When Zimbabwe was the freest economy in the world

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HARD as it may be to believe, Zimbabwe was once the freest economy in the world. Not in the dim, distant past, but just a few years ago. Between 2009 and 2012, the economy grew at 8% a year, albeit off a bombed-out base.

Zimbabwean Movement for Democratic Change (MDC) parliamentarian Eddie Cross, who is also an economist, says Zimbabwe’s brief experimentation with economic liberalism deserves far more attention from other countries in the region – including from Zimbabwe’s current rulers.

The miraculous turnaround happened between 2009 and 2013 when the MDC had control of the finance ministry, during a period when the ruling Zanu-PF was forced to share power with the MDC – an arrangement known as the Government of National Unity (GNU).

In 2009 then finance minister Tendai Biti stood up in parliament and in a 30-minute speech announced that he was lifting exchange controls and scrapping pricing and controls that had been implemented by the previous government. The result was an economic flowering the likes of which had not been seen before or since. “In that moment, Zimbabwe became the freest economy in the world,” says Cross in a recent article.

Shortages of fuel and food vanished and once-empty supermarkets were stacked to the roof. Where did the hundreds of millions of US dollars come from to make this possible? Inflation, which was doubling prices every few hours, fell to minus 7%. Zimbabwe’s inflation was the lowest in the SADC region over the period. Zimbabweans could scarcely recognise the country in which they were living. Entrepreneurs were making money hand over fist.

“What did the GNU leadership do to make these dramatic changes? They simply gave Zimbabweans economic freedom,” says Cross. 

This all came to an end in 2013 when Zanu-PF regained absolute control of the government and reverted to form with out-of-control spending and economic restrictions.

Prior to 2009, Zimbabwe’s economy had been devastated with rampant money printing and a world-record annual inflation rate of 231 000 000%, reached in June 2008. This came to an abrupt end when the country adopted hard currencies such as the US dollar and rand as the primary means of exchange.

The results were immediate and dramatic, and government revenues shot through the roof.

Cross says there is a lesson here for all Africa countries:  should SA follow the Zimbabwean model (indeed, should Zimbabwe follow its own example), a new era of economic prosperity would eventuate.

Cross told Moneyweb: “What authorities fear the most about relaxing exchange controls is that they will run out of foreign exchange. This is false, and Zimbabwe has proved it. We did away with exchange controls and prices stabilised. The great fear of running out of money to pay for imports was proven to be wrong. We had millions more dollars to pay for imports than we had before.

“South Africa has one of the most restrictive exchange control regimes in the world. The same with Venezuela. We could solve Venezuela’s problems in an hour.”

Under the GNU, entrepreneurs were free to import what they liked without restriction or the need for import licences.

It goes without saying that any discussion of Zimbabwe’s economy during the GNU recovery should be prefaced with a red label warning. A country analysis by the World Bank says the country’s GDP virtually halved between 2000 and 2008 due to a string of political and economic crises. This, says the bank, was “the sharpest contraction of its kind in a peacetime economy”, raising poverty rates to more than 72%, and leaving a fifth of the population in extreme poverty.

University of Zimbabwe economist Tony Hawkins pointed out that for all the positive outcomes of economic liberalisation, the country’s savings had been wiped out by hyperinflation and “dollarisation” of the economy. Since 2010, savings had turned negative. No country can grow without foreign investment – which has averaged around 17% of GDP between 2009 and 2015, well short of the 30% needed to create the millions of jobs the government has promised.

Reserve Bank of Zimbabwe governor John Mangudya noted in the bank’s 2013 annual report that economic activity had started to decelerate due to external shocks and concerns over the upcoming elections. The economic miracle was coming to an end. In a 2017 country report, the International Monetary Fund says Zimbabwe’s economy remained hidebound by a lack of structural reform and government spending that is crowding out the private sector.

Cross says President Emmerson Mnangagwa has started out by making all the right sounds “but has failed to change the situation on the ground where 95% of all Zimbabweans are. The messaging at Davos was designed for an elite audience and an impact was made, but that will not win him an election that is now just around the corner. That will be decided on real bread and butter issues.

“Today people are saying that the changes in leadership have changed nothing. We are still sleeping outside banks trying to get our own money out of the banks to feed our families.”

The official consumer inflation rate is 3%, though for most people it seems closer to 30%, adds Cross. “We know our salaries are buying less and what we have in our bank accounts is not US dollars, it is something else and shrinking.”

Zimbabwe government revenue

Source: Eddie Cross

Cross says there is a real chance the MDC might win the upcoming election in June. If so, it would be a fitting tribute to the party founder Morgan Tsvangirai, who passed away last week. “The question is, can the MDC ride that tiger? We might have to draw skills from outside the party.”

Some 70% of the new voters roll is under the age of 35, while the cabinet age is well over 60. Mnangagwa remains a minority figure in his party, having alienated and expelled many of the faithful. Zimbabwe could end up with a coalition government, though few in the MDC would embrace this with enthusiasm. Their memories of an obstructionist Zanu-PF during the GNU are still painfully fresh.

Whoever rules after the June election, Cross says Zimbabweans want a return to the freedoms they enjoyed between 2009 and 2013. Exchange controls need to be taken away from the Reserve Bank and returned to the commercial banks, import restrictions must once again be abandoned, and a local currency free from political manipulation must be reintroduced.

This article is taken from MoneyWeb. Ciaran Ryan is a Johannesburg-based freelance writer who has a background in finance and mining, having previously headed up a gold mining operation in Ghana.