Should local industry be protected from cheap imports?

"WHEN Zimbabwe begins to deliberately and as much as possible produce what she consumes and consume that which she produces, only then can we begin to see the rise, re-industrialisation, development and creation of value for Zimbabwe.”

The idea of prohibiting certain imports into the country seeks to reduce competition from cheaper imports so that local industry can occupy that space and reduce the import bill. It is a fact that each time we import as a country we are effectively creating jobs elsewhere and, therefore, working against ourselves.

Many countries protect their economies from competition so that they are able to maintain and develop their industrial base, protect local jobs and encourage local investment in those specific sectors.

Countries which became rich by creating higher incomes and high investment returns for investors at some stage protected and nurtured their manufacturing sectors. An example is the West, which deliberately banned the manufacture of specific goods within colonies, thereby allowing them to add value locally to raw materials imported from the colonies and retain that value within their economies.

Zimbabwe has clearly articulated its intentions of reducing imports in order to deal with the trade deficit and add value and beneficiate its raw materials in agriculture and mining sectors. This will allow the creation of local jobs and retention of value within our local industry.

As a result of this we have seen some investors in the food processing industry coming into the country and creating jobs.

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While it is critical that we protect local industry it is important that local consumers are not the losers. The protection of local industry from imports can also lead to price monopoly, especially when there are a few players.

In cases whereby local industry does not have or has not developed adequate capacity to meet local demand, this can lead to shortages and price hikes to the detriment of the consumer. The lack of foreign exchange to import essential raw materials can also result in local industries being unable to meet local demand and that has been the case with many companies in Zimbabwe. This means that even if they may have the capacity, they are unable to fully utilise that capacity to meet market demand.

For example, the Reserve Bank of Zimbabwe once noted that although the protection of local industry is key to growth, the resultant demand for foreign exchange for imported input of raw materials had increased significantly and created a dilemma. Added to this is the issue of excessive profiteering whereby local companies can take advantage of their dominance and pass on higher prices to consumers because of lack of competition.

What is the best way forward?

It is critical that we plan effectively. The best route, in my opinion, is to establish an industrial body which looks at investment and development of our manufacturing sector to replace imports over the medium to long term so that once committed we do not go backwards. When we commit to protecting local industry it is important that they have access to adequate capital over an agreed period. It is also key that we ensure that there is adequate competition within these sectors to avoid price monopolies.

Some very thought provoking insightful research has been done on how to industrialise and I want to point out to my readers the work done by Erik Reinert in his book: How rich countries got rich and why poor countries stay poor. Central to his insights, is that countries wishing to industrialise must endeavour to emulate industrialised countries, learn and understand what they actually did to industrialise as opposed to what they may prescribe to other countries who wish to take the same path.

Reinert studied 500 years of economic developmental policies in what are now industrialised countries and what is indeed striking is that the now industrialised countries took a route which they now actively discourage developing countries to take.

In his book Reinert suggests what he terms “the toolbox for economic emulation and development” for those countries wishing to implement sustainable developmental policies through industrialisation.

His advice is informed by the policies which the now industrialised countries actually implemented.

His advice is informed by the policies which the now industrialised countries actually implemented.

• First, it is important to target support and protect of economic activities which render increasing returns. The export of primary products to developed economies keeps poor countries poor and they must move away from such economic activities which create decreasing returns and move towards manufacturing and services sectors which create increasing returns. Decreasing returns occur when unit costs of production increase with increased volumes, while increasing returns are those activities that decrease unit costs and increase volumes.
• Second, temporary monopoly rights, patents and protection must be provided for local companies which are involved in increasing return activities, including geographical exclusivity. It is necessary to provide all the necessary support and to protect such economic activities from foreign competition until such time these sectors are able to compete globally. This allows such economic activities to grow and build the necessary economies of scale.
• Third, establish a manufacturing sector at all costs. “It is better to have a badly managed manufacturing sector than none at all.” The synergies or direct and indirect linkages created by a manufacturing sector are critical for development. A manufacturing sector increases value addition and gross domestic product, increases employment levels and incomes and also solves the balance of payments.
• Fourth, offer tax breaks for targeted activities, thus easing the cost of doing business. Also offer cheaper credit and export incentives for value added exports in order to encourage their local manufacture.
• Fifth, is to establish export taxes for raw materials, thus making it unattractive to export raw products and more expensive to foreign buyers. This must be coupled with string promotion of import substitution and deliberate consumption of locally made goods. It will be necessary to develop local manufacturing capacity using these raw materials.

Doing these will ensure an economy begins the process of localised industrialisation. The protection, promotion and support of those economic activities which create local value and higher incomes are the underlying principles. A clinical, well researched and effectively implemented local industrialisation strategy is, therefore, key.

• Vince Musewe is an independent economist. You can contact him directly on vtmusewe@gmail.com