The key issues", In Finance and the Real Economy ed. Yilmay Akyuz and Gunther HeldSantiago:
Zimbabwe's Economic Structural Adjustment Programme ESAPlaunched inwas meant to herald a new era of modernised, competitive, export-led industrialisation. But despite a high-performing economy in its first decade of independence, the country now appears firmly lodged in a quagmire of mounting debt and erratic growth in the wake of five years of ESAP-mandated reforms.
In a short time, ESAP's World Bank-inspired reforms has ripped into the existing economic and social infrastructure, shifting the focus of many mass-oriented development social programs away from redistribution towards management of defined and limited, even declining, public resources.
Now, as Zimbabweans await the unveiling of a follow-on, second five-year program, rising popular displeasure with ESAP has brought pressure to bear on the government and its international backers for the re-evaluation of what has proven in practice to be a treacherous model of development.
When ESAP was first introduced, the government claimed it was the only alternative to continued production bottlenecks, stagnant local demand and a worsening unemployment problem that threatened to become politically troublesome. Zimbabwean industry was an easy convert, but the country's political leadership was less easily swayed.
In the s, Zimbabwe had been a star performer in Africa in the provision of social services and in the reconstruction and development of its public infrastructure. Average life expectancy was on the rise; childhood mortality was down, and other measuring sticks such as the literacy rate and the technical skills capacity were encouraging.
Moreover, most of this social growth was financed by government without jeopardizing relative macroeconomic stability. But from the mids the ruling party maintained that the future development of the country would depend upon the leading participation of the local private sector and capital inflows from overseas.
So it did not come as a shock when the first phases of ESAP were announced, starting with government's budget statement in July What did come as a surprise was the rapidity with which the program undermined the relative stability of Zimbabwe's social economy. Zimbabwe's adjustment program contained the usual collection of Bank-inspired reforms - trade and currency de-regulation, devaluation of the Zimbabwe dollar, movement towards high real interest rates, the lifting of price controls, chopping of "social spending" and removal of consumer subsidies.
All were standard ingredients of "liberalisation," as were the Bank's and IMF's increasing emphasis on reduction of the government deficit, civil service reform and shedding of public enterprises. And finally, there was the string of large loans and credit facilities from the Bank, the IMF and international donors, aimed at supporting the country's balance of payments and government's plans for substantial private sector infrastructural development.
Zimbabwe would spend its way into a new free market on borrowed money. Government and its bankers said the new investment would be focused on modernizing the manufacturing sector which would enable the country to compete in international markets and earn the hard currency needed to pay back ESAP's underpinning foreign loans.
The government admitted this risked higher unemployment and higher consumer prices in "the short term," but Zimbabweans were promised a rising real standard of living, long-term employment expansion and a modern, growing, internationally-competitive economy.
But in a country where local production was highly integrated and often efficient, and where a large state provided a range of quality social services, the reforms represented more peril than promise for most.
An experiment gets out of control As it happened, neither the market reforms, nor the different measures that were meant to offset their effects on the most vulnerable, went according to plan.
At the same time as parts of the Zimbabwean private sector displayed worrying signs of deindustrialization, and the public debt spiralled upwards, the standard of living of most Zimbabweans was also plummeting to levels not seen in 25 years.
The initial economic shock treatment undertaken with ESAP's launch in the early s hit the business sector and ordinary Zimbabweans very hard, and the impact of these measures was greatly exacerbated by the severe drought of the early s. Inafter two consecutive poor rainy seasons, the economy contracted by at least 7.
One result was a sharp decline in average real wages. It was the beginning of a trend that would see, by the mid s, average real earnings fall to the lowest levels since the early s.
ESAP, one study concluded, was quickly bringing the Zimbabwean working class to the brink of widespread destitution. In the rural areas, the majority population was often forced to depend on government food aid.
By the end of the drought in Novembermore than half the population of the country was receiving some form of drought relief assistance from government. However, the return of rains in did not improve the situation, making it clear that the ESAP reforms themselves were the leading factor in undermining ordinary people's standard of living.
Loan agreements emanating from ESAP have stretched the country's foreign and domestic debt to unmanageable proportions. And ESAP's deficit-cutting fetish has led to the state's slashing of real per-capita social spending throughout the s, and the marked undermining of local industry by government's greater - not smaller - role in one part of the private sector, financial markets.
Forced to borrow heavily from local markets to finance reforms and service the deficit, government ended up distorting financial flows.
Heavy public sector demand crowded-out private sector borrowing, and kept real interest rates punishingly high. The combined outcome of chaotic fiscal policy and increased competition from imports is the development of a worrying pattern of deindustrialization, amid a pattern of spiralling government deficit and debt.
Social cuts and their consequences The primary response to the continued government deficit and climbing debt servicing was increased pressure to cut real spending on public services, including the cost of overall government administration itself. In this regard, it soon became clear that the fine attention to technical details which were part of the economic reform process was missing when it came to devising, implementing and reforming programs involving the "social" aspects of adjustment.
Moreover, there was a shift in emphasis in the redesign of the state's social programs, away from a concern with issues of equity and access, towards a system of management driven primarily by the problem of how to administer the supply of services given defined, limited resources.
The negative social and economic consequences of this shift were immediately and abundantly clear for ordinary Zimbabweans.In this context, financial liberalization represents a key strategy, which has an impact on economic growth and development, vulnerability to financial crises, and domestic financial and capital market development.
next article in issue: financial development and economic growth: assessing the evidence.
next article in issue: financial development and economic growth: assessing the evidence financial liberalisation, stockmarkets and economic development. Financial development and liberalisation have a favourable impact on financial instability with the effects of financial liberalisation being greater than the effect of financial development, while economic growth has an opposite effect.
An important objective for each Member State of the Southern African Development Community (SADC) is to achieve sustained Economic Growth and Sustainable Development so that people in the region have better living standards and employment opportunities..
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