Adam Smith, in his ‘Wealth of the Nations’, advised the Americans not to “artificially promote manufacturing industry and argued that any attempt to stop the importation of European manufactures would obstruct instead of promoting real wealth and greatness”. The Americans did not listen to Adam Smith but rather to their then Treasury Secretary Alexander Hamilton who argued that American industries were still in their infancy and as such could not be expected to compete against the mature industries in the more advanced economies without an initial period of deliberate government promotion and protection.
The prevailing situation Zimbabwe where capacity utilisation has been declining to alarmingly low levels is not sustainable. For domestic manufacturers, competiveness has been diminishing in the face of stiff competition from cheaper imports from much larger manufacturers from neighbouring South Africa and from the Far East, mainly China, who benefit from economies of scale. Zimbabwe’s manufacturing sector is in a dire state due to poor infrastructure as well as shortage of capital, electricity and water. Most companies are operating under 40% of their capacity according to the Zimbabwe Investment Authority.
A good example is the textile manufacturing sector in Zimbabwe. Over the past few years there has been an influx of indigenous clothing manufacturers. However, only a very small number, less than 10%, manufacture for export despite the growing regional market and inroads in past years into new markets mainly in Europe and America (Zimbabwe Investment Council, 2013). There is a great deal of opportunities to develop this side of the industry through investment work with a sound marketing base. The sector has a highly skilled clothing sector which is able to produce clothing to world standard requirements for export (ZIA, 2013) and, importantly, at competitive prices.
The textile industry has gone through a severe down period and requires investment in new technology which will enable it to compete with imports into the Southern African region and the Far East. It is important for local textile manufacturers to focus on competiveness as the ultimate long-term objective but government needs to initially offer the sector a period of infant industry protection as they build up their competiveness.The Zimbabwe Textiles Manufacturers Association recently lamented that current tariffs on finished dyed and printed fabrics at 10% were detrimental to the country’s textile manufacturing sector as we are allowing a finished product into the country which does not require value addition.
Duty on spare parts for machinery, which is currently pegged at between 15% and 40% is also highly prohibitive. According to the Zimbabwe Textiles Manufacturers Association (2014) the current duty exemption structure which allows clothing factories to import finished fabric at 0% duty goes against the principle of industry infant protection. It would be very difficult to revive the ailing textile manufacturing sector by allowing downstream firms to import duty free fabrics that should be made locally.
All economic theories are based on restrictive and unrealistic assumptions and thus are not absolute. Empirical historical and modern-day evidence clearly shows that it is nearly impossible for a developing economy like Zimbabwe to develop without some form of trade protection and subsidies. Evidence shows that trade liberalisation works only when it happens gradually and selectively as part of a long-term industrial policy.
Even the guru of New Trade Theory, Paul Krugman, has changed his position on free trade over time even though he retains his position on competitiveness. Krugman has relaxed his initial assumptions of constant returns to scale and argues that using the protectionist measures to build up a huge industrial base in certain industries will then allow these sectors to dominate the world market. The value of protecting infant industries has been vigorously defended since the 18th century by economists such as Alexander Hamilton in 1791 for the USA trade policy.
Protectionist policies facilitated the development of the Japanese auto industry in the 1950s when quotas and regulations prevented import competition and Japanese companies were encouraged to import foreign production technology but were also required to produce 90% of their parts domestically within five years. Given that our manufacturing sector is emerging from over 10 years of a downturn or should I say still on the ground, thus in its infancy, it cannot be expected to compete against the mature industries in the more advanced regional and advanced international economies without an initial period of deliberate government promotion and protection.
It is going to take time and, more importantly, investment in technological capabilities for manufacturing companies in Zimbabwe to absorb advanced technologies. Without this initial period of protection the sector is going to struggle to survive international competition. The manufacturing sector in Zimbabwe requires government protection and subsidies at the initial stages so that they can absorb the technologies and learn to complete in the global market. It is easy to say that the key to industrialisation is competiveness, not protectionism, but a baby has to learn to crawl before they can walk.
Free trade is one of those theories that is logically consistent with itself but not in the real world as it has not been universally linked to subsequent economic growth. This is evidenced by the economic chaos unleashed by the structural adjustment programmes of the early 1990s in Zimbabwe and other developing countries. Without some sort of infant industry protection the economy will have little hope of diversifying through industrialisation and accelerating growth on a sustainable basis. Zimbabwe’s manufacturing sector, in this early stage of revival, would benefit from this critical period of protection to enable it to maintain output and employment and this will subsequently spearhead economic growth.
All things being equal, lowering the tariffs as has happened in the textile manufacturing sector has indeed made clothes and textiles imports cheaper, benefiting the consumers. However this has had a negative impact on local manufacturers who have been exposed to import competition. It is true that increased import competition may make domestic producers more efficient and the current situation in the textile industry the assumption is that everyone would be better off. However the stark realities on the ground are not necessarily taken into account by new economic theory.
It is important to make a strong argument that premature trade liberalisation has been a failure and characterised by negative economic growth in per-capita terms and collapse of manufacturing with our domestic production swamped by cheap imports as capacity utilisation has dropped to alarmingly low levels. Let me briefly touch on the success story of China which has shown that while some trade liberalisation may be necessary and beneficial, in the early stages of development, some form of protection is still necessary. With very few exceptions, tariff cuts and other measures of trade liberalisation have not brought about the anticipated economic growth and, in a lot of cases, have in fact brought economic collapse. China’s economic success story in the 1990s took place on the background of tariffs over 30% (UNDP, 2003, pg. 29) and Zimbabwe’s current 0% tariff on textile imports will not stimulate the textile manufacturing sector but rather stifle it. However, the relationship between trade policy and growth is likely to be different in terms of structure for countries at different levels of development.
In the 1950s most of the now developed western economies and more recently China and Taiwan in the 1980s had very high tariff rates, averaging 30-40% and protectionist policies in place in the initial stages of their development. As they have developed their economies they have substantially reduced their tariff regimes because they can compete in the world market. Brazil has kept imports very low by imposing very high tariffs which have stimulated their manufacturing sector and exports and, in 2013, the European Union took legal action against Brazil’s high import tariffs on European imports. The concerns expressed by the Zimbabwe Textiles Manufacturers Associations are genuine concerns based on the realities on the ground. Economic theory can help us understand the realities on the ground; however the practical realities on the ground offer us an informed inference into the economic discourse.
I am particularly intrigued by the fact that the USA, the UK and other EU developed economies, Japan, China and more recently countries like Brazil have used an industrial development strategy in which industry protection was key and the most important component in the earlier days of their economic development. I strongly believe that an initial period of protection for the manufacturing sector is necessary and tax rebates for manufacturing inputs especially for spares and machinery parts imports and those inputs used in the production to encourage the emerging industry.
Industry protection however, needs to be combined with an export strategy as export earnings are crucial in allowing the manufacturing sector to upgrade its economic activities as export earnings will provide the means to purchase advanced technologies and machinery and machinery spares and parts. Zimbabwe just like other developing economies has a fundamental right to reconstruct a new future through an initial period of industrial protection and subsidies.
Bernard Bwoni on twitter@bernardbwoni/ www.bernardbwoni.blogspot.com.
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