The Problem Engine: A New Model for Institutional Breakdown in the Context of Zimbabwe L. J. B.

CRAIGIE 2011

Explain the role of extra-state centers of wealth in contributing to the decline of state economic institutions in Zimbabwe. INTRODUCTION In answering the above question, this paper proposes a model of institutional breakdown in Zimbabwe that may also be applied more broadly as an explanatory model for other incidences of institutional breakdown including civil war and state failure. This model is the result of an interdisciplinary approach that incorporates both economic and socio-political accounts of institutional failure. Specifically, this model relies heavily on theoretical extensions regarding the resource curse thesis as conceptualized by Richard Auty (1993). This explanatory model for some of Africas most pressing problems is most aptly named the problem engine account of institutional breakdown. This problem engine of institutional breakdown is composed of three functional categories: motivational elements, enabling mechanisms, and catalytic events that produce compounding cycles of institutional decay. In this paper it is argued that extra-state centers of wealth fulfill the functional role of enabling mechanisms within a greater problem engine of economic institutional decay in Zimbabwe. This paper defines extra-state centers of wealth as any source of wealth that, due to its informal, illicit or extraterritorial nature, sits outside the formal control of the institutions of the state. The role of extra-state centers of wealth is analyzed from Zimbabwes independence to the formative years of economic crisis preceding the dollarization of the Zimbabwean economy in 2009. In this specific context, offshore financial centers and extraterritorial and informal diamond mining concessions are identified as prominent extra-state centers of wealth enabling elite misbehavior and institutional decay. The structure of this analysis is as follows; this paper will first provide a comprehensive explanation of the theoretical context of the problem engine model before further explaining the model itself. This will be followed by an account of the historical development of a problem engine of institutional decay in Zimbabwe, including a specific sub-focus on the role of the two extra-state sources of wealth specified above. THE THEORETICAL CONTEXT Before moving to the specific case of Zimbabwe and applications of the problem engine model, it is necessary to first fully explain the model of institutional breakdown proposed within the context of more established concepts in academic literature. In the search for a model of the role of wealth and resources in the decline of economic institutions in African states, one cannot overlook the recent dominance of the resource curse debate. The resource curse thesis as established by Richard Auty (1993), argues that there is a strong correlation between high levels of natural resource endowment and high levels of developmental retardation and civil conflict in African states. Civil conflict may be considered the ultimate case of institutional breakdown

the breakdown of the institution of the state itself. In its short history, discussions of the resource curse have developed many offshoots, divided both by methodology and theoretical claims. A major expansion of the Autys work is arguably that of Michael Ross in arguing that the specific characteristics of a resource (in particular its lootability, obstructability and legality) affect its propensity to either initiate or prolong civil conflict (2003, p 48). In his study of the effects of the resource curse on SubSaharan economic development, Matthias Basedau also makes a similar distinction between direct and indirect effects, short, mid and long term effects (2005, p 9). In respect to the development of this authors model of institutional breakdown, this differentiation between catalyst and long-term fuels to conflict (modeling function over time) is crucial. The breadth of variables considered surrounding resources was also much enlarged by the Collier-Hoeffler model of greed and grievance in civil war, refined in conjunction with Nicholas Sambanis (Collier & Sambanis, 2005). In a massive statistical analysis of factors relevant to the onset of civil conflict in some 161 countries over the period 1960-99, Collier and Sambanis find that economic proxies for opportunity rather than objective grievances are the chief covariant with the onset of rebellion or civil conflict (2005, p 3). In respect to this authors model, the significance of the Collier-Hoeffler model is not its conclusions but rather its methodological division of grievance and greed factors, or more simply the differentiation between motive and means. Noting the usefulness of the various methodological distinctions made by Ross and Collier et al., both cases share the common methodological limitation of country-based case studies. Cyril Obi criticizes the country-based analyses of his predecessors in the resource curse debate on the grounds that transnational historical, socio-economic and political linkages can and do mediate the relationship between resource abundance and developmental outcomes (2010, p 40). A country-based analysis, by its own methodological constraints of seeking a set of n country-specific factors, cannot account for the effects of global processes. It is therefore necessary that, in respect to this authors model and the case of Zimbabwe, global factors and processes affecting institutional breakdown must also be taken into account. Indeed, specifically in the case of extra-state centers of wealth including extraterritorial organizations such as offshore financial centers, a country-specific focus is of little utility. Also absent from the above methodologies is a systematic consideration of the compounding effects of institutional breakdown. Indra de Soysa (2000) identifies such compounding effects in regards to the dutch disease offshoot of the resource curse. Proponents of the dutch disease thesis argue that an abundance of extractable resources will drain labour, capital and innovation from the manufacturing sector of developing states (Sachs & Warner, 1997). De Soysa adds that the narrow revenue streams and economic instability of states infected with the dutch disease can create of cultures of clientelism, patrimonialism, perverse subsidization and at worst corruption and rentier state behavior (2000, p 122). Thus primary resource-dependence and institutional decay may be considered selfcompounding processes once engaged. Hence in respect to this authors model, there

must be some acknowledgement of the ability of processes of institutional decay to compound and become cyclical. The various methodological distinctions discussed above are employed in the problem engine model below. THE PROBLEM ENGINE MODEL This problem engine of institutional breakdown is composed of three functional categories: motivational elements, enabling mechanisms, and catalytic events that produce compounding cycles of institutional decay. In simple terms, the problem engine model stipulates that in the event of the failure of legitimate institutional power (a catalytic event, such as an economic crisis or looming electoral defeat), those with a survivalist political will or culture (the motivational element of misbehavior) will resort to illegitimate or non-institutional power. The extent of the resort to non-institutional power (both in terms of time and scale) will be tempered by the availability of sources of extra state power (enabling mechanisms). Easily lootable natural resources, ethnic identities, unchecked armed caches and offshore financial centers can all be considered potential enabling mechanisms of illegitimate power. Enabling mechanisms are therefore instruments that can be harnessed to produce illegal and non-institutional power, but critically, are not necessarily illegal instruments themselves. For example, alluvial mineral deposits and offshore bank accounts are not inherently illicit, however both of these instruments are often exploited as part of broader illegal behaviors including bribery and money laundering that may draw economic activity away from legal institutions. Finally, the use of illegitimate or non-institutional power, particularly by elites who have a controlling interest in state institutions, may further weaken legal enforcement mechanisms. As such, illegitimate power may become increasingly attractive or competitive relative to legitimate power, subject to the availability of enabling mechanisms. In such cases the use of illegitimate power is likely to expand to an ever-increasing number of individuals in a compounding cycle of institutional decay. It is therefore the combination of motive, available enablers and a catalytic event that can be considered the cause of institutional breakdown. The methodological considerations noted earlier are readily apparent in the above model. The distinction between long-term and short-term motives is inherent in the separation of motivational elements and catalytic events. Similarly, a distinction is made between motive and means in the separation of motivational elements from enabling mechanisms. It should be noted that the functional categories of the problem engine are deliberately generalized and highly inclusive. As such, there is no predetermination of the role of n types of resources that contribute to institutional breakdown (as per Collier at al 2005, Ross 2003). Rather, resources along with other factors may be identified in the model according to their function in a specific historical context. Thus the problem engine model is an explanatory structure that may be applied to specific cases of institutional breakdown, rather than a predictive model that identifies common factors across case studies that increase the likelihood of institutional breakdown. Hence in the analysis of the Zimbabwean case study below, a brief historical account is necessary before the explanatory model of the problem engine can be applied and the

role of factors identified. THE CASE OF ZIMBABWE From its height as the bread basket of Southern Africa, averaging a growth rate of 3.4 percent through the 1980s, to obtaining a world record monetary inflation rate of 2.3 million percent by November 2008, Zimbabwes recent economic history has been one of extremes (Addison & Lakso, p 460). The two decades of steady economic decline, from economic structural adjustment in 1991 to the dollarization of the Zimbabwean economy in 2009, may be considered the peak years of institutional breakdown. In this period four cases of institutional subversion are most striking: the plunder of the Democratic Republic of Congo, the seizure of white-owned farms, the manipulation of foreign exchange rates by officials and capital flight during hyperinflation, and the military takeover of the Marange diamond fields (Partnership Africa Cananda, 2010, p 6). A CATALYTIC CONTEXT The immediate historical context of the first cycle of economic institutional breakdown in Zimbabwe is as follows. By the late 1980s Zimbabwes core export sectors, mining and agriculture, were suffering the effects a global downturn in commodity prices. In addition a decade of generous IMF development loans had failed to deliver substantial cross-sector expansion. Thus in January 1991 an ambitious economic structural adjustment program (ESAP) was undertaken as part of new IMF loan conditionalities (Kayenze et al, 2011). At the heart of the ESAP was the liberalization of foreign capital flows, currency devaluation and cutbacks to social services and food subsidies (Densereau et al, 2005, p 13). Economic reality quickly deviated from IMF predictions as liberalized interest rates, coupled with a state fiscal deficit, led to flight from the Zimdollar and uncontrollable inflation (Addison & Laakso, 2003, p 463). The result was a debt trap in which inflation rates wiped out the governments ability to make foreignloan repayments. The independence of the Reserve Bank of Zimbabwe was also assaulted at this time, forced to finance the government deficit despite the growing problem of monetary inflation (Kanyenze et al, 2011, p 481). The result was a rise in inflation in food prices of 516% and in transport and education of 300% between 1990 and 1995, such that 62% of households were unable to afford all the basic necessities of food, clothing, shelter and transport (Dansereau et al, 2005, p 14). Inflation also wreaked havoc on the wider economy. Despite IMF predictions to the contrary, domestic-orientated manufacturing and textile sectors did not benefit from currency devaluation and suffered a collapse in output and employment (Dansereau et al, 2005, p 14). By the late 1990s even the mining sector initially a beneficiary of a devalued Zimdollar, was falling into decline. Kanyenze et al list some fifty gold mines that collapsed between 1996 and 2002 (2011, p 179). This was a direct result of the RBZ and MMCZ decision to pay producers in local currency, which was far too weak to cover the US dollar-based import costs of production. In addition, average real earnings in the public sector fell to 61% of their 1990 level by 1996 due a fixed wage policy (Kayenze et al, 2011, p 461). Public sector strikes of an

unprecedented scale occurred in 1994 and 1996 (Danserau et al, 2005). Land reform had also come to a complete standstill with 70% of the most fertile farmland still in the hands of the white minority of just 0.6% of the population in 2000 (Batha, 2000). Thus by 1997 the Mugabe regime was faced with an unprecedented crisis including a critical shortage of state funds, nation-wide public and private sector revolt and a crisis of political legitimacy around stagnated land reforms. It is in this context of a triple crisis that the regime turned to non-institutional sources of power to ensure its survival. ENABLING MECHANISMS OF BREAKDOWN: DIAMONDS The triple crisis of the late-1990s can be considered catalytic event that prompted the Mugabe regimes establishment of an extraterritorial trade in diamonds. Due to the collapse of the Zimdollar and domestic mining operations (of which the Mugabe regime previously took a commission through the Minerals Marketing Corporation of Zimbabwe) domestic opportunities for personal enrichment inside Zimbabwe had rapidly declined (UN, 2001). Despite several attempts at gold-buying permit systems from 1996, gold smuggling emerged as a significant trade by the late 1990s (Kayenze et al, 2011). Minerals smuggled outside Zimbabwe could be sold for foreign currency or goods, thus circumventing the problem of Zimdollar inflation. This domestic black market in gold was soon entirely eclipsed by a highly sophisticated extra-state trade in diamonds by the Zimbabwean military in the Democratic Republic of Congo (DRC) (Addison & Laakso, 2003). In August 1998 Mugabe committed some 11,000 troops to the Democratic Republic of Congo, upon the request of President Laurent-Dsir Kabila officially in order to help Kabila fight off rebel invasions from Rwanda, Burundi and Uganda (Masunda, 2001). However, by late 1998 joint commercial partnerships for mining activities began to be created between Congolese firms and the commercial arm of the Zimbabwean Defence Force Operation Sovereign Legitimacy (Cosleg), whose chief shareholders are Lieutenant General Zvinavashe and Job Whabira, the former Permanent Secretary in the Ministry of Defence (UN, 2001). The most significant joint venture formed was that of Sengamines, which was awarded concession rights to some of Congos richest kimberlite and alluvial diamond deposits, in Tshibua and along the Senga Senga River areas, respectively. Sengamines bifurcated ownership structure is essentially composed of Cosleg, Oryx Natural Resources and Comiex (a Kinshasa-based firm of which Kabila is the chief shareholder) (UN, 2001). This extraterritorial diamond trade was complemented by an unofficial domestic trade in 2006 upon the discovery of extensive alluvial mineral deposits in Marange and the subsequent expulsion of the legitimate concession holders, Africa Consolidated Resources (Partnership Africa Canada, 2010). Following Operation Chikorokoza Chapera, headed by the Police Minerals Unit and Ministry of Mines, the Zimbabwean military and police effectively oversaw informal mining operations in Marange (Kanyenze et al, 2001). The army and police established syndicates, with army brigades rotating into the region every 2-3 months, by which small-scale miners were extorted for overnight mining rights (Partnership Africa Canada, 2010). This control was further enhanced in October 2008, through Operation Hakudzokwi (No Return), in which

elements of the Zimbabwean National Army, Air Force and Central Intelligence Organization killed some 214 miners in a crackdown on informal mining (Human Rights Watch, 2009). This operation gave key elements of the defence establishment access to personal enrichment at a time of extreme hyperinflation and state insolvency (Sokwanele, 2011). The extraterritorial and informal diamond trades inflicted severe costs upon the economic institutions of the state. It is estimated that the costs of sustaining the Zimbabwean military presence in the DRC were at least $US 200 million between 1998 and 2000 (UN, 2001). To finance this expenditure the Reserve Bank of Zimbabwe was forced to rapidly print Zimdollars, significantly exacerbating the monetary inflation problem and undermining the integrity of Zimbabwean finance as a whole (Makochekanwa, 2009). Furthermore, the unofficial activities of the Marange diamond fields enabled the untaxed production and export of diamonds, which could have otherwise supported the state budget. The activities in Marange and DRC may also be considered self-compounding in that they further fostered a kleptocratic extortionist culture amongst the police and military. It is easy to understand how diamonds became such attractive centers of extra state wealth. In times of currency instability diamonds serve as a de facto hard currency they are easy to smuggle, have a high-value to weight ratio and are virtually impossible to trace (Smillie, 2005, p 186). Furthermore, in the case of alluvial mineral deposits, such as those found in the Marange fields, the extraction of these minerals may be accomplished without skilled labor or capital. There are also no legal requirements in Zimbabwe to report cross-border movements of gold or other high value items such as diamonds or gems as long as they are for personal use (Eastern and Southern Africa Anti-Money Laundering Group, 2007, p 18). Thus, utilizing the resource characteristics of Ross (2003), diamonds are highly lootable, extremely difficult to obstruct and often of indiscernible legality. Thus diamonds may rapidly come to draw economic activity away from the national currency, banks and the official tax base. From the above account it is evident that diamond trade activities were a significant enabling mechanism in the decay of both the economic and civil integrity of the Zimbabwean state. It is however more difficult to determine the exact motivational elements that drove the Zimbabwean elite to initiate such a vitiating trade. Proponents of the Collier-Hoeffler model of the resource curse thesis may draw attention to a longer history of resource abuse in Zimbabwe. Transfer-pricing arrangements between domestic mines and foreign parents companies were rife in Ian Smiths Rhodesia (Herbst, 1990). Furthermore the position of various army officials as chief beneficiaries to the Congo mining concessions is indicative of an extensive kleptocracy within the Zimbabwean defence and security establishment noting that neither the Zimbabwean parliament nor ombudsman have oversight power in respect to public expenditure by the Office of President, Ministry of State Security and Central Intelligence Organization (Bracking, 2009, p 41). However it must be noted that concerns of political survival, rather than greed (economic survival), also prompted subversive action by Zimbabwean elites. Sandra

Maclean argues that entry into the DRC conflict was primarily an attempt Mugabe to shore up military support during a time of political uncertainty (2002, p 523). The initiation of the DRC expedition coincided with other events that could arguably be interpreted as part of a broader patrimonial outreach. These events include the November 1997 payment of Z$50,000 and award of free education and healthcare to war veterans, and the gazetting of 1,471 farms for compulsory acquisition (Addison & Laakso, 2003, p 37). Each time the Mugabe regime has faced a crisis of legitimacy it has shown a propensity to resort to extra-state sources of wealth to placate key constituencies (Partnership Africa Canada, 2010, p 6). This chain of causality would thus flow counter to that of the Collier-Hoeffler model of the resource curse, in which the presence of minerals motivates misbehavior and conflict. Rather, at least in the case of Zimbabwe, conflict or crisis would appear to increase dependence on resource extraction (Brunnschweiler & Bulte, 2009). The motivation behind the enabling of extraterritorial and informal diamond trade activities by Mugabe can therefore be described as primarily patrimonial-survivalist although pandering to the kleptocratic motives of the defence and security establishment. ENABLING MECHANISMS OF BREAKDOWN: OFFSHORE FINANCIAL CENTERS The role of offshore financial centers (OFCs) as enablers of economic institutional decay in Zimbabwe came to fruition most significantly from the late 1990s onward the peak years of inflation. Monetary inflation escaped the control of the RBZ by 2000 due to a combination of long term and short term inflationary pressures including capital flight, food shortages resulting from the 1999/2000 farm-invasion campaign and the expenses of the DRC expedition (BBC timeline, 2011). It was in this context, starting with the 1999/2000 farm-invasion campaign that legitimate businesses and property owners both white agriculturalists and members of black petit bourgeoisie, began formally declaring bankruptcy while channeling all profits and remaining assets to offshore financial centers (Bracking, 2011). Thus capital flight was both a product and contributor to a compounding cycle of fiscal breakdown. Capital flight in general is a debilitating problem for developing economies. It is estimated that some US$160 billion per year is lost globally in corporate taxes to OFCs which is more than one and a half times the combined global aid budget of US$103.7 billion in 2007, and enough to reach the Millennium Development Goals by 2015 (Christian Aid, 2008). Palan et al estimate that for developing countries overseas aid replaces just 20% of such illicit capital flight (2010, p 174). In the case of Zimbabwe its external assets by 2004 (US$19.8 billion) were 5.1 times greater than their debt assets and 3.4 times GDP (Ndikumana & Boyce, 2008, p 41). Without the assistance of OFCs, it is possible that some of these misappropriated or untaxed funds could have instead contributed to the domestic economy. The term offshore financial center is therefore rightly used interchangeably with tax haven and secrecy jurisdiction precisely because the defining characteristics of such jurisdictions are regulatory regimes and systems that enable tax evasion, money laundering and the evasion of economic liability (Norwegian Commission on Capital Flight from Developing Countries, 2009, p 26). The particular exodus of capital from Zimbabwe from 1999 onwards was a survivalist moment in which the legitimate institutional power of the state had failed to protect

property and domestic savings and extra-state guarantees of wealth protection became necessary (Bracking, 2011, p 2). However the use of OFCs by Zimbabweans extends far beyond instances of capital fight during times of economic crisis. As identified by Ndikumana & Boyce in a survey of 40 Sub-Saharan African countries over the period of 1970-2004, unprecedented peaks in the annual level of capital flight from Zimbabwe (US$1.13 billion in 1981, US$1.12 billion 1982, and US$1.275 billion in 1987) corresponded perfectly with the years in which the IMF awarded development loans (2008, p 55). It is therefore highly likely that a significant portion of IMF funding at this time was misappropriated offshore by the regime indicative of an opportunistic rather than survivalist logic behind misbehaviour. Patrick Bond also identifies this period as the beginning of the briefcase businessman phenomenon, and documents several instances in the early 1980s in which foreign banking intermediaries made direct suitcase exchanges of large sums of cash with Mugabe and other Zimbabwean officials (1998, p 198). Such collusion between foreign banks and African elites is well documented as a wider kleptocratic phenomenon, the most famous cases including the 2003 Riggs Bank scandal involving Guinean elites, and the case of Bank of Credit and Commerce International (BCCI) and its assistance to Liberian elites in the 1990s (Baker, 2005). More controversially, it is also claimed that foreign-advised economic structural adjustment processes implicitly encourage domestic strategies of corruption by legitimizing the private accumulation of wealth (Bracking, 2011, p 39). In leading the expansion of the banking sector and reintroduction of foreign currency-denominated accounts during Zimbabwes ESAP, the IMF certainly facilitated capital flight (Kanyenze et al, 2011). The cumulative impact of global financial processes and policies towards Africa including the use of OFCs may therefore be both enabling and motivating elite misbehaviour (Obi, 2010, p 487). The motivations behind the use of OFCs in the specific case of Zimbabwe are therefore best described as being transnational-kleptocratic in the long term and survivalist in the short term, aggravated by a compounding cycle of fiscal decay. CONCLUSION From the above analysis it is clear that extraterritorial and informal diamond trades and offshore financial centers acted as enabling mechanisms in a self-compounding cycle of economic institutional breakdown in Zimbabwe. The use of informal and extraterritorial diamond trades in this case was motivated in the short term by the patrimonial-survivalist will of Mugabe regime and pandered to the long term kleptocratic culture among Zimbabwean elites in the defence establishment. In contrast, the use of OFCs by Zimbabwean elite was clearly part of a kleptocratic culture that predated independence and peaked during a survivalist moment of fiscal crisis.

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