To protect or not to protect local industry?

Due to recent spikes in prices of  basic commodities such as cooking oil and sugar, the Government has decided to re-open the borders and allow the importation of products which were prohibited by ISI 22. Is this the right response?

There are many arguments for and against protecting the economy from cheaper imports.

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.

On the other hand, 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 where there are a few players.

In cases where 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 input 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 (RBZ) 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 where 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?

Clearly in order to avoid a disaster, the Government has rightly suspended import restrictions under ISI 22 of essential commodities especially as we go towards the festive season. This is hopefully a temporary measure to give consumers relief and push local pricing downwards.

However, although necessary, this postpones the establishment of a local industrial capacity to manufacture these items locally and could work against those who have invested in that sector.

Policy changes are never an attractive phenomenon to investors who want consistent long term policies so that they can plan and invest over the long term.

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 so that we don’t get price monopolies.

A clinical, well researched and effectively implemented industrialisation strategy is therefore key.

Vince Musewe is an economist and economic development policy advisor. You may contact him on vtmusewe@gmail.com