For the past four years or so the government of Zimbabwe has embarked on a policy to promote substitution of imports with locally produced products, as well as to add greater value to products locally for both local and foreign markets.
The government’s policy on import substitution and value addition has mainly centred on manufacture of industrial components and spaces, a rather narrow portfolio given that the demand for some of the materials coming out of Zimbabwe is quiet high.
The following is a justification for the government’s continued focus on the import substitution and value addition program, with perhaps the added emphasis on export promotion.
Import substitution
Import substitution is simply the local provision of goods and services to achieve the same ends as products that are brought into the country. While promoting this policy the country fist of all stands to benefit from reduced deficit in balance of payments. With the continued failing of Zimbabwe’s economy and reliance on other countries to meet local demand through imports, the country’s foreign currency reserves have been continuously eroded. As the country seeks economic resurgence, the accumulation of foreign currency is high on the monetary policy agenda. As less is imported by virtue of local products being used to meet demand, the country has a few less foreign currency consumers to think about.
The following are the main benefits that are derived from the import substitution initiative.
1. Employment creation.
Through import substitution activities employment is created in various sectors of the economy. The most significant are of job creation is in the manufacturing sector where a combination of skilled and unskilled jobs are created. Given the high rate of unemployment that prevails in Zimbabwe, the initiative, if well funded, has the potential of having a significant contribution towards alleviating this challenge. Zimbabwe boasts of a highly educated population but due to the prevailing economic challenges, large numbers of highly skilled individuals are currently unemployed meaning that the country is losing potential revenue from their inactivity, and does not benefit from the investment into their education and training.
Employment and the resulting earnings on an individual level is the greatest contributor to market activity. Through the promotion of increased spending on the local market by the creation of more jobs and eventually higher earnings through the benefits of economies of scale, the employment creating ability of import substitution can significantly contribute to economic resurgence.
2. Reduction of balance of payments burden.
In international trade the imbalance in imports and exports affects the country’s foreign currency reserve situation. In situations where the country imports more than it exports, the country’s foreign currency reserves are depleted. This is the prevailing situation in Zimbabwe and over the past decade of so the situation has resulted in the country’s foreign currency reserves being depleted to the extent that basis and critical services cannot be procured.
By reducing imports through local production of goods that are currently being bought externally, the burden on the foreign currency that is currently being generated is reduced. Given that not many local industries that export are operating at full capacity, and that the critical agricultural and mining industries that bring in a significant amount of the country’s foreign currency, are under-resourced to produce at optimum capacity, the country already faces the challenge of generating sufficient foreign currency for its day to day requirements.
Import substitution, particularly in the areas of consumer goods and parts and spares for the manufacturing, transport, mining and agricultural sectors would significantly reduce the country’s imports as these industries are not sufficiently serviced locally and the bulk of products for these sectors are imported from neighbouring countries.
The successful management of the import substitution program may in the long-term result in the country producing excess high quality goods that can compete with the products that are currently being imported. At this point, the country will be able to generate extra foreign currency through the export of new products and services.
3. Products and services to meet the requirements of all segments of the local market.
At present, through the country’s look east policy, as well as trading relations with South Africa, products to meet basic requirements for both industrial and domestic consumption are made locally available. In some instances however, the quality of the products does not adequately meet the requirements of the market, as is the case with some clothing imported from Asia. While products are now locally available, certain segments of both the domestic and industrial markets are not adequately services.
With the promotion of import substitution, the exact requirements of local markets can be addressed at reasonable prices, which is currently not the case. This initiative will reduce the need for imports from countries that do not deal favourably with Zimbabwe, which inadvertently increases the cost of imports from these countries.
At present the markets most affected by the present import regime are:
- Domestic electronics,
- Tyres for light vehicles.
4. Avoid foreign policy risk: embargoes and sanctions.
For over a decade the country has been subject to economic and political sanctions from a number of European countries, the United States of America, Australia and other significant economic powerhouses. The results of these sanctions have been far-reaching in both areas of import and export.
The country has had, for the better part, been forced to seek other markets for the supply of machinery and spares for equipment procured from there and other hostile countries. Areas that have been affected significantly include the transport sector, where for example, US procured locomotives have had to be serviced locally due to the suppliers’ unwillingness to continue dealing with the country. This scenario has been seen in several areas that cover domestic goods as well as military equipment.
The continued political instability of Zimbabwe has meant that despite the institution of a multi-party government, some countries have continued to enforce trade restrictions on the country, depriving the nation of critical services and supplies.
Through the promotion of locally produced goods to perform the same functions as those that were traditionally brought in from countries that are now hostile to Zimbabwe, critical industries such as the health delivery sector, manufacturing, and defence, will not grind to a hold.
Since the inception of this program by the government of Zimbabwe, several companies have shown that the country has the capability, but perhaps lacks sufficient capacity, to produce products and services that can parallel the quality of what has traditionally been imported.
the country’s abundant natural resources, which are well sought-out by many of the countries we call hostile, puts Zimbabwe in a good position to become an economic powerhouse. Through research and development to achieve comparable technology in the areas of defence, food production and manufacturing,
Value addition
Value addition is in essence the processing of products to a greater extent than the current level. There are several reasons why value addition is beneficial to the local economy, and financial benefit could by far be the greatest benefit. Zimbabwe’s mining sector is one area that could yield great benefits to the country if value addition was introduced and fervently practiced.
1. Greater contribution to Gross Domestic Product.
Value addition takes several forms depending on the product that is being transformed. Whatever the case may be, this involves as process that increases the investment into the finished product, and hence its value. Packaging is a typical vale addition process that is used for foodstuffs. This significantly increases the market value of the sold product, resulting in each unit of product having greater contribution to Gross Domestic Product than a comparable semi-finished product.
Through value addition process, more man-hours are put into developing the final product, and it is likely in the case of manufactured products that more material is added to produce the final product. These activities directly increase aggregate disposable income as well as result in greater earning down the supply chain.
In effect value addition is comparable to the creation of a new line of products and new industries. The advantage however of building the value addition process into traditional products and processes is that there is less capital required for the setup of production facilities, and these activities can be effectively executed through process redesign, which is a process Zimbabwean industries will inevitably have to undergo to reduce costs and have their products become cost competitive.
2. Promotion of infrastructure development.
As the drift towards adding value to products proceeds, industry at large will undertake to develop its facilities to cater for new product lines and improved manufacturing processes. In line with this development, both local and central government will be forced to contribute to infrastructural development particularly in the area of transport, wherein road and rail networks will undergo upgrading to cater for increased load.
The sustainability of the developed industries will afford the cost of these infrastructural developments
3. Greater indigenous participation in local economy.
The government of Zimbabwe has made efforts to promote indigenisation of various sectors of industry; through the enforcement of shareholding quotas and other mechanisms. Through the value addition program, native Zimbabweans have the opportunity to enter previously undeveloped sectors of the economy, leading to their economic empowerment.
Foreign organisations and nationals, prompted by their national legislation at time, have avoided setting up enterprises that ensure only a finished product emanates for countries they invest in. For this reason many of the products that leave developing countries are semi-finished or subassemblies. This has created a void which indigenous business people can tap into without having to encounter much competition from foreign owned businesses.
Export promotion
The defining metric for the success of the import substitution and value addition program is the increase in the country’s exports.
The successful implementation of the program will inevitably result in the country’s exports of both traditional and new products to trading partners. The trend is likely to begin with the exploration of new markets in the developing world and expand to markets in the developed world. Given this profile, the country would likely achieve great success if it was to promote the production of low cost products for primary industries as these are the main economic activities of a great number of developing countries, Zimbabwe included.
The need for export promotion cannot be overemphasised as this is the keystone of the import substitution and value addition program.
While it is good for the country to promote local production for local consumption, it is only through exports that local industry can influence monetary policy and provide a solid basis for the reintroduction of the Zimbabwean currency.
Conclusion
The present successes of the import substitution and value addition program indicate great potential for the program’s contribution to the country’s all-round economic turnaround.
The effective management of the program is critical for the purpose of identifying critical sectors to prioritise and which have the greatest economic impact.
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