Observing the Economic Fundamentals

Economics is a strange subject for academics – so much of it involves human behavior and even psychology and sometimes it seems as if there is no real consensus in the field as to what should be done about the wide variety of problems that confront our societies today.

Even with all our sophistication and knowledge and the vast amount of information that is available to practitioners, we still seem to make fundamental mistakes and in the process, plunge our countries into one crisis after another. The financial crash in the USA not long ago is a prime example.

The modern debate about economics really began after the Second World War and sought to unravel what had happened in the global depression from 1930 onwards. This massive collapse of world markets led to millions losing their jobs and was only ended by the Roosevelt policies of social support and State expenditure on a massive scale, although the Second World War helped by forcing the USA and other countries into overdrive.

The debate led to the creation of the European Union and the Multilateral Financial Institutions of the IMF and the World Bank. But even these historical developments failed to restore order to the social science of Economics. But it did provide the framework, within which States can manage their affairs and in the process, enjoy growth on a scale that has never been seen before in history.

China is the prime example. In 1974, they were coming out of nearly 30 years of radical social and economic transformation which had plunged the Chinese population into poverty and isolation from the world economy. This was a country with a history going back thousands of years of sophisticated government and a well-educated elite. The epicenter of this state failure was the “Great Leader” Mau Tse Tung whose authority and control was absolute.

Then he died and the Red Army took control and installed a little known academic, Deng Zhou Ping, who took over the reins of power. Deng enunciated his policies in simple phrases such as “I do not care what color your cat is, does it catch mice?” It was pragmatism writ large in every way. However, what it disguised was in fact a highly sophisticated economic and business program that literally took China by the throat and plunged it into the global economy.

Marxist economic theory was abandoned in favor of the full observance of the basic economic fundamentals that have become accepted as the essential underpinning policies of sound macro and micro economics. They maintained strict fiscal discipline, gave their business managers the responsibility and the right to make market driven decisions and they opened to the world economy and modern technology. I can remember the days when Chinese delegations visited our factories with cameras in their hands, noting every aspect of how we did things. If a new product came onto the market – the Chinese bought a copy and took it home to be dissected and analyzed and improved – and then produced in vast quantities for export.

Our banks, loaded with the savings of centuries of market economic activity found the Chinese a ready market for surplus funds. They discovered that the Chinese were disciplined borrowers and in turn they responded by lending the Chinese trillions of dollars to build factories and infrastructure at a break neck speed. Cities sprung up at such a pace that if you were away from your home for a year, you could hardly find your way when you got back.

The result – 40 years of unprecedented growth raising Chinese GDP per capita to middle income status – in 1975 they were on average poorer than the average Zimbabwean. Still a long way behind the established developed countries and the USA, but because of the population size, completely dominant in many sectors of the world economy.

Looking back, you must acknowledge that Germany and Japan were first to discover the power of the market and sound economic policy. Even today these countries, although they are what is now known as “mature” states, are still the biggest exporters in the world and global leaders in technology and manufacturing. Now we also have the Asian Tiger States which are emulating China and Japan and are themselves becoming economic power houses which must be taken seriously. India, long the country best known for its teeming millions in absolute poverty, is now the fastest growing economy in the world.

And what about Africa? We have now been largely independent of our colonial masters for over half a century and those who claim our failures are the responsibility of our erstwhile masters are simply talking nonsense – we are responsible for the failure of Africa to take advantage of its resources, human and physical, and the opportunities that we have been given since we took control of our own affairs.

Zimbabwe is the prime example of failure, in every way. In 1980, we took over a small but quite sophisticated and diversified economy and virtually no debt. Our leadership was the most qualified ever to take control of a country with 17 PhD graduates in our first Cabinet – and these academic qualifications were not bought over the counter but earned in great universities like Princeton in the USA.

We inherited a country which seemed to have everything – a good climate, rich soils, good basic education and a sound, honest administration. We were not only self-sufficient in nearly all foods, but at prices well below regional levels. We have some 40 minerals in significant quantities – potentially we are globally significant producers of iron ore, gold, platinum, chrome, nickel, coal and a multitude of other things. We have great tourism potential and are the economic and political hub of the southern African region with neighbors who have also got huge potential and are significant players in many fields.

But today, unlike China, Zimbabwe has gone backwards and has the poorest population in Africa outside of perhaps Somalia. Our social statics are littered with world records – not of achievement but of failure – child and mother mortality and death rates, the highest ratio of orphans to population in the world and we are not a country at war although we have the statistics that say that. We have not serviced our debts for 20 years and our record of human rights abuse includes genocide and politically motivated killings.

What has gone wrong. The primary problem has been that our President has, like King Canute, taken on the belief that he can walk on water and command the sea to go backwards. The result has been some of the most spectacular abuses of macro-economic principles ever seen. A Reserve Bank that printed so much money that eventually a Zimbabwe dollar, worth US$2 in 1980, collapsed to the point where a billion dollars would not buy you a loaf of bread.

Now we are headed for a budget deficit that could exceed half our budget. Last year it was 30 per cent of all expenditure and 44 per cent of income. The resultant collapse will be just as spectacular. Nearly every country in the world, including all the former Communist States have learned that you cannot violate these fundamentals and expect to get away with it, but not so in Zimbabwe. There will be a price to pay – the tragedy is that it is the people who will pay and pay dearly, while their leaders play.

Eddie Cross
Harare, 26 August 2017