ONE of the main focus areas for the modern-day economist is to advocate for policies earmarked at alleviating poverty and reducing inequality.
Most economists concur that economic growth should be maintained as a major policy objective. A major reason for this being that it is a feasible option to solve the problem of poverty.
The argument is that with economic growth, the lives of the poor can be improved without taking anything away from the better-off. The most famous economist of the 20th century, John Maynard Keynes, contended that the very essential economic problem — scarcity — can be abolished through economic growth.
However, new studies are showing that poverty is not just one problem but instead an accretion or series of different problems which feed on each other.
Mthuli Ncube, Finance Minister
As such, there is no one silver bullet for poverty alleviation. In addition, the arithmetic of economic growth does not necessarily imply any reduction in economic inequality.
If the incomes of the rich and the poor grow at the same rates, the proportionate difference between them stays the same, and the absolute difference — in dollars per year — actually increases. As demonstrated by the original Kuznets curve hypothesis, when growth or industrialisation increases, income inequality first increases and then decreases at a later stage. Inequality is only expected to decrease when a certain level of average income is reached and the processes of industrialisation — democratisation and the rise of the welfare state — allow for the benefits from rapid growth and increase the per-capita income.
That said, concerns are that while recent numbers show improvements on poverty levels, more than 700 million people still remain in extreme poverty, in certain parts of the world, particularly in Sub-Saharan Africa. In the case of Zimbabwe, poverty levels have been increasing.
We expect Zimbabwe’s economy to contract by 12,7 percent in 2020 on the back of several headwinds such as (i) a drought that continues to weigh on agricultural output and energy production from hydropower and (ii) ongoing currency and a liquidity crisis that is hampering economic activity across the country.
Our view is that current policies are not addressing the fundamental constraints in the broader economy and are in actual fact increasing poverty levels in Zimbabwe. In this article, we discuss some of the main areas where current policies are perpetuating poverty.
Firstly, salaries and wages of most workers within the private and public sectors are in Zimbabwean dollars (ZWL). The deteriorating exchange rate implies that the real value of incomes is declining on a monthly, if not on a daily basis.
This situation presents serious risks for companies given the pressure to continuously review salaries. We also highlight that certain sectors such as real estate (rentals and property purchases) are still pricing in USD and this presents further pressures on disposable incomes.
Informal sector transactions are also in USD and ZWL pricing is pegged against the parallel market exchange rate. Wages and salaries of those that are formally employed have therefore, not moved in line with inflation. Most households are living below the poverty datum line. We estimate that the average Zimbabwean survives on less than USD50 per month. The World Bank defines extreme poverty as living below the International Poverty Line (IPL). The daily per capita IPL is a global absolute minimum of US$1,90/per capita.
Secondly, the limited avenues for companies to generate forex implies that production levels have dwindled (capacity utilisation projected at 27 percent in 2020).
The low productivity has led to downsizing thereby contributing to unemployment. Labour unions and other independent bodies have pegged the unemployment rate in Zimbabwe at between 80 percent and 90 percent. While this is clear evidence that the economy is largely informal, it gives a good indication of low household income. Other factors such as fuel and power shortages (also linked to forex) have also affected productivity levels across industries in Zimbabwe.
Thirdly, taxes in Zimbabwe remain high. It is worth noting that Zimbabwe has one of the highest personal income tax rates in the world. This is because the government is cash-strapped and revenues from the Personal Income Tax Rate are an important source of income. The Intermediated Money Transfer Tax has also negatively impacted household incomes and constrained consumer demand. The two percent tax has made the general populace worse off given the contraction in consumer purchasing power and the inability of households to build personal assets.
Finally, access to capital for small and medium sized businesses remains limited. In its Monetary Policy Statement, the Reserve Bank of Zimbabwe maintained the overnight accommodation rates from 35 percent per annum. We feel that this is still expensive for micro-enterprises. We have consistently insisted that policy makers need to boost employment and aggregate demand by providing financing solutions for micro-enterprises.
In conclusion, a major risk that could play out in Zimbabwe at this stage is social unrest. We feel the architects SI 142 have set in a “time bomb” that will soon explode.
Further, other economic and political risks also remain elevated. We maintain that investors on the local market should preserve value by parking ZWL balances in export-oriented stocks and those with ex-Zim exposure. Our top picks include Ariston, Padenga, Hippo, SeedCo, SeedCo International and Simbisa Brands.
Matsika is the head of research at Morgan & Co, a local investment banking group in Zimbabwe. He writes in his personal capacity.