The ugly face of protectionism

Last week Industry and Commerce minister Mike Bimha was quoted as saying the anachronistic beggar-thy-neighbour protectionist trade policy was on the verge of being scrapped. This week, he changed tune, saying the policy is still in full force.

Colls Ndlovu,Economist

Through protectionism, consumers bear the brunt of price increases.

Through protectionism, consumers bear the brunt of price increases.

Despite the minister’s spirited defence of the policy, which included questionable claims and exaggerations that can’t stand the test of analytic economic scrutiny, the much-maligned Statutory Instrument 64 (SI 64) has generated a negative feedback loop for Zimbabwe as the country’s trading partners may resort to adverse retaliatory policy measures that disadvantaged Zimbabwean cross-border traders.

When this ominous instrument was introduced, ostensibly to protect Zimbabwean domestic industries, which hardly exist after years of massive de-industrialisation due to the economic crisis and an associated wave of company closures, this writer warned that this was a drift towards a dangerously inward-looking and toxic policy which could only achieve negative results in the final analysis.

Zimbabwean authorities do not seem to understand the economic principle called the fallacy of composition. That is to say, what is true of one is not necessarily true of the whole. By protecting local industries, the rationale is that the country would then achieve industrial growth.

But what they forget is that by so doing, they then inadvertently kill the industries of their neighbours, who were hitherto to some extent dependent on the Zimbabwean market. This then triggers the neighbouring countries to also seek to protect their own industries by banning imports from Zimbabwe as South Africa and Zambia have been contemplating.

The problem with protectionism is that always and everywhere, it has had adverse devastating consequences for consumers in the end. With protectionism, the hoarding of goods and artificial shortages creep in, all as a ploy to push prices up in the name of scarcity. Local manufacturers start colluding and through a co-ordinated process, begin to create rampant artificial shortages of certain products, knowing fully well that consumers cannot import them.

When this protectionist statutory instrument 64 was introduced, we challenged consumers to do the following simple experiment: i.e, put all the goods (one item per product range) that had been gazetted for protection against imports into a basket and calculate their price.

After three months revisit the same basket and recalculate their prices and see by how much these goods would have gone up. As a control experiment, take a basket of goods that had not received protection and do the same calculation and recalculation after three months. The results would speak for themselves.

At the time Zimbabwe was experiencing a combination of deflation and disinflation (implying prices that were not rising). Today, as a direct result of that protectionist measure, Zimbabwe’s inflation is rising and is already in positive territory. That trend will continue with such policies in place.

The ugly face of protectionism is that it causes inflation through higher prices as highlighted above. The unintended consequences of protectionism include destruction of jobs rather than creating them.

Economic history has shown that protecting inefficient firms proves to be worse than useless as such protected firms seldom get better. Sunset industries end up attracting new capital that should have been better spent elsewhere.

Think about the policy of protecting a company that makes black and white television sets. There is no rationale for protecting such a company because if it becomes innovative, it should need no protection.

Since protectionism tends to shield the inefficient industries, it then weakens those that can compete as they are left to the vagaries of the markets, while weak ones are protected. Protectionism has the overall effect of reducing a country into a closed economy or market North Korea-style.

The root cause of lack of competitiveness is not addressed as protectionism hinders efforts to become quality oriented, by taking the heat off the worst offenders. Innovation generally comes from the free exchange of ideas, information, technology and products across borders. Protectionist attitudes slow the exchange of innovative ideas and technologies.

One may wonder what the benefits of competition are: Look at how efficient the transport system now is in Zimbabwe. Almost every family, inclusive of “small houses”, has a car and that pushes the standard of living of the people up. Had the government continued with the ill-conceived policy of protecting Zupco or the inefficient Willowvale Motors, then the country would still be mired in the doldrums of transport ineffiencies. Gone are the days of the long transport queues at bus termini. All these consumer gains were courtesy of the government’s relaxation of protectionist policies and allowing its citizens to import cars directly from abroad. Today Zimbabwe has one of the cheapest forms of public transport to and from work.

Former US Federal Reserve chairman Ben Bernanke has argued that a retreat into protectionism and isolationism would be self-defeating and, in the long run, probably not even sustainable.

In the case of Zimbabwe, what has led to the dramatic improvement in the transport system has not been protectionism, but rather the embracement of the many opportunities provided by free trade.

The broad benefits of trade may come at a cost to some local industries, but as we have highlighted above, through the fallacy of composition, when one or two industries suffocate as a result of competition, a thousand other industries are powering ahead and growing, generating jobs.

While trying to ameliorate such pain, there is no need to stand in the way of economic growth and improvement in the standard of living for the people by resorting to a sledge-hammer response.

In general, a drift towards protectionism is the option with the worst economic return. The economic price of protection, in terms of distorted incentives, reduced flexibility and broader costs on the economy as a whole, seem both more substantial and more enduring than any temporary economic and political benefit.

Economic openness tends to affect some industries and some workers within an economy. But the adverse impact suffered by those so affected are a drop in the ocean relative to the broader and bigger benefits enjoyed by the economy as a whole in line with the economic dictum that what is true of one is not necessarily true of the whole.

The pains of one worker who loses his job due to imports are outweighed by the gains of millions others whose standards of living goes up due to imports. Admittedly, the natural reaction of those so affected is to resist change, for example, by seeking the passage of protectionist measures.

Policymakers would rather help these displaced workers by retraining them to fit into the new ensuing economy rather than to stifle innovation. Economic theory and economic history have provided ample evidence showing that changes in legislation and regulation that tilt toward economic isolation and protectionism are retrogressive and unhelpful.

Former US Federal Reserve chairman, Alan Greenspan once argued that protectionism in all its guises, both domestic and international, “does not contribute to the welfare of workers”. At best, it is a short-term fix for a few workers at a cost of lower standards of living for a nation as a whole.

Training for those displaced by the Schumpeterian process of “creative destruction” is the answer, “not a stifling of competition”… through protectionism.

In conclusion, protectionism is counterproductive and should the neighbours retaliate (as they have already done to Zimbabwe in some respects) by restricting imports into their own markets, overall standards of living deteriorate. Invariably, consumers tend to bear the brunt as they would begin to experience rising prices and getting goods of inferior quality.

Ndlovu is an independent economist and a financial risk consultant. He writes in his personal capacity.

One thought on “The ugly face of protectionism”

  1. vembuya says:

    The funniest thing in Zimbabwe is we have people who call themselves strategists, economists, doctors and the like who think like new born babies. We have failed to run anything profitably because we always think of our tummies, the nicest cars which even Messi who generates more revenue than the whole Zimbabwe does not drive. We build mansions and go to meetings daily to talk and no production. We have punch drunk youths whose sense of entitlement leaves a lot to be desired.

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