Wednesday, August 19, 2015

African Economic Experiments: Zimbabwe vs. Botswana

Why Is Africa Poor?
The simple answer to why sub-Saharan Africa is poor is that they have less capital per person than richer nations.  That's the definition of a poor nation.  In the word's of famed economist Ludwig von Mises:
There is but one means available to improve the material conditions of mankind: to accelerate the growth of capital accumulated as against the growth in population. The greater the amount of capital invested per head of the worker, the more and the better goods can be produced and consumed. This is what capitalism, the much abused profit system, has brought about and brings about daily anew.~ Ludwig von Mises, The Anti-Capitalist Mentality, p. 10
The real question is why, in sub-Saharan Africa, is the process of capital accumulation that makes other regions of the world rich seeming not to work?  Africa's sad story owes in large part to the fact that socialism and Marxism swept across most of the continent during the Cold War.  I am going to tell you the tale of 2 nations.  Neighbors.  Two different economic systems, two SHOCKINGLY different results.
Zimbabwe's GDP per Capita Since Mugabe Took Office

When asked why Africa is poor the class warfare types have a standard answer that Africa is exploited by rich, non-African nations.  I'll show you shortly this socialist/communist rich exploitation mindset is actually the cause of Africa's poverty, and is exactly what's keeping much of the region in poverty.  Plus, the facts are firmly against that foreign exploitation notion anyway since almost all the capital being accumulated in the sub-Saharan African nations today came from their trade with other nations in the first place.
The cause of the persistent poverty in this region of the world is easy, and I'm going to use Zimbabwe as an example.  The first graph above is Zimbabwe's declining GDP per capita since their Marxist president, Mugabe, came into power in 1980.
Zimbabwe vs. Botswana GDP/Capita 1975-1985

In 1980 Botswana (their neighbor) was just as poor as Zimbabwe.  To the left are the 2 neighboring nation's GDPs per capita from 1975 - 1985.  At the end of the article I'll show you what GDP per capita looks like now so you can contrast the growth under capitalism with the increased poverty under socialism.

Zimbabwe, Marxism & Seizing Control of The Means of Production
What socialism fails to realize is that stealing assets ensures poverty.  That is why you have never, on the face of this earth, seen any nation become rich through socialism.  You have seen some nation's become rich through the mechanism of free-market capitalism, then later adopt socialism.  However, contrary to what socialists will tell you about wanting to solve the boom/bust cycles of capitalism in order to help the poor, in reality, their methods only ensure poverty.  
Zimbabwe is a fine example of this; the country recently had its "elections."  The incumbent president/dictator (Mugabe) got "re-elected."  Mugabe is a Marxist.  Like all socialists & communists he speaks of equality then proceeds to treat people very unequally.  His specific take on Marxism is he wants to create a:
"socio-economic system ... which is planned and operated by those who are chosen by the people."  Asked what kind of society he hoped to lead, Mugabe replied, "A truly democratic society devoid of racism... a society where there is equality, where there are civil liberties. ... And as far as our own program is concerned, we are for a socialist society, you see."(Source: PBS interview)
After the last election Mugabe announced that Zimbabwe is tired of being exploited!  In typical socialist & Marxist fashion Mugabe announced that the proletariat of Zimbabwe were no longer going to be oppressed by the rich (mainly white) bourgeois!
His party is calling this policy "indiginization."  If Zimbabwe is to reduce the control of the rich and empower the people, then all stocks on the Zimbabwe stock market must have 51% of their shares taken (without pay of course) for the benefit of the people of Zimbabwe.  In 2000 Mugabe did something similar and seized the land of the richest farmers (also without compensation) because they were too rich.  "How can Zimbabwe say we are an independent country when our resources are controlled by others?" (referring to white land and business owners). Mugabe's party spokesman asked.  Mugabe is taking his cue straight from the the great book itself:
Yes, gentlemen, the Commune intended to abolish that class property which makes the labor of the many the wealth of the few. It aimed at the expropriation of the expropriators. It wanted to make individual property a truth by transforming the means of production, land, and capital, now chiefly the means of enslaving and exploiting labor, into mere instruments of free and associated labor.~ The Communist Manifesto
When Zimbabwe went through its earlier Marxist - "we hate the capitalists!" - moment back in 2000 they seized land, today it is socializing the ownership of all the businesses.  The 2000 farm seizure went against property rights (the very core tenet of liberalism and of free market capitalism), and it had consequences.  It lowered production, which lowered tax revenues, which caused the government to have to print money.  By 7 years later they were into inflation so bad people were using $100 million dollar bills to buy groceries.
Zimbabwe's Fall in GDP After the 2000 Land Seizures

That is the effect of Marxist action against the means of production: in the name of fighting inequality you attack the only thing in the economy that produces output, employment, and is growing.  The effect of this: Zimbabwe's GDP shrunk every year from the farm seizures until 2009.  How's that for a recession?

Zimbabwe's Keynesian Stimulus Ahead
The Mugabe Administration announced that once they "get" this money from indiginization of these stock shares, then "the people" of Zimbabwe have decided to spend it on new roads, infrastructure and social programs.  The country can't otherwise afford these things because their treasury is empty.  Well that's not the real cause, let me take it back a step.  Their treasury is empty because they have created a strongly anti-business climate and no one other than a lunatic would do business there if they had a choice.
This is an especially bad idea because, for those who don't know, Keynesian stimulus of this kind causes inflation.  Today, in 2013, Zimbabwe is preparing to embark down the same road to printing billion dollar bills that these anti-capitalist methods took it down in 2000.
Botswana, Capitalism & High Quality of Life
Bordering Zimbabwe to the west is Botswana who took a, thankfully, very different approach to their socialist neighbor.  That is why today they have one of the highest qualities of life in the Africa and Zimbabwe has one of the lowest.  Botswana adopted total free trade and total, unregulated, laissez-faire capitalism.  By doing so new businesses began to appear.  Zimbabwe has taken the opposite approach and, by attacking the small amount of remaining wealth, created a climate where you'd have to be insane to open up a business.

GDP per Capita = Capitalist Prosperity In Botswana vs Socialist Poverty in Zimbabwe

Growth from Free trade: Botswana has overall mostly free trade.  This has caused a booming export industry to grow up in the last 30 years.  Botwana's economic freedom has attracted a lot of foreign investment into the country.  Remember where we started at the opening of the article?  The only method to improve the quality of life of the common citizen is to increase the amount of capital in a country per head of population  There is no other method, and this is exactly what capitalism has done in Botswana.  Today foreign assets account for 66% of all total bank assets in the country.  This foreign investment that has helped fuel growth and amplify the growth from the free enterprise / free market system.
Growth from Free Market Capitalism: The growth laissez-faire capitalism has caused in Botswana is seen in the new sectors in the economy that didn't exist even in 1980.  According to Botswana's Central Statistics Office mining has been largely unchanged, and today makes up 26% of Botswana's economy compared to 25% in 1980.  Manufacturing is also unchanged making up 4% of the economy.  The change has been the rise of modern industries that have sprung up due to the capitalist economic freedom the country enjoys.  Those growth industries include: trade, hotels, banking, insurance, telecom, transportation, construction, and utilities.  Manufacturing & mining haven't increased much, or, to coin the phrase used by authors who object to jobs created by capitalism: these are not "bad", "low paying" "wage slave" jobs. 
Growth from Responsible Government:  At a time when Americans consider why we have no economic growth we might want to compare ourselves to Botswana.  The country has:
  • Kept national debt under 10% of GDP (the US is presently 105% of GDP)
  • Kept annual budget deficits to 2% of GDP (the US deficit is 6.6% of GDP)
  • Have nearly no barriers to free trade (the US government controls every aspect of trade)
  • A federal income tax top bracket of 25% (the US is presently 39.6%)
  • Corporate tax rates are either 5%, 15% or 25% (the US is presently 35%)
  • Equipment imported into Botswana for use in business is tax & tariff free
  • Raw materials imported are tax & tariff free (haha, the US even puts a tariff on oil at a time when we are paying $4/gallon at the pump)

The Good News
The good news is Zimbabwe could very easily transform itself from a poor, vacated, socialist shit-hole into a thriving, booming epi-center of Africa.  Neighboring Botswana (where every sane person living in Zimbabwe has long since fled to) has the most capitalistic, freest economy in all of sub-Saharan Africa.  It is also no coincidence that since it adopted those policies it has also had the highest economic growth rate of any nation in the world, even surpassing Hong Kong.  Private sector growth in Botswana has been in the double digits for going on 4 decades!  Also (which is an important point after this week's indignization announcement in Zimbabwe), Botswana's Constitution has a provision that expressly protects all private property from government seizure.  
To those who are unfamiliar there is a data set called the Penn World Table that tracks worldwide incomes.  Overall the world is become richer and richer in every country in an absolute sense.    The countries who engage in socialist or Marxist methods and deny their people access to the capitalist process of accumulating capital are the only exceptions. The Penn World Table can be viewed here.  
I am going to close you where we began.  And I'm going to again give you a von Mises quote because I happen to like his explanation on this topic more than other economists:
What constitutes the greater wealth of a capitalistic society as against the smaller wealth of a noncapitalistic society is the fact that the available supply of capital goods is greater in the former than in the latter. What has improved the wage earners’ standard of living is the fact that the capital equipment per head of the men eager to earn wages has increased. It is a consequence of this fact that an ever increasing portion of the total amount of usable goods produced goes to the wage earners.None of the passionate tirades of Marx, Keynes and a host of less well-known authors could show a weak point in the statement that there is only one means to raise wage rates permanently and for the benefit of all those eager to earn wages—namely, to accelerate the increase in capital available as against population. If this be “unjust,” then the blame rests with nature and not with man.~ Ludwig von Mises, The Anti-Capitalist Mentality, p.58 

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