This is a continuation from last week in which the writer looks at a host of economic challenges in the country including worsening de-industrialisation and consequently the liquidity crunch in Zimbabwe, among other issues bedeviling the economy.
Consumer spending is an important anchor of economic activity, although this alone may not be enough to lift growth to levels required to slash unemployment. Liquidity problems have always been cited as a source of many of the myriad of problems in Zimbabwe.
The Reserve Bank of Zimbabwe (RBZ) has persistently raised issues of inefficiencies and challenges arising from the severe and persistent liquidity problems which it says have made it difficult for local productive sectors to access sufficient credit; lack of competitiveness of locally-produced goods due to high costs of production resulting in the huge importation of finished goods.
Top of the list of the problems is the appreciation of the US dollar by 17% against major currencies in the last three years as a result of the growth of the United States economy and mounting speculation of interest rates hike. This is making the country less competitive compared to key regional trading partner South Africa, whose rand has depreciated sharply by 28% against the US dollar.
Labour and utility costs
Coupled with this factored on the premium strength of the strong currency in use, the country’s minimum wage levels indicate higher labour costs compared to regional counterparts.
The Zimbabwean industrial unit output is also subjected to unreasonable higher energy (electricity) costs than their regional counterparts. According to the economic think tank, Zimbabwe Economic Policy and Research Unit (Zeparu) electricity consumers pay an effective tariff of 14,5 US cents per kilowatt hour (KWh), while the average tariff of the four neighbouring countries (Botswana, Mozambique, South Africa and Zambia) is at 8,3 US cents per KWh, which is 57% of what Zimbabwean businesses pay.
Industrial policy reforms
In the absence of any new meaningful authoritative industrial policy since Independence in 1980, Zimbabwe has largely kept the same pre-Independence industrial structure since independence.
The 2011-2015 industrial policy framework document spells out that the overall objective is to restore the manufacturing sectors contribution to GDP from the current 15% to 30% and its contribution to exports from 26% to 50% by 2015. An average real GDP growth of 15% is targeted under this policy framework. But, as is always the case with Zimbabwe, the situation on the ground is different.
Notwithstanding the political rhetoric, a technical industrialist point of view would have said instead of the existing costly, rabid and highly charged emotive egocentric method in pursuit of political correctness in the Indigenisation and Economic Empowerment policy, which somewhat Hulks over the purported industrial policy, Zimbabwe needed a new industrial policy presided over by an all-stakeholders’ conference.
To support this argument, empirical findings by the Confederation of Zimbabwe Industries (CZI) found that as a result of the Unilateral Declaration of Independence (UDI) in 1965 and the subsequent sanctions against white minority Rhodesian government, Zimbabwe’s manufacturers have always been forced to be their own suppliers by carrying out the majority of operations “in-house”.
The generic operations of local factories have always needed raw materials that simply could not be imported because of sanctions, and hence they have always been sourced locally. A good example is the Dairibord Holdings.
Therefore by understanding the colonial industrial model, a new industrial policy would have been the basis of political parties’ shaping their manifestos. Also this would have been factored in the process of dismantling, re-building and reconfiguring the new industrial order to the ever-changing outside world where the country exports its goods.
An all-stakeholders industrial policy conference would have discussed the progressive character of manufacturing in terms of productivity (as a source of economic growth), innovation (as a source of productivity) and international trade (as a source of export income and also productivity).
Manufacturing trend 1930-2015
On an annual basis, the share of the manufacturing sector in GDP for Zimbabwe peaked at 26,9% in 1992 before collapsing to 7,2% by 2002. Various CZI manufacturing sector surveys suggest that industrial capacity utilisation has declined sharply from 35,8% in 2005 to 18,9% by 2007 and to less than 10% by 2008.
There was recovery, with an increase to 33% recorded in 2009 under the coalition government, 43,7% in 2010 and 57,2% in 2011, before declining again to 44,2% in 2012 and 39,6% in 2013.
In 2004, 80% of jobs in Zimbabwe were in the informal sector, with the 2011 Labour Force Survey suggesting the rate had further increased to 84%.
In the evolution of Zimbabwe’s manufacturing sector, the most significant record is that substantial and almost uninterrupted expansion of the country’s manufacturing sector has taken place in the 50 years between 1938 and 1988.
According to the Overseas Development Institute (ODI), not only has rapid manufacturing expansion been achieved, but the sector has played an increasingly important role in the overall economy.
In real terms, manufactured value-added (MVA) goods doubled in the six-year period from 1938 to 1944, doubled in the four years to 1948 and doubled again in the seven-year period to 1955. By this time the MVA goods/GDP ratio had risen to 15%, up from the 10% achieved in 1938 (the year when reliable data was first collected).
The steady expansion achieved over the past 35 to 40 years prior to 1988, with the exception of a short period in the mid to late 1970s, when both real MVA/GDP ratio fell and, more in the period 1982-84 when the volume of production contracted.
The most marked expansion — in terms of both real increases in value-added products and in the contribution of MVA to GDP — occurred during the first full nine years of the UDI and the first few years into Independence.
Tracking it back to the 1930 and in 1938, when the first industrial census was taken, and not only had the iron and steel foundries and mills been built and the Rhodesian Iron and Steel Corporation (Risco), later re-named Zisco, was established, but the country was already exporting goods manufactured in each of the International Standard Industrial Classification (ISIC) sub–sectors. By then, the country’s manufacturing sector was contributing 10% to the GDP.
By 1985-86 the manufacturing sector was responsible for just over 25 percentage of GDP, with net output valued at over US$2,5 billion (US$1,5 billion). It was the second largest modern employment sector, employing some 160 000 people, 16% of the formal sector labour force.
In 1985, the exports of manufactured products totalled Z$726 million (US$450 million), almost 50 percentage of domestic exports. Over the two-year period, 1983-84, 18% of total gross fixed investment originated in the manufacturing sector, valued at $215 million for each year.
In 1987, Zimbabwean exports were 33% of the GDP and when the country fell headlong in 2008, they were only 9,9% of the GDP. The country recorded a record low of US$156,41 million in March of 2014. In January 2015, Zimbabwe exported $231 million and in March this year exports declined by 27,6% to $188, 7 million. In the first quarter of this year, the cumulative trade deficit is recorded at $853,6 million.
The “sources” of growth of Zimbabwe’s manufacturing sector between 1952 to 1983 have been calculated and decomposed into their three constituent elements: import substitution, domestic demand and export growth.
The Zimbabwean economy is externally oriented, dominated by old colonial and foreign capital, and it is vulnerable to fluctuations in global commodity prices that make economic growth and industrial employment sensitive.
What’s worse, the strength of the US dollar is proving to be devastating to local production because it has reduced competitiveness of local products in the export markets. On the other hand, foreign companies selling their products in Zimbabwe are profiteering from higher exchange rate factored premium prices charged in Zimbabwe.
The profits realised by these foreign companies are not adding any value to the domestic economy as they are not being banked locally system or re-invested to improve efficiencies and productivity, so they are not contributing to the job creation.
The empirical analysis of changes in the level and share of Zimbabwe’s manufacturing employment over the period 1930–2015 brings out to the fore the acute fall of what could conventionally be characterised as de-industrialisation. Zimbabwe’s de-industrialisation is largely associated with half-baked socialist populist policies premised on the desire to stay longer in power.
Zimbabwe is experiencing what is considered to be “acutely premature” de-industrialisation, in the sense of commencing at the lowest levels of per capita income than what is generally the case. Premature de-industrialisation has particularly severe negative effects on long-term growth and it can turn living standards upside down, hence today bread for breakfast is now a luxury.
Among some of the economic structural problems facing Zimbabwe de-industrialisation has received relatively little attention in the debate — there is little systematic discussion of the relationship between trade, growth and the sharp declining of manufacturing employment.
Lest we forget, the faster growth in manufacturing is associated with faster aggregate growth, productivity growth in manufacturing is endogenous to the growth of manufacturing output, and aggregate productivity growth is positively related with the growth of manufacturing output and employment.
There is limited strides from the government on the policy front to improve the investment climate, there are still some challenges. The investment climate remains fragile and uncertain.
This is being weighed down by the downside risks arising from the lack of a clearly agreed policy framework and resolve within the government.
According to the World Bank’s recent Doing Business Indicators, Zimbabwe has slipped from a ranking of 157 out of 185 countries to 173. Impediments to investment include limited resources and high cost of capital, dilapidated infrastructure, obsolete technologies and power and water shortages.
A shortage of official and private external financing because of perceived risks and the low level of banking sector deposits have significantly affected the performance of key sectors of the economy: agriculture, mining and manufacturing.
The country has suffered from massive human capital flight, dilapidated and outdated equipment and under-capitalisation.
The country also faces challenges and risk of fragility in the political and socioeconomic context.
The country is stuck in the risks associated with the latent succession struggles and infighting in the ruling party. This has compromise focus on development issues. This has seen the politicisation of public institutions which is limiting room to adopt checks and balances, foster greater access to justice, and build more transparent and accountable public financial management.
Finally, apart from sorting out the structural defects of the economy, Zimbabwe is a country in urgent need of a re-industrialisation plan. Policy interventions are needed to be able to reverse the existing debilitating premature de-industrialisation.
However, it needs courage to acknowledge that it is generally difficult to build up lost production capacity because of micro-level factors such as loss in market share, fixed capital, networks both in input sourcing and output markets, skills, tacit knowledge and the other institutional qualities that are built over time.
The types of policies relevant to meeting these challenges maybe beyond the scope of the current Zimbabwean leadership, but it is important that Zimbabwean industrialists, economic commentators and many in business start building up treasure troughs of business, industrial and economic literature that sparks the basis for national debate.
What we can say is that, if Zimbabwe want to pursue (re)industrialisation, it cannot take things in business as usual fashion. Decisive and effective industrial policies are required, along with a macro-economic environment that does not contribute to the further decimation of industry.
Musonza is an asset manager and portfolio client accountant for a United Kingdom investment company. He is also a student at UK Business School. — firstname.lastname@example.org.