Deindustrialisation in Zimbabwe





INTRODUCTION

The objective of any government should be the sustained prosperity of   the   nation,   state,   province,   city   or   district,   depending   on   its geographical   focus.   Among   others   this   means   that   they   should   be creating a suitable business environment, along with the provision of supporting   public   services   for   businesses.   This   means   that governments   should   take   constructive   actions   to   create   an environment that supports increasing productivity.  The challenge of industrialization in the twenty-first century differs in several ways from the experiences of developed countries when they initially industrialized in the nineteenth century, as well as developing countries that rapidly industrialized in the twentieth century. One important difference is that many countries have in fact experienced deindustrialization in recent times. Deindustrialization occurred in most upper-income countries over the past few decades, but it has become increasingly prevalent in middle-income countries as well.

By Rutendo P Nyagope

Body

Zimbabwe has agonised large-scale de-industrialisation since 1995 that has destined the bulk of the population to a grinding subsistence life as communal and resettlement farmers, according to the latest United Nations (UN 2006) poverty assessment report on the country. All surfaces of the crisis-sapped country’s industrial and commercial sectors had declined drastically leaving only agriculture and most of it at subsistence level – as the main economic activity. For example, the manufacturing sector, a vital cog of the economy, declined from employing 10 percent of labour to employing only four percent. The services industry shed jobs leaving it employing nine percent of labour from the 19 percent it employed before 1995.

Deindustrialisation has reached catastrophic levels with dire consequences for the country’s struggling economy, the Confederation of Zimbabwe Industries (CZI) has warned. In its 2014 State of the Manufacturing Sector Survey, the industry lobby group said companies in Zimbabwe were under serious threat with capacity utilisation continuing to decline.

“The slow-down being experienced in the economy at large has not spared the manufacturing sector. In 2014, average capacity utilisation continued to decline, shedding 3.3 percentage points to 36.3%,” reads the report.  “Quite telling is the prolonged effects of power cuts and costs, liquidity challenges, low domestic demand and many others on the performance of the manufacturing industry,” CZI (2014).  According to the CZI the, “challenges facing the economy are so intertwined that sometimes it is not easy to separate the causes from effects”.

These would be critical for replacing the short-term expensive loans that have been granted by local financial institutions since the commencement of the multiple currency system.

Says the CZI: “An analysis of these challenges shows that the economy has failed to sustain the strong growth trajectory stimulated by the liberalisation of the foreign exchange system in 2009 after failing to attract critical offshore financial inflows (both foreign direct investment (FDI) and long-term lines of credit).

It was the view of the majority of respondents that the current economic environment was not conducive for business.  The tight liquidity situation has further exacerbated the situation for most companies affecting cash flow positions thus affecting operations. It was the general view that there was need for a shift in policies to ensure investor confidence to drive investment inflows.” The bleak outlook can however, be turned around by stimulating production through pursuing consistent, transparent and predictable economic policies.

Industrialisation strategies

Industrialisation strategies aim at increasing competitiveness of domestic industries. Typical industrialisation strategies build technical, managerial and financial capacities and provide incentives to innovate. There are seven wide-ranging industrialisation strategies:

1.     Import substitution

2.     Manufacturing of own natural resources

3.     Industrial cooperation with other countries

4.     Cartel-formation

5.     Central planned economies

6.     Open-door

7.     Informal sector, small scale industries

Each of the problems has affected output. If we want to start fixing the problems, we have to restore output, which means restoring our ability to produce. And for that we need investment. But the messages we are sending to potential investors is not one that makes them willing to consider Zimbabwe as an option.

Even the former employees of Zimbabwean companies, thousands of whom had to leave the country when the waves of consequences reached them, have yet to hear news that will encourage them to return home. Since 1995 Zimbabwe has experienced a process of de-industrialisation with the large majority (of the people) becoming largely dependent on communal and resettlement agriculture, a sector where there is high poverty prevalence,” UN report.

Causes of deindustrialisation

The Zimbabwe government inherited various controls used by the Rhodesian government including import substitution strategy in the context of command economy (UNDP, 2008). However, diminishing demand of Zimbabwean exports began to be experienced, there was also a decline in investment and capital formation and a severe shortage of foreign currency. The combination of all the factors to be discussed led to a recession and the government accepted International Monetary Fund (IMF) Economic Structural Adjustment Programme (ESAP) implemented in 1990-1996 (UNDP, 2008).  One of the major components of ESAP was trade liberalisation. Its objectives were to remove exports incentives, abolition of imports licensing, removal of foreign currency controls, reduction of tariffs, and removal of surtax and achievement of 9% annual export growth rate (Tekere, 2001). UNDP (2008) further add an important objective of trade liberalisation was to move away from import substitution strategy to an open market driven economy.  Some of the key points that led to the deindustrialisation are discussed below:

Poor policies and low capacity utilisation

Low capacity utilisation, working capital constraints and the government’s indigenisation policy, among other factors, have caused the de-industrialisation of Zimbabwe, a study conducted by the National University of Science and Technology (NUST) revealed. The study, commissioned in September 2011, says more than 73% of interviewed industrial companies’ capacity utilisation was low with most operating in “survival mode”.
The objective of the study was to investigate industrial manufacturing level and state of the business environment in Bulawayo in the 1960s to 1980, 1980 to 2000 and 2000 to date.
According to the study, relocation of industry dates back to pre-Independence period and accelerated after 1980 because certain economic and political realities favoured relocation to Harare.
The companies, according to the study, attributed low levels of capacity utilisation to loss of skilled labour, a shrinking market and obsolete equipment.  Out of the companies surveyed, the 40% that experienced high labour turnover between 2000 and 2009 were metalworking and mining-related industries.  “The relocation of businesses from Bulawayo has been reducing the customer base of industrial manufacturers over the years,” the study shows.  The supplier base for industry has similarly been eroded.  The study also noted purchasing power of the Bulawayo population was very low, adding poverty levels were very high.

High interest rates and scarcity of resources
In addition, the interest rates are high to the point of making it not feasible to earn a profit. Raw materials such as agricultural produce and steel products, once available in the country are now scarce, forcing companies to import.
This led to increased operating costs. Erratic power supply had also contributed to the problems facing companies.  High cost of utilities like electricity, water and rates is not helping the situation.

The indigenisation policy

John Robertson, a leading independent economist, said the de-industrialisation has been exacerbated by policies that are not investor friendly.  In the face of the government indigenisation drive, the external parent companies concerned have since backed away from investing in their Zimbabwe entities and hence those companies are on the verge of collapse.  Competition from cheap imports had slowed down turnover.

Furthermore, the idea of the government of Zimbabwe of 51/49% ownership has scared away investors who were willing to devote their funds. Unfortunately, government seems to believe that it has simply to describe Zimbabwe’s natural endowments and economic potential in an enormously positive light, all of these problems become too small to worry anybody. But this remarkable potential has not proved to be enough to offset investors’ concerns. Investors know what they want and they make their own assessments about whether the investment climate needed to realise the promises is present in Zimbabwe.  Most of the investors are briefcase investors, once they perceive any uncalculated risk in their investments, they flee away.  As a result of indigenisation, most manufacturing firms in Zimbabwe which were being owned by foreigners closed down.

As a result, the ways the problems have been handled have all led to falls in output, the consequences of which have been falls in jobs, export revenues, imports, taxes, electricity, water, education, health and in the quality of just about everything. Indigenisation proposals seem highly likely to repeat the pattern.

However, the economy is making it difficult for foreign investors to bring their money and expertise here. Unless the indigenisation policy is reversed, Zimbabwe will continue to de-industrialise.

Land reform

While the emphasis might be of their decisions to migrate directly to the consequences of Land Reform, many would prefer to put the emphasis on another, wider issue, the country’s abrogation of the rule of law. The politically chosen moves impacted most directly on civil rights, property rights and contractual obligations. Land was confiscated, but so were financial assets such as pension funds, savings accounts and bank balances.  As full adherence of ownership rights forms the foundation of all investment decisions, foreign investors as well as domestic investors are quick to argue that Zimbabwe’s recent departures from international standards of behaviour and normal business procedures can be directly linked to decisions to suspend or cancel investment plans. Unless give reason to change their minds, their investment funds and emotional commitments will go elsewhere.

 

To add on, by land reform, most persistent and well known farmers were sent away.  This implies there is nothing to process as raw materials to have finished products.  Most A2 farmers who were awarded 15hactares through the land reform are sub-standard when it comes to output expected.  For there to be industrialisation, there is need to have the inputs or the factors of production.  On the other hand, by encouraging people to have farms all alone, that factor shows that the government of Zimbabwe has encouraged deindustrialisation of its economy.  This can be further elucidated by the definition of industrialisation which states that there should be transformation from agrarian based to a more of mechanised state.

 

Unemployment
Since 2009, numerous firms have closed shop with more than 200 000 workers losing jobs, despite government’s efforts to bail out struggling companies.  If a country is industrialised, one of the key indicator is high employment rates because of mechanisation.   “Labour policies in this country make it very costly to retrench, so when companies are not performing well the only option they have is to shut down,” Robertson (2011).  “Regulations in the country also make it difficult to register a company. The process can take up to months before anyone can get a company license. Investors do not want to face such hurdles and they end up taking their money elsewhere,” he said.

The African Development Bank (AfDB) has also noted that although the de-industrialisation of Bulawayo has generated a lot of attention, it appeared the pattern was the same across many cities outside Harare.  ‘The imminent closure of Karina Textiles, which was the sole manufacturer of carpets and hand-knitting yarn in Zimbabwe, is one example of de-industrialisation of Mutare. Other companies based in Mutare that have also closed shop include PG Plate Glass, Zimboard, Mutare Board & Paper Mills, Hunyani Papers, and Cairns Food,’ said AfDB.  This left a lot of Zimbabweans unemployed meaning there was no longer mechanisation taking place.

Lethargic growth approach by politicians
Bulawayo, Zimbabwe’s second largest city, has been deserted by industrial firms due to a number of factors, key among them a sluggish approach to the growth of the city by politicians and acute water shortages.  The city was once considered key to the economic scheme of things due to its proximity to key markets, notably South Africa, Botswana, Namibia and Zambia.  This left Bulawayo a deindustrialised area.

AfDB said that the relocation of companies from other towns to Harare was a clear signal that distance from the capital city is proving to be a significant determinant of production costs, while the closure of monopolies is puzzling.  Given that demand was almost assured, the companies could have survived with re-tooling and modern technology after overhauling the dilapidated plants and equipment.
The Confederation of Zimbabwe Industries (CZI) warned that Zimbabwe’s manufacturing industry was in crisis with capacity utilisation down 13 percent and firms under-performing due to erratic power supplies and lack of capital

The ZimAsset

Faced with this harsh economic reality, one would have expected Zanu PF policy wonks that drafted the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (ZimAsset) document to think outside the box in crafting a blueprint that would chart a path towards creating a conducive environment for recovery and sustainable growth. What many Zimbabweans expected was a framework for industrial revival and job creation. Sadly, ZimAsset fails this simple test and will not drag the economy out of the pothole it is stuck in.

ZimAsset’s proposals for the agricultural sector is a sick-joke. The same failed strategies that have resulted in the country going from Africa’s breadbasket to a basket case are recycled. Instead of addressing the biggest problem confronting the agricultural sector and industrialisation, which is that of land being rendered dead capital by the absence of security, the authors of ZimAsset regurgitate the same tired mantra of “government support to agriculture”.  This document is mainly supporting the citizens to be more agrarian which the opposite of industrialisation is.

 

Strategies to reverse deindustrialisation trends

After all the catastrophes of the economy suffered, the country, through the government must bear in mind that there is a life to live.  There is need for turnaround strategies to get everything on track and back to normal.  Some of the strategies that can be used to foster industrialisation are discussed below:

Globalisation and international development

Although the impact of globalisation and regional integration may be exaggerated, it is taking place and do have impacts on most of the national economies.  Most economies become more open. There are less trade barriers, more FDI, more mobile finance and so on. This openness means that countries are exposed to externalities.  This result in opportunities in foreign markets, but also may cause temporary or permanent crises.   It is certainly true that governments applying traditional economic interventions may not have the same control on the economy, as open economies do expose themselves to foreign risks, and therefore governments have to search for alternative means to enable their domestic industries to exploit opportunities and counter treats. More than ever the policies with regard to macro-economic stability, industry, technology and trade should be coordinated if not integrated.

The term “globalisation” refers to growing trade and foreign direct investments. Many countries have adopted policies supporting more trade and foreign direct investment. For example, evidence shows that most old industrialised countries do not trade more than they did a century ago. Their imports from traditional and transitional economies are not higher than 3 percent. Small industrialised countries import more from the developing countries, but the majority of their imports come from other industrialised nations. There was a major increase in foreign direct investments in the old industrialised countries. However the percentage of foreign direct investment in the traditional economies is extremely low, less than 1 percent and it is decreasing. Another indicator of globalisation could be trade in patents, but again the overall majority of the obvious owners remain in the old industrialised countries. The location of the copyrights still depends on the home-nation of the industries.

 

Attraction of FDI

FDI should be used selectively as a tool for industrialisation and export expansion. It is important for countries to be able to control foreign exchange earnings and spending by foreign companies, for example, by ensuring that a proportion of their inputs are purchased locally. The policies reviewed by the government should reveal a consistent preference for export-led growth and the attraction of FDI. Investment regimes are generally very open and offer attractive tax, customs and locational benefits.  Private investment should undoubtedly be a major, if not the main, engine of entrepreneurship and economic activity, the emphasis on FDI particularly for export activities, raises several questions.

FDI which would flow to Zimbabwe will tend to highlight productive patterns by concentrating on enclaves of export-oriented primary production or natural resources using imported technology and with limited linkages to the rest of the economy (Milberg, 2004). The examples of mining, agro-processing and more textiles and clothing are cases in. For this reason, restricting benefits to priority investments (technology) or non-traditional sectors and technologies can prove very strategic.

FDI policies need to be linked to a wider national development strategy with policy measures for upgrading activities and integrating new value chains. Such measures can include reverse engineering of imported goods, technology screening, performance criteria, domestic content agreements, prohibited entry into infant sectors, and exchange controls.  To ensure that the host country derives substantial benefits from FDI, it is important also to impose performance or qualitative requirements for foreign firms to hire and train local manpower, transfer technology and skills, use local inputs and so on.

Risk sharing with private firms

Risks and uncertainties have far-reaching implications for economic growth as private firms are not able to invest in high-risk projects. In the absence of a well-functioning financial market which allows the amalgamating of risk involved in capital investment, one bad draw from a random experiment will drive the investor off the scene. The Zimbabwean experience suggests how risk sharing between the government and private firms can affect the process of rapid industrialization and product diversification.

The Zimbabwean government will have to act as an active risk partner for all industrial firms chosen to participate in strategic projects.  In practice, the risk-sharing scheme should be established by the state’s control over finance. The government’s commitment to risk partnership largely motivates private entrepreneurship and allows the credit-based economy and its highly leveraged firms to explore risky investment opportunities with long-term objectives in mind thereby encouraging high level industrialisation.

Introduction of meaningful and viable businesses

When successful businesses are formed, many other business opportunities would emerge as they expand, and in the process, as the broadening spectrum of activities leads to the development of larger urbanised communities, yet more companies would be required to cater to their needs and would contribute further to employment and infrastructural development.

As these openings are taken up, yet more jobs would be created and as new skills are acquired, more foreign currency savings would be realised. As has already happened with the road-building consortium that was formed to build the road used by ZIMPLATS, the most successful of these businesses would enjoy prospects of winning contracts in neighbouring countries.

 

Export Promotions

From the beginning of their first Five-Year Economic Development Plan in 1962, the Korean government adopted an export promotion strategy rather than an import substitution po1icy.  The government strongly supported exporting firms with various incentive measures, including favourable treatment in the allocation of credit and in the taxation system.

The system of export financing played a critical role in supporting export industries until the mid-1980s when the Korean current account recorded a surplus. The essence of the system was the Bank of Korea’s (BOK’s) automatic rediscounting policy, which supplied credit via commercial banks to exporting firms who received letters of credit. The central bank‘s discount loans were also extended to reshipment exports, as well as to imports of raw material; and intermediate goods for export use and to the purchase of export content from local suppliers.

The Zimbabwean government can also take this strategy to resuscitate industrialisation.  By this, the government will be trying to correct the balance of payment deficit hence making the economy favourable for trade and industrialising.  Encouraging local firms to export play an indirect important role of encouraging to add value to their products.  By adding value, for instance maize to mealie-meal, we need the grinding process, hence mechanisation.  The government can also initiated close consultation with the export industries and monitor the performance of supported firms through monthly export promotion expansion meetings.

However, there is significant controversy over the effectiveness of Export Processing Zones in fostering growth, particularly because of the absence of forward and backward links with domestic firms and the rest of the economy. Blecker (1999) noted that export-led growth cannot be pursued by all countries at the same time. Export promotion requires that at the other end there is a country with an appetite for imports. The export-driven strategy is once again being questioned, with China and other export dependent countries being hit by the slump in US and global demand.

Formulation of sound policies

Governments should realise that both the planned economies and laissez faire ones are ideals that have resulted in serious problems due to respectively government and market failures. Governments have a role to regulate and kindle economic activities.  However, the government should comprehend that they will never have complete control over its society. At best, it can influence some of the performers and factors.  Persistent consultation with the private sector, exporters, labour organisations and representatives of the informal economy is therefore crucial to shape successful policies.

These consultations provide important feedback of existing and new government policies, trends with regard to production and markets.  Only when economic goals will not be achieved without public intervention, the government should impede in the economy.

Producers and consumers similar, may not have the capacities or the incentive structure may hamper these performers to contribute sufficiently to these economic goals. Typical examples of government interventions are the provision of education, control of public health and incentives to invest in Research and Development.

Industrial policy usually addresses multiple objectives, like employment creation, increased output, more even income distribution, promotion of strategic domestic industries and enhanced technological capacity. In most cases industrial policies pursue these objectives through long-run productivity improvements. The government should also have an industrialisation strategy.  An industrialisation strategy is simply a broad policy whereby the government expresses in global terms how they intent to support economic activities in their country.

Privatisation

A lot was said and written about the causes of the fall of the Berlin wall and the new transition economies. The past central controlled economies started to privatise their assets and move towards a market economy.  The evolution was far from smooth.  Many transition economies face high inflation and unemployment.  Most importantly, it only succeeds partially in creating new entrepreneurs and competition. They create a capitalist society in which a certain best managed to create monopolies through ownership of capital assets. These arbitrageurs and speculators in capital assets became extremely wealthy. Notably the new elite of the free market economy had a Marxist party background or had strong links with them. As many of the state enterprises are nearly bankrupt, the elite are able to purchase the capital assets far below the real costs. They are also able to purchase their investments with risk free loans. The new private owners of the former state enterprises cut cost through reducing of provision of social services.

Privatisation of state owned enterprises changes the environment in which the management of the privatised company has to operate.  Governments no longer finance the losses of the companies and also allow the privatised companies to earn profit hence encouraging the best ways of maximum employment of resources and capacity utilisation in the organisation.

Import substitution strategy

Import substitution industrialisation is most commonly referred to as “trade and economic policy based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products” (Nkwocha, 2012).  The objective of import substitution policy sought to develop industries in a protected environment rather than depend upon the international economy as the ‘engine’ of growth. Thus the goal is to build industries competent of manufacturing substitutes to expensive imports whilst promoting industrial growth and expanding the internal economy. This leads to the notion that import substitution policy would generate a process driven my learning through exposure to new ideas and methods that would extend into the entire economy (Dev, 2003, pp. 58).

Consequently, the capacity of import substitution strategy success by developmental means is largely determined by the way in which such policies are implemented. This include the ability of government to strategize as well as their capacity to plan and re-plan. In correspondence, the key to import substitution strategy or any form of industrialisation for that matter is not minimal state intervention as neo-liberals would argue, however, the capacity and willingness of governments to learn and reform weak policies (Bruton, 1996, pp. 930).

This can be evidenced by Asian countries, from building a technology base, they moved towards greater innovation strategies and attempted to build their own technologies. Furthermore, development strategies of Brazil was centred on increasing the levels of local technological research in order to establish new industries.

 

Conclusion

The importance of industrialisation as an engine of economic growth and development cannot be inflated. Industrial production creates job opportunities at higher skill levels, facilitates denser links across the services and agricultural sectors between rural and urban economies and between consumer, intermediate and capital goods industries. Prices of manufactured exports will be less unpredictable and less susceptible to long-term deterioration than those of primary goods, making it particularly strategic in highly commodity-dependent developing countries like Zimbabwe. In addition, industrialisation is a critical tool in poverty eradication, employment generation, and regional development policies. Finally, it can offshoot technological advancement and innovation as well as productivity gain and is hence able to play the development role more suitably than the agricultural sector.




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