2.9 Market failure - public goods Questionbank

Economic and Development Dynamics in Zimbabwe

Zimbabwe is a landlocked country in southern Africa known for its significant agricultural potential, mineral wealth, and a history of monetary instability. Since 2019, the government has reintroduced the Zimbabwean dollar (ZWL) after years of dollarization, in an effort to rebuild monetary sovereignty. However, persistent inflationary pressures remain a concern. Official figures indicate that year-on-year inflation hovered around 50% in 2020 before peaking at nearly 90% in late 2022, causing uncertainty for both consumers and businesses.

Although Zimbabwe has experienced intermittent economic expansions, measured real GDP growth has been uneven. Following a modest recovery in 2019, real GDP contracted in 2020 due to global market disruptions and severe droughts affecting agricultural output. By late 2021 and into 2022, there were signs of improvement, aided by increased mining exports of gold and platinum group metals (PGMs) and an uptick in regional trade within the Southern African Development Community (SADC).

A key pillar of the government’s reform agenda is the Agriculture Modernization Plan. Under this plan, smallholder farmers are encouraged to employ new irrigation technologies and improved seed varieties. The government has also sought to attract foreign direct investment (FDI) into commercial agriculture through joint ventures, though some critics argue that unclear land tenure remains a barrier. Supporters of the plan emphasize that better farming methods can reduce food insecurity, raise rural incomes, and promote export diversification.

Notwithstanding the potential of agriculture, Zimbabwe’s high tariffs on selected imported goods (such as certain dairy products and textiles) have raised concerns over domestic market competition and consumer welfare. Some domestic firms argue that tariff protection is necessary to shield local industries from unfair global competition. Meanwhile, economists warn that such policies can lead to inefficiencies and higher prices for consumers.

The country continues to grapple with widespread poverty. According to recent estimates, over 30% of Zimbabweans live below the national poverty line, with rural areas most severely affected. Chronic underinvestment in public education has contributed to skill gaps in the labor force, potentially trapping many low-income families in a cycle of poverty. Remittance flows from Zimbabweans living abroad totaling approximately US$1.4 billion in 2021 provide relief to some households, but these flows also highlight the dependence on external income sources.

Since 2021, the Reserve Bank of Zimbabwe has tried to stabilize the exchange rate by auctioning foreign currency to importers. However, a parallel (informal) market with a premium over the official exchange rate persists, reflecting confidence issues in the local currency. Fluctuating diaspora remittances add another layer of complexity to exchange rate management.

On the industrial front, the government unveiled an Industrialization Strategy targeting manufacturing of processed agricultural goods, textiles, and machinery. By lowering certain taxes and offering credit facilities to local producers, policymakers hope to boost domestic supply capabilities and eventually increase exports. International organizations like the African Development Bank have advised further trade liberalization to integrate more deeply into regional supply chains.

Efforts to reduce poverty are at the forefront of the policy debate. Some government agencies propose more direct subsidies to smallholder farmers for inputs such as fertilizer and irrigation equipment, while others emphasize investment in rural education and health care to break the poverty cycle. The success of these interventions may depend on political will, institutional capacity, and macroeconomic stability factors that have historically been volatile.

To balance short-term needs with long-term development goals, Zimbabwe’s policymakers are weighing the costs and benefits of protective tariffs, agricultural subsidies, and currency management strategies. As the economy progresses through structural changes, the Agriculture Modernization Plan is seen as a cornerstone for revitalizing both food security and export competitiveness. Yet, the outcome will largely hinge on success in fostering transparency, attracting more FDI, and ensuring that macroeconomic headwinds particularly inflation are kept in check.

Below are two tables presenting selected data. Table 1 provides general macroeconomic indicators. Table 2 focuses on aspects related to the Agriculture Modernization Plan, including government spending allocations and early outcomes in key crops.

Table 1: Zimbabwe’s Key Macroeconomic Indicators (2019–2022)

Table 2: Selected Data on the Agriculture Modernization Plan

† In ZWL millions

Text A: The Coffee Market in Country Z

Country Z is a major producer of coffee beans, contributing significantly to its export revenues. However, due to a global oversupply of coffee, prices have fallen dramatically, impacting the incomes of local farmers. To support farmers, the government introduced a price floor above the equilibrium price. While this has stabilized farmer incomes, it has resulted in surplus production and increased government spending on storing unsold coffee.

In response to environmental concerns, Country Z has also introduced subsidies for farmers who adopt sustainable farming methods. Critics argue that while these measures aim to support farmers, they distort market efficiency and divert resources from other sectors of the economy.

Table 1: Coffee Production and Government Intervention

Text B: Regional Economic Cooperation in Country Y

Country Y recently joined a regional trade bloc that promotes free trade and economic integration. This has resulted in the removal of tariffs on agricultural and industrial goods traded within the bloc. The government hopes the trade bloc will help diversify the economy, currently reliant on exports of low-value-added agricultural products.

However, small-scale farmers in Country Y have struggled to compete with larger, more efficient producers from neighboring countries. To address this, the government is providing subsidies to small-scale farmers to improve productivity. Critics warn that the focus on agricultural subsidies may hinder the country’s transition to a more industrialized economy.

Table 2: Trade Performance in Country Y

Country A has seen a significant increase in the consumption of soft drinks, leading to concerns about rising health issues such as obesity and diabetes. To address this, the government introduced a 20% excise tax on sugary beverages, aiming to reduce consumption. The tax has resulted in an increase in the price of soft drinks by 15% and a 10% decline in quantity demanded.

Some beverage companies have adapted by offering low-calorie alternatives, while others have lobbied for tax exemptions, arguing that the tax disproportionately affects low-income households. Meanwhile, the government has launched public health campaigns and introduced $50 million in subsidies for local farmers to grow fruits and vegetables, aiming to promote healthier diets and reduce dependency on sugary beverages.

Table 1: Price and Quantity of Soft Drinks in Country A Before and After Tax

Country B is a member of a regional economic bloc that recently transitioned from a free trade area to a customs union. This change led to the removal of tariffs on intra-bloc trade and the introduction of a 10% common external tariff on imports from non-member countries.

Trade within the bloc has flourished, with exports increasing by 25%. However, some domestic businesses struggle to compete with larger firms from neighboring countries. Additionally, while integration has boosted investment in infrastructure and renewable energy, it has widened income inequality between urban and rural areas, as rural communities lack access to the same economic opportunities.

Table 2: Trade and Income Inequality in Country B

Economic Dynamics and Policy Measures in Zimbabwe

Over the past decade, Zimbabwe has experienced considerable economic volatility, characterized by episodes of high inflation and fluctuating real GDP growth. In 2018, the government introduced a transitional stabilization program aimed at curbing hyperinflation, which at its peak exceeded an annual rate of 89% in mid-2019. Despite partial success in reducing price growth to about 60% by 2021, inflation expectations remain volatile.

To foster long-term development, the government has promoted infrastructure investments in transport, energy, and healthcare. This includes an intensive plan to rehabilitate farmland, which suffered from utilization challenges in the early 2000s. Proponents argue that improved irrigation systems and better-quality inputs can help Zimbabwe’s agricultural sector return to its former status as a key regional food supplier. Still, financing such large-scale projects has led to increased public debt.

Zimbabwe operates under a multicurrency regime, with the Zimbabwean dollar and the US dollar both accepted. To manage persistent currency shortages, the central bank imposes foreign exchange controls on certain transactions. However, diaspora remittances—totaling around US$1.2 billion in 2019—have become a crucial source of foreign exchange. Some stakeholders believe further liberalization of the currency market is necessary to attract new foreign direct investment (FDI) and stimulate domestic enterprises.

Government interventions in key markets, including staple food subsidies, are intended to stabilize prices and improve social welfare. Critics, however, claim these measures may distort resource allocation and create fiscal pressure. In addition, Zimbabwe’s informal sector accounts for an estimated 60% of total employment, limiting tax revenues and complicating the provision of public services.

Another area of concern is the energy sector. Although Zimbabwe has abundant hydropower resources in the Zambezi Basin, inconsistent rainfall has led to power shortages, prompting the government to consider diversified energy sources, including solar and natural gas. This shift aims to reduce production bottlenecks that many manufacturing and mining firms face.

With uncertain global and regional economic conditions, Zimbabwe has begun seeking export diversification in mining, tourism, and services. Historically, tobacco and gold exports have been essential foreign exchange earners. Authorities now emphasize technology, financial services, and horticulture to create a more resilient economy. They also offer lower interest rate loans to small-scale entrepreneurs, which policymakers project will help reduce urban unemployment, currently estimated at 15%.

Socially, Zimbabwe grapples with wide income disparities. While the official poverty rate has shown slight improvement, many rural communities face inadequate access to healthcare and education. The government has implemented vocational training programs to increase human capital formation, hoping to address both structural unemployment and underemployment.

Looking ahead, Zimbabwe’s policymakers acknowledge the need for balanced reforms. Sustaining economic growth and price stability while promoting social welfare remains a key goal. As shown in the data below, modest real GDP gains have been offset by inflationary pressures and currency instability. Still, ongoing efforts at infrastructure rehabilitation, coupled with potential export diversification, could pave the way for more stable development.

Table 1: Zimbabwe’s Key Economic Indicators (2018–2021)

Table 2: Sectoral Contribution to GDP (2021)