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  My E-Discussion With Eddie Cross, Secretary of Economic Affairs For Zimbabwe's MDC Party One of the beautiful things about the Internet is that it allows people to engage in a dialogue when they normally would not even meet. It allows people in different lands with different political and economic systems to share their views with one another, on a variety of subjects. At BlackElectorate.com we experience this on a daily basis as our site is viewed by many in Africa, Europe and Asia. Is Hatred of Mugabe Enough? As the elections in Zimbabwe approach, the battle lines are very clearly being drawn between Zimbabwe President Robert Mugabe’s ZANU-PF party and Morgan Tsvangirai’s Movement for Democratic Change (MDC). On one side sits the ZANU-PF party that is making a nationalist appeal to the people of Zimbabwe and on the other side sits the MDC that is making the argument that Zimbabwe must gain acceptance from the international community. ZANU-PF has made the 4500 white farmers who own as much land as 8 million Blacks their key issue while the MDC has made Mugabe himself and the corruption of his government the issue. We have looked at Mugabe’s argument and some of the validity behind it in earlier writings. But now we turn to the MDC’s position and specifically parts of the economic plan it hopes to enact when and if the MDC comes to power in Zimbabwe. It is an economic plan that fits its internationalist agenda but one that raises the question of whether a Zimbabwe under MDC leadership will be better off than the Zimbabwe that has been guided by Mugabe. Here is an excerpt of a statement written by Eddie Cross, the Secretary of Economic Affairs of the MDC opposition – it details some of the MDC’s “economic vision” for Zimbabwe. It was written on June 9th – this past Friday. My comments are in bold and italics. If we form the government we will be faced with this mountain to climb. We have already established that our post election economic strategies are acceptable to the multilateral agencies (the IMF, WB, ADB etc). Subject to us making a firm commitment to those strategies in our first budget statement (which will come out within 30 days) and then negotiating the way forward with them, they will support the program. Then there is the support for the recovery program for education and health as well as land reform and these are expected to generate further budgetary support. The resumption of aid flows from development partners is also expected and all of these moves are expected to generate sufficient foreign exchange inflows to stabilise the dollar and to get domestic supplies of essential inputs back on track. This reliance upon the IMF, World Bank and African Development Bank is a recipe for disaster. It is interesting that the MDC has already “established” that its economic strategies are acceptable to “the multilateral agencies”. This alone makes one wonder who will really be in control of Zimbabwe if the MDC replaces ZANU-PF. The MDC is mistaken if it thinks that an IMF planning of its economy is an “economic strategy”. It is actually a loss of sovereignty as the IMF will determine what fiscal, monetary and regulatory policies Zimbabwe must enact. There is no autonomy for Zimbabwe under such a scenario. The IMF will not give the country a dime unless it does what it asks before an agreement is even signed. This is what is happening in Nigeria right now. Nigeria is following IMF dictates just in order to qualify for an IMF loan. Nigeria’s “decision” to end fuel subsidies and raise gasoline prices was not a decision it arrived at on its own. It was persuaded to do so by the IMF. Notice how the “economic strategies” that are acceptable to the multilateral agencies are subject to the MDC making commitments in its first budget. The IMF will certainly ask Zimbabwe to cut spending in some of the very programs – health and education- mentioned as being strengthened as a result of the IMF’s involvement in the country. These inflows will create a very substantial volume of domestic resources which must be "sanitized" if they are not to disrupt the domestic economy and cause further problems. We will use these to kick-start the economy and get some of our social programs up and running and at the same time restructure and refinance our domestic debt to get the service ratio on the debt under control. There is no record of a single country ever having its economy kick-started by aid from the multilateral institutions. Multilateral institutions, at best help nations to survive an economic crisis, they are never engines of economic growth. Cross is also sadly mistaken if he believes that the Zimbabwe’s social programs will be “up and running” because of the multilateral institutions. Quite often the aid is accompanied by request from the IMF to cut spending on social programs. The two objectives 1) Receiving aid from the IMF and 2) Increasing resources to social programs are incompatible. The conditions demanded for the aid will undermine many of the social programs. Spending on social programs will be cut in key areas. Getting the budget under control will not be easy - the news reaching us in recent days has been very disturbing. The government printers have printed Z$30 billion in new notes since the start of the year - borrowings are double what they were 12 months ago and rising at about Z$6 billion a month. The Congo will be a drain for at least the remainder of the year while we withdraw. The revenue side of the budget must also be a shambles. At this stage we think that it will take us two years to get the fiscal side under control and into the limits that we can sustain. Cross is correct here. He accurately depicts the problem of inflation and the dangers it poses to the budget process and generating tax revenues. The inflows of foreign exchange will help us get the social side back on track - we should be able to overcome the shortages of essential drugs and paying a few suppliers will encourage them to resume supplies to hospitals and schools. The huge amounts of Zimbabwe dollars that will be generated plus the slow down in borrowings will cause a liquidity crisis on the local markets - too much money. This should lower interest rates and encourage the banks to look after their customers but it will also enable us to fund a whole heap of projects that are on hold - the Tokwe Makorsi Dam, the Gwaai Shangani Dam and the related pipelines and canals. These will create 100 000 jobs in the next two years and increase output in marginal areas with low and erratic rainfall. We can build large numbers of new houses and begin the task of reducing the backlog of housing in urban areas where we have 2 million homeless. We can tackle the urgent need for infrastructure rehabilitation following the cyclone and Zanu. These measures will put our professionals back to work and get the construction industry moving. The multiplier effect will give the whole economy a kick-start. This may be the worst part of Cross’ “economic strategy”. First he is counting on an influx of foreign exchange but says nothing about solving the country’s currency crisis. Without bringing stability to the value of the Zimbabwe Dollar the country will attract very little foreign exchange. Actually, the opposite will occur, foreign exchange will flee the country. No investor desires to park their money in a country that is experiencing sharp increases in its rate of inflation or whose currency is fluctuating wildly as is the Zimbabwe Dollar. Foreign exchange will enter the country when investors believe the central bank of Zimbabwe is successfully able to create an environment for currency stability; when they believe the central bank is managing the supply of dollars properly in relation to the demand for those dollars. Cross, nowhere in his articulation describes a plan of action to stop Zimbabwe’s inflationary track. Hopefully, Cross is not referring to the aid package from abroad when he speaks of “inflows of foreign exchange”. The aid will be miniscule in comparison to the social needs of Zimbabwe. We also notice that Cross is now praising inflation in this portion of his writing when he previously had denounced it. How he arrives at a new positive view of inflation is anyone’s guess. His belief that inflation will allow the country to fund public works projects (dams, canals and pipelines) and have a positive effect on the economy is flawed. If the projects are paid for in inflated dollars, workers will demand increased wages in order to compensate for their decreased spending power. This would cause the government to print even more money which would further generate inflation. So the 100,000 new jobs that Cross and the MDC see as a result of the building of infrastructure like dams, canals, and pipelines look good only on paper. They would not feel good in the pockets of workers hired to work these projects. It is clear that Cross believes that the people of Zimbabwe are in a position analogous to that of America in the 1930s, in the depression. He is emulating the economic strategies of Franklin Delano Roosevelt. But his analogy is misguided as it is impossible to compare the two countries whose economies are so different in nature. Cross’ dependence on the multiplier effect (whereby government becomes the leading purchaser of goods and services that starts a ripple effect whereby employees buy more goods and services with the wages that they receive) is misplaced as the government in Zimbabwe will be paying its workers in inflated dollars these workers will then be buying goods and services in inflated dollars and paying the government taxes in inflated dollars. In fact, because of the inflation, workers will be forced to pay higher taxes as the inflation will cause them to rise into higher income brackets (As the MDC has already promised to raise taxes and stiffen enforcement of the collection of taxes.) My note: Wanting Mugabe out of power because his leadership has been ineffective is one thing, but improving upon his shortcomings is another. It is evident that the MDC’s strategy is to ride dissatisfaction of Mugabe right into power in Zimbabwe. They hope to win the support of those in Zimbabwe who do not like the job that Mugabe and ZANU-PF have done and they hope to curry favor with the West (who also has grown tired of Mugabe) by blindly adhering to the demands of the IMF, the World Bank among others. This strategy may win the MDC an election and earn it a few billion in aid but it will not stabilize the country or improve its economy. In fact we believe that it will worsen it. While the MDC does good to point out the flaws of Mugabe’s government they more than cancel that benefit by championing an inept economic strategy that really is noting more than warmed over colonialism. The people of Zimbabwe deserve better. Dissatisfaction with Mugabe is not an agenda. And it certainly is no way to run an economy. * * * We estimate that we will require US$1.5 billion in the first six months of an MDC administration to overcome critical shortages in food and energy, pay areas in debt payments that are now overdue, service parastatal debts, the backlog of essential imports of raw materials and spares for industry and mining and to get the inputs that are needed for the 2000/2001 agricultural season This sum of foreign exchange can come from no other quarter than the international community. The "recipe for disaster" that Cedric calls it, was the decision by government to double the domestic debt from 60 billion dollars to 120 billion in less than 12 months. To destroy the foundations of the Zimbabwe economy in the form of the agricultural industry and to disable the tourism sector by a program of systematic, state inspired and funded, political violence. In addition the decision to peg the dollar at 37:1 against the US dollar for 18 months has crippled exporters in every field of endeavor. We have no choice but to go back to the international community and to get their help to deal with this unprecedented crisis. The alternative is to see our people starve in the next 12 months, industry completely crippled by fuel and power shortages and the ranks of the unemployed grow by hundreds of thousands of workers. If we want to get back into the international community - we have to do so on the basis of the rules that have been laid down by the institutions that govern the game. We have no choice in the matter. If we were not in the hands of our creditors, if we had not allowed our state resources to be pillaged by a decade of corruption on a scale never before seen in this country, if we had lived within our means and followed sound, prudent policies - we would not be where we are. But MDC cannot change that - we inherit this state of affairs from the Zanu PF government. As far as the fallacious argument as to "who will be in control" I must remind Cedric that any business person will tell you, that if you live beyond your means, control over your life will pass to your creditors. It has been Zanu PF, not the MDC that has made this decision. It is their mismanagement of the economy that has sold our independence to the foreign banks. Its now up to the MDC to get us out of their clutches, and for that we have to have their co-operation and help. They will give it to us to secure their own debt and to help us rebuild the economy so that in the long term we can again become an independent, self sustaining state in a financial sense. I can assure your readers that the MDC has a highly competent economics team. The civil service is well staffed with excellent people and we as a nation, have the intellectual and management ability to run our own affairs. As to myself, I am a life long African nationalist - in the best sense of the words. Nobody can take away our right to make our own decisions, but when we make the wrong decisions, we must learn to pay the price and then put things back on track ourselves. To ask for help in so doing is not "losing our sovereignty" but rather working together with our development partners in the interests of all Zimbabwean citizens. You state the "worse part" of our strategy, is that we fail to point out how we would stabilise the dollar. I cannot believe that an economist would say that after reading our policy. The current "stability" of the dollar is completely artificial, bears no relation to the relative rates of inflation in the region or in respect to our trading partners. If we allowed the dollar to float today on its own without massive support, it would completely collapse as it did in 1997. The steps required are very clear - we must organise an inflow of foreign exchange to meet our essential requirements and re-establish some reserves, then we must manage the dollar so that it regains some sort of rational value in relation to our economic situation and then we must re-establish confidence. Only after you have done those three things can you then expect the dollar to find its proper value in the scheme of things. No currency in the world is independent of these forces - not the US$ or the pound or the Euro or the Yen. How can we expect to be any different? To argue that we are "praising inflation" is astounding. We do no such thing, the reason why we have to sanitize the inflows of foreign exchange required to stabilise the economy, is to prevent this inflow of liquid resources from further stimulating the inflationary pressures that are already in the economy. We have set out goals to get inflation down to less than 10 per cent in 2.5 years. More we could not hope to do in circumstances where the government has borrowed $12 billion from the Reserve Bank and have printed $30 billion dollars in the past six months. Both of these practices are highly inflationary and we expect inflation to continue to rise until we can get a grip on things. As far as your comments on social services of education and health, I really cannot let you get away with that! At no time in my experience over the past 20 years, have I ever heard the IMF or the World Bank advocate a reduction in spending on these essential services. On the contrary they have consistently urged government to protect these areas while seeking to get government spending into line with income. They have offered to cover shortfalls and to support efforts to get other countries to help meet the cost of these services. In the current budget Zanu PF allocated 20.8 billion dollars to education and health. This compared to the 10 billion for security services except the police. In the current year we will spend an additional 15 billion dollars on the war in the Congo and 3 billion dollars on the allowances and other costs related to the War Veterans administration. This raises the total unbudgeted expenditure on these two items alone to 18 billion dollars. All that we are saying is that we will use part of the inflow of resources that can be secured from our partners once we are in power to put these services back on their feet. We will restore budget allocations as much as we are able and will go to the international community for the rest. As for the long term, education and health services will be at the top of our agenda, along with housing and rural land reform. As for your spurious references to our dependence on the multiplier effect driven by government expenditure - where did we say that? Our housing program is totally private sector driven, has no subsidy elements in it and our role is purely to act as a facilitator and to ensure the resources are available. The demand is there - we have two million homeless, the capacity is there and the resources - all of them local - are all available. There are no "new deal" economics here - just plain common sense and doing the right things in the right way. Finally - "is hatred of Mugabe enough" - of course not and we do not "hate" Mugabe. We hate what he and his cronies have done to this country. Look at the record - incomes are lower than they were 20 years ago after 15 years of civil war and sanctions during the UDI era. Life expectancy for all Zimbabweans has declined by 15 years in the past decade - women can now only expect to live on average for 37 years, half of the expected life of the average in Europe. Only 12 per cent of our adult population is in paid employment compared to 20 per cent in 1980. Per capita expenditure on health services is down to one third of what it was in 1980 in real terms. Corruption in the public sector alone has cost us over $40 billion in the past three years. Expenditure on issues unrelated to essential domestic priorities has cost us over $35 billion in the past twenty two months. On top of this he is now trying to hold onto power by subverting the democratic system, promoting violence on a scale not seen since the end of the war in 1980 and encouraging rogue elements in our society to break the law on a national scale. He is destroying what is left of the economy, has hocked the future of every child for the next 4 generations at least and has completely subverted the trust that has been placed in the Presidency and government by the people who fought the war of liberation and who gave him the power in the first place. He deserves what is coming to him and his cronies. E G Cross Secretary for Economic Affairs, MDC. 14th June 2000 Cedric Muhammad's First Reply: Eddie: I really appreciate your response. And I learned much from it. Thank You. Let me begin with a question for the record: 1) What exactly was the process by which you established that, as you put it, your "post-election strategies are acceptable to the multilateral agencies (the IMF,WB,ADB)"? Please explain your interaction with the multilateral institutions and what they were most concerned about as you informed them of your economic strategies. Eddie, I think that your three steps to stabilize the Zimbabwe dollar will prove to be ineffective. You recommend the following: 1) we must organize an inflow of foreign exchange to meet our essential requirements and re-establish some reserves, 2) then we must manage the dollar so that it regains some sort of rational value in relation to our economic situation and 3) then we must re-establish confidence You then conclude, "Only after you have done those three things can you then expect the dollar to find its proper value in the scheme of things. No currency in the world is independent of these forces - not the US$ or the pound or the Euro or the Yen" Eddie, I think that your three steps are flawed because the premise out of which they grow is flawed. You fail to indicate that you understand that a currency has three functions in any nation, they are 1) a medium of exchange 2) a store of value and 3) a unit of account. In your country's case it is most important that you recognize the role that the Zimbabwe dollar assumes as a unit of account. Whether you realize it or not the Zimbabwe dollar serves as a measurement of units of labor of all of the people who live and work in Zimbabwe. Whether they are farmers or bankers or bus drivers they all measure their labor according to one Zimbabwe dollar. They all trade their labor for Zimbabwe dollars in the marketplace. You err in thinking that your ability to accumulate foreign exchange or U.S. dollars will somehow give the Zimbabwe dollar its value as a unit of account. This is not and can never be the case. Managing the supply of foreign exchange relative to the supply of Zimbabwe dollar will not definitively determine the value of the Zimbabwe currency because the values of the other currencies fluctuate on a daily basis, therefore only a definition of the value of a currency in terms of something else that doesn't waver achieves the goal of currency stability. Once that is done there can be only a negligible amount of inflation if the government or central bank effectively manages the supply of the domestic currency in proper relation to the demand for that currency. It is interesting that you mention Britain and the U.S. but even more interesting that you overlook what has historically determined the value of their currencies. Neither country established a strong currency by accumulating foreign exchange because both countries recognized the role that money serves as a unit of account. Stacking up the currencies of foreign nations would have done nothing to give value to the British pound or U.S. dollar. Both Britain and the U.S. defined the value of their currency by government edict and their central banks managed the supply of currency relative to its demand as signaled by the movement in the price of gold. They defined the value of their currencies in terms of another commodity. Throughout their history, with the exception of periods of war, both countries defined the value of their currency in terms of a weight of gold and silver. Eventually silver was demonetized and gold was used exclusively. The U.S. dollar was officially defined in terms of gold up until the early 1970s when the dollar-gold link was officially severed by President Richard Nixon. And since that time we all have experienced world-wide inflation. At different times in U.S. history the official gold price has been $20.67 per ounce, $35 per ounce and $42 per ounce, so when gold was valued at $35 per ounce that meant one dollar was worth 1/35 of an ounce of gold. Every day that people woke up in America they knew what one dollar was worth in terms of the most monetary of all commodities - gold. This allowed everyone in America to measure the value of their labor with a clear and definitive measurement. So the barber knew how to measure the units of labor it took to cut hair as did the baker and the farmer or doctor and lawyer in their respective occupations. This is no longer the case in America, as you know, the value of a dollar fluctuates on a daily basis so every one in America wakes up every day not really knowing what a dollar is worth in terms of a commodity, good or service - anything. There is no standard of measure that will give the dollar the same worth every day of the week because the government of America has abandoned its powers to define the value of the dollar in terms of gold. Am I saying that Zimbabwe should back its currency with gold? Not necessarily at this stage but I am trying to show you that young nations will always have a problem with the value of their currencies unless their governments publicly declare a definition of the value of the currency in terms of some firm standard. Collecting foreign exchange as you propose means that you will be managing the supply of the Zimbabwe dollar in relation to the supply and daily value of as many foreign currencies that you collect. I stress this because you incorrectly compare Zimbabwe with these two countries (Britain and America) and do not indicate that you are aware of the fact that when they were in the same stage of development as Zimbabwe is today, they firmly established the value of their currencies so that everyday their citizenry could wake up knowing how to measure their labor and transactions. The confidence in a currency comes once you have defined its value in terms of something else that doesn't fluctuate. Remember it is the government that can best give a currency sound backing, today this certainly does not occur by watching the value of the world's 164 different currencies. Imagine how difficult it will be to plan your budget and figure the value of a Zimbabwe dollar from year to year. Keep in mind Eddie that nations that have dealt with the IMF have not had much success in getting their currencies back to normal levels and stable in their value. The result: the loss in purchasing power suffered by the citizens is devastating. Inflation is never rooted out. Do you know that the IMF gives little attention to currency values? Though they say they do, look at the results of their policies in the 1997-1998 crisis in Southeast Asia. That began as a currency crisis and those nations are still reeling from the prescriptions handed to them by the IMF. The IMF actually prevented Indonesia from enacting a currency board that could have stabilized the rupiah, at least in the short term. In fact, the very same day that word got out that currency board expert Professor Steven Hanke was serving as a counselor to Indonesian President Suharto, the markets shot up by over 30%. Yes, in one day. Eddie, how is that for investor confidence? That is what your seeking, right? Well, how did the IMF respond to this sign of approval from the financial markets? It fought Hanke and Suharto tooth and nail and told Indonesia that it would not give them any money if they enacted a currency board. They rejected an idea that could have helped the country not because it was ineffective but because it didn't fit in with their policy formula. Eddie, I dare say that they rejected the currency board initiative because it would have made the IMF unnecessary in Indonesia. In August of 1998 Indonesia and the IMF set the goal of an exchange rate of 6,000 rupiah to every U.S. dollar. From August of 1998 until the first week of June, the exchange rate has averaged 8143 rupiah to 1 dollar. Currency stability, the prerequisite to price stability has not occurred since 1998, even at inflated levels. And the exchange rate has not even approached that IMF stated objective of 6,000 rupiah to 1 dollar. Eddie why do you think it will be any different in Zimbabwe? I can assure you that if President Mugabe leaves power and the MDC and IMF continue to do business, your currency will not stabilize. Do you realize how upset the people of Zimbabwe will be when they see that you have replaced President Mugabe but haven't improved the economy; that you still will be giving workers inflated dollars. By thinking you are actually helping to solve your currency problem by dealing with the IMF you may actually be shortening the time the MDC is in power. Look at what happened in Benin in 1993, it is an instructive example to those countries that force the IMF prescriptions on their people. Soglo was removed because he implemented the IMF program to the letter. Eddie, fair elections is one thing, fixing the economy is another. The people of Zimbabwe want both. I think this is a fact that is lost on many of those who support you in the West. I just attended a hearing on Zimbabwe in Congress here in the U.S. All that was mentioned was fair elections and democracy. Not a word was uttered on solutions for Zimbabwe's economic woes. If you come to power the people will soon forget about your victory and will want you to get inflation down and the economy moving. How will you do it with the IMF around? Furthermore, how will the people ever forgive you when they realize that you gained "acceptance" for your plan prior to the elections taking place? The responsibility for this will rest in your lap and not on Mr. Mugabe's shoulders. So having stated that, what is your long -term strategy to give the people of Zimbabwe a currency that maintains its value over time (at least 3-5 years)? Please expand on your second step: after you have accumulated the necessary foreign exchange how will you "manage" the value of the Zimbabwe dollar. And furthermore, what is the rate of exchange that you are looking to target with the U.S. dollar specifically? What mechanisms will you use to maintain that exchange rate? Eddie, I find it hard to believe that you are actually attempting to defend the IMF in the manner that you are. You mean to tell me in 20 years you have never heard of the IMF telling a country to end subsidies and cut spending in the social sector? Really? What do you think World Bank SAPs and the IMF ESAFs are all about? They frequently involve "privatizing" health care and reducing assistance for school fees. Even if you could demonstrate that the IMF and World Bank don't directly say "cut social spending" their budget mandates have the same effect as you are forced to cut spending in order to close budget deficits. I suggest you look at what the IMF tried to force Indonesia to do in 1998 in order to qualify for an IMF loan. Yet and still, even though you deny that IMF conditions will result in cuts in social spending you admit the IMF will ask you to "get spending in line" In line with what Eddie? Where will you make cuts in Zimbabwe's budget, other than ending the involvement in the Congo War, which I agree with you is inappropriate. This brings me to another concern I have with the MDC economic agenda which you make public on your website. You mention under the section Economic policies "The immediate solutions to the economic crisis lie in a comprehensive re-assertion of control of the budget" How can this occur Eddie when the IMF will be determining your budget? Your first of six main actions you promise to take is "restoration of confidence in the budget process" Whose confidence are you seeking Eddie? You have already used this word "confidence" in reference to the currency. I am trying to understand what you mean by it. Are you seeking the confidence of the people of Zimbabwe in the budget process? Or the confidence of the IMF and World Bank? If it is the confidence of the people that you are seeking how is it that you have already forfeited control over that process to the multilateral agencies who will demand that you do this and that with your budget before you get your first drop of aid? Your economic agenda also makes reference to stakeholder participation via a transparent national budget process. It is clear you intend to open or democratize the budget process but haven't you already prevented that by your premature dialogue with the IMF? You even indicated that the budget will be based upon the economic strategy that the IMF has already found acceptable. Your economic agenda makes reference to a "national consultative process". Could you please elaborate on exactly what that is? Who or what types of individuals (in terms of their occupation) will be consulted on the budget? Will they have power to veto the economic strategy that the IMF has already indicated are "acceptable"? What about the budget that you say will come within 30 days of your possible victory? Will the national consultative process be able to reject the budget you will craft that is aimed at gaining the IMF's acceptance, in the event that the MDC takes office? Looking Forward to Your Reply, Cedric Eddie's Reply: Dear Cedric So you live in the USA - an armchair critic!! You also have some weird ideas on currency management!! Now down to the issues you raise. First, when you get yourself into debt - and we will inherit a situation where our national debt will be equal to 135 percent of our annual GDP - then you are in the hands of your creditors. Secondly, no country can operate in a vacuum - what we do at home is judged abroad and we are then either rewarded or punished for our actions. We saw that in 1997 when Mugabe first declared that he was going to take 1400 farms without compensation. The international investor community took that as a signal that we were going to do serious damage to our economy (right) and that we were not going to respect property rights or the law (right again). They then reacted by withdrawing their investments from the local stock market, converted their Zimbabwe dollars into foreign currency and sent it home to their respective countries. Our local stock market fell 50 per cent and our currency collapsed, our reserves of foreign exchange were wiped out and we have never recovered. That is difficult for an American to understand as the US dollar is a so-called "reserve currency" and is used throughout the world as a means of trade. It is also backed by a economic system that is strong and a political system that limits the power and excesses of government. We cannot use our currency for trade purposes - if we want to pay for our imports, we must buy a form of foreign exchange that is acceptable to our suppliers and then pay them in that currency. So we must have foreign exchange in our banks at all times to fund trade and other payments. We must also service our foreign debts (70 per cent of the national debt is foreign) in the form of an acceptable currency - usually the US dollar although we also use the Pound and the Euro a lot. What should happen is that people who hold foreign exchange - exporters, should be able to sell their earnings to others who want foreign exchange on a form of free market. In Zimbabwe today the exchange rate for official transaction is 37:1 for the US dollar. In the "free" market its trading at about 62:1. neither represents its "real" value as the one is overvalued (the official rate) and the other is undervalued because of a critical shortage of foreign exchange at present. You cannot arbitrarily fix a rate for the dollar and like King Canute, command the forces that surround it to obey your dictum. The value will be determined by supply and demand and the relative inflation rates of our main trading partners. At present we have inflation at about 60 per cent while our regional trading partners are at about 7 per cent and our international trading partners at about 2,5 per cent. Under these circumstances, holding our currency steady is pure nonsense and would eventually destroy all our export industries. The gold standard was abandoned because it was no longer able to meet world demand for a reserve currency - the world trade system simply outgrew the practice. It is impossible to go back to anything like this as gold is simply a commodity today - we give it value for a variety of reasons, not as a backing for currency. Rather the value of a currency (like a share on a stock market) is worth what people think its worth and for what it will buy - no more and no less. Therefore confidence and supply and demand are the prime determinants, not the actions of a government or the Reserve Bank. Now back to the IMF and the World Bank. As an economist from the third world I find the hostility of the activist community in the developed countries towards these global institutions rather difficult to understand and hardly rational. I would say the same for the WTO as we in the small countries and in the developing parts of the world need a rules based system to curb the power and actions of the big countries. In fact without these systems we would be naked in a free market blizzard. Its not a question of being controlled by these institutions - that is laughable, its a question of needing their assistance to get us out of a hole which we ourselves have dug and cannot get out of without help. So what our team did was to first study the problems we would be faced with when the MDC took power - and the list is formidable. Then we had to decide how to tackle these problems and to sequence the actions required. When we had done this we then looked at what support we would need and then went to the World Bank and the IMF and talked these issues through on an informal basis. Negotiations will come later - at this stage we simply wanted their confirmation that our analysis was not flawed and that we were on the right lines in terms of our prescriptions. Once we had decided on an appropriate program - and received an indication that this would attract support, we then took the program to the Executive and then, after incorporating the changes they wanted, we put the program to bed and on the Website as a general policy statement. You must remember that we have a very severe economic crisis here - and we do not want to waste time after the elections and the transfer of power - we want to be able to hit the ground running, for the sake of our people and no one else. But we cannot even hope to get out of the starters gate without massive short term assistance - and that will be triggered by a decision of the multilaterals to say "yes, we think these guys are on the right track". On the issue of social spending - we allocated some 20 per cent of our total budget to education and health this year - military expenditure will absorb about 30 per cent and debt servicing some 50 per cent. We need to re-order our priorities and in doing so would be acting prudently. We cannot do this by simply printing or borrowing money, so we have to operate within the capacity of our economy to generate the resources needed for such a program. We cannot expect to be able to operate as a country with budget deficits that are consistently above what we can afford - say 3 per cent of GDP. If we go beyond this, then the result is rampant inflation and all sorts of other problems which inhibit growth and reduce incomes. The budget process is not one for the IMF - its crafted by officials in consultation with stakeholders in the Zimbabwe economy. Management of our affairs within the constraints of the budget and "living within our means" will restore confidence in the process. By adhering to sound financial principles and applying discipline to government departments, we will win the confidence of our creditors and the others in the system who will make the required decisions to invest in our economy or to support our activities as we seek to meet the needs of our people. The MDC stands for a social market system which emphasizes participation and transparency. We will apply these principles to all that we do when we win power. Eddie Cross Secretary for Economic Affairs, MDC. Harare, 16th June 2000 End of Part I Cedric Muhammad Wednesday, June 21, 2000 To discuss this article further enter The Deeper Look Dialogue Room
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