Political Economy Analysis
Part of Zimbisa’s success can be attributed to the political economy analysis.
According to OECD, political economy analysis “is concerned with the interaction of political and economic processes in a society; including the distribution of power and wealth between groups and individuals, and the processes that create, sustain and transform these relationships over time”.
Political Economy Analysis is a tool that can support more politically viable development strategies, and more realistic expectations of the risks involved and what can be achieved. Using Political Economy Analysis we can better identify where the main opportunities and barriers for business environment reform exist, and how we as donors can use our programming to promote positive change. With this lens on, let’s have a look at Zimbabwe.
Zimbabwe initially recovered strongly from the hyper-inflation and economic contraction of the 1999-2008 decade (Gross Domestic Product almost halved) and in June 2015 the Reserve Bank of Zimbabwe phased out the Zimbabwe dollar to counter hyper-inflation, formalising the multi-currency system with dependence on the US dollar. The banking sector remains fragile, with low liquidity and continuing concerns over non-performing loans. Zimbabwe’s external debt is estimated at $7.1 billion, with the World Bank having the largest share (57%). Arrears are estimated at $1.8 billion.
Growth has recently slowed due to continuing political risk and vulnerability to climate change and terms of trade shocks, particularly the fall in the South African rand, Zimbabwe’s main trading partner. Growth declined to 3.2% in 2014 and to an estimated 1.5% in 2015. It is likely to be zero in 2016.
Political economy factors are important to the success of Public Private Dialogue. Political and business elites shape economic policy and understanding their incentives and motivations to engage in Public Private Dialogue are critical for success. Public Private Dialogueprovides government with a structured engagement platform and implementation capacity.
The July 2013 presidential and parliamentary elections saw President Mugabe win a seventh term in office with his Zanu-PF party taking 75% of parliamentary seats. Subsequently, President Mugabe sacked his Vice-President and seven ministers. He has been endorsed as the Zanu-PF candidate for the 2018 presidential election.
Political fragility has characterised Zimbabwean policy making and remains a significant constraint to inclusive, pro-poor economic growth – Zimbabwe is unlikely to attract significant levels of investment while there is political uncertainty and open hostility to foreign and white Zimbabwean-owned businesses. This is exemplified by the adoption of policies such as the Mining and Minerals Act and Indigenisation and Economic Empowerment Act that have further undermined investor confidence. Foreign and white-owned companies with assets of more than $500,000 are required to cede or sell a 51% stake to black nationals or the National Economic Empowerment Board. Mining companies such as Impala Platinum, Anglo Platinum and Aquarius Platinum and several foreign banks operating in Zimbabwe have had to comply with the law.
Zimbabwe’s investment climate has been severely damaged by poor macroeconomic policies, a lack of respect for the rule of law and a deteriorating business enabling environment, in particular, a failure to protect property rights and forced indigenisation of medium and large businesses.
The Government of Zimbabwe 2016 budget statement (“Building a conducive environment that attracts Foreign Direct Investment”) announced that the government would actively seek to create business friendly conditions, including improving ease of doing business and clarification of indigenisation laws. The Finance Minister stated recently that the Government is willing to negotiate its black empowerment laws with foreign companies. Yet the Government continues to allocate more than 80% of its budget to paying state employees and any serious re-allocation of resources to productive sectors of the economy seems very distant.
Reformist elements in Government, including the Office of the President and Cabinet and the Ministries of Finance and of Economic Planning and Investment Promotion have provided entry points for dialogue with the private sector to influence policy changes in the business environment. The responsibility for improving the business environment, however, lies with the Office of the President and Cabinet and not the more appropriate Ministry of Industry and Commerce and the Ministry of Economic Planning; and responsibility for clarifying indigenisation laws lies with the Ministry of Youth, Indigenisation and Economic Empowerment, whose Minister has recently announced an extra 10% levy on non-compliant companies.
A key factor in a more optimistic outlook has been Government re-engagement with the International Monetary Fund. The introduction of a Staff-Monitored Programme by the International Monetary Fund for Zimbabwe in 2013 and associated reforms including token payments on arrears to multilateral institutions have raised hopes for an improved investment climate. The International Monetary Fund sees the potential for renewal of institutional and operational capacity in the public sector, improvements in basic public services and reforms in economic policies. Policy action is needed to revive the Zimbabwean economy: fiscal discipline and improving the business environment are key priorities, in particular, the transparent implementation of the indigenisation policy and the introduction of bankable land leases to boost productivity and access to financing in agriculture.
Government Business Environment Reform Initiatives
Various ministries have been engaging constructively with reforms: the Ministry of Industry and Commerce is studying the duplication of functions across regulators and on the overall licensing regime; the Ministry of Economic Planning and Investment Promotion is reforming the Zimbabwe Investment Authority by creating a One-Stop-Shop for business; and the Ministry of Industry and Commerce is studying cost drivers affecting the competitiveness of Zimbabwe’s businesses, such as labour, power, water, finance, transportation costs, tariffs and trade taxes, taxation and information technology.
The 100 Day Rapid Results Initiative was launched in September 2015 with World Bank support. Working groups were formed to take action on Doing Business indicators under starting a business, construction permits, registering property, credit insolvency, paying taxes, trading across borders, protecting minority investors and enforcing contracts. Some improvements have already been introduced: registering a business has been reduced from 90 to 30 days; getting construction permits has been reduced from 448 to 120 days; property registration has been reduced from 36 to 14 days; and paying taxes has been reduced from 242 hours to 160 hours.
The second 100 Day Initiative runs up to May 2016. Action will be taken on starting a business, protecting minority investors, dealing with construction permits, registering property, enforcing contracts, resolving insolvency, paying taxes, trading across borders and getting credit.
Business environment reform continues to be successful in the challenging political and economic climate of Zimbabwe. It is imperative that we continue to understand the relationships between the state, market forces and civil society, and the processes that transform these relationships, through a thorough analysis of the political economy. This will ensure that we continue to identify how and where we focus our efforts to promote positive change in Zimbabwe and learn lessons for application to countries in similar circumstances.