Reports from Zimbabwe suggest that Robert Mugabe’s dictatorial reign may be nearing its end: Mugabe may soon be forced out, paving the way for a new government consisting of elements of his own ZANU-PF and the opposition party Movement for Democratic Change, led by Morgan Tsvangirai.
If and when this happens, the new government will have to pick up the pieces of a shattered Zimbabwean economy. Zimbabwe currently ranks last of 130 countries in the Fraser Institute’s annual Economic Freedom of the World report. To get the economy on the right track to growth, the new government might consider the following steps:
1. Stabilize the currency situation
With runaway inflation approaching 2,000 percent, Zimbabwe is sure to face some difficulty getting ordinary Zimbabweans to trust the currency, much less the financial markets. But Zimbabwe will not have time to lose and currency stabilization is a vital step toward stabilizing the economy as a whole. Pegging the Zimbabwean dollar to a foreign currency might not send a strong enough signal to reassure the markets, because abandoning the peg in the future is relatively easy. The government should therefore adopt the South African Rand or the Euro as its national currency—since South Africa and the European Union are Zimbabwe’s main trading partners—and the possession, use, and exchange of other currencies should be freely permitted. Since most Zimbabweans have already seen their savings eaten away by inflation, and have either turned to foreign currency or been reduced to barter, the switch should be relatively easy to accomplish.
2. Liberalize trade
Zimbabwe’s weighted average tariff rate is almost 19 percent, with additional non-tariff barriers including import and export bans. Customs officials are corrupt and inefficient. However, Zimbabwe also lacks strong domestic industries seeking protection from overseas competition—an unintended consequence of Mugabe’s mismanagement of the economy. The government should exploit that weakness and immediately abolish all tariff and non-tariff barriers to trade.
Doing so would mean ignoring the advice of Oxfam and Zimbabwe-based Seatini, both of which oppose unilateral trade liberalization and favor protecting infant industries. Historical evidence suggests that domestic protectionism tends to encourage inefficiency and increase the cost of consumer goods and services, rather than encouraging cub industries to become globally competitive.
3. Reform taxes
The government should abolish the existing plethora of taxes and eliminate all subsidies, thus sending a powerful signal that Zimbabwe is committed to establishing a friendly and non-discriminatory business environment. To raise enough revenue to pay for the state’s most basic functions—primarily maintenance of law and order—the government should instead introduce a low-rate and broad-based consumption tax. Consumption taxes are relatively neutral with respect to altering behavioral patterns and spending habits, leading to minimal misallocation of resources. Along with the economy, the provision of public services has totally collapsed in Zimbabwe; the government cannot be expected to reintroduce those public services in the short run. Thus, radical tax reform is all the more achievable—and a radical tax overhaul could substantially increase future revenue without increasing the tax rate.
4. Secure property rights
Securing private property is a fundamental requirement for economic growth. Unfortunately, over the past seven years Mugabe has severely undermined Zimbabweans’ property rights. Pre-Mugabe Zimbabwe had a long history of protecting private-property rights, so returning to the status quo ante should be possible. Zimbabwe is likely to rely on agriculture as the main source of revenue and employment for the foreseeable future. Land reform will thus have to be revisited. Mugabe’s expropriation of white farms was an unmitigated catastrophe; the collapse of agricultural production clearly demonstrates the need to end the state-sponsored subsistence farming experiment and reconstitute large-scale commercial farming. Such a shift cannot be achieved without restoring at least some of the land to white farmers and compensating them for expropriation, perhaps with bonds that would mature in 15 or 20 years. Nicaragua undertook a similar and moderately successful compensation scheme after the end of the Sandinista rule. The rest of Zimbabwe’s government-owned agricultural land ought to be auctioned off, with small-scale farmers who already occupy the land among the potential buyers.
Of course, these four steps will be just the beginning for Zimbabwe. Additional reforms must include liberalization of the labor market and of business regulation. With unemployment approaching 80 percent, Zimbabwe will need to create new jobs, and quickly. For the private sector to recover, obstacles to entrepreneurship must be reduced: currently it takes 96 days to start a business in Zimbabwe (as opposed to 24 hours in Hong Kong, and a world average of 48 days). To maximize foreign investment, exchange-rate restrictions and capital controls should be eliminated. And just as most Iraqi debt acquired by Saddam Hussein was forgiven after the 2003 U.S. invasion, the new Zimbabwean government should request that public debt acquired by Mugabe’s regime be forgiven on “odious debt” grounds. But just as the first step to recovery is admitting you have a problem, a new Zimbabwe would do well to begin by repudiating Mugabe-era economics—and taking the above four steps to get rid of any lingering traces of Mugabe’s failed policies.
