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Prosper Munyedza: Correspondent

Import substitution industrialisation (ISI) may be defined as an economic theory that is archetypally utilised by developing countries or emerging market economies seeking to diminish their dependence on developed countries as well as increasing their self-sufficiency.ISI advocates a replacement of imports with domestically produced output. It is a trade protectionist policy in that it generally seeks to shield the incubation of newly-formed industries from the perils to survival that are attendant to free trade. ISI, besides being an idealistic patriotic concept, may also serve as a sound concept through which a country may lessen its dependence on foreign production.

The ISI concept largely draws its roots from the post-World War II re-organisation that took place in Latin American countries. There, ISI was premised on protecting, strengthening and growing domestic industries via protectionist tactics which included tariffs, import quotas and subsidised government loans. These economic policies are largely instructed by approaches to development postulated by Keynesian, Communitarian as well as Socialist economic schools of thought.

It has been argued that all, or virtually all nations that have managed to significantly industrialise have at some stage in their developmental path instituted ISI.

The developed world stands accused of having utilised ISI until they achieved desired levels of development that enabled them to compete on the global trading arena (thanks to the interventionist policies) then, all of a sudden, adopted free market discourses aimed at creating larger and augmented markets for their output as well as impeding developing economies from adopting similar developmental strategies.

Economic development, at times, is thwarted by a protracted throttling of small developing economies’ industries by large developed economies’ manufacturers thanks to free trade. At times, development is rendered an impossibility by sheer policy misalignment with the trajectory that should lead to desired outcomes.

In this light it will be critical to review Zimbabwe’s Statutory Instrument 64 (SI 64) of 2016. Protectionist policies of the interventionist type are largely aimed at enhancing domestic productive capacity. Policy makers, having satisfied themselves that there is a need for intervention in what would otherwise be an unfettered market, may settle on inward-looking policies.

The aim, apart from protecting infant industries, could be to achieve an increase in total factor productivity. Once the primarily targeted industry is shielded from foreign competition, it is envisaged that the industry will be able to mobilise resources, for example labour, from other untargeted industries.

This factor mobility from untargeted industries to the industry of primary focus will achieve two main objectives.

First, factors will be diverted away from sectors that policy makers deem not to be giving optimal factor returns or of lesser strategic importance to those industries earmarked as industries of focus by policy makers. Second, once this factor mobility is attained, factors of production are directed to areas where they would be envisioned to earn optimal returns, which should grow those targeted industries to levels where they would eventually be able to compete with global players.

The in-built belief in this interventionist policy is that there are no structural rigidities attendant to factor mobility.

Reality, unfortunately, is not always that simple. Not all factors may attain frictionless mobility at the stroke of a pen. There are some industries that require huge capital investments which, for Zimbabwe, have become mandatory due to the fact that most plant and equipment had been rendered obsolete over the years thanks to challenges that bedevilled the local manufacturing sector over the past decade. Some of these challenges, unfortunately, may not be easily wished away.

A quick perusal of the manner in which ISI was rolled out in Latin America reveals that the industrialisation process hinged on a three-fold approach involving: governmental; private; and foreign capital.

The governments focused mainly on infrastructural and heavy industry development. While the private sector concentrated on the manufacture of consumer goods. Foreign direct investment was channelled towards the production of durable goods such as cars. That is exactly how Brazil rolled out her largely successful ISI.

Inadequate capital is a huge drawback in the quest for national economic development. SI 64 sought to substitute domestically produced for foreign made goods (for the goods covered). In addition, it may be argued that it also sought to achieve an inhibitory effect through plugging the massive leakage of the US dollar exiting Zimbabwe in search of what policymakers deem low economic value luxurious goods. Indeed, this appears to be a masterstroke in the light of successes registered in the edible oils sector, which also had a similarly applied godsend.

The edible oils sector may be characterised as one which requires little capital outlays. In addition, the production cycle in this sector is relatively short. From the first stage of the production cycle to getting the product ready for the market, the financial commitment on each unit factor input is also characteristically small.

This renders the sector one where interventionist policies of the SI 64 ilk highly likely to lead to success, again with the results registered almost immediately.

Granted, this sector requires little by way of inputs and processes, the fact that local producers were failing to realise meaningful returns could largely be attributed to the throttling effect of competitive forces on the market emanating from robustly backed and huge financial muscled foreign players, who like foreign sharks had ventured to rummage our small rivers that were infested with a few local baby tilapia breams.

The continued presence of foreign players had led to plant closures in this sector as local players had failed to maintain production in the face of stiff competition.

With plant closures came labour redundancies. With the redundancies came increased poverty levels among previously employed workers of that sector. The effects also extended to reductions in total revenues collected by the Zimbabwe Revenue Authority. The reduced revenue collection meant ever dwindling Government coffers with all the attendant crippling effects on Government expenditure.

One is able to see that indeed with this sector, intervention was a master stroke as far as revenue collection and local productive capacity enhancing are concerned. One may argue that the revenue side of the story could still have been addressed via tariffs on edible oil imports and indeed that would be a fair argument.

Tariffs appear to offer a more appropriate interventionist policy alternative where local players have no capacity to immediately substitute imports.

Lack of capacity could be due to scale or financial challenges. Revenue, so garnered, could then be channelled towards capacitating local industry players in targeted sectors. Such funds could be availed to the right industry players at concessionary rates. That proposition could be a win-win for both the consumer and local manufacturer.

The customer will not pay dearly through having to deal with sudden product shortages and the attendant price increases as the law of demand and supply set in. The local manufacturer gets to scale up their production at reasonable costs. However, such a move would not guarantee significant immediate employment creation.

Maybe, a few ZIMRA officials could immediately be employed as revenue collectors, but feeder industries, such as the agricultural sector, would not immediately benefit from such appropriation of tariffs as would be the case with an embargo.  ISI creates jobs in the short term as previously dormant sectors are invigorated. However, competition always pushes one to their best in terms of effectiveness and efficiency. Without competition (with the foreign type usually presenting a formidable sort), it has largely been seen that dynamic inefficiency always results.

Domestic producers, once shielded, have little or no incentive to streamline their costs as they are well aware that their products are likely to sell at any price as there will be no alternatives on the market. Collusion in price setting is always a possibility when domestic producers have collectively successfully lobbied for an embargo on imports. Lobbying processes have a proclivity to create collusive tendencies.

These tendencies may be utilised to the collective good of all participants in the lobbying exercise. Human nature is what it is. Unfortunately, humans are principally self-serving and that is what theories of rational behaviour make us believe and we see that happening unremittingly.  SI 64 undeniably was premised on noble aspirations. However, there may be a great need to ensure that the challenges bedevilling local industry are addressed first. An alternative to focusing on market end technicalities as a key approach to boosting local production could involve an interrogation of local industry’s productive capacity as far as capital is concerned first.

Is the local industry well able to absorb the demand once foreign goods are embargoed? Local players may not have the financial wherewithal to self-capacitate to produce to such scales as to immediately be able to substitute locally produced goods for embargoed imports. Some of the players that lobbied the Ministry of Industry and Commerce may not have the capacity to take up all the shelf space suddenly rendered empty thanks to the import bans in those sub sectors.

In a number of cases, industrialists’ main and current challenge is not foreign competition. It is the unavailability of lines of credit on favourable terms. Once this key aspect is addressed, then and only then, could such manufacturers be in a position to readily take over local markets left vacant by trade embargoes.
Yes, the expectation by policymakers is that bankers will immediately come to the party sensing a bolstered potential for profits that are created by assured markets.

Bankers would be expected willingly structure financing products and packages for the local industry players now basking in the glory of protectionism. Guaranteed markets could be viewed as bankable propositions, wouldn’t they? But, do bankers readily come to the party? Lending, by its nature, is driven by other dictates that go way beyond this simplistic proposition. Bankers ought to come on board if this interventionist policy is to yield meaningful returns in Zimbabwe.

Interventionist policies of the protectionist ilk may also lead to a prevalence of instances where product quality could be adversely impacted. Once these policies are instituted, concerted efforts would then need to be made, on the part of enforcement agencies, to ensure product quality is not subsequently compromised.

Luckily, in Zimbabwe, we have instituted bodies like Standards Association of Zimbabwe to ably deal with that.  By and large, protectionist policies may also lead to price increases. Competitive prices that are ushered in by free trade are also driven away by protectionist policies. Prices may not move southwards in those sectors that have but a few players once protectionist policies are instituted. Such industry players tend to collude.

Collusion results in sub-optimal pricing to the chagrin of the consumer. Price setting and agreeing forums between policymakers and industrialists may also need to be instituted right away. Price setting automatically requires significant government intervention once is trade intervention is introduced.
Protectionist policies, if correctly targeted, have the ability to substitute foreign products with locally produced goods. Such substitution conceptually serves as one potent way of recouping all exported local jobs that were dished out to foreign industrial players via local plant closures and support for foreign production via importation of goods.

However, much care has to be taken when implementing such policies as they may lead to dynamic inefficiencies of monumental proportions. Present day successful economies once utilised trade protectionism as a means of transporting their countries from poverty to their current successes through targeted ISI. Zimbabwe could do herself such a great service by moving forward on the basis of informed policy making and implementation.

*Prosper Munyedza, MSc Business Analysis & Finance (University of Leicester), BSc Econ (Hon) (University of Zimbabwe) is a lecturer at a local university. He wrote the above in his personal capacity.