Tuesday, December 30, 2008 

By Dr. Razeen Sally 

Zimbabwe reminds me of my native Sri Lanka a country with once golden promise that has become a spectacular Third World failure, riven with political violence and economic mismanagement. An incompetent and corrupt government has quashed the everyday freedoms of ordinary people and with it their life chances. Worse than Sri Lanka, the Mugabe government has reduced Zimbabweans to mass penury. But like Sri Lanka, Zimbabwe, with its back to the wall, and with the right policy choices and follow-through, has the potential to rebound and prosper.

The necessary but not sufficient conditions in the short term are a durable political settlement, a minimum of political stability, and the control of key economic policy agencies by the long-time opposition party, Movement for Democratic Change, which won the March 2008 parliamentary elections. Especially important are control of a powerful and coordinating prime minister’s office, and a ministry of finance to which other economic policy agencies are subordinated. To prepare for that, the MDC needs a coherent vision and credible economic policies. This applies to three main areas: (1) macroeconomic stability, (2) domestic microeconomic reform, and (3) external opening and rapid global economic integration. My focus is on the last set of policies. Of course, my advice on trade policy is intimately related to the other two areas and should not be seen in isolation.

Globalization and Trade Opening Reduce Poverty

The broad vision the overall goal should be crystal clear: Zimbabwe should move as swiftly as possible toward free trade. That goal should be part of a package of market- based reforms to rescue the economy and build the foundation for sustainable growth and decent life-chances for ordinary Zimbabweans. Free trade is a practical proposition, not merely a matter of academic theory or faith-based opinion. The historical record is clear: economies grow faster and get richer the more open they become. Economic advancement has occurred in poor countries that have embraced contact with the outside world, particularly with the advanced centers of the world economy in the West. The detailed evidence from recent decades demonstrates that strong liberalizers have reaped the most gains in terms of growth, poverty reduction, and improvement of life-conditions for the broad mass of people.1

Major trade and foreign direct investment liberalization among developing countries is most visible in East Asia especially China. Though more slowly, India has been reaping the benefits of liberalization and globalization since the late 1980s. Hong Kong and Singapore, both free-trade city-states, have benefited most, going from "Third World to First World" in just one generation. Stellar globalizers elsewhere include Chile in Latin America, Estonia and several other Central and Eastern European countries since the break-up of Soviet communism, Vietnam in South-East Asia, Georgia in the Caucasus, and Australia and New Zealand in the Organization for Economic Co-operation and Development. Other large emerging markets, such as Brazil and South Africa, have liberalized less, but there can be little doubt that substantial liberalization and globalization rescued their economies, delivered large growth and welfare gains, and laid the foundations for future prosperity.

Sadly, Zimbabwe finds itself in a large basket of "less globalized" or "non-globalized" countries with much worse economic performance. Indeed, Zimbabwe has "de-globalized" and finds itself in a category of failed states run by venal, thuggish, and murderous elites, with declining average incomes and mushrooming numbers of the poor and destitute. Zimbabwe should look to the stellar performers, the really strong liberalizing and globalizing emerging markets in East Asia, Central and Eastern Europe, and elsewhere, for best-practice examples. There are hardly any examples in Africa, but Mauritius is worth a close look.

Beware Aid Dependency and Other Traps Ahead

A new government should be aware of traps ahead and avoid them. The danger is that a climate of external opinion, external policy advice and foreign aid will combine with entrenched domestic interests to retard market reforms, including liberalization of trade and foreign investment.

When Robert Mugabe’s reign comes to an end, Zimbabwe will no doubt receive a major transfusion of foreign aid to deal with the humanitarian disaster, short-term revenue shortfalls, balance-of-payment problems, and assorted technical assistance, especially to build up market-supporting institutions. But it is very important that Zimbabwe does not fall into a typical African trap and vicious cycle of aid dependence. There are no doubt plenty of self-seeking interests within the Zimbabwean elite and among donors, nongovernmental organizations (NGOs), and consultants salivating at the prospect of making Zimbabwe a creature of the aid business. Hence the importance of fashioning a homegrown program of credible reforms rather than having them driven by the International Monetary Fund, World Bank, United Nations agencies, U.K. Department for International Development, or indeed the South African government. Unilateral market reforms are much more important than grand aid blueprint ts such as the United Nations Millennium Project and the Africa Commission Report, or even the World Trade Organization’s "aid for trade" initiative.

Moreover, prominent liberalization and globalization skeptics advocate a slowing down of market reforms, including external opening, and a bigger, more interventionist role for government, including industrial policies to protect and promote "strategic" sectors.2 Those views are more influential than they were a decade ago in donor agencies and governments including the ruling African National Congress in South Africa. Most policy NGOs have always had a strong anti-market bias. The last thing Zimbabwe needs is for a new government to become too dependent on donors, foreign governments, and an attendant circus of NGOs and academics for poor advice based on dodgy premises and weak evidence. That is a recipe for muddled and drifting policy that will not drastically improve conditions for Zimbabweans. Hence it is vital for the MDC to form its own vision and policy program and follow those through decisively once in power.

The starting point for reform is today’s economic policies. The order of the day for trade policy is blanket tariffs and quotas, sweeping restrictions on inward investment, draconian foreign- exchange controls, the nationalization of the "commanding heights" of the economy, price controls, the carnage of property rights and the rule of law, which are all related to state planning. Protectionist barriers on imports, exports, and foreign investment are not just high they are also mind-bogglingly complicated and opaque, and subject to huge political and administrative discretion. That situation breeds massive corruption and waste. Not surprisingly, the World Economic Forum’s Enabling Trade Index, which "measures the factors, policies and services facilitating the free flow of goods over borders and to destination," found that in 2008 Zimbabwe ranked 112 out of 118 countries surveyed.3

The resulting tax on Zimbabwe’s previous growth engines agriculture and exports has wreaked wholesale destruction. This rotten, tottering edifice of protection needs to be dismantled as quickly as possible so that new trade, foreign investment, and a supporting network of services and new enterprises can rescue Zimbabwe from total economic collapse, bring about recovery, and create a path to prosperity.

First-Generation Reforms

What should be the economic vision for a new Zimbabwe, in trade policy in particular? Public policy should be kept as simple as possible, with a concentration on the basics. That means focusing on macroeconomic stability, openness to the world economy, a favorable domestic climate for doing business, investment in public goods, and a state that performs core functions well (or at least not too badly). Those are the chief lessons from East Asian success. Above all, people should be able to go about their daily business free of arbitrary political or administrative interference. Zimbabwe’s problem by no means exceptional is that it has far too much politics at all levels of society. This cramps individual freedom, particularly for the poor citizen without political connections. It also stymies wealth-creating enterprise.

A focus on maximizing growth is preferable to a focus on redistribution. Growth creates the conditions for fairer distribution. It is the necessary condition for poverty reduction and human-welfare improvement. Zimbabwe needs massive growth in the first few years of market reforms. Moving from protection to free trade as fast and as comprehensively as possible will be a critical engine of high growth. It will quickly reestablish regional and global trade and investment networks, allow Zimbabwe to exploit her comparative advantage (above all in agricultural exports), and enable longer-term dynamic gains from trade and foreign investment that feed into productivity improvements and growth.

Macroeconomic stabilization is a categorical imperative, for without it, serious microeconomic and trade reforms are not sustainable. That requires tightening monetary policy to control hyperinflation, as well as strict disciplining of fiscal expenditure. The latter assumes downsizing the bloated public sector, axing an array of wasteful subsidies, reshaping the tax base, abolishing price controls, and moving to full market pricing for electricity, oil, and other utilities. Those measures blend into microeconomic reforms.

The trade-policy objective should be short and simple: free trade. Economists talk about "getting prices right" by removing the bias (effectively a tax) on tradable goods and services. In essence, free trade means the freedom to engage in cross-border commerce without impediment or discrimination. All restrictions on exports, imports, and inward and outward investment should be abolished. This can be done to a phased though strict timetable.

The first step is to demolish quantitative, "administered" barriers such as state trading monopolies, product bans, quotas, licenses and special tendering requirements. Those cause the worst market distortions including rampant corruption. That first step should be done in the first few weeks and months of a new administration. The second step is to simplify a highly complex trade tariff structure by reducing and harmonizing tariffs to a uniform tariff of 5 to 10 percent. That should be the preliminary step to full free trade, that is, zero tariffs. Both steps should be announced clearly at the beginning of the reform program, with set deadlines of six months to a year for Step 2, and one to two years for Step 3.

At the same time, all restrictions on foreign direct investment should be abolished, with investors given full "national treatment" under local laws, and recourse to international arbitration. Investment approval procedures should be quick and automatic. That should apply to goods, services and resource sectors. The above measures should be "locked in" through strong WTO commitments as well as bilateral investment treaties with major trading partners. Finally, foreign- exchange controls should be abolished at the very beginning of the reform program, alongside a unified exchange rate, and full convertibility on current-account transactions. Those measurers should be followed by full convertibility on long-term capital-account transactions. Full capital-account convertibility can follow once prudential regulations are in place again with a set timetable.

The trade policy measures above are "first-generation" reforms. They are relatively simple technically and can be done quickly though politically those measures are rarely easy. First generation reforms are essentially "negative" steps: they remove regulations rather than put new ones in place. They should be coupled with competition-friendly measures to improve the domestic business climate, that is, to lower the costs of doing business. In other words, trade policy reforms should be hitched to a domestic market-based reform agenda. This domestic reform agenda is primarily a matter for unilateral action rather than an external plaything of trade negotiations and international organizations.

Domestic red tape includes procedural hurdles to starting a business, licensing procedures, registering property, getting access to credit, employing workers, paying taxes, protecting investors, and bankruptcy procedures. Red tape directly affecting exports and imports includes time taken by documentation and costs of clearing goods through customs. Those regulations are classified and benchmarked in the World Bank’s Doing Business index, which had Zimbabwe 158 out of the 181 countries surveyed in 2008, and the aforementioned Enabling Trade index.4 All of those measures are "trade-related:" they affect international trade and investment as well as domestic trade and investment. Tackling them would enable and mutually reinforce domestic as well as international commerce for Zimbabwe.

Accordingly, a new government should set clear short- term targets for simplifying and abolishing such red tape, alongside the short-term targets for trade-policy reforms. It should aim to race up the African and global rankings in the Doing Business and Enabling Trade indices by adopting best practices from the star performers mentioned earlier. In Africa, the performer to emulate is Mauritius. In the last three years, Mauritius, building on relatively good performance by African standards, has slashed corporate taxes, sharply reduced trade tariffs and inward-investment controls, improved customs administration, and done away with assorted red tape. Those reforms have already borne fruit in terms of better economic performance.5

Second-Generation Reforms

"Second-generation" reforms need to follow simpler, short-term first-generation reforms. The former relate to complex domestic regulation, such as regulation of services, food safety and technical standards, intellectual property, and public procurement and competition rules. Those reforms should proceed in tandem with reforms to improve "hard" infrastructure (roads, ports, airports, railways, and communications) and "soft" infrastructure (such as private property rights, public administration, the judiciary, health care, education, and skills). Private investment, including foreign investment, and competition among suppliers, will be crucial.

Second-generation reforms are technically and administratively difficult and take time to implement. They cost money. They demand a minimum of capacity across government, especially for implementation and enforcement. They are also politically extra-sensitive, as they affect entrenched interests that are extremely difficult to dislodge. A new government will need to shape those medium-term reforms to follow and reinforce preceding first-generation reforms.

Independent, well-resourced agencies to police pro-competitive regulation will be important in the medium-term. That includes a Competition Commission with teeth. Also, the new government should establish an independent "Transparency Board." The latter, based on the model of the Australian Productivity Commission (the former Tariff Board) should have statutory powers to investigate the costs and benefits of government’s trade-related policies, and the freedom to disseminate its findings to the media and the wider public.6

All of the first- and second-generation reforms outlined are as much about simplicity and transparency as they are about liberalization. Together they form a trinity of good policy and good government for individual freedom, flourishing commerce, and social advancement.

Avoid New Protectionist Measures

Trade policy takes place along several tracks: unilaterally in terms of what governments do independently, bilaterally and regionally in preferential trade agreements (PTAs), multilaterally in the WTO, and, finally, through agreements with donors. Weak governments, which do not know what they are doing and are beholden to protectionist interests, allow trade policy to be driven by external forces WTO, PTAs, and donors. Governments that do know what they are doing and that have sensible policy goals, rely on unilateral measures and only in the second instance on other trade-policy tracks. Strong and sustained liberalizers the ones mentioned above have been unilateral liberalizers. This is the Nike strategy ("Just Do It"). Governments "liberalize first and negotiate later," as Mart Laar, the former prime minister of Estonia, puts it.7 Accordingly, the new government in Zimbabwe should under no circumstances allow its trade reforms to be held hostage by external tracks. Rather,! it should charge ahead unilaterally. In the WTO, it should "bind" its liberalizing measures with much stronger commitments. Those binding commitments should replace time-wasting activity in the African Group and other anti-market coalitions that have been obstructing progress in the Doha Round.

Finally, the new government should not give priority to PTAs and PTA initiatives in the region, such as Southern African Development Community, Common Market for Eastern and Southern Africa and Southern African Customs Union. Those organizations are too politicized and foreign- policy driven. They are "trade light" and do not seriously liberalize markets. In addition, they cause business complications through overlapping, restrictive rules of origin and other discriminatory provisions. The new government of Zimbabwe should opt out of SADC or COMESA initiatives for a customs union?which would preclude a move to free trade. Rather it should focus on concrete, bread-and-butter measures to facilitate trade and investment with its neighbors, especially at border-crossing points. That is particularly important for trade with South Africa.

Much bureaucracy and public money is wasted on "industrial policy," which is back in favor with the African National Congress government in South Africa, just as it was favored by apartheid National Party governments before 1994. Selective industrial-policy interventions include targeting "strategic" sectors and firms for trade protection and subsidies. "Picking winners" and "infant-industry protection" have proved an abysmal and very costly failure around the world, not least in Africa. In South Africa, it helped to run the apartheid economy into the ground. Continued government cosseting of the car industry in South Africa relies on massive subsidies that could be better spent on primary health care, schools, and infrastructure. The result of those policies is inflated prices for new and second-hand cars in southern Africa in general and South Africa in particular.

Industrial policy sometimes includes selective incentives for foreign investors. Far better to ditch all the above and focus on the basics to attract investors: an open door to trade and foreign investment, light and transparent regulation, security of property rights and enforcement of contracts, flexible labor markets, and political and macroeconomic stability. "Soft" measures could complement that package. For example, a slim-line Board of Investment (akin to "single window" clearance of goods at border-crossing points) could be created to act as a one-stop-shop facilitator of inward investment.

Achieving the above reforms will also depend on benchmarking and branding. Benchmarking star performers in East Asia and Central and Eastern Europe, and in Georgia, Chile, and Mauritius, has already been mentioned. Benchmarking should target trade and business-climate reforms using the World Bank’s Doing Business and other indicators. Advertising the "new Zimbabwe" brand will be as important. But advertisement in order to be effective must be based on real improvements in Zimbabwe’s policy and institutional environment. What better way to achieve that than to announce that Zimbabwe will move to full free trade, far ahead of all other African countries? If achieved, Zimbabwe could advertise itself as the Hong Kong, Singapore, or Dubai of Africa. What better way to make Zimbabwe stand out and shout that it is finally and definitively open to the world and open for business?

Common Objections to Free Trade

Unfortunately, free trade is misunderstood in much of Africa, as it is in other parts of the world. One of the most important objections to free trade has to do with foreign competition. Imports tend to be seen as a threat to domestic production and employment. Consequently, African leaders often call for greater access to developed world markets, but shrink from opening their own markets to foreign goods. In reality, imports increase specialization, which leads to higher productivity, which raises wages and leads to cheaper and better domestically produced goods and services in addition to those provided by foreigners. Moreover, tariffs or "taxes" on imports are actually taxes on exports. By making inputs (or imports) more expensive, import tariffs make outputs (or exports) more expensive. Therefore, removing the import tax is the simplest and most effective way to boost exports.

According to Mary O’Grady of the Wall Street Journal:

The beauty of free trade is that it increases competition. Preferential trade agreements may make a small segment of elite exporters better off. But it is importing not exporting that is the critical step in the process of wealth creation in the developing world. Access to low-priced inputs allows for productivity gains at home. Outside competition spurs innovation. Producers become more export competitive, as unilateral opening in both Chile and New Zealand have demonstrated.8

There is no reason to believe that Africans do not respond to market signals in a rational and self-interested manner just like everyone else in the world. Whenever they have been exposed to increased competition, they too have responded by searching for new market niches consonant with their countries’ comparative advantages. To say that Africans cannot compete in a globalized world is equivalent to saying that Africans are fundamentally different from the rest of humanity.

Other critics point out that rich countries, like the member states of the European Union and the United States of America, do not practice free trade. That criticism is only partially true. First, both the European Union and the United States impose some tariffs and nontariff barriers on imports, but those are considerably lower than tariffs and nontariff barriers imposed by African countries on imports not least imports from other African countries. Second, as was already mentioned, many developing countries have liberalized their trade regimes alongside domestic market reforms, and their reward has been high economic growth. Third, decision making in the West, just like in Africa, does occasionally get captured by special interests like the farming lobby that push for protection and subsidies. These measures harm the economies of Europe and the United States. Just because the European Union and the United States follow a certain set of policies does not make those policies correct. Fourth, Europe, the United States, and other developed countries, despite pockets of market distortions, have generally market-friendly domestic business climates that enable international trade and investment, thus reinforcing the effect of open borders. Hong Kong and Singapore are the gold standard in this regard. The "new globalizers" in the developing world have also been moving in this direction. In stark contrast, most African countries have among the worst business climates in the world imposing costs on internal and external trade and investment that are even higher than border tariffs and quotas.

Conclusion: The Politics of Reform Matter

Finally, let me make a few observations on the politics of the reform program. First, nearly all radical market reforms have been pushed through in response to an economic crisis that was often combined with a political crisis. When "normal politics" is suspended, a period of "extraordinary politics" can provide a window of opportunity for thoroughgoing reforms. Zimbabwe is in such an extreme situation. A new government should take advantage of that window to forge ahead speedily with a critical mass of reforms, including free trade.

Second, crisis-induced reforms, if radical enough, will overcome the opposition of protectionist interests, and, by integrating with the world economy, create new outward- looking interests with a stake in an open economy. The latter comprise new exporters, users of imported inputs, multinationals with global supply chains, and cities and regions seeking to be magnets for trade and foreign investment. Third, especially in the early stages of reforms, it is vital to centralize authority over economic policy in the prime minister’s office and the ministry of finance. That also applies to trade reforms and investment reforms. If left to a commerce ministry and regulatory agencies, reforms will be captured by protectionist interests and diluted.

Dr. Razeen Sally is codirector of the European Centre for International Political Economy, an international economic policy think tank based in Brussels, and author of New Frontiers in Free Trade: Globalization’s Future and Asia’s Rising Role. He is presently on a leave of absence from the London School of Economics and Political Science, where he has taught since 1993.