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The country’s economy is relatively small but diversified, which means there is need to look at specific areas that should be allocated more resources and effort to achieve a high standard of living for all Zimbabweans.  When an economy is facing de-industrialisation and company closures there is often an attempt to keep trying to reopen businesses whose model and practices are no longer compatible with the demands of the modern economy.

The temptation is to inject scarce resources in businesses which can no longer be turned into strong or viable entities.
This is best analysed using the comparative advantage principle. Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it was written) is unnecessary in free trade.

Popularised by economist David Ricardo, comparative advantage argues that free trade works even when one partner in a deal, holds absolute advantage in all areas of production – that is, one partner makes products cheaper, better and faster than the other trading partner.

Zimbabwe has several sectors which have produced world-class products and these sectors have already consumed massive amounts of capital in investment and infrastructure.

In tobacco and cotton production Zimbabwe has achieved global fame as a producer of high quality products. Platinum, gold and diamond production is also at a significant level on an international scale. These areas should be strengthened and supported.

The value chain in tobacco and cotton processing and production should be strengthened and enhanced to maximise revenue from areas where it is already proven that Zimbabwe has built competencies and expertise in producing high quality tobacco and cotton. However, the manufacturing sector has found the going tough. Efforts have been made in practice and in principle to revive the manufacturing sector.

While this is commendable these efforts should be implemented carefully to avoid spending scarce resources on companies that deserve to die and should be left to die a natural death due to their in efficiencies, mismanagement and general backward way of doing business.

According to the principle of comparative advantage, the gains from trade follow from allowing an economy to specialise. If a country is relatively better at making wine than wool, it makes sense to put more resources into wine, and to export some of the wine to pay for imports of wool. This is even true if that country is the world’s best wool producer, since it will have more of both wool and wine than it would have without trade.

A country does not have to be best at anything to gain from trade. The gains follow from specialising in those activities which, at world prices, the country is relatively better at, even though it may not have an absolute advantage in them. Because it is relative advantage that matters, it is meaningless to say a country has a comparative advantage in nothing. The term is one of the most misunderstood ideas in economics, and is often wrongly assumed to mean an absolute advantage compared to other countries.

The ability of a country/business or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realise stronger sales margins.

Having a comparative advantage or disadvantage can shape a company’s entire focus. For example, if a cruise firm found that it had a comparative advantage over a similar company, due to its closer proximity to a port, it might encourage the latter to focus on other, more productive, aspects of the business.

It is important to note that a comparative advantage is not the same as an absolute advantage. The latter implies that one is the best at something, while the former relates more to the costs of the particular endeavour.

The primary fear for nations entering free trade is that they will be out-produced by a country with an absolute advantage in several areas, which would lead to imports, but no exports. Comparative advantage stipulates that countries should specialise in a certain class of products for export, but import the rest – even if the country holds an absolute advantage in all products. So it is not bad at times to see shelves in Zimbabwean supermarkets full of South African products when South African industries are fed Zimbabwean cotton, tobacco, platinum, etc.

A practical and historical example is how Great Britain provided support for comparative advantage by essentially outsourcing its food growth (importing grains, meat, cheese, wine, etc) and focusing on manufacturing high value goods for export, thus, becoming the workshop of the world during the Industrial Revolution.

Comparative advantage urges nations to engage in true free trade and specialise in areas where they have the highest comparative advantage, instead of looking to bolster weak industries from foreign competition by imposing protective tariffs that stifle production that leads to overall gains in wealth.

Zimbabwe as a nation could become wealthy just by focusing a few sectors and specialising on those. This will see it becoming a world leader in just a few areas with the exports being used to stabilise the whole economy. The idea of seeking to reopen certain businesses which have already failed to compete could turn out to be disastrous as it diverts resources from key areas which could create more jobs and produce higher quality and higher value exports.

Disclaimer: At GMRI Capital, we pride ourselves on the quality and depth of our research and analysis. This means digging deeper than our competition for information and generating more useful reports. This article is provided “as is” for informational purposes only, not intended for trading purposes or advice. Prior to execution of any security trade, you are advised to consult your authorised financial advisor to verify the accuracy of all information. Neither GMRI Capital nor any independent provider is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein.

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