eBusiness Weekly
Alfred M. Mthimkhulu
In 2015, four economists at the Reserve Bank of Zimbabwe led by the then Director of Research, Mr Sam Nyarota, shared an insightful paper titled “An empirical assessment of binding constraints to Zimbabwe’s growth dynamics”.
The paper is available from the Bank’s website.
In it, the quartet studied economic data from 1980 to 2014. They wanted to find out what had constrained economic growth the most in that period. It is a must-read paper in times of key policy pronouncements such as National Budgets as it helps us reflect unemotionally on whether we are still deep in Chirinda forest or about to see and feel the glazing sun.
The paper used a method called Growth Diagnostics to determine what economists call binding constraints. In the ideal world, all problems in the way of progress can be identified and quickly eliminated. The real world is way more complex. Resources to identify and tackle all problems are always limited. This suggests that for us to move forward, leaders must be constantly aware of issues affecting progress and be able to rank the importance of each of those issues unclouded by personal biases.
The problems inhibiting growth the most are the binding constraints. Tackling other problems other than the binding constraints is unlikely to deliver progress.
Growth Diagnostics which Ricardo Hausmann and his colleagues came up with in the early 2000s is one method that helps us identify the binding constraints in any economic system.
What did the RBZ quartet find to be the binding constraints to growth in Zimbabwe using this method?
Two key things. They found that Zimbabwe had not been investing in fixed assets such as machinery and equipment. Economists refer to investments in such assets as “gross capital formation”.
They found that in the period to 2008, Zimbabwe suffered “a contraction of gross capital formation” meaning that the country’s manufacturing sector’s asset base shrunk.
The share of value-added by the manufacturing sector to the economy which had averaged 3,6 percent in the 1980s had been shrinking by an average of -7,2 percent between 1997 and 2008.
Their other finding was that productivity was low. Productivity must not to be confused with volume produced. It is the rate at which a factory converts inputs to finished products.
Productivity is evident when goods are quickly whisked-off the shelves by customers (locally and internationally) and competitors struggle to beat the price and quality of the goods. That certainly does not sound like a description of Zimbabwean goods. How do we change our fortunes?
As an armchair economist, I can throw numerous recommendations, the best being that the country must lure Foreign Direct Investment (FDI). FDI comes with better machinery, better production technologies and skills lacking in the country.
Since the target market for FDI products is almost always global than local, FDI boosts foreign currency earnings thus stabilising the local currency. But this is a pathetic recommendation in this fragile environment. Country risk is still too high.
Zimbabwe is unlikely to attract meaningful FDI for several years to come. If not FDI, how then can the country turn its fortunes and realise growth?
Before answering that question, let me express a fundamental concern on the paper by the quartet. On refection, the paper studied symptoms of problems than the problems. Low gross capital formation and productivity are not constraints but outputs of an economic system. They are symptoms of problems. Obviously, land reform-related pandemonium explained and still explains lack of investment in Zimbabwe by both local and international capital.
As the economists at the Bank shared their paper in 2015, my academic mentor and I were publishing a paper on binding constraints to the growth of small-to-medium-sized enterprises in South Africa.
We used the same Growth Diagnostics approach the Bank’s economists used, except that our hypothesised binding constraints were not economic data outputs but infrastructural and societal considerations such as availability of skills, managers’ education levels, electricity availability, transport, crime rates and so on. We found that crime and electricity affected growth the most.
We concluded that even though crime had significant effects on growth, it was in itself a manifestation of the binding constraint namely, limited electricity supply for industrial growth which stifled job creation thus raising social tensions and crime itself.
In our time, energy generation constraints in whatever form are the most towering challenge across SADC. Headlines and general conversations in South Africa, Zambia and Zimbabwe attest to that. When this binding constraint is addressed, the region will leap onto a new growth trajectory. For that to happen, energy engineers and related scientists (including economists of course!) must be empowered to explore better ways of harvesting and storing renewable energy.
In any case, the intensity with which societies embrace scientific dissection of problems and innovate determines their global rankings in well-being.
Accordingly, forthcoming budgets must nurture necessary structural changes to eliminate the binding constraints. That’s what some of us will be paying close attention to for several years to come than fleeting deficits and surpluses.
Alfred M. Mthimkhulu, Senior Lecturer, Graduate School of Business, NUST. Email: [email protected]. Twitter: @mthimz
