The full circle of African underdevelopment

 

By Bernard Bwoni

Africa will forever be taking the full circle of underdevelopment and poverty should the continent continue embracing the very same free trade policies which were effectively rejected by the now established developed economies of today. Since David Ricardo laid out the principle of comparative advantage and Adam Smith’s invisible hand economists have advocated free trade and have argued that governments should not attempt to either reduce or increase levels of exports and imports that occur naturally as a result of supply and demand. The free market economy entails no economic intervention and no regulation by the state. The concept of the invisible hand of the market underlies the theory of the free market economy. However free trade is one of those theories that is logical consistent with itself in theory but not in the real world as it has not been universally linked to any subsequent economic growth particularly in the developing countries. The theory is outdated and makes many assumptions. It does not account for externalities, assumes perfect information, no social interactions and puts limits on economies of scale.

 A country is said to have comparative advantage over another in the production of a good if it can produce it at a lower opportunity cost and if is produces that good at a lower cost than anyone else. Trade allows specialisation based on comparative advantage with each country producing those goods that each produces comparatively efficiently compared to others. A country should specialise in those goods it has comparative advantage and some economists have argued that Zimbabwe could focus on a strategy puts emphasis exporting goods that have a comparative advantage and importing only those that have a comparative disadvantage. Zimbabwe has comparative advantage in agriculture and as such should focus more on that sector to benefit from trade with other countries. Provided opportunity costs of various goods differ in two countries both of them can gain from mutual trade if they specialise in producing and exporting those goods that have relatively low opportunity costs compared with other countries. Zimbabwe is endowed with abundant natural resources and theoretically should have comparative advantage by virtue of available resources. Of course the practical realities on the ground are different.

 

Bernard Bwoni can be contacted on bernardbwn@aol.com/  bernardbwoni.blogspot.com

 

On the complex reintroduction of the Zimbabwe dollar

By Bernard Bwoni

The most important price in any nation is the price of its national currency in relation to other currencies. The main component in the successful reintroduction of the domestic currency in Zimbabwe is going to be a solid commitment by the Reserve Bank of Zimbabwe and the government in taking the crucial and necessary steps required to ensure that the new currency is going to be perceived as stable by the relevant stakeholders mainly industry, business, members of the public, the regional and international community. The government, business and members of the general public need not avoid dialogue on the reintroduction of the Zimbabwe dollar. The reintroduction of the Zimbabwe dollar is going to require sound macroeconomic policies, committed legislation in the financial sector, careful preparation and the right policies and processes in place. The reintroduction of the Zimbabwe dollar is going to demand thorough planning with a detailed forecast which must include the cost of printing and minting the new cash currency.  The final phase will be the production of the new currency and of course the all important implementation.

The benefits of the multicurrency financial system have come at cost for Zimbabwe. The case for or against the multicurrency system is contentious and complex and requires delicate handling and implementation. The Reserve Bank in effect lost its influence on conduct of the monetary policy. In as much as the multicurrency system has brought inflationary stability on the one hand it has also eliminated the possibility of financing the fiscal deficit with seigniorage which compound the current liquidity crisis because without this possibility of public financing, the government will have to look for fallback sources of revenue. The Zimbabwe government has given up control of the money supply which regulates and restricts any stabilising response of fiscal policy to adverse extrinsic and intrinsic unpredictability.

Zimbabwe is currently facing a banking sector and liquidity crisis. The multicurrency system has imposed limitations on the Reserve Bank’s role as the lender of last resort to the banking sector which means local banks are already at a disadvantage and prone to internal and external shocks. Quantitative Easing is a source for liquidity and without a domestic currency the Reserve Bank will have to look for alternative sources to respond to financial crises. The Zimbabwe economy has widely been opened to capital mobility, left vulnerable to shocks and government has its hands tied in terms of flexibility to respond to these shocks. The question to pose is what can be done to address the emerging liquidity crises?  
The country is facing huge fiscal deficits, deeper external imbalances and continuous capital flight. The current banking sector crisis indicates an unstable demand for money which is impacting on the capacity of the Reserve Bank to conduct monetary policy. The Zimbabwean banking sector is susceptible to high insolvency risk, higher deposit volatility and propensity to suffer sudden disruptions in capital flows. There is a series of systemic banking crises in Zimbabwe with slower and more volatile output growth without any visible gains in terms of domestic financial depth. If the Reserve Bank had the role of lender of last resort it would be in a position to provide loans to crisis-hit banks facing liquidity problems.

The reintroduction of the Zimbabwe dollar when it happens is most likely going to be implemented amid tight macroeconomic conditions. It is important to note that the process of reintroducing the dollar is not going to address these macroeconomic difficulties immediately but gradually if supported by fiscal and monetary action. From a psychological point of view the return of the Zimbabwe dollar is likely going to facilitate the stabilisation of the economy. The key term here is likely. The reintroduction process needs to be combined with exchange rate unification to eliminate the complications of both an official exchange rate and the shadow exchange rate.

The return of the Zimbabwe dollar needs to be supported by sound financial sector legislation to ensure consistency international best practices. The Reserve Bank of Zimbabwe is the arm of the state that is responsible for reintroducing the domestic currency and thus reinforcing its capacity is critical in the process. The Zimbabwe financial sector is currently bedevilled by liquidity issues and the Reserve Bank of Zimbabwe needs to assess the extent to which fake banknotes will be in circulation. The RBZ can work collaboratively with the ministry of finance and commercial banks to come up with a strategy to arrest any surge in the circulation of counterfeits during the crucial implementation phase of reintroducing the dollar.

Reintroducing the Zimbabwe dollar is going to be a painful process, but necessary. It is a complex an undertaking which requires in place a well-functioning accounting system. The process is going to require independent auditing to continually test the integrity of the currency revamp by ensuring accurate reporting and accounting of the currency exchange. This is the phase in the return of the domestic currency where failure is not an option.

The public needs to be provided with accurate information and education on the necessity of reintroducing the local currency back into circulation. The Reserve Bank of Zimbabwe needs to go on a charm offensive not a defensive mode that will render whole process a failure from inception. It can coordinate this public education strategy in collaboration with representatives from the country’s financial sector and members of the general public. The education and awareness campaign should encourage people to deposit their cash currency in accounts at banks. It is imperative that the public education campaign provides clarity for account holders that once the dollar is back in circulation that they can withdraw their money in the form of new banknotes. It is important that the RBZ provides the right information to the public how the dollar is going to be injected back into circulation with as minimal disruption as possible.

The public education campaign needs to start early, the Reserve Bank needs to carefully define and announce the terms of redenominating the new currency. This is the national currency and people need to be free to discuss the issue. The RBZ needs to initiate a robust awareness and education campaign. Leaflets and booklets illustrating the reintroduction process and the new banknotes need to be distributed and published in local and national papers along with clear explanatory notes to allay fears about this anxiety-provoking process. The Reserve Bank of Zimbabwe can set up a hotline number to answer questions presented by all stakeholders and offer reassurances to businesses and members of the public. The practical aspects of reintroducing the local currency are equally important and the RBZ can decide to use the same banknote printer and coin minter as pre-multicurrency. However care needs to be taken to provide security against counterfeiters. The decision about the artistic design of the banknotes is critical psychologically.

Thus the crucial initial step in reintroducing the Zimbabwe dollar is the unification of the exchange rate. During the hyperinflationary period and the critical shortage of foreign currency the period leading to the 2008 general election, a dual exchange rate system prevailed with the official exchange rate and an informal parallel black market exchange rate. The starting point is to devalue the official exchange rate to a commercial rate at which banks can freely trade with the public with the intended outcome being full unification in due course. The RBZ can set currency exchanges at convenient locations to provide easy access and official access at rates close to the shadow exchange rate to kill off demand for the black market. The government will have to issue new foreign exchange regulations under which the Reserve Bank of Zimbabwe can begin providing banks and formal channel currency changers with access to foreign exchange which means that provision of sufficient foreign exchange across the country will help in eliminating the black market.

The Reserve Bank of Zimbabwe will need to involve stakeholders in the design and denominations and once these are in place decision can be made on how much to produce taking into account the demand for money in general. Currency exchange is crucial to finalising the reintroduction of the Zimbabwe dollar. The Finance Ministry and the RBZ will make the final decision as to when it will begin and when it will end. All stakeholders need to be consulted extensively.

Bernard Bwoni can be contacted at bernardbwn@aol.com/ bernardbwoni.blogspot.co.uk

A developing continent, but what is a developed society?

By Bernard Bwoni

Recently watched a YouTube clip about two young Zimbabweans at the receiving end of the most heinous and brutal savagery that made the whipping scenes from that disturbing movie ‘12 years a slave’ look like a friendly pat on the back. Their crime, an allegation of livestock theft, judged, sentenced and justice meted out instantly. A group of bulky-looking black South Africans had menacingly encircled these defenceless and visibly traumatised young men and taking turns to physically break them in one of the most distressing and gruelling scenes of violence ever seen. The despair, the forlorn sense of defeat, the hopelessness and helplessness was heartbreaking to watch. The gloom-ridden despondent dearth of hope and the evident emotions of despair are unsettling.  One of the young men had been tied to a rope and he was suspended from a tree by his testicles. And on top of that was repeatedly whipped to a pulp whilst the gathering community jeered and cheered. The trauma was so significant to the point that he could barely cry and all he could do was groan and whimper. The two young men are mercilessly tortured for over an hour until their tormentors were all physically exhausted and the young men were then set upon each other, forced to maim one another with threats of being sliced by machetes if they refused. Reluctantly the young men had to and did exactly what anyone thrust in their situation would have done, that is survived. It is a harrowing and distressing depiction of the hideous face of xenophobia in the Rainbow Nation.

Now this begs the question, is Africa just a developing continent never to be a developed society? The burning tyres round the neck of many a wretched Zimbabwean souls in South Africa, the gut-wrenching televised scenes of Mad-Dog dragging a hapless Muslim off a bus and devouring them alive in a very disconcertingly distressing act of cannibalism in the Central Africa Republic and countless reported and unreported incidences continent-wide. Where is the compassion, the conscience and that degree of self-control that separates us from animals?

There is a sense of denial in terms of accepting responsibility and accountability for such actions by society collectively. Compassion, philanthropy and empathy are the hallmarks of any nurtured and matured society. How any society treats the most vulnerable, how any society accepts the most vulnerable and how any society welcomes the vulnerable from outside is what distinguishes it from the animal kingdom. A degree of self-control and that empathic outlook sets us wide apart from beasts. This is not about governments and this is not about politicians but about that unique entity called society. This is about what individuals or groups of individuals collectively are prepared to do and prepared to forego to attain that level of a developed society. This is not about industrialisation or technological development, but societal responsibility. The two Zimbabwean young men were brutalised senselessly in the full glare of society and for over an hour not a single soul raised any objections to the barbarity and savagery exhibited by the tormentors. What really is a developed society?

Dishonouring Zimbabwe Independence Day is moral repugnance

by Bernard Bwoni

Zimbabwe has a unique and complex his­tory; apartheid and segregation; displacement and theft; a bitter armed liberation struggle; heroism and greatness of the pioneers of the liberation movement and that priceless day on 18 April, 1980. This is a unique country, founded on the principles of freedom and emancipation on the backdrop of a lethal liberation war against a system that deliberately and ruthlessly segregated and mutilated on racial grounds. Independence is that exquisite feeling that has given all Zimbabweans and Zimbabwe options to make her decisions and to define own destiny as a sovereignty country. As Zimbabwe marks 34 years of independence it is regrettable that many are now associating hard won freedom with the economic problems currently bedevilling the country. That the gallant spirit and selfless sacrifices of those sons and daughters of Zimbabwe who went into that unforgiving bush with that bonafide raison d’être to truly liberate the country is lumped together in the same small corner as the indiscretions of some self-serving individuals without an ounce of the patriotic marrow in their bones is disheartening to say the least.

 There are many heroes who just fly beneath the radar, fought gallantly in the bitter liberation struggle and to this day largely go unnoticed as they get on silently with their lives and in some instances encounter ridicule from the very same people they helped liberate from draconian and racist regime. They are not celebrities, they are not on the conference main stage yet they give and have given of themselves for the greater good of Zimbabwe. Their lives inspired and continue to uplift, their spirits transformed political landscape and yet we deliberately forget to acknowledge their totally altruistic forfeiture for the liberation of the majority. The men and women who put their lives on hold to fully commit themselves to liberating the country from the darkest depth of colonialism and racist apartheid system to the revered pedestal of the liberties and freedoms we enjoy and take for granted today. These are the men and women who have been through the mud and mire, enduring unimaginable distress and privation for the love of Zimbabwe. There are many such men and women in Zimbabwe and they all deserve our respect, recognition and reverence, precisely because they did not ask for it, they earned in ways we can only imagine.

Nowadays you often hear statements like ‘smith and Rhodesia was better’ or ‘take us back to when we were under colonial rule’. This is from people who now have that right to vote, that freedom to walk, freedom to exist freedom and be human beings. This is not playing the ‘colonial card’ but hard facts that things were never ever breezy, cheery and rosy under that Ian Smith and his racist henchmen. Rhodesia was a beautiful country for Rhodesians and not the descendents of Changamire Dombo and Lobengula. That is precisely the reason why arms were taken up against that regime. Rhodesia had some of the most repressive and discriminatory laws which reduced the black Zimbabwean to the end of bottom with no impunity. The Rhodesians, some of them still among us because of the reconciliatory hand of President Mugabe, mercilessly maimed and mutilated innocent blacks and today they don the sheep’s clothes as champions of democracy and human rights in independent Zimbabwe! These are the very same people who poisoned wells and sanctioned the indiscriminate massacres at Chimoio, Tembwe, Nyadzonya and many others. Zimbabwe’s Independence Day is sacred as blood flowed continuously through the beautiful landscape for us to enjoy the freedoms we take casually today. Thanks to President Mugabe we have forgiven the Rhodesian atrocities but will never forget, must never forget!

The liberation struggle was initiated by men and women who said enough was enough of the unrepentant regime and they focused on putting emphasis on cascading real power down to the people, advocating for policies that focus on self-sustenance and self-reliance and deconstructing the mind from that neo-colonial structure that continues to render Africans perennially indebted to those who have subdued, subjugated and exploited the Africans continent for centuries.

Hushed heads are an embodiment of real power focusing on action instead of words, and have ability to encourage ownership and develop loyalty in unique ways. The big idea is earning the respect and our heroes earned that. Men and women believed in a cause, fought for that cause displaying conviction minus the complacency. A great many were maimed, massacred by the brazen regime’s callous forces. Many a young men and women got arrested for the cause but never faltered and saw the liberation struggle to its unimaginable bitterness and victorious conclusion. Silence is golden and certainly easier for those that already have the analytical and introverted behaviours already in place. These are the men and women who were brought up on the values of the liberation of this country and confident but not over-confident with that ability to think laterally. As Zimbabweans we should define our heroes and relate to them, imagine what drove them to put their lives on hold to get out there and liberate this country. I am deeply indebted to all the heroes who have the country-defining values as part of their deoxyribonucleic acid and the values still ineradicably etched.

Any nation not build on any values has no foundation and is no nation at all. For you to believe in yourself you have to have some values to subscribe to. A country with no values has no vision and with no vision there basically is no future or growth. Any ideology that focuses on improving the lives of African people inherently threatens the irreversibly colonial and neo-colonial establishment and as such forever ridiculed and suffocated. As we celebrate this unique and sacred independence we must continue to honour the selfless sacrifices of those who helped liberate the country. Discrediting 18^th April 1980 and demeaning the liberation struggle is morally defunct. 18^th April 1980 has no price-tag and is free for all present and future generations to cherish. The liberation war heroes of Zimbabwe already put the price on their tab for all present and future generations to enjoy without limits.

Bernard Bwoni can be contacted on bernardbwn@aol.com/  bernardbwoni.blogspot.com

The EU, Africa and Zimbabwe: disarray leads to industrial stasis

By Bernard Bwoni

Revolutions just as with evolution can happen silently. Analysing the boon and bane of the new landscape and the transformation it ushers is fine art or should I say finite. A new and effective system of checks and balance and politics of maturity and openness evolves. Any ruling party has to constantly be kept on its toes by a brand of inter-party and intra-party political maturity by learning to adapt to this uncomfortable but necessary level of scrutiny. This ascendance towards a mature brand of politics is for those with the moral and mental mettle to deal with the facts minus the associated emotions. Let us focus on facts and figures of the realities on the ground. Zimbabwe signed the trade liberalization EPA with the EU which means Zimbabwe with mere population of less than 15 million people opening 80% of its markets to products from the EU with its 300 million economically-advantaged population by 2022. In the short term it will appear like Zimbabwe is gaining from the trade relationship but in the long term what you will find out is that as volumes increase the balance will shift exactly where the long-term thinking EU are aiming for and that is in their favour. Do your sums and numbers and facts are stubborn.

The Economic Partnership Agreements (EPAs) are ‘meant to safeguard’ African, Pacific and Caribbean countries’ preferential access to EU markets previously granted through the Lome Convention. The recent EU-Africa summit focused on trade liberalization as well as liberalization in investment and services. Many African countries have expressed reservation about signing the EPAs and rightly so. The EU has been exerting pressure on those countries which have not ratified and has set a deadline of October 2014 or it will start levying tariffs on all imports into the EU from those countries that have refused to ratify.

Zimbabwe is already an import-dependent country and signing the EPA and opening its doors further duty-free to more imports was a counter-productive move. The country could have focused on developing the industrial sector to compete globally especially in those areas the country has comparative and competitive advantage. The comprehensive duty-free access for EU finished products significantly impact on revenue to government in the long-term. The government could be forgiven for signing the interim EPA as this was during the time of contentious government of national unity.

The deal which the EU is putting on the table appears fair on paper but in reality and in the long term will not stimulate economic transformation on the continent. Zimbabwe has signed the interim EPA which covers the liberalization of goods (agricultural or manufactured products) but not the full EPA to cover services.

The comprehensive EPA includes goods, services and investment including banking, water services, construction and any other services. From the import figures above it is clear that Zimbabwe mainly exports raw materials to the EU and liberalizing the services sectors which could be important to the country’s own productive capacity as stipulated in ZimAsset’s value addition and beneficiation cluster is detrimental to the country’s economic growth. The EU has not been very clear on infant industry protection within the EPAs being proposed for the continent. What this means is that countries like Zimbabwe which have signed the EPAs will be exposed to direct competition from EU goods and services. Just a quick look on the EU exports to Zimbabwe will illustrate the point clearly. Value addition will be hampered, infant industry protection will be affected and domestic industry will not realize their full productive potential as they would be prematurely exposed to competition from more established firms from the more developed EU.

The recent EU-Africa summit focused on liberalization of investment and services which the EU is pushing for with individual African countries. This is negative for African unity in the sense that by negotiating different terms with already weak African economies this is basically weakening regional integration. The pressure from the EU for African countries has forced some countries to give in and sign the EPAs fearing the threat of exclusion from the EU market.

The EU is Zimbabwe’s third largest trading partner and in fact the balance is in Zimbabwe’s favour on face value. Zimbabwe has more exports to the EU than imports. The value of trade with the EU is in excess of US$800 million with a positive trade balance in favour of Zimbabwe. Zimbabwe exports to the EU mainly raw materials such as raw cane sugar, minerals, tobacco, citrus, cotton, raw hides, tea and leather. In return Zimbabwe imports cars, transport equipment, machinery, chemicals and luxury goods. The Zimbabwe government has signed the interim EPA with the EU which means the country will continue to enjoy preferential duty-free  plus quota-free access of all goods to the EU market and in turn the EU also will have a 80% duty-free quota access to the Zimbabwe market for their manufactured products gradually implemented with full implementation in 2022. The issue of infant industry protection has not been made very clear and there seem to be a lack of long-term planning on Zimbabwe’s part here.

Zimbabwe is likely to lose that revenue base from the removal of all tariffs from trade with the EU and SMEs will be negatively affected by trade liberalization in the long-term. There is no country in the world that has developed without protecting its industry. With very few exceptions, tariff cuts and other measures of trade liberalisation have not brought about the anticipated economic growth and in a lot of cases have in fact brought economic collapse.

Zimbabwe should be looking more at strengthening regional integration and tapping into the huge potential of the regional trade as that will most definitely stimulate economic growth. Zimbabwe’s trade with the DRC and Botswana is positively skewed in favour of Zimbabwe as exports are tenfold more than imports and it is value-added exports. The concerning feature is that our government preaches value addition and beneficiation and at the stroke of a pen turn around and open up its markets duty-free to more advanced economies and in so doing exposing domestic producers to  unequal competition.

Zimbabwe has a significantly negative balance of trade with the world and that is where the argument against EPAs is stemming from. It is quite interesting to note that the EU urgently wants African countries to commit to the EPAs or face tariffs on goods from those countries that have not signed. The EU wants to counter the growing Chinese influence on the continent and it is beginning to look like they are coercing African governments to sign trade agreements which are unfavorable in the long run. The 100% duty-free quota access will give the EU firms the definite edge over competitors in particular the Chinese. The issue with the trade flow between the EU and Zimbabwe is not in the numbers but the detail. Exporting raw materials and importing the finished product will hamper innovation and development for a country like Zimbabwe. The country recently came up with a brilliant ZimAsset blueprint which clearly prioritises value addition and giving 100% duty-free access for EU finished products will just curtail domestic manufacturing industry potential and revival.

The recently concluded EU-Africa summit did touch on this delicate subject and the EU wants a free trade zone for goods with Africa as well as services. What this means precisely is that if a tender is put out for any of the service industries in the country, then companies from all over the EU will freely and equally compete for such tender with local  companies. Now this goes against infant industry protection which is why some African countries are holding out on signing the EPAs. Domestic African companies would find it very difficult to compete against the more established companies from the developed EU with some form of initial infant industry protection.

What we have here is a case of facts and figures, political grandstanding aside. The Zimbabwe government signed the interim EPA with the EU in 2009 and since then trade between the two has increased drastically. The trade is in fact skewed positively in favour of Zimbabwe at present. However looking into the detail of the agreements is crucial because it is the all-important small print that sets out our contractual rights and dilemmas, which tie us down and when you do not read the small print it is a life time braise. The elimination of export taxes will significantly impact the National Trade Policy (NTP) and Industrial Development Policy (IDP) which are meant to promote trade and industrial regeneration respectively. It will also negatively impact ZimAsset which advocates value-addition and beneficiation.

Empirical historical and modern day evidence clearly shows that it is nearly impossible for a developing economy like Zimbabwe to develop without some form of trade protection and subsidies. The signing of the EPA in the short-term and on paper might seem a positive step but in the long term is damaging to Zimbabwe’s developmental efforts. Documents and their small print are always difficult and confusing to read and hence why developed countries have specifically trained individuals to synthesise such and offer politicians and decision-makers an informed inference into their contents. These are not documents you just browse through and sign on the dotted line. They have far-reaching national implications and complications.

Evidence shows that trade liberalisation works only when it happens gradually and selectively as part of a long-term industrial policy. Given that Zimbabwe’s manufacturing sector is emerging from years of decline, it cannot be expected to compete against the mature industries in the more advanced regional and advanced international economies without an initial period of deliberate government protection. It is going to take time and more importantly investment in technological capabilities for manufacturing companies in Zimbabwe to absorb advanced technologies. Without this initial period of protection the sector is going to struggle to survive the international competition. The manufacturing sector in Zimbabwe requires government protection and subsidies at the initial stages so that they can absorb the technologies and learn to complete in the global market. The exportation of EU manufactured goods and services would directly expose domestic industry to this unfair competition.

When Zimbabwe signed the interim EPA in 2009 trade increased drastically between the two. The EU will be granted full duty-free access to the Zimbabwe market by 2022 and what some analysts have pointed out is that that is sufficient enough time for Zimbabwe industry to  build on its competitiveness and face the competition from EU goods and services. What is interesting to note is that all EU countries developed their economies on a backdrop of tariffs and subsidies throughout the 19^th century and 20^th century and exerting the sort of pressure they are on African countries to commit to these EPAs can only be detrimental to African economic transformation.  Zimbabwe is one country that should have learned from ESAP. Americans owe their high standards of living and international political dominance to the intellectual father of protectionism Alexander Hamilton and not to free market economists like Adam Smith. My argument is that Zimbabwe’s industry is not even in its infancy, it is still to be reborn and exposing it to EU competition by 2022 is just too premature and will impact negatively on the country’s economic progress. It is all high sounding talking about competitiveness but for Zimbabwe to build that level of competitiveness to compete with more advanced economies of this world it requires that initial level of protection and promotion.