Government of Zimbabwe in recent years promulgated a number of statutory instruments aimed at safeguarding local producers from foreign competition. Statutory Instrument 64 (SI 64) of 2016 attracted a lot of attention both locally and regionally.
Notwithstanding the controversy regarding SI 64, the impact of the instrument together with previous measures, for example, measures which were previously applied to the cooking oil and dairy sectors, have yielded positive results which, inter alia, include: Increase in capacity utilisation and employment;
- New investments as in the case of Delite; and
- Improvement in fiscal space (as reported by Zimra).
The major question that has been asked by many stakeholders is as to whether this policy direction is sustainable. Are there any better alternatives to achieve the same results?
There is growing consensus among stakeholders that this country needs to move a step further into a local content framework (policy) which speaks to Zimbabwe’s needs.
In as much as the measures have successfully worked to save the selected sectors, they cannot foster sustainable solutions to Zimbabwe’s competitiveness problems because the measures by themselves are temporary and are constrained to cover the entire economy due to bilateral, regional and multilateral agreements assented to by Zimbabwe.
Defining local content
Local content can be defined as a government policy that requires manufacturers of a particular product (e.g cigarettes or fruit juice) to obtain domestically a specified minimum percentage of their basic agricultural input (e.g tobacco or fruit from domestic producers).
Local content requirements (LCRs) are thus policy measures that typically require a certain percentage of intermediate goods used in the production processes to be sourced from domestic manufacturers.
By requiring firms to use a certain percentage of local inputs, demand for domestic industries will increase, spurring job creation in the short-term. In the long term, there are economic benefits to be gained from “learning by doing” and from increasing the supply of local goods and services. Countries implement LCRs with the two-pronged goal of achieving a robust industry that will be competitive in international markets, and securing associated local job creation. The scope for a local content policy in Zimbabwe is thus to build on the import management scheme in;
- Adding value to locally-produced goods and services;
- Establishing a minimum local content threshold for different sectors in Zimbabwe;
- Identifying, specifying and favouring sub-sectors that are embryonic or within easy grasp rather than beyond feasible reach;
- Preserving to the extent possible, especially in the context of bilateral investment treaties, the policy space to adopt appropriate policies to foster domestic value addition and backward and forward linkages; and
l Being consistent with the agreed World Trade Organisation frameworks governing such.
LCRs are thus a smart protectionism measure which are in force in developing countries, emerging and developed countries. They have become a dominant feature of the trading system since the 2007/8 global financial crisis.
LCR is in compliance with the WTO provisions. The most relevant agreements on compliance of LCRs are the General Agreement on Tariffs and Trade, the Agreement on Trade-Related Investment Measures, the General Agreement on Trade in Services, the Agreement on Subsidies and Countervailing Measures, and the Agreement on Government Procurement.
However, in many cases, LCRs are not only trade related, but essentially investment related.
Therefore, international and bilateral investment agreements also largely regulate the extent to which signatory countries can use (or not) certain measures to oblige foreigners to use more local content.
It is important to differentiate local procurement and local content regulations.
The local content is biased towards procurement of locally-produced goods. Local procurement, on the other hand fosters supporting a motion for locals to be given procurement tenders with no legal requirement to buy them locally.
World comparative cases
Local content policies have probably been the single most important policy driver of linkages from the commodity sector. It is critical for such policies to be evidence-based and well-informed rather simply stated without clearly set and measurable objectives. Although it is difficult to make an overall assessment of the impact of LCRs in resource-rich countries, in part due to lack of empirical evidence but also because experiences vary significantly across countries, there is somewhat evidence that LCR managed to bring the expected gains.
In some countries, as the World Economic Forum noted, there are many cases where measures have failed to achieve their stated objectives due to a lack of capacity to implement, manage, and monitor LCRs.
Countries that have been successful in using LCRs have all used a combination of quantitative and qualitative measures, based on their capacity to deliver, while ensuring a fair balance between their economic objectives and the viability of investments.
Help or hindrance?
A number of African markets have proven that striking the right balance between local content requirements and creating a healthy investment environment is difficult.
While some argue for no legislation, instead advocating that market dynamics create the level playing field legislation strives for, others worry that no legislation leaves a vacuum for abuse by all sides. For local content policy to work, it ought to satisfy three key things;
Stakeholder buy in
Legislation created without consistent dialogue with the stakeholders is destined to fail but can be successful when this consultation is led by an independent third party.
Time to embed and adapt to new any policy or legislation is key.
There is need to be realistic in what can be achieved in the short term, given that the industries most affected require specialised, high-end technological inputs that are often sourced through globally integrated supply chains. Overly ambitious local content policies tend to create supply bottlenecks and negatively impact all concerned.
Setting specific targets
Rigidly enforced targets do not adapt to fundamental changes in market conditions. Businesses will have to drastically rethink their operating models and what is affordable, as they work with new rules. The policy can be wrongly seen as a cost of doing business. If not carefully managed, it can create rent-seeking behaviour and market abuse that actually denies locals the very opportunities this legislation is seeking to create.
There is a compelling need of a local content policy in Zimbabwe. What is critical is that all stakeholders are continuously consulted in the drafting of the policy and continue to be involved during implementation and beyond. Despite the shortcomings of much of the local content legislation in Africa, a framework to operate within is better than no framework at all.
Gundani is the chief economist of Buy Zimbabwe, as a proponent of a local content policy as the market-friendly and WTO compatible means to enhance local production (industrialisation). These New Perspectives articles are coordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society, e-mail: email@example.com and cell +263 772 382 852.