Why Zimbabwe's government is not afraid of 'scaring away foreign investment' with empowerment legislation

The latest chapter in Zimbabwe's on-going drive for majority local ownership in companies, or 'indigenization,' is the threat to shut down platinum concern, Impala Mining, for non-compliance with the new laws. Many observers have been shocked because it was somehow believed that the government would back off if pushed by a large, influential investor. Some are dismayed at what they see as government intransigence on the issue, others are positively alarmed at what is perceived to be economic recklessness. What are some of the factors behind policies that don't appear to make conventional sense?

''Indigenization will scare away desperately needed foreign investors'' is a refrain heard repeatedly in Zimbabwe today over the governments plan for at least 51% of company shares to be held by black citizens. The second fear is that it will be a 'company grab' that will benefit a small well-connected elite, who will then run the companies down. ''It will be like the chaotic land reform exercise that brought the economy to its knees; this one will surely completely kill it,'' many say.

Other things that are feared will be caused by the controversial indigenization law by its critics are that the seas will run dry, the world will stop turning, and the sun and the earth will crash into each other. In other words, it is a disaster of such a magnitude that the world will end!

Given the avalanche of negative opinions in reaction to its indigenization plans, why is the Mugabe government so determined to push ahead? Is it not worried that indeed, foreign investors will turn away just when the country needs them most, and when they had begun to show confidence and interest in Zimbabwe again after a long investment drought? What could explain government thinking?

The Mugabe regime has been deeply traumatized by western economic sanctions, and the experience of 2006-2008, when hyperinflation and shortages reigned. Certain media talked with much glee about the 'collapse' of the Zimbabwean economy then. If it didn't actually happen, the country came to the very brink of economic collapse. That multi-causal economic crisis almost made Mugabe's ZANU-PF party history during the election of 2008.

There are no prizes for guessing that ZANU-PF has taken many of the lessons of that economic crisis to heart, and is determined that neither the party nor the country should find itself as vulnerable as they were then, or at least not in the same ways. But those lessons certainly aren't the orthodox, obvious ones, such as ''liberalize the economy and bend over backwards to do anything to make Zimbabwe attractive to traditional foreign investors.'' It wouldn't be the Mugabe government if things were that simple and straightforward, would it?

Part of its coping strategy is to be less heavily dependent on investment from the West, and to balance it with more investment from countries perceived as all-weather friends, such as India, China and others. Western companies, (and some of those from South Africa) are fairly or unfairly seen as very likely instruments of western foreign policy in a way that is perceived as a potential threat.

So in a way, indigenization critics who invoke the bogey man of 'scaring away foreign investors' are to a large extent missing the point. The Mugabe government may very well want to 'scare away' certain types of investors, and to attract certain other types, as part of a very deliberate strategy of mitigating 'regime change risk, ' which is perceived to come almost exclusively from western countries.

The Mugabe government does not want entrenched British-origin companies like Barclays or Standard Chartered banks to leave over differences over the local shareholding requirement, nor majority South African-owned platinum mining concern Zimplats. But it certainly wants them to understand that they are welcome to stay under quite different conditions.

For some or all of these companies for which locals may not be able to buy 51% of their shares, compromises will be worked out. However, they will be compromises that nevertheless seek to lessen the perceived potential of the foreign portion of their ownership to be in a position to squeeze the Mugabe government in response to pressure from its 'enemies.'

This all sounds paranoid, but the Mugabe government is indeed paranoid about western intentions towards it. The Wikileaks leaked cables of U.S. diplomatic communications suggest that the paranoia is not completely baseless. From the point of view of economic orthodoxy the government's economic pronouncements sound rash and illogical, but from the point of view of ensuring its survival, and lessening the perceived potential choke points of its perceived enemies, it makes perfect sense.

The Mugabe government has gone way beyond any need to feel constrained by western economic orthodoxy, except for that which it absolutely can't help but subject itself to.' Collapse' arguments no longer have much weight for them either. They figure, probably correctly, that there are not many things that are likely to happen as a result of indigenization that come anywhere close to the economic crisis of 2006-2008. Thirdly, the Mugabe government has been called every ugly name in the book, subjected to all sorts of 'machinations' by its enemies, so is hardened against opposition to measures that are controversial.

The Zimbabwean economy would negatively feel the pullout of companies like Barcalys, Stanchart, Zimplats, etc. It is to underestimate the Mugabe government to portray it as either unaware or oblivious of the negatives that would result from their withdrawal. The intrasingence and hot-headed rhetoric at their perceived tardiness in submitting indigenization-compliance proposals is because the government has gambled, probably correctly, that these companies have too much at stake in Zimbabwe to leave over their unhappiness at the new law. Not only that, Zimbabwean business and growth prospects in the medium to long term are very bright, even if political and other concerns make the present somewhat uncertain.

If Barcalys, Standard Chartered or Zimplats defied the Mugabe government by saying, ''We simply cannot agree to your 51% local shareholding requirement, and we are unable/unwilling to go beyond the X percent compromise figure we have proposed,'' would Mugabe's government really go ahead to withdraw their operating licenses as threatened? Reckless as that would then be, they probably would. It would not want to, realising the practical and perception problems this would cause, but it would simply not do for the Mugabe government to be seen to be backing down under those circumstances. All the evidence is that while hoping the foreign companies would cry 'uncle,' if they didn't a political determination to shut them down if they continued to be 'arrogant' s not out of the question.

The two leading foreign-owned banks have in their compliance strategy clearly tried to flex some of the muscle of their size and longevity in the country (percentage of deposits, number of branches and employees, etc,etc), as if to test just how much the government would stick to its guns. Zimplats has been even more bold in doing so. But in the end, in reaction to the hot-headed responsible minister's increasingly aggressive rhetoric about their 'arrogance,' they wisely resolved to work harder to submit more politically palatable compromises to the 51%.

Old time foreign investors like the three mentioned here are a product of their time in Zimbabwe's history. But as long as ZANU-PF rules, and if Mugabe's influence/ideology outlasts him, it is unlikely that companies of their western provenance would be allowed to gain the dominance of their respective sectors that these have enjoyed. In banking, in the fuel industry, in farming and many others, it is easy to see a very deliberate trend to dilute foreign and/or non-black dominance. These efforts predate land reform or all the current talk of indigenization-by-legislation.

''Ah but look at the results. Have they not been disastrous?'' Certainly the results have been mixed, but even with the 'disastrous, chaotic land grab,' the real results for the country need more time than that which has so far elapsed. There has certainly been tremendous pain, loss and reversal all around in the short term, with many of the support factors to make all these various 'empowerment' successful not in place. Expect a lot of refinements of them all over many years, but don't expect a fundamental reversal of the basic ideology of indigenous empowerment, under whichever government.

But if present investors with too much to lose by pulling out make accommodations with this shareholding shakedown, surely no new investor would be willing to do the same, would they? Is the Mugabe government's victory over pre-existing investors not at the expense of scaring away new ones? That conventional wisdom, uttered every second by all manner of 'economic commentators,' is that this is what will happen, but that remains to be seen.

The 'flexibility' in implementation promised by the government has already been seen in action (e.g. Indian majority-held iron and steel concern ZISCO, Chinese investors in diamonds, etc). That flexibility is more likely to be extended to the kinds of investors that are thought to be desirable, and denied those who are not.

But wait a minute, many will argue; impoverished, investment-desperate Zimbabwe is not so inundated with investment offers that it can afford to pick and choose them like that! Perhaps not, but again, the Mugabe government's gamble is likely that Zimbabwe is, or soon will be attractive enough to be able to be selective, and to use that leverage to continue the overall diversification of investment origins away from the West.

When companies like Air Zimbabwe come up for privatization soon, we are likely to see the same steering of the process towards potential investors who are not only have the capital and know how to turn them around, but who also are considered politically correct/safe. So even if it wanted to, which it probably wouldn't anyway, one would not expect British Airways to be allowed to be the foreign shareholder who buys 49% of broke Air Zimbabwe, for example. Asian investors would generally be favorably considered, and various non-British European ones as well. That is the political reality that informs the Mugabe government's economic thinking with regards to investment. So if you accuse the Mugabe government of speaking and acting in ways which 'scare away' British investors, that is a charge they might secretly accept with some pride.

''But many of these big foreign companies are listed; their shareholders are institutions and individuals who buy stock from anywhere in the world. They are not owned by the foreign governments Mugabe and Company fear could in future again use economic muscle to lean on them.'' Technically true, but really neither here nor there. The power of the U.S. government, in particular, to lean on a wide variety of economic and financial institutions across the world is spelled out in the ZIDERA act which instituted the sanctions of the U.S. on the Mugabe government. Many government and private Zimbabwean companies and institutions have directly or indirectly felt the effects of the U.S. government officially declaring that Mugabe and his government are effectively international outlaws.

So again, the paranoia displayed in the government's seeking to make deep and long-term changes to the country's investor profile is not so crazy when looked at from this point of view.

Because Zimbabwe recently hit a very rocky bottom from which it is slowly beginning to rise, there is a kind of sense in the timing of the indigenization legislation from that perspective as well. It is an opportunity to start some things on a new slate at a time when there is very little to lose by ruffling feathers. During the 'collapse' stage there was no talk of anyone wanting to invest in Zimbabwe. In today's early post-crisis recovery, many interested investors want the next election out of the way before making a commitment. So if radical new investment laws are to be introduced, now is a better time than say two years from now, a post-crisis and post-election period when it would be even more disruptive to implement radical new measures, because what everybody would be looking forward to would be some years of predictability and stability.

Already invested companies that stuck it out during the awful days of 2006-2008 are not going to leave Zimbabwe over indigenization laws, no matter how much they may dislike them.

There will certainly be potential investors who lose their interest in Zimbabwe as a result of the law, and perhaps even many, as the many doomsayers shout themselves hoarse predicting. For the Mugabe government, the reaction is likely to be to shrug and say, 'Sorry you feel that way, but we won't really feel the absence of something we never had anyway.' As is being witnessed in several sectors, but strangely overlooked and downplayed by people making their anti-indigenization arguments, there are investors who find Zimbabwe attractive despite the new law.

These are investors who may have a different orientation in many ways to the western investors who up to now still dominate in Zimbabwe, but this will be just fine with the Mugabe government, because that accords with its investor-diversification thrust. These new investors who come in accepting the new rules, softened by concessions that will be made, will not have the anti-indigenization resentment and fears that the present shareholders of long-established investors like Barclays, Standard Chartered, Zimplats and others presently do.

Part of how these new investors may be different is that they come from countries where laws similar to the indigenization act already exist. It is a big deal in Zimbabwe partly because it is such a shock to the system of thinking that has existed up to now, and partly because in southern Africa it is impossible to divorce talk of empowerment from the incendiary issue of race. There is also a real fear of the unknown and of the new and different, on the part of everybody. The government's poor reputation on economic issues, including ''Mugabe's-chaotic-land-grab-from-white-farmers-to-his-cronies-which-turned-Zimbabwe-from-breadbasket-to-basketcase,'' is another, legitimate reason for disquiet. Then there is the fact of the Mugabe regime's generally belligerent, threatening way of doing everything, which instinctively invites opposition even on issues that would win it support if more sensitively handled.

However, with indigenization as with land reform, a very big part of the difficulty of introducing and implementing them is to change entrenched thinking, on the parts of all concerned.

''What? You bloody $£%&*"^*! So you're saying you support Mugabe's company grab? Will you accept responsibility when the economy is destroyed, when it really collapses this time? Are you one of Mugabe's cronies hoping to get shares in somebody's company for nothing?''

Please, down boy, down girl; calm down. All that has been attempted here is to try to get inside the brain of the Mugabe regime, and try to see things from their vantage point. This has been an effort to try and understand/explain how a way of thinking that to many seems so irrational, may from another point of view which few are considering seem quite logical. All present and prospective investors in Zimbabwe would be wise to be conducting such an exercise on their own, to figure out how best to maneuver in the changed investment/business environment that is not just coming, but that is already here.

The Mugabe government certainly won't back down from the basic thrust of insisting on more local shareholding. Many of the details will be refined, the minimum percentage may be reduced and many other compromises made, including to comply with global capitalist economic imperatives that neither the Mugabe government nor a relatively small economy like Zimbabwe can ignore. The indigenization law is not going to go away, but in one, two or three years' time is likely to look and be implemented very differently from that feared by so many today. No doubt many will find loopholes around it. Many will come to the table kicking and screaming at this radically different new reality, but will learn to live with it once its irreversibility is accepted.

Firm prediction: There will be discomfort. There will be many adjustments; to the law, to thinking and to how it is effected. There will be abuses, there will be corruption, there will be failures that will need to fixed. But the sky will not fall, the oceans won't run dry and the world will not stop turning because Zimbabwe has implemented a local shareholding requirement. And some potential investors will be scared away, but others will accept the new reality and find a way to work with it.

The Zimbabwe Review
http://www.thezimreview.com