{"id":9995,"date":"2022-09-19T00:51:21","date_gmt":"2022-09-18T19:21:21","guid":{"rendered":"https:\/\/aayushbhaskar.com\/?p=9995"},"modified":"2022-09-19T00:58:43","modified_gmt":"2022-09-18T19:28:43","slug":"zimbabwe-economic-disaster","status":"publish","type":"post","link":"https:\/\/aayushbhaskar.com\/zimbabwe-economic-disaster\/","title":{"rendered":"Zimbabwe: A Man Made Economic Disaster","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"

Not too long ago, Zimbabwe was in the news for all the wrong reasons. Political instability, a state-sponsored class struggle along racial lines & hyperinflation were all the makings of a country in disarray. <\/p>\n

Fast-forward to the present day and the picture is completely opposite. There is political stability in the country with the return of representative democracy, the society is less divided than it was at its peak and the economy has rebounded.\u00a0<\/p>\n

While politics and sociology aren’t our remits, it is interesting that after hitting 800%+ annual inflation in 2020, the country was just praised by the World Bank<\/a> for a strong recovery in base economic fundamentals.\u00a0<\/p>\n

To find out how Zimbabwe accomplished this, we take a deep dive into all things macroeconomics in a bid to learn more.\u00a0<\/p>\n

1. The Lost Years \u2013 1997-2009<\/h2>\n

1.1 Humble Beginnings\u00a0<\/h3>\n

\"Zimbabwe<\/p>\n

– Zimbabwe \u2013 GDP Growth Trend<\/p>\n

Zimbabwe, formerly Rhodesia, is a landlocked country in Southern Africa that achieved rule by the majority in 1980 after a long civil war between the ruling white minority & the majority black indigenous population. <\/p>\n

The Lancaster House Agreement, which ended the war, transferred power to black majority rule while preserving the rights to liberty of the white landowners who, as generational residents, identified themselves as Africans & chose not to return to Britain.\u00a0<\/p>\n

For the next 17 years, the country enjoyed relative stability from a political and social perspective although economic boom and bust cycles continued, which is common for developing countries with a high reliance on primary goods. Thus, international prices of minerals and crops dictated the relative economic performance of the country or the recurrent drought that would severely hamper food production altogether.\u00a0<\/p>\n

1.2. Black November 1997<\/h3>\n

In November 1997, following a severe stock market<\/a> crash, the weak economic footprint spilled over into massive civil unrest. Key amongst those striking against severe economic hardships were the veterans of the country’s civil war.\u00a0<\/p>\n

It is important to mention here that by this time, the then President, Mr. Robert Mugabe, had been in power for 17 years. As the formal rebel leader who had fought on the battlefield and achieved the political settlement that led to majority rule, he was a widely respected figure. <\/p>\n

Under his leadership, the war veterans had given up arms and there was a considerable effort made to reintegrate them into the economic apparatus but with limited success given the country’s resources.\u00a0<\/p>\n

It was then from a position of weakness & a perceived threat from his own power base that President Mugabe announced an economic assistance program to appease the war veterans<\/a>. The only problem was that the program would cost 3% of GDP in the form of a one-time bonus payment!\u00a0<\/p>\n

1.3 Troublesome 98 & 99<\/h3>\n

The country didn’t have the funds for the bonus payment. They first tried to raise the same through a levy that was vehemently opposed by the business community. <\/p>\n

Next, they started borrowing, which put pressure on the Zimbabwean dollar. The country’s finances continued to be drained as it joined a multi-nation campaign in 1998 for the second Congolese war. 1999 brought a drought & official defaults on sovereign debt obligations.\u00a0<\/p>\n

1.4. Land Reform<\/h3>\n

With the economic collapse bearing down & suggesting immense political upheaval, the Government diverted the attention of the masses by initiating a land reform act, whereby land held by white settlers was to be redistributed to black farmers. Mass unrest followed, with white settlers fleeing the country & international condemnation leading to sanctions against the country itself.<\/p>\n

The impact on the economy was devastating, as sanctions dried up the prospect of foreign direct investment. On the other hand, agricultural production plummeted as black farmers didn’t have the means or expertise to undertake large-scale mechanized farming and resorted to low-yield subsistence farming instead. <\/p>\n

This is because most lands had been violently grabbed, and the new black \u201cowners\u201d lacked the proper documentation to approach banks for working capital<\/a>.<\/p>\n

1.5. Hyperinflation\u00a0<\/h3>\n

The drop in economic output from sanctions and the impact of the violent land reform took a further toll on public finances. The Government resorted to borrowing what it could, but largely printing money. <\/p>\n

The impact was that from 2004 to 2009, the country was caught in a deep hyperinflationary spiral with inflation peaking at 6,600% by some estimates. The Zimbabwean dollar lost all credibility and the Government resorted to implementing price controls. This only exacerbated the problem as the populace resorted to the informal economy.\u00a0<\/p>\n

2. The Decade of Dollarization<\/h2>\n

2.1. First Steps<\/h3>\n

In 2009, the three political parties in Parliament agreed to set up a Government of National Unity to undertake painful economic reforms while hoping that political unity and stability will create the ideal environment to help restore the economy.\u00a0<\/p>\n

The first step that the new Government took was in February 2009 when they legalized foreign currency transactions in the domestic economy. The impact was that by April 2009, the Zimbabwean dollar had lost all credibility and was suspended entirely. The US$ became the official currency for Government transactions.\u00a0<\/p>\n

2.2 Initial Impact<\/h3>\n

The impact of this move was extremely positive. Inflation reversed, the banking system stabilized & economic growth began. However, there were negative consequences as well:\u00a0<\/p>\n