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The Incidental Positive Effects of Economic Sanctions: A Case of
Zimbabwe
A thesis submitted to the Bucerius/WHU Master of Law and Business Program in partial fulfillment of the requirements for the award of the Master of Law and Business (“MLB”) Degree
Godfrey Mugari July 16, 2010
12,690 words (excluding footnotes) Supervisor 1: Professor Matthias Busse
Supervisor 2: Professor Hans-Bernd Schaefer
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Table of Contents
1. CHAPTER ONE – INTRODUCTION ................................................................................................. 1
1.1 Introduction ........................................................................................................................................... 1
1.2 Background Information ....................................................................................................................... 2
1.2.1 The Zimbabwean Case ....................................................................................................................... 3
1.3 Motivation ............................................................................................................................................. 4
1.4 Aims and Objectives ............................................................................................................................. 5
1.5 Research Questions ............................................................................................................................... 5
1.6 Benefits .................................................................................................................................................. 6
1.7 Assumptions .......................................................................................................................................... 6
1.8 Contributions ......................................................................................................................................... 6
1.9 Scope of Research ................................................................................................................................. 6
1.10 Structure of Thesis ................................................................................................................................. 7
2. CHAPTER TWO – LITERATURE REVIEW ..................................................................................... 8
2.1 Introduction ........................................................................................................................................... 8
2.2 Economic Sanctions .............................................................................................................................. 8
2.3 Effectiveness of Economic Sanctions .................................................................................................11
2.4 Sanction Busting – Adaptability ..........................................................................................................16
2.5 The Case of Zimbabwe ........................................................................................................................18
2.6 Reasons for Sanctions .........................................................................................................................18
2.7 Nature of Sanctions against Zimbabwe ...............................................................................................20
2.8 The Effects of Sanctions on Zimbabwe ...............................................................................................22
3 CHAPTER 3 – RESEARCH METHODS ..........................................................................................25
3.1 Introduction .........................................................................................................................................25
3.2 Research Type .....................................................................................................................................25
3.3 Data Collection ....................................................................................................................................25
3.3.1 Primary Data Collection ...................................................................................................................26
3.3.1.1 Questionnaires ...............................................................................................................................26
3.3.1.2 Interviews ......................................................................................................................................27
3.3.2 Secondary Data Collection ...............................................................................................................27
3.4 Sampling ..............................................................................................................................................28
3.4.1 Target Population .............................................................................................................................28
3.4.2 Sampling Methods ............................................................................................................................28
3.5 Reliability and Validity .......................................................................................................................29
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4. CHAPTER FOUR – FINDINGS........................................................................................................31
4.1 Introduction .........................................................................................................................................31
4.2 Findings ...............................................................................................................................................31
4.2.1 Revenue Collection ..........................................................................................................................32
4.2.2 Indigenisation and Economic Empowerment Act of 2008 ...............................................................34
4.2.3 Manufacturing ..................................................................................................................................35
4.2.4 Tourism ............................................................................................................................................36
4.2.4 Diaspora............................................................................................................................................37
4.2.6 Financial Institutions ........................................................................................................................38
4.2.7 Look East Policy ..............................................................................................................................41
4.2.8 Cultural Changes ..............................................................................................................................43
4.2.9 Mining ..............................................................................................................................................45
4.2.10 Structural Changes ..........................................................................................................................46
5. CHAPTER FIVE – CONCLUSION AND RECOMMENDATIONS ..............................................47
5.1 Introduction .........................................................................................................................................47
5.2 Conclusions .........................................................................................................................................47
5.3 Recommendations ...............................................................................................................................50
Further Researches……………………………………………………………………………51
Bibliography…………………………………………………………………………………..53
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List of Acronyms
DRC: Democratic Republic of Congo
GDP: Gross Domestic Product
GNU: Government of National Unity
IMF: International Monetary Fund
MDC: Movement for Democratic Change
RBZ: Reserve Bank of Zimbabwe
RTGS: Real Time Gross Settlement
SADC:Southern African Development Community
UK: United Kingdom
ZESA: Zimbabwe Electricity Supply Authority
ZIDERA: Zimbabwe Democracy and Economic Recovery Act
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1. CHAPTER ONE – INTRODUCTION
1.1 Introduction
Sanctions are „the penalty imposed to ensure compliance with the law‟.1 However, the
country or institution coming up with sanctions has several options on its hands to use on
the target or subject to ensure compliance, and these options are diplomatic, economic or
military means. The focus of this research is on economic sanctions, which are defined as,
„an attempt to achieve a political end, namely a change in policy, via an economic means,
namely alterations in trade, investments and other economic relationships‟2.
It has been that „African countries have to respond to the needs of globalisation by
rearranging their tariff structures and export administration, but also related macro- and
sector policies. Important is the cross-border and international traffic infrastructure…‟3.
Not much attention is given to such statements by the same governments for which it is
written. During a period of economic sanctions, however, a country id forced to make
institutional and structural policy changes that affect the legal, political and economic
systems of that country as it tries to adapt to life under sanctions. It is the contribution of
these policy changes towards the growth and development of a country after the removal
of the sanctions that form the basis for this research thesis.
This Chapter will provide the background information to this research, including the
background to the imposition of sanctions on Zimbabwe. The motivation, aims and
objectives will then be outlined after which the researcher will provide the questions
arising from this research. This Chapter will also show the benefits of conducting this
1 Renwick (1981), p1
2 Blumenfield (1987), pg190
3 Wohlmuth (2000), p539
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research as well as the contributions that the research will have towards scholarly work.
Assumptions and the scope of this research paper will also be outlined, and lastly, the
structure of this research paper will be presented.
1.2 Background Information
Economic Sanctions are meant to maximise economic damage to the to the target in order
to coerce it to change its trade or foreign policies as well as the human rights issues4.
However, the economic performance of most of the countries that go through sanctions is
much better than that of the neighbouring countries after the lifting of sanctions, despite
the amount of economic damage inflicted during the period under sanctions.
An upward trend was observed in the general economic activities just after the lifting of
sanctions in Libya5. He specifically states that this upward trend was as a result of
„political changes in the political field, in particular the modified economic policies and
exchange rate measures‟. Additional impulses and favourable tendencies could also be
noticed in the coming years. The premise, therefore, would be that policies made during
periods of sanctions actually work for the country once the sanctions are removed. Naylor
(1999)6 is in total agreement with this notion and he writes that „the embargoes encourage
target states to create their own production capacity with the result that today, countries
incapable of providing electricity to their masses can shock their neighbours with
successful intermediate range missile tests‟. He goes on to say that once the war is over,
the supporting infrastructure remains in place, „simply democratising its client base‟
Zimbabwe, currently under economic sanctions from USA, Britain, the European Union
and other western countries like Australia and New Zealand, has also made several policy
4 Miljkovic (2002), p1
5 Strunz and Dorsch (2000), p559
6 Naylor (1999), p386
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changes in its attempt to bust the sanctions, which have been in place since 2000. This
research thesis intends to develop a theory on the positive effects of economic sanctions
on the target, though not by intention. The approach is to note the policy changes that the
country have come up with and analyse the positive effects on the growth and
development of the country, after the sanctions are removed, that these policy changes
have.
1.2.1 The Zimbabwean Case
Zimbabwe, a former colony of Britain, took independence from the British rule in 1980.
In 2000, the government of Zimbabwe embarked on a controversial land acquisition
policy, in which land was taken away forcibly and without compensation from the
minority white country farmers, who numbered about 4000 and occupied about 70 % of
the land. This land was reallocated to the majority black population. The land was taken
forcibly after Britain reneged on its previous pledge to fund the land acquisition process,
and this came out after the Donors Conference of Land held in Harare in 1998. 7
The reaction of the world was that of anger as they interpreted this move by the
government of Zimbabwe as expropriation and disrespect of private property. As a result,
economic sanctions were imposed on the country with the objective to „restore democracy
and normalcy‟8. USA enacted ZIDERA which instructed the executive directors to each
of the multinational financial institutions to vote against any loan, credit or guarantee to
the government of Zimbabwe. No reduction or cancellation of any debt owed by the
government of Zimbabwe was allowed under this Act. The European Union and its allies
also impose restrictive economic measures on Zimbabwe.
7 Chingono (2010), p067
8 Chingono (2010), p067
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In response to the economic sanctions from all quarters, the Zimbabwean government
embarked on a number of legal, political and economic policy changes in an attempt to
keep the economy going. Effects of the sanctions have been and are still being felt as the
country experienced some of the worst economic factors in the world like the hyper-
inflationary rates as well as interest and exchange rates that are more unrealistic than
realistic.
1.3 Motivation
The motivation for this research comes from the realisation that most countries that have
been put under sanctions have done well than the neighbouring countries once the
sanctions are removed.9 During the period of economic sanctions, so many undesirable
effects are noted such as the severe damage to the economy, the increased suffering of the
general populace, the limited cooperation of the government in power with regards to
humanitarian efforts and the prioritisation of the government towards consumption of the
remaining resources at the expense of the government.
However, once these sanctions are removed, there is a tremendous growth in the
economies of these previously sanctioned countries. This growth is different to the catch-
up effect and leads to the level of development in the previously sanctioned country
surpassing that of the neighbouring countries. Notable countries that have been sanctioned
and have done much better than the neighbouring non-sanctioned countries include South
Africa, Libya, Israel, Nigeria, Japan and Rhodesia.10
This research intends, therefore, to
develop an idea why some of the countries that are put under sanctions end up doing much
better than the neighbouring countries, despite that the their economic growth is
suppressed during the periods of sanctions.
9 http://data.worldbank.org/data-catalog/world-development-indicators
10 http://data.worldbank.org/data-catalog/world-development-indicators
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1.4 Aims and Objectives
The aim of this thesis is to prove that even though the imposition of economic sanctions is
meant to coerce the target country to alter its trade or foreign policies or human rights
issues through maximising economic damage11
, an opportunity is created for the target
country to improve its working culture, institutional structures and policies. Focus would
be on the growth-stimulating policies that a country can come up with for more effective
results in the economy. The research also aims to show that these improved policies
provide the platform for the sanctioned countries to perform much better than the
neighbouring unsanctioned countries once the sanctions are removed. Most researches
have been focusing on the negative effects of economic sanctions on a target and not
much have been written on the positive results that can be achieved by a country that
works hard to bust the sanctions imposed on it by implementing a lot of policy and
institutional changes.
1.5 Research Questions
i. What measures (legal, political or economic) did the government of Zimbabwe take
to overcome the economic sanctions since their imposition in 2000?
ii What effects do these policy changes have on the future economic performance of
Zimbabwe, after the lifting of the economic sanctions?
iii Do sanctions have any positive effect on the growth and development of a country
after the lifting of the sanctions.
11
Naylor (1999), p4
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1.6 Benefits
Most countries do not simply give up when imposed with economic sanctions. The normal
reaction by the governments on which sanctions are imposed is to suppress their people
and accumulate wealth. The most benefit of this research, therefore, is to enlighten
governments that working on policy issues that stimulate growth in a country will build a
much stronger economy in the future after sanctions are lifted.
1.7 Assumptions
a. It is assumed that any benefits to be reaped from any policy changes espoused in
this research will only start accruing once all the economic sanctions against
Zimbabwe are lifted.
b. The policies under review are those that were made as a survival strategy, and
would not likely have been introduced if the sanctions were not imposed.
1.8 Contributions
This thesis will contribute to a new theory in addition to the existent theories on economic
sanctions. The new theory focuses on the positive effects that can be realised through
initiatives made during period of sanctions as a country tries to adapt for survival.
1.9 Scope of Research
The research will be focusing on the country of Zimbabwe, and therefore will be restricted
to the policies that have been made only in the country. The policies under consideration
are those that were made in response to the economic sanctions, and whose likelihood of
having been introduced are low had sanctions not been imposed. People to be investigated
upon are the economists, government departments and economic advisors in the country.
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1.10 Structure of Thesis
This chapter introduced the research and outlined the background information, the aims
and objectives, the questions that need answers as well as the benefits of conducting such
a research. Assumptions considered for the research are also spelled out. Chapter 2 of the
thesis focuses on Literature Review so as to provide an in-depth understanding of the
subject area and what other authors have written on economic sanctions. Chapter 3
outlines how the research was carried out and the different factors that were considered
for any particular choice or instruments to be made. Chapter 4 presents the findings of the
research whilst Chapter 5 is on conclusions and recommendations.
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2. CHAPTER TWO – LITERATURE REVIEW
2.1 Introduction
Policy Makers have been increasingly using economic sanctions as a way of trying to
change the behaviours and policies of the target countries to those that are globally
acceptable. A lot of scholarly material has been written on this subject as analysts tried to
share views on the same. In this Chapter, the researcher will review the literature that has
been written regarding the subject of Economic Sanctions. This includes an area that has
been so much debatable, and that is the effectiveness of the sanctions, why the rate of
economic sanctions has been low and why they are continuously being used despite that
fact. The research also looks at the substantial capacity of the target to adapt to these
sanctions.
Since this research is focusing on a case of Zimbabwe, it is important to understand what
has happened in Zimbabwe for sanctions to be imposed and what the nature of these
sanctions are. There have been different views regarding the nature of sanctions in the
country, depending on the perspective from which one is analyzing the issue. The research
will therefore review what has been written on the sanctions and lastly, the research will
look at specific cases of economic sanctions from around the world.
2.2 Economic Sanctions
The broad meaning of the term sanctions is 'an economic or military coercive measure
adopted usually by several nations in concert for forcing a nation violating international
law to desist or yield to adjudication'.12
It was observed that sanctions can be classified
12
http://www.merriam-webster.com/dictionary/sanction
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loosely into military, diplomatic and economic.13
This research focuses on economic
sanctions as a tool to coerce the target to behave in a manner acceptable to the country or
institutions imposing the sanctions. Economic sanctions have been described as an
alternative to using military force and it has been stated that they provide a low-cost
alternative method of punishing undesirable behaviours and resolving conflicts.14
However, Mr Pattison15
, do not agree and described economic sanctions as a distinct tool
that is not used as an alternative.16
The definition for economic sanctions is derived from its objectives, and most scholars
agree on these objectives. Economic sanctions are characterised by imposition of
economic pain with the objective of influencing of the target nation.17
They can also be
defined as defined as 'an instrument of policy to induce an offending government to
change its conduct and thereby resolve or help to resolve the international problems'.18
Miljkovic (2002) agrees with the previous authors and defines economic sanctions as 'the
measures that one (sovereign government(s) or a body under the jurisdictions of different
sovereign governments) uses to influence another party'.19
He explains the 'influence' to
refer to trade, foreign policies and human rights issues. Many scholars agree with these
two since the general objective of sanctions is to enforce international morality and force a
target to reconsider its political options20
. Economic sanctions are therefore used for
behaviour modification, retribution or punishment, or as a signal to the target or to other
13
Brown (1985), p1
14 Gordon (1983), p188
15 Mr. Pattison is the Director in charge of International Security at the United Kingdom Foreign Office
16 Pattison (2006), p21
17 Nincic & Wallensteen (1983), p4
18 Renwick (1981), p1
19 Pg1
20 Naylor (1999), p2
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third country states.21
Economic sanctions are used 'to demonstrate resolve both at home
and abroad, express outrage, to punish or to deter'.22
There is a general agreement among scholars on what kinds of actions constitute
economic sanctions, and these include financial asset blocking, freeze orders and export
controls.23
In fact, the scope and nature of economic sanctions varies. It has, therefore,
been agreed that sanctions come at a cost, both to the sender and to the target, and the cost
comes from the loss in trade as well as the resources involved in the effective monitoring
and policing of the embargoes.24
The Washington Post (1982)25
estimated that the trans-
Siberian embargo on Russia cost the US and its subsidiaries about $2.2 billion in
cancelled contracts. In fact, according to Hufbauer (1997), economic sanctions cost
United States an annual amount of $18 billion. It is, therefore, the ability of a nation to
absorb the costs associated with the imposition of the sanctions that has resulted in
economic sanctions only being imposed by rich developed nations. The underdeveloped
countries, not being able to absorb the associated costs, find themselves assuming the role
of targets in most situations where sanctions are imposed.
As a result, scholarly interests have been aroused and questions have been asked whether
the imposition of economic sanctions really produce the intended results or not.26
There is
also little understanding of the political and economic nature as well as the mechanisms
and consequences of policies on sanctions, even by those who advocate and employ
them.27
Questions have been asked, as a result, if economic sanctions must ever be used as
21
Alexander (2009), p10
22 Hufbauer, Schott, & Elliot, (1990), p92
23 Alexander (2009), p10
24 Blumenfeld (1987), p191
25 pA15
26 Miljkovic (2002), p1
27 Blumenfeld (1987), p190
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an instrument of policy.28
This policy debate has been a result of the upsurge in the use of
economic sanctions as a coercive tool by many institutions and countries.
2.3 Effectiveness of Economic Sanctions
Many scholars have questioned the effectiveness of economic sanctions as a behaviour
modifying tool.29
It is important to understand the prerequisites for the success of
economic sanctions first, and these are:30
a) Well defined narrow goals – this has been the reason for success in most situations
where the objectives foe the sanctions were explicitly defined, for example, in the
Libya case, the main objective was the handover of the Lockerbie suspects. Some
authors believe that explicitly spelt out objectives are not always better than vague
ones.31
b) The costs associated with the imposition of sanctions – Effectiveness of sanctions is
constrained to a greater or less extent by the costs associated with imposing the
sanctions.32
c.) Multilateral cooperation – economic sanctions being imposed by several countries, as
well as international institutional like the UN, tend to be more effective than those
imposed by single countries.
28
Brown (1985), p1
29 Brown (1985)p1, Renwick (1981) p3, Miljkovic (2002) p2, Green (1983) p4
30 Oxford Analytica Daily Brief (21/02/2006)
31 Miljkovic (2002), p2
32 Blumenfeld (1987), p193
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d.) Allies and Adversaries – sanctioning allies would be more effective than sanctioning
adversaries. This is because there is much to lose from the existing relationship for an
ally.
e) Sanctioning elites – the normal reaction by a government is to shift the burden of
sanctions to the general population and, therefore, effectiveness of sanctions is
increased when the elites are sanctioned within a country.
Even with the knowledge of these preconditions, economists are not able to prove using
rational arguments if the sanctions would be successful. It is also surprising that the failure
rate is still high even with the knowledge of what is needed for economic sanctions to be
successful.
Most researches that have been done have come to the conclusion that economic sanctions
have a high rate of failure. Economic sanctions, whether operated within the UN or
outside, have never had a high rate of success.33
Ten cases studied where comprehensive
trade sanctions were imposed realized only a 20% success rate.34
The most comprehensive
studies on the effectiveness of economic sanctions were done by Hufbauer et al (1990),
and they came to the conclusion that economic sanctions were effective in only 34% of
the 115 cases under study.35
Wallensteen (2000) also noted that 'only two of the eleven UN sanctions initiated during
the 1990s had been lifted by the end of the decade (i e. December 31, 1999), where the
initiator has stated that the target country changed behaviour'.36
The assumption here was
that the two successful cases had resulted in the lifting of sanctions due to the initially
33
Wallensteen (2000), p5
34 Nincic & Wallensteen, (1983), p124
35 P93
36 P6
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stated objectives being achieved. The non-lifting of sanctions, on the other hand, in the
other cases mean that the objectives for which these sanctions had imposed had not been
achieved. As a result, the success rate was just below 20%, which were almost similar
previous studies. Drezner (2003) however argues that these studies underestimate the
effectiveness of the threat of sanctions. As a result, he maintains that if the threat of
sanctions, whose success rate was much higher than that of imposed sanctions, were taken
into consideration then the rate of success of sanctions will be much higher.37
Dr Howells, a member of /parliament for the British House of Commons, answered that
there was no realistic hope of economic sanctions succeeding in Zimbabwe when asked by
the Sanctions Committee about sanctions against Zimbabwe, but he still maintained that
sanctions should still persist.
It is surprising that, with most of these studies concluding the ineffectiveness of economic
sanctions, there has been a continued increase in the use of the same as a means of
coercing the targets to revisit their policies that are considered undesirable by the senders.
37
P653 - 4
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Table 1
Number of instances in which sanctions were imposed
1920 - 1929 2
1930 –1939 5
1940 – 1949 10
1950 – 1959 12
1960 – 1969 21
1970 – 1979 34
1980 – 1982 11
Source: Brown (1985)38
Why then is the world experiencing an increased use of sanctions considering the rate of
ineffectiveness of these sanctions to achieve the intended objectives? One of the reasons is
that it is well known that there are costs associated with imposition of sanctions which
results in the economy being crippled, especially over a longer period of time. There is
thus a general belief that the more prolonged the sanctions, the greater the damage, and
the more likely the target is expected to give in. Some authors dispute and argue that the
longer periods allow the target to adapt to the conditions prevailing during the periods of
sanctions.39
38
P2 39
Wallensteen (2000), p5
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The other reason for using sanctions against a state is as a means of punishment or with
the objective of weakening the state militarily or otherwise. Davis and Engerman (2003)
wrote that '...sanctions were typically deployed to disrupt military adventures...‟.40
Sanctions are often imposed not primarily for instrumental purposes of inducing the target
to comply with the sender's demands but instead for expressive or demonstrative
purposes.41
Thus, in that case, there is disregard of the effectiveness of the sanctions. 'The
economic effects, in other words, are means
to achieve ends, not ends in themselves'. He further goes on to explain that success is
separated from the effects of the economic sanctions, whose effects are regarded as a
necessary sacrifice for a higher cause.
The other reason for increasing the use of sanctions even in the wake of their insufficiency
to meet outlined objectives is that 'they can they show that the international community
takes certain norms seriously, such as democratic governments, human rights and fight
against terrorism'.42
The idea behind this move is that, imposing sanctions in such
situations has no regard to success, but is meant to curtail repeat behaviour regarded
unacceptable. What this means is that the sanctions are not necessarily used for specific
objectives but are being put to a wider use for a wider set of purposes. When a military
action is ruled out for some reason, there is need to show the offending nation that the
sender of the sanctions disapproves of offensive policies.43
In this case, the sanctions 'do
not serve instrumental purposes but have expressive functions', though he also points out
that this is an expensive way of doing so.
40
Davis & Engerman (2003), p188
41 Galtung (1983), p380 - 1
42 Wallensteen (2000), p7-8
43 Galtung (1983), p48
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Closely related to the reasons above is the proposition by Drezner (1998), who brings in
the concept of conflict expectation.44
He argues that a country will impose sanctions on
the behest of any slight conflict if it anticipates more frequent conflicts in the future. This
is done even when the sender herself also incurs a lot of costs. The objective is to signal to
the target that any conflict will be costly to both of them and the sender is prepared to
incur such costs. The effect, therefore, is that the target will try to avoid any conflict in the
future because of the associated costs. Drezner goes on to explain that the sender would
naturally try to avoid imposition of sanctions where she does not expect frequent future
conflicts and would only impose such sanctions if 'they incur minimal costs and the target
would suffer significantly'. It was observed that, frequently, the purpose for economic
sanctions is to 'deter objectionable future policies by demonstrating an ability to retaliate
rather than to modify extant behaviour'.45
There are so many theories of thought regarding why nations and international
organizations continuously use sanctions even when researches point that they are
ineffective. Most of them, however, concur that it might not be correct to consider
sanctions to be ineffective on the basis of not meeting their intended objectives because
there are various levels of success.
2.4 Sanction Busting – Adaptability
There are three ways that a country can bust sanctions and these are adaptation to
sacrifice, restructuring the economy to absorb the economic shocks, and smuggling.46
The
economic restructuring usually occurs at the level of the government through
implementation of policies. This research paper is more concerned with the restructuring
44
Drezner, (1998), p711
45 Miroslav & Peter, (1983), p6
46 Galtung (1983), p31
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of the economy the effects of the restructuring will be used in the future after the lifting of
the sanctions. Since economic sanctions usually target imports and exports in its quest to
cripple the smooth operation of the economy, there is a greater tendency to be more
innovative within the country's industrial sectors. As a result, there is an increase in the
target country's ability to enforce import substitution. International sanctions, therefore,
promote domestic cohesion and adaptation which allow the target state to weather the
economic costs.47
Predictions were made that the Rhodesian companies would come out of the sanctions
with a greater share of the home markets, which was the incentive for the companies to be
more inventive.48
He pointed out that hidden forces can be activated when a target society
is hurt and the opposite of what is intended will then be the outcome.49
Imposition of
sanctions on Italy resulted in it cutting back on its imports, which effectively resulted in
the improvement in the trade balance.50
In Rhodesia, he noted that companies found it
difficult to remit dividends to their parent companies abroad and this resulted in an
increase in liquidity in the banking system. He also points out that there was significant
diversification in the economy to such an extend that 'the Rhodesian economy was
transformed from virtually total dependence on the importation of manufactured goods in
exchange for raw materials to a remarkable degree of self sufficiency in most areas...'.
States are also able to survive through sanctions due to assistance from other third party
states. Even though there was unanimity at the United Nation for comprehensive
economic sanctions towards Rhodesia and import and export of important products had
been banned between this country and other nations, there were still lots of trading taking
47
Green (1983), p62
48 Galtung (1983, p34
49 Galtung (1983), p46
50 Renwick (1981), p85
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place in the underworld.51
He specifically mentions over 100 violations detected by the
Security Council Sanctions Committee involving powerful nations like New Zealand,
Australia, West Germany, France, Japan and many more. Beside the assistance received in
the trading arena, Rhodesia was also receiving assistance from South Africa to fight the
black revolutionary groups.
2.5 The Case of Zimbabwe
Zimbabwe has been chosen as a case for the analysis of the effects of economic sanctions
on a country. The country has been trying to survive under difficult conditions that include
one of the highest inflation rates in the history of mankind and has been coming with a lot
of legal, economic and political policy changes. It is these policy changes, which are
expected to have an impact in the future economy without sanctions that are the reason for
this research paper. Zimbabwe is an interesting case in the sense that the sanctions are still
in place and the research will come out with findings that can be verified in the future.
2.6 Reasons for Sanctions
As espoused by many writers that reasons for sanctions are always different depending on
the perspective of the sender or the target, it also is the same with the Zimbabwean case.
However, there is a part that both parties concur to and that is the background leading to
the imposition of sanctions.
Zimbabwe, a former colony of Britain, took independence in 1980. One of the central
issues before and after independence was the issue of land. The Zimbabwean government
viewed the distribution of the land at the time as highly skewed since only 4500 white
farmers occupied 70% of the land, or 11 million hectares of the country's prime farming
51
Green (1983), p78
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land, which constituted 21% of the total land.52
This issue received little attention since
independence until the late '90s when the war veterans started demanding the government
to act on it. The Zimbabwean government, after an impasse at the 1998 Land Donors
Conference in Harare, legalized the acquisition of land from the white commercial farmers
without compensation through the amendment of section 16 of the country's
constitution.53
On the 24th
of May 2000, Mugabe54
invoked the presidential powers temporary measures
to sign regulations55
that would enable the government to start acting on the acquisition of
land as provided by the Land Acquisition Act. In September 2000, the government then
embarked on a ' fast track' land reform that was characterized by the forceful acquisition
of land from the white to commercial farmers without any compensation. Since there was
no planned strategy in the acquisition of the land, the whole process was marred with
violence as most of the war veterans took it upon themselves to chase the white
commercial farmers from the land.
The reasons for the sanctions include:
a) The violent acquisition of land without compensation, which was interpreted by the
west as expropriation and disrespect of private property.56
However, Mugabe's
government argues that the land ownership at the time was unfair and his government was
simply redressing a colonial past.
52
Taylor & Williams (2002), p549
53 Chingono (2010), p067
54 Robert Gabriel Mugabe is the President of Zimbabwe
55 The Presidential Powers Temporary Measures, Land Acquisition Regulations
56 Chingono (2010), p67
20 | P a g e
b) The Zimbabwean army's involvement in the DRC was also an issue with the
international community as this was viewed as an unnecessary expenditure. The economy
of Zimbabwe was on a downfall with unemployment rate of 50%, a falling GDP and
skyrocketing inflation rate when Zimbabwe intervened in the DRC conflict.57
The
international community did not see any rationale since Zimbabwe did not have any
substantive 'national interest' in the country.
The Zimbabwean government on the other hand feels it was operating within the
framework of SADC principles.
c) The other reasons for sanctions were the disrespect for human rights, lack of good
governance, suppression of opposition politics and the lack of freedom of speech. The
government of Zimbabwe, on the other hand argued that it was the one that brought
democracy to Zimbabwe and has been upholding it since 1980 by conducting free and
fair elections.58
In general, the Zimbabwean government felt that sanctions were unfairly being imposed
on them due to the politicization and internationalization of the land issue, which was
supposed to be a bilateral issue with Britain. It also claimed that the West was bent for a
'regime change' in Zimbabwe and was using human rights violations, elections and land
issue as a scapegoat
2.7 Nature of Sanctions against Zimbabwe
There has been differences between the senders' and the target's interpretation of the exact
nature of sanctions against Zimbabwe59
. The senders in this case include Britain, USA and
57
Maclean (2002), p522
58 Chingono (2010), p69
59 Chingono (2010) , p67
21 | P a g e
the rest of European Union60
as well as New Zealand and Australia.61
According to the
senders, the sanctions are 'targeted', 'smart' or 'restrictive' and specific to Zimbabwean
officials who had “formulated, implemented or supported policies that have undermined
Zimbabwe's democratic institutions”, whilst the Zimbabwean government considered
them to be 'economic' and comprehensive in nature since the 'impact of these sanctions
stretch on the economy to infinite causing untold suffering to the unintended people, the
general population'.62
The Zimbabwean government derives its argument from the US enactment of ZIDERA
200163
, which gives a directive to the Secretary of State to instruct every US executive
director of an international financial institution to oppose and vote against:
1. any extension by the respective institution of any loan, credit or
guarantee to the Government of Zimbabwe; or
2. any cancellation or reduction of indebtedness owed by the Government
of Zimbabwe to the United States or any international financial
institution.64
International financial institution in this case means the multinational development banks
like African Development Bank, African Development Fund, the Inter-American
Development Fund, and the International Bank for Reconstruction and Development, and
the International Monetary Fund. Any move contrary to this instruction can be made only
with a certification from the President. The US also instituted travel restrictions on
60
Brooks & Shin (2006), p1
61 Chingono (2010), p72
62 Chingono (2010), p67
63 http://law.justia.com/us/codes/title22/22usc2151.html
64 Section 4( c )
22 | P a g e
selected individuals from the Government of Zimbabwe, along with the EU, Australia,
New Zealand and Switzerland.65
The EU, on the other end, only instituted travel restrictions and assets freezes on the assets
of selected members of the Zimbabwean government. In total, £160,000 belonging to
Zimbabwe was frozen in UK. There are also 126 people on the sanction list restricting
people from travelling throughout the EU. There are no trade sanctions on Zimbabwe,
though the British government observed a decline in trade between the two countries, a
fact attributed to unattractive business environment in Zimbabwe.66
2.8 The Effects of Sanctions on Zimbabwe
Economic sanctions had very serious economic and sociological effects on Zimbabwe.
Most of the effects experienced in the country were interrelated. The major impact was on
the rate of inflation, which officially toped 231 million % on average and the highest in
the word.67
Most people believe that the actual inflation rate was much higher than the
reported one. Inflation resulted from the fact that the country is a net importer and the
economic sanctions had put restrictions on the flow of foreign currency to Zimbabwe
resulting in a serious shortage of the same in Zimbabwe. This affected all the industries in
Zimbabwe, and as the companies and the government all tried to mop the foreign currency
in the market, the rate was raised tremendously. This had a direct effect on the inflation
rate as this directly impacted on prices of goods.
65
House of Lords (1987), p4
66 House of Lords (1987), p4
67 Gono (2008), p14
23 | P a g e
Most companies failed to access the foreign currency due to the shortage and this resulted
in shortage of goods and services, which led to retrenchments. The unemployment rate
stood at 80% in 1998. As more people got into the informal sector to survive, there was an
increase in the level of criminal activities, particularly fraud and corruption. The effects
had ripple effects on every part of the economic and social fabric of the economy. Gono
(2009)68
summarises the effects as:
i. Hyperinflation
ii. Shortage of foreign currency for critical imports
iii. Interest rate and exchange rate distortions
iv. High unemployment levels
v. Declining levels of domestic and foreign investments
vi. De-industrialisation and negative economic growth rates
vii. High levels of corruption
viii. Prevalent levels of greed and speculative behaviour, including falsification of
accounting records
ix. Lack of unity of purpose among Zimbabweans, as well as political, social and
economic polarisation, all which led to a depressed operating environment.
x. High levels of suspicion and mistrust among Zimbabweans in general
xi. Drying up of credit lines
68
Gono (2008), p122 - 123
24 | P a g e
xii. Malfunctioning parastatals and local authorities.
25 | P a g e
CHAPTER 3 – RESEARCH METHODS
3.1 Introduction
Given the limitation in time and finance, the research had to be structured in a way that it
does not exclude important information during the research process. It is also important to
note that this is a research which concentrates on a particular case, a case of Zimbabwe,
and as a result of that, challenges result from the physical distance created between the
researcher and the source of information. In this chapter, the researcher will focus on the
methodology used, concentrating on the methods used for of data collection and sampling
and the justification for usage of those specific methods.
3.2 Research Type
This is a qualitative research, which uses an inductive approach, and whose objective is to
contribute to the economic sanctions theory. An inductive approach is „a theory building-
process, starting with observations of specific instances, seeking to establish
generalisation about the phenomenon under investigation‟.69
Although theory exists with
regards to economic sanctions, there is another line of thinking that has not been
developed, and that is the positive effects of economic sanctions. The objective of this
research is to contribute this unexplored part of the economic sanctions theory.
3.3 Data Collection
The researcher concentrated on primary data collection since the area of research has not
been explored. Positive aspects of economic sanctions have not been the focus of
69
Wilson (2010), p7
26 | P a g e
researches done before and as a result not much is written on the subject. However, the
research also employed secondary data collection from newspapers, internet articles and
policy documents. A number of articles were written, especially on Zimbabwe, as the
country defied the economic sanctions imposed on it.
3.3.1 Primary Data Collection
„Primary data is the data that the researcher collects by himself or herself through a range
of collection tools such as interviews, observation, and questionnaires, rather than simply
relying on existing data sources‟.70
The main reason why the researcher mainly focused
on primary data collection is that there are limited articles written on the subject of
positive aspects of the economic sanctions. Most of the articles written on economic
sanctions focus on the nature and effects, mostly negative, of economic sanctions. This
method of collecting data has its own challenges like time and financial constraints and
inability to access one‟s subjects, in some cases. There is, however, a greater contribution
to the area of research.
The research made use of interviews and questionnaires.
3.3.1.1 Questionnaires
Given the physical distance between the researcher and the subjects, a questionnaire
became an important tool for data collection since it is also cost effective and reliable.
This tool enabled the researcher to get accurate information from different sources
through structured questions that were self-administered. Both open ended and closed
questions will be asked. For the convenience of both the researcher and the respondents,
70
Wilson (2010), p136
27 | P a g e
the questionnaires were administered through email. This provided a cost-effective and
quick way of communicating and was able to reduce the distance between the two parties.
3.3.1.2 Interviews
Interviews were also very important for this research, especially for the collection of data
from people who are or were in decision-making positions during the period of sanctions
in Zimbabwe. Their perception towards the usefulness and effectiveness of some
economic, political and legal changes they made were of paramount importance to the
effective conclusion of this research.
One main advantage of interviews over the other data collection tools is that the
researcher will also get verbal and non-verbal communication from the respondent.
However, due to the distance involved as well as time and financial constraints, face to
face interviews were not possible and therefore the researcher was limited to telephone
interviews. The main advantage is that this method provides for a wide geographic
coverage.
3.3.2 Secondary Data Collection
Secondary data „are data that has been collected by other researchers‟.71
There is a lot of
information that has been written on Zimbabwe and the economic sanctions imposed on it.
A lot of information has also been provided on how the economy has changed over the
years including some changes in the legislative and economic framework. However, not
much analysis has been done on the effects of some of these changes on a future
Zimbabwe without sanctions, which is the basis of this research. An important source of
71
Wilson (2010), p170
28 | P a g e
secondary information was the book72
written by Dr. Gono73
. In this book, he explains the
policies he made and how they were able to impact on the country‟s economy. The same
information was however used for analysing the impact the same policies will have on the
economy once sanctions are lifted. Other important sources of information were
governmental policy documents that were released by the government outlining some of
the measures it was taking to arrest economic decay.
3.4 Sampling
Sampling is important in the sense that one cannot target the whole population. By the
same token, the research targeted certain individuals in Zimbabwe who provided the
required data.
3.4.1 Target Population
The research targeted those individuals who are knowledgeable about the effects of
decisions made during the period of sanctions and the potential effect they have on the
economy. This group of people include Bankers, Economists, Lecturers, and officials
from the ZIMRA, RBZ and the Ministry of Finance.
3.4.2 Sampling Methods
Different sampling methods were used for different respondents in order to have
appropriate representation. The respondents all came from Harare, which is the capital
city and economic hub of the country. The main advantage is that the city effectively
represents the whole country since it accommodates the majority of the experts sought for
72
Gono (2008)
73 Dr. Gideon Gono is the Governor for the Reserve Bank of Zimbabwe
29 | P a g e
the research. The only exception was the universities, which are spread throughout the
country. The following methods were used for the respective targeted respondents:
a. Banks – Simple random sampling method was used to come up with the banks
from which the personnel to provide information required for the research came
from.
b. Bank Officers – Due to the need for expert opinion on the subject topic, purposive
sampling method was used. The bank‟s Economists or the Directors for Banking
Systems were targeted to provide the required information for the research.
c. Ministry of Finance – the purposive sampling method was also be used in this case
and the senior officers in the Ministry were specifically targeted.
d. Tax Authorities – senior members of staff were also be targeted, therefore
purposive sampling method will be used in this case.
e. Reserve Bank of Zimbabwe – Purposive sampling was employed with the focus on
senior management of the central bank.
f. Universities - Simple random sampling method was used to come up with the
universities from which the personnel to provide information required for the
research came from.
g. Academics – The economics departments of the universities will be purposively
selected whilst the academics within those departments were selected randomly.
3.5 Reliability and Validity
This research focuses on a topic that requires expert knowledge and there has been need
for the inclusion of only experts in the respondents list. The data from this research is
30 | P a g e
valid and reliable since the respondents are either experts in the field or are the actual
persons who crafted the policies. The research was also made to span throughout the many
sectors of the economy, which makes the information provided more reliable.
31 | P a g e
4. CHAPTER FOUR – FINDINGS
4.1 Introduction
This Chapter presents the findings of the research. The research received a wide range of
responses on policy changes that have occurred in Zimbabwe since the inception
sanctions. There has been also a lot of selectivity on the sanctions presented hereunder
since the focus is on policies whose likelihood of change or introduction would have been
very low had sanctions not have been imposed. This is meant to maintain the premise that
those policy changes were influenced mainly by imposition of sanctions, a premise which
can be highly debatable. The research also focused on the theoretical effect of these policy
changes as understood from an economic point of view without any focus on the
calculations of the expected impact
4.2 Findings
The sanctions against Zimbabwe included BOP support withdrawal, which put the country
in a very precarious position considering that it is a net importer. For the most part of the
period under sanctions, the country has been operating with an import cover of less than a
month. It can be noted that one part of the policies that the country had to come up with
were to either generate foreign currency or preserve the little that was already in the
country in order to satisfy the import requirements, and the other part was concerned with
generation of revenue within the country, for the satisfaction of the local needs of the
government. All this happened before the introduction of multiple currencies that included
the US dollar and the South African rand. After the introduction of the multiple
currencies, both local and foreign commitments could now be satisfied from the same
sources, which resulted in combined efforts to generate and preserve revenue collections.
32 | P a g e
Selections had to be made on policies and policy changes that qualify for the purpose of
this research, that is:
1. Policies and changes that were made as a result of the imposition of sanctions
and
2. Policies and changes that would be enable the country to perform better than
other similar countries once the sanctions are lifted.
As a result, there are policies whose benefits have already been felt, such as the
introduction of multiple currencies that resulted in stabilization of inflation rate at less
than 1% and led to the increase in production from 10% to more than 35%, but will not be
considered as appropriate policies for this research. The main reason is that the multiple
currencies system is a short term policy and would not have any great impact on the
economy after the lifting of sanctions.74
Other policies that were not considered as
appropriate, even when they will benefit the country after sanctions are lifted, are those
related to current trends, such as modernization and computerization of systems. The
assumption is that, sanctions or no sanctions, the country was going to introduce such
changes because they go in line with the trends being observed all over the world.
4.2.1 Revenue Collection
With regards to revenue collection, the government of Zimbabwe made major strides
through commercialization and amalgamation of the Department of Taxes `and
Department of Customs and Excise in ZIMRA in 2001. This was meant to increase
effectiveness and efficiency in resource allocation and utilization, and the country is
already enjoying the benefits of the move. ZIMRA has been surpassing its targets since
74
The multiple currencies system is in place until 2012.
33 | P a g e
inception. Besides, ZIMRA has also introduced a lot of innovative ideas and policy
changes, which has led to the increase in the revenues collected. Some of the changes,
which also qualify for policies introduced as a result of sanctions as the country tries to
survive, include:
a) Presumptive Tax – this legislation was introduced to broaden the revenue base in
view of the increase in informal business activities. One of the effects of sanctions
was the increase in the rate of unemployment to about 80% as most people were
either retrenched or found employment not rewarding due to high levels of inflation
and ending up joining the informal sector, which was more rewarding, for survival.
ZIMRA did not have a way to tax the informal sector before and the introduction of
this tax was meant to ensure the participation of this sector towards the national
revenues. Some of the individuals and companies taxed include omnibus operators,
driving school companies, informal traders and goods vehicles.
b) Toll fees – Zimbabwe is centrally positioned in Southern Africa and as a result is a
transit route for foreign motorists linking up with other countries. Due to
unavailability of funds under the sanctions, the roads had become dilapidated and
responsible for many accidents. ZIMRA spearheaded the introduction of twenty -
two toll gates throughout the country in 2009 as a way of widening revenue
collection. More than US$600,000 was earned within the first two weeks. The
revenue is meant to be used to maintain and upgrade the country's dilapidated road
infrastructure.
c) VAT – In 2004, ZIMRA abandoned the Sales Tax and replaced with the VAT.
Since there is recovery of any added value, there is less likelihood to come with
ways to evade paying tax as in the case of Sales Tax.
34 | P a g e
d) Anti-Smuggling activities – one of the effects of economic sanctions is the increase
in criminal activities75
, and this was the case in Zimbabwe. A lot of leakages were
observed as companies, traders and individuals cost the country in lost revenues as
a result of smuggling of goods. ZIMRA responded by initiating a number of
activities that included road blocks, border patrols, site visits, post-importation
audits, scanners and whistle blowing. Incentives were given for whistle-blowing
resulting in 10% of the amounts recovered under Anti-smuggling activities being
accounted under the whistle-blowing activity.
e) The Income Tax Bill – ZIMRA has spearheaded the crafting a Bill to replace the
current Income Tax Act. This bill is expected to come into effect in 2011. The
notable changes that will also improve the country's revenue collection include the
departure from source-based income to residence-based income, enhanced anti-
avoidance rules as well as the streamlining of deductible allowances to those
expenses incurred in the production of income only. The benefits of the intended
Act are enormous considering that Zimbabwe has one of the largest list of tax
exemptions
4.2.2 Indigenisation and Economic Empowerment Act of 2008
The Government of Zimbabwe has enacted a very controversial legislation, the
Indigenisation and Economic empowerment Act. This Act makes it mandatory for all
foreign companies with capitalization above US$500,000 to dispose 51% of their
shareholding to indigenous Zimbabweans. Controversial as it may be, this Act, if properly
implemented have the capacity to positively impact on the economy. The most obvious
contribution of this act is increased participation of indigenous people in the economy,
75
Naylor (1999), p4
35 | P a g e
which results in the reduction of poverty. However, the most important contribution of the
indigenising 51% shareholding in most foreign companies is the reduction in the amount
of dividends paid out of the country, which effectively results in an increase in liquidity in
the economy.
An increase in the liquidity means that the banks will have an increased ability to lend to
companies and individuals. This will also mean low interest rates making debt affordable
to all and sundry at more than 75% and most people participating in the informal sector,
availability of funding will go a long way to stimulate the economy and reduce poverty
through projects at the grassroots. The background to the introduction of this Act is that
there was a lot of externalization of funds through declaration of dividends, and the
Government, being in need of the foreign currency, introduced the Act to ensure funds
stay in the country.
4.2.3 Manufacturing
Manufacturing used to 20% towards the country's GDP in 1996 and this fell an average
contribution of 7.5% during the periods under sanctions. The government recognizes the
importance of this sector in the recovery of the economy and as a result came up with a
number of policies that were meant to ensure speedy recovery. Since there is need to
minimize the expenditure of foreign companies, the government came up with a fund to
support all those companies that were involved in import substitution. The companies that
ensure import substitution allow the country to save a lot of foreign currency. The fund
was meant for different sectors like beverages, food processing, motor industries and
pharmaceuticals.
Most companies in this sector are SMEs and, as expected, the most contributions come
from the same. SMEs are also the major employers in this sector when combined together.
36 | P a g e
These SMEs get a lot of assistance from two government-related entities that are meant to
promote the operations of these type of companies. One of these quasi-government
entities, SIRDC, was recapitalized last year to enable it to provide more support to the
SMEs in terms of loans for working capital and as well as machinery and equipment. The
capitalization of the other institutions supporting SMEs, ZIMTRADE, is still on the cards
and is meant to provide even more support in terms of expansion of the export base,
import substitution and access to new technologies and markets. There has been a serious
focus on international market access with ZIMTRADE organizing a lot of trips to
exhibitions for SMEs.
The SMEs have traditionally been the backbone of this sector in terms of contributions to
the national income and employment but there was no due recognition until the country
suffered foreign currency shortages. On the other hand, the larger manufacturing
companies had always had the capacity to innovate and contribute to import substitution
but there has been no support, both from the government and the financial institutions.
The shortage of foreign currency therefore enabled the whole sector to be realised as
critical to the operation of the economy.
4.2.4 Tourism
Zimbabwe boasts of a number of very competitive tourist attractions such as the mighty
Victoria Falls, the world's largest falls. The country also offers some of the best hunting
grounds in the world, with the much sought for big five. The tourism industry had risen to
be one of the major contributors to the GDP before the 'land reform' program. At the
height of the economic sanctions, this industry became one of the most affected.
The country of Zimbabwe suffered a lot of bad publicity since the government embarked
on this controversial 'land reform', which resulted in the white commercial farmers losing
37 | P a g e
their land for no compensation. This has been viewed by the whole international
population as lack of respect for private property and absence of rule of law. This was
worsened by the inter-party fights between the ZANU PF supporters and those of the
opposition, MDC during the elections of 2000 and 2002. So many western countries
including the US, UK, Australia and New Zealand as well as the EU black issued travel
warnings to their citizens against traveling to Zimbabwe.
In 2009, the government of Zimbabwe embarked on an aggressive “Visit Zimbabwe
Campaign” meant to re-market Zimbabwe as a preferred destination. This campaign
covers the domestic, regional and International clients and is managed by the Ministry of
Tourism and the Zimbabwe Tourism Authority. The campaign has seen the country
hosting an annual Tourism event to showcase what the country offers for tourists76
. The
Campaign has gone further than just attracting visitors from the traditional tourist supplier
countries and has now infiltrated the Asian market, particularly China and Iran. The
efforts have already begun to show some fruits with the country being able to attract one
of the most sought after soccer national teams, Brazil, to come and play against Zimbabwe
during the World Cup finals.
4.2.5 Diaspora
Zimbabwe is the second placed country in Africa in terms of literacy rates and its
education system is highly regarded. According to IMF, 'Zimbabwe is ranked near the top
third of countries for the quality of its education system'. This is attributable largely to the
importance granted by the government to education since independence. At the height of
economic sanctions, a lot of professionals that included doctors, teachers, economists and
accountants among others left the country to offer their services in foreign countries,
76
The Sanganai/Hlanganani World Travel and Tourism Africa Fair
38 | P a g e
mainly South Africa, UK, Australia and New Zealand. As the government dried up in
terms of foreign currency, it started recognizing the presents of its professionals in the
Diaspora and the amounts of contributions they could make to the economy. Most of these
professionals in the diaspora sent their money back to Zimbabwe but this would form part
of the black market.
Formal efforts were made to encourage these professionals to repatriate foreign currency
to Zimbabwe in 2005 when the RBZ Governor, Dr Gideon Gono, travelled around the
world in countries where Zimbabweans are located. The RBZ formed a subsidiary called
Homelink Private Limited, which later went defunct. There were several policy changes
with regards to trying to entice the professionals in the Diaspora to send foreign currency
through formal channels and that recognition of that these people could contribute to the
economy was the most important. With the enactment of the new Income Tax Act, that
seeks to shift from source-based income to residence-based income, there are expectations
that the professionals in the diaspora can now be formally taxed, with their contributions
enabling the country to realize an increased rate of growth once the sanctions are
removed.
4.2.6 Financial Institutions
The financial sector is central in the operations of any economy because it provides
intermediary services for different players in the market. This sector allow for the smooth
flow of business and exchange of transactions between the many parties that are
stakeholders in this sector. As a result, it is important that the participants abide by the
rules and regulations that apply within the sector.
39 | P a g e
There were seventeen Asset Management firms in Zimbabwe and these were regulated by
the Ministry of Finance, which did not have the capacity and resources to monitor the
activities of these firms. Because of the hyper-inflationary environment, one of the more
pronounced effects of the economic sanctions on Zimbabwe, a lot of financial institutions,
including these Asset Management firms, tried to hedge against this inflation through
acquisition of fixed assets such as motor vehicles and houses. When Dr. Gono took over
as the Central Bank Governor in December 2003, he immediately put these Asset
Management firms under the regulatory authority of RBZ, and required them to register
with the same. It was through this process that it was discovered that one of these Asset
Management firms did not have any liquid assets and had invested in fixed assets valued
at Z$61 billion.
This had a ripple effect throughout the economy. As the RBZ continued with their
assessment of the Balance Sheet positions of the financial institutions, they discovered
that most banks had hedged themselves with fixed assets and did not meet the minimum
liquidity positions. The banks which faced liquidity problems were realized to have
indulged in speculative activities through hedging in fixed assets to preserve value, against
the principles of banking. Out of thirty-two banks, four were liquidated and ten were
placed under curator-ship in what is known as the Banking Crisis in Zimbabwe. This was
all blamed on poor corporate governance and risk management practices, and weak
regulation and supervisory frameworks.
After these events, the RBZ went on a recruiting mission and adequately staffed its
supervisory arm of the Central Bank. It also addressed several issues to do with
governance and risk management in order to bring sanity to the sector, and this involved:
40 | P a g e
a. Streamlining of operations to enhance role clarity and the establishment of structures
that ar relevant to the business thrust,
b. Enhancing coordination and communication within the various departments in the
troubled institutions.
c. Restructuring the balance sheets
d. Disposal of assets held for speculative purposes
These moves not only assisted with bringing discipline during the time of hyperinflation
but they also assisted in coming up with the proper framework to regulate and supervise
the banks.
The economy, mainly characterized by hyper-inflation, interest and exchange rate
distortions and high levels of unemployment, among others, meant that people were
always on the lookout for opportunities to exploit. In 2008, the country was hit by another
spate of fraudulent activities as individuals instructed their brokers to purchase shares
against unsecured positions and only disposing the unsecured shares to fund their
purchase, effectively pocketing the profit from no investment. This further fuelled the rate
of inflation as it became a new source of money creation.
This led to RBZ coming up with a number of measures77
to curtail these activities and this
included:
i. that all the trades on the ZSE be supported by the actual credit balances confirmed by
the buyer's bankers,
77
Gono, (2008), p83
41 | P a g e
ii. that any party who failed to settle any stock exchange obligation due to lack of
funding be automatically blacklisted on Zimbabwe's whole banking system,
ii. that any bank not reporting any suspicious banking transactions be liable under the
anti-money laundering law.
However, the most important step taken towards the stabilization and providing investor
confidence of the ZSE was the introduction of the Securities Commission. This was meant
to regulate the activities on the capital and securities markets, with the effect of reducing
the risk of market manipulation and ensuring transparency, professionalism and integrity.
4.2.7 Look East Policy
As a net importing country, Zimbabwe was experiencing painful economic and social
difficulties. The inflation rate was spiralling out of control, the country was dry of any
foreign currency, unemployment rate was at unprecedented levels, health, education and
transport infrastructure were collapsing, and so many other economic and social ills were
being experienced. With the IMF and the /world Bank holding back any balance of
payment support towards Zimbabwe, the country was left with no choice but to look for
alternative sources. The country was one of the first African countries to have a 'Look
East Policy'. This has had an effect on the ability of the country to keep afloat as the
country enjoyed a lot of benefits.
Zimbabwe declared the 'Look East Policy' in 2003 initially with Malaysia and then went
on to sign a trade and cooperation agreement with China. Whilst the country's tourism
industry was shrinking by 36% compared to the previous year, and this was the third time
in a row the industry had declined, it was actually enjoying a 245% increase in Chinese
visitors. The Chinese now comprised 7% of the total visitors. The reason why the country
was enjoying so many visitors from China is that the Chinese government had granted
42 | P a g e
Zimbabwe an 'Approved Destination Status', at a time when the western governments
were issuing travel warning against the country.
The people of Zimbabwe approved the presence of the Chinese because they could now
access cheap clothes, shoes and other textile. The Chinese were also active in the
construction industry and had also invested in a cement manufacturing company. The
Government of Zimbabwe granted the Chinese prospecting rights for several minerals as
well as oil in the Zambezi escarpment, which was previously reported to have oil, though
not in large enough quantities to warrant commercial production. The Chinese invested
US$10 million towards this prospecting. The Chinese Government also provided two
MA60 aeroplanes for use in domestic and regional flights. They also signed agreements
with the Air Zimbabwe to have direct flights to China twice weekly.
Zimbabwe's energy company, ZESA, received transformers worth US$110 million and
the two governments signed an agreement of US$2.4 billion for more equipment and the
expansion of Hwange Power Plant. Within the same agreement, there were provisions for
development of domestic capacity to manufacture transmitters and distribution worth
US$40 million and US$140 million. The Chinese Government also donated 4,500tons of
maize and US$241 million towards agricultural land reform. China has become the single
most importer of Zimbabwean tobacco. There are three tobacco companies operating in
Zimbabwe, and their strategy is assisting the farmers with inputs on the guarantee that the
farmers will not sell to any other buyer except to their financiers, who are the Chinese
tobacco companies in this case.
The Chinese Government has also been supporting the Zimbabwean government
militarily, through sell of arms and ammunition. In 2008, there was a worldwide outcry
regarding military deals between the two governments after China tried to sell a whole
43 | P a g e
shipment of arms and these could not be allowed to pass on to the landlocked Zimbabwe
from either the South African, Mozambican, Namibian and Angolan ports.
This 'Look East Policy' was only initiated by the Zimbabwean Government after the
country had been abandoned by its traditional financiers, that is, the IMF and the World
Bank. The policy has been hailed as one that allowed Zimbabwean to keep afloat and
assisted in easing the pain inflicted by economic sanctions on Zimbabwean people
4.2.8 Cultural Changes
Besides the policies formulated by the Government of Zimbabwe, there also has been a
change of culture of doing things among the business circles and the general population.
These changes were aimed at either earning more income or reducing the costs.
a. Toll Manufacturing
The manufacturing sector, faced with closure due to lack of raw materials and foreign
currency to import those raw materials, embarked on toll manufacturing. This is a
process where the client brings his or her own raw materials and the company
manufactures on behalf of that company, charging a small amount as the margin. Most
companies have always had the capacity to include toll manufacturing during good
times but would not consider that until they were faced with closure from lack of
business.
b. Transport
One of the areas that were severely affected by the sanctions was the transport sector.
This sector faced a lot of disruptions during the periods when the country could not
purchase fuel as a result of shortage of foreign currency. The people who bore the brunt
for such disruptions were the commuters whose fares changed at any time. Even now,
44 | P a g e
with the use of the US dollar as the official currency, the commuters still find it
difficult to make it to and from work daily. In order to reduce this cost from the
commuters, most companies have bought buses that transport their workers to and from
work. Even the government, which is the largest employer in the country, has also
bought buses to transport the civil servants. Such initiatives have resulted in most of
these companies being able to retain their employees.
c. Financial Sector Initiatives
The financial sector is one of the sectors that were most innovative and were able to
record profits even when most sectors were recording record losses. One of the areas
where they were innovative was regarding the use of RTGS. This is a real time system
which is meant to ensure quick transfer of money from one bank to the other through
passage over SWIFT. Now, since 1980's, the RTGS system was meant to route through
a server in Belgium, and every transaction costs foreign currency. Even when
Zimbabwe was suffering from severe shortage of foreign currency, it was in the top
five of the RTGS users. As a result of this, the RBZ requested for a local solution,
which was nowhere to come. The banks, in order to reduce costs of transferring money
among themselves, improvised a system where they would batch transactions, and then
transfer on one lump-sum through the Belgian server. They would then send the
physical copy to the bank on how to split the total amount sent through RTGS. In this
way, the bank reduced the cost of foreign currency paid at bank and at country level
through provision of RTGS.
Each bank also operated a card system. The bank would be responsible for printing the
bank cards as well as own the POS machines. The banks were now accumulating the
costs associated with servicing the POS machines and this also had a foreign exchange
45 | P a g e
component. The banks then decided that they would refocus their business to the
production of the bank cards only whilst outsourcing the operations of the POS
machines. This has also impacted positively on the costs side of the bank's expenses
since the costs associated with outsourcing are much lest than operating the systems.
d. Entrepreneurship
The Zimbabwean people showed entrepreneurial skills that they had never shown
before during the period of sanctions. There were times when the shelves in the shops
would be empty but still people would be having their daily requirements. 80% of the
population was unemployed and had joined the informal sector. There was an increase
in the number of cross border traders and all the food stuffs and groceries that were in
short supply in the supermarkets would be found in the black market. This is how many
families were able to survive and continue with their lives in Zimbabwe. The
government appreciated this spirit of innovation and gave a commitment to continue
supporting such endeavours
4.2.9 Mining
Mining has traditionally been one of the major contributors to the GDP, after agriculture
and manufacturing. There are many small-scale miners in Zimbabwe and most of them
were facing serious viability problems as a result of the economic sanctions. The
government responded by providing a fund that could be accessed by these miners to buy
machinery and equipment. But even with that kind of assistance, the miners were still
faced with viability problems as the amount of money offered by the governmental
institutions that buy minerals was way below the market values. This was especially so
with the small scale gold miners, and as expected, these miners started smuggling the gold
into other markets. The Government then realized that there was a lot of pilferage going
46 | P a g e
on and responded by introducing a policy that has been hailed as the best they could do.
The RBZ allowed the gold miners to sell their gold anywhere they want and then
repatriate the profits. This ensured that the government also increased its revenue base as
the miners then complied with the RBZ directive to register the gold before leaving for
sell to ensure the repatriation of funds to Zimbabwe.
4.2.10 Structural Changes
One of the most prominent events that came to being as a result of sanctions was the union
between two fiercely opposed parties in Zimbabwean history, that is, the MDC and ZANU
PF, after both parties failed to gunner enough votes to get into power. There was supposed
to be a run-off, which could not take place after reports of intimidation and political
violence against each other's supporters. The crisis was then settled through negotiations
which gave birth to the GNU through the GPA. This GNU resulted in changes in the
structures of the government, which changes allow for a more efficient system.
The most important component of the GNU was the introduction of the position of the
Prime Minister, who effectively diluted the President's power. The Prime Minister's main
duty is to ensure the formulation and implementation of the policies decided by the
Cabinet. He also holds executive powers and chairs the Council of Ministers whilst he is
the Deputy Chairperson in the Cabinet. These structural changes have led to an improved
performance by the Ministers.
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5. CHAPTER FIVE – CONCLUSION AND RECOMMENDATIONS
5.1 Introduction
Conclusions can be drawn from the research results presented in the previous chapter. The
researcher is now in a better position to know whether the information gathered from the
responses is enough to conclude that indeed there are incidental positive benefits in
sanctions as previously premised. This chapter, therefore, will present the conclusions that
can be derived from the research findings. With those conclusions, the researcher will be
in a better position to come up with recommendations. Lastly, the researcher will outline
areas that for which room has been left for further research.
5.2 Conclusions
It has been noted that in some cases, the country of Zimbabwe has been able to realize
positive outcomes from the implementation of the changes thy have made, whilst they are
ye t to receive any benefits from some of the policies. It therefore can be concluded that:
a. The country has always had potential
As has been noted, the country has always had potential to do better that it has been
doing. The people of the country also had the potential and the skill to do better.
Precisely, the people of Zimbabwe had the education level and knowledge to engage
and succeed in entrepreneurial activities but did not bother to do so. The government
also had the potential to come up with extra efforts to market itself as a tourist
destination of choice, not only to the traditional countries that have been touring the
country, but also to new countries with little knowledge of Zimbabwe, for example,
China. The country also had the potential to promote activities of income generating
and economy stimulating sectors such as the small scale miners, the SMEs, the cross
48 | P a g e
border traders and the innovative companies. The country also had the potential to
enhance its incomes through privatization and commercialization of some of its
departments and parastatals, for example the Department of Taxes and the Department
of Customs and Excise, which later combined to form ZIMRA.
Zimbabwe had potential to diversify its economic relationships with other countries
other countries. As a member of the Commonwealth, the country mainly related
economically with the western countries particularly Britain. The country also had
potential to reduce leakages through the borders by increasing their monitoring
capacity. It also had the potential to to increase the staffing at the Central Bank in order
to ensure proper monitoring mechanisms for the financial sector. Zimbabwe has always
had and is still abound with potential to improve a lot of things within its political,
economic and legal systems.
It is, however, interesting to note that most of the changes presented in the previous
chapter were only made when Zimbabwe was under economic sanctions, when it is
difficult to ensure the ultimate success of the policy changes. None of these changes
came to being before the imposition of the sanctions against the country.
b. Zimbabwe did not invent any concept
The people and the Government of Zimbabwe did not invent any economic or social
concept. Commercialization of government departments has always been there. VAT
has always been in use It has always been known that support is supposed to be given
to those sectors that stimulate the development of an economy. Import substitution is an
economic concept that has always been used by many countries. The Zimbabwean
people have always been in existence and have always been the indigenous. They also
had all the opportunities to be entrepreneurial time immemorial. There are many
49 | P a g e
Zimbabweans who have always been living in the diaspora for a long time and these
have been ignored also for a long time as well. Countries have been engaged in
aggressive marketing of their countries to new tourists and they have been able to
receive substantial support in terms of response.
The question that then arises is, ' If a country has the potential to change into or
introduce effective policies, and if the options of policies available are known, why
then do counties fail to effect any policy changes?'
c. Sanctions provide incidental positive effects.
In response to the question posed in the previous section, it can be noted that most
countries are in the comfort zone and would stay in that zone if nothing happens to
change their status. In the case of Zimbabwe, the country had a lot of potential to grow
and become one of the successful stories of Africa, given its resources both physical
and human. However, because it enjoyed a stable economy characterized by stable
exchange rates, interest rates and inflation among other benchmarking factors, it did not
recognize the need to make any changes.
Zimbabwe only formulated some changes in the economy after the imposition of
economic sanctions. Naturally, every country would want to give a fight after being
imposed with economic sanctions and the fight include some structural and policy
changes. The country would only give up after the changes have failed to lift it to
sustainable levels of livelihood, but all the same, there are changes that are now in
place as a result of the sanctions. A country is only willing to make gradual changes to
its policies, and the „gradualism can in theory smooth the adjustment process and
reduce short-term costs of restructuring but it bears the danger of watering down
reforms that are urgently needed‟. The conclusion, therefore, is that economic sanctions
50 | P a g e
induce a country to make policy and institutional changes that are beneficial to the
growth of a country's economy.
d. Post-Sanctions Zimbabwe.
The neighbouring countries to Zimbabwe are not formulating and implementing
institutional and policy reforms at the same rate as Zimbabwe. When sanctions are
removed, it means that the country has satisfied the minimum requirements for which
the sanctions were imposed in the first place. It means the country can be regarded as
having rule of law and respect for property rights. It means that there is now freedom of
speech and association, and naturally, the environment is now conducive for
investments. It is therefore expected that the country will grow at a significantly higher
rate to surpass the cumulative growth that has been accumulating in the neighbouring
countries when Zimbabwe was under economic sanctions.
5.3 Recommendations
Revenues in Zimbabwe have recovered following the implementation of 2009 short-term
recovery program. This, however, is necessary but not sufficient. From the findings and
the conclusions, the following recommendations are offered:
a. Ensure sustainability
It has been noted by Rohm and Halback (2001) that the process of coming up with
reforms beneficial to the country 'is usually not free of pain and bears fruit only after it
has been sustained for several years'.78
The most important phrase here is 'sustained for
several years'. The reforms that the Government of Zimbabwe has come up with, have,
in some circumstances, been proven to be effective and there is therefore need for
78
P679
51 | P a g e
willpower to sustain the same reforms. Any laxity in the formulation and
implementation of the said policy changes will only work to slow down progress or
even cannibalize on the achievements achieved. The government therefore needs to
keep on being innovative and making more policy changes, with the background
knowledge that the country has some unfulfilled potential. The hard work and the
ability to reform should be carried over even after the sanctions are removed.
b. The economy operates in totality
The Government of Zimbabwe should know that the economy operates in totality. In as
much as it has tried to address a number of pertinent issues, it is still important to
consider other policies over and above the ones that have been considered so far. The
country should work towards the restoration of an environment that is acceptable to the
international community for the full benefits of the policy changes to work. The tag of
an unlawful, undemocratic and oppressive government should be done away with.
c. Stop cannibalization of benefits
The Government of Zimbabwe has been regarded as one of the governments with the
highest expenditures, especially those relating to remuneration of civil servants. This
only serves to reduce the benefits of all the hard work done. Lack of discipline on the
part of the government's expenditures will cancel out all the positives created by the
institutional and policy changes and the net effect in those circumstances is zero.
5.4 Further Researches
There is room for the improvement of the theory herein alluded. The focus was only on
one country that is still under economic sanctions and therefore, it is difficult to assess the
actual impact of these sanctions. Research therefore needs to be carried out on those
52 | P a g e
countries whose imposed sanctions have been lifted. At least in such circumstances, there
is an ability to measure the precise information. Metrics need to be done to understand the
real impact of sanctions and the levels that induce certain types of behavioural changes.
53 | P a g e
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