Honourable Minister Bimha, I would like
to bring your attention to the situation prevailing in the country where
capacity utilisation in the textile manufacturing sector has plunged from 44%
in 2012 to 39.6% in 2013 and still declining. For the local
manufacturer 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. The country’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
The textile manufacturing sector in
Zimbabwe is wholly owned by Zimbabweans who own the majority of the companies.
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. 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 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 infant industry
protection as they build up their competiveness.
Honourable Minister, the current tariffs on finished dyed and printed
fabrics at 10% is
detrimental to the country’s textile manufacturing sector as we are allowing a
finished product into the country which does not require value addition. The
duty on spare parts for machinery 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.
Honourable Minister, let me start by
acknowledging the fact that all economic theories are based on restrictive and
unrealistic assumptions and thus not absolute. However that does not diminish
their relevance to economics. Paul Krugman’s New Trade Theory predicts that as
trade barriers are reduced, increasing-returns industry concentrates in the
large market (Brulhart, 1998). However 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
(Chang, 2007). Evidence shows that trade liberalisation works only when it
happens gradually and selectively as part of a long-term industrial policy
(Rodriguez and Rodrik, 1999). Even Krugman has changed his position on free
trade over time but he retains his position on competitiveness (Brulhart, 1998).
New trade theory is often based on assumptions such as monopolistic competition
and increasing returns to scale and that all firms are symmetrical meaning that
they have same production coefficients (Krugman, 1995). The
same theorists have however relaxed the assumption of constant returns to scale
and some argue 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 (Chang, 2007). Some economic
theorists have argued that protectionist policies facilitated that 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 required to produce 90% of their parts
domestically within 5 years (Grubel and Johnson, 1967).
Honourable Minister Bimha, one of the
greatest economists in the world, Adam Smith in his book Wealth of the Nations
(1776) advised the Americans not to ‘artificially promote manufacturing industry
and stressed that any attempt to stop the importation of European manufactures
would hinder instead of facilitate the progress of their country towards real
wealth and greatness (Chang, 2002). The developed countries that have succeeded
in developing their economies have not exactly followed Smith’s advice. Against
the urgings of Adam Smith (Chang 2007) the first US Treasury Secretary
Alexander Hamilton (Hamilton, A.1791 [2001] proposed a policy package that
would provide tariff protection and government subsidies to the country’s
emerging manufacturing industries. Honourable Minister, given that our textile manufacturing
sector is emerging from over 10 years of a downturn thus in its infancy, 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 textile manufacturing
companies in Zimbabwe to absorb advanced technologies. Honourable Minister,
without an initial period of protection the sector is going to struggle to
survive the international competition.
Protectionism
versus Competiveness
Honourable Minister the revival of the
textile manufacturing in Zimbabwe requires government protection and subsidies
at the initial stages so that we 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. Economic literature considers that import
restrictions of any kind create an anti-export bias by raising the price of
importable goods relative to exportable goods (McCulloch, Winter and Cirera,
2001). The argument from new economic theory is that the removal of this bias
through trade liberalisation will encourage a shift of resources from the
production of import substitutes to the production of export-orientated goods (World
Bank, 2003). Honourable Minister, as you are aware free trade is one of those
theories that is logically consistent in theory but possibly 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 our economy will have little
hope of diversifying through industrialisation and accelerating growth on a
sustainable basis. Our textile 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.
Increasing
Returns to Scale
Honourable Minister it has been argued that
the distinction between international and regional trade economics is no longer
valid in a world where boundaries based on economics are becoming increasingly
different from political boundaries (Brulhart, 1998). Returns to scale explain
the behaviour of rate of increase in the output or production to the subsequent
increase in the inputs (Johnson, 1982). All things being equal, lowering the
tariffs as has happened in the textile manufacturing sector has indeed made
imports cheaper benefiting the consumers, however this has had a negative
impact on local manufacturers who have been exposed to the import competition.
It is true that increased import competition may make domestic producers more
efficient and the current situation prevailing in the textile industry the
assumption is that everyone would be better off. However the stack realities on
the ground are not necessarily taken into account by new economic theory.
Economies
of Scale
Economies of scale cannot be achieve without
entering the export market early on and if the country gets the production
scale wrong the unit production can easily double (Johnson, 1982). However when
there are economies of scale it is also possible that countries may be locked
in to disadvantageous patterns of trade (Brulhart, 2008). Krugman’s argument
that trade is largely shaped by economies of scale is relevant due to the fact
that those sectors with most production will be more profitable and will therefore
attract even more production (Krugman, 1982). Honourable Minister, from
Krugman’s argument it is evident that for our local textile industry to revive
successfully that depends on their ability to raise productivity to serve the
domestic market and with economies of scale in the long run, stimulate exports.
.
Proposed course of action to take
Honourable
Minister, 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, collapse of manufacturing, 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 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. Honourable Minister it is important to note that 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 tariff of 0% on textile
imports will not stimulate the textile manufacturing sector but rather stifle
it. The relationship between trade policy and growth is likely to be different
in terms of structure for countries at different levels of development (Chang,
2007).
In the 1950s
most of the now developed western economies and more 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 tariffs 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 (Jones, 2013). Honourable Minister my proposal is going
back to basics if we are to revive our textile manufacturing sector. 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 offers us an informed inference into the economic discourse. Krugman
stresses the changes in the distribution of income among the developed economies
as key to understanding and accounting for the evident expansion of trade in
relation to income (Brulhart, 1998). Thus as there is some form of equitable
distribution of income, the model predicts that trade volumes should rise
(Krugman, 1995 cited in Brulhart, 1998). Honourable I am 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 textile manufacturing sector in necessary and as
the Zimbabwe Textiles Manufacturers have lamented, tax rebates for
manufacturing inputs especially for spares and machinery parts imports and
those inputs used in the textile production to encourage the emerging industry.
Our infant industry protection needs to be
combined with an export strategy as export earnings are crucial in allowing the
textiles sector to upgrade its economic activities as export earnings will
provide the means to purchase advanced technologies and machinery and machinery
spares and parts. Honourable Minister, the country’s manufacturing sector has a
fundamental right to reconstruct a new future through an initial period of
industrial protection and subsidies.
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