International Experiences on Economic Policy Reform: Critical success factors and Recommendations for Zimbabwe By Dr. A. Makochekanwa Department of Economics.

International Experiences on Economic Policy Reform: Critical success factors and Recommendations for

Zimbabwe

By

Dr. A. Makochekanwa Department of Economics

University of Zimbabwe

Cell: 077 4444 390

[email protected]

1June 13th 2013 ZNCC Annual Conference: Elephant Hills, Victoria Falls

mailto:[email protected]

Introduction

Economic reform – broadly taken to mean policy changes that can help boost a country from low gross domestic product (GDP) growth to high growth rate of at least 7% per year.

Warning! There is no one-size-fit all economic reform(s), BUT countries can learn from what others have done, and done it well such that they did achieved GDP growth of at least 7% for a consecutive long period of time!


China Prior to the initiation of economic reforms and trade liberalization in 1978,

China maintained policies that kept the economy very poor, stagnant, centrally-controlled, vastly inefficient, and relatively isolated from the global economy.

Since opening up to foreign trade and investment and implementing free market reforms in 1978, China has been among the world’s fastest-growing economies, with real annual gross domestic product (GDP) averaging nearly 10% through 2012.

In recent years, China has emerged as a major global economic and trade power.

The country is ranked 2nd after USA in terms of GDP.

The question then is: What reforms did the country implemented which changed its fortunes, and is there anything that Zimbabwe can learn!


China – Economic trend


China – Major components of Economic reform1) Agriculture (Introduction of household responsibility system)

2) State-owned Enterprises (SOEs)

Institutional changes were adopted and carried out step by step:

i. First SOEs were given autonomy in production, marketing and investment decisions

ii. Second, SOEs were made financial independent, allowing them to keep earnings as their own profits after paying taxes


China – Major components of Economic reform3) The Open-Door policy

Under the open-door policy foreign trade and foreign investment are encouraged:

i. On trade, a number of institutional reforms were introduced:

a) Provinces were given autonomy to promote exports

b) Trading companies were established to facilitate decentralization of trading activities

c) Special treating was given to exporting companies (export retention allowances etc)

d) Several Export processing zones (EPZs) were established

ii. On foreign investment

a) Foreign investors were allowed to set up factories

b) Foreign investors were given special tax breaks

c) Government encouraged certain categories of investment which are useful for new technology in agriculture, in the production of energy, transportation and vital raw materials, and in renewing resources and prevention of environmental pollution


China – Major components of Economic reform4) The Price System

The main objective of the introduction of the price system reform (in October 1984) was to decontrol the administratively determined prices gradually and allow prices to be determined by market forces.

5) Development of Non-State Sectors Besides the state enterprises there are three other types of enterprises in

China: collective, individual and overseas-funded. In 1978, SOEs produced around 77% of total gross industrial output by

value and that share declined 28% by 1996, and is currently less than 20%.

6) The Banking and Financial Sector From mono-bank (People’s Bank) in 1978 to a system with commercial

banks and insurance firms


China – Characteristics of the reform process 1) There was political stability

2) The reform did not had a blueprint – each step was taken after drawing the experience of the previous step.

3) The steps (in (2)) were taken one after and gradually [and not all at once (not big-bang nor shock therapy)] [Deng Xiaoping’s oft-quoted dictum to “cross the river by feeling for the stones”]

Why was economic reform successful?

1) The basic element of reforms were successfully introduced and strongly supported by the government (political will)

2) Availability of large amount of human capital

3) Competence of Chinese leaders in carrying out reforms


India Indian economy was in deep economic crisis in July 1991, when

foreign currency reserves had plummeted to almost $1 billion; Inflation had roared to an annual rate of 17 percent; fiscal deficit was very high and had become unsustainable; foreign investors and NRIs had lost confidence in Indian Economy. Capital was flying out of the country and we were close to defaulting on loans.

After pursuing an inward-looking development strategy with the state assuming an important role for more than four decades, India decided to take a historic step of changing tracks in 1991. It embarked on a comprehensive reform of the economy to widen and deepen its integration with the world economy as a part of structural adjustment.


India – Economic growth trend


India – Major components of Economic reform 1) Home-grown approach for reforms

2) Inevitability of gradual implementation in a pluralist, highly participatory democracy.

3) The third is that implementation of com plex reforms involves a process of learning and discovery, which means that there were inevitably be some false starts and midcourse adjustments in the implementation process.

4) The fourth is that when dealing with multiple reforms on several fronts, careful attention must be paid to sequencing.

5) Liberalization and State governments. Liberalization implied that unless state governments (as opposed to central gvt) actively engage in reforms, the potential benefits of liberalization may not materialize.

6) Finally. India's experience yields important lessons about poverty alleviation.


Mauritius Mauritius has developed from a low-income to a middle-income economy

within a relatively short period of time, with an average annual growth rate of 5.5% over the past 10 years, a per capita income of US$7,500 today compared to $200 in the late sixties, and a correspondingly substantial reduction in poverty.

There have been significant structural transformations in the economy characterized by doses of policy reforms, from the agrobased mono-crop culture (dominated by sugar production) to a much more diversified export-oriented one.

The export-led growth of Mauritius could in essence be explained by access to preferential trade arrangements under the Lomé Convention, for its sugar, and the Multi-Fibre Agreement, for its textile products.


Mauritius – Growth trend

June 13th 2013 ZNCC Annual Conference: Elephant Hills, Victoria Falls 13

Mauritius – Major components of reform1) Sectoral transformation

Over the past three decades, economic growth in Mauritius has been principally driven by three main sectors; sugar, tourism and the Export Processing Zone (EPZ), while financial intermediation, a fourth sector, played a more prominent role over the last decade.

However, with the gradual phasing out of trade privileges, Mauritius had already started to diversify its economy further by establishing a total of FOUR more pillars, namely financial services, (particularly offshore banking), Information and Communication Technology (ICT) (partnering with India!), seafood hub (partnering with Malagasy gvt – who have low labour costs and rich stock of fisheries) and the knowledge hub.


Mauritius – Major components of reform2) Fiscal policy

First decade after independence gvt was guided by Keynesian advocacy of expansionary public spending to achieve higher economic growth rates through linkage effects.

This led to pronounced fiscal imbalances and worsening of economic conditions in the late 1970s and the beginning of the 1980s.

However, following adoption of IMF supported structural adjustments, there was a shift in policy regime, and the state took prudent measures by investing massively in both physical capital formation and human capital formation – critical to attract more FDI, leading to an expansion of the productive potential of the economy as a whole.

The increasing investment and the expansion of EPZ exports led to higher growth rates that helped the state to reduce its external debt significantly from 24% in 1981 to 12.9% in 2004.

It is informative to add that the initial conditions that triggered rapid policy reforms which proved to be successful were backed by strong political will


Mauritius – Major components of reform3) Financial sector reforms and micro-credit schemes

Monetary and financial sector reforms meant that BOM instructed commercial banks to provide a wide array of financial packages to small and medium enterprises in order to boost private investment and encourage the small and medium enterprises (SMEs) to invest in agrobusiness, aquaculture, garments, retail outlets and other niche markets.

The SMEs have been encouraged to take full advantage of the regional trade agreements (RTAs), SADC and COMESA amongst others, to outsource their products.

Interest rates have been kept within controllable bounds and intentionally regulated through OMOs and moral suasion as and when the need was felt – this helped in the progress of the EPZ and services sector bringing multiplier effects to the economy.

In addition, the Development Bank of Mauritius has played an equally important role in agricultural credit and softer loans to some priority sectors of the economy at highly concessionary rates. These have encouraged the inception of small scale businesses, such as retail outlets, the community of planters and of fishermen who could strengthen their production technologies and reduce their vulnerability to risks and uncertainties.


Mauritius – Major components of reform4) External trade regimes

The external trade sector was marked by trade preferences under the Lomé Convention for sugar/Cotonou (to EU) and the Multi-Fibre Agreement for garments (to US).

In fact, Mauritius took full advantage of the Multi-Fibre Agreement by offering attractive fiscal incentives, such as duty free access to imported raw materials for the textile industry and unprecedented tax concessions on profits realized by foreign investors

The potential threats to developing countries with respect to trade liberalization have urged many economies to establish regional trading blocks such as the SADC, COMESA and New Economic Partnership for Africa’s Development (NEPAD) amongst others – and Mauritius is party to all these three!

The movements of goods and services between Mauritius and member countries in the SADC and COMESA have actually been low (DUTY FREE ISLAND?) –


Mauritius – Major components of reform5) Quality of institutions

Mauritius has been faring reasonably well in terms of quality of institutions (See Table below from Human Development Report)


Indicator Mauritius Standard Range of Values

Policy Score 10 -10 to 10 [-10 authoritarian ; and democracy]

Civil Liberties 2 7 to 1 [1.0 – 2.5 free; 3.0-5.0 partly free; 6.0-7.0 not free]

Political Rights 1 7 to 1 [1.0 – 2.5 free; 3.0-5.0 partly free; 6.0-7.0 not free]

Press Freedom 17 100 to 0 [0 –30 free; 31-60 partly free; 61-100 not free]

Voice & Acco 1.7 -2.50 to 2.50, higher the better

Political Stability & Lack of Violence

1.2 -2.50 to 2.50, higher the better

Rule of Law 1.00 -2.50 to 2.50, higher the better

Gvt effectiveness 0.76 -2.50 to 2.50, higher the better

Corruption Percepti

4.5 0 to 10, higher the better

Corruption: Graft 0.49 -2.50 to 2.50, higher the better

Rwanda Rwanda’s economic growth over the last decade has been remarkable. With a

government that is committed to achieving sustainable economic growth coupled with growth in employment opportunities for its people, Rwanda has made impressive progress in rehabilitating and stabilizing its economy to exceed pre-1994 levels.

The overall economy is growing at a significant rate. The average annual growth rated in GDP was 8.8 per cent between 2005 and 2009. Rwanda’s GDP per capita has increased from less than 200 USD in 1994 to 540 USD in 2010.

Although still at an early stage, the GoR has set a set path towards economic transformation in Rwanda


Rwanda – GDP trend


Rwanda – Major Economic reforms 1) Government introduced revised tax code and implementation of the doing

business reforms since 2005 (increased and/or attracted both domestic and FDI)

2) Export incentives were introduced (including export diversification into areas prioritised by government)

3) There has been an incipient (beginning) structural shift in the mode of production away from low-productivity subsistence farming to a higher degree of market-orientation and more use of soil-enriching and yield-enhancing cash inputs.

4) Government has encouraged development of the non-agricultural sectors of the economy. This has been dominated by a proliferation of small-scale business and activities operating on an informal or semi-informal basis.

5) Tariff liberalization

6) Financial and monetary liberalization


Rwanda’s Innovative Poverty Reduction Programs – Highlights

Vision 2020 Umurenge: This is a pro-poor rural development and social protection programme. It aims to eliminate extreme poverty by 2020 through releasing the productive capacity of the very poor. It includes public works, credit packages and direct support and is implemented at village level using participatory methods;

1) One cow per family (Giringa project)

2) Umurenge SACCO (Saving mobilisation scheme)

3) Umuganda Evaluations (community self-evaluations of MDGs progress)

4) Performance contracts (Imihigo): Accountability of local authorities to Government through citizen participation


Zimbabwe – Desired positive future is possible… Here comes IRAQ growth rates


Zimbabwe – Desired positive future is possible… Here comes IRAQ GDP per capita


Recommendations for Zimbabwe 1) Home-grown reforms (or is borrowed, should be sustainable after the supporter has

gone)

2) Reforms and/or policies must be faithfully implemented

3) Need to consider issues of sequencing and gradualistic (when applicable)

4) No country has sustained rapid growth without keeping up impressive rates of public investment (or at least seriously encouraging investments) – in infrastructure, education, and health.

5) Make effective use of your readily available resources – land, minerals (platinum, diamonds etc), human capital etc

6) Need sound and high quality institutions

7) An increasingly capable, credible, and committed government. EFFECTIVE POLITICAL WILL NEEDED!


Matendwa

Thank You

Siyabonga

Amaseginalo

Muito Obrigado,

Asante Sana!

June 13th 2013 26ZNCC Annual Conference: Elephant Hills, Victoria Falls

International Experiences on Economic Policy Reform: Critical success factors and Recommendations for Zimbabwe By Dr. A. Makochekanwa Department of Economics.

Documents

zncc annual conference

victoria falls

elephant hills

economic policy reform

introduction economic

china economic trend

economic reform successful

initiation of economic