Zim should develop net foreign assets and own multinationals

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Chris Chenga
Zimbabwe has struggled with consistent fiscal deficits, tax revenues being surpassed by expenditures. Pressure has been put on Minister Chinamasa to balance the budget, especially as government is already expecting a deficit for the first half of 2017. Correctly, suggestions are made such as rationalisation on non-essential expenditures and better accountability of resources by avoiding leakages and outright wastage.

The narrative of public finance management is indeed befitting. Consider it, however, at an empirical extreme; public finance management being at a high standard of efficiency in Zimbabwe. Would this be adequate to bring about world class public service provision and potent government spending with a stimulus imperative for high growth? This is a legitimate question, unless of course we have settled to deprive ourselves off aspirations of globally comparable standards of living.

There are two objective essentials of any country’s fiscal budgets; high quality service provision to the public and stimulus spending for enterprise to boost GDP.

Unfortunately, these two essentials are increasingly misintepreted as they are placed in similar context with balanced budget. Balanced budgets are a fallacy that must be disproven. Efficient fiscal management is only as relevant as it can bring about a certain social and enterprise stature, the kind you find in developed economies! A balanced budget,with the meager fiscal capacity of developing economies is empirically inconceivable, especially for developing economies trying to make the jump to developed economy.

We see this in developed economies themselves. Only Saudi Arabia, South Korea and Russia have a budget surplus in the entire G20, all other economies sustaining their standards of living through budget deficits. In the last decade though,a few brave developed economies have tried to abide to such conventional discipline; and the ones which have, suffered accordingly. In the United Kingdom, fiscal consolidation has had a harmful effect on social service provision and economic growth for enterprise. In 2015, with Chancellor of the Exchequer being George Osborne, the UK government planned for $130 billion cuts from public spending over the next four years.

With government cutting on spending on social service provision, citizens trying to sustain the standard of a developed economy are accumulating private debt. To avoid the plight of resorting to food banks, low cost housing, and decaying education infrastructure, households are now borrowing more as they fear living in poor standards. Debt is in effect transferring from government to households. When the households incur debts as they try to accommodate for lowering public health and education provision, aggregate demand in an economy falls, meaning that for enterprise, there is no stimulus.U

nderstandably, the advent of fiscal consolidation and austerity has rightfully started to lose intellectual credence. It is being identified as the fallacy that it truly is.

Contrast this UK occurrence to a case in Norway, where a central government under fiscal pressureto balance the budget had the privilege to rely on withdrawing from its sovereign wealth fund for the first time ever.

The difference between Norway and the UK is that Norway kept its level of government spending because it had the luxury of the world’s largest sovereign wealth fund ($970 billion), whilst the UK naively cut its spending.

Norway in effect kept the standard of developed economy for its citizens, while the UK deprived citizens of the public social service provision of a developed economy.

Now, Zimbabwe does not have comparable fiscal capacity as neither of the aforementioned. Indeed our national budget is a meager $4 billion, our GDP per capita being $800. Even assuming efficient fiscal management, one has to pose the question that is such a budget sufficient to provide world class public social services and spending stimulus for enterprise to create GDP growth? Of course not! In absolute terms, developing world fiscal capacity -revenues or expenditure, and subsequent budgets – cannot create developed economy standards of living for citizens.

The disparity in fiscal capacity is explained by developing economies not having net foreign assets and global multinationals. This is what is lacking in developing nation economic strategy. A consistent characteristic of G20 economies with high GDP per capita data is net foreign assets and multinationals with market share across the globe.

The net foreign asset (NFA) position of a country is the value of the assets that country owns abroad, minus the value of the domestic assets owned by foreigners. The net foreign asset position of a country reflects the indebtedness of that country.

Arguably, this metric alone explains why developing countries remain with perpetual fiscal deficits, negative balance of payments, and relatively weak currencies that propagate monetary difficulties. This explains why structurally similar, maybe even smaller countries, like Norway with a population of 6 million can have a GDP per capita of over $70,000. Indeed the fiscal capacity which finances developed economy social service provision comes from positive net foreign assets.

Zimbabwe, and developing nation peers, will never see comparable GDP per capita and developed economy standards of living without positive net foreign assets. So how does a nation develop that net foreign asset position? This happens through creating and support of Zimbabwean multinationals that secure market share across the globe. Multinationals repatriate funds to their home economies, significantly boosting fiscal capacity. Consider how Samsung alone is responsible for 20 percent of South Korea’s $1.1 trillion economy.

To grasp this concept, an inverse rationale should be used. The same income shifting activities that developing economies complain about such as transfer pricing and duplicitous service charging to reduce tax liability are all means in which developed economies satisfy greater fiscal capacity.

For Zimbabwe, it starts with a visionary global industrial policy. Our African peers such as South Africa, Nigeria, Morocco and Egypt have structured industrial policy with the intent of nurturing globally competitive multinationals that expand local fiscal capacity. Inadvertently, we have been subject to foreign industrial strategy through third party trade partners we deal with. For example, Zimbabwe imports cars.

This is subject to motor agreements such as South Africa’s Automotive Production & Development Programme of 2013. In bilateral agreements with South Africa, home economies such as Japan and South Korea capacitate their multinationals such as Toyota and Hyundai to meet South African demands on multinationals to build at least 50,000 vehicles a year to enjoy incentives that included import-duty benefits and investment rebates. These motor companies, of which many are on Zimbabwean roads are in effect net foreign assets that fund fiscal capacity for Japan and South Korea through third party economies like South Africa of which we import them from.

These are industrial strategic deliberations that Zimbabwean captains of industry should start to have with government, especially fiscal authorities. The vision is there, recent years have seen Zimbabwean companies in foreign markets includeNicoz Diamond in insurance, Africa Sun in hospitality,Econet in telecoms. Government must then draft industrial policy with an understanding of global market share pursuit. This means within our industrial policy, global regulatory trends in diverse industry such as manufacturing and services must be understood.

For example, Mauritius understood the global yearn for easy financial services access and assurance. Accordingly, it has created a local financial sector that services global clients – most FDI in Zimbabwe comes through Mauritius. It is conceivable for a Mauritius based insurer to insure a Japanese business operating in West Africa. These global industrial strategies boost net foreign assets improving foreign currency liquidity, balance of payments and ultimately, fiscal capacity. Evidence is in the increasing disparity between developing economies that are starting to resemble developed economy living standards.

High quality service provision to the public and stimulus spending for enterprise to boost GDP are clear to see. It is about developing net foreign assets. Optimistically, the chances of growing net foreign assets are in sequence with the growth of globalization.

Local economic activity is insufficient to grow fiscal capacity; the kind the gives citizens developed economy social services and spending stimulus for enterprises.

A balanced $4 billion budget will not give this kind of standard of living to citizens and private business. Sure, fiscal management will probably boost this budget in the short term (perhaps even reaching $10 billion?).

However, a budget of that amount is still insufficient for world class public service provision. Indeed the intent is not to discount the importance of balancing budgets, but our perception of fiscal consolidation are premature at the current level of fiscal quantity.

The focus should be on how we can conceive industrial strategy that secures net foreign assets and develops multinational companies. For broad socio-economic transformation need a five figure GDP per capita; we are currently at $800. The disparity can be made up by net foreign assets and multinationals contributing to GDP.

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