Extractive Institutions finally proving to be unsustainable

Open Economy
Our economy is overly dependent on State enterprises in terms of income-generation and public services. There has been concern about the Zimbabwe Revenue Authority’s tax collections. Industrialists and parliamentarians havebeen openly critical, saying it will suffocate the economy. I agree with these concerns.

However, Zimra is not wrong in trying to fulfil its mandate. As the nature of our economy goes, businesses function to avail offerings to a consumer market. These businesses make a return. The state collects taxes that can either be directly imposed, derived from transactions, or service specific payments to respective agencies.

Depending on State budgetary discretion, the tax revenue is then used to provide public services and infrastructure that help sustain this cyclical ecosystem.

Unfortunately, our ecosystem has become financially squeezed. This is due to the unsustainable appropriation of tax revenue.

The economy is suffering from low consumer demand. People have no money. About 230 000 of formally employed people in the economy are in the civil service. They get their money from tax collection. However, many have grown accustomed to delayed payments. Some have experienced six months passing by without income. As a result, these people represent lost customer equity to the economy. Consequences are many: businesses closing down, a depressed housing market, youths with well-designed businesses in principle but still failing simply because there is no customer base, all the way down to social ills of people not having money to live on. Meanwhile, at the discretion of prior corporate governance, at a State enterprise like ZBC, for example, a single individual was paid US$32 500 a month as lower level employees went unpaid for six months. At the time the institution was US$40 million in debt.

Never mind the sustainability of that enterprise in itself, this business model substantially contributed to our problem of low consumer demand.

As civil servant salaries make up 85 percent of tax revenue expenditure, it is understandable to assume that taxpayers have been paying taxes simply to satisfy salaries of high-level individuals. No, I am not bringing up “salarygate” all over again. We can certainly trust the rectifications that were promised will indeed take place.

However, I am saying these are the cumulative effects that we are feeling today.

Many state institutions have little to show for in terms of meaningful performance. Our public works are deplorable.

Our infrastructure is defective. Our public services are dissatisfactory. Yes, responsible parties have expressed the desire and promise to raise standards and finally provide the decent offerings that taxpayers are owed.

However, these efforts will still need financing. The economy is already dry on finances. Any further taxation is not sustainable. In the last year we have seen all sorts of tax regimes from road tolls to radio and television licences.

Even our interest in the informal sector is mainly for potential tax revenue.

Such fiscal pressure is harmful. Likewise, it has been suggested to pursue austere policies that lower the state wage bill, but that will only exasperate the low consumer demand by reducing money in people’s hands.

We cannot finance state initiatives anymore without further upsetting aggregate demand. Sovereign debt would be difficult to attain, let alone pay off in the future. We need another solution around this. I suggest that if we are indeed to open up our economy again, as indicated by our Finance Minister’s engagement with foreign countries and institutions, the best means would be through public-private partnerships (PPPs); concession contracts between State and foreign entities in which infrastructure for services or works are provided by the private sector.

Through PPPs, there is tax relief on citizens because financing of these projects would be shared with better financed entities. These projects would create employment for diverse professionals and in substantial numbers.

While some may not be able to rely on competence from state enterprises, profit motive is a trustworthy incentive for foreign entities to efficiently deliver quality public services and infrastructure. Our greatest economic flaw is that the economy is overly dependent on state enterprises in terms of income-generation and public services. This is proving to be a perilous systemic construction of our economy for two reasons.

First, our economic culture is not sustainable for our economic design. If we believe that there should be greater remuneration and perks for working in state institutions than in private industry, then our perspective of social equity does not match our economy. State institutions will continue to be extractive and contract our economy.

Second, an economy is supposed to grow outwards from state centralised discretion. If our economy remains clustered around state institutions, then innovation and ingenuity of citizens will remain stifled. If 25 percent of our formal workforce is in civil service, that means our country will only develop at a bureaucratic pace because citizens are economically dependent on the state. Open up the economy, and decrease dependence on state institutions. We should look into other means of increasing economic activity that will give citizens wealth. This will increase consumer demand that further gets industry going, ultimately leading to tax revenue that can be used for creation of a sustainable social and economic environment.

 

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