Eric Bloch Column

Beneficiation vs import substitution

ZIMBABWE has now been in a foreign exchange crisis for more than 42 years! It was on February 14 1962 (St Valentine’s Day!) that the government, through the Reserve Bank, introduced exchange controls because of th

e imbalance between the country’s foreign exchange inflows and outflows.

The negative balance of payments which rapidly developed after the 1960 decision to dissolve the Federation of Rhodesia and Nyasaland was becoming catastrophically greater, forcing the government of the day to take the drastic action of regulating all foreign currency outflows, concurrently with strenuous efforts, reinforced by law and regulation, to ensure the inflow of all export proceeds and other foreign currency earnings.

With a view to minimising outflows of the scarce foreign exchange resources, the authorities resorted to numerous strategies, one of the foremost being focused upon the establishment of industries to produce goods which would otherwise have to be imported. And this strategy was vigorously intensified after the government of the day embarked upon its foolhardy Unilateral Declaration of Independence (UDI) on November 11 1965.

An immediate consequence of that ill-considered action was that the United Nations, at the request of the then colonial power, the United Kingdom, imposed severe international trade sanctions upon Rhodesia, now Zimbabwe. The government arrogantly tweaked its nose at the international community, and set about innumerable methods of circumventing those sanctions or, at the least, minimising them.

One of those methods was perceived to motivate industry to engage substantively in import substitution, whereby products previously imported would be locally manufactured, thereby reducing the demands upon available foreign currency, while concurrently other economic benefits — such as employment creation — would be realised.

It cannot be denied that some very significant successes were achieved, such as the establishment of several motor vehicle assembly plants and some substantial manufacturers of pharmaceuticals, among many others.

The fact that the costs of production were immensely greater than the landed cost of equivalent imported products was considered to be irrelevant, for the import substitution assured product availability, notwithstanding the almost universally applied trade sanctions.

Understandably, cost was a very secondary consideration to availability. The higher costs were due to diverse factors, including those occasioned by the need to circumvent sanctions in order to obtain necessary imports.

However, the greatest contributant to the greater costs applicable to the domestic production, as compared to imports of like products, was that the country could not achieve economies of scale. The size of the domestic market, and other factors, minimised volumes of production as compared to the volumes produced by factories in other countries.

Thus, for example, the total production of all our motor vehicle assembly plants in one year was less than the production of some of Japan’s leading motor vehicle manufacturers in one day! Such a production disparity unavoidably created such a production cost disparity, but the higher cost was considered acceptable as the local production of goods, which would otherwise have to be imported, markedly negated the effectiveness of the trade sanctions. Concurrently the oppressed economy enjoyed the ancillary benefits of the local production operations.

After UDI came to an end and an independent Zimbabwe came into being, the trade sanctions against the country were lifted. However, despite the import substitution and other measures that had prevailed during the almost 15 years of UDI, the economy was a very emaciated one, necessitating a continuance of exchange controls.

As a result, the government continued to extol the virtues of import substitution, and has done so throughout the 24 years of Zimbabwe’s Independence. However, in the past almost a year, its calls upon commerce and industry to intensify import substitution has — alongside pleas for increased export performance — been one of the mainstays of the drive by the government and the Reserve Bank to counter the ongoing balance of payments deficits which so very severely constrain the economy.

Regrettably, the focus upon import substitution is excessive, being almost to the exclusion of other methodologies as could address Zimbabwe’s foreign exchange and other economic needs.Although import substitution should be constructively pursued wheresoever it can be achieved without prejudice to, or to the benefit of, the consumer, pursuing import substitution in instances which exacerbate the final cost is counterproductive to the economy, even if some saving in foreign currency utilisation is achieved.

Even more regrettable is that the emphasis upon import substitution has, to some considerable degree, diverted attention from another economically beneficial measure, and that is to maximums upon value-addition to Zimbabwean production.

Zimbabwe has the productive capacity for a wealth of primary products. These range from many, varied agricultural products such as cotton, timber, fruits and vegetables, poultry and meats to numerous minerals, precious and semi-precious stones and the like. Without endeavouring to enumerate all of the latter, some of the foremost are asbestos, platinum, iron ore, bauxite, gold, diamonds and emeralds, to name but a few.

However, the bulk of these very valuable primary products are exported in their foundling state, either subjected to no processing whatsoever, or to very little processing. Instead, the products are exported in their original procurement condition, inclusive of all attendant waste.

Although in no manner the only one of such products, cotton is a prime example. Based upon most recently available data, Zimbabwe currently produces a cotton crop of approximately 350 000 tonnes. Of this, an estimated approximately 250 000 tonnes is exported with the only value-addition being ginning.

Between 20 000 and 50 000 tonnes are exported with some slight additional beneficiation, being in the form of yarn, leaving only 50 000 to 80 000 tonnes being converted to fabrics and, possibly, garments or furnishings. Similar statistics are attributable to most other Zimbabwean primary products.

This situation suggests that there is a crying need for Zimbabwe to engage very energetically in the promotion of industries as would be beneficiating Zimbabwe’s primary products. The benefits of doing so would be very considerable.

In the first instance, the waste content of exports would be significantly reduced, therefore reducing transportation costs sustained without a corresponding enhancement of earnings.

Secondly, the value addition enables realisation of higher selling prices, thereby generating greater foreign exchange inflows — potentially to a far greater extent than the curtailment of foreign exchange outflows achieved by import substitution.

The beneficiation processes also involve the establishment of new industries, and the expansion of existing ones, which convey numerous benefits to Zimbabwe and its economy. In particular, value addition to primary products can result in very great job creation, which is desperatelyrequired in an economy in which more than three million of the country’s labour force are unemployed.