The loss of property rights and the collapse of Zimbabwe.

• Author: Richardson, Craig J.

What in the world happened to Zimbabwe? Although the country certainly had its share of difficulties during the first 25 years since independence in 1980, it largely dodged the famines, civil strife, and grossly mismanaged government policies so common in other sub-Saharan African countries. Through the 1980s, its annual real GDP growth averaged more than 5 percent, and, unlike other African countries, agricultural yields were large enough to allow the country to export grain. In the following decade, economic growth slowed, and government policies were less than efficient, but Zimbabwe still managed to grow an average of 4.3 percent, in real terms. (1) The government also offered free education and relatively good access to medical care. Population growth was slowing, and foreign direct investment increasing. With rich mineral assets, an educated workforce, and beautiful natural wonders, Zimbabwe appeared to have the best chance to be an African success story.

However, in 2000 through 2003, the Zimbabwean government initiated a land reform policy that involved forcibly taking over white-owned commercial farms, ostensibly to redistribute this property to landless blacks. The rationale for this policy was to redress the British seizure of fertile farmland in the late 1890s, which resulted in hundreds of thousands of blacks being pushed onto lower grade communal lands.

No compensation was paid to the commercial farmers, and hundreds of thousands of employed black farm workers were left without jobs. Despite a ruling from Zimbabwe's Supreme Court that the action was illegal, the Mugabe-led government continued with the land takings. These land reforms marked an important turning point for Zimbabwe. It was the first time in its 20-year history that laws regarding property rights were no longer respected or defended. Property titles, which once served as a key insurance mechanism for guaranteeing bank lending, no longer were recognized by the Mugabe government.

Within a short period, Zimbabwe went from a place of hope to one of the grimmest places on Earth. The economy collapsed by 5 percent in 2000, 8 percent in 2001, 12 percent in 2002, and an estimated 18 percent by 2003 (OECD 2004: 357). Inflation reached 500 percent and Zimbabwean dollars lost more than 99 percent of their real exchange value (IMF 2003: 28). The International Monetary Fund, the United Nations, and the Organization for Economic Cooperation and Development blamed the "severe drought" in 2001-02 along with a host of other factors--including AIDS, poor fiscal and monetary policies, and rigid price controls--for causing much of the food shortages and resulting economic difficulties. Although the other factors certainly contributed negatively to Zimbabwe's economy, the land reforms and the changes in rainfall were the only variables that appeared to change dramatically during the 2000-03 period. Thus, they are the primary suspects in plumbing the reasons for Zimbabwe's quick collapse.

In this article, I argue that the land reforms were the primary driver of Zimbabwe's sudden collapse, not the lack of rainfall. After giving a brief overview of the literature that covers the link between property rights and economic growth, I correlate official Zimbabwe government rainfall data with GDP growth, and also use these data to rank the severity of the 2001-02 drought versus other droughts in the past 50 years. Next, I illustrate the precise mechanics of Zimbabwe's collapse, by showing how the damage to property rights destroyed three key, yet invisible, components of the marketplace: investor trust, land equity, and entrepreneurial knowledge and incentives. Finally, I use ordinary least squares regression analysis to independently assess the impact of the rainfall, land reforms, political strife, labor productivity, capital formation, and foreign aid on Zimbabwe's economic growth. I conclude that over the 2000-03 period, the land reforms alone were responsible for an estimated 12.5 percent average annual decline in GDP growth. Rainfall played a minimal role in the GDP contraction. Perhaps most dramatically, estimates made in this article indicate that after the revoking of commercial farm property titles, the aggregate value of Zimbabwean farmland dropped so quickly that the net loss in one year was nearly three and a half times larger than all the World Bank aid ever given to Zimbabwe. This loss in wealth rippled throughout the economy, severely strained the banking sector, and led to a rapid downward spiral in the economy.

The collapse of Zimbabwe is thus a dramatic natural experiment that serves as a compelling case study on the economic consequences of damaging property rights.

Previous Work on Property Rights and Economic Growth

Property rights have long been recognized as a key ingredient in markets, as noted by Adam Smith ([1776] 1976) and much later, Frank Knight (1971). Both pointed out that economic activity is enhanced when people are able to secure the value of their work in a legally defended asset. Economic historians such as North (1973) and Rosenberg (1994) have argued that property rights are important with respect to long-run economic growth. Hernando de Soto (2000) notes that a property system creates a network through which people can rearrange their assets into more valuable combinations. By creating such a network, de Soto argues, developing economies can grow far more quickly, because previously untitled land can now be leveraged as equity to build new businesses.

Yet most of the recent theoretical work explaining economic growth models has been framed by neoclassical models that underscore investment in technology, human capital, and international trade flows (Solow 1956, Romer 1986, Grossman and Helpman 1991). These models offer important insights into causes of economic growth, but they implicitly assume that there are well-enforced private property rights (Heltberg 2002). Easterly (2002) nicely summarizes many theoretical reasons for Africa's dismal performance, but again barely mentions Africa's poorly defined property rights as a contributing factor.

Some economists, however, have shown more interest in empirically measuring the link between property rights and economic growth. Scully (1988) reported that countries with well-developed property rights and market structures experienced, on average, 2.6 percent GDP growth, compared with 1.1 percent in countries where property rights were limited and there was a great deal of state intervention. Heitger (2004) showed that a doubling of an index of property rights more than doubled living standards, and concluded that property rights were one of the ultimate sources of economic growth. Goldsmith (1995) also found that less-developed countries enjoyed faster growth when they had more secure property rights, as measured by a Heritage Foundation index.

On the other hand, Torstennson (1994) reported in a cross-sectional analysis of 68 developed and developing countries, that those countries that experienced arbitrary seizures of property had negative economic growth. His study predicted that a country might increase its growth rate by more than 1 percentage point by putting a stop to such seizures. Of the 15 countries in his study that undertook arbitrary seizure of property, 9 had negative growth rates. They included Chad (-6.1 percent), Liberia (-4.0 percent), and Zaire (-5.1 percent). Those findings appear to underestimate the total impact of property seizures, at least in the case of Zimbabwe.

The underlying reasons for this economic growth are buttressed by other studies. For example, preliminary evidence in Peru suggests that the nationwide effort to secure urban land titles has increased the number of household labor hours worked by 17 percent, because people spend much less time guarding their property, thus increasing economic growth (Field 2002). In addition, research has shown that investments in land improvements on titled land were 1.4 to 2.2 times higher than on untitled land in Paraguay, Thailand, Brazil, and Honduras (Alston, Libecap, and Schneider 1996; Feder 1999). The reason for this, as demonstrated by Broegaard, Heltberg, and Malchow-Moller (2002) in a Nicaraguan study, is that formal land documents increase the value of the land by giving better incentives to invest and engage in long-term land use, such as growing perennial crops. All of this results in higher output. The authors also noted that rural credit markets need to be developed in tandem, as titling currently has little impact on the credit supply in Nicaragua. They conclude that without formal titles, landowners in Nicaragua tend to be rich individuals with liquid assets, who are not necessarily the most productive users of the land. However, there is also evidence from Thailand (Feder et al. 1988) and Honduras (Feder 1999) that shows the positive improvement in credit access and land prices after issuing formal land titles. Titled farms obtained 3 to 4 times as much credit as untitled farms. Furthermore, titled land was valued 1.8 times higher than untitled land in both countries.

Land security also encourages conservation and sustainable use of natural resources, as shown by Heltberg (2002). In Central America, deforestation and environmental degradation have brought renewed attention to land titling and the security of property rights (Lutz 1998 and Utting 1996). In Zimbabwe, satellite photos clearly indicate that areas without well-defined property rights suffer severe erosion, as communal farming methods take their toll through slash-and-burn agriculture. Small- and large-scale farms with property titles (owned by both whites and blacks) suffer no such environmental degradation (Prince 2004).

Just How Severe Was the Drought?

In order to untangle the reasons for the collapse of Zimbabwe, a critical piece of the puzzle is assessing the severity of the 2001-02 drought, which occurred...