Wall ST warms up to Zimbabwe's "remarkable improvement"

—————————————————–Zimbabwe is tentatively emerging from a decade of international isolation. Prime Minister Morgan Tsvangirai is currently on a tour of major capitals to drum up support for his fragile, yet promising, four-month-old unity government. 

During his visits to Washington, Brussels, Berlin and London, Mr. Tsvangirai has been asking for more development assistance. The response has been variations on a theme: "We support you in your struggle for democracy but need to see more progress before any real money is forthcoming."

International donors are wary because Robert Mugabe — who systematically destroyed his country’s economy to stay in power and whose lieutenants have arrested and beaten Mr. Tsvangarai several times — remains president. Mugabe’s thugs are also still in place, looking over Mr. Tsvangirai’s shoulder.

Yet despite this imperfect political deal, Zimbabwe has made significant progress in just a few months that provides signs of hope for the future. The worthless Zimbabwean dollar has been scrapped as of June 1, and the U.S. dollar and South African rand are now legal tender. This helped eliminate Zimbabwe’s hyperinflation, which is now effectively zero, compared to billions of percent between mid 2008 and January 2009.

Dollarization, combined with new rules allowing exporters to retain their foreign exchange instead of having to convert into Zimbabwean dollars at official rates, instantly made more businesses profitable. This also has diminished the ruling party’s patronage machine and reduced the policy-making clout of the central bank governor, Gideon Gono, an old Mugabe comrade. An emergency budget has allowed civil servants to start receiving their salaries again, and has begun to restart essential services.

The man primarily responsible for these positive steps is Tendai Biti, the new finance minister and longtime deputy to Mr. Tsvangiari. What’s more, other capable, decent people have replaced Mugabe’s yes-men in most of the critical ministries, such as energy and power development, education and health.

Although the government is short on supplies and materials, it has reopened schools and hospitals and has put food and other commodities back on once empty store shelves. It has also identified and prioritized investment goals in key areas of power generation and transmission, education, health and infrastructure.

These moves have caught the attention of international donors, and they have opened the door a crack toward normalization. Zimbabwe will receive some additional humanitarian aid from the World Bank, Britain, the U.S. and others to get schools and clinics running again.

But nearly all of this money will remain outside government channels. For the donor community to open the aid floodgates to budget support, debt relief and major reconstruction funds will require much more political progress.

Perhaps more important for Zimbabwe’s long-term economic revival, private investors are also taking notice of a possible turnaround. Despite the global economic crisis, there is still considerable foreign capital — including in my own fund, which specializes in portfolio investment in publicly listed companies in the developing world — ready and willing to invest in Zimbabwe’s future.

Capital is already starting to flow again into mining of gold, platinum and diamonds, and the market capitalization of the stock market, with 80 listed companies, is up 127% since March. Fund managers and foreign CEOs are visiting Harare and Bulawayo, the second-largest city, again.

But for significant private money to come, investors will need more confidence that the reforms are irreversible and that political change is gaining momentum. Putting an end to land seizures, clarifying land ownership and protecting private property would be crucial steps in that direction.

Mugabe starved his country when he seized farmland from those who knew how to farm it and redistributed the land to partisans in his Zanu-PF Party. Aside from the immediate economic consequences, the move also sent an alarming signal about his lack of respect for property rights.

Similarly, the restoration of the rule of law is essential. Zimbabwe’s courts will once again need to be independent, and the once-professional police will have to be de-politicized. Lastly, the water and power infrastructure must be rebuilt. This is a prerequisite for the country’s once-vibrant farms and factories to reopen and become sources of jobs and economic growth.

If Prime Minister Tsvangirai and his team can accomplish these ambitious steps, both public and private money will come. Donors and investors are understandably cautious given the risks and inevitable setbacks ahead. Yet the progress that has been made in just the past four months should give us all a reason to take a serious look at Zimbabwe’s opportunities.

Mr. Harmon is chairman of the Caravel Fund and served as president and chief executive of Export-Import Bank of the United States during the Clinton administration. This article was originally published in the Wall ST Journal.