 percentof the equity in any business.

Recent research highlights three critical inter-related pre-requisites for successful export-drivengrowth:

(i) Macroeconomic stability;

(ii) Competitiveness; and

(iii) Supportive infrastructure and institutions –which overlap with competitiveness to theextent that it is extremely difficult for individualenterprises to be internationally competitivewhere these supportive facilities are weak.

Global recession, domestic market shrinkage,investment and infrastructure deficits and thedestruction of the domestic-savings base by adecade of chronic inflation and hyperinflation willdictate the future growth of the Zimbabweeconomy. In terms of traditional two-gap analysis,Zimbabwe will have to close a domestic-savingsgap – the consequence of hyperinflation and thesteep fall in disposable incomes – as well as anover-stretched public sector, while also running asubstantial surplus on capital account of the balanceof payments to accommodate the necessary surgein import spending.

Strong export expansion is essential in part to absorbexisting excess capacity in the economy, whileproviding market scope for output and employmentgrowth and to help provide the foreign currencyrequired to finance substantial new investment ininfrastructure and industrial, mining and agriculturalinvestment.

Over the long haul both import and, to a lesserextent, export volumes have expanded faster thanGDP. In the pre-crisis period (1980–1997), whenGDP (in US dollars) grew 1.8 percent annually,exports, also in US dollars, increased 3.1 percentannually while imports rose 4.1 percent a year. Ineffect this meant that every $1 million increase inGDP was associated with a $1.24 million rise inexports and a $1.45 million increase in imports.

27

Section 5 – International Experience and Lessons for Recovery

Secondly, the hostile policy environment asmeasured by investment climate yardsticks suchas the World Bank’s Governance and DoingBusiness indicators and the World EconomicForum’s Global Competitiveness Index. Third,during the period of deepening crisis, thecombination of market shrinkage and escalatingpolitical risk dampened the animal spirits of eventhe most sanguine foreign investor.

In the post-crisis environment, it is imperative thatthis post-independence trend be reversed. Becausethe domestic savings base was destroyed byhyperinflation and because the country experienceda decade of very low levels of investment to thepoint where, during the period of deepening crisis,the national capital stock actually shrunk,Zimbabwe will become more foreign capital reliantprobably than at any time in its history. Furthermorethe strong probability is that export growth,especially during a global recession and post-recession period, will not be rapid enough togenerate the foreign currency needed to financean essential, but ambitious, national investment andrecapitalization programme.

5.1 BALANCE-OF-PAYMENTSADJUSTMENT UNDERDOLLARIZATION

With dollarization, Zimbabwe’s policy options forbalance-of-payments adjustment have narrowed.Devaluation is no longer a policy option, thoughdevaluation and revaluation effects will be felt whenthe two currencies in use – the US dollar and theSouth African rand – appreciate or depreciate.However, from a Zimbabwe policy viewpoint sucheffects will be exogenous in the sense that the only

choice open to policy-makers is whether to dollarizeor randize.

Similarly, there is little scope to use monetary policyto facilitate balance-of-payments adjustment. Asforeign-currency deposits build up in the Zimbabwebanks, so there will be scope for the Reserve Bankof Zimbabwe to adjust statutory reserve ratios toinfluence money supply growth and, indirectly,interest rates. But in the near-to-medium-term suchscope will likely be limited by the low levels ofbank deposits and the absence of a lender of lastresort capable of bailing out banks that make badloans. Banks are likely to operate with significant,possibly substantial, ‘excess reserves’ over andabove the 10 percent of liabilities statutory reserveratio imposed in February 2009.

Under the existing policy regime (April 2009), theRBZ has set a maximum margin above the LondonInterbank Offered Rate (Libor) of 6 percent. At atime of deflation – prices falling some 2 to 3 percentmonthly in the first quarter of 2009 – such a marginpoints to positive real interest rates in US dollarterms in excess of 10 percent and in rand terms ofmore than 17 percent. This will impose a heavyburden on firms accustomed to borrowing atmassively negative real rates of interest. The RBZcould vary this 6 percent above Libor maximumrate as part of an adjustment strategy, but its impactwould likely be minimal.

In sum, because exchange rates have become anexogenous variable outside the control of theZimbabwe authorities while monetary policy, atbest, might make a marginal contribution to balance-of-payments adjustment, balance-of-paymentsadjustment must be internalized, best analysed interms of the Absorption approach to adjustment.

Figure 8: Zimbabwe: Net inflow of FDI

600

400

200

0

-2001980–1989 1990–1999 2000–2008

$ millions

28


This is written as B = Y-A, where B refers to thebalance of payments on current account, Y denotesoutput and A absorption or expenditure. It followsthat where, as in Zimbabwe, a country has acontinuing and unsustainable current accountexternal payments deficit averaging some $300million a year (2000–2008) that is likely to widenas the economy recovers, it is necessary toincrease output or reduce expenditure, or both.

If monetary policy is unable to make much morethan a marginal contribution to adjustment, as islikely to be the case in a dollarized economy, theburden of adjustment falls on fiscal policy in theform of reduced public spending or higher taxation.Since Zimbabwe’s fiscal space is likely to be tightlyconstrained for the foreseeable future, in allprobability there will be little room for manoeuvrein the fiscal policy field. In Zimbabwe’s case theadjustment task is further complicated on threefronts:

(i) Post-hyperinflation and post-dollarization, theeconomy was left with an elevated price, wageand cost structure, which may require acombination of real price and wage reductionsand increased productivity.

(ii) Furthermore, falling prices (deflation) arenormally, though not always, associated withstagnation or recession in respect of both outputand employment. Clearly, after a decade ofdeclining output, employment and livingstandards, such an adjustment path is sociallyand politically undesirable.

(iii) Because import dependence has grown andbecause there are substantial investment deficitsto be made good, especially in infrastructure andre-equipping the private and parastatal sectors,there must be a strong probability that the tradegap will widen over the next few years, especiallygiven the probability of relatively sluggish globalexport markets for several of the country’s mainexports.

The policy implications are clear:

(a) Growing reliance on capital inflows of all kinds,including foreign aid so that balance-of-payments adjustment can be phased over anumber of years in the hope that the medium-

term import bulge will be funded by a temporarysurge in financial inflows on both current (aidgrants and diaspora remittances) and capitalaccounts (aid, FDI and offshore borrowings).

(b) A focus on productivity and competitivenessreforms designed to gradually eliminate theZimbabwe export-price and import-paritypremia. Realistically, however, this is unlikelyto be achieved without further falls in livingstandards.

(c) Doing business and investment climate reformsaimed at increasing inflows of FDI that wouldhave the beneficial effect of raising output andemployment while also helping finance thedeficit on current account.

5.2 A CENTRAL ROLE FORCOMPETITIVENESS

The concept of competitiveness as an objective ofgovernment economic policy, as distinct from astrategy for enhancing corporate performance, hasgrown dramatically in importance in the last20 years. Until the 1990s, international financialinstitutions like the IMF and World Bank used theconcept sparingly and then mostly in the contextof exchange rate competitiveness. Indeed, evenZimbabwe’s Economic Structural AdjustmentProgramme (1990), drafted primarily by WorldBank officials, makes little mention ofcompetitiveness.

But this has changed. Competiveness has movedtowards the top of the policy agenda for donorsand international financial institutions, thoughseldom yet for African governments. However attwo meetings in the course of 2008, a group ofdevelopment professionals and interest partiesdeveloped the ‘Kivu Consensus – An Agenda fora Competitive Africa’ which identifies competitive-ness as ‘the critical element in a strategy toincrease employment and proposerity’ (BrenthurstFoundation, 2009: 1).

Competitiveness is often measured in terms of acountry’s export market share leading critics tocomplain that this suggests it is a zero-sum gamesince China’s export market gains have beensecured at the expense of other nations like the

29


US. Such a definition of competitiveness is thenused to justify government policy interventions inthe form of industrial policies designed to increasethe country’s export market share using subsidies,exchange-rate devaluation and lower wages andother input costs, including the rate of interest.

This is a flawed view of competitiveness becauseit implies that low wages or currency devaluationmake a country more competitive, yet the veryopposite is true because the need to hold downwages or devalue the currency means that thecountry’s firms are not competitive. Exports drivenby an undervalued currency and low wagesdepress a country’s standard of living.

Accordingly, competitiveness is better defined interms of productivity. Although GDP per head isthe most widely used indicator of a country’seconomic well-being, differences in productivityexplain virtually all of the cross-country variationsin output per head (Lewis, 2004). ‘Productivitysupports high wages, a strong currency andattractive returns to capital – and with them a highstandard of living’ (World Economic Forum, 2007:52). The policy goal is productivity not exportcompetitiveness per se.

The World Economic Forum (WEF) definescompetitiveness as ‘the set of institutions, policiesand factors that determine the level of productivityof a country’. Productivity levels determine a

country’s prosperity as well as the rate of returnon investment. Because the return on investmentis a fundamental driver of the rate of GDP growth‘a more competitive economy is one that is likelyto grow faster over the medium to long term’ (WorldEconomic Forum, 2008: 3). In the 30 years that ithas published its Global Competitiveness reports,the WEF has progressively revised and improvedits measurement of competitiveness. Its most recentreport (2008) identifies 12 ‘pillars’ ofcompetitiveness that are grouped into three broadcategories (Figure 9) which in turn are linked withthree stages of economic development.

Figure 9 shows that four basic requirement pillars– institutions, infrastructure, macroeconomicstability and health and primary education – aredeemed to be the key drivers of the initial stage ofdevelopment in factor-driven economies. The vastmajority of sub-Saharan economies, includingZimbabwe and half of the members of the SouthernAfrican Development Community (SADC) –Lesotho, Madagascar, Malawi, Mozambique,Tanzania and Zambia – fit into this category. OneSADC country, Botswana, is classified as ‘intransition’ from the factor-driven developmentstage to the efficiency-driven stage in which six‘efficiency enhancers’ are deemed critical to acountry’s growth. Three SADC economies –Mauritius, Namibia and South Africa – areclassified in this second category of efficiency-driven economies.

Figure 9: The 12 pillars of competitiveness

Basic requirements• Institutions• Infrastructure• Macroeconomic stability• Health & primary education

Efficiency enhancers• Higher education & training• Goods market efficiency• Labour market efficiency• Financial market sophistication• Technological readiness• Market size

Innovation & sophistication factors• Business sophistication• Innovation

Key forfactor-driveneconomies

Key forefficiency-driven

economies

Key forinnovation-driven

economies

30


In the WEF’s terminology, factor-driveneconomies, such as Zimbabwe compete on thebasis of their factor endowments, primarily naturalresources and unskilled labour. Firms in a factor-driven economy compete on the basis of price,rather than quality, style and product differentiation.They sell basic products or commodities and theircompetitiveness arises from factor-endowment inthe form of plentiful cheap labour or rich naturalresources. Productivity per worker is low, resultingin low wages. Sustaining competitiveness dependson macroeconomic stability, a sound infrastructure,well-functioning public and private institutions anda healthy, literate workforce. However, at thebottom of the pile, Zimbabwe is unlikely to competeon this basis of price in both the regional and extraregional export markets, because of high coststructure of production environment.

In the 2008/09 report Zimbabwe is ranked secondfrom bottom. Only Chad gets a lower score, whileFigure 10, illustrating the rankings of Zimbabwe andthree other SADC economies, shows how thecountry has slipped down the competitiveness ladder,though this reflects the combination of the inclusionof an increased number of countries in the index aswell as Zimbabwe’s relative fall from grace.

In the 2008/09 rankings, Zimbabwe scores best(122) on innovation factors and worst (134) onbasic requirements. It has the lowest ranking inthe world for macroeconomic stability (134) withhigher rankings (88) for infrastructure and 113 forhealth and primary education. In terms of efficiencyenhancers, its best ranking is for financial marketsophistication and its lowest are for marketefficiency and market size (133). For innovation

Table 12: Competitiveness 2008/09: Zimbabwe and comparators

Basic Efficiency InnovationCountry Rank Score requirements Score enhancers Score factors Score

rank rank rank

South Africa 45 4.41 69 4.41 35 4.46 36 4.13Botswana 56 4.25 53 4.65 82 3.76 98 3.22Mauritius 57 4.25 50 4.67 66 4.03 69 3.65Namibia 80 3.99 48 4..71 93 3.57 104 3.16Kenya 93 3.84 104 3.80 76 3.90 50 3.87Zambia 112 3.49 121 3.54 100 3.43 93 3.29Tanzania 113 3.49 114 3.61 108 3.34 106 3.12Mozambique 130 3.15 131 3.21 132 3.09 127 2.84Zimbabwe 133 2.88 134 2.88 131 2.87 122 2.90

Source: World Economic Forum: Global Competitiveness Report 2008/09 (2008)

Figure 10: Global competitiveness index

140

120

100

80

60

40

201998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

South Africa

Mauritius

Zimbabwe

Botswana

Source: World Economic Forum: Global Competitiveness Reports (various editions)

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factors it scores best (119) for innovation and worst(124) for business sophistication (Table 13).

The WEF finds that firm, not country, level variablesaccount for 71 percent of variance in GDP perhead across countries. Enterprises, not countries,are the source of competitiveness, but thatcompetitiveness depends on the combination ofboth macroeconomic and national factors, usuallydesignated comparative advantage, andmicroeconomic or strategic influences, normallycalled competitive advantage.

Competitive advantage is firm-specific, determinedby the activities and technologies and managerialtechniques that the firm uses, relative to other firmsin the same industry. It may take the form of someproprietary advantage that the firm enjoys – accessto a patent, a technology, a brandname – whichgives it an advantage that rivals cannot readilymatch. It is possible to have (some) competitivefirms in an uncompetitive economy but withoutcompetitive firms economies cannot becompetitive. The evidence suggest it is verydifficult, if not impossible, to sustain competitivefirms in an uncompetitive economy because, in thewords of Professor Michael Porter who has playeda key role in developing the theory ofcompetitiveness: ‘The sophistication of companiesis inextricably intertwined with the quality of thenational business environment’ (Porter, 1990).

His argument is that a country’s productivity isdetermined by the productivity of its firms meaningthat a country can only be competitive if its firms– whether they are indigenous or foreign andwhether they are in the private or public sector –are competitive. More productive firms haveoperating practices and strategies that require morehighly skilled people, better infrastructure, betterinformation, strong institutions and more efficientgovernment processes.

Porter and the WEF lay considerable emphasis onthe contribution of competitive pressure. Firms thatare monopolies or members of cartels in theirdomestic markets are unlikely to developcompetitive advantage in the global economy.Accordingly, government policies that seek tofoster ‘National Champions’ – in Zimbabwe, e.g.,the Zimbabwe Iron and Steel Co (Zisco) has oftenbeen accorded that status by successiveadministrations – are unlikely to succeed becausesuch enterprises are not challenged in their domesticmarkets where they are accorded preferentialtreatment.

The lesson of experience, documented in the WEF’sannual Global Competitiveness Reports, is that thereis no single step, no grand strategy, that can delivernational competitiveness. There must be a criticalmass approach, involving many differentimprovements in different fields across a broad

Table 13: Zimbabwe detailed global competitiveness index rankings (out of 134 countries)

Category or pillarRank

(out of 134 countries)Score

Basic requirements 134 2.881. Institutions 126 3.002. Infrastructure 88 2.903. Macroeconomic stability 134 1.484. Health & primary education 113 4.16

Efficiency enhancers 131 2.875. Higher education and training 107 3.186. Goods market efficiency 133 3.057. Labour market efficiency 127 3.568. Financial market sophistication 90 3.929. Technological readiness 129 2.2810. Market size 133 1.25

Innovation factors 127 2.9011. Business sophistication 124 3.2612. Innovation 119 2.55

Source: World Economic Forum: Global Competitiveness Report 2008/09

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front. Structural reforms designed to improve theefficiency of goods, capital and labour markets arean essential part of the process.

There are roles for both government and the privatesector. The contemporary debate focuses on thelinkages between enterprise-level competitivenessand national competitiveness, usually analysed inthe context of comparative advantage.Government’s role is that of creating theappropriate business and investment climate, whichincludes investment in infrastructure and humancapital, building and sustaining strong institutionsand implementing appropriate macroeconomicpolicies. With that platform in place the role of firmsis to build competitive advantage.

Countries can be classified as over-performers orunder-performers by comparing actual GDP percapita with that ‘predicted’ by its GlobalCompetitiveness Index (GCI) score.5 Countriesclassified as overperformers are those whose GDPper head is greater than their competitiveness scoreand ranking justifies. This is a warning sign becauseit suggests that prosperity is not the result ofproductivity and competitiveness but of thepossession of rich natural resources – oil, gas orminerals – or of temporary phenomena such as ashortlived boom in commodity prices of FDI or aidinflows. Over-performer status may also reflectthe time-lag between diminishing competitivenessand the subsequent, inevitable, decline in livingstandards.

Ironically, it is preferable for a country to be anunder-performer, reflected in lower per capitaincomes than its competitiveness predicts. Thismay result from a failure to bring people into theformal market from the subsistence sector; it mayreflect enclave-type growth as in an oil or mineral-rich economy, or – and this would seem to theexplanation in Zimbabwe’s case – it could be atemporary aftermath to protracted socio-economiccrisis.

A 1997 report by the World Bank says that if Africais to reverse its unfavourable export trends, ‘it mustquickly adopt trade and structural adjustmentpolicies that enhance its internationalcompetitiveness and allow African exporters tocapitalize on opportunities in foreign markets’(Yeats, et al., 1997). ‘In short, the future of Africaneconomies will be determined by Africa, notoutsiders’.

5.3 MAKING ZIMBABWE MORECOMPETITIVE

Competitiveness must be near the top of the policyagenda in Zimbabwe, especially in the wake of aprotracted period of chronically-high inflation andhyperinflation. In a dollarized economy currencydevaluation is not an option while a ‘Low Road’growth strategy driven by low wages, lowproductivity and static or dated technologies is nosolution for a country in which living standards havehalved in the last decade and where income perhead is as low in 2009 as in the 1950s.

Export growth is crucial for a number of reasons.Exports will generate income growth at a time ofweak domestic demand. For a small ($3 billion to$4 billion) economy foreign markets are likely tobe the main engine of growth or, as in Zimbabwe’scase, recovery. Strong export growth generatesmore jobs as well as better jobs, while on the wholeand especially in manufacturing, export firmscreate higher-productivity jobs that pay higherwages and offer better working conditions than inimport-substitution activities. There is evidence toothat export growth helps to build a more efficientproduction structure as a result of compositionalshifts whereby the most productive exportingbusinesses tend to grow most rapidly (Schank,Schnabel and Wagner, 2007 and Bernard et al.,2007).

5 ‘Predicted’ levels of GDP per head are obtained by regressing country scores on the competitiveness index against GDP per head.Countries with actual GDP per head above the regression line are then deemed to be over-performers, while those below the lineare under-performers. (World Economic Forum: Global Competitiveness Report 2006/07).

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Zimbabwe needs therefore to foster an ‘exportsurge’6 defined as a sustained period – 7 to 12years – of accelerated export expansion associatedusually with four main characteristics:

• Export surges are more likely in openeconomies or economies that are liberalizing;

• Surges are preceded by a large depreciationin the real exchange rate;

• In developing countries, the real depreciationis large enough to leave the exchange rateundervalued by a 20 percent margin (onaverage); and

• The discovery of new products and newmarkets by developing country exporters isdependent on this substantial undervaluation ofthe exchange rate.

‘Undervaluation – or, put another way, acompetitive currency – is the big push thatencourages both more entries and moresuccesses. It performs like a “grand openingsale” and once customers start coming manyof the new relationships are maintained evenafter the sale is over’. (Freund and Pierola,2008: 6)

These Freund/Pierola findings make disconcertingreading for Zimbabwe policy-makers in a post-dollarization economy, because their researchsuggests that real exchange-rate depreciation ismore likely to foster the export surge thatZimbabwe needs than trade liberalization. They findthat: ‘A real exchange-rate depreciation of 20percent gives a large and immediate boost toexporters. Trade liberalization tends to be variableacross products and takes place in smaller stepsof 2 or 3 percentage points in a year.’ (Freund andPierola, 2008: 27).

Furthermore, although trade liberalization supportsexporters, it does not discriminate in favour oftradables relative to non-tradable sectors of theeconomy. In contrast real exchange-ratedepreciation shifts resources from the import-competing sector into both export and non-tradablesectors.

5.4 STRUCTURALCOMPETITIVENESS AND‘‘‘‘‘BEHIND-THE-BORDER’BARRIERS TO TRADE

The real exchange rate is defined as the, ‘domesticrelative price of non-tradable goods to tradablegoods’. Prices of non-tradables are partlydetermined by domestic factors while in a smalland dollarized economy like Zimbabwe the pricesof tradable goods are set by international pricesfor exports and imports and by the nominalexchange rate. This means that an increase in therelative price of a non-tradable good reflectsincreased domestic production costs and, otherthings being equal, a reduction in the profitabilityof tradable sectors, especially exports.

In effect this means that where the nominalexchange rate – US dollar or rand – is exogenouslydetermined, as it is under dollarization –misalignment (overvaluation) of the real exchangerate can only be addressed by measures designedto exert downward pressure on domestic costs,wages and prices, or by exogenously-drivendepreciation of the nominal exchange rate for theUS dollar or rand.

Although dollarization may inhibit exchange-ratecompetitiveness, Zimbabwe can become morecompetitive if productivity (output per worker,usually proxied as GDP per capita) grows morerapidly than in its main trading partners. Positiveterms-of-trade effects – export prices rising relativeto import prices – will have the same effect, whilegreater openness should also enhancecompetitiveness because increased exposure tointernational markets should reduce domesticprices. Provided new investment easesinfrastructure bottlenecks and boosts productivity,this too will enhance competitiveness.

Accordingly, in a policy environment where thereis little, if any, scope for direct manipulation of thereal exchange rate, the focus of competitivenessanalysis shifts from the exchange rate to otheryardsticks. These include the country’s export-market – are its export volumes growing fasterthan the global average? How profitable is the

6 Export Surges – the power of a competitive currency. Caroline Freund and Martha Denise Pierola. World Bank, Policy ResearchWorking Paper 4750, October 2008.

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export sector and what is the state of the balanceof payments on current account? Is it in structuraldeficit measured by a steady rise in net indebted-ness? To what extent is a structural deficit the resultof depressed export markets and prices for thecountry’s main exports or the consequence ofinappropriate macroeconomic and microeconomicpolicies that retard export growth? Is weak exportperformance explained by ‘behind-the-border’institutional, infrastructural or policy shortcomings?How can the balance of payment on currentaccount and the structural deficit be influenced toincrease productivity?

Behind-the-border assessment criteria focus on hightransaction costs – the difficulties and cost of doingbusiness. Survey-based indices of the quality of thebusiness climate are available for a large number ofcountries, and allow for easy multi-criteriacompetitiveness assessments. The three indices withthe largest country coverage are the World Bank’sannual Doing Business Surveys, the WorldEconomic Forum’s Global Competitiveness Index

and the Index of Economic Freedom compiled bythe Heritage Foundation. These surveys based onobjective criteria such as a country’s macroeconomicindicators and questionnaire data are used to assessthe effectiveness of institutions, including regulatorybodies, governance and security considerations andmacroeconomic and microeconomic conditions andpolicies.

In 2008, Zimbabwe was ranked 152 out of 176countries in the World Bank’s Doing BusinessSurvey. It ranks 123 in respect of conditions foremploying workers, it is placed 97 for access tocredit and 107 for investor protection. The countryhas the world’s highest labour dismissal costs –446 weeks of salary – the second highest beingSierra Leone with 189 weeks.

Not only does Zimbabwe have a very poor rankingfor Doing Business conditions but it is well behindits main competitors in the regional Doing Businessleague table (Table 15).

Table 14: Zimbabwe: Doing Business rankings

I tem Ranking Procedures TimeCost(Percent of income per head)

Starting a business 143 10 96 days 21.6%Dealing with licences 172 19 952 days 11,799.0Registering property 79 4 30 days 25% of property valueEnforcing contracts 74 38 410 days 32% of claimClosing a business 151 – 3.3 years 22% of estatePaying taxes 144 52 payments 256 hours Tax rate 53% of profits

per year per yearTrading across borders 169 – – –Export 9 documents 52 Days $1,879 per containerImport 13 documents 67 Days $2,429 per container

Source: World Bank: Doing Business Survey (2008a)

Table 15: Doing Business rankings 2008 (178 countries) Zimbabwe and regional competitors

Country Ranking Country Ranking

Mauritius 27 Lesotho 124South Africa 35 Malawi 127Namibia 43 Tanzania 130Botswana 51 Mozambique 134Kenya 72 Madagascar 149Swaziland 95 Zimbabwe 152Zambia 116 Angola 167Uganda 118 DRC 178

Source: World Bank: Doing Business Report (2008a)

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There are three messages for policy-makers. DoingBusiness reforms are relatively inexpensive toimplement, cost little politically, though there is anadministrative burden, and benefit new, smallbusinesses disproportionately relative to their largerwell-established rivals (World Bank, 2008a).Secondly, Doing Business reforms make asubstantial contribution to enhancing a country’sstructural competitiveness by reducing oreliminating barriers to raising productivity,increasing exports and making import substitutesmore competitive. Thirdly, they increase acountry’s attractiveness for FDI and domesticinvestment alike.

The main hypothesis of recent investment climateliterature is that the business climate affectseconomic performance across the board andespecially the incentive to invest. It is nowacknowledged that a number of institutional,behaviourial and structural variables driveeconomic growth. Recent research pinpoints fourcritical variables that ‘collectively define the so-called business or investment climate’ (Dethier, Hirnand Straub, 2008). These are:

(i) Infrastructure;

(ii) Access to finance;

(iii) Security levels of crime and corruption; and

(iv) The regulatory framework including theprotection of property rights and competitionpolicies

Trade Logistics

Only relatively recently have policy-makers startedto pay attention to trade logistics with thepublication by the World Bank in 2007 of the firstcomprehensive cross-country study of logisticsperformance. The Bank’s Logistics PerformanceIndex (LPI) provides a comprehensive picture ofsupply chain performance – from customsprocedures, logistics costs, and infrastructurequality timeliness in reaching destination, and thecompetence of the domestic logistics industry.(World Bank, 2007). The report says that those atthe bottom of the LPI are ‘often trapped in a viciouscircle of overregulation, poor quality services, and

underinvestment’. Importantly too it finds thatcountries with strong logistics performancerankings are also those experiencing economicgrowth led by manufactured exports.

Table 16: The first Logistics Performance Index:Selected southern and east African economies

Country Score (out of 5.0) Rank

South Africa 3.53 24Kenya 2.52 76Uganda 2.49 83Angola 2.48 86Malawi 2.42 91Zambia 2.37 100Lesotho 2.30 108Mozambique 2.29 110Zimbabwe 2.29 114Namibia 2.16 126Mauritius 2.13 132Tanzania 2.08 137

Source: World Bank: Connecting to Compete (2007)

Zimbabwe ranks 114th out of a total of 150countries assessed, falling behind most of itsregional comparators (Table 16) Zimbabwe’s worstrankings – of the 7 yardsticks used – were forCustoms procedures and operations (138),infrastructure (136) and domestic logistics (134).

While landlocked countries, such as Zimbabwe, areat a clear disadvantage, the report notes that threelandlocked economies – Uganda, Malawi andZambia – are in the top 15 of the 39 sub-Saharancountries assessed. It says that:

‘Logistically friendly countries are more likelyto have better global value chain integrationand attract export-oriented FDI. Since tradeand FDI are the key channels for theinternational diffusion of knowledge, poorlogistics may impede access to new technologyand know-how and slow the rate ofproductivity growth.’ (2007: 12)

The report’s findings reinforce the evidence thatthere is a great deal that the Zimbabwe authoritiescan – and should – do both to improve exportperformance and lower operational costs that doesnot require market access concessions orpreferences on the part of trading partners.

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The Enabling Trade Index

The Enabling Trade Index, compiled by the WorldEconomic Forum, first published in 2008 measures‘the factors, policies and services facilitating thefree flow of goods over borders and to destinations’(World Economic Forum, 2009) The index is basedon four sub indexes covering market access, borderadministration, transport and communications,infrastructure and the business environment.

Table 17: Enabling trade index: Selected Africancountries, 2008

African Globalranking ranking

Country (25 (118 Scorecountries) countries)

Mauritius 1 40 4.50Tunisia 2 49 4.23South Africa 3 59 3.98Namibia 5 77 3.66Uganda 6 79 3.69Zambia 7 85 3.52Kenya 8 86 3.51Lesotho 13 95 3.36Mozambique 18 101 3.30Tanzania 19 102 3.27Nigeria 22 111 3.02Zimbabwe 23 112 2.98Chad 25 118 2.60Sub-Saharan Africa 3.90

Source: World Economic Forum: Africa CompetitivenessReport (2009)

Table 17 shows that Zimbabwe ranks third frombottom in the list of 25 African countries and issixth from bottom in the global index. The countryranks bottom in Africa for business environment,the regulatory environment and import and exportprocedures, once again highlighting the potentialfor substantial improvements in the country’scompetitiveness were Doing Business reforms tobe implemented. The country scores very poorlytoo for border administration and physical security.

5.5 FIRM COMPETITIVENESS ANDMANUFACTURED EXPORTS

Just seven industries account for over three-quarters of sub-Saharan Africa’s manufacturedexports and when resource-based semi-processeditems are excluded there are only two – motor

vehicles from South Africa and clothing that countfor Africa’s exports. Why has the region laggedbehind its peers especially in Asia, but also in LatinAmerica?

Obviously there are powerful macroeconomic aswell as microeconomic explanations why Africanmanufacturing is under-developed. On the macroside, market size is crucial along with poorinfrastructure and a range of policy shortcomings,from cumbersome bureaucratic and corruptcustoms and tax systems to unattractive investmentclimates.

Over time there has been a discernible shift frombroad macroeconomic and trade liberalizationstrategies designed to tackle these problems bycreating an enabling environment for robust exportgrowth, to targeted microeconomic policies aimedat helping firms to exploit export opportunities.Firm-level evidence explains why some enterprisessucceed in export markets while others fail.

Research studies pinpoint low productivity as amajor – perhaps the major – obstacle to growth inmanufactured exports in Africa (Bigsten andSoderbom, 2006). Teal (1999a) shows thatfollowing trade liberalization, manufacturing outputgrew 4 percent annually in Ghana in the first halfof the 1990s, but this was entirely attributable tolabour and capital accumulation, not to technicalprogress and productivity growth.

Technical inefficiencies, often the result of decadesof protectionism and very high levels of marketconcentration in small markets, are partly to blame.Comparisons between a highly successful clothingexporter, Bangladesh, and an unsuccessful Africanone, Kenya, are instructive. Bangladesh is one ofthe world’s largest clothing exporters, while Kenya,despite some recent penetration of the US marketthanks largely to the Africa Growth andOpportunity Act (AGOA), has failed to breakthrough into global markets. The most importantsingle explanation appears to be production costs,which are three times higher in Kenya than inBangladesh, primarily, but not only, due to wageswhich were 138 percent higher in Kenya.

High costs extend beyond wages however, toinclude finance costs. In Kenya and Madagascarexport finance costs borne by clothing exporters

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were 136 percent and 227 percent respectively ofthose in China (Kaplinksy and Morris, 2007). Thehigh costs of African manufactured exportsappears to be a structural problem rather than onerelated purely to labour productivity (UNCTAD,2008).

Evidence from Ethiopia, Ghana and Kenya showthat there is a positive correlation betweenmanufacturing firm productivity and export success(Mengistae and Pattillo, 2004) leading UNCTADto conclude that whether or not a firm will exportdepends on production costs on the one hand andthe level of entry barriers to foreign markets onthe other. Exporting depends on costs beingcontained below a certain threshold, with the resultthat firms whose costs are above that thresholdconcentrate on domestic market sales (UNCTAD,2008).

Empirical evidence also suggests that firms learnby exporting as a result of which their productivityrises. In other words, it is not highly productivefirms that export, but firms that ‘learn productivity’through exporting that are successful. Bigsten andSoderbom (2006) calculate that learning fromexporting can generate productivity gainsamounting to 50 percent of value-added whichexplains how firms and countries develop‘momentum’ in exporting. Past exports lead tofaster future export expansion.

Two types of learning are crucial to export success:

(a) Productivity learning, where exporters learn toproduce better quality at lower costs; and

(b) Market learning whereby firms exposed toforeign consumers’ demands discover how todesign and produce items that foreign buyerswant. Moroccan manufacturers thatconcentrate on consumer items, attribute theirsuccess to export market learning. BecauseAfrican consumer markets and productcharacteristics differ so greatly from those inexport markets, success in the domestic marketis no guarantee of export growth, other than inneighbouring markets with similar per capitaincomes and consumer tastes. Three-quartersof manufacturing firms in Morocco that exportdo so within the first three years of theirexistence underlining the fact that successful

exporters are those set up with the aim ofserving foreign markets (Fafchamps, et al.,2008).

UNCTAD cites evidence to show that the sizedistribution of African firms in the manufacturingsector is skewed towards smaller firms and this isa ‘serious handicap to export performance’(2008: 72). In the Kenyan manufacturing sector,the probability of firm failure decreases with sizewhile Bigsten, et al., (2004) found that exportingfirms in Cameroon, Ghana, Kenya and Zimbabweare larger than non-exporters. Generally, a firm inAfrica exports only if it reaches a minimum of 100employees (Teal, 1999b) and the fact that thereare relatively few firms of this size helps to explainwhy so few sub-Saharan firms export.

UNCTAD (2008) concludes also that the high costsof African manufactured exports relative to thoseof competitors in Asia and elsewhere appear to bea structural problem, not just one of labourproductivity and relative wages, therebystrengthening the policy case for across-the-boardInvestment Climate and Doing Business reformsdesigned to reduce transaction costs, eradicatebehind-the-border constraints and improvecompetitiveness.

5.6 THE MACROECONOMICCHALLENGES FACINGZIMBABWE’S EXPORTINGSECTOR

Research carried out on the impact ofmacroeconomic policies on local firms shows thatthe inward-looking strategies of the 1980s werenot compatible with an industrial strategy thatemphasized growth, resulting in a failure to spurgrowth, to diversify the country’s manufacturingbase and to resolve the problem of weakcompetition (Bjurek, et al., 2002, Ndlela andRobinson, 1995). The mainstay of the Zimbabwegovernment strategies during the control period(1980–1990) encompassed:

1. Foreign-exchange allocation system – whichbecame the most important policy instrumentthat affected short- and long-term decisionsof enterprises in both the private and publicsectors;

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2. Investment policies – also intertwined with theforeign-exchange allocation system impliedthat investment was controlled through anadministrative approval of all new investmentor expansions, the main criteria for approvalbeing that, ex ante, the project should not be anet user of foreign exchange during any twelvemonth period of its expected life and that itshould not compete with local production unlessit also produces for export;

3. Price controls – where the governmentdetermined a maximum selling price for mostbasic commodities, while other commoditygroups required government approval beforeprice increases could be initiated;

4. Local market regulations – instituted throughthe statutory minimum wage legislation of 1980,under which the government set up minimumwage and salary increments for various incomebrackets;

5. Trade policy and export incentives – in additionto foreign-exchange controls, stringent importrestrictions were set by government, with onlya limited number of incentives aimed at boostingthe country’s manufacturing sector, with littlechange in the tariff structure inherited fromthe colonial government – imports of rawmaterials were subject to 10 percent or lesswhile the average rate of capital goods wasabout 20 percent.

The adoption of outward oriented industrial policiesof the 1990s failed to live up to expectations, asthis was followed by a lackluster performance ofthe manufacturing sector. The disappearance ofthe chronic shortages of imported inputs and capitalgoods, the removal of foreign-exchange allocationsystem, price controls and several regulations inthe labour market, the slight increase in the domesticand international competition, should all havecontributed to a substantial increase in productivity,but this did not happen. The total factor productivity(TFP) growth rates, estimated for 31manufacturing sub-sectors over the period 1980to 1995 showed no clear tendency to increase

during the ESAP period. On the contrary more thanhalf of the sub-sectors experienced declines in TFPduring 1991 to 1995, with some improvement ofperformance during 1994–1995 (Bjurek, et al.,2002: 275)7. During the later period productivityincreased for approximately two-thirds of the sub-sectors, but the time span for this was short-lived.

The overall impression is that TFP growth waslower during ESAP than during the period 1986–1990, even though during the last two years of theprogramme more sub-sectors experienced higherproductivity growth than durng 1986–1990. Bjurek,et al., observed that the;

‘differences between periods could well be theresult of liberalization, but they could alsobe due to changes in exogenous factors suchas changes in demand, foreign aid andweather conditions.’ (Ibid)

The main econometric test analysis was performedthrough setting up one dummy to zero in 1993, andto unity in 1994–1995, when the administrativeallocation system of foreign-exchange system, thedirect local market allocation (DLMA) had beenabolished and a unified exchange rate established.The econometric tests results ‘do suggest that theincrease in the growth of imports and foreign aidthat occurred during ESAP raised TFP. An increaseby one percentage point in imports or foreign aidraises TFP growth by 0.2 and 0.1 percentage points,respectively.’ (Ibid: 278).

The above result is in line with other estimates ofthe exchange-rate liberalization whose most positiveresult was the unification of the exchange rate inthe second quarter of 1994. The liberalization of tradeand exchange-rate policy reforms meant thateconomic agents could import as per theirrequirements. Firms and individuals could go to themarket and source their foreign exchange. The roleof the Central Bank was only to ensure that themarket operates efficiently, subsequently it wouldintervene, whenever there was a mismatch betweensupply and demand of foreign exchange in themarket implying that the RBZ would buy or sellforeign currency to maintain stability in the market.

7 Since the growth rate performance of the TFP is determined by different factors. not just market reforms, the authors estimateda panel data model to control for exogenous variables. They then tested formally to see if TFP was higher after the implementationof ESAP than before. Though none of the measures turned out to be significant, two variables related to ESAP had an impact onTFP growth – the growth rate of imports and foreign aid.

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In line with regional developments, foreign-exchange bureaux were allowed to operate inZimbabwe. Furthermore, the private sector wasallowed offshore borrowing up to US$5 millionwithout the approval of the External Loans Co-ordinating Committee.8 The Central Banktransferred the responsibility of arranging forwardcover to commercial banks. By July, 1994 furtherimprovements were implemented in the exchangecontrols and exporters were allowed to retain 100percent of their export earnings and the holidayallowances for individuals was further increasedto US$5,000 by January 1995.

The reforms in the trade and exchange ratesallowed business and individuals to source foreignexchange in the market. However, in view of thethinness of the market and lack of the appropriateinstitutional prudence to manage the new system,exchange-rate management problems wereexperienced. Beginning from 1994, the realexchange rate remained continuously appreciatedfor more than two years, leading up to the 1997correction. This experience epitomizes an inflexibleapproach to exchange-rate management, whichresults in the persistence over time of anappreciated real exchange rate. During the lead-up to the crisis, there was a tendency to confusethe appreciated exchange rate with exchange-ratestability. This perception continued even after thelevel of gross foreign reserves fell sharply duringthe six-months to the end the first quarter of 1997.The appropriate response to this fall in reserveswould have been to encourage a more flexibleadjustment of the exchange rate while tighteningmonetary policy. Neither of these two remedieswas adopted when reserves began to fall, possiblybecause the authorities believed that the fall inreserves was temporary. However, monetarypolicy was progressively tightened since mid-1997,after it became obvious that reserves would notrecover.

On 14 November 1997 the Zimbabwe dollarcrashed by almost a fourth of its value in localcurrency terms and continued to slide until the endof that year. This currency crisis had suddenlysurfaced against the background of relatively

optimistic and confident mood that had prevailedin the economy during the first and second quartersof the year, bringing into sharp focus theimportance of redressing underlying fundamentalweaknesses in the economy, as well as fosteringconfidence in economic management.

The Zimbabwean economy had entered 1997 onthe back of a strong rebound in economic growth,declining inflation, a buoyant stock market, astrengthening current account position, and grossofficial reserves near historically high level of someUS$830 million which was three months of importscover. However, the problem lay in the littleprogress achieved in fiscal consolidation, whichcontributed to further erosion in externalcompetitiveness.

It would appear that from 1997 onwards there wasincreased pressure on foreign-exchange reservesfor a number of reasons, including the stability ofthe exchange rate, whose sustainability is in turndependent on the country’s macroeconomicfundamentals such as convergence of the inflationwith that of its major trading partners. In the caseof Zimbabwe there was no occasion to align thelocal levels of inflation and budget deficits withthose of the country’s major trading partners.

5.7 CHALLENGES FACINGMANUFACTURING SECTORFIRMS

Following the onset of Zimbabwe’s deepening crisisthat started in 1997, one key feature of theZimbabwean manufacturing sector has been theextremely low capacity utilization of firms. Thecapacity utilization of local manufacturing firms stoodat 19 percent in 2007 compared to 34 percent in2006 (CZI Survey, 2007). According to the resultsof a limited survey of companies undertaken duringthis study (Table 18), capacity utilization averaged38 percent in 2007 and 21 percent in 2008.

Due to such low effective capacity utilization rates,many local manufacturing sector enterprises havelost their competitiveness even in the domestic

8 This committee monitors all external borrowing in Zimbabwe. The limit of US$5 million offshore borrowing has since beenabandoned.

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market. The extent to which the operationalenvironment has been extremely inimical to theoperations of companies can be illustrated by twoepisodes. The first was the imposition of pricecontrols in July 2007. The price controls wereenforced at the end of the production chains,unfortunately with no appreciation of the pricestructures that normally lead to the final pricing ofthe products. Particularly for those companies thatwere mainly supplying the domestic market,production simply ground to a halt as companies ranlosses on their order books. Secondly, the RBZ’sregistration of the foreign licenced warehouses andretail shops (FOLIWARS)9 towards the end of 2008did not recognize the existence of localmanufacturers. The entire thrust was based onaccommodating importers of groceries and similaritems, and no attention was paid to the needs of thealready struggling local manufacturers. This initialexclusion of local manufacturers meant a preferencefor imports. Later, it was clarified that manufacturersnot registered under the FOLIWARS could sell tolocal companies in foreign exchange but subject toraising the central bank’s CD1s10 as if thetransaction was an export. However there was aproblem with this arrangement in that the proceedsfrom the transaction were subject to the centralbank’s forex surrender requirement of 15 percent.This effectively meant that transactions by localfirms were subjected to an additional tax whereasthe imported goods were not, thereby rendering thelocal manufacturer uncompetitive compared to theforeign supplier.

In terms of competitiveness, because of theanti-export signals from virtually all publicinstitutions and the generally deteriorating economicenvironment, most companies are currently at bestambivalent about whether to consider productionfor exports. The majority of them have just crawledback into what they consider as a more securedomestic market, though in essence there is nolonger a secure domestic market. The situation ismade even more difficult when one considers thatstructurally most of Zimbabwe’s companies,whether small or large conglomerates, produce in

isolation of one another. Quite unlike developmentsin other regions of the world, which are increasinglybeing organized in a variety of different businesssystems and global value chain approaches, buildingon distinctive institutional contexts and throughcoordination of economic activities across nationalboundaries, the majority of Zimbabwean firms arestill predominantly producing in isolation of eachother even at the domestic level. There has beenlittle effort by companies to concentrate on theircore business and sub-contract non-core functionsto other companies, both within the country orregionally, as each case may demand.

Under normal conditions, Zimbabwe’s local firmsshould be aiming at identifying factors that willboost competitiveness in both the domestic,regional and global markets as the main driver oftheir corporate strategies. As this working paperhas argued, Zimbabwe’s domestic market, likethat of many countries in the region, is arguablytoo small to act as an incentive for localcompanies to operate at the necessary levels ofoutput and economies of scale in order to becompetitive at the global level. With the cominginto effect of the COMESA Customs Union tobe followed soon by that of SADC – both freetrade areas with a common external tariff –domestic companies have to be competitive in boththe local and regional markets.

Table 18: Capacity utilization of a sample of 20companies

Capacity utilization

2007 20082009

Sub-Sector(%) (%)

(%)projected

Food & agro industries 13 6 45Text & clothing 47 29 40Metal working 47 40 37Chemicals-pharmaceuticals 22 19 35Chemicals-fertilizer 47 24 70

Average capacityutilization 38 21 30

Source: Data obtained from survey by COMESA (2009)

9 This was the effective start of dollarization in the sense that these so called FOLIWARS were allowed to sell their goods to localconsumers in foreign currency, initially side by side with local procured products being sold in the local currency.

10 CD1 (Customs Declaration Form No.1) is an exchange control document in terms of the Exchange Control Act [Chapter 22.05]that is processed by authorized dealers (commercial banks, who do it on behalf of the Reserve Bank of Zimbabwe) and is used forthe clearance of all exports of a commercial nature, i.e., exports whose value exceeds US$1000.00.

Shouldthis notbe pasttense?

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As with other sectors of the economy, the majorchallenge facing Zimbabwe’s manufacturing sectorin the short term is to reconcile the need to maintainviable capacity utilization, adequate employmentlevels and improve competitiveness. As alreadydiscussed above, with the dollarization of thecountry’s currency – and devaluation no longerbeing an option – regaining competitiveness willdepend on how fast measures will be taken toreduce the current high and uncompetitive pricingand cost structures prevalent in the economy. Aslocal companies move to align their high costdomestic prices with those offered in the region,competitiveness will be achieved through a numberof ways, including:

• raising productivity;

• cutting costs – which in the short term mayinclude jobs and wages;

• encouraging greater competition, particularlyin domestic and regional markets; and

• alignment of local prices with those offered inthe region.

The immediate challenge, therefore, is how to getthese firms to raise their capacity utilization levelsto supply both the domestic market and regionalmarkets in the face of fierce price competitivenessof regional and international competition. Somewould argue that, given their attendant high costand inefficient production structures, the localmanufacturers would have to be protected fromwhat appears to be the more efficient and low costSouth African competition in order to avoid anyfurther slide into de-industrialization of theeconomy. Indeed most of the companies recentlyinterviewed, particularly in the agro and foodprocessing sub-sectors, are lobbying for tariffprotection in order to offset foreign competition.However, a mindset of autarky will, as it hasrepeatedly done in the past, encourage domesticproducers to think that there is still an exclusivedomestic market, instead of thinking about

diversifying and seeking new opportunities andchallenges in the regional markets and beyond.

Under normal circumstances, corporate strategiesare supposed to be proactive rather reactive.However, analyses of Zimbabwean companies andlocal support institutions suggests certain commonresponse patterns in the face of the unprecedentedanti-export bias created by the macroeconomicenvironment and ancillary legislation. Of the twomain strategies likely to be followed by companies,namely: (i) reactive firm strategies, and (ii) proactivefirm strategies, the main response of local firmsappears to be the former as firms struggle forsurvival and shelve any consideration of the latter.11

According to the Zimbabwean companies, thecurrent state of a generalized low-capacityutilization is due to a number of factors, including:

• Non availability of foreign currency to purchaseraw materials, spare parts and machinery;

• Lack of normal access to credit lines;

• Exchange control regulations which negativelyaffected profitability, e.g., the retention andcompulsory liquidation of company’s foreigncurrency balances resulting in lack of viabilityof exports;

• The demise of the commercial agriculturalsector which has led to most agricultural inputsnow being imported, depressed demand forindustrial products, massive brain drain, demiseof the middle class which negatively affectedmarkets for certain high value products;

• The initial exclusion of local manufacturersfrom supplying local shops thereby givingadvantage to imports under the FOLIWARSprogramme in November 2008; and

• Deterioration of infrastructure: unreliable railtransport, deteriorating road network, erraticsupplies of electricity, water and communicationsystems.

11 For the reactive firm strategies (retraction to domestic market and Transnational Corporations [TNC]-subsidiaries adjusting totheir headquarters directives, and proactive firm strategies (increased efforts to export, upgrading of products through diversificationof activities), see Gereffi, 1996; Gereffi & Korzeniewicz, 1994; Ndlela, 2004.

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5.7.1 Retraction to the Domestic Market

Virtually all Zimbabwean companies have in thepost-2000 period retracted to the domestic market.In the sample of 20 Zimbabwean companies spreadthrough five manufacturing sub-sectors shown inTable 16, 82 percent of them were by March 2009only producing for the domestic market, with acombined exports to the regional markets sharedbetween SADC (14 percent) and COMESA (4percent). Exports to the rest of the world arevirtually insignificant at 0.25 percent.

According to the CZI Manufacturing Report(2007), the main reasons for industrial firmsdropping out of export markets in the order ofimportance were:

1. A controlled managed (overvalued) exchangerate;

2. Non-availability of foreign currency;

3. Foreign competition; and

4. Non-tariff constraints on exports.

Table 19: An analysis of destination and sourcemarkets

Sub-sector Market destination (%)Domestic COMESA SADC Other

Food & agro 86 6 6 0.25Text & clothing 80 10 10 0Metals 66 3 32 0Pharmaceuticals 84 0 16 1Fertilizer industry 93 0 8 0Simple average 82 4 14 0.25

Source: Data obtained from survey by COMESA (2009)

The majority of companies surveyed cited retentionby the RBZ of a large chunk of their exportearnings (which varied from between 45 percentto 15 percent towards the end of 2008) as a majordisincentive to export, with companies forced toabandon export markets and retract to a poor and

declining domestic market. In addition to theretention schemes, companies were also forced toeither utilize their foreign-currency earnings within30 days or liquidate them at an extremelyovervalued exchange rate. Up to the first half of2004, local exporters were compelled to surrender25 percent of their export earnings at an officialexchange rate which was on average 6 times lessthan the official auction rate of foreign currency.From 2007 onwards, a number of companiesstarted citing shortages of raw materials as themain reason for their failure to export. Of course,this was strongly linked to foreign currencyshortages.

An additional non-tariff constraint on Zimbabwe’sexport performance was its growing internationalisolation over the crisis period.12 For example,Zimbabwe became ineligible to benefit from theUSs African Growth and Opportunity Act (AGOA)with the loss of a significant export market. Thoseneighbouring countries that became eligible forAGOA subsequently became beneficiaries of firmsthat pulled out of Zimbabwe, e.g., Botswana andSouth Africa. Zimbabwe thus lost the possibility oftechnology upgrading, quality and volumeproduction of woven and knitted fabrics, whichZimbabwean based firms would have produced forexports to the AGOA bound manufacturers in theregion, as well as exporting directly to the UnitedStates.

Finally all companies suffered from acute shortagescaused by policy distortions at the centre. Theshortages ran to electricity, money, water, and semi-manufactured inputs, e.g., sugar for manufacturersof soft drinks. For example, large companies inthe food processing sector were forced to scaledown their operations due to lack of raw materialand power outages, from the first half of 2008onwards, such that consumers have been forcedto import maize-meal, flour and cooking oil fromSouth Africa and while local capacity utilizationplunged to all time lows.

12 While there were no explicit measures that were being imposed by regional partners (SADC, COMESA and AU), the country waseffectively isolated from many international regional pacts currently enjoyed by other countries of the region, e.g., AGOAfacility, in the European Union (EU) assistance rendered during the implementation of the Cotonou Agreement and EconomicPartnerships Agreements (EPAs).

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Up to 2006, the most important constraint facinglocal firms had been foreign exchange, followedby the availability of raw materials (partial overlapwith access to foreign currency) and domesticdemand continued to be the next most importantconstraint (Table 20). However, the situationchanged drastically from July 2007 when thegovernment suddenly introduced a price freeze.For the majority of the companies this was theturning point, and capacity utilization dropped bybetween 60 to 80 percent between July and August2007 due to the prize freeze. As noted above, the

government imposed the prize freeze at the end ofthe production chain, i.e., at the retail level of theproduct, with absolutely no regard to the coststructure of the whole production chain.

However, following the installation of theGovernment of National Unity (GNU) in February2009, the constraints facing the companies haveagain changed. As shown in Table 20. whereas,government policy and exchange rate had occupiedfirst and second positions just before the installationof the GNU, these no longer loom so large in theconcerns of companies.

Table 20: Major constraints on industrial production

Constraints2009 2008 2007 2006 2005(% of respondents)

Finance 100 Price controls (as of July 2007) 90 90.0 n/a n/aQuality 65 Foreign currency 80 74.0 69.4 79.7Human resources 38 Raw materials 68 64.5 58.9 70.9Government policy 38 Working capital 45 12.0 9.7 8.9Infrastructure 33 Demand n/a 30.0 26.4 41.9Price control n/a Power outages 20 20.0 8.3 6.3Exchange rate n/a Fuel availability 4.5 70.0 6.9 8.9

Source: Confederation of Zimbabwe Industries: Survey of Manufacturing Industry 2006 up to 2007. Estimates for 2007/08and 2009 have been obtained from interviews with companies in the survey

44

1. In post-crisis Zimbabwe, investment andinfrastructure deficits in both the private andpublic sectors, at a time when the domesticsavings base is negligible and when the bankingsector is unlikely to be in a position to satisfythe working capital demands of businesses,mean that for the foreseeable future Zimbabwewill be a substantial net importer of capital –foreign aid, FDI, offshore bank borrowing andlimited portfolio inflows. This will almostcertainly result in some, possibly substantial,dilution of domestic ownership of the capitalstock.

2. Closing the infrastructure deficit at a time whenZimbabwe’s public sector finances will beseriously constrained is likely to mean increasedreliance on private sector funding, includingpublic-private partnerships, commercializationand privatization.

3. Although – in the medium term – the mainburden of balance-of-payments adjustment andthe financing of investment will have to beborne by the capital account of the balance ofpayments, this carries a risk of excessivedependence on foreign funding along with thepossible emergence of an unsustainable burdenof foreign debt.

4. Accordingly export promotion anddiversification must be at the top of the policyagenda, though given that in a dollarizedeconomy Zimbabwe will be unable to pursuethe kind of competitive currency export growthstrategy proposed by Freund and Pierola(above), other options will have to be pursued.

5. However, when it comes to the choice of acurrency peg – dollar or rand – policy-makersshould take note of the benefits of a competitivecurrency. If, over time, the rand is deemed likelyto depreciate relative to the US dollar then thisis a strong argument for Zimbabwe to opt forthe South African currency as its referencecurrency, especially in the light of the country’s

tighter trade and financial integration with otherSADC states, especially South Africa.

6. Arguably the most likely medium-term exportgrowth path is not that of export diversificationbut of continuing high concentration in a limitedrange of primary product exports – platinum,ferrochrome, gold, cotton, tobacco and nickel.Such a growth path is sub-optimal to the extentthat there is no broadening of the country’sexport portfolio, and the bulk of the exportproducts, though not tobacco and cotton, arecapital-intensive, thereby limiting the extent ofnew employment creation. Export growth inthe mining sector will depend on substantialFDI and recruitment from abroad of expensiveskills, while such a growth path implies littleexport market discovery and learning as wellas limited scope for participation in, andexploitation of, Global Value Chain (GVC)opportunities. For these reasons this growthpath while feasible, and indeed probable, wouldmake only a limited contribution in terms ofreviving manufacturing, enhancingcompetitiveness and diversifying Zimbabwe’sexport basket.

7. Prior to the onset of the crisis, Zimbabwe didhave competitive advantage in the field ofservice exports, especially tourism, whichcould be revived though this would involve achanged business model for tourist operatorsalong with substantial infrastructure andcapacity investment by both the state and theoperators allied with more tourist-friendlypolicies. The latter includes streamlinedcustoms and immigration formalities, an open-skies policy to attract greater internationalairline participation and, possibly, privatizationof the national airline. Finance and banking isa second industry in which Zimbabwe hastraditionally enjoyed competitive advantage andin which it could become a regional player.

8. An immediate policy priority should be tacklinghigh transaction costs since, in the wake of

Section 6

Policy Recommendations

45

Section 6 – Policy Recommendations

decades of above-average inflation, culminatingin ten years of chronically-high inflation andhyperinflation, Zimbabwe’s cost, wage and pricestructure is out of sync with those in regionaland global competing countries.

9. There is no evidence of sustained success inthe export of manufactures by a landlockedcountry, though some cite the recent, butseemingly temporary, surge in Lesotho’sclothing exports. Geography – being land-locked – works against exporters ofmanufactures in two main ways: firstly byincreasing the cost of penetrating wealthier ordenser foreign markets although Zimbabwedoes have a relative competitive advantage inthe form of the proximity of the large Gautengmarket in South Africa. Secondly, firms inlandlocked countries encounter higher inputcosts because they are further away fromcheaper foreign suppliers and becausedomestic substitutes are more expensive(Elbadawi et al., 2006). This too underlines thenecessity of measures to enhance structuralcompetitiveness by reducing or eliminatingbehind-the-border obstacles to foreign trade.

10. High transaction costs that inhibit exports mustbe tackled. It is simply impossible for exportersto expand where they are hamstrung by highertransport, energy, finance and logistics coststhan their competitors. Transaction costs canbe lowered by fostering domestic competitionin the services sector and by the use ofregulators where natural monopolies exist asin electricity, water and rail transport. Hoekmanand Nicita (2008) conclude that policies toreduce transaction costs at or behind-the-border will have a greater payoff than furtherreductions in tariffs and non-tariff barriers.

11. Domestic resources must be channelled wherethey are most productive. This is not a matterof picking winners and then using industrialpolicy to promote these industries orenterprises, but of eliminating existingdistortions in the structure of incentives so thatresources flow to those firms and industries inwhich the country has long-term competitiveadvantage or has the capability to developcompetitiveness. This is then a ‘Discovery’issue.

6.1 THE CORPORATE STRATEGYDIMENSION

Invariably, policy debates overlook the role of firmsand managers because the focus is on whatgovernments can and should do. But becauseultimately a country’s competitiveness isdetermined by the productive efficiency of itsenterprises, corporate strategy plays a critical rolein the process of export growth and exportdiversification. With the explosive growth of globalproduction sharing in the last 20 years a country’sexport success depends increasingly on the locationdecisions of multinational companies. Few todaydeny that foreign direct investment is a major driverof technology transfer and improvements, job andskills creation and export expansion.

The criteria on which location decisions are madeare part industry-specific, part location-specific andpart task-specific, which means that there is nosimple means of assessing how policy mightinfluence the FDI decision. Most investmentintentions surveys highlight the crucial roles ofmarket size and projected future market growth,though these may assume less significance whereinvestment is resource-seeking in nature – oil, gas,minerals and tourism – and where it is motivatedby cost reduction considerations or so-calledefficiency-seeking investment. Some FDI is exportplatform in nature whereby the multinational investsto exploit cheap labour or more likely preferentialaccess to the EU and US markets. Frequently,motivations overlap so that an investment in Chinamight be driven by the size and growth potential ofthe domestic market, low production costs andattractive regional or global export opportunities.

Given these criteria, the scope for public policyinterventions to attract FDI is limited. Almost allthe survey evidence casts doubt on the efficacy oftargeted interventions such as special tax-breaks,wage subsidies or subsidized utility tariffs. Fromthese surveys, however, there is support for generalinvestment climate and doing business reforms thatlower transaction costs and market uncertainty.Such reforms make sense from an industrial policyviewpoint too because there is no need for theauthorities to try and pick winners but rather tofocus on eradicating or minimizing obstacles todoing business and administrative or bureaucraticconditions likely to reduce the rate of return on

46


investment. In contrast, interventions that seek toraise the rate of return by limiting competition orgranting preferential tax rates are undesirablebecause they are costly in terms of tax efficiencyand because they reduce consumer welfare, evenif they do create jobs and generate output andemployment.

FDI and trade can seldom be disentangled.Investment in platinum translates into rapid exportexpansion, as well as the participation in GVCs oroffshoring. Accordingly, corporate strategicdecisions have a major impact on the structure andgrowth of foreign trade. Where the firm decidesto outsource or seek a foreign input into itsworldwide value chain that will impact not just onoutput and employment in the chosen location butalso on its foreign trade. Accordingly the oftenunpredictable micro- or firm-level response tomacroeconomic policies determines whether agiven policy initiative will succeed or fail.

6.2 REPLICATING FOREIGNEXPERIENCES

Policy-makers are tempted to seek models orexperiences elsewhere that they can replicate intheir own economies. What may be appropriate inKenya with a given resource endowment andinstitutional, cultural and behaviourial variables, maywell not suit a different set of conditions in Zambiaor Zimbabwe.

Success is location-specific so that even it if werepossible to identify a unique Asian Model forreplication in sub-Saharan Africa, the chances ofsuccessfully transplanting an entire system to analien environment are slim. Obviously countriescan learn from each other’s experiences but thatis very different from seeking to turn Zimbabweinto a mini-Korea or Taiwan.

47

At this stage in its development, Zimbabwe has nooption other than to seek growth through enhancedintegration with the regional and global economies,especially in the form of export growth andopenness to foreign capital inflows of all kinds. Itis unfortunate that this should coincide with theworst global recession for 70 years and at a timewhen the steep decline in trade and investmentflows suggest that the international economy hasentered into a phase of de-globalization.

Because during the crisis period the economydownsized, suffered an exodus of skills andendured unprecedented hyperinflation resulting inthe destruction of the savings base, there is noalternative to an outward-looking strategy. From apolicy viewpoint, this means that fixation with tradeliberalization, trade preferences and access toindustrialized country markets should be replacedby a much tighter focus on domestic – behind-the-border – obstacles to export growth in the form ofmalfunctioning domestic institutions and markets,

especially labour markets, weak infrastructure andlow levels of productivity and competitiveness.Government needs to adopt and implementstrategies designed to boost productivity andcompetitiveness by lowering transaction costs andreducing, if not eliminating, obstacles to foreigninvestment.

The success of any development strategy dependsultimately on the response of private sector players– entrepreneurs, investors, lenders and corporatestrategists. If they are unconvinced, the strategywill not work. Because they are a heterogeneousgroup, it is simply impossible for the state to devisea ‘one-size-fits-all’ strategy. Some investors maybe attracted by outsourcing opportunities whileothers will see clusters or GVC participation asprofitable. The optimal way out of such a policydilemma is a level playing field approach, leavingentrepreneurs and investors to ‘discover’ what theycan and cannot do.

Section 7

Conclusion

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