Zimbabwe Manufacturing: need for a paradigm shift in policy

Following the economic downturn caused by the global financial crisis, most economies have focused on increasing exports in an effort to reduce the widening trade deficits. This has been no easy fit however, with global demand weakening on the back of a less than impressive world economic outlook as indicated by forecasts from the Bretton Woods Institutions.

In fact, the European Commission forecast a 3% decline in economic activity, with the 17 member Eurozone bloc`s economy expected to contract by 0, 4% this year and stagnate in 2013. Domestic demand in the Eurozone continues to be muted by the belt-tightening austerity measures currently being implemented in most of the Eurozone bloc, meant to maintain a balanced budget. However, since the onset of the Global Financial Crisis in the last quarter of 2007, China has continued to be the major driver of the global economy, with the world`s second largest economy growing at an average of 10 % a year for the past 3 decades.

Nonetheless, declining global demand has also started having a toll on the economic powerhouse, with the People`s Bank of China lowering interest rates twice this year and the Chinese central bank also reducing the Reserve Requirement Ratio, in an effort to spur growth, driven by increased consumer spending. The weakening global demand has not only affected China alone, with Japan, the world`s 3^rd biggest economy, currently in a technical recession following two consecutive quarters of contraction. Home to some of the world`s largest manufacturers such as Sony, Toyota and Panasonic, Japan has posted trade deficits in 10 of the last 12 months according to Bloomberg BusinessWeek statistics. This trend has come on the back of decreasing manufacturing orders, which are an indicator of capital spending.

Proponents of export-led recovery have been left with mud on the face, as the recent global patterns have rebutted the fundamentals of the theory. The interconnectedness and interdependence of the global economies has a domino effect, implying that a slowdown in one economy will lead to the rest of the global economies faltering like deck of cards. This can be evidenced by the case of Germany, which had largely remained insulated from the economic meltdown in Europe, but recently, European Central Bank president  has warned of a slowdown in Germany`s economic activity.

The overall impact of this global weakening in demand obviously has dire effects for Africa`s economy. Historically, Africa`s economy has been structurally dependant on primary production although efforts have been made in expanding into both the secondary and tertiary industries albeit, to a limited extent. Slumps in the prices of primary commodities have an overreaching effect as most of Africa`s economies, especially the sub-Saharan economies do not have buffer mechanisms to withstand such economic shocks.

Not far beyond our borders, South Africa, the world`s biggest producer of platinum, accounting for 88% percent of the world`s platinum reserves and about three quarters of global platinum production, has been affected by the dip in platinum prices over the last year, caused by the decline in demand for platinum by the end users in the automotive industries, which together with rising labour costs has caused losses in industry heavyweights like Anglo American Platinum of R256 million in the first half of 2012. The net effect has been to cut back on spending and downsizing operations.

Much of this argument may seem foreign in the Zimbabwean context, given that the Confederation of Zimbabwean Industries released statistics showing that the capacity utilisation plummeted from 57, 2% in 2011 to 44, 2% in 2012, and reasons cited for this include liquidity constraints, erratic utility supplies and inflexible labour laws. Given all  this, Zimbabwean Industries are faced with the twin challenges of not only figuring out a way to navigate  around the problems of declining global demand, but also to come up with solutions to increasing capacity utilisation.

To circumvent the problem of weakening global demand, the answer may not be as far-fetched as it may initially seem. The African Development Bank estimates that in the next 20 years, there are going to be 2 billion people in Africa, with at least 1,2 billion people living in urban cities, and of these, 300 million will be earning about US$20 a day, creating a US$2 trillion market annually. This implies that significant efforts must be channelled at positioning Zimbabwean industries to tap into this growing market. We have been witnessing the trend of increased investment flows into Africa, as companies and investors from abroad seek to establish a foothold on the continent to have a slice of the cake. To put it into context, China through China Export-Import Bank earlier this year pledged up to US$20 billion in loans for infrastructure development such as dams to generate power, and rail-road networks to improve accessibility, over a 3 year period with emphasis being placed on trade rather than aid. It is evident therefore that going forward, the continent will present a ready market for Zimbabwean industries. The plans to establish a Pan-African free trade area will all the more add to the allure of the African continent as a vibrant market.

The weakening global demand will lead to a ‘survival of the fittest, elimination of the weakest’ type of phenomenon, with manufacturers who cannot produce efficiently, hence cheaply, being driven out of the market. It is critical therefore for deliberate efforts aimed at developing infrastructure, technology locally and improving supply of utilities like electricity and water, to ensure our local products remain competitive, be implemented. We have already seen the potential Zimbabwean companies have on the continent, take for example Seedco with a 50% market share in Malawi, 46% in Zambia and Tanzania, and plans to enter into the Nigerian and Ghanaian markets next year.

The challenge therefore would be to increase capacity utilisation and operational efficiency in local industries. We have to take a long hard look at ourselves as a nation. With all the capital flows that have been coming onto the African Continent, in the last decade or so, why have Foreign Direct Investment Inflows into Zimbabwe been meagre, given the human capital and mineral wealth we have, when other countries which are not as endowed in skilled human capital and mineral wealth as we are have enjoyed significant Foreign Direct Investment flows. Various analysts believe the current uncertain political environment which has been creating ‘noise’ in the financial markets has kept investors at bay, further giving currency to the age old adage common amongst private equity investors that, “money does not like noise.” It follows that, government has to craft policies guaranteeing a stable business environment, which will act as a catalyst for the much needed Foreign Direct Investment.

Increasing focus has to be placed on Small to Medium Enterprises (SMEs), to spur economic recovery. Industry and Commerce minister, Professor Welshman Ncube suggests that SMEs are crucial in driving the economy due to their high labour-to-capital ratio, and as such, can be turned around much cheaply than conventional larger industries. The role of SMEs is multi-pronged, with benefits in areas such as employment and poverty reduction and other positive spin-offs of their presence like increased productivity in the economy. With an ever widening trade deficit, it is unsustainable for Zimbabwe to continue incurring a high import bill, importing such basic things like clothes, chickens and such other trinkets. Support must be given to the SMEs to venture into sustainable agri-business, Information Communication and Technology which is the country`s fastest growing sector with tele-density increasing locally and other fast moving consumer goods sectors which will always have a market as the number of people living in urban cities and the  general level of affluence increases in the economy.

Indeed, Zimbabwe`s own version of the ‘New Deal’ is needed to revive the manufacturing sector. Our competitive advantage lies in the skilled human capital we have. The period from 2009 to 2011 witnessed a resurgence of our industries albeit a lacklustre performance in 2012, this indicates however, the potential Zimbabwean Industries have. Progressive synergies between government, the finance sector and the industry have to be nurtured so as modernise and shore up the business environment and attract the much needed funding to revive industry.

There are some analysts who believe that, perhaps due to the nature under which our local industries where established in the then Rhodesia, were a policy of self-containment was being pursued to reduce reliance on imported commodities to counter isolation, Zimbabwe should shift economic ideologies. The argument is that, our industries were never built to compete with foreign ones and given that after independence in 1980, since there was not much capital investment in local industries; they lack the technological means to produce efficiently.  Considering the antiquated machinery local industries are using, this argument seems to have its merits. It follows therefore that focus should be shifted to establishing Zimbabwe as an investment hub by turning it into a tax haven, and establishing the necessary regulatory and political policies to attract the rise of a robust financial services sector. Other countries like Dubai and Singapore have gone his route, and the benefits are there for all to see.