Eddie Cross's Website

Economic Fundamentals

For most people the situation in Zimbabwe is quite bewildering. They find it very hard to work out what is happening and to understand why. In fact if you observe a few simple, but fundamental rules, it is quite easy to understand why the collapse here has taken place and the speed with which it has destroyed what had been quite a decent, if small, economy.

In my own business I have to observe these simple rules every day - or go out of business. So for example I watch the following issues very closely on a daily basis:

1. Does my staff feel they are a real part of the business and have a very real say and stake in what goes on? If not, I cannot command their loyalty and commitment to the business and without that, we simply cannot succeed in the long term
2. Are we making more money than we are spending? Its very simple really - you can ignore the issue of 'profitability' because that can mean many things, but you cannot ignore your cash flow. In basic terms if you are not making more money than you are spending, you are going broke.
3. Management is about managing change. Our working environment is changing every day - sometimes by the hour. You cannot do much about the changes taking place but you can learn how to surf the waves and enjoy the process.
If you do not, you will pretty soon find yourself on the beach.

It's like that in the country. If you print more money that is actually needed to fund day-to-day transactions, you reduce its value. It's like pouring water into a glass with some cool drink concentrate in the bottom. Put too much water into the mix and it is tasteless - in monetary terms, it will buy less. By doing so, government destroy value and savings, they secretly tax their people by reducing the real value of what they earn or have in their pockets by running the presses at the Reserve Bank.

If a nation spends more than it earns it has two options - it can borrow the money from others willing to lend or it can print money. In the first instance if they borrow from those who are a captive lender and take advantage of their power to do so on uneconomic terms, then they pay a lower return on such borrowings than would be demanded in a 'free' market. Both happen in Zimbabwe. We run a budget deficit that is extraordinary by historical and world standards - last year it was over 60 per cent of GDP.

When even borrowing on the scale we undertake simply cannot fund this level of spending then we print money, vast amounts of it and in doing so we foster inflation and destroy value. This is why the real earnings of everyone who lives in Zimbabwe are now down to about 10 per cent of what they were 20 years ago. This is why all pensions are no longer worth the paper they are written on. I think the failure of the pensions industry to protect the real interests of their clients is an absolute disgrace. In my own case I contributed to 5 separate policies for all my working life and when they matured it would have cost the company more to write me a letter thanking me for 50 years of servitude and to write a cheque that would not buy me three loaves of bread today.

When governments behave like this they are in criminal dereliction of their duty towards their people. That is the position of the Zanu PF regime in Zimbabwe today. The fact that the private sector has been complicit in this whole exercise is another shameful episode. Then we come to two other key issues. The first is the truth that people only look after what they own or have secure tenure over. When I was a small boy my father became an alcoholic. He started out as a social drinker, it got out of hand and when he finally woke up to what he was doing, we were homeless, broke and five kids dependent on a working mother with a standard two education.

We moved from a large home in an up market area to what was effectively a slum; Municipal housing occupied by low-income families. When we had been there for a few years, the City decided to give us title. We were allowed to treat the rent we had paid as a deposit and were given a bond for the rest. The transformation was immediate; people painted their homes, put up walls and planted gardens. I have never forgotten the lesson.

Even today you can drive around any suburb and you will see which homes are owned and which are rented. In the agricultural sphere it is the same - the foundation of productive agriculture is a sound and secure tenure system within a functioning legal system. Destroy that and you create deserts. Africa's biggest problem is the loss of productive land through land degradation. That is why our deserts are growing faster than anywhere else in the world.

The second truth is that only markets can allocate resources efficiently and make the hard decision as to what a product or a service is worth. You interfere with this principle and you will pay a terrible price. I have seen it all too often - try to knock a price down in a negotiation and you will often get nowhere until you can say the magic words, 'I can get this product cheaper elsewhere'.

In Zimbabwe we have violated all these fundamental principles and are now paying the price. The loss of security of tenure has destroyed our farms. The failure to observe basic discipline in our economic affairs is driving inflation to historic levels, the attempt to halt inflation by exercising control, is now wiping out what is left of our economy.

I warned my colleagues in the MDC leadership the other day that no foreign owned firm or even a locally owned firm would accept the demand for 51 per cent control. This is true for any country in the world but even more so in Zimbabwe where everyone knows what the intended beneficiaries would do with such control.

Countries, like ordinary people, can only learn from their mistakes. We are certainly doing that and I see in that process great hope. Perhaps when finally we throw off the yoke that we were landed with in 1980, a new generation of leaders will come to the fore and having seen what happens when you disobey the basic rules of economics, will instead make the necessary decisions to take the country in a radically new direction. It's not rocket science.

Eddie Cross
Bulawayo, 24th August 2007