Destruction of a vibrant economy

Zimbabwe a model SA should aspire to says Zuma

None so blind as those who don't want to see...

Moneyweb - Magnus Heystek

8 May 2017

If ever there was an opportunity for a bunch of eager economists to conduct a real-time experiment of the effects of political decisions on a country’s economy, it would be with our neighbour Zimbabwe.

Here is a country we are mostly familiar with as its unravelling has been played out on our television screens and in other media. It has a similar colonial heritage as South Africa — but without the added damage of separate development. It became a black majority-ruled country in 1980 and therefore has a head start of 14 years of self-rule over its much larger neighbour South Africa.

For a while Zimbabwe was the poster child of black rule in Africa. At one stage, in the middle of the 1980s, I can recall writing articles about how residential property prices were much more expensive in Harare than in Johannesburg or Cape Town.

Zimbabwe's economy was booming; it was known as the “bread-basket of Africa” and it was attracting massive foreign investment into its diamonds, gold and precious metals industries. The Zim dollar was stronger than the rand for most of this time up until the late Nineties.

It was a period of rising prosperity for Zimbabweans compared to South Africa, which was going through its pre- and post-1994 general election convulsions.

This all changed in the year 2000 when it looked like president Robert Mugabe might possibly lose the upcoming general election and he embarked on his disastrous and destructive policy of “radical economic transformation”. Mugabe turned his focus on white-owned farms, so-called white-owned monopoly capital and set about, over a period of 17 years to destroy what was once a very vibrant and prosperous economy.

In Zimbabwe it was just called by another name, namely “indiginisation” but the end result has been the same.

In the process he and his Zanu-PF party gave foreign investors, especially from Europe and North America, a big fat finger, often telling them to go and “jump in the lake”, Mugabe’s actual words on many occasions.

Sounds familiar, doesn’t it?

Today Zimbabwe - despite the delusional claims by Mugabe at the World Economic Forum for Africa last week that it is “the second most sophisticated economy in Africa” - is a country in ruins, now officially the poorest economy in Africa, with a GDP per person of only $200.

GDP per capita has dropped by 40% since 2000, at one stage inflation was 500 billion% and unemployment is close to 80%. Almost 90% of the country’s budget is used to pay wages and salaries of civil servants.

Many parts of the country have returned to a type of barter system and according to some reports goats, cattle and sheep are now again being used as collateral for bank loans.

Yet despite this overwhelming evidence on how to ruin an economy in less than one generation, Mugabe still is held in high esteem by some political leaders.

President Jacob Zuma, on many occasions, has referred to the Zimbabwe-model as a blueprint for economic liberation; a model SA should aspire to - according to many in the ruling ANC. Some report that Zuma last week “agreed” with Mugabe that Zimbabwe is not the basket-case that everyone seems to be claiming. 

Zimbabwe a country in slow motion collapse

Contributing to the slow but inevitable collapse of Zimbabwe since 2000, according to a recent report by New World Wealth (NWW), include:

  • The erosion of ownership rights in the country. Ownership rights, whether property or businesses, are key to wealth creation. Zimbabwe business owners are unsure whether their business will still belong to them a year or two down the line, so why should they invest or expand?
  • Ongoing political intimidation and allegations of fixing of the elections in 2002, 2005, 2008 and 2013.
  • The banning of independent media in the early 2000s. Foreign TV crews have been banned and foreign investors have to rely on the news and information only coming from the tightly-regulated and controlled state-owned TV stations.
  • Around 20% of Zimbabweans have fled the country since 2000, taking their remaining wealth with them as well as their brains and entrepreneurship.

Why not follow the Mauritius model?

Contrast the experience of Zimbabwe with that of the small island-state of Mauritius, some 2 000 kilometres east of Kenya, but still considered to be part of Africa and Sadc. Mauritius, too, was colonised by three imperial super powers, first the Dutch, then the French and thereafter the English. It became independent in 1968 with not much going for it economically. It had no natural resources apart from sugar cane and a little bit of tourism, in those days still in its infancy.

The growth and development curve of Mauritius since then, but particularly since the turn of the millennium, has been nothing short of spectacular. Many South Africans who remember the island from a holiday or honeymoon 20 and even ten years ago, are astounded by the rapid growth of the Mauritian economy, which has branched out into real estate, financial services, textiles, trade and shipping in order to reduce its dependence on sugar and tourism.

This has been done, not by means of a heavy-handed regulatory intervention in the economy but by getting out of the way and letting the free-market system do its work. This “light-touch” but effective regulation has seen Mauritius surpass South Africa as the wealthiest country in Africa a long time ago, as measured by GDP per capita, a more accurate measurement of the wealth of individuals. The average Mauritian, according to the NWW report, now is doubly richer than the average South African. 

At end 2016 the average wealth of Mauritians was $25 700 compared to the average wealth of $11 300 in South Africa.

As a frequent visitor to the island, I am often surprised by the pace of economic development. Where there was once only fallow land one now finds gleaming building shooting up at the next visit. The country is awash with wealthy foreigners, mainly from France and Britain but increasingly also from South Africa, purchasing homes in designated areas in order to qualify for residency.

Buying a property in certain designated developments costing more than $500 000 permits permanent residency for husband, wife and children under the age of 24.

The country has no exchange controls; one can freely remit money in and out of the country without onerous capital controls. There are no death-, capital gains- or dividend taxes and companies and individuals pay a maximum of 15% tax on personal and company profits. VAT is 14% on most items.

The Mauritian government also late last year announced tax-free holidays (up to 5 years and more) on a wide range of industries including asset management, personal services, investment administration, to name just a few.

It is also rated as the easiest country on the African business to open and run a business. No trade unions or BEE regulations.

What is particularly appealing about spending time in Mauritius from a personal point of view is the almost total lack of crime. I might be out by one or two but during 2016 there were only a handful of murders on the island, and two of them were with the involvement of South Africans! No one on the island is allowed to own weapons and car hijacking simply doesn’t exist.

Mauritius places enormous emphasis on property ownership rights, either residences or businesses. Contrast this to Zimbabwe (and increasingly more South Africa) where property ownership has been undermined for many years.

According to NWW, Mauritius also experienced the highest increase (% wise) in the number of high net worth individuals (HNWIs) over the ten-year period from 2006 to 2016, namely 2 300%. Over the same time the number of SA’s HNWIs, albeit from a much higher base, only increased by 8% over the same period. It is estimated that almost 300 HNWIs moved to Mauritius over the same period. I would suggest that this number is on the low side.

Zimbabwe is not even mentioned in this survey.

Mauritius has also identified international schooling as a major growth area and there are a number of international schools and universities on the island. The Middlesex University, which already has a campus there, is currently building a brand new campus in the Tamarin Bay-area. Middlesex has three other campuses around the world, in Dubai, Malta and London respectively. It now allows students to move around these four campuses doing the same degree. How cool is that! It also costs substantially less than what one would pay for a similar course in London or the USA.

In summary, South African policy makers have some important decisions to make to reverse and eventually eradicate the current economic stagnation and polarisation between the haves and have-nots. The ANC clearly thinks wholesale state intervention is the answer. Free-marketeers shudder at the thought and see it as the path to destruction and financial chaos.

Maybe our local politicians and economic advisors should cast their eyes further afield across the Indian ocean for an economic experiment that seems to be working.

Magnus Heystek is the investment strategist of Brenthurst Wealth and can be reached at magnus@heystek.co.za for ideas and suggestions.

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