Commercial Farmers' Union of Zimbabwe

Commercial Farmers' Union of Zimbabwe

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Economic deversification sustains growth

Economic diversification sustains growth

The Zimbabwe Independent

2010 07 09

http://www.theindependent.co.zw/business/27141-economic-diversification-sustains-growth-.html

Thursday, 08 July 2010 17:52

THE Zimbabwean economy has always had the heavily “agro-based’’ tag as agriculture to a large extent has been the main driver of economic growth.

 

Agriculture, according to some estimates, contributed about 41% of the country’s exports as well as 18% of GDP just before “land reform” started in 2000/1.

 

There was a reversal of fortunes over the last decade as most farming skills emigrated and agricultural finance declined, sending the economy into a protracted period of contraction. The reliance on this key sector and subsequent overall economic decline is evidence of the risk of economic activity concentration on one sector.

 

Several African economies have also experienced volatility in growth as a result of over-reliance on one sector. The Zambian economy in the 1970s strongly relied on mining for its sustenance. The “party continued” as long as copper prices spiralled upwards. When the global copper prices tanked the economy went into a tailspin resulting in external debt defaults and subsequent economic decline. Recently the economy of Botswana, which is almost solely dependent on diamonds, was also adversely affected by the globally economy going into a recession, as prices went southwards.

 

As the economy moves out of the doldrums it is essential that we take a cue from the global economic trends and the key drivers of sustainable growth for the world’s fastest growing countries. The majority of the G7 countries have benefited immensely from a deliberate strategy to move away from economic concentration in one sector.

 

The Asian economies, especially the United Arab Emirates, have taken a deliberate strategy to reduce concentration on oil to other sectors. The oil revenue generated in Dubai for example has been channelled towards massive infrastructural development including the construction of the world’s tallest building, the Burj Khalifa. This has been a deliberate shift to diversify the economy and dilute the oil revenues to incorporate other sectors such as tourism and the services industry. The oil price decline since the beginning of the recession was a hard lesson for most of these countries and forced the strategy shift.

 

There has also been a more sophisticated approach amongst these Asian countries such as the UAE, Kuwait and Qatar who have established Sovereign Wealth Funds (SWFs) specifically tasked with diversifying the country’s reserves from oil. This has seen the funds completing transactions across sectors including real estate, listed and unlisted entities globally.

 

Among the notable transactions was the purchase of a 4, 9% stake (worth US$ 7, 5 billion) in Citigroup by ADIA, Abu Dhabi’s SWF which is the world’s largest with funds under management estimated at US$ 800 billion and the Kuwait Investment Authority which invested US$ 2 billion in Merrill Lynch in 2007. Abu Dhabi has also gone as far as buying football clubs with the purchase of the English Premiership`s Manchester City Football Club in 2008 being a high profile case.

 

Economic diversification mitigates against the shocks and volatility arising from external and internal changes in the demand for the product or service which is the main driver of activity. This will guarantee sustainable growth as other sectors will be able to carry the economy forward during the “lean years”. There is also a risk of structural unemployment if a specific industry collapses if it’s the main driver in an economy. The skills utilised by a specific sector such as mining may not be able to move across to other economic sectors in the event of a decline. Global legislative changes also pose a risk of economic decline if there is concentration. The environmentalists are advocating for cleaner energy uses which will in future adversely affect economies heavily dependent on commodities such as coal. Other commodities such as asbestos may also be affected by potential global bans due to health concerns.

 

The Zimbabwean economy has slowly started to emerge from the “lost decade” and there is need for a concentrated and deliberate effort to grow all economic sectors simultaneously. The mining sector, for example, is largely expected to be one of the key growth drivers. Revenue generated from this sector can then be used to jump-start other sectors such as manufacturing and other downstream industries linked to the sector. The strategy will also entail the development of stand alone industries with a huge export potential.

 

Growth in the overall economy can also accelerate the development of sectors such as the services sector including financial services through the creation of liquidity. The adoption of a focused approach can to a large extent ensure the sector becomes a key driver of economic activity and overall output. The developed world has successfully created financial services hubs and nothing preludes the country from doing the same if a forward thinking and determined approach is adopted.

 

By Precious Mhlandhla

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