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Fall of Gushungo: the difference between wealth creators & wealth consumers

May 12, 2019

 

Why is it that members of our political class and their associated businesses, formerly seemingly successful, hit the doldrums not long after leaving office?

 

It didn’t take long before ZANU PF veteran Didymus Mutasa’s properties were getting auctioned to satisfy debts. He's now back in the old party, chastened by his experience out in the cold. Soon after falling out of favour, another ZANU PF veteran, Sydney Sekeramayi was in the news, being pursued for huge utility debts. This weekend it was the turn of Gushungo Dairies, a company owned by the Mugabe family. It has obviously fallen on hard times and its properties were being auctioned.

 

They are not alone in this predicament. Others’ wealth acquired during their powerful days is diminishing at a faster rate than it is growing and it is likely there will be more similar stories in he near future.

 

True, the national economy is in bad shape and businesses across the board are suffering under he weight of national economic failure. However, it is arguable that had the Mugabes still been in power, it is unlikely that their flagship business would be suffering the ignominy of publicly auctioning its properties in this manner. Instead, it would probably be winning some awards. It's not long ago that visiting VIPs were being given tours of the business, portrayed as a model of indigenous commercial farming and agricultural processing industry.

 

Ironically, that is precisely the same approach they are taking to current president, Emmerson Mnangagwa's Sherwood farm in Kwekwe.  It's just a repeat of the same old story where those in power are portrayed as successful business people. The truth is that while these people may be good at acquiring cheap wealth by virtue of proximity to power, they are not exactly wired for business. They are wealth consumers, not wealth creators.

 

They struggle after leaving power because they do not understand the concept of capital in the capitalist sense. They are pretend-capitalists, not true capitalists. Most of them have prime assets like huge potentially productive farms which they acquired during the land reform program. But most of them are not as productive as they were before and Zimbabwe's agricultural output has suffered as a result. The crop of politician-farmers does not understand and has not been able to implement the concept of capital as a process.

 

Let us start off with a very rudimentary example to illustrate the difference between a wealth consumer and a wealth creator who understands the concept of capital in the capitalist sense. A wealth consumer gathers money and resources by whatever means and consumes it while a wealth creator uses his money in order to make more money. There are more wealth creators at Siya-so home industry at Magaba than they are in the leafy environs of Glen Lorne.   

 

Two people, X and Y get $1000 each. Both decide to buy a cow each. After a few years, each of them has a sizeable herd of cattle. X sells two-thirds of his herd and buys a brand new Mercedes Benz, which many in the community admire. He acquires new tastes as his lifestyle changes dramatically, appearing in lifestyle magazines as one of the wealthy ones.

 

Y on the other hand patiently grows his herd, relying on his old jalopy. He buys a truck to transport materials on his plot. His kids are at a modest but efficient public school. When he sells some his cattle he builds new facilities for the rest of the herd, helping it grow bigger.

 

By the end of the decade, X’s herd is severely depleted as he struggles to fund his acquired lifestyle. But Y has expanded and he is now producing cheese and other dairy products at his plot of land.

 

The difference between X and Y is that Y understands the concept of capital while X does not. Y decided to grow what he earned because he understood that capital is neither static nor infinite. X, on the other hand, is a typical conspicuous wealth consumer who has no respect for money. He does not understand the concept of capital.

 

The way capital operates in the capitalist sense was described by Marx in the classic formula of “capital”: M-C-M+ (Money - Commodity - More Money). In other words, Money is converted into a Commodity (or service) and that commodity is, in turn, converted into More Money. This process is continuous. It goes on and on. It doesn’t stop. A person who understands capital in this way is always trying to make more money from what he has, not merely to consume and deplete it.

 

This notion of capital is different from how capital is recorded in the financial books as if it were static. Under this notion, capital is a process, not an item. Hence land is not capital unless it is being converted into more money; unless it is part of a process. That's why some economists would refer to it as "dead capital" if it isn't being put to productive use. "Capital" in the capitalist mode of production is always moving; always growing; always producing more, by any means possible, all in pursuit of profit maximisation. If a business does not make a profit, sooner or later it collapses.

 

One major problem, and a great hazard of capitalism is that this process of wealth creation can be severely exploitative. Profit making requires keeping costs at a bare minimum and here labour tends to suffer. Indeed, great vices have been committed in the course of human history in the name of capital: slavery and the slave trade, colonial subjugation, forced labour, fomenting conflict for resources, modern-day slavery, child labour, low wages and sweat-shops are just a few examples.

 

But this dark element, which is important, is not the primary concern of this piece. What is of concern for present purposes is the distinction between those who are able to use money in order to make more money and those who simply consume the money they have without making more from it. In fact, these wealth consumers still exploit others even without generating ore wealth. 

 

Readers of the Bible may find the tale of X and Y familiar because it resonates with the well-known parable of talents. In that parable, those who grew their talents were wealth creators who understood the notion of capital while those who sat on them were not and did not appreciate the idea of capital as a continuous process. It might also resonate with the parable of the prodigal son who took his inheritance and squandered it. That prodigal son did not understand the concept of capital and so instead of growing what he had, he depleted it and returned empty-handed.

 

There are many prodigal sons in the political world; many who squander their talents instead of growing them. Unfortunately, these wealth consumers are admired and attract headlines far more than wealth creators.

 

This phenomenon helps us understand why politically connected persons who, during their time in office, have vast access to money and resources flourish at the time but find themselves impecunious and struggling once they are out of office and without access to cheap money and resources.

 

While in office or close to it, they have access to vast amounts of cheap money from the state and from the private sector. They get huge allowances and benefits from the state, they don’t pay taxes and they can bring goods into the country without paying import duty. They can get cheap credit from financial institutions and they don’t pay their bills to utility companies for water, electricity and even agricultural inputs for their farms. They get access to assets, such as the infamous RBZ Farm Mechanisation Scheme. They also acquire free fuel from the state. They can commandeer prison labour for their farms and factories reducing the costs of production. Gushungo Dairies would almost certainly have been a major beneficiary of state largesse, through these schemes. 

 

But because they have a reliable supply of money and resources from the state and private sector, they aren’t frugal enough. They spend, spend and spend with reckless abandon. Why would they care when it's not their money? They have no loss control systems so those who work for them also extract rents from their businesses. In short, they are powerful people with access to resources but they are not business people. They are not wired for business. They have many talents, which they squander. The problem is that they actually believe the lie that they are wealthy, forgetting that they are merely rent-seekers.

 

The moment they are out of power, the resources’ channel is cut off and their businesses suffer. With no regular supply of cheap money and labour, the cost of doing business rises - in fact, it becomes more realistic, something that they are not used to or prepared for. Suddenly they cannot cope.

 

Creditors who had long exercised forbearance on account of the debtors’ political power and leverage sense a moment of vulnerability and begin to make demands. In fact, it comes as a deluge of demands; a flood which completely overwhelms and suffocates the business.

 

Employees use the opportunity to loot from the company since it never had serious controls and relied on the fear of political power wielded by the owners. Seeing the dwindling fortunes, some employees take the exit option, taking whatever loot they can, leaving the business in the lurch.

 

Without political power, without access to credit and experiencing great financial hemorrhage, the business is forced to plead for protection. First, it seeks administration (judicial management) to protect itself from creditors while it tries one last ditch recovery. Then when this fails it goes into liquidation. If lucky it might be sold off to someone who understands the concept of capital.

 

Basically, the business is broke and cannot continue. Hence you see them auctioning properties in order to salvage something from the business and also to pay creditors who have suddenly found the energy and have become aggressive.

 

In no time, the formerly powerful political characters will be pleading poverty. Whatever money they stashed away, they have been using it to fund an expensive lifestyle they became accustomed to while in office. They have failed to readjust to life after and without office. They forget that they no longer have cheap money which they used to fund that lifestyle.

 

This is how political business types fall from grace. This is how they collapse from the lofty heights conferred by political office. They are not wealth creators. If they were wired for business and understood the M-C-M+ formula they would probably make better use of the vast amounts of money they acquire while in office.

 

It’s hardly surprising that Gushungo Dairies which not long ago was being given dubious awards in recognition of “success” is now virtually broke and auctioning dilapidated machinery and equipment. To be sure, it was already struggling while the Mugabe’s were in office and had power. What saved it then was not financial acumen but political power.

 

What is certain is that it is not the first politically-connected business to suffer that fate and it will not be the last. The current crop of politicians and their businesses is no different. They can flaunt it, yes, but they are not creators of wealth. Without political power, they would struggle just as much. Deep down they know it, which is why they never want to leave office. Yet the irony is that it is these political types and their associates that are counted amongst the wealthiest in the country.

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