The Challenges of Industrial Development Policy Design in a Post-Liberalisation Era – the case of Zimbabwe
Brian Mureverwi, tralac Intern, highlights the essential components of a dynamic industrial development policy using the case of Zimbabwe
In October 2015, the Confederation of Zimbabwe Industries (CZI) released data on capacity utilisation in Zimbabwe’s industrial sector; indicating that capacity utilisation had fallen to 34.3% in 2015, from 36.1% in 2014. Capacity utilisation has been falling consistently from 73% in 1998, 60% in 2004, and 44% in 2012.
Zimbabwe’s growth projections reflect this industrial decline. The Ministry of Finance published the 2016 budget statement in November, with a revised 1.5% estimated GDP growth for 2015, and a projected sluggish growth of 2.7% in 2016. GDP growth has been sliding from 10.6% in 2012, 4.5% in 2013, and 3.8% in 2014. These statistics portray a gloomy picture of a once vibrant Southern African country. Perhaps unpacking the factors for the declining performance of the economic indicators can help understand the policy challenges.
The CZI Manufacturing Sector Report 2015 indicates that the challenges facing industry emanate from inconsistent government policies as well as policy uncertainty, unclear property rights, country risk perception, power shortages, high cost of doing business, low domestic demand, high import volumes, inefficient services delivery from government owned business entities, among others. The budget statement notes the challenges associated with the slowdown in global economy, low commodity prices especially for minerals, poor performance in the agricultural sector, liquidity challenges, widening balance of trade deficit, among others. Zimbabwe’s key export commodities are unprocessed minerals, tobacco, cotton, and sugar, while top import commodities are composed of food products, fossil fuels, and vehicles.
It is quite clear that industrial development in Zimbabwe has not proceeded according to national expectations. This may be explained by the fact that although the plans are presented as medium term, they have in essence become short-term macro-economic management tools. The annual budgets, the means for translating the national plans into actual development programmes, are more influenced by the need to respond to short-term demands such as civil service wage bill, rather than focusing on long term infrastructure development. There is no clear mechanism for using annual budgets to achieve medium and long term strategic objectives. Development planning has become a crisis management process without a guiding long-term vision.
The debate about industrial strategy in the economic development literature is again enjoying priority. During the past decade, policy makers faced a rapidly changing global economy, and at the same time as their ability to act domestically was curtailed by fiscal and political constraints. Industrial strategy rests upon directed public interventions at the sectoral or firm level, aimed at stimulating particular lines of economic endeavour. Microeconomic “targeting” of these policies toward particular sectors is often involved. The state may also undertake economy-wide actions through public enterprises, to complement the sectoral thrusts. All governments engage in industrial strategy in this sense. The expected outcomes of such industrial policies are employment creation, economic growth, export competitiveness and diversification, economic transformation from a producer of primary products to an exporter of processed goods and equipment.
When designing national economic policies, many governments have a common objective, that is, to achieve a sustainable high rate of economic growth and speedy development in order to raise incomes and standards of living of the people. Pursuant to this broad objective, the government launched its Industrial Development Policy (IDP) 2012-2016, whose primary objective was to add value to raw materials. Embedded within the policy were strategies such as import substitution industrialisation through raising import tariffs, technology transfer, spatial development initiatives and economic zones, among others. These strategies were intended to assist the country to leapfrog from primary commodity producer into a vibrant exporter of processed goods into the SADC and COMESA regions, anchored on agri-business (food and beverages), clothing and textiles, leather & footwear and wood and furniture, fertilizer and chemicals industry, pharmaceuticals, metals & electricals sectors. However, the recent poor performance of the industry in particular, and the economy in general reminds many macroeconomists of the Milton Friedman’s famous adage “one of the great mistakes is to judge policies and programs by their intentions rather than their results”. While the mid-term review of the IDP, if any, is not available to public, the CZI and the budget statement suffice to raise concerns about the recent industrial performance.
As the IDP (2012-2016) enters its final year, it might be prudent to start thinking of the strategies and processes to come up with a more robust and dynamic industrial policy that achieves national objectives. The purpose of this note is to flag select issues that might assist in coming up with a home-grown industrial policy. This is motivated by the fact that the global economic landscape has changed dramatically, and that many developing economies are in a post-liberalisation era, where traditional industrial development policy space is limited. Traditional concepts like import substitution industrialisation strategy no longer apply in the modern economic environment, and in fact imports are critical for consumer welfare, production of the final output, and exports. At the end of the day, it is the economic welfare of the people at household level, that matters.
The following are the essential components of a dynamic industrial development policy that spurs robust economic growth and social development in the 21st century:
Review of the IDP (2012-2016). Monitoring and review help to unpack the constraints and success areas of a particular programme. Many policies end up gathering dust in the shelves of government offices, without having been consistently reviewed. Review ensures that the policy maker achieves the “results of the objectives”;
The design and institutional management of the policy itself. Industrial policies are motivated by various factors, and have specific objectives within the broad national economic goals. It is essential that an industrial policy is in synch with national energy, agricultural, trade, investment, environmental, minerals, banking, transport policies, among others. These sectoral policies are expected to work together in achieving broad national objectives. In the 2015 CZI, there are glaring differences in this regard, for example, load shedding affecting production working hours, banking institutions not to extend affordable working capital to the industry, indigenisation policy pushing away investors, agriculture sector not supplying sufficient inputs to the manufacturing sector, among others. Yet all these policies and programmes have a common understanding of achieving national objectives in a sustainable manner. Empirical literature on the design industrial policies shows that policymakers, academicians and other industrial stakeholders tend to identify key general constraints to industry, and devise broad policy interventions to alleviate them. This industrial policy design tends to lock-in the policy, thereby taking away the dynamism of the policy. Eventually, it becomes a race to the bottom. Some of the sectors that require dynamism are IT, transport, communication, and banking.
Unclear relationship between the existing inward looking industrial policy anchored on the manufacturing sector vis a vis market access processes brought about the country’s trade policy. Zimbabwe is party to the free trade area agreements under SADC (2008), COMESA (2000), the World Trade Organisation (WTO), Interim Economic Partnership Agreement with the European Union (2013), and has bilateral agreements with Botswana (1988), Namibia (1993), and Malawi (1995). These are rules based agreements designed to ensure trade in a predictable manner. Whenever there are import surges of particular products, the temptation from the trade policy administrators has been to review import tariffs upwards, introduce surtax, quantitative restrictions, and other import controls such as reducing travellers’ rebate or completing removing certain goods under travellers’ rebate. While these reflex trade policy responses have been applied without a sunset clause as to the time limit for application, the protected sectors have failed to register growth. In addition consumers have been denied affordable quality goods, especially from regional trading partners. More importantly, it might be prudent for policy makers to refer to provisions in the trade agreements, specifically on safeguards to address import surges. It is striking to note that the CZI report indicates that the major source of threats to industry in terms of imports volumes is the same lucrative export market. Hence mutual recognition of trade agreements is fundamental;
Identification of offensive and defensive industrial policy interests within the ongoing market access processes under COMESA, SADC, COMESA-EAC-SADC Tripartite initiatives, and the Economic Partnership Agreements with the European Union is essential. These market access arrangements provide reciprocal trade preferences, which must be utilised by the exporting industries. Efficient production techniques and export competitiveness become the key to the utilisation of these market access preferences. In 2016, Zimbabwe will be negotiating the Continental Free Trade Area, a much bigger market for its exports. Hence, the strategic complimentary relationship between industrial and trade policies is of paramount importance;
Structural challenges that inhibit industrialisation, and these include erratic supply of power, inefficient road and railway system, clogged supply chain logistics at border posts. Efficient infrastructure is fundamental to the efficacy of any industrialisation strategy. Borrowing from the experiences of South Africa on road and railway system, Ethiopia on electricity supply and the coming on board of the Great Renaissance Dam, and South Korea on ICT and maritime transport, it becomes evident that infrastructure development is the initial success condition for a robust industrial development policy. Infrastructure projects drive industrialisation processes, and not vice versa;
Marginalisation of the services sectors as the new source of employment creation, economic growth, poverty reduction, among others. The disturbing reality is that manufacturing is now less labour intensive, and technology has snapped up demand for unskilled labour. It is becoming harder for developing economies to create employment in this techno era. The general tendency has been to view the manufacturing sector as the golden goose, at the expense of other sectors such as transport, banking and finance, tourism, construction, health, education, among others. This becomes part of the broader servicification of the economy. Not all sub sectors of an economy are efficient to compete at global scale, hence it is important to identify and harness specific comparative advantages. It is also important to identify the section at which a sub sector participates in the Global Value Chains. Modern day production processes have become transboundary in nature, from the research and development, design of the product, manufacturing and standardised services, warehousing, distribution and retail, marketing and brand management, after-sales back up, disposal and recycle. Hence, it critical at firm level, to identify where to plug in the GVCs.
Investment policy and business climate. It is critical to appreciate that economies around the world are competing for FDI, and clarity on investment policy, adherence to the bilateral investment treaties, and addressing structural and bureaucratic problems on doing business will improve the effectiveness of industrial development policy; and finally
Synchronising domestic industrial policy with regional, continental and global initiatives. The SADC Industrialisation Strategy 2015-2063, Africa Union Accelerating Industrial Development in Africa (AIDA), and Boosting Intra African Trade (BIAT), Agriculture Climate Change and Mitigation Framework are few of examples with critical issues for designing an industrial development policy in line with United Nations’ Sustainable Development Goals (SDGs)
 The CZI manufacturing sector survey, is available at www.czi.co.zw