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Liberalisation: Industries Need to be Nurtured

JOHN recently decided to start a small business. He managed to borrow money from a relative and bought the machinery and equipment required for his new cooking oil manufacturing business.

After installing the machinery in an old warehouse leased from a friend in the Graniteside industrial area of Harare and recruiting the necessary work force, John’s business was good to go.
A snag hit the business within days of the factory opening. John had asked his accountant to work out the costing for his product.  The workings revealed that the cost of producing a 750ml bottle of cooking oil as $1,20.
This was the same as the shelf price of a similar bottle of cooking oil imported from South Africa. The price left John with no room for his own profit markup, or for the retailer, if the product was going to be sold at a competitive price.
After analysing his cost build up and comparing it with the South African supplier’s costs, John discovered a number of sad facts for his new business. For starters, the price of the main raw materials for John’s product, sunflower seeds and soya beans, was nearly double in Zimbabwe compared to what they cost in South Africa. Second, John was buying packaging at five times the price in South Africa. John’s factory was producing 3 500 litres of oil a day, while the South African manufacturer had a capacity of 100 000 litres daily. Clearly, the advantage was heavily skewed against John.
Many Zimbabwean industries face similar unfair competition from goods produced outside the country. Most of the companies are strapped for cash, and need heavy financing in order to refurbish their equipment and buy raw materials.
Facing high costs of borrowing, it becomes difficult to generate returns which are significantly higher than the cost of capital. As a result firms cannot build up enough reserves to replace their capital assets or to expand. It becomes a vicious cycle where low returns result in reduced capacity which in turn causes lower returns as firms fail to utilise economies of scale.
Small businesses are the engine of economic growth in many countries. Because of their small scale and agility, they can make use of innovation to develop new value added products faster than bigger firms.
The problem is that if similar products can be sourced from elsewhere at cheaper prices, the innovative entrepreneur’s efforts will be in vain as his products will fail to compete in the global market that have been opened up by free markets, high speed communication and cheaper transport costs. Customers now have wider options to choose from around the globe.
A look at the history of developed countries shows that they protected their own industries for many years before they opened up the markets. America and Europe still have protective
policies in place designed to safeguard certain of their industries, such as agriculture and textiles. Historical evidence shows that although not all countries that have applied protectionism and subsidies have succeeded, few have succeeded without them.
South Korea is an example of a country which transformed from a non-industrialised to a highly developed major exporter in half a century.  To develop its economy, the country nurtured certain new industries selected by the government in consultation with the private sector, through tariff protection, subsidies and other forms of government support until they had developed enough to withstand international competition. One symbol of South Korean industrial success is Samsung, which started out as an exporter of fish, fruit and vegetables in 1938. Today Samsung is one of
the leading exporters of mobile phones in the world.
Zimbabwe can learn a few things from the Korean example. By selecting certain high-value-adding industries in which it has great competitive advantages and nurturing them, they can grow to become global exporters generating essential foreign currency for the country. The country has so many resources that can be added value to for
export, including minerals and agricultural products.
The government allowed duty free imports of basic foods and other essential products in order to avert hunger and shortages of critical items.  While this arrangement is in place, entrepreneurs wishing to venture into the production of these goods suffer from unfair competition.
To nurture such industries, the government should carefully select those that are ready and capable of adequately supplying national needs, and put in place measures to protect them. 
Tariffs will help producers of products such as cooking oil or maize meal to find their feet
by being able to charge prices that enable them
to maintain and increase their capital assets, ensuring their long-term survival and growth. At the same time consumers who prefer imported products will be able to enjoy them, although at a higher price.
The benefit from tariff protection is that local industry can grow, creating employment, consuming local resources and also supporting down industries.  This is in contrast with imports, which create employment and develop industries in the exporting countries, resulting in a negative flow of money into Zimbabwe.
The current situation of importing more than we export negates our GDP growth and perpetuates the country’s poverty status.
My point is not to subsidise inefficient companies as that only perpetuates incompetence and makes things unnecessarily expensive. Instead, the nurturing policy should be targeted at those industries that  have great competitive advantages and  also great export market potential.
The policy should be for a limited period of time, with the market being opened up gradually as the companies grow.

Chichoni is a business planning consultant who works with new and existing SMEs. For your views and comments, please email chichonip@yahoo.com . His web blog is http://chichonip.wordpress.com

 

Phillip Chichoni

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