OPEN ECONOMY: Where trimming formalisation results in expansion

01 Feb, 2015 - 00:02 0 Views

The Sunday Mail

Just over a week ago, I had the opportunity to be on television. While it was a very enjoyable experience being on the evening news, there is that intimidating factor of speaking as the whole nation watches.

Fortunately, Rumbidzai Takawira was a pleasant host.

She did, however, ask an intriguing question; is it advisable to make certain sectors of the economy completely informal?

I hope I gave an adequate answer for the inquisitive viewers, and also hope that my expansive efforts here do not diminish the relevance or accuracy of what I said then.

While the notion of complete informality is undesirable and should be refuted by any self-aware economy, there is need to strive for“minimalist formalisation”.

That is regulation and governance by institutional structures that is firmly enforceable, yet non-intrusive and facilitates the fluidity of free enterprise.

In practice that means an economy where there is very little paperwork and bureaucracy in formalising business entities, time efficiency in terms of entities abiding to formal procedures, and very little involvement in actual economic activity by institutional structures.

Such an economy is never going to be designed at one go. Just as an economy continuously evolves, so should the design of institutional structures that regulate and govern that economy.

In the global economy, a competitive advantage that each country must strive to have is a quick responsiveness to implement structural reforms.

This is probably the most imperative competency in economic management. As a nation, we score poorly when it comes to our speed in implementing structural reforms.

Historically, we have hardly made structural reforms of our own,if not for the pressure from IMF/World Bank.

In sombre reflection, I wonder if perhaps we fail to see the need for structural reforms simply from an inapt understanding our own economic architecture and its consequential effect on potential economic growth.

Monetary and fiscal policies remain our only go-to manoeuvres when attending to the economy, yet they are insufficient. We need structural reforms.

It would be greatly beneficial if we worked abruptly towards minimalist formalisation. Our present economic structure continues to be detrimental on two fronts.

First, an oversized government is faced with an inherent difficulty to achieve policy cohesion.

With minimalist formalisation there’s a virtue in trimming the institutional structures that have economic discretion. In our case,when a government has too many economic organs they intrude on each other’s functional capability leading to policy inconsistency.

For instance, while monetary efforts by the RBZ and Ministry of Finance and Economic Development are directed towards reducing our trade deficit and import bill, at the intersection of Speke Avenue and Leopold Takawira in the centre of Harare, you will finda huge tent that represents the Ministry of Youth, Indigenisation and Empowerment’s stand out project proudly promoting cross-border traders who import textiles and clothing.

This is policy contradiction.

Furthermore, it seems ironic that cross-border trading of textiles has become a staple for empowerment, especially when knitting and sewing are skills households nationwide have traditionally taught children.

Wouldn’t our youth be more empowered if they used these skills to form their own textiles and clothing enterprises? Enterprises that if promoted would create jobs, increase our fiscal base, boost exports and increase foreign reserves?

Likewise, among Cottco’s and David Whitehead’s many business difficulties were erratic levels of demand for cotton and lint. With more local textile and clothing enterprises within our borders, these companies may have been saved from depending on ferociously competitive foreign markets to sustain their operations.

The preceding scenarios are examples of policy cohesion.

The problem is that all this economic activity falls under the discretion of at least four ministries; the Ministry of Industry and Commerce, Ministry of Small to Medium Enterprises and Co-operatives Development, Ministry of Agriculture and the Ministry of Youth, Indigenisation and Empowerment.

However, all these institutional structures are pursuing individual policies of their own, which then distorts the chances of such economic alignment and policy cohesion.

Second, when Government is a large economic entity, there is an inherent limitation to foreign capital inflows. We need FDI to expand the economy.

This cannot happen if our pursuit for FDI is State-led.

While some policymakers will assure you that there are Government delegates and State institutions working diligently to attract foreign investment, they are unaware that this actually reflects a repressive investment climate.

In terms of perception, investors associate overly involved governance with economic restriction.

A Wall Street Journal report just listed Zimbabwe as the most repressed economy in Sub-Saharan Africa and in the bottom five worldwide – due to Government intervention, policy inconsistency and corruption.

In the same vein,giving preference to small delegations in engaging foreign investors gives incumbents with personal enterprises a monopoly on accessing foreign capital ahead of all other economic participants in the country.

Logically, a significant portion of investment deals secured from such engagements are proprietary ventures because Government is insolvent to partake in capital markets and debt instruments such as bonds that typically offer state financing.

We need to reform how we are seeking foreign investment.

The process should become more inclusive, with all economic participants having overt liberty to seek out their own foreign investors.

Government should focus on minimalising formalities for actual investment and facilitate transparent recording of capital inflows without intervening in proprietary dealings itself.

While some policymakers will tell you that they have gathered the interest of a number of foreign investors, can we compare that number to if every economic agent in the country was as liberated in pursuing their own foreign investors?

In a free, fairly competitive economy, all economic participants must have equal opportunity to capital seeking.

In terms of attractiveness of potential investment,while real growth sectors the world over involve free enterprise, we have state enterprises that are monopolies in sectors such as energy, information and media, transport and logistics, notwithstanding a highly regulated technology sector.

Naturally, that diminishes our investment spectrum to just infrastructure and state projects. Well, as infrastructure projects are long term, they typically involve institutional investors.

Unfortunately, regulations in much of Europe, America and Asia are constraining the amounts that institutions can invest in long-term illiquid investments, such as the roads, dams and railways outside of their own respective markets.

This all means structural reforms that encourage a competitively fair free market within our own economy are necessary to make potential investment more appealing.

Conclusively, I do not think it is advisable to make certain sectors of the economy completely informal. However, we must be working towards minimalist formalisation.

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