Democracy Lab

The Breadbasket Is Still a Basket Case

Zimbabwe is bouncing back from recent history's most shocking economic slump. Or is it?

On July 31, 2013, Zimbabwe will hold regularly scheduled parliamentary and presidential elections, the first under its brand-new constitution. Robert Mugabe, the 89-year-old leader who transformed a country once known as the breadbasket of Africa into an African basket case, hopes to extend his 33-year-long hold on power. But standing in his way is Prime Minister Morgan Tsvangirai.

Tsvangirai is an imperfect leader who has committed many strategic errors, splintering the opposition movement in the struggle against Mugabe. He is also a man who, in defense of freedom and democracy, has survived numerous alleged assassination attempts, and suffered both jail time and torture. Importantly, Tsvangirai also understands the need for economic freedom. He knows that in order to prosper, Zimbabwe will have to restore respect for property rights, shut down money-losing state-run enterprises, and dramatically improve the business environment. Zimbabwe could do much worse than to elect him to the presidency.

Zimbabwe experienced a miserable decade between 1998 and 2008. During that time, its economy contracted at an annual rate of -6.09 percent. Next door, in Botswana and Mozambique, annual economic growth rates were 3.95 percent and 4.94 percent respectively. Zimbabwe's per capita income fell from $1,640 to $661. In contrast, incomes in Botswana increased from $3,705 to $4,769. In Mozambique they rose from $1,428 to $2,400. As a consequence of economic contraction, Zimbabwe's unemployment rate rose to an estimated 94 percent in 2008. While Zimbabwe rebounded somewhat from the low of 2008, its economy was 36 percent smaller in 2012 than it had been in 1998. The United Nations' Human Development Index (HDI) -- an approximate measure of a standard of living that is calculated on a scale from 0 to 1 -- saw Zimbabwe decline from 0.376 in 2000 to 0.345 in 2008. The cholera outbreak of 2008 that afflicted thousands and killed hundreds of people merely confirmed the obvious: Zimbabwe was a failed country.

While the immediate cause of Zimbabwe's economic implosion was the violent occupation and expropriation of white-owned commercial farms, the roots of the country's economic problems were political. Robert Mugabe became prime minister and, later, president of Zimbabwe in 1980. An avowed communist, Mugabe was explicitly committed to turning Zimbabwe into a one-party Marxist state. By defeating the white-minority rule in what was once known as Rhodesia, Mugabe came to see himself as the supreme leader and his party, the Zimbabwe African National Union (ZANU), as the only legitimate political force in the country. Opposing Mugabe was Joshua Nkomo and his Zimbabwe African People's Union party (ZAPU). Thus, in 1983, Mugabe unleashed the Zimbabwean military on Nkomo's supporters. At least 20,000 people died in that conflict. After the bloodletting, the ZAPU was forced to merge with the ZANU, forming the Zimbabwe African National Union -- Patriotic Front (ZANU-PF), and Nkomo became Zimbabwe's powerless vice president.

There is little doubt that, as a liberator of the black majority from white rule, Mugabe enjoyed considerable popularity. Throughout the 1980s and much of the 1990s, Zimbabwe enjoyed relative stability; the small, but economically vital, population of white farmers and businessmen flourished unmolested. An important proviso of the entente between the white minority and the black government was that the former would eschew meddling in Zimbabwe's politics. The economy continued to grow, albeit at a slow pace of 1.18 percent per year, and Zimbabwe's HDI score reached a high of 0.427 in 1990, similar to that of Rwanda and Ivory Coast today. By the late 1990s, however, Mugabe's magic started to wear off. Slow growth, rising unemployment, and corruption, which inevitably flows out of the exercise of absolute power, set in. In 1997, Britain discontinued its financial aid to Zimbabwe's land resettlement program, which bought white-owned farms and distributed it to black Zimbabweans, sighting corrupt practices that included awarding of the newly-acquired farms to Mugabe's cronies.

A new anti-Mugabe coalition emerged in 1999. The Movement for Democratic Change (MDC) consisted of disaffected urbanites as well as black farm workers. Importantly, it enjoyed the financial backing of white commercial farmers. The latter grew alarmed at Mugabe's increasingly vitriolic verbal attacks on the whites, whom the aging leader tried to scapegoat for Zimbabwe's declining fortunes. The leader of the MDC was a one-time Mugabe supporter and a ZANU-PF member, Tsvangirai. Tsvangirai was a popular and powerful trade union leader who became disenchanted with Mugabe's one-man rule as well as the corruption of the ZANU-PF party elite.

That year, Tsvangirai led the opposition to a proposed new constitution that would have given Mugabe more power and extend his rule. Crucially, it would have legalized confiscation of white-owned land without compensation. Zimbabwe's economy relied heavily on the highly productive white-owned farms for domestic food supply as well as export revenue. Tsvangirai saw that by expropriating the white farmers, Mugabe would undermine property rights and ruin Zimbabwe's economy. The referendum on the new constitution took place in February 2000; Mugabe's proposal was defeated by a 10-point margin.

With his supremacy challenged and hold on power threatened, Mugabe decided to destroy the opposition. Even though the law prohibited expropriation of farmland without compensation, Mugabe green-lighted the invasion of white-owned farms by thousands of his war veterans. Many whites were killed or fled and hundreds of thousands of black farm workers became destitute. He then used the armed forces and the police to dislodge hundreds of thousands of MDC supporters from urban areas by bulldozing their dwellings and chasing them into the countryside. Last but not least, Mugabe passed "indigenization" legislation that requires foreign-owned businesses to hand over at least 50 percent of their shares to black Zimbabweans.

The violent theft of white-owned commercial land had predictable results. Banks, which use land titles as collaterals when extending credit to farmers, were suddenly saddled with a lot of bad debt and the financial system froze. Most of the new occupants of the farmland had no knowledge of commercial farming and returned, in the best of cases, to subsistence farming. With much of the land uncultivated, agricultural production dwindled. Companies that processed packaged, and exported agricultural produce shut their gates. Zimbabwe's export earnings collapsed. Widespread shortages of imported goods, including food and clothing, quickly followed because of the lack of foreign currency.

Foreign direct investment dropped from a high of $444 million in 1998 to a low of $3.8 million in 2003. Since the start of the power-sharing agreement and the introduction of foreign currencies, foreign direct investment rose and stood at $400 million in 2011. With the election approaching, however, foreign investors have been growing increasingly jittery. Political stability and future of property rights, it must be expected, will go on being of major concern to any foreign companies looking at Zimbabwe as a potential investment opportunity.

With the tax revenue in a propitious decline, the government decided to pay its domestic and foreign creditors by unleashing the printing presses. What followed was the second greatest hyperinflation in history. Professor Steve Hanke of Johns Hopkins University estimated that hyperinflation reached 90 sextillion percent in 2008, with prices doubling every 24 hours. Only postwar Hungary experienced a higher rate of inflation, with prices doubling every 16 hours. The public's confidence in the Zimbabwe dollar evaporated. With the people refusing to use the domestic currency, the government was forced to change course. The Zimbabwe dollar was abolished and the people were permitted to use whatever currency they pleased. Today, the South African rand and the American dollar are widely used, though other currencies, such as Botswana's pula, are also in circulation.

Under pressure from economic collapse, hyperinflation, Western sanctions against the top ZANU-PF leadership and their commercial interests, and diplomatic maneuverings by the neighboring African countries, Mugabe agreed to share power with Tsvangirai, who became prime minister. Tsvangirai's MDC received half of the seats in the cabinet. The rest was filled by members of the ZANU-PF. Crucially, the 2008 power-sharing agreement allowed the ZANU-PF to maintain control over the military and police. At previous elections, Mugabe used both organizations to intimidate human rights organizations, journalists, and ordinary citizens.

The ZANU-PF also retained control of the country's enormously valuable natural resources. The South African, Chinese, and Russian state-owned or government-linked corporations have obtained valuable mineral concessions in platinum, diamonds, gold, chrome, and nickel. Some of the profits from those mining operations are channeled to the ZANU-PF, which uses the money to buy the loyalty of the police and military. With billions of dollars at stake, there is real danger that, should the ZANU-PF lose the elections, it will use force to stay in power.

Meanwhile, the ministries controlled by the MDC have seen some real progress. Consider the Ministry of Education, which is run by David Coltart, an MDC politician. In 2008, prior to the power sharing agreement, the country saw only 28 full teaching days. The teachers were on strike, because they were paid in a worthless currency or were not paid altogether. Some 98 percent of all schools were shut and 90,000 and exams from the previous year were still unmarked.

There was no money for education in the government's budget, and the textbook-to-pupil ratio was 15-to-one. Coltart allowed parents to pay performance incentives to teachers whose salaries, when they were paid, were a measly $100 per month. Today, even the lowest paid Zimbabwean teacher can expect to earn over $300. While it is not much -- a teacher in neighboring South Africa has an average salary of $1,800 a month -- it is a great improvement from 2008. The teachers returned to work. Coltart also set up an education transition fund that allowed Western aid to bypass Zimbabwe's government and help finance the education system directly. He broke up a domestic textbook publishing cartel and held an international tender that brought the cost of textbooks down to 70 cents from five dollars. Zimbabwe's textbook-to-student ratio is now one-to-one, the best in Africa.

Since the power-sharing agreement, Zimbabwe has experienced relative political stability. Not surprisingly, growth has picked up. Between 2009 and 2012, economic growth has averaged over 7 percent and GDP amounts to just over $6 billion. Some of the growth, no doubt, simply represents a rebound from a thoroughly depressed state of affairs in the preceding decade.

But even though things are looking up, a fundamental question lingers: Can high growth be maintained as long as Zimbabwe remains one of the least economically free countries in the world? In 2010, Zimbabwe came in 142nd out of 144 countries surveyed in the Fraser Institute's Economic Freedom of the World report; in 2013, it came in 172nd out of 185 countries surveyed in the World Bank's Doing Business report; 132nd out of 144 countries surveyed in the World Economic Forum's Global Competitiveness Report, etc.

Craig Richardson, associate professor of economics at Winston-Salem State University in North Carolina, has recently analyzed the sources of Zimbabwe's economic growth in a 2013 Cato Institute study entitled "Zimbabwe: Why is One of the World's Least-Free Economies Growing So Fast?" According to Richardson, Zimbabwe's growth is largely artificial, and he gives three reasons why. First, two-thirds of Zimbabwe's nominal GDP growth was the result of increases in government expenditures, augmented by hundreds of millions of dollars in International Monetary Fund grants and Chinese loans. Second, rich Western countries dramatically increased their infusions of "off-budget" grants to Zimbabwe, and this foreign aid now accounts for nearly 9 percent of its GDP. Third, Zimbabwe's economy is becoming increasingly dependent on the production and export of raw mineral commodities, which have experienced rapid worldwide price hikes.

In addition, Richardson has calculated that between 2008 and 2011, for every $1 paid off to international lenders, Zimbabwe took on an additional $11 in new debt.

That is not a solid base on which to build long-term growth and prosperity. What Zimbabwe desperately needs are structural reforms including tax simplification, labor and product markets deregulation, and privatization of loss-making state-owned enterprises. Above all, the Zimbabweans need to find a way to restore the rule of law and a respect for property rights. For decades, Zimbabwe's rulers have benefited from government monopolies and parastatals, sale of permits and licenses, and outright theft and fraud. All the while, the majority of the Zimbabwean people are suffering. That is why Mugabe's party can never be a reliable partner in reforming the country's economy. Only a clean break with the past will return Zimbabwe on a path to a sustained rate of high growth.



Prepare for the Worst

It's already time to start planning for what happens if the Middle East peace talks fall apart.

Last month in Jerusalem, I sat in on a small conference organized by the Yesha Council, the central organization of Israeli settlers in the West Bank. A featured speaker was Naftali Bennett, leader of the far-right Jewish Home party and minister of economy, who made a simple point: The Palestinian-Israeli conflict is not solvable.

To underline his point, Bennett spoke of a friend from military service who suffered a shrapnel wound close to his spine -- "near his backside," Bennett said, in a line that immediately made headlines. The doctors told his friend that they could operate, but he'd run a serious risk of paralysis to his lower limbs. Alternatively, the friend could learn to live with an unpleasant but manageable problem. 

The medical choice was clear, Bennett said. And the choice facing Israel was clear as well: Rather than try to solve an unsolvable conflict with the Palestinians and risk catastrophe, Israel should opt for limited and practical measures to manage the reality in the West Bank. The death of the two-state solution may be unpleasant for can-do Westerners to acknowledge, he argued, but the depth of the conflict and the number of settlers now living in the West Bank precludes a peace agreement.

It's a good story, but Bennett's parallel is, in fact, wrong. And yet Secretary of State John Kerry's motivation for pushing to revive Middle East peace negotiations was actually similar. Kerry reasoned that if the two-state solution is not achieved soon -- perhaps in the coming two years -- it might never be possible. Soon, in other words, Bennett and others who make the same point would be right.

While hoping for the best, and striving to make it reality, we should also prepare for the worst. While Kerry must lay the groundwork for giving the resumed peace talks the best chance of success, he must also plan for their failure. If the negotiations collapse, there is a danger that people will take the secretary of state at his word and conclude that the door to peace is finally shut. Whatever happens at the negotiating table, Kerry must ensure that he doesn't help convince people that Bennett, after all, was correct.

The risk of failure is real. The Israelis and Palestinians are far apart on the most important issues and, moreover, each of the sides suspects the other has entered the talks with bad intentions. Trust is hard to come by these days in the Holy Land: Palestinian President Mahmoud Abbas fears that Israeli Prime Minister Benjamin Netanyahu is only interested in talks for the sake of talks, in order to ease international pressure on Israel. Netanyahu suspects that Abbas, faced with a Palestinian society where most oppose a return to the negotiating table, has entered the talks just to avoid blame for Kerry's failure, and will continue to play the blame game during the negotiations. 

The bad news is that they may both be right. Kerry's creative ambiguity, which was necessary to get the talks off the ground, will apparently entail him enunciating terms of reference -- notably referring to the 1967 borders as a starting point for negotiations. This will permit each side to voice its reservations about these parameters before entering into negotiations. The sides have agreed to disagree, in other words, but they have agreed to do so in the same room. 

To avoid the blame game, Kerry seems to have wisely insisted on the secrecy of the talks. Maintaining the discreet nature of the negotiations throughout their duration -- and even if and when they stall -- will help prevent the parties from backsliding into blame attribution. In general, the less hype there is around the talks, the less media frenzy is likely to emerge around their conclusion. The less the United States apportions failure or blame, the less credible the sides' accusations will be.

If the talks do collapse, will Kerry find the peace process back to where it started -- or could the situation be even worse? Many fear that unmet expectations may lead to an outbreak of violence, and point to the outbreak of the Second Intifada in the wake of the much-hyped 2000 Camp David summit as evidence. In the ensuing bloodshed, more than 4,000 people lost their lives over the next four years.

But those drawing parallels between today and the Second Intifada risk learning the wrong lessons from history. Much of the events of 2000 had to do with internal dynamics and decisions of both parties before the collapse of peace talks. The Palestinian organizations -- including the grassroots militia of Yasir Arafat's Fatah Movement -- were preparing for violence long before the disappointment of Camp David. And the Israelis were already preparing a forceful response to Palestinian violence -- a response that may have helped turn the conflict into a full blown and horrifically violent intifada.

Today, the circumstances are different. Abbas is not Arafat, and the Palestinian security organizations have been thoroughly reformed under the leadership of former Palestinian Prime Minister Salam Fayyad. At present, military cooperation between Israelis and Palestinians in the West Bank is good, and is supported by an ongoing U.S. effort to maintain security. On the Israeli side, too, responsible and cool-headed generals now command the forces in the West Bank -- men who are well aware of the dangers of over-reaction.

Yet even if a failure of negotiations does not lead to an outbreak of violence, it could lead to renewed demands on the Palestinian side for dissolving the Palestinian Authority. Palestinians are weary of the peace process, and there is real risk that they will increasingly prefer dangerous (and unrealistic) aspirations for a one state "solution." There is also the risk of growing demands in Israel to annex less inhabited parts of the West Bank to Israel proper: Naftali Bennett, for example, has called for annexation of "Area C," which includes all the Israeli settlements. Most in the Israeli political system still oppose a move along these lines.

Staving off worst-case scenarios is possible, but requires close attention -- even as Kerry's energy is devoted to giving his effort the best chance of success. The secretary of state will also have to lay the groundwork for keeping the possibility of future negotiations alive, even if this round of talks stalls. To do so, Washington should prepare steps that fall short of a final-status agreement. The United States, and even Israel, may, for example, recognize the state of Palestine even before agreement on its borders or its relations to Israel is finalized. This suggestion is less outlandish then it might seem: Several Israeli politicians, including the hawkish former Deputy Foreign Minister Danny Ayalon, suggested doing just that. Doing so would help protect some degree of Palestinian self-rule from rash steps in the wake of failure.

Further interim steps, while undoubtedly difficult, would go a long way for providing the peace process with a safety net. Israel, for example, may return to the idea of limited disengagement in the West Bank. Under such plans, Israel would pull out of most of the West Bank without a final status agreement, shaping its own eastern border. The authority in the vacated area would then presumably fall to the Palestinian Authority, just as it did in the Gaza Strip did when Israel evacuated in 2005. It is important that such steps be coordinated with the Palestinians as much as possible -- rather than unilaterally implemented, as they were in 2005 -- so that they encourage rather than preclude future negotiation.

Skeptics (like me) have been wrong before. This round of peace talks may succeed, and we should wish wholeheartedly for their success. Netanyahu has the political backing -- from opposition parties, if necessary -- to make bold, historic decisions. Abbas may prove skeptics wrong and demonstrate courageous leadership in the face of difficult circumstances.

And yet, even while wishing the parties Godspeed, we should also think seriously about the possibility that the talks may fail. Washington should make sure that the ultimate winners of this peace effort are not those who oppose peace.

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