I was pointed to an intriguing World Bank report recently – Creating markets in Zimbabwe: Mobilizing the private sector in support of economic transformation – that came out earlier this year. It is striking in a number of ways. Not only is it rather positive about the private sector, especially in agriculture, but it also is honest and realistic about the important role of the informal economy. It offers I think some important pointers for the future.
Zimbabwe aspires to be a middle-income country by 2030, similar to Egypt, Turkey, South Africa or Indonesia. For anyone living and working in Zimbabwe this frankly seems far-fetched, but the World Bank seems surprisingly positive, especially around agriculture’s potentials. For example, the report finds that Zimbabwe is highly competitive in several agricultural value chains including sugar, cotton, horticulture, as well as meat and dairy. Yet informality, it argues, restricts potential, even if the informal sector generates jobs and livelihoods on a mammoth scale.
A vibrant informal economy
Nearly the whole of Zimbabwe’s economy is informal, and many of the growth successes in agriculture the report highlights are in or linked to this large informal sector. The report points out that there are 1.1 million self-employed people and 1.6 million business owners of micro, small and medium enterprises in the country and that these “play a significant role as a source of employment and job creation”, even though 84% are informal and 94% not registered. These medium-small scale businesses are dominated by female owners, with the share of female-owned enterprises increasing to 60% in 2022. 39% are involved in agriculture and 37% in often related wholesale/retail business activities.
In sum, this is today’s Zimbabwe economy – informal, small-scale and female, but vibrant and generating jobs and livelihoods at scale. Zimbabwe is second only to Bolivia in having such a dominance of the informal sector at the heart of the economy. As the report notes, informal activity accounts for two-thirds of Zimbabwe’s output and four-fifths of its employment.
There is no point in berating those in the informal economy as some social media commentators and politicians are prone to do. This is the reality. The question is how to capitalise on it.
Constraints to growth
There are of course a number of major constraints to private sector-led growth centred on a largely informal economy. The main constraint identified is macroeconomic instability, which hampers the unlocking of private sector potential as an engine of economic growth. Other constraints include what the report calls the ‘poor business environment’, created through layers of bureaucracy and regulation, including outdated licensing requirements, which discourage formalisation of businesses. These are inheritances of the colonial era aimed at restricting the formal economy (to whites and regulated blacks), and the regulations are still being implemented and working to exclude. The consequence is that businesses remain informal, taxation is avoided and capital is sequestered or removed from the country.
Such businesses are in turn further constrained by a lack of access to finance. This blog has commented on this many times, and the failure of the banking system to come up with ways of financing agriculture with alternative forms of collateral arrangement remains a big burden. Interestingly, the report also mentions sanctions by name, unusual for a donor report. As everyone knows, the sanctions regime, while notionally directed to targeted individuals, affects the economy as a whole and reduces the flows of foreign direct investment. This is exacerbated of course by financial mismanagement, the use of extra-fiscal funding by the Reserve Bank and so on, all of which are also noted in the report as affecting the availability of finance for investment.
The final set of constraints centre on infrastructure – and the lack of reliable transport networks (poor roads, no functioning railway), electricity (endless load shedding) and digital access (poor and expensive networks). We all know this but having this laid out so clearly and in comparison to other middle income countries shows how far Zimbabwe has to go and what the scale of (mostly) public investment is required.
However, despite all this, the report observes that “Zimbabwe’s private sector has continued to show resilience and—in certain niche sectors—performs at a level equal or superior to that of many other African countries.” This is down to a skilled workforce, and some highly competitive industries. But continued instability due to political-economic factors means that net FDI (foreign direct investment) inflows as a percent of GDP are only half of South Africa and Egypt at just 1.2% of a low GDP value.
Agriculture as key to economic revival
Agriculture is perhaps the key sector around which an economic revival has to be built. The report notes how agriculture provides livelihoods for approximately 70% of the population, accounts for a third of formal employment, contributes more than 40% percent of national earnings from exports and is the basis for many forward and backward linkages in the economy, whether through processing, transport or input supply businesses (see our blog series on the ‘hidden middle’). The agriculture sector has accommodated a large flow of around 1.5 million people from urban to rural areas between 1999 and 2014, with 960,000 agricultural and 300,000 rural/small town service sector jobs created.
The major exported agricultural products, according to the report, are tobacco, sugar, raw hides and skin and cotton. Also, Zimbabwe produces crops that already have a large global market size including cotton and many horticultural products. Horticultural exports grew from by 6.8% in 2021, reaching a total of US$64.6 million. This growth was largely driven by exports of macadamia nuts, which contributed US$13.8 million (with Zimbabwe now the 5th highest global producer), as well as citrus, vegetables and flowers. The top agricultural export destinations in 2020 were the Netherlands, the UK, Belgium, Ireland, France and South Africa.
Unlike the usual dismal tales from international commentaries on Zimbabwe, the report was surprisingly upbeat, countering some of the negative narratives about Zimbabwe’s potential, especially in the agriculture sector.
Responding to multiple challenges
That said, Zimbabwe, as anyone knows, is not without its problems. The report lists a fairly predictable set of responses to Zimbabwe’s many challenges, the foremost of these being the need to create a level of macroeconomic stability to encourage investment.
The many stabilisation initiatives dealing with the currency, debt and improving Reserve Bank functioning and transparency are all aimed at this. Only with this can government address the major investment requirements. A revival will need a huge effort, as the much-touted road improvements and power generation projects ongoing are not nearly enough.
As the report acknowledges, Zimbabwe has a fairly robust and functioning financial sector (compared to many other African countries), but to get finance moving and business confidence increasing, much needs to be done, whether in the form of joint venture leverage, small business investment programmes, voucher schemes, insurance or other measures, alongside a wholesale overhaul of the regulatory and licensing system.
Transforming the economy
The most interesting part of the report was the discussion of how to transform the economy. As noted above, the economy is mostly informal, unregulated and poorly supported, yet given everything surprisingly vibrant. Rather than the usual narrative that condemns informality, the report accepts it and indeed the rationale for it persisting under current conditions. Given the prohibitive costs of formalisation, it makes sense to remain informal. This, the report argues, limits the transformational potentials that are clearly evident within the economy.
So rather than imposing formality through some heavy-handed restructuring or adding yet more regulation to prevent informal operations, the report argues that informality makes economic sense in Zimbabwe today but that the incentives to formalise must be increased through reducing the red tape and providing state support to new (formal) businesses.
Equally, since informality is effective at generating jobs and economic activity and dominates the economy for good reasons and cannot be eliminated or wished away, linkages between formal and informal sectors can be improved to facilitate growth and investment. In the agriculture sector, this might involve for example, joint ventures, hub and spoke estate models and various forms of contracting.
We see all of these emerging in our study sites already and it is good that such dynamics are being acknowledged as central to economic revitalisation and might yet see their way into policy thinking.
A refreshing, positive view
It is not often that I find a report by the World Bank on private sector led growth refreshing and encouraging I must admit, but this was an exception. It was a bit formulaic at times and the prescriptions suggested were rather limited, but the overall diagnosis I think is broadly correct. This runs as follows:
- The informal economy dominates the economy for rational reasons, and that it is an important source of growth, employment and linkage effects especially in the post land reform agriculture sector.
- Yet the potentials are not being realised because of excessive, outdated regulation, inappropriate state interference/subsidy regimes and lack of finance and infrastructure support.
- The possibilities for growth are there however – and the expansion of agricultural exports in certain commodities, despite all the constraints, is witness to this.
As the report suggests, this is only the beginning, as much more could happen if only policies changed (yes and that includes sanctions regimes). This positive view from surprising quarters surely provides a useful agenda for change, one that needs urgent attention.
This blog was written by Ian Scoones and first appeared on Zimbabweland