Pros and cons of protectionism in business
In Africa, if you mention the word ‘protectionism’ you are immediately branded ‘anti-progress’, you will have statements like ‘build up competitiveness’ hurled at you and end of story.
Well, the more I look into the history of Africa’s economic development or lack of, the more I am convinced that a period of infant industry protection and promotion is exactly what is required to get to that stage where domestic industry can effectively compete on the global stage. Zimbabwe is my point of focus and when protectionism is used in this article this is not to suggest that the country should seal off all its borders to all foreign imports, but rather adopt strategies for imports and exports that facilitates domestic production to build up capacity.
The infant industry protection debate in Zimbabwe is often limited to the competitiveness argument without further exploration and in-depth analysis of the many crippling constraints domestic producers and industry face. Zimbabwean industries are currently operating at below 40% capacity utilization and it is unrealistic to expect domestic manufacturing to build capacity amid unrestrained competition from cheap foreign imports in sectors where products could easily be produced locally. This then begs the question, where is the sense in exposing fledgling domestic industries to competition from more established external producers who already benefit from greater economies of scale? A good example is the Zimbabwe tea blenders and packers who have been facing stiff competition from cheap imports, which constitutes 25% of the domestic market share. Tanganda Tea Company and Arda Katiyo Tea produces 15000 tonnes of tea against local consumption of 4000 tonnes and about 3000 tonnes are supplied to the local market whilst the rest is exported. Local tea blenders and packers have however lost 25% of this market share to imported teas that have flooded the market. The irony is that the imported tea, which constitutes this 25%, is originally Zimbabwe, which is, exported as bulk tea. What this basically means is that the country exports raw tea and then imports that very same tea packaged and more expensive. Now here is an opportunity for the country to protect such a specific sector to allow them time to build capacity and competiveness. Zimbabwe currently has no tariffs on imported packaged tea products from South Africa yet the South Africans have a number of heavy duties, local content provisions and government procurement provisions all that makes it very expensive for Zimbabwe to put her tea products on South African shelves. These are concerns that have been repeatedly raised by relevant stakeholders in these sectors and such concerns have to be taken seriously.
The case for strategic, selective and systematic infant industry protection remains very relevant in the context of Zimbabwe. The South African auto assembling industry is heavily protected and industries such as clothing and textiles are also strategically protected and have been designated under the country’s local content protectionist policies. In Zimbabwe the local car assemblers such as Willowvale and Quest do not appear to benefit from the same South African-style protection and promotion strategies, which is unfortunate. In 2011, President Mugabe gave a clear directive that all government institutions should buy their vehicles locally in order to support the local industry and preserve the country’s limited foreign reserves. The recent case of the State Procurement Board (SPB) awarding the tender for the purchase of 139 pick-up trucks at a cost in excess of US$3 million for the Zimbabwe Electricity Transmission and Distribution Company (ZETDC) to Croco Motors and Paza Buster (PVT) Ltd certainly goes against infant industry protection. This is a clear case for domestic industry promotion where Willowvale or Quest would have been given the tender to assemble these vehicles and the knock-on effect on employment creation and on GDP would have been significant. The idea of awarding the tender to a car import company at the expense of local assemblers goes directly against infant industry protection.
In 2014 Zimbabwe imported close to US$500 million worth of cars mainly from Japan, South Africa and UK at a time when Willowvale and Quest local assemblers are operating at below 10% capacity utilization. Of that US$500 million, how much goes towards the national GDP and how many jobs are created from that? If strategic protectionist policies are implemented and assemblers such as Willowvale and Quest are cushioned from competition to enable them to increase their capacity utilization the gains in GDP terms and employment creation would be significant. Sometimes policy makers have to bite the bullet to forge ahead with certain policies for society to realize the gains of such policies.
Zimbabwe’s borders are way too wide open to facilitate domestic industry revival and growth. There are a number of key sectors that require strategic protection and promotion to enable them to build their capacity. Protection and promotion will have the long-term effects of increased employment creation in local industry and tariffs can help offset foreign dumping and help industries like the clothing and textiles and car assembly industry. Protection in the right sectors will boost domestic industry rather stifle it as many have argued otherwise.
During the Ministry of Finance’s First Quarter Treasury Bulletin of 2015, exports for January 2015 alone amounted to US$276 million and imports amounted to US$538.1 million creating a trade gap of US$262.1 million. Merchandise imports, excluding fuel and electricity and services account for 60% of the country’s import bill, indicating the country’s over-reliance on imported goods and services that can easily be produced locally. There is a highly unbalanced relationship between the country’s exports and imports hence the huge trade deficit. The First Quarter Treasury Bulletin of 2014 from January to June the country’s total exports stood at US$1.2 billion down from US$1.5 billion in the same period in 2013. During the same quarter of January to June 2014 the total import bill stood at US$3 billion, down from US$3.9 billion during the same period in 2013. The major imports for the period January to June 2014 were fuel, food, machinery and equipment, wood, paper and plastic and motor vehicles. Fuel accounted for 25.2% of total imports, machinery and equipment 16.5%, food and beverages 16%, wood, paper and plastic products 12%, motor vehicles 8.2%, metal products 6%, fertilizers and chemicals 4.6%, other manufactured goods 2.7%, clothing and fabrics 2.4%, building materials 1% and transport equipment 0.3%. The 16% share of food and beverages in total imports for this First Quarter of 2014 clearly indicates that the country is importing items that can be made locally and in so doing promote the revival and growth of domestic industry. This is where the infant industry protection argument continues to be relevant and this is not just about protecting everything but rather gradual and strategic opening of the economy.
The First Quarter Treasury Bulletin from January to March 2015 clearly highlights the issue of constraints that impact on competitiveness of domestic industry and hence the urgent need for strategic infant industry protection and promotion. Domestic manufacturing remains severely depressed due to infrastructure and financial constraints. The period from January to March 2015, exports amounted to US$716 million compared to US$627 million in the same quarter in 2014. The import bill for the quarter January to March 2015 stood at US$1.5 billion and the major imports were fuel, food, clothes and textiles and motor accessories. The export of textiles and clothing from Zimbabwe has remained constant at around US$25 million over the period from 2005-2015. Zimbabwe has exported over 74000 tonnes of cotton lint on average over the last 25 years, which is reflective of a lack of value addition and transformation domestically. Fabric exports from Zimbabwe represented total earnings of US$24.4 million between 2009 and 2013. In 2013 alone the fabric export value reached about US$4.2 million.
The value of import of fabrics into Zimbabwe between 2009 and 2013 was US$221 million. This trade deficit of US$196.6 million is unsustainable and makes a very strong case for infant industry protection and promotion. The export of clothing from Zimbabwe amounted to US$42.6 million between 2009 and 2013 and during the same period imports of clothes amounted to a total value of US$98.5 million. T
here are many examples in Zimbabwe where protectionism would facilitate growth if guided by specific indicators and guidelines. Domestic industry protection has to be combined with a robust export strategy. There is however the counter argument against protectionism.