Foreign direct investment vs Domestic direct investments: Case of Zimbabwe economic recovery path

By Spiwe Kavhukutu 0734447461

Author is a Master of Science Degree in International Trade and Diplomacy at the University of Zimbabwe

Zimbabwe has been in economic doldrums for the past two and half decades due to a plethora of challenges. These were sired in economic mismanagement and political crises that led to capital flight from the mid-1990s especially after the failure of Economic Structural Adjustment Programs (ESAP). The economic downturn was exacerbated by unplanned expenditures by former President Robert Mugabe’s government like involvement of the Zimbabwe National Army (ZNA) in the former Zaire war and compensation of restless war veterans, which led to the plunge of the Zimbabwe dollar on 14 November 1997, which was termed Black Friday. To make it worse, the country also embarked on an unplanned fast track land reform program, which disturbed the means of production and invited crippling sanctions from the United States of America (USA) and European Union (EU) by the end of 2002. The result was a fall into an economic abyss that the country has been failing to get out of for the past twenty years. There was foreign capital flight as a result of failure by the authorities to observe private property rights as well as its failure to guarantee security of foreign investments. Furthermore, the country’s poor human rights record and low rating on the corruption perception index did not help the situation. This was the background that the New Dispensation, which was ushered in through ‘Operation Restore Legacy’in November 2017 sought to work against in order to pull the country from years of economic quagmire.

Structuralism theory, which was propounded by Raul Prebisch in 1949, describes best the development approach that has been embraced by the New Dispensation, which is pursuing inward-oriented development through implementation of the National Development Strategy I (NDS1) running from 2021-2025. This came after a realization that the country was not getting meaningful foreign investors even though it had embarked on an offensive diplomatic operation post November 2017 that sought to attract investments. Even the presence of the European Partnerships Agreements (EPAs), which facilitate trade between EU and regional blocs including Africa’s could not help ameliorate the situation. The country remained a bad investor destination. Human rights violations and political violence were cited as deterring foreign capital investments. The shooting of protestors on 1 August 2018 and from 14-16 January 2019 by soldiers did not do the country any good. The mega deals that were signed between President Mnangagwa and foreign investors remained stuck on paper and became an object of ridicule by the opposition. Western sanctions on Zimbabwe’s political leadership have remained firmly in place. These sanctions have also disqualified Zimbabwe from accessing lines of credit from International Financial Institutions (IFIs) such as the World Bank (WB) and the International Monetary Fund (IMF). The failure by Zimbabwe to meet its balance of payments obligations has also led to its credit rating plummeting and as such being effectively excluded from accessing key international capital markets for venture capitalists, industrialists as well as investors to come and invest in Zimbabwe’s economy. This harsh economic reality has forced Zimbabwe to learn from other emerging economies that succeeded with little to no real FDI from the West and to come up with home grown solutions to uniquely Zimbabwean economic problems. The crafting of NDS1 on the backdrop of the relative success of the Transitional Stabilisation Programme (TSP) was premised on the need to marshal and channel domestic financial, material and human resources to the laying of the basic fundamentals needed for economic growth- energy, transport, technology and industrial retooling.

This has led to the crafting of the NDS1, a structuralism theory-based development blueprint that seeks to awaken Zimbabwe’s economy from slumber. It follows successful implementation of the Transitional Stabilization Programme (2018-2020), which sought to reform areas of the economy and politics that were hindering sustainable growth by setting right fundamental needed to spur economic development. The NDS1 shifts the trajectory of the country’s development from being dependent on foreign investments to an inward-oriented path where the Government has realized that country is endowed with vast natural and human resources that only need harnessing and beneficiation in order for it to rejuvenate its ailing economy. This is largely informed by the fact that more than forty years after independence Zimbabwe’s economy is still largely dependent on the extractive resources industry which largely exports most of its products in raw form which fetches a pittance on international markets. The emphasis in NDS1 on value addition, beneficiation and industrial capacity utilisation is thus aimed at making Zimbabwe’s economy a modern industrial economy that produces finished products that meet international standards and by extension increase the country’s revenue in-flows. This would be achieved through an Integrated Results Based Management (IRBM), which comprise of integrated development planning, result based budgeting, personnel performance system, monitoring and evaluation and management information system. These are the stability pillars upon which Vision 2030 as espoused by President Mnangagwa would be premised.

Key areas that are to catalyze rapid development include macro-economic stability where the economy is expected to grow by rates of GDP above 5%, stabilization of the foreign exchange rate to contain inflation, attaining per capita income of more than US$3 000.00 by the year 2025 and creation of more than 700 000jobs. Mining, agriculture, image building and international engagement and reengagement are expected to play key rolestowardsrealization of an industrial revolution. This would translate to a good life for Zimbabweans who will be expected to enjoy modern infrastructure and services that come with status of an upper middle-class economy as espousedby the country’s Vison 2030. It’s not an easy road but if followed to the letter and spirit of its architecture, NDS1 will change the economic fortunes of Zimbabwe.

The pivot to focus on domestic investment is not only a reaction to the lukewarm response the country has gotten from the West in terms of political and economic reengagement but rather is premised on contemporary historical precedent that highlights the importance of domestic investment. Contemporary economic theory as well as the bedrock of economic theory as espoused and advanced by great economic thinkers such as Adam Smith argues that a country can only develop economically if its own domestic financial wherewithal is harnessed towards a common goal. Recent examples such as China, Brazil and India stand as testament to the utility of utilising domestic resources and channeling fiduciary resources to infrastructural development. The Asian miracle in China was achieved through massive savings in the population and the direction of these savings to industrial retooling, technological advancement through research and development as well as strategic infrastructural development in energy, transport and technology. Although FDI has played a role in China’s economic progression, it goes without saying that the foundational framework for this economic growth was painstakingly laid by domestic investment. This is the same trajectory that NDS1 aims to take Zimbabwe through. This has been seen through the massive investment in energy projects such as the Gwanda solar project and the Togwe-Mukorsi Dam which all present unique and exciting energy generation opportunities that not only seek to exploit the cutting edge of green energy but seek to do so in a sustainable manner in line with Zimbabwe’s vision 2030. The focus on energy generation by the New Dispensation is informed by the fact that current power generation is not enough to meet local consumption demand even though industrial capacity utilisation is at less than 30%. This means that energy supply is at the core of any economic growth the country would want to see. As such it is imperative for Zimbabwe to invest heavily in energy security in order to provide its economy with a firm foundation on which to build its industrial capacity and move from a net importer of finished goods to a net exporter. The development of energy generation capacity thus forms a key pillar of NDS1 in order to increase industrial productivity.

Other strategic infrastructure projects have been the upgrading of the Beitbridge-Harare-Chirundu highway which serves as the connecting artery for Africa’s most sophisticated and diverse economy, South Africa, to the rest of Africa. This trade lane is of strategic value as it places Zimbabwe at the crossroads of African trade and commerce. These impressive strides have been made through harnessing and utilising local capital and domestic investment form budget surpluses. The long term benefits of these initiatives are turning Zimbabwe into a regional economic powerhouse through a diversified economy that has a firm industrial base as well as linkages with other industrial capabilities within the SADC region. As such the basic development of infrastructure is aimed at making Zimbabwe a producer of finished goods rather than depend on extractive industries for foreign currency earnings. This realisation has thus exposed the dangers of overexposure and dependency on FDI which is largely focused on the extractive industries such as mining. These industries rely on exporting raw unprocessed products which are not value added shortchanging the generality of the Zimbabwean population by way of artificially low prices paid for these precious natural resources. FDI investor for the most part only focus on importing machinery useful for the extraction of precious resources such as gold, diamonds and platinum and contribute little if anything to the general development of the country in terms of roads, schools, hospitals and energy generation plants- which ironically are the seeds for weaning Zimbabwe off the need for FDI though setting up the spark needed for a nascent industrial processing base. 

In this regard FDI is by nature designed to keep a country depended on the metropole or center as argued by Raul Prebisch in his seminal dependency theory. Dependency theory explains the economic quagmire that most third world countries, especially those in Africa, find themselves in. Most extractive resource dependent country’s often fail to stimulate any economic growth independently without financial aid or FDI from the global north. Countries such as the Democratic Republic of Congo (DRC), Libya, Chad, Sudan/ South Sudan and Angola have fallen prey to the resource Curse where an abundance of precious natural resources has led to conflict and political instability due to conflict over control of these resources. The lack of FDI into diversifying the economies of these resource rich countries points to a sinister motive which is to keep the global south dependent on the international capital markets for FDI. It is pertinent to note that this FDI only flows as long as the resources can still be exploited, once they run out the capital tap also dries up. The economic dependency on extractive industries has also led to economic instability and hyper sensitivity to international market shocks such as the economic collapse Zambia experience in the 1990’s when copper prices tumbled. It is with these lessons in mind that Zimbabwe has learned, albeit the hard way, that FDI is a double edged sword that gives a short lived false sense of security. NDS1 in essence seeks to divorce Zimbabwe from this addiction to revenue flows from the export of raw materials and seeks to diversify the Zimbabwean economy from an extractives based economy to a knowledge based industrial economy. These steps all merge to remake Zimbabwe as a Middle Income country by 2030.

However it is important to note that domestic investment alone is not enough to lift a whole country out of poverty. With formal employment making up an estimated 5% of total employment and unemployment rates speculated to being at about 95%, the government of Zimbabwe faces an ever shrinking tax base from which to raise capital for badly needed vital infrastructural development. NDS1 has sought to increase taxes on the already struggling workers as well as on the few companies still operating in the country. These measures have been touted as increasing the budget surplus and therefore creating the necessary capital base needed to stimulate economic activity. However an unintended effect has been to erode the meagre salaries of workers in Zimbabwe and thereby decimating the little disposable income they have to spend on the products produced by the industries that the government wants to resuscitate. This is a chicken and egg economic argument, that can make ones head spin, about which comes first, taxation or industrial development. Liberal economic thinkers would argue that industrial development comes first, as taxation would only wipe out peoples savings (and also leave them without any disposal income to spend on products from industry), which are critical for building local capital pools that banks can then lend to industrialists. The small tax base also means there is very little revenue to collect in Zimbabwe, and juxtaposed with the colossal capital needed to stimulate industrial and by extension, economic growth, in Zimbabwe, it will take a lot more than domestic investment to lift Zimbabwe from the economic doldrums it finds itself in. this makes it imperative for Zimbabwe to find other friendly sources of FDI with favorable terms of trade. Zimbabwe’s dalliance with China has been to the detriment of its own nascent local manufacturing and has opened the door to unmitigated looting of the country’s natural resources by shadowy “investors” from the East Asian economic giant. Chinese investors have not invested in any meaningful long term infrastructure that does not directly aid their own economic activities in the country. They had also flooded the country with cheap Chinese products that local businesses have failed to compete with and have effectively destroyed local business initiatives which NDS1 purports to want to support. In this regard the search for FDI should not be done at the expense of local businesses but rather should be done n order to compliment already existing local business ventures in Zimbabwe.

Zimbabwe has a long way to go in terms of economic development. However with a sober approach to economic policy and an emphasis on generating local solutions for local problems, Vision 2030 can indeed become a reality. There is need to balance the need for FDI and assisting local businesses thrive in order to truly build a Zimbabwean economy controlled, owned and sustained by Zimbabwean capital. An economy that is sophisticated diversified and knowledge based in order to achieve sustainable development. These goals are achievable with visionary and resolute leadership that makes the hard decisions that need be made for brighter future for all Zimbabweans.

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