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Economic objectives, public sector deficits and macroeconomic stability in Zimbabwe

A fundamental macroeconomic problem in Zimbabwe is that the sum of public-sector projects is greater than the resources available to finance them. The government’s difficulty in discerning the macroeconomic limitations on new initiatives was greatly increased by the unusual circumstances of the first two years: a commodity boom; promises of more aid than eventually arrived; expectations of a peace dividend which did not come; initial high rates of economic growth; and initial low foreign debt. All of these circumstances created unrealistic expectations, concealing the probability that the government’s plans would be impossible to finance. The government was slow to react to expectations being disappointed. This created a debt problem. Drought and terms of trade shocks make things worse. No allowance is made for the likelihood of these shocks. The government is unwilling (or politically unable) to engage in fiscal adjustment, so the burden of adjustment is pushed on to the monetary authorities. Forced saving by the private sector enables greater domestic borrowing by the government, but this reduces private consumption. Uncertainty caused by the growing public-sector debt reduces private investment. The result is a further reduction in the growth rate. A macroeconomic model shows that the variable with greatest influence on overall growth is agricultural output. However, the budget deficit has an unambiguously negative impact on exports. It also reduces private welfare and worsens the distribution of income between high- and low-income earners by reducing private consumption and investment and therefore employment. In other words, some of the policies implemented after independence and aimed at redistributing resources or alleviating poverty have been unsuccessful, or have perverse effects, creating distortions which push the economy towards macroeconomic instability. In Zimbabwe the growth of government has become a drain on the economy, rather than a facilitator of economic growth and development.