TCS Daily

Capital Punishment

By Roger Bate - March 28, 2005 12:00 AM

When I first visited Zimbabwe in 1996, $1US would buy about $8Zimbabwe (Z$8). When I was there last November, $1 would get you Z$7000 at the official rate, but Z$12,000 when traded on the black market (with those desperate to get hard currency in another country). Today's bank notes are printed on only one side and with an expiration date; bank collapses occur on a regular basis; not surprisingly, unemployment is about 80 percent, and the economy has halved in the past five years.

Much has been written about Government-backed violence in Zimbabwe. Almost as much has been written about attacks on independent journalists and the systematic rape by the youth league of the odious regime led by Robert Mugabe. It is widely thought that Mugabe's desire to sustain power has led to policies that prompted the collapse of the economy. And more of the same is expected with another unfree and unfair election due on March 31st.

But what is the fundamental reason for the recent collapse in Zimbabwe? It is not the loss of freedom of the press, or unsound monetary policy, or high military expenditure from fighting wars in other countries that benefit cronies, or low health expenditure -- although all these factors have a negative impact.

No, the real reason that Zimbabwe has collapsed is that there is no protection of private property. The executive rides roughshod over the judiciary in all matters of property. The result is "dead capital" -- a term invented by Hernando de Soto -- and total economic annihilation. The economy is now worth barely more than one percent (in US$ terms) of its value in 2000, when the Mugabe regime's "land reform" program, in which they appropriated farms and land-holdings from private owners, really started.

In short, Zimbabwe provides the reverse of the good news offered by De Soto. In The Mystery of Capital, De Soto exhaustively demonstrated that where private property rights are delineated and enforced, economies can grow rapidly. When someone can borrow against his one large asset (for nearly everyone this is his home) he can establish a business, buy supplies, establish marketing programs, sell products and make a profit and thrive.

For some countries the vast majority of capital is dead -- one cannot prove one owns it outright, and hence no capital market will lend against it. For example in the mid-1990s when De Soto was asked by President Hosni Mubarak to assess the situation in Egypt, De Soto found that 90% of the capital was dead. Today the situation is slowly improving as more and more people can prove they own their property.

Not long ago, Zimbabwe had all the rights and rule of law one could have wanted. It had a decent titling system, a judiciary that upheld rights of landowners in the face of an executive branch that was largely Marxist in orientation (like so many African economies). And this same judiciary continued to try to do this in the face of mass expropriation of land rights in 2000. Even as late as 2003, as the final major swathe of white farmers were thrown off their property and their land left idle, some judges tried to uphold the constitutional rights of these farmers.

But finally all the good judges were fired, resigned or escaped the country in peril for their lives. I met one such judge in late 2004 in Johannesburg. He stood up for individual rights in a case in mid 2003. First he was quietly told to drop the case by a junior minister, then the authorities attempted to bribe him with a farm of his own; then they threatened and publicly humiliated him with a smear campaign in the Government-run Herald newspaper, claiming he was the recipient of bribes; finally he was told by a friend with police contacts that he was going to be arrested on bribery charges, so he fled the country. This 42 year old, former Appeals Court judge, was gaunt and without visible means of financial support.

While his story is upsetting, the thousands who have died and the millions who have fled Zimbabwe with even less than this judge are all victims of the destruction of rights in Zimbabwe, which led to the almost instantaneous collapse of the economy. I am not alone in this assessment. Craig Richardson, an economist at Salem College, North Carolina, claims that the land seizures broke a vital "trust" and everyone "wondered if their assets were safe".

By way of hope, Richardson draws a parallel with Nicaragua. Nicaragua, also suffered economic collapse based on the destruction of property rights under the Sandinista government in the early 1980s. But in recent years, with a more capitalist-minded government, the Nicaraguan economy has annually grown at over 4 percent, with inflation below 10 percent, which is mainly due to protection of property rights and private sector development, he claims. Richardson found that the other institutions of a free society matter, but none matters so much as the right to the rewards of one's own labor.

Zimbabwe needs reinstatement of land rights and compensation to those robbed. Some white farmers I spoke too still hold on to their original title deeds in the hope that they will be able to reclaim their land. Turning dead capital into something with life will do more than anything else to reverse the disaster that is Zimbabwe. This can not happen with the current government. But Mugabe will die, become too infirm to Govern or be the victim of the coup at some stage; then there is a chance for democratic reform. While political reform is a necessary condition for economic growth, it is not sufficient -- only private property right enforcement adds sufficiency for growth.

Dr Roger Bate is a Resident Fellow at the American Enterprise Institute


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