Poor legal structures the reason behind Africa's economic stagnation; Zimbabwe's fuel crisis a case in point
Due to the time constraint I was unable to cast myself into the lively discussion that has been going on in blogosphere for a few weeks now. The developing fuel crisis in Zimbabwe today however lends itself useful for the illustration of my convictions about economic development in Africa and in the other places around the globe where it is so badly needed.
William Easterly in his 2001 book The Quest for Growth, like many of the blogs, disscusses panacea that we know have failed. He covers many big ticket items like population growth, education, savings and investment, and debt relief. Easterly details examples where these factors are present and have either contributed to growth or have hindered it. After a very meticulously examining many factors, Easterly concludes that it is the incentives that are most important in order to precipitate growth. Leaders must figure out ways to line up the incentives so that people are drawn to the idea of growth. A fair conclusion but hardly a full one.
While I'm still in the "plug the books" mode, let me just mention another valuable read from an esteemed development economist that might be worth reading if you're interested. Joseph Stiglitz, the 2003 Nobel Prize laureate in economics, has a book entitled Globalization and Its Discontents. Bluntly put, this book is a well researched “poop on the Bretton Woods institutions” party. Stiglitz begins by explaining how globalization has necessitated global institutes that look out for the wellbeing of the entire global community. As such he says, such institutions cannot be dominated by the interests of only one side of the table, dialogue must be fair and fairly representative of the world.
His main argument is that the IMF foists wrong policies on the rest world while it protects the interests of its major constituency (i.e. the US Treasury). Among his many disagreements with the IMF is the institution’s resiliency in trumping radical establishment of the free markets above all else. Stiglitz is a proponent of the gradual introduction capitalism because, “Capitalism requires a transformation of society.” It’s more than just having the right institutions and infrastructure, the whole structure of society endures critical change when capitalism comes about. Another of his discontents with the IMF in addition to the idea that they constantly seem to be pushing the wrong policies, is the lack of parity and transparency on the IMF’s part. In negotiations with countries seeking help, the IMF dictates requirements instead of listening. Stiglitz also notes that at the same time the IMF advocates for transparency from governments it helps, it is not a very transparent entity itself.
Now to the fuel crisis in Zimbabwe. For the past five years Zimbabwe has been laboring under an acute shortage of fuel owing mainly to corruption (in the state fuel procurement entity), a grossly weakened currency, and rising oil prices on the global market.
Since the market place is supposed to match people with wants and providers of good/services, let's take a look at the state of the Zimbabwean fuel market and see if we can find the chink in the chain is.
The National Oil Company of Zimbabwe (NOCZIM), a parastatal, is the country's official oil provider. The arrangement is supposed to work as follows (it's not working); NOCZIM finds oil and pays for it on the global market. They import it and sell it to petrol companies in Zimbabwe. Well and dandy except when the country's currency devalues up by up to 90% in ten years and the government's (READ:NOCZIM's) foreign currency reserves dry up. So NOCZIM has no BP-buying power as it were. Add to that the fact that the government has fixed the exchange rate at levels that morbidly overvalue the local currency. So for a while NOCZIM has been importing oil at loss.
After NOCZIM failed to meet the demand in the country government has been toying with the idea of deregulating the oil industry by allowing independent firms to source their own fuel and set their own prices. Laissez faire like it is supposed to work. But then this would mean foregoing fuel tax which the NOCZIM arrangement allowed them to levy easily. The government doesn't like that. The Financial Gazette Chronicles just how deep the controversy runs in this article;
So theyhave laws barring unregistered people/companies from sourcing fuel for the country. Effectively, this means that potential suppliers, many of them Zimbabwean in the diaspora, have been shut out of the fuel procurement process. The problem here is that there government has barriers in effect stopping the so called "informals" from entering the market place. Like I said in the title of this post Zimbabwe's fuel crisis is just a case in point. You can extrapolate the same dynamic into other markets, commodities and countries. It's basically the same thing, the government and mercanilists, ironically fight against the informals claiming informals hinder development yet efficiency and creative genuis reside in the endeavors of the informal market."Technically, a Special Purpose Vehicle (SPV) put together by industry players for purposes of importing fuel might have to be disbanded should these proposals sail through.
It is the dismantling of the SPV and the prospect of the proliferation of several Direct Fuel Importers (DFI) that has split the Cabinet right through the middle as others members fear chaos might reign supreme in the pricing and distribution of the product.
The central bank, thrust at the centre of current efforts to turnaround the waning economic fortunes, has already suggested the whittling down of players in the industry from the estimated 200 companies to around 20 because of the rampant externalisation of foreign currency.
"Nyambuya is basically saying anyone with access to foreign currency, be it a Zimbabwean in the diaspora or an exporter, should source fuel and no questions should be asked about the source of funds," said a source.
Nyambuya, who refused to comment yesterday, preferring the questions to be put in writing, is also against the grilling of DFIs at the hands of customs officials who require them to prove their sources of funding.
Sources said the energy minister is also pushing for substantial cuts in taxes levied on fuel at the ports of entry such as the NOCZIM levy, customs duty and fees paid to clearing agents to make the product more affordable.
His critics however, said such concessions would rob the fiscus of the much-needed revenue and slow down the anti-corruption crusade launched by the government last year and has seen the arrest of several high-ranking government and ZANU PF officials including former Finance Minister Christopher Kuruneri.
Nyambuya's proposals are viewed as too radical and some of his peers prefer the smoothening up of the SPV."
Enter Hernando De Soto the Peruvian economist whose lifelong research and work chronicle this strange phenomenon. His research substantiates the case against developing countries shunning the informal market to their own undoing as the informal market has solutions for many of the problems where the formal market is failing. Check out his two books, The Other Path and The Mystery of Capital.
The root of the problem is in the laws of the land. It's not enough to clamor for the protection of property rights; we need to hold our governments responsible for crafting laws that are accomodative of everyone and laws that make the formal market place easily accessible to all people. How do informals do that? They operate in their own market (which formals and the governmnent call "black) which has laws that are reasonable and negotiable by the informals. Don't worry Zimbabwe, the "black" market will be back. You can't destroy it by demoliting infrustructure, it is precipitated in the mind that's where it resides.
Zimbabwe, live8, Zimbabwe Economy, Economics, Development, Hernando De Soto,ILD, William Easterly, Joseph Stiglitz, IMF, G8,
