The collapse of Zimbabwe

By Anthony Batty | 10 December 2005

How the Loss of Property Rights Caused Zimbabwe's Collapse (PDF) was published recently by the Cato Institute.

For development to happen, it is important to have stable and secure property rights. A seminal work in this regard is a report by Williams in 1975 ("The Extent and Significance of Nationalization of Foreign-owned Assets in Developing Countries, 1956-1972", Oxford Economic Papers). He found that in developing countries from 1956 to 1972 governments nationalised about 19% of foreign capital. Furthermore the compensation paid was only around 41% of the book value of these companies.

While in the short term governments may see the expropriation of private property as a viable policy option, in the long term this will only harm the economy. Rational investors will demand a risk premium for investing in developing countries (if rates of return are the same then why invest where your money is not secure?).

This risk premium will cause the interest rate to be higher than it would otherwise be, thereby reducing inflows of capital. This causes the opportunity cost of a short term gain to the government to be the loss of investment that would provide jobs, income, improved life expectancy and a plethora of other indicators. Even worse capital could flee the country totally, leaving the economy in ruins - as happened in Uganda under Idi Amin (although in this case the capital was Human Capital and left involuntarily).