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Can Zimbabwe Attract Growth Capital From Its Diaspora?
This paper will outline the economic divergence between the Zimbabwean government and its over 5 million Diasporans and potential frameworks for incentivizing increased formal direct investment by Dia
We are not attempting to re-litigate any political factors behind divergence. An objective view of economics in today’s world shows that there are many different political systems that have successfully managed to drive sustained GDP growth, attract high volumes of foreign direct investment, and oversee significant improvements in domestic quality of life. It is our view that, regardless of how emotionally fraught political issues may appear, investment and investors are concerned primarily with protection of principal and achievement of positive inflation-adjusted returns.
At its core, the divergence between the Zimbabwean government and its Diaspora is about currency and the methods that the government - and by extension, the Reserve Bank of Zimbabwe - has used in an attempt to manipulate currency value to its own advantage at the direct financial expense of investors and its own citizens.
Many government actors around the world believe that control over currency is the source of their economic legitimacy and hegemony. The global primacy of the US dollar, euro and British pound, along with the emerging power of the yuan and the commensurate political influence of their respective issuers appear to support this belief. But central to the value of all of those currencies are the real positive returns experienced by holders of the government bonds that underlie those currencies. The United States, for example, would be unable to fund its perpetual deep budget deficit if holders of US Treasury bonds experienced consistent negative returns, where inflation outpaced the coupon rate of the 10-year Treasury bond. In such a scenario, the value of the USD would plummet and the US government would be unable to finance its considerable and rising debt
The economic thesis of this paper is thus:
The fundamental value of a fiat currency issued by a government comes from investor faith in three things:
  1. 1.
    The interest on long term government debt meaningfully outpacing currency inflation (protection of lender principal)
  2. 2.
    Sustained positive GDP growth within the economy of the issuer (sufficient government revenue to stay current on debt payments)
  3. 3.
    Central bank and government commitment to protecting asset values
Real returns cannot be faked, and currency utility cannot be forced. No amount of legislation or coercion can create sustained market demand if there is no real growth (net of inflation) backing the currency.
Regardless of the underlying political ideology of those in government, the most successful economies around the world - as demonstrated empirically in the 20th and 21st century - succeeded by making liquidity highly available to the private sector and financial transactions as frictionless as possible.
Sound fiscal and monetary policy are key to generating positive economic outcomes, and subsequently investor confidence in local currency. And central to those positive outcomes are the cultivation of high money velocity and liquidity.
This paper will cover the policy elements that are key to encouraging economic participation by Diasporans, and what the barriers are today that prevent Diasporan investor confidence. It will also provide apolitical recommendations of good faith steps that the Zimbabwean government can take to slowly rebuild lost trust and facilitate inclusive economic growth.
But before we progress into the realm of policy and economic outcomes, we first must outline the total investment opportunity that the Diaspora presents as a class for the Zimbabwean economy.
In 2020, the total amount of foreign direct investment (FDI) invested in Zimbabwe was ~$280M USD (source). By contrast, the total amount of remittances sent by Diasporans to friends and family in Zimbabwe totalled over $1.2B (source). Remittances totalled over 4 times the volume of FDI, and is a hefty sum when compared to Zimbabwe’s total GDP of $16.8B in 2020. Much of that $1.2B was in support of Zimbabwe’s informal sector, which generated over 30% of that GDP and by some estimates makes up more than 85% of the total labor force in Zimbabwe(source).
But as significant as that $1.2B is, it’s just the tip of the iceberg of the amount of wealth that Diasporans are choosing to invest in their adopted homes instead of in Zimbabwe. Estimates of total wealth held abroad by Diasporans range from $150B to $350B (source). But even a 10% increase in the total amount remitted would equal the total current amount of formal FDI inflows. The negative economic effects of targeted sanctions from the US (source) could be mitigated altogether, clearly, if the Zimbabwean government could persuade Diasporans to on aggregate invest even 10% of the wealth they hold into Zimbabwe. Not only would the volume of investment be on par with the development loans currently available to the Zimbabwean government, but it could be secured at a far cheaper cost of capital than the 7% on offer from entities like the African Development Bank(source).
However, to take advantage of the opportunity, a dramatic shift needs to occur in the relationship between the government and its Diaspora. The following two sections will cover practices recommended from the official Diaspora policy drafted in 2015 (what has been implemented, what has worked, and what has not worked) as well as the current barriers that still exist that discourage Diasporan investment. A third section will cover additional policy recommendations that we believe will encourage detente and incentivize greater participation by Diasporans in Zimbabwe’s economic recovery and development.
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