Pergamon World Development, Vol. 24, No. 2, pp. 395405. 1996 Copyright 0 1996 Elsevier Science Ltd Printed in Great Britain. All rights reserved 0305-750X/96 $15.00 + 0.00 0305-750x(95)00141-7 Growth, Distribution and Environment: Macroeconomic Issues in Zimbabwe ROB DAVIES University of Zimbabwe, Harare and J0RN RATTS0” University of Trondheim, Norway Summary. - The main policy challenges in Zimbabwe relate to generating income growth, reducing poverty and stopping land degradation. The government attempted redistribution with growth at inde- pendence, but ran into macroeconomic unsustainability. After a period of import compression. the government now has embarked upon a liberalization program. The consequences for growth and distrib- ution so far have been unfavorable, and the economic structure has been reoriented toward primary goods. It is hard to see this strategy as helpful in terms of poverty and land degradation. The article throws some light on the macroeconomic aspects of the development strategy using an economywide computable general equilibrium (CGE) model and evaluates the conditions for land reform to improve on distribution and environment. I. INTRODUCTION Zimbabwe’s economic development since inde- pendence in 1980 can be characterized as a brief postindependence boom followed by stagnating per capita incomes and worsening income distribution. The strategy of economic controls, import compres- sion and export promotion did not generate the employment growth needed to keep pace with the population growth. In the early 199Os, the government has liberalized foreign trade, presumably to stimulate competition and efficiency. The distributional conse- quences of the shifting development strategies are evaluated with an emphasis on the macroeconomic context. At this stage, the liberalization has only offered macroeconomic instability, economic con- traction and income inequality. The economic adjust- ment mechanisms explaining the dismal outcome are investigated. Our concern for income distribution is partly moti- vated by the main environmental problem of the coun- try, land degradation. Peasant agriculturalists have been systematically pushed to marginal lands, which have become even more marginal as population pres- sures have increased. The enforced overcrowding and misuse of these fragile areas have accelerated their degradation. The form this takes, and the scope for solving it, are conditioned by Zimbabwe’s history as a settler colony. The settler colonial period saw the entrenchment of a dual agricultural system with rigid racial separation of land tenure and utilization sys- tems. Broadly speaking, half the land was reserved for white farming while black agriculturalists were forced onto the remaining half. The land reserved for whites fell in the better agroecological zones, and many black farmers were marginalized. Zimbabwe is consequently an example of the forced environmental degradation trap described by Karshenas (1992, p. 1 I), “. . . an economy with stag- nant technology, low investment and capital stock and a growing population which eats into the natural capi- tal stock in order to survive.” The process is forced because poverty is associated with unsustainable agri- cultural practices. Poor people have few alternative strategies to cope with survival. They have to arrange food production, grazing and firewood as best they can. The time horizon is necessarily short. The envi- *We are grateful to WIDER for research support, to Lance Taylor for program leadership, to Ragnar Torvik for CGE- model collaboration and to Bill Gibson for helpful discus- sions. 395
Transcript
Pergamon World Development, Vol. 24, No. 2, pp. 395405. 1996
Copyright 0 1996 Elsevier Science Ltd Printed in Great Britain. All rights reserved
0305-750X/96 $15.00 + 0.00
0305-750x(95)00141-7
Growth, Distribution and Environment:
Macroeconomic Issues in Zimbabwe
ROB DAVIES University of Zimbabwe, Harare
and
J0RN RATTS0” University of Trondheim, Norway
Summary. - The main policy challenges in Zimbabwe relate to generating income growth, reducing poverty and stopping land degradation. The government attempted redistribution with growth at inde- pendence, but ran into macroeconomic unsustainability. After a period of import compression. the government now has embarked upon a liberalization program. The consequences for growth and distrib- ution so far have been unfavorable, and the economic structure has been reoriented toward primary goods. It is hard to see this strategy as helpful in terms of poverty and land degradation. The article throws some light on the macroeconomic aspects of the development strategy using an economywide computable general equilibrium (CGE) model and evaluates the conditions for land reform to improve on distribution and environment.
I. INTRODUCTION
Zimbabwe’s economic development since inde- pendence in 1980 can be characterized as a brief postindependence boom followed by stagnating per capita incomes and worsening income distribution. The strategy of economic controls, import compres- sion and export promotion did not generate the employment growth needed to keep pace with the population growth. In the early 199Os, the government has liberalized foreign trade, presumably to stimulate competition and efficiency. The distributional conse- quences of the shifting development strategies are evaluated with an emphasis on the macroeconomic context. At this stage, the liberalization has only offered macroeconomic instability, economic con- traction and income inequality. The economic adjust- ment mechanisms explaining the dismal outcome are investigated.
Our concern for income distribution is partly moti- vated by the main environmental problem of the coun- try, land degradation. Peasant agriculturalists have been systematically pushed to marginal lands, which have become even more marginal as population pres- sures have increased. The enforced overcrowding and misuse of these fragile areas have accelerated their
degradation. The form this takes, and the scope for solving it, are conditioned by Zimbabwe’s history as a settler colony. The settler colonial period saw the entrenchment of a dual agricultural system with rigid racial separation of land tenure and utilization sys- tems. Broadly speaking, half the land was reserved for white farming while black agriculturalists were forced onto the remaining half. The land reserved for whites fell in the better agroecological zones, and many black farmers were marginalized.
Zimbabwe is consequently an example of the forced environmental degradation trap described by Karshenas (1992, p. 1 I), “. . . an economy with stag- nant technology, low investment and capital stock and a growing population which eats into the natural capi- tal stock in order to survive.” The process is forced because poverty is associated with unsustainable agri- cultural practices. Poor people have few alternative strategies to cope with survival. They have to arrange food production, grazing and firewood as best they can. The time horizon is necessarily short. The envi-
*We are grateful to WIDER for research support, to Lance Taylor for program leadership, to Ragnar Torvik for CGE- model collaboration and to Bill Gibson for helpful discus- sions.
395
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ronmental problems consequently arise out of under- development. There are no simple instruments avail- able to handle the land degradation. The one receiving most attention, land reform, is discussed in a macro- economic context.
Section 2 is a discussion of the recent growth per- formance. The role of the state is examined in section 3. The linkages between distribution and environmen- tal concerns are outlined in section 4. Land reform as the key issue is discussed in section 5, and economy- wide aspects of this option in section 6. The economic conditions affecting distribution and environment are changed by the trade liberalization implemented since 1990. Section 7 evaluates the preliminary short-run effects of reform while section 8 offers some long-run prospects of the Zimbabwean economy.
2. GROWTH PERFORMANCE AFTER INDEPENDENCE
The economic development since independence can be described in three phases. In the first few years, the first phase, the economy experienced a boom. Favorable weather conditions, expansive fiscal pol- icy, increasing wages, the removal of sanctions and optimism at the ending of the war all created the con- ditions for significant GDP growth. The postindepen- dence boom and optimism, coupled with a need to refurbish industrial capital after 15 years of sanctions, stimulated high investment demand, which could be accommodated because of easier access to foreign financing. Green and Kadhani (1984) tell why the growth could not be sustained.
In 1982 when the government began to be con- cerned about the long-term debt implications of for- eign borrowing, it resorted to an array of import con- trols and administered foreign exchange allocation mechanisms inherited from the sanctions-ridden Smith regime. This system successfully achieved its immediate goal of controlling the current account deficit, which moved from a deficit of above 10% of GDP to a small surplus. As analyzed in Davies and Rattso (I 993), however, the control apparatus set up a stop-go type of economy. The outcome is illustrated in Figure 1. In 1983, import compression due to falling foreign exchange earnings was dealt with by severe cuts in allocations for intermediate goods. A sharp drop in capacity utilization followed. This in turn increased the government budget deficit as tax revenues fell along with industrial activity. In the mid- 1980s investment demand fell, due to political and business uncertainties (Dailami and Walton, 1989). Cuts in public sector investment, as a response to the public sector deficit, probably also reduced private investment through negative crowding in. Demand for imported capital goods fell, allowing more foreign exchange to be allocated to intermediates and there-
fore raising capacity utilization. The desirable increase in capacity utilization was thus made possible only because of the decline in investment demand, the typical tradeoff in gap models.
From the mid-1980s, in phase two, government started to build a number of institutional responses to the foreign exchange constraint. In particular a series of export-promoting measures were introduced, designed either to increase the incentive to export or to remove the imported input bottleneck for exporters. These measures led to the outward drift of the function seen in Figure 1. Capacity utilization was increased and the investment rate declined only slightly.
The adjustment process is described by the devel- opment of the savings-investment balance (shown in Table 1). In the mid- 1970s private savings were chan- neled to private investment, about 15% of GDP. The liberation struggle of the late 1970s disrupted the investment-savings formation, and the private invest- ment level fell below 10%. Except for the indepen- dence boom of 1980 and 1981, private investment has been depressed below 10% of GDP during the 1980s. Since the relative price of capital goods have gone up, the real investment activity has been even lower. After independence, the private savings declined, possibly related to the shift in income distribution promoted by progressive wage policy. Later the government used import rationing to reestablish foreign exchange bal- ance. Private savings rates returned to historical levels and above, 1520% of GDP, possibly explained by the import rationing and income distribution shift to protected profits. The implied private savings surplus has been necessary to finance the public savings deficit, given that foreign savings have been held down.
In view of the relative success of this modified reg- ulation strategy in the late 1980s. the regime shift embarked upon in the 199Os, phase three, is puzzling. Why, when the main constraint on the economy in the 1980s foreign exchange, seemed to be easing, did the
2 I I I I I !x 75 80 x.5 90 95 100
Capacity ulilizalion rate (70)
Figure 1. Capaciry utilization and the investment rate.
ZIMBABWE 397
Table 1. The savings-investment balance (shares of GDP, current prices)
Year Private fixed Public fixed Change in Private Public Current account investment investment stocks savings savings deficit
government embark upon an orthodox Washington- type trade liberalization and domestic deregulation package? The understanding that the regulation regime was not sustainable was an important eco- nomic reason. Although redistribution efforts were defended, it became increasingly obvious that the economy was unable to provide acceptable primary income distribution. As the fiscal deficit became more problematic, the ability to sustain the redistributive policies through subsidies and social services became more questionable. It was thus the sustainability of the system which motivated the shift in policy.
The liberalization program announced in 1990, called ESAP, presented a broad package of reforms, including all the elements of the standard Washington advice (Government of Zimbabwe, 1991a). A social dimension was added later (Government of Zimbabwe, 1991b). It was designed to be imple- mented over five years beginning in 1990 and, at the time of writing, that process is ongoing. Trade liberal- ization is the most visible change of economic condi- tions so far. Serious problems of adjustment to reform can be identified at this stage, as discussed in section 7.
3. THE STATE AND DISTRIBUTION
One of the legacies of the settler regime to inde- pendent Zimbabwe was a dirigiste state. Throughout the colonial period the state had played a strong role, not only in suppressing indigenous opposition to colo- nization but in fostering development of the settler economy. Colonization had been carried out under the British South Africa Company, which effectively governed the country for the first 32 years after colo-
nization. In the subsequent years state power was used to alienate land for settler farmers (Land Apportionment Act 1931), to control marketing of outputs (Maize Control Act 1930), to establish public corporations, not only utilities (the railways) but also in production (iron and steel). In the 1940s and 1950s the state set up marketing boards, often in response to economic difficulties being faced by white private farmers (Maize Marketing, Dairy Marketing). The Industrial Development Corporation was established to foster development of new industries. State finan- cial assistance to farmers was provided through a land bank which eventually became the Agricultural Finance Corporation.
From the start of the colonial period, the labor mar- ket was subject to state control. The Masters and Servants Act, which governed most black workers for most of the period, criminalized most actions taken collectively by workers in labor disputes. The Industrial Conciliation Act which regulated industrial labor from 1960 on, set up an extensive system of state-controlled wage determination.
When UDI (Unilateral Declaration of Indepen- dence) was declared and international sanctions were imposed, administered allocation of foreign exchange was the foremost instrument used to ensure macroeco- nomic stability. It is important to emphasize that while these controls provided a high degree of protection for local import-substituting industries, their use was motivated by macroeconomic rather than microeco- nomic concerns.
By 1980 therefore there was a high degree of dirigisme in Zimbabwe. Although the controls and interventions had been geared almost exclusively to benefit the white settler producers, the new state did not dismantle them. Rather it felt that they could be
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adapted for restructuring the economy in more egali- tarian ways.
The state definitely made an attempt at narrowing the gap in living standards after independence. If one adds in the social wage, or alternatively looks at the distribution of postbudget income, distribution appears to have improved. On the expenditure side, education and health were the main elements of the social wage. The education system expanded rapidly, with nonfee paying primary education and heavily subsidized secondary education. Access to health care services was also improved. Free health care service was offered for those earning under Z$150 per month, which meant effectively most industrial and all agri- cultural and domestic workers plus all communal farmers and unemployed. Free immunization and other aspects of the improved preventive health care program also added to the social wage (Davies and Sanders, 1988). On the tax side, the postindependence tax structure was relatively progressive. Thus on both the expenditure and the tax side, it seems that the postindependence budgets improved income distribu- tion and probably strengthened the improvements that were taking place in the primary distribution.
After 1983 government policies became more con- cerned with stabilization and the erosion of the gains can be dated from this period. The main negative aspect of the change in focus was government’s use of minimum wage legislation to restrict rather than pro- mote wage increases for the low paid. An attempt was made to defend the social wage so that, although there was not the rate of increase that had been seen earlier, real expenditure per head in education and health did not decline significantly (see Davies, Sanders and Shaw, 1992). The decline in the real wage, however, not only offset some of the gains from the social wage but also undermined the ability of the poor to make use of these public provisions. For example, school drop-out rates started to rise, apparently as families were unable to carry the indirect costs of school chil- dren. Furthermore, the increasingly difficult macro- economic maneuvering required to mobilize private savings to maintain the public sector expenditure raised serious doubts as to whether the programs could be sustained.
To sum up: it is difficult to agree with the IL0 that,
it is very probable that both income inequality and poverty were reduced between independence (1980) and 1990 as the result of developments such as the promotion of agriculture in the communal areas, the substantial expansion of basic services and the Zimbabweanization of the public sector and parts of the private sector (ILO, 1993, p. 122).
It seems more probable that the dominant influ- ences have been those which, as the IL0 itself recog- nizes, make for increased inequality and poverty: stagnation of formal employment and real earnings,
rising unemployment, the casualization of the work- force, informal sector expansion and the concentra- tion of agricultural output. As regards the latest phase of liberalization, it seems that urban unskilled workers have lost so far. Their nominal wages have not kept pace with the jump in inflation. All groups have suf- fered losses due to the general liberalization contrac- tion.
4. ENVIRONMENT AND DISTRIBUTION
The main environmental challenges in Zimbabwe are land degradation, pollution in urban and mining centers, and access to clean air and water for the poor (Gore, Katerere and Moye, 1992; ODA, 1992). Industrial pollution is mostly related to mining and chemical production while other urban pollution results from the living conditions of the poor. Overcrowding and shortage of adequate housing and services lead to sewage disposal problems. Wood fires are a major contributor to air pollution.
Land degradation is the central environmental problem in Zimbabwe and it is the issue on which this paper focuses. Without entering the debate on the most appropriate definition of land degradation, we follow others in seeing it broadly as “a decline in the productivity of natural resources which is irreversible except at prohibitive cost” (Campbell, Du Toit and Attwell, 1989, p. 37). It takes the form of deforesta- tion, soil erosion and river siltation.
Soil erosion reduces the productive capacity of the land in several ways. Run-off reduces the depth of topsoil and depletes nutrients. Whether this reduces national land potential or is simply redistributive is debated (Gibson, 1996). Much erosion ends up in river and dam siltation, however, which is not reusable and is positively harmful (Campbell, DuTort and Attwell, 1989). It is no longer economical to build dams on some major rivers because of the rate of silta- tion. Since Zimbabwe’s rivers are all seasonal and it has no natural lakes, this severely hinders irrigation development.
Whitlow and Campbell (1989) have attempted to quantify the extent of erosion in Zimbabwe. They classified areas according to the percentage of land eroded to an extent visible from aerial photographs. As Table 2 shows, erosion is much more extensive in communal areas than elsewhere. It also shows that erosion rises with population density.
Estimates of the amount of soil washed away vary. One study of the Save catchment area - the most populous part of Zimbabwe - suggests “minimum soil loss from the more gentle slopes . . . to be of the order of 40 tons per hectare per year.” This level would double on steeper slopes; above average rain- fall would exacerbate the loss. At that rate it was esti- mated within 20 years the soils would be too shallow
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Table 2. Land disrribution, population density and erosion
Population density (No.km*)
Communal lands General lands Zimbabwe
Area erosion Area erosion Area erosion % % % % % %
to grow maize (Campbell, Du Toit and Attwell, 1989, p. 40). According to a more recent report on the same area, “soil erosion in excess of 75 tons of soil per hectare per year is taking place in many areas” (Matiza, 1994, p. 8). Attempts at estimating the cost of replacing nitrogen and phosphorus lost by erosion have indicated amounts in the order of 35% of GDP.
Deforestation reduces real income of rural house- holds, which may further intensify environmental degradation. It has been estimated that Zimbabwe is losing 1.5% of its woodland cover each year (Gore, Katerere and Moye, 1992, p. 42). Although some deforestation relates to commercial logging, the rate is much higher in communal areas. In 1989 about 37.5% of communal areas experienced extreme shortages of wood, 28.4% moderate shortages while only 32.7% still had a sufficient supply.
Many economic and social factors are involved in explaining the misuse of land resources. The pressure from population growth in communal lands threatens marginal areas. Land tenure systems promote over- grazing. Deforestation is the result of expanding arable land and rising demand for fuel and building materials. The erosion leads to siltation of dams and rivers, exacerbating water scarcity. Underground water becomes more important, but poor households lack the technology for reaching it; irrigation deterio- rates and the spiral continues. Whitlow and Campbell ( 1989) examined the effect of six explanatory factors on soil erosion: population density, land tenure sys- tem, area under crops, rock outcrops, rainfall, and an index of erosion hazard. Using stepwise regression, they found that the first three, “human” factors explained most of the erosion: the R-sq. for the first three was 0.41 while adding the three “natural” factors raised it to 0.42. Although it is difficult to separate out the contribution of individual factors, it is clear that population density is the best single explanation of land degradation.
Zimbabwe’s environmental problems cannot be understood outside the context of its dualistic agricul- tural system. The origins and development of this have been extensively outlined elsewhere (see, for
example, Palmer, 1978). By 1980, some 700,000 black “peasant” households (comprising 54%~ of the total population) occupied 16.4 mill. hectares and pro- duced less than 20% of gross agricultural output, of which only 40% was marketed. On the other side, some 6,500 white commercial farmers occupied 14.3 mill. hectares and produced over 80% of gross output, more than three-quarters for the market (Government of Zimbabwe, 1982). Most of the favorable ecological regions were occupied by white farms.
No thoroughgoing land reform was undertaken after independence, although limited resettlement was car- ried out. Reform was circumscribed by the constitution, which constrained government to acquire land from white farmers only on a “willing-buyer, willing-seller” basis. Constitutional changes after 1987 allowed gov- ernment to introduce the 1992 Land Acquisition Act, giving it power to acquire land compulsorily for reset- tlement purposes. Some land has been acquired under the Act, but it is unclear what systematic long-term use will be made of it. Thus, even though the unjust land distribution had been a focal point of the anti-colonial snuggle, it persists 15 years after independence.
The issue of land reform - essentially land redis- tribution - has been central in political debates. The calls for reform have been based on moral/political grounds - the justice of returning land to those from whom it was stolen under colonialism, combined with a desire to address social equity issues. In this paper we focus on an environmental argument; land reform, we argue, is a necessary component of conservation policy. Although the precise forms which land reform might take are not clear, we argue that some redistrib- ution of land is essential to reduce pressure on mar- ginal communal areas and provide breathing space in which other policies may be implemented.
5. LAND REFORM AND THE ENVIRONMENTAL CHALLENGE
Whatever Zimbabwe’s economic prospects, it has to pay attention to the question of land degradation.
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Arresting environmental decline requires reduction of population pressures on land, particularly in the more densely populated areas. This can be reduced by two mechanisms. First, if economic growth is sufficiently strong, the underemployed workers on communal lands can be absorbed in the formal labor market, either in cities or in rural industrialization processes. The prospects discussed in section 8 lead us to a pes- simistic view of this way out.
The government then must pursue the second alter- native, to redistribute land, moving people out of com- munal areas onto commercial farm land. The limits on alleviating land pressure in this way can be easily seen through a simple population/land accounting process. Even if the entire commercial farming area is used for resettlement, population density would only fall from 29.8 per square kilometer to 22.5 per square kilome- ter. The gains in terms of average land density are thus limited, due to the large number of farm workers presently employed on commercial farms. At the mar- gin, however, significant improvements can be made since land density in some marginal areas is well above the average; Whitlow (1988, p. 423) cites cases of densities up to 300 people per square kilometer. Furthermore, it is not the density per se that matters, but rather the density relative to the carrying capacity. Redistribution at the margin can by itself reduce the pressure on natural resources in these areas.
Relocation will change agricultural practices and output mix. A shift from export crops to food is likely. There is no strong evidence that foods crops lead to less erosion than export crops, since the environmen- tal consequences depend on the use of technology and inputs and natural conditions (rainfall, slope, soil type). In experimental work Elwell and Stocking (1988, p. 79) found that “the loss of nutrients was not directly related to the type of crop grown.” The farm- ing system, however, does have a strong influence. Intensive monocropping, with little use of fertilizer, leads to rapid loss of fertility. Although these practices are followed by some commercial farmers, they are more extensive among peasant farmers. This is pre- sumably explained by their lack of land (on which to practice crop rotation) and by their poverty and restricted access to credit with which to buy fertilizers. In the worst redistribution case, these constraints will not be removed so that the changed use of land in the areas presently dominated by commercial farming may worsen overall soil degradation.
Land reform should not be seen as only a reloca- tion of population. It must also address property rights (within both the communal and the resettled areas) and must be accompanied by large infrastructural investments and policy changes to alleviate con- straints which restrict adoption of environmentally friendly farming techniques by peasant farmers. Alternative ways of organizing the land reform clearly have different effects on the use of land. At this stage
we can only conclude that land reform reduces the pressure on marginal land and thereby potentially can improve the environmental conditions.
To achieve major improvements of environmental practices, the redistribution of land must be accompa- nied by property rights that encourage conservation. The property rights issue involves the incentives asso- ciated with different property arrangements, and the necessity to motivate long-run natural resource con- servation. The concept of “the tragedy of the local commons” has been developed based on this under- standing (Dasgupta, 1990). In Zimbabwe it has been argued that the land degradation problems in commu- nal areas could be reduced through appropriate priva- tization of ownership. This view has also underpinned the thinking of what has probably been the most successful conservation program in Zimbabwe, Operation CAMPFIRE (Communal Area Manage- ment Programme for Indigenous Resources). Implicitly this program tackles the problem of missing markets in natural resources by setting up village- level resource management programs, implicitly pri- vatizing (at least localizing) the ownership of resources.
Unfortunately, the empirical literature cannot con- firm simple relationships between landownership and natural resource conservation. Perrings (1991) argues that unsustainable development in sub-Sabaran Africa results from privately controlled landholdings com- bined with the poverty of the owner.
6. THE MACROECONOMICS OF LAND REFORM
Whatever microfoundations on which land reform is built, it will have economywide consequences via the effects on agricultural markets and exports and the investment program necessary to support it. While land reform is likely to have negative short-run effects on exports, its effects on food production are uncertain and will depend on appropriate complementary investments being undertaken. These three elements link land reform into the broader macroeconomy. It is important to understand the macro consequences of land reform, since this is part of the sustainability issue. If it sparks macro instability, then the land reform program itself may not be sustained. To some extent this has been the experience of Zimbabwe already. When government policy focus shifted away from equity to stabilization in the early 198Os, because of increasing concern about the long-run implications of public sector and foreign deficits, the resettlement program was the fist to suffer large cut-backs.
To analyze the room to manoeuver in terms of dis- tribution and environmental reform, a computable general equilibrium (CGE) model developed by Davies, Rattso and Torvik (1994a) is used. The model
ZIMBABWE 401
is set up in two basic versions, one capturing the essential features of the controlled regime of the 198Os, the other allowing the liberalized regime of the post ESAP 1990s to be analyzed (see Davies, Rattso and Torvik, 1994b). The model emphasizes sectoral balances and real side macroeconomic performance, and brings together two types of dual models familiar from development economics. The dependent-econ- omy model, which distinguishes between traded and nontraded sectors, can be seen as a starting point. With a view to including terms of trade effects and the previous role of import rationing, traded goods pro- duction is disaggregated to importables, exportables, and food agriculture. Since production structure and demand linkages differ, nontraded production is dis- aggregated to services and construction. The dual flexprice-fixprice models, distinguishing between agriculture and the rest of the economy, are included when food agriculture is separated out. Our formula- tion is different from Taylor (1983, chapter 3) since both food agriculture and nonagriculture outputs are supply driven.
The sectors are disaggregated into the following categories: food agriculture, nontraded consumer goods (“services”), nontradable capital goods (“con- struction”), exportables, and importables. Output of food agriculture is exogenous in the short run. The production technology of construction, importables, and exportables is nested CES functions in skilled labor, unskilled labor, domestic intermediates, imported intermediates, and fixed sectoral capital stocks. On the distribution side, the model includes four groups: food producers, skilled workers, unskilled workers and profit-takers. The food produc- ers are dependent on shifting domestic food markets affected by weather conditions, import policy and overall demand. Skilled labor is in short supply, and the wage rate adjusts to achieve equilibrium. Excess supply prevails in the market for unskilled labor, and the nominal wage is set exogenously. The real wage of the unskilled is driven down by inflation in the short run. The demand is affected by substitution possibili- ties toward skilled labor dependent on the relative wages. The profits in the construction and importables sectors have been strongly affected by the import- rationing system. The importables market has been protected, and comfortable profits have been collected by domestic producers. At the same time, they have experienced rationing of imported intermediates. Restricted access to imported intermediate goods has raised costs, since an inefficient mix of domestic and imported intermediates has resulted. The profitability of exportables production has been held back by an overvalued exchange rate.
The potential effects of each of the three “land reform shocks” are discussed under liberalized condi- tions, representing the situation after the structural adjustment program (ESAP) now being implemented.
The model allows us to derive consistent scenarios about adjustments to possible effects of land reform. The three possible responses outlined above, a likely decline in agricultural exports, a shift in food produc- tion and investment support, are discussed in turn.
The first element, a possible decline in agricultural exports, worsens the trade deficit. If the government is able to finance the deficit, real short-run costs are small. The costs are postponed into future financing of foreign debt. The long-run costs and sustainability of the land reform then depends on how this debt is repaid. The land reform itself may shift income distri- bution into less import-intensive consumption and investment. In this case land reform can be a long-run sustainable strategy even if agro exports fall immedi- ately.
Alternatively the debt can be repaid by increased exports in the long run. Although this may happen through export diversification, it is also possible that appropriate policies will stimulate the resettled farm- ers to move into export production. If the government is unable to finance the trade deficit, exchange rate devaluation is a possible escape. New stabilization problems arise related to inflation and income distrib- ution. Aided land reform will help the government overcome forced import compression or unsustain- able trade deficit. Some donor involvement in a land reform seems to be a good idea.
The second element with macroeconomic reper- cussions, a possible positive shift of food production, may compensate for at least some of the loss of export crops. Investment support may be needed to achieve the positive shift. The effects of a shift in food produc- tion under the economic conditions of the program are discussed below. In the liberalized economy, a posi- tive food output response to land reform will help off- set the loss of exports. If the food market is assumed to be opened to foreign competition, and the food price is fixed at the world market level, the food output shock influences the rest of the economy through income and trade effects. The income-based expansion of demand drives the economy up upward-sloping sup- ply curves, and the price level increases. All sectors except exportables expand with demand, and exportable output is reduced by real exchange rate appreciation. IL0 (1993) reaches similar conclusions in an evaluation of the consequences of the structural adjustment program for agriculture.
A shift from agro exports to food is the key struc- tural shift expected from land reform. The net effect on the trade balance is likely to be negative in the short run. If the reform had been implemented during the 198Os, with a government determined to avoid trade deficit, output would have been compressed. When the government has decided to liberalize, the short-run costs are much smaller - when the following trade deficit can be financed.
The possibly compensating food production
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response will depend on the investment program accompanying the reforms. This introduces the third element of the analysis, the macroeconomic effects of an investment expansion, to which we now turn. The macroeconomic consequences of increased invest- ment are related to the high import content of invest- ment. An investment program implemented to help land reform work will have conventional multiplier effects. The capital goods sector receives the first round of demand injection, and services and import- ables expand with overall demand. The price level rises along upward sloping supply curves, and exports are discouraged by real exchange rate appreciation. Free trade of food may help keep prices low and reduce the real appreciation. The trade balance is worsened by the export response and the import con- tent of investment. The fragile private savings surplus shown in Table 1 may threaten the macrostability of the operation.
The overall macroeconomic effect of land reform depends crucially on the output adjustment in agricul- ture, the investment support needed, and the capacity to adjust to a worsening of the foreign balance and the private savings surplus. The ability to finance a rise in the foreign deficit is important in the short run, and opens up a role for foreign donors. If a negative shift in export crops is serious, the trade deficit can be unmanageable and the liberalization process could be reversed.
7. LIBERALIZATION WITH CONTRACTION AND RISING INEQUALITY
The economic conditions determining distribution and thereby environmental degradation have changed dramatically since Zimbabwe embarked upon an adjustment program. Only the short-run consequences can be seen thus far and an evaluation of the experi- ences is disturbed by the untimely drought in 1992.
The reform process started in October 1990 with a liberalization of raw materials and inputs to industries (put on a list of Open General Import License - OGIL). The next step started in early fall 1991 and extended the liberalization to include imported final goods. New items were put on the OGIL list, the Export Retention Scheme introduced in the spring was broadened and in effect created an unofficial for- eign exchange market. During 1993 Zimbabwe had basically eliminated the quantitative restrictions to trade. The third step involved capital flow liberaliza- tion, by allowing the corporate sector to open foreign exchange accounts (January 1994). To eliminate the exchange rate differential between the official and the unofficial rate, the exchange rates were unified by an official float (influenced by Reserve Bank policy). Now at the end of this process, Zimbabwe is an extremely open economy. The only restrictions left on
the capital account concern returns to investments made before independence and holding foreign assets abroad.
To understand the real side adjustments to liberal- ization, we used the CGE model to simulate regime shift (see Davies, Rattso and Torvik, 1994b). The sec- toral balances captured allow the study of resource shifts between importables, exportables, nontraded construction and nontraded consumer goods. The main action involves the import-dependent construc- tion and importables sectors previously affected by rationing and protection. Their short-run supply func- tion is drawn in Figure 2, reproduced from Davies, Rattso and Torvik (1994b). It is upward sloping because of fixed capital stock implying increasing marginal costs. The supply curve under intermediate rationing is drawn as a solid line, and is steeper when rationing comes into effect, Reduced availability of imported intermediates can be compensated only imperfectly by domestic intermediates, and marginal costs increase for the intermediates aggregate. The rationing system offers the producers commodity- specific licenses for intermediates, and they are not allowed to resell. Clearly this system motivates rent- seeking, and costs associated with rent-seeking is another possible source of steeper marginal costs. In Zimbabwe the license holders were old clients of the government, and observers agree that costs associated with rent-seeking have not been important. License holders do get an implicit rent as a result of the rationing, since the price of the finished good is driven up by the protection.
The first step of the liberalization program did away with rationing of intermediate imports. The intermediate import demand functions for construc- tion and importables are now unconstrained. Figure 2 captures the expansionary supply effect, and the sup- ply curve shifts outward to the dotted line. Given the demand curve D, output will expand from a to b. The intermediate imports constrained importables and construction sectors are sources of expansion with lib-
Figure 2. Trade liberalization effects on import compressed sectors.
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eralization. The analysis of Davies, Rattsa and Torvik (1994b) indicates limited short-run response to inter- mediate imports liberalization, implying that firms have adjusted to the rationed conditions.
The government quickly moved on to liberalize final goods markets, and contractionary factors were introduced. The elimination of protection adds demand effects to Figure 2. Two counteracting forces can be identified. On the one hand, private savings rates are reduced when foreign goods are made avail- able, and the consumption demand goes up given the income level. Since the stock of wealth accumulated under rationing can be higher than desired under liber- alization, the immediate flow-effect on consumption can be quite large. If demand expansion dominates, we may end up in an equilibrium such as c in Figure 2. Both supply and demand factors are expansionary under liberalization. On the other hand, demand switches to imports since consumers have been forced to hold an inefficient mix of domestic and foreign goods. This effect tends to shift the demand curve to the left, possibly ending up in an equilibrium such as d in Figure 2, with output contraction as a result of lib- eralization.
The data base to evaluate the experiences of the 1990s is clearly still limited, but the broad picture drawn in Table 3 is correct. The economy expanded during imported intermediate liberalization (1991) as expected, and contracted during final goods liberal- ization (1992) when combined with drought. Our pre- liminary model analysis suggests that output would have fallen during 1992 even with normal rainfall due to the crowding out of import competing industries. The liberalization moved the economy from a to d in Figure 2. Compared to trend growth, output fell by about 10% in 1992. In 1993, the Gross Domestic Product still had not reached the 1990 level.
On the monetary side, inflation started to rise with liberalization. It reached an annual rate of nearly 50%. The drought which caused rising agricultural prices contributed to the inflation. The inflation has led to
dramatic cuts in real wages and thereby a shift in the income distribution away from urban unskilled labor. The interest rate level drifted up with inflation and reached a peak with an extreme real loan rate of about 20%. The inflation is on its way down (to about 20% in 1994), while the nominal interest rate level is slug- gish.
The foreign exchange balance has developed about as expected: imports have flowed in, while export response has been slow. In fact, real exports have fallen and the 1994 merchandise exports are still below the 1990 figure (measured in US dollars). The trade deficit was quite serious for a period, close to 20% of GDP (when measured with a corrected “equi- librium” exchange rate). Foreign loans accumulated during the liberalization episode must be repaid, it is hoped, with higher export growth.
The liberalization has contributed to structural change, primarily deindustrialization. Manufacturing output fell by more than 20% from the peak in spring 1991. The output index of Table 3 shows that the industrial contraction has been turned around, but pro- duction is still well below that of 199 1. Compared to trend growth, the manufacturing output loss has been significant. Deindustrialization is expected when pro- tection of domestic final goods markets is reduced.
Overall, the economic development during the program has been most unfortunate. Output and employment seriously contracted, inflation and inter- est rates jumped up, income distribution shifted away from the urban poor, exports fell, the current account deficit led to accumulation of new foreign debt, and private investment and savings have probably fallen. The positive side so far is an expansion of private and to a large extent imported consumption for the upper middle class. A great deal must be gained in terms of future exports and output growth to make the liberal- ization a successful reform.
The environmental consequences of the reform program are difficult to evaluate at this stage. Using the concepts of Gibson (1996), extensive degradation
Source: Central Statistical Office and World Bank. 1993 and 1994 figures are estimates. *Merchandise exports, million US$. TMerchandise imports, million US$. *Trade balance including services, million US$. $Index of manufacturing output, 1980 = 100. 199Lfigure is January-July.
404 WORLD DEVELOPMENT
related to resource extraction should go down with deindustrialization. The tendency of a resource shift toward mining counteracts this improvement. Worsening of intensive degradation driven by rising inequality and falling employment is probably domi- nant.
8. LONG-RUN PROSPECTS
As discussed in section 3, the new government tried to shift the income distribution by wage increases and social expenditures after independence. Phase one may be interpreted as an attempt at redisti- bution with growth. With hindsight we know that the redistribution was not macroeconomically sustain- able. The strategy was aborted when the economy ran into a foreign exchange bottleneck. Unfortunate cir- cumstances, such as consecutive drought seasons, worsened the stabilization problems. A redistributive strategy always has the risk of threatening profit-tak- ers, thereby reducing both exports and investment.
The development model chosen in phase two relied on managed export orientation. The export perfor- mance was promoted to generate sufficient foreign exchange to finance the import demand of existing import-intensive production activities. Economic pol- icy stimulating exports from commercial farmers and industrialists was distributionally biased. The major losing group was unskilled labor, suffering from the lack of employment generation. No new major distrib- utive initiatives were taken, and land reform was post- poned. ‘The model assumes a partnership between gov- ernment, commercial farmers and industrialists to promote exports. Many observers see the failing growth after 1983-84 as a result of the breakdown of the part- nership that existed during the UDI period (Robinson, 1993). In a sense, the government could have improved the growth performance by worsening the income dis- tribution even more - by treating the exporters even more favorably. If higher growth was achieved, poten- tially everyone could have gained. It is highly uncertain that trickle down or government policies would have distributed the gains to the poor sections of Zimbabwe.
We now know that the government had other plans - they wanted to arrange the conditions for a more standard liberalized open-market economy, to which we turn. The long-run prospects of the liberalized Zimbabwe are dependent on the restructuring of industries toward exports to compensate an expected loss of previously protected importables production. Robinson (1993) offers some qualified guesses in terms of comparative advantage. A successful transi- tion based on the structural adjustment program implies an export-oriented growth model with direct benefits mainly for commercial farming, export man- ufacturing and mining. Labor-intensive domestically oriented manufacturing and services are assumed to follow. The economy climbs over the top of Kuznets’s inverted U-curve, presumably with tightening unskilled labor markets and rising unskilled real wages. Improved living conditions in communal lands can follow if infrastructural investments and exten- sion services are promoted.
Unskilled labor is likely to carry the short-run bur- den of liberalization during deindustrialization, while only those communal farmers marketing surpluses will benefit from higher food prices. Can we identify forces suggesting that the unskilled will be included in the growth process at a later stage? Increased eco- nomic growth is a necessary, but not sufficient condi- tion to raise living conditions of the unskilled. Given a population growth above 3% per year and a large pool of un- and underemployed, labor demand must grow rapidly to satisfy the Kuznets mechanism. Even with an annual labor demand growth of 5%, it will be long before unskilled labor markets tighten. The success of long-run trickle down is an open issue.
The immediate shift in the income distribution toward exports farming and mining may reproduce itself. The farm workers of commercial agriculture will take a limited share of new agro export earnings, and export-oriented mining is capital intensive. This economic structure is not conducive to strong demand effects asking for unskilled labor. In addition, the strategy may lead to a primary goods-oriented econ- omy after a period of deindustrialization.
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