How extractive institutions impede economic recovery

How extractive institutions impede economic recovery 1
How extractive institutions impede economic recovery 2

By Alex Magaisa


THE purpose of this BSR is to examine and demonstrate how extractive political and economic institutions are standing in the way of economic recovery. If Zimbabwe is to make a good recovery, there is a need for a completely new approach to political and economic institutions. At present they are no more than instruments of extraction of wealth by a few political elites. We do so with a few examples taken from the news this week.

The following items have been selected for illustration purposes in this analysis of extractive institutions:

First, the state media claimed the government had rescued a white farmer whose business was under threat from a rival land claimant.

Second, former Finance Minister and veteran Zanu PF politician, Patrick Chinamasa was appointed to chair the “board” of Air Zimbabwe.

Third, a Zanu PF MP Hon. Justice Mayor Wadyajena hogged the limelight with his acquisition of a hideously expensive Italian supercar, a Lamborghini Urus SUV. It was reportedly imported duty-free.

In another story, Parliament was forced to explain away a document which suggested that it was paying for fuel for MPs at well above normal rates.

The problem of extractive institutions

These items share a common thread. They illustrate, in different ways, the notion of and challenges associated with extractive political and economic institutions. They are weak, promote corruption and cronyism, and provide no incentives for long term economic growth.

Prospects for economic recovery, let alone growth will remain limited as long as our system is dominated by extractive political and economic institutions. In this BSR, we will show how parliament and Air Zimbabwe typically illustrate extractive political and economic institutions harnessed to benefit the elites.

We will also show how the situation around agricultural land, particularly the insecurity of property rights is related to the extractive political and economic institutions. This has negative implications for economic growth due to a lack of incentives for investment and innovation.

The institutional theory is advanced by economists Darin Acemoglu and James A. Robinson in their acclaimed work, Why Nations Fail: The Origins of Power, Prosperity and Poverty.

Why Nations Fail

According to Acemoglu and Robinson, nations are more likely to be economically successful when they have inclusive political and economic institutions. These are institutions that while centralised, they allow for plurality and broad participation of citizens. They create incentives for investment and innovation which are central to economic growth.

By contrast, nations that have extractive political and economic institutions are likely to fare badly in the long run, even if they start off well. Extractive political institutions are narrow, authoritarian and controlled by a small political elite. Extractive economic institutions are designed to “extract resources from the rest of society”.

Thus extractive political institutions which ensure that unrestrained power is held by a few elites tend to encourage extractive economic institutions. In fact, as the author’s point out, it’s a vicious cycle in which extractive political and economic institutions support each other.

If political institutions were more inclusive, they would weaken the foundations of extractive economic institutions. The problem is governing elites who control extractive political institutions and benefit from extractive economic institutions want to keep it that way. A further problem is that those who challenge and wish to replace these elites in political institutions tend to mimic their predecessors and thus maintain extractive institutions.

This is the plight of many African countries which have undergone a change of leadership in the last 30 years without changing the extractive political and economic institutions. They have kept the same set of extractive institutions and sometimes, they have enhanced them, making them stronger and more extractive than before.

In 2011, Egypt underwent a revolution that got rid of long-term dictator Hosni Mubarak but today it has its own dictatorship. Sudan is a tragic example of what happens when elites dispose of each other. Al-Bashir was ousted three months ago in what appeared to be a people’s revolution but now military elites who replaced him are slaughtering civilians. They want nothing more than to keep the extractive institutions that the long-time dictator maintained.

Whether a nation adopts inclusive or extractive institutions is therefore ultimately a political choice. This Acemoglu and Robinson call “the politics of institutions”. They examine why the politics of some societies lead to inclusive institutions, while the politics of the other societies lead to extractive institutions. Before we consider the items referred to earlier, a quick glance at a few key pages of history.

Brief Look at Rhodesia through to Zimbabwe

A quick assessment of the history of Zimbabwe since 1890, a critical juncture, shows that the nation has been dominated by extractive institutions. Rhodesia made economic progress but ultimately it was a political and economic system that was designed to serve the interests of elites in the settler white minority. It was, after all, a nation founded by a man who was an entrepreneur at heart and the primary motivation of all involved at the start was the pursuit of wealth.

Unsurprisingly, using a vast array of colonial policies and laws from the imposition of the Hut Tax, forced labour, expropriation of land and cattle, racial segregation, exclusion of blacks from voting, the colonial state was highly extractive in its ways.

If it was successful economically, it was no different from the economies of the Caribbean islands in the 17th century which were powered by highly extractive institutions represented by the sugar plantations where slave labour was used extensively. Or the rapid Soviet industrialisation in the 20th century where cheap labour was also used.

However, because all these economies were powered by extractive institutions, their initial success was unsustainable and they failed in the long run, as indeed happened to the Soviet Union.

In Rhodesia’s case, a nation built on extractive political and economic institutions eventually attracted armed resistance. It was unsustainable to have so few riding on the backs of so many. In the end, Rhodesia collapsed but more significantly, its extractive political and economic institutions did not. The new black elites simply took over the reins of extractive political and economic institutions.

They did succeed in one area though: they fulfilled the theory that the success of extractive institutions is unsustainable. Having taken power in 1980, the new leadership did little to change the extractive institutions to become more inclusive, a big start to their failure. Instead, they kept the extractive political and economic institutions intact, with both political and economic power being concentrated in the hands of a narrow elite.

By 1987, Robert Mugabe had become an Executive President which meant a concentration of political power in his hands. The party (Zanu PF) and the state became conflated. One mirrored the other. That’s why Zanu PF can announce an appointment to a state-controlled company even though it lacks the legal mandate to do so. The political elites appointed their fellow elites to boards of state-owned entities which had been established during the colonial period as Rhodesia built import-substitution industries to counter UN sanctions.

The elites began to abuse the public finance system, allocating government contracts to their peers and fostering corruption. Without any incentives for technological development and with growing corruption, these big industries began to disintegrate. ZISCO, the iron and steel company based in Redcliff is a case in point. It collapsed under the weight of expansive extraction by company executives and political elites. They used corporate entities to acquire goods on credit and never paid.

The list of state entities that suffered a similar fate is endless, among them Air Zimbabwe, National Railways of Zimbabwe, ZUPCO, CSC, etc.

In 2007, vast deposits of alluvial diamonds were discovered in Chiadzwa. There was a diamond rush among the political and military elites as each stacked a claim for personal enrichment. There is probably no better modern illustration of extractive institutions than the Chiadzwa diamond rush, where foreign elites among them the Chinese also joined in. It was a classic case of extraction of resources by elites with the ordinary people literally getting nothing.

Coup: elites’ fight for extractive institutions

As Acemoglu and Robinson point out, the fight became more about which elites could gain control of extractive institutions. This indeed was the long-running fight which culminated in a coup in November 2017, which toppled Robert Mugabe and ushered in Emmerson Mnangagwa. It was, in essence, a battle between ruling party elites for the control of extractive political and economic institutions.

The winners of that battle had no incentive to dismantle the extractive political institutions or to change the extractive economic institutions. These are the only kinds of institutions they know and they have served them well, making them millionaires in a sea of enormous poverty.

The notion of extractive institutions controlled by a narrow elite to serve interests explains why President Mnangagwa finds no fault in appointing the wife of his top diplomat as the Anti-Corruption Tsar or his son-in-law as the Chairman of the Sports and Recreation Commission. He is also on the board of a telecommunications company which was recently taken over by the government. A nephew sits on the board of a state pensions company. After all, didn’t his predecessor Mugabe give his own son-in-law a role at Air Zimbabwe? Before that, another Mugabe son-in-law headed ZESA the national energy utility.

Jobs for the Boys

Cronyism is a key element of extractive political and economic institutions. The leader assigns old boys in the network to roles within the vast branches of the state. This is why he had no trouble appointing Patrick Chinamasa to the chair of a board that does not exist.

The appointment of Chinamasa to head the board of Air Zimbabwe is a legal farce even by the low standards of the Mnangagwa regime. The board of Air Zimbabwe ceased to have any role in October 2018, when the Government placed the broke national airline under administration. It is trite that when a company is placed under administration the board loses its power which is transferred to the Administrator. What “board” then was Chinamasa appointed to when none exists? Was Mnangagwa not aware of this legal and factual situation when he made the appointment?

One is left with the inescapable conclusion that it’s another case of “jobs for the boys” as Mnangagwa accommodates an old ally who has probably fallen upon hard times a year after being dropped from Cabinet. But it also shows how there is no regard for the law under extractive institutions. Instead, power is exercised in an arbitrary fashion, itself a hallmark of extractive political institutions. The law is treated as a nuisance which can be blatantly ignored.

The Chinamasa appointment is symptomatic of how the post-independence regimes, whether under Mugabe or Mnangagwa, have simply intensified the extractive system of governance. The extraction has been fatal to some state-controlled entities while it has caused terminal decline to others. Air Zimbabwe used to be a major airline on the continent but it is now a shell, completely impecunious now only barely alive on account of national pride than for commercial reasons. The story of how it fell from grace is just like all the other the stories of how political elites used it to extract resources from the nation. And now, even as it lies comatose, Mnangagwa is appointing a crony to milk whatever remains of it.

Property rights

Under extractive political and economic institutions, fundamental rights and freedoms are no more than an inconvenience to power which is held by a narrow elite. The quest for power often means all land is expropriated and held by the state. In reality, it is the small elite that controls the state which really is in charge of the land. They can do as they please including removing the ones they don’t like and giving to or protecting those they prefer. That is why for The Herald, the White coffee farmer was “rescued” by the government.

This betrays a mentality that property rights are non-existent except on the political will of the government and the elites that control it. This is a deeply insecure and discouraging situation because protection does not depend on the rule of law but the rule of man. If a new political elite comes in to replace the current and has a different opinion, the farmer could lose his investment. Property rights must be protected by law, not by the opinion of Cabinet. It would be foolhardy for the farmer, Richard Le Vieux to believe that his investment is now secure just because the Mnangagwa Cabinet has said so.

The point is a nation that wishes to attract investment and make economic progress must have a secure system of property rights protection. Having secure property rights to the land provides an incentive for long-term investment as the farmer knows he can realise returns on that investment. Some investments take years to bear fruit. An investor who has no security in the property will hesitate before making long-term investments.

The government might think it has shown a positive message by protecting Le Vieux and superficially it might appear like that. But serious investors will be wary of protection that depends on political actors, not on the law. What happened to Le Vieux should simply not be happening in the day and age. That it did and it required Cabinet intervention illustrates the perils of extractive political and economic institutions. Le Vieux may have benefited from the hand of the extractive state on this occasion but the irony is that it is also a reminder of the arbitrary power of the state, which one day could be used against him or others in his position.

What Zimbabwe needs are inclusive institutions in which fundamental rights, including the right to private property, are respected and protected as a matter of law, not just politics.

It’s not about the supercar

Much has already been said over the controversial duty-free importation of a supercar by the young Zanu PF MP, Justice Mayor Wadyajena. While the outrage at the apparent extravagance at a time when the majority are struggling to make ends meet is understandable, the real concern is not over the politician’s choice of vehicle.

The real story is about a political system which allows an MP the opportunity to import a supercar without paying duty. It’s a story which reveals a system that is built by political elites for political elites and indicts both the ruling party and the opposition.

The case illustrates the gap between political elites and the people they purport to represent. It’s not the first case of its kind and it probably won’t be the last. In The Wretched of the Earth, Frantz Fanon had long forewarned us about this kind of behaviour among political elites the love of luxury amid a sea of poverty; the desire to replace the former bosses and adopting their lifestyle. It’s an Orwellian world in which, Animal Farm-style, after moving into Farmer Jones’ home, the pigs begin to tell others that some animals are more equal than others. So, the ruling party preaches austerity, but its elites engage in acts of conspicuous consumption, at the same time offering justification for it.

It is hardly surprising that people react negatively to such acts of conspicuous consumption by political elites. There is a serious scarcity of foreign currency, which is affecting the supply of basic commodities, but it is enough for a politician to purchase a luxury vehicle. From a national perspective, it would probably count as a gross misallocation of scarce resources. It should be embarrassing to a government that is preaching austerity. It’s a personal choice, one to which the honourable gentleman is perfectly entitled but it lacks political and economic wisdom.

The big issue, however, revolves around the institution of parliament and its role in this saga. This is because since he is an MP, Wadyajena reportedly did not have to pay import duty on the luxury car. By law, as part of their benefits package, each MP is entitled to import a vehicle without having to pay duty. It is this facility that Wadyajena exploited in order to avoid what could have been an astronomical and possibly prohibitive tax bill.

Since the law allows it, it might be argued that no law was broken in the importation of the luxury war. But as some have asked: was this the purpose for which this facility was designed? Was it designed to allow MPs to import luxury vehicles? This is a question of interpretation and some would argue that legally the type of car is irrelevant; that what matters is whether a literal reading of the rules allows an MP to import a car duty-free. If the type of car and purpose were important, the rules would be specific.

There is some strength in this view, whatever misgivings people have about the type of car that the MP chose. Wadyajena used a facility that is open to all MPs. He isn’t the first to use it. He might be guilty of lacking political sensitivity but not of breaking the law. The facility does not seem to have restrictions as to the type or value of a car that one can bring. It can be an expensive Italian supercar or a cheap second-hand Japanese import. If there is a weakness, it is in the rules governing the facility.

The problem, therefore, is not Wadyajena but the system which was created, ironically, by the MPs themselves. If hyenas are given the power to look after goats, they will feast every day. They are, after all, law-makers and it is the law that gives them an open and unlimited facility to import cars duty-free. It doesn’t end there.

The law gives them other benefits. They are exempt from paying other taxes like toll-gate fees for example. They get fuel allocation ostensibly to perform their parliamentary duties. They get sitting allowances for attending parliament – over and above their wages. One can attend every single sitting, contribute nothing and still collect their allowance. There are more allowances when they travel out of Harare or out of the country on parliamentary business. But few apart from MPs themselves know their full package of benefits.

All this is not to be unfairly critical of MPs. They occupy an important role in society and nobody doubts that they deserve to be treated with the respect that comes with their office.

Constitutionally, they are no different from judges and ministers in the executive – officers in the other two arms of the state. If anything, being elected by the people, they have a democratic mandate that is better than that of judges. Any criticism is therefore not reserved for MPs alone. Rather, it is a criticism of how these institutions of the state are set up and how they disproportionately benefit elites and distance them from the rest of the public.

The reason why Wadyajena has attracted controversy is as explained above and that he has not been modest and discreet about his acquisition (in any event, the type and complexion of the automobile do not permit discreetness). But if truth be told, we have no idea how other MPs, judges, ministers and senior civil servants have been using similar benefits. Unlike Wadyajena’s flashy automobile, their acquisitions generally go without notice, but they are no less extractive. So, this is not just about Wadyajena and his supercar. It is, as already stated, about a system created by political elites to look after political elites’ interests.

Why does this matter?

It matters because it helps us understand how extractive political institutions work, even in political systems that are inclusive. Owen Jones has a brilliant critique of the British political system in his acclaimed book, The Establishment. His incisive examination demonstrates how the political system is designed to serve the interests of political and business elites.

Likewise, it is important to understand how the Zimbabwean political system works for political and business elites their political colours notwithstanding. Doing so is helpful in our efforts to reform the political system and as Acemoglu and Robinson argue, to promote inclusive institutions.

It helps the governed to understand why there is inertia when it comes to reforming political and economic institutions, even after the governing elite has been removed. As we have already observed, in most cases the short-term aim of elites fighting governing elites is to replace them, not to transform the extractive institutions into inclusive ones.

This might help to explain why our parliament has not really changed as an institution even though it has had a significant presence of opposition MPs since the historic elections of 2000. This is both an embarrassment and a challenge to the MDC MPs who should be at the forefront of reforming this extractive institution. Regrettably, some of them have in the past embarrassed their own supporters by making demands which are out of sync with the country’s parlous circumstances.

By importing a luxury vehicle without paying duty, Wadyajena has simply used a facility that is available to all MPs. The political elites on both sides of the political divide have conspired to maintain an extractive institution because it benefits them. Since they have embraced it and have never challenged it, they lack the moral authority to condemn Wadyajena.

If anything, this case is a moral call upon their conscience to revisit the institution of parliament and related arms of the state so that they can cease being so extractive. The least they can do, even if they can’t let go of that facility, is to put a cap on the value of the vehicle that can be imported duty-free so that it is not misused.

Overall, it is, of course, a matter of concern when MPs’s lives and circumstances are divorced from the conditions of the people they represent. Since they generally don’t pay some of the taxes that their own people are subjected to, they never quite understand their daily struggles. It is important for MPs to understand and empathise with the political community they represent.

Conclusions

Tax dollars of ordinary Zimbabweans many times finance these extractive activities of the political elites at a time when the country is struggling to supply basic equipment to hospitals.

The political machinery displays such arrogant extravagance all the while preaching austerity to the masses. Where they are concerned, austerity is an afterthought, if a thought at all.  Nations and leaders fail to live by the words they preach and when they fail to listen to understand the plight of their constituents.

The news from this week has been heartbreaking in part because it shows legislation that is willing to take loopholes in the law to enrich itself and one that in the same breadth disregards the law to promote friends to positions they have no experience in.

What of the ordinary Zimbabweans who don’t have access to resources to challenge the legality of land repossession? Villagers in Chisumbanje lost their land to Green Fuel, a company owned by a Mnangagwa, but that’s a big story for another day. Suffice to say the owner is known to be a Mnangagwa associate, another member of the elites in the extractive institutions.

What of the ordinary Zimbabweans who don’t know anyone in the structures of power who have also fallen on hard times and are desperately in need of a job? Who will look out for them when the very government that has been mandated to do so, couldn’t care any less? Extractive politics is dangerous ground to be treading on and will be very difficult to undo in the long run. The elites get away with it because the system favours them.

It has many trickle-down effects: economic ruin, shortage of goods (passport paper, food, medication etc), poorly equipped public hospitals, demotivated civil service, an uninspired citizenry, rent-seeking behaviour: – all of these, Zimbabweans know very well.

wamagaisa

wamagaisa@me.com

Source: NewZimbabwe.com

Related posts

Leave a Comment