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Indigenisation — Sharing crumbs of cup cake?

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WHEN it comes to populist policies such as indigenisation, you cannot question the craftsmanship and frothing passion of its most avid political proponents.

Report by Lance Mambondiani

It’s a zero sum game; foreign shareholders and the private sector have been bullied and marched into submission and the rest of us have to unquestionably believe in the sincerity of State paternalism as a redistributive force with the capacity to deliver people from inequality and out of poverty.

If this is the only economic policy in town, the question is, in its current format. Will the indigenisation policy change the lives of ordinary Zimbabweans? Will it create jobs, reduce poverty or spur economic growth?

BEE – “Black Elite Enrichment”
Like land redistribution, there is little argument about indigenisation as a justifiable imperative — the country’s economic transformation requires a restructuring and democratising of ownership and control of the economy by empowering the historically oppressed to play a leading role in the mainstream economy.

Several African countries have attempted different empowerment models with mixed results. Of course, very few of these have been as combative and headline-grabbing as ours. Evidence across Africa suggests that almost consistently, empowerment models which focus on redistribution have benefitted distributional cartels consisting of those in power at the expense of ordinary people.

The policy has succeeded in replacing a foreign capitalist with a black one with no real impact on addressing inequality.

A very small cake to indigenise
As a pathway to economic growth, the indigenisation agenda appears feeble and deficient.

The policy’s major weakness is its central focus, the requirement that all companies with a share capital above $500 000 dollars (or a specified threshold) should arrange for 51% of their shares or interests to be owned by indigenous Zimbabweans. In this regard, the policy is fixated on the redistribution of the past. Changing who owns 51% of a company may alter the ownership structure (perhaps from white to black), but it offers little incentives on creating new jobs to address the high levels of unemployment.

Besides, after years of economic collapse, the private sector has been decimated and has shrunk to the size of a cup-cake. In terms of revenue, corporate income tax accounts for less than 3,2% of GDP. Unlike land redistribution, indigenising the private sector is unlikely to trigger any movement on the poverty Richter scale in Dotito.

An effective economic policy should focus on empowering the 80% unemployed through an equitable business environment which supports entrepreneurship, small businesses and integration of the informal sector into the mainstream economy.

A threat to foreign direct investments
Where it fails to create jobs, the indigenisation policy has been a catastrophic success in deterring foreign direct investments (FDI), crucial to stabilising our current account deficit. Despite improvements in the economy post GNU, our external position remains precarious.  Current account deficit widened to 36% of GDP in 2011, financed in large part by debt — related flows, arrears and a drawdown from the SDR.

Zimbabwe has lived with an underlying balance-of-payment problem for the past 50 years, without substantial foreign investment inflows, sustainable economic growth is near impossible regardless of how well the economy is integrated or indigenised.

The indigenisation policy has a potentially destabilising effect.
Although there are other factors, the policy has contributed significantly to a polarised business environment, poor investor confidence and weak FDI flows. Since the Indigenisation and Economic Empowerment Act was enacted, net FDI figures (as a percent of GDP) have recorded an all time low, with negative inflows at  — 25,9 in 2009, and  — 21,1 in 2011. The uncertainty and inconsistency around the application of the policy has affected investment decisions particularly for new investments across the productive sector.

Empowerment through sustainable jobs
The essence of economic empowerment is in spreading the benefits of economic growth to everyone, making economic growth more inclusive and sustainable. The majority of the previously disadvantaged groups are not necessarily comprised of people interested in owning shares in companies. Their main focus is on getting good jobs (sustainable jobs), improving their skills (skills development), starting and running their own businesses (preferential procurement and enterprise development) and simply living a better life.

An effective empowerment model should put together policies concerned with economic transformation through interventions which look beyond equity ownership.

  • Dr Lance Mambondiani is an Investment Executive at Coronation Financial and a researcher in Development Economics.

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