The banking sector is a critical pillar of economic development.

With reference to
Zimbabwe and using appropriate examples, discuss the role of building societies in
Zimbabwe’s economic development (30).

A building society is a mutual financial institution that is owned by members. Taylor (2003)
contends that building societies offer banking and related financial services especially savings
and mortgage lending. The oxford dictionary defines a building society as a financial
organisation which pays interest on investments by its members and lends capital for the
purchase or improvement of houses. Sloman J et.al (2006) concurs with the above definition and
posits that historically building societies were specializing in granting loans for house purchases.
In Zimbabwe, the existent building societies in the current banking architecture include Central
Africa Building Society (CABS), National Building Society (NBS), ZB Building Society, CBZ
Building Society and FBC Building Society.

Economic development is a multi-faceted concept that encompasses growth in the productive

capacity of an economy as the general improvement in the economic welfare or standards of
living of a country’s citizens. This write-up assesses the role played by building societies in the
economic development of Zimbabwe, under the following headings.

Mobilisation of savings. Building societies play an important role in the mobilisation of savings
from the surplus units of the society to the deficit units of the society, in a process known as
financial intermediation. Sloman J et.al (2006) posits that building societies compete for the
savings of the general public through a network of high street branches. Building societies along
with commercial banks are deposit-taking financial institutions, though they act as a medium for
small savings tapped from the society through various types of demand and time deposit
accounts. They mobilise deposits by offering attractive rates of interest, which otherwise would
have remained inert, into active capital

Provision of mortgage loans. A mortgage loan refers to an advance made by a financial

institution with the aim of allowing or affording the borrower to purchase a residential or
commercial property through a contractual agreement. The borrower agrees to pay the lender or
building society over a long period of time, typically in a series or regular payments that are
divided into principal and interest, and the property serves as a collateral to the loan. The
provision of mortgage loans allows many Zimbabweans who are incapacitated to buy property
outright, to be afforded ownership of either residential and or commercial property, thus
improving their general and economic welfare.

Development of housing and commercial properties/ contribution to infrastructure.

Building societies play an important role in the development of urban housing and commercial
properties such as shopping malls or complexes. For instance, the National Building Society has
constructed residential properties along the Harare-Bulawayo Highway known as the NBS Park
whereas CABS has also invested in the Budiriro housing scheme as well as the Nkulumane high
density housing projects. The development of residential and commercial property projects has
led to the development of infrastructure which is critical for the economic development of
Zimbabwe. Through these developments, there has been the development of basic and social
amenities such as water and sewer reticulation, road and communication networks. Such social
infrastructure has a potential to attract investment which is critical for the spurring of growth and
development.

Capital formation and Industrial Development. Building societies in Zimbabwe are not only
confined to mortgage lending, but can also include personal and corporate loans in their lending
portfolios. The advancement of loans is critical for promoting entrepreneurship which leads to
investment and ultimately industrial development. Kalpana B (2017) asserts that building
societies increase capital formation by collecting deposits from depositors and convert these into
loan advances to the industry.

Generation of employment. Since building societies promote industrial development and

capital formation, they automatically generate employment opportunities in the economy. This
will then create a multiplier effect of growth entrenched in the economy which leads to
employment creation, stimulation of economic activity as well as growth in income and general
improvement in the standards of living in Zimbabwe.

Policy function. Building societies are also a conduit through which government monetary
policy is tailor made to be effective in the economy. They act as channels through which the
governments may endeavour to stabilise the economy and avoid inflation.

Financial inclusion. Building societies plug into the void which is left by bigger financial
institutions by allowing the participation of economic agents that are not serviced by other
institutions such as commercial banks. Mataruka (2015) maintains that the existence of building
societies in the financial system also promotes financial inclusion. Moreover, through electronic
banking, there has been increase in financial inclusion to low-income groups and unbanked
households. Consequently, this leads to the increase in deposit mobilisation and channeling of
excess funds to the productive sectors of the economy.

Payments function. Building societies provide mechanisms for making payments for goods and
services in the form of currency, checking accounts, debit cards, credit cards, digital cash, among
others. In Zimbabwe, all building societies are incorporated into the national payment system
known as the Real Time Gross Settlement System (RTGSS) which brings convenience to the
transacting public as well as allowing the flow of funds to the most productive uses in the
economy.

However, the effectiveness of building societies in driving the wheels of the economy, and on
the contribution to the economic development of Zimbabwe is limited due to the following
factors.

Low levels of confidence in the banking system. There is low confidence with the financial
system in Zimbabwe, as necessitated by past experiences of bank failures, high levels of
inflation, negative real interest rates, among other factors. This has created informal channels
through which funds circulate in the economy. Most households in Zimbabwe do not maintain
accounts to which they deposit their wealth because of the difficulties encountered in accessing
the very same funds at the banks. This is also compounded by the fact that most deposits with the
building societies are transitory in nature and hence cannot be utilized for the long-term growth
and development of the country.

A less developed housing market. The low levels of income in Zimbabwe have led to
stagnation in the growth of the housing market. apart from supply of mortgages, there has not
been significant changes in the mortgage market in as far as the introduction of new financial
instruments is concerned. This has led to the gradual disappearance of building societies in the
economy, for instance, the former Intermarket Building Society and Beverly Building Societies
were merged into ZB Building Society and CBZ Building Society respectively. In the same vein,
the business that these financial institutions do has since been taken away by well-established
commercial banks.
In conclusion, building societies are of paramount importance in the economic development of
Zimbabwe but the challenging operating environment limits the capacity of these institutions to
spur growth and development.

Question 1b.

The Zimbabwean currency serves as a symbol of the country’s sovereignty. Discuss with
appropriate examples, the functions of money in economic development of Zimbabwe (20).

Money is anything that is acceptable as a means of making payment. The key definition of
money is stressed in its acceptability feature as a means of effecting payment. The modern-day
money is referred to as fiat money in the sense that its acceptability is enforced by the state as a
form of legal tender. Other key features of money include portability, uniformity, recognizable,
durability, stability in value, among others. The role of money in the facilitation of the economic
development is elucidated under the following headings.

Medium of exchange. This is the conventional and primary function of money. Money
facilitates economic transactions or the exchange of goods and services in the economy. This
creates avenues for production, investment and commerce which are critical for economic
growth and ultimately development of the Zimbabwean society. The exchange function of
money becomes a basis upon which production, income and spending are manifested in the
economy which leads to an increase in economic activities in critical sectors of the Zimbabwean
economy such as agriculture, mining, industry and others which are central to the economic
development of Zimbabwe.

Beardshaw J (2001) contends that the barter system was full of difficulties of exchanging goods
and services between individuals. The authors further stated that the absence of easy exchange of
goods and services the barter system worked as an obstacle to the division of labour and
specialisation among individuals which is an important factor for increasing productivity and
economic growth. Further, the process of economic growth leads to the expansion of production
of goods and services and consequential rise in incomes of the people.
Store of wealth or value. Money can be used as a form of storing wealth or value which
competes with other forms of assets such as movable and immovable properties, gold and other
means of storing wealth. This function enables the accumulation of thrift or savings in an
economy. Savings are a repository or source of investment funds that are in turn used for capital
accumulation. Countries such as China and Japan are recent testimonies of how economic
growth and development can be driven by the accumulation of savings.

Promotes Investment. The development another important role of money lies in making the
magnitude of investment independent of the current level of savings. In a barter system, the
goods not consumed constitute the savings as well as investment. That is, investment is not
different from current savings. The greater the current savings, the greater the investment.
However, in a modern economy, this is not so. Whereas it is households which save in the form
of money, it is the firms which invest money in capital goods.

 In times of depression when idle productive capacity exists, the increase in investment made
possible by creation of new money by the government or banks would lead to the increase in
aggregate demand for goods and services. In such times the supply of goods and services is
elastic due to the existence of excess capacity. Therefore, increase in aggregate demand
generated by the investment financed by created money brings about expansion in output of
goods and services and thereby causes an increase in the level of employment.

Monetization and Economic Growth. Most developing countries such as Zimbabwe have a
large scale non-monetised sector where production is for the purpose of subsistence only. To
break the subsistence nature of economic activity and thus generate new forces for economic
growth, its monetization is required. The introduction of money helps in bringing it in contact
with the modern sector. The contact of the subsistence sector with the modern sector will lead to
expansion of output. This has been evidenced in the agricultural sector where production has
been traditionally carried as subsistence by peasant farmers but due to the monetization of the
sector, farmers are now producing surpluses for sale and in other cases cash crops such as
tobacco and cotton. The surplus produce as well as the cash crops can therefore be sold or
exported thereby improving the livelihoods of subsistence farmers.

Standard for deferred payments. Money performs a very critical role of facilitation of deferred
payments, that is the extension of loans and credit facilities in the economy. The extension of
credit facilities have the capacity to boost the level of consumption and investment in the
economy which ultimately contributes to economic growth and stimulates development in the
economy.

However, the local currency in Zimbabwe has somewhat lost its credibility in spurning growth
and development. Due to long periods of inflation accompanied by the loss in the purchasing
power of the Zimbabwean dollar, there has been general loss of confidence in the local currency.
In the recent years the currency has been demonetised and replaced with a basket of foreign
currencies and the re-introduction of the currency has failed to oil the wheels of the economy and
drive the development of the country.

Question 2a.

In recent years, there has been growing concerns about the performance of most
Zimbabwe’s parastatal institutions and experts calling for their privatisation. Identify and
discuss the potential benefits and costs of privatising Zimbabwe’s parastatal institutions
(30).

Privatisation is defined as the process of transferring ownership and control of publicly owned
enterprises from the public sector or government to private individuals and companies which
constitute the private sector. Mohr P (2015) corroborates the above view and defines
privatisation as the transfer of state-owned assets from the public sector to the private sector.
Privatisation, therefore involves an attempt to increase reliance on market forces and on private
sector initiative.

Privatisation can be carried out in different forms. Sloman J (2006) asserts that there exist three
types of privatisations namely share issue privatisation, voucher privatisation and asset-sale
privatisation. The author further states that share issue privatisation involves selling shares of the
enterprises to private individuals and businesses on the stock market. Voucher privatisation
entails the distribution of share ownership of the enterprise to all the citizens usually for free or
at any low price. Asset sale privatisation involves the sale of the entire enterprise or a substantial
part of it to a strategic investor, usually by auction. The following is a discussion on the potential
benefits and costs of privatisation.
Greater efficiency. Most state-owned enterprises are set up through legislation in order to
provide public utilities or essential services to the public. These entails that the decisions made in
most parastatals are based on the provision of services at affordable rates. The lack of the profit
motive leads to the inefficiency of government owned entities which are perennial loss-making
entities. Privatising these state-owned enterprises will make them more efficient thereby
allowing productive and allocative efficiency to prevail and also increased profits.

Increased competition. Selling public entities to the private sector opens up some industries to
competition and the subsequent entry of new players into the industry. The privatisation of Dairy
Marketing Board into Dairiboard Zimbabwe Holdings in the 1990s by the government allowed
the entry of other players into the industry and has made the dairy industry more competitive
than before. Sloman J (2014) contends that if privatisation involves splitting an industry into
competing companies, this greater competition in the goods market would force the companies to
keep their costs as low as possible in order to stay in the business.

Access to capital markets. Privatisation allows the privatised entities to access financial
markets to raise capital. Private companies do not have direct access to government finance. To
finance investment, they must go to the market. Therefore, they must issue shares or borrow
from banks or other financial institutions. The privatisation of Dairiboard and the Cotton
Company of Zimbabwe (COTTCO) saw the two entities listing on the Zimbabwe Stock
Exchange, where they raise equity capital through issuance of shares and debt instruments.
Dairiboard Zimbabwe has since expanded into the Malawi market through access to capital.

Enforcement of market discipline. Market discipline will be enforced by shareholders who

may want a good return on their shares and will thus put pressure on the privatised company to
perform well. If the company does not perform to expectations to make sufficient profits,
shareholders will dispose their shares, which leads to a decline in share prices and makes the
company vulnerable to takeovers. In most private companies, the directors are accountable to the
shareholders and are bound to make such entities profitable, otherwise they would be judged by
the market and the investing public.

Widening of the tax base. Most state-owned enterprises do not pay tax to the government and
hence privatising such will expand the tax base of the government. The privatised entities also
stand a high chance of making a profit and hence the tax base is widened in addition to that as a
public corporation the company was previously exempted from taxes. Moreover, the entry of
new players in privatised industries also allows the government to collect more tax revenues than
in the prior situations. In the same vein, the government can use the proceeds from the sale of
public entities for financing its activities such as capital expenditures on development of social
infrastructure such as roads, dams, bridges which are critical for the economic development of
the country.

Reduced fiscal burden. In Zimbabwe almost all state-owned enterprises and parastatals are loss
making entities and the government pumps billions of taxpayers’ money every year to bailout
these institutions. Privatising these entities will have a positive impact of reducing the fiscal
burden that is imposed on the fiscus by these loss-making entities. As a result, the government
will free some funds that can be invested in much needed areas such as agriculture, mining or
addressing poverty and inequity in the society. Privatisation will also free the government from
heavy annual subvention and subsidies to unprofitable enterprises.

Reduced government interference. The government has power to determine the operations of
most parastatals. The pricing structure of these entities may be determined by political decisions
without taking into account, the operational viability and profitability of the public entities. In
Zimbabwe, some populist policies have contributed to the demise of most parastatals through a
charging regime meant to win the hearts of the voters. In this regard, privatisation frees the
company from government control and allows it to make rational decisions and plan future
investments with greater certainty.

Financing tax cuts. The privatisation drive through the issuance of shares directly earns the
government money and thus reducing the amount it needs to borrow. The government can also
use the proceeds of privatisation to finance tax cuts in the economy.

Share ownership and empowerment. Privatisation will increase share ownership in the
economy and serves as an instrument of empowerment to the indigenous people. The
privatisation can be used to empower the indigenous people, for example through employee
share ownership scheme where priority will be given to the employees to buy shares in the
privatised corporation.
Critics of privatisation have managed to raise the following arguments against the privatisation
of public entities under the following headings.

Natural monopolies. The market forces argument for privatisation largely breaks down if a
public company is simply replaced by a private monopoly. Critics of privatisation argue that at
least a public-sector monopoly is not out to maximise profits and thereby exploiting the
consumer. Once a corporation is privatised, it will charge economic or market prices for its
products, a situation which is likely to see the poor not being able to buy the product. This is a
major drawback especially where the product is essential. For instance, ZESA holdings will end
up charging electricity tariffs that are beyond the reach of most rural consumers and small-scale
farmers.

Externalities. Private companies pursue the objective of profit and disregard the presence of
external costs and benefits of their activities on the society. Privatising entities may lead to an
increase in the incidence of externalities such as noise, pollution, traffic congestion, depletion of
natural resources and environmental degradation. Such incidences result in considerable welfare
losses to the society.

In a nutshell, privatisation brings in more benefits than problems as witnessed by the success
stories of Dairiboard and Cotton Company of Zimbabwe (Cottco) which have become the blue
chip listed companies on the Zimbabwe Stock Exchange. On the other hand, privatisation also
brings with it problems such as loss of government control, emergence of private monopolies
and incidence of externalities.

Question 2b.

Distinguish between foreign direct investment and foreign aid and critically discuss the
potential benefits of foreign aid to a country like Zimbabwe (20)

Foreign aid refers to funds that are made available to struggling nations by countries that have
financial strength to help a country in times of distress. Foreign aid can be in the form of low-
interest loans, grants, relaxed trade policies, preference in terms of trade agreements,
technological transfers, donations, humanitarian assistance among others. Foreign aid usually
takes the form of low-interest loans where the country in need can borrow funds at a lower cost
with relaxed payment terms.
The aim of foreign aid is to assist the countries in need by offering them with assistance in
solving their problems and fulfilling their needs. Foreign aids help to resolve short term
problems such as poverty and hunger or to resolve long term issues such as improvement and
development of a country’s technological infrastructure.

Shapiro AC (2014) defines foreign direct investment or FDI as the acquisition of companies
abroad, property, or physical assets such as plant and equipment. Foreign investment is where
one country will make investments in a foreign country with the main aim of making profits.
Foreign direct investment is when a firm in one country invests in a business that is located in
another country. A firm may have FDI when the home country firm holds more than 10% of its
shares in a foreign subsidiary. Multinational firms looking to start up operations in a foreign
country generally start with an FDI to test the market place before a big move. 

Scholars have identified a relationship between foreign aid and foreign investment. When a
country offers aids to a nation in need, this will result in better infrastructure, technological
development, development of industries, and overall economic development. Once the aid
receiving nation reaches a certain level of economic development through foreign aid, this may
encourage countries to make higher foreign investments in these developing economies.

Foreign aid is of paramount importance to the development of a developing country such as

Zimbabwe. The following is a discussion on the potential benefits that foreign aid can usher to a
country such as Zimbabwe.

Foreign aid supplements domestic resources. Foreign aid is used to complement or

supplement on domestic resources especially in the African countries like Zimbabwe where the
mobilisation of domestic savings is cumbersome. To exploit the untapped resources in the
country, there is need for aid, because domestic savings are insufficient to explore some of the
resources such as minerals, natural gas, oil reserves and other natural resources which may need
additional funding in form of aid to explore. The exploration of some of the untapped resources
in Zimbabwe has a potential to contribute to employment creation and improvement in the
standards of living of the people.

Development of infrastructure and capacity building. Foreign aid has been pivotal in the
development of the African economies in building capacity that has contributed to the growth of
African economies through attracting private investment. This aid has been applied towards
infrastructural development in form of roads, bridges, dams, educational institutions which has
allowed African countries to attract foreign direct investments and other forms of capital flows.
For example, of one the success story is the Kariba dam constructed between Zambia and
Zimbabwe in the 1950s at a cost of USD$840 million has generated hydro-electric power which
has immensely benefited the two economies since then.

Strengthening the systems of governance. Izobo M (2017) contends that foreign aid enables
African governments to strengthen their institutions by providing educational and technical
support aimed at building strong legislative, executive and judiciary systems to enhance the
effectiveness and efficiency of governments. Moreover, foreign aid can further improve
governance and the respect of the rule of law by reducing corruption through management of a
country’s expenditure and revenue collection in a legitimate manner.

Supporting key sectors of the economy. Foreign aid can be used to support agriculture the
Zimbabwean economy. It has been established that agriculture is the mainstay of the
Zimbabwe’s economy contributing significantly to the economic activities in the country. With
the limited capacity in the budgetary allocations to this sector, foreign aid will be of paramount
importance in propping up this sector which has a potential to alleviate hunger and starvation,
increase food security, contributing to the growth of downstream industries such as food
processing and reducing poverty levels in Zimbabwe. In the same vein, foreign financial
assistance can be applied to develop modern methods of farming such as climate-proof
agriculture in form of irrigation development, development of the sector through investing in
research and development and increase the sustainability of agricultural production.

Improving the livelihoods of the population. Aid can also be used to improve on health and
sanitation in the country. The state of the health infrastructure and health delivery system in
Zimbabwe still leaves a lot to be desired, with the population still suffering from diseases such as
Malaria. The aid funds can be invested in the health systems on the continent which is critical in
the investment in human capital. In the same vein, most Zimbabwean inhabitants have no access
to clean water and sanitary conditions and this calls for financial assistance in such areas to
improve the livelihood of the population on the continent.
Export value addition and beneficiation. Foreign aid if applied to exports promotion through
allocation of the funds to develop exporting industries in Zimbabwe has a potential to lead to the
economic development of the country. In the same regard, import substitution industries can also
be established to save the foreign currencies generated. Furthermore, the quality of the country’s
exports needs further processing and value addition so as to increase the export proceeds. The
proceeds from foreign aid can be used to develop industries that are involved in beneficiation of
natural resources.

Despite the above-mentioned benefits that aid has brought to countries on the African continent
such as Zimbabwe, the recipients of foreign aid has also faced a myriad of challenges which has
escalated poverty levels as well as the stagnation of growth of African economies. The
discussion below focuses on the factors that have led Zimbabwe to be in the quagmire due to
foreign aid.

Conditional loans. Foreign aid has been disbursed to Zimbabwe with conditions attached to it.
In the 1980s and 1990s many African countries accessed aid from International Monetary Fund
and the World bank on conditions of economic stabilisation and structural adjustment.
Stabilisation meant reducing countries’ imbalances to reasonable levels, for example,
government fiscal debts and the import-export ratios whereas structural adjustment was aimed at
encouraging greater trade liberalisation and helping to reduce price and structural rigidities by
such means as removing subsidies.

The economic structural adjustments under the auspices of the International Monetary Fund
(IMF) did not fit well with the structure of the economies on the African continent, of which
some were still running under the communistic and socialistic ideologies and were more of
inward-looking economies. In Zimbabwe, for instance, the Economic Structural Adjustment
Programme (ESAP) failed to yield desirable results and was associated with rising poverty levels
due to massive job losses and retrenchments that ensued as the government was adopting market-
based elements. Such is a case of the conditional nature of foreign aid which makes aid to be
unproductive to African countries.

Debt trap. Foreign aid creates a dependency syndrome to which countries will be caught up in a
debt trap. A huge foreign debt could seriously strain the government in repayment because the
repayment has to be made in foreign currency. This may drive a country into a debt trap, that is a
situation where the government has to borrow to service interest on debt. Zimbabwe was
suspended from accessing loans from the International Monetary Fund back in 2003 when it
failed to service her debt obligations.

In conclusion, foreign aid is beneficial to an economy such as Zimbabwe as it complements the

local resources, but it can be a source of concern if it is used unproductively.

Reference List

1. Beardshaw J et.al (2001) Economics. A Student Guide. 5th Edition. Pearson Education
Limited.
2. Black, Calitz and Steenkamp (1999) Public Economics, 5th Edition. Oxford University
Press. South Africa.
3. Chrystal K.A and Lipsey R.G (1997) Economics for Business and Management. Oxford
University Press.
4. Hussein A.W (2012) Role of International Aid and Open Trade Policies in Rebuilding the
Somali State, Bildhaan: An International Journal of Somali Studies 11.
5. Izobo M (2017) The Impact of Foreign Aid in Africa.
6. Mohr P et.al (2004) Economics for South African Students 3rd Edition. Van Schaik
Publishers, Pretoria, South Africa.
7. Piros C.D and Pinto J.E (2013) Economics for Investment decision makers. CFA
Investment Series.
8. Samuelson P.A and Nordhaus (2010) Economics 19th Edition. Mc-Graw Hill Publishers.
9. Sloman J (2006) Economics 6th Edition. Pearson Education Limited, England.
10. Sollenberg M (2012) A Scramble for Rents: Foreign Aid and Armed Conflict,”
Dissertation presented at Uppsala University.