Tuesday, April 13, 2010

Implementation of new ownership rules in Zimbabwe leaves economic recovery in question


All Africa.com: Zimbabwe: Govt Says No to Engen Buying Assets

All Africa.com: Zimbabwe: Mugabe Ignores PM's Directive
Cato Institute: R.I.P. Zimbabwe Dollar
Cato Institute: The Loss of Property Rights and the Collapse of Zimbabwe
Wikipedia: Zimbabwe
All Africa.com: Zimbabwe: The Coast is Not Clear Yet
All Africa.com: Zimbabwe: Future Generations Will 'Inherit Only the Wind'

Zimbabwe has recently taken its first action under a new law that attempts to rein in foreign control over companies and resources. This has already caused concern by foreign investors who already regard the country as hostile to investment. It has also created growing uncertainty over how the law will be implemented in the future. Investment concerns are always worrisome, but they can become a critical issue in a country where poverty and unemployment are extremely high. The economy has the potential to rebound, but laws like this are making some worried that future generations will find the country as destitute as today.

Zimbabwe is no stranger to interfering in private ownership. Starting in 2000, the government started a land reform policy that took farms away from their white owners and attempted to redistribute the land to blacks. No compensation was paid to the legitimate owners, and this was the first time that private property rules were abridged by the government. Experts point to this as one of the major causes of the economic crisis that started in 2000 and is still grinding on today.

Currently the economic situation in Zimbabwe is dire. Unemployment is still at 90% and social services have not been restarted. Even steady electricity is not guaranteed. Previously, Zimbabwe was one of Africa’s stronger economies, but poor management and drought destroyed its strong position. At one point in 2008, the inflation rate skyrocketed to 89.7 sextillion percent, making it the second highest inflation rate in world history. The business world was also hurt by price controls and government programs that printed money. Thankfully, the economy has picked up in 2009, with companies reporting stronger numbers, but at the same time cautioning that the coast is far from clear.

For some time Zimbabwe has been described as unfriendly to business of any type. Some company executives have reported police persecution, while others felt like running a business has become itself a criminal act. This led investors to take their money elsewhere, and investment in the Zimbabwean economy dried up.

The ongoing effects of investment pullout are being seen currently and will be exacerbated by this new law. Oil giants Shell and British Petroleum decided to leave the Zimbabwean market and to sell their assets. Engen Petroleum and Kenyan oil retailer KenolKobil wanted to buy these assets that included filling stations, fuel deposits, and a petroleum blending plant. The Indigenization and Economic Empowerment Act says that Zimbabweans must have 51 percent ownership of strategic businesses. Local Zimbabwean petroleum companies voiced concern over the transaction, and the government announced it would not approve the sale. Business leaders believe this law will only serve to keep investment away.

All countries want a strong economy, but the mind-bending situation in Zimbabwe is uniquely poignant. As a result of the negative business climate leading to unemployment and a lack of social services and poverty the citizens of Zimbabwe have been forced to turn to using firewood, thus destroying their forests. One activist described the situation as “future generations will "inherit the wind." If current policies that prevent economic growth continue, it seems almost certain that Zimbabwe will not move forward.


1) Should countries require a percent of domestic ownership?

2) Do foreign companies have any obligation to make even small investments in Zimbabwe to help alleviate poverty and unemployment?

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