HomeLocal NewsDe-industrialisation: Zim’s economic crisis demystified

De-industrialisation: Zim’s economic crisis demystified

THE growing disturbing scenes in the capital Harare’s central business district and in other urban centres elsewhere across the country where millions of unemployed men and women of all ages who have not had the chance to escape the borders have set stalls on pavements, car parks selling food, clothing, mobile phone accessories, domestic appliances and even goats is a clear sign of the scale of de-industrialisation in Zimbabwe which needs critical examination.

Brighton Musonza

When a shock you predicted happens, it is still a shock. The Zimbabwean economy was expected to struggle, but the intensity of the ongoing de-industrialisation process is a shock to the system.

The economy remains fragile with an unsustainably high external debt and vulnerable to many challenges, particularly an accelerated de-industrialisation and informalisation.

This article tries to explain this new phenomenon which characterises Zimbabwe’s economic breakdown. Where have we gone wrong? Why are people in the streets? Why are business executives, industrialists, economic commentators not making their voices heard? Does the country’s leadership have the will and depth of knowledge to quantify and qualify the impact of their actions? Is the empowerment and indigenisation policy the new Mr Killjoy? More importantly, is the informal sector the new name of unemployment? Can we formalise the informal? Is informalisation any different to de-industrialisation? Is de-industrialisation the elephant in the room?
De-industrialisation: what is it?

First, it is essentially important to explain the characteristics that describe the state of the industries and problems the country faces. An in-depth outline below analyses the historical context of the built-up of our country’s industrial base since the arrival of the white settler.

In their descriptive forms, industrialisation, de-industrialisation, and re-industrialisation refer to changes in the contribution of the manufacturing sector to GDP or employment and therefore the sharp decline in Zimbabwe’s manufacturing sector will help us understand how far deep the country has cascaded into the abyss. Without understanding the level of this depth; it is difficult to know more about the unknowns that should be known to inform our knowledge base for known and unknown solutions. Zimbabwe is in urgent need to know both the unknowns and the knowns to get things right.

Far more important is essential for us to acknowledge that the manufacturing sector, specifically, is regarded in some economic schools of thought as having particular characteristics that makes it far more important as an engine of growth, hence it makes industrialisation important for economy growth and prosperity. Furthermore, it is also key to note that Zimbabwe’s share of mining employment and GDP is to a significant extent outside its control given that it derives in part from a country’s mineral endowments.

This article examines the significance of the troubled Zimbabwean manufacturing sector and changes in its share in employment and impact on GDP; reflecting on the unprecedented factory closures which is turning the country into a nation of vendors.

The fall in the share of manufacturing employment in Zimbabwe is generally characterised in economics and business literature as de-industrialisation — it is therefore essentially important that we as a nation start to describe the existing situation as such and any attempts to describe it as a transformation into informalisation should be deemed as propaganda foisted as the new normal of the abnormal.

Scale of industrial decline
The scale of this industrial catastrophe in Zimbabwe can be measured by scanning through the research paper by the London-based Overseas Development Institute (ODI) titled Industrialisation in Sub-Saharan Africa (Zimbabwe).
At the time of publication in 1987, the research paper said Zimbabwe’s manufacturing sector had expanded over a time span of more than 60 years to become, in the late 1980s, one of the most advanced and diversified in Sub-Saharan Africa.

The level of the sophistication of the Zimbabwean economy as aluded to by the ODI report and together with the pivotal place occupied by country’s manufacturing industry led to suggestion that with favourable domestic policies and supportive external environment, Zimbabwe could (outside South Africa) have been the first country in Sub-Saharan Africa to join the ranks of the handful of newly-industrialising countries (NICs), which at the time was confined to Asia and Latin America.

The sharp decline in manufacturing in the last 20 years since the country adopted IMF-World Bank market reforms leading to the longstanding internal political conflict is the most prominent in terms of job losses and it explains why the de-industrialisation debate should focus on the manufacturing sector. De-industrialisation reflects in essence the decline of manufacturing relative to other industrial sectors, hence any attempts to relegate employment in manufacturing as a choice in policy in favour of populist socialist informal sector options is an exercise in futile.

There are a multiple interpretations of what the ongoing Zimbabwean de-industrialisation process can be described as. Since the 2009 coalition government that introduced the multi-currency regime was dissolved, industrial output has plummeted so has been employment levels.

Structural regression

In proportional terms, locally manufactured goods have declined sharply thereby exacerbating the balance of trade deficit.

The balance of trade has averaged minus US$422,44 million between 1991 and 2014. Trade deficit was at US$2,9 billion in 2014 and it was projected to narrow to US$2,8 billion in the period 2015, but by January 2015 it got to US$3 billion.

The balance of trade deficit has accumulated to the extent that the country is unable to pay for necessary input and energy imports to sustain further production of goods, and thus fuelling a downward spiral of economic decline.

Unemployment is the greatest problem facing Zimbabwe today and with it there are serious threats to socio-political stability. According to a report by the African Development Bank, Zimbabwe is experiencing structural regression with the acceleration of de-industrialisation and informalisation of the economy.

Measure of industrial decline
Going back in time, to measure the depth of today’s economic malaise consider this: 80 years ago Zimbabwe’s manufacturing sector was already responsible for 10% of the country’s GDP. It employed 7% of the formal sector labour force and accounted for 8% of total export earnings.

To put this into context, ODI says data for most of Sub-Saharan Africa in the three decades preceding the research showed that at least 70% of countries’ ratio of manufactured value added (MVA) goods to GDP was less than 10%. In over 56% of countries manufactured exports accounted for less than 10% of total national exports and in over 40% of the countries fewer than 10% of employees were working in the manufacturing sector. What these comparisons highlight is therefore that an assessment of Zimbabwe’s contemporary industrial performance marked by 8% ratio of MVA to the GDP; at some point, was placed firmly within an extremely high-end band.

How far we have deviated from that course is summed up by the Confederation of Zimbabwe Industries (CZI) president Busisa Moyo’s recent statement in his attempts to explain the vendor crisis.

“What we are seeing is a manifestation of the economic problems in the country: the people are unemployed,” Moyo said. “These are people who were in industries and farms and now have no means to make an income. In the long run, we are going to see only more manifestations … What it means for government is that due attention has to be paid to protect those industries that remain, and facilitate their recovery.”

Prominent among problems facing the country are factory closures, rising youth unemployment, a liquidity crunch, a negative country-risk premium arising from high levels of public debt, declining international capital inflows (including remittances), and infrastructure bottlenecks (transport, water, energy).

Official figures show that at least 4 600 companies were closed between 2011 and October 2014 last year, with thousands losing their jobs. At least 60% of all companies are currently under judicial management.

There are many notable names that have been wiped off in the manufacturing map — but one key name that government has battled and failed to rescue is the food and beverages processing giant Cairns Holdings known for a wide variety of groceries and wine. Its strategic importance can be explained by the fact that at some point the Reserve Bank of Zimbabwe (RBZ) held 63,3% interest. Recent attempts to find investors from China and Russia have proved to be futile. Cairns was directly hit by cheap food imports from South Africa.

Another practical contemporary example would be to assess the following business decision models: to stay competitive in the exports and domestic market, how would Dairibord Holdings evaluate its packaging policy if it sticks to local packaging suppliers — Flexible Packaging or Saltrama Plastics — factor in the exchange rate and buy packaging from South Africa?

Saltrama Plastics, founded in 1947 and at one stage was the largest plastic company in Africa, would have lost out on its key account. Would Saltrama or Flexible still be able to stay competitive in regional markets given the strength of the US dollar against regional currencies? What would have been the fate of Saltrama’s 200 employees?

Inactive monetary policy

Upon his re-election in July 2013, President Robert Mugabe promised to create 2,2 million jobs during the five years of his current term. However, inauspicious signs of the economy descending on a tailspin have been glaring since his inauguration than any other time before that. The UN Development Programme estimates the unemployment rate at 90%.

Figures from the Retrenchment Board, a government agency, paints a gloomy picture and indicate that nearly 100 companies shut down and over 1 000 people were retrenched in the first quarter of 2015.

Zimbabwe’s economic problems are largely structural, but there are notable macro-economic related issues caused by the inactive monetary policy since the adoption of multi-currency system (dollarisation). Optimising and mixing up various monetary policy tools like inflation control, money supply, interest rates and exchange rate mechanisms is the only way jobs can be created because those are the instruments that determine the cost and supply of money for both investment and consumer spending levels. With the adoption of the US dollar Zimbabwe has no leverage due to an inactive money supply.

The poor performance of domestic revenue inflows and the rise in recurrent expenditures is continuously constraining fiscal space, while the continued use of the multi-currency regime results in the monetary policy largely remaining unchanged.

The economy is in this state because consumers, businesses and the government have no access to credit. The fact that the country has no meaningful lines of credit or reserves reflects on the Reserve Bank’s inability to act as lender-of-last-resort and companies are running into refinancing difficulties. There is no visible leverage on the central bank to influence the supply side of money and we can as well fairly say there no fiscal room for manoeuvre.

To be continued next week.
Musonza is an asset manager; portfolio client accountant for a United Kingdom investment company. He is also a student at UK Business School. He can be contacted at mmusonza@aol.com.

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