Zimbabwe's Economic and Structural Adjustment Program (ESAP) supported by the World Bank dismantled many of the controls confining the country's economy. Implemented during a severe recession brought on by Zimbabwe's worst drought in more than a century, the program made impressive strides in trade and domestic regulatory policy, creating the basis for self-sustaining growth. But according to OED's recent audit,1/ the program did not reduce poverty and unemployment as its architects had hoped. Critical fiscal reforms made slow and uncertain progress, keeping budget deficits high. This created uncertainty and shortages of capital for private producers, which delayed investment in new capacity and job creation. By focusing on the formal urban sector, the program restricted its ability to reach the majority of Zimbabweans, who work predominantly in the informal sector and in rural areas. Two basic lessons are that: (1) macroeconomic stabilization--particularly fiscal adjustment--is a prerequisite for sustainable growth in employment, output, and incomes, and (2) sound macroeconomic policies need to be accompanied by actions specifically designed to assist and protect people who do not directly benefit from formal sector growth. Zimbabwe's ongoing Poverty Alleviation Action Plan incorporates many of the lessons drawn from the first phase of the ESAP.
To reduce Zimbabwe's deep socioeconomic disparities, the government that came to power at independence in 1980 invested heavily in health and education and, through parastatals, in rural development and the productive sectors. This led to an increase in public expenditures, which for most of the 1980s made up 45 percent of the GDP.
Although social indicators improved, particularly in health and education, per capita income stagnated. Large government spending crowded out private investment and fueled inflation, while shortages of imported goods constrained investment and growth. Population grew faster than job creation, widening the disparities in income levels. In 1991, the government proposed a policy agenda that formed the basis for the Economic and Structural Adjustment Program. The World Bank supported the ESAP with a $125 million structural adjustment loan (SAL) and a $50 million structural adjustment credit (SAC), both approved in 1992 and closed in 1993.
The ESAP sought to transform Zimbabwe's tightly controlled economic system to a more open, market-driven economy. The restructuring sought to promote higher growth and to reduce poverty and unemployment by (1) reducing fiscal and parastatal deficits and instituting prudent monetary policy; (2) liberalizing trade policies and the foreign exchange system; (3) carrying out domestic deregulation; and (4) establishing social safety net and training programs for vulnerable groups. The focus was on the formal sector as the engine of growth.
Implementation and outcome
A severe drought in 1992 left Zimbabwe in its worst recession since independence. Despite the drought the government continued the reforms, making considerable progress in trade liberalization and domestic deregulation. It dismantled the foreign exchange control system, freed all current account transactions from exchange controls and import licensing, removed public monopoly over the marketing of agricultural commodities, deregulated the financial sector, lifted price controls, and abolished investment licensing for all but large foreign investments. By dismantling many of the economic controls, the reforms established a better basis for selfsustaining growth.
Structural changes brought on by the reforms resulted in improvements. The manufacturing sector achieved positive growth in 1994, and its exports increased. Agriculture showed signs of recovery. Freeing the maize market in particular benefited the urban poor, both nutritionally and economically. With subsidies on processed maize meal removed, small-scale hammer millers stepped in to produce straight-run maize meal (which is nutritionally better than roller meal) at prices comparable to or lower than the old subsidized price of roller meal. Finally, the availability and quality of urban transport improved. But the program's success in economic liberalization was not matched in the implementation of fiscal reforms and social welfare programs.
The fiscal reforms hinged on reducing the size of the civil service and subsidies to parastatals. Although the government reduced spending significantly, from 46 to 39 percent of GDP between 1989 and 1994, the cuts did not go far enough. The civil service wage and salary bill remained high, and the slow pace of parastatal reform contributed to government deficits, leading to excessive monetary growth, inflation, and high interest rates, crowding out the private sector from access to domestic savings. On the revenue side, a decrease in the marginal tax rates for individuals and corporations lowered tax revenues. Coupled with the high costs of drought relief, these trends kept the deficit high. The climate of uncertainty that ensued delayed the supply response and contributed to a worsening of living conditions for the poor.
The program's social dimensions of adjustment (SDA) component was to address the transitional hardships brought on by the proposed civil service downsizing, the removal of maize meal subsidy to poor urban consumers, and the reinforcement or introduction of health and education fees. It centered around a social development fund with two parts: (1) a social safety net, which provided support for food expenses and school examination and health fees; and (2) an employment and training program for those affected by the downsizing.
The SDA suffered from many problems. Insufficient prior analytical work led to poor targeting of beneficiaries and inaccurate assessment of their numbers and where they lived, leading to an urban bias. The program was slow in getting started. After announcing the SDA component in 1991, the government took 18 months to appoint a coordinator (the drought took much of the government's attention during part of the program). SDA was underfunded, overly centralized, and relied on overworked staff already fully committed to the drought relief effort. It suffered from serious design flaws. It relied on beneficiaries to apply for benefits, and the complicated and costly application process effectively excluded many of the poorest people, who had little access to government information. The program's fee support system was complex, involving different eligibility criteria and arbitrary income thresholds. Finally, its training component for retrenched workers was too short and not always relevant to needs.
The government has since addressed these shortcomings in its new Poverty Alleviation Action Plan. The guiding principle of the new plan is decentralized decisionmaking, with project needs to be identified at the village level and approved at the district level.
Zimbabwe's experience provides two important lessons for other highly dualistic economies undergoing major reforms, among them the need for:
- Macroeconomic stabilization, particularly tighter fiscal policy, which requires sustained reduction of public expenditures through faster privatization of parastatals and civil service downsizing. The latter also requires integrating retrenchment initiatives and strategic planning to ensure efficiency gains.
- Careful targeting of social programs. Zimbabwe's experience highlights the inherent difficulties in targeting social programs to reach the poor. It shows the importance of avoiding an urban bias, of devising simple eligibility criteria for social safety net beneficiaries, of devolving initiatives to the community level, and of engaging a wide range of interested parties, including disadvantaged groups and community leaders, in partnership.
1/ Performance audit report, "Zimbabwe--Structural Adjustment Program," Report No. 14751, June 1995. Performance audit reports are available to Bank executive directors and staff from the Internal Documents Unit and from Regional Information Service Centers.