Economic Focus: Paying the price of de-industrialisation…Its causes and implications

Source: Economic Focus: Paying the price of de-industrialisation…Its causes and implications – Sunday News August 14, 2016

Dr Bongani Ngwenya

Preamble:
INDUSTRY is an important factor of economic growth, although it may cease to be an activity that employs the most workers, as new technology innovations emerge to replace human labour.

Therefore, especially after the economic challenges experienced around 2008, Zimbabwe was expected to have considered an array of different measures geared towards encouraging industrial growth.

The lack of structural economic changes that needed to be made after Zimbabwe adopted the multi-currency regime and rapid de-industrialisation are the main reasons behind the country’s failure to achieve its industrial potential, notwithstanding the fact that the economy has always been agriculture-based and driven.

Zimbabwe has experienced a secular decline in its share of manufacturing employment, a phenomenon that exited a period leading to the economic problems in 2008, and has not subsided even to this day.

De-industrialisation, in simple terms, is the decreasing importance of the industrial sector. It is a phenomenon observed in the disintegration of the formal economy into informal. It is also defined as the relative decrease in employment in industry or share of industry in the country’s Gross Domestic Product (GDP). In some countries that have experienced de-industrialisation, including developed countries, de-industrialisation has seen a shift in the concentration of employment, from industry, especially manufacturing to an expansion of the services industry — that is positive de-industrialisation.

However, Zimbabwe has experienced negative de-industrialisation. When our industrial capacity continues to shrink, as more and more companies shut down and throwing thousands of workers out of jobs, the services sector is even much more affected.

During de-industrialisation, Zimbabwe’s declining share of employment in manufacturing industries appears to mirror a decline in the share of manufacturing value added in GDP. De-industrialisation has contributed to the persistently high formal unemployment rates experienced in Zimbabwe, which started manifesting itself as early as around year 2000.

Causes of de-industrialisation:

Zimbabwe is not an industrial country in the true and modern sense of the term. Like most of developing countries, especially on the African continent Zimbabwe’s economy is driven by export commodities earnings, that is, minerals and agricultural produce. The sector that has experienced the most onslaught of de-industrialisation in Zimbabwe is the textiles. It used to be the largest provider of employment after agriculture.

Consequent upon recovery from hyperinflation, the textiles sector in the country has seen a massive influx of cheap textiles and clothing imports and the domination of cheap imports of cloth into the local market has caused a lot of havoc. It has created large scale unemployment in the clothing and textiles industry as well as unbelievable drop in wages among the local clothing designers, spinners and weavers.

The other sectors which could not make necessary adjustments to withstand the savage onslaught from imported goods are the basic food staffs and iron and steel and other light engineering manufacturing, just to mention a few.

There is strong argument for internal causes as well, such as the weaknesses in the Zimbabwe industrial structure itself that must also be blamed for this decline of the industry or deindustrialisation. Zimbabwe has no clear industrial policy for example. First, no efforts were made to explore external markets for most of Zimbabwean manufactured products.

In the case of external de-industrialisation, the changes in economic structures had a negative impact on employment tendencies, with declining industrial employment potential, unfortunately the service sector cannot compensate for the difference. In my opinion external factors, such as spiralling recession can cause de-industrialisation when the decline in employment is mostly due to structural changes despite the purported increase in service sector employment elsewhere in the world. However, that notion does not count for Zimbabwe, as its services sector is equally affected — informal sector is not synonymous to services sector.

The price or implications of de-industrialisation:

De-industrialisation in Zimbabwe has seen a straightforward decline in the output of manufactured local goods or in employment in the manufacturing sector in general. The gap created in capacity production has been filled by imports that are cheaper and have caused a serious competitive challenge for the little evidence of industry existing in Zimbabwe. This has necessitated the Government to impose the import restrictive measure in the form of Statutory Instrument (SI) 64 of 2016.

There is a potential of seeing prices of locally produced goods marginally going up, pushing the cost of living higher, unless there are immediate measures taken to reverse the process of de-industrialisation.

The other major challenge is that Zimbabwe does not have a clear industrial policy, maybe as result of the historical structural problem of the country’s economy being commodity-based. Agriculture and mining have always driven the economy of this country, albeit its own challenges of susceptibility to commodity price volatility.

It is for these reasons that most of the developing countries, such as South Africa, Indonesia, Malaysia, just to mention a few are seriously taking the route of industrialisation. As I have alluded above, in some countries, positive de-industrialisation has caused only a shift from manufacturing to the service sectors, so that manufacturing has a lower share of total output or employment. This is positive de-industrialisation, which sees a decrease in the performance of the manufacturing sector, at the same time an increase in the performance of the services sector.

The net effect is that there is no change in the overall performance of the economy as a whole, unlike in the case of negative de-naturalisation that Zimbabwe has gone through from the past several years now. We have deliberately let our industry die. Manufacturing companies have failed to rejuvenate their machinery and equipment for example, much of it that has become technologically obsolete. I remember attending a CZI meeting in Bulawayo some time in 2012, where the then president of the Bankers Association was at pains in trying to explain and justify the reasons why bankers are finding it difficult to extend credit to some of the manufacturing companies, especially in Bulawayo.

Of course that was controversial. However, the reasons given were that most of the assets that are pledged for collateral were now unbankable — because they had grown obsolete.

The other price that Zimbabwe is paying is that, the locally manufactured goods have comprised a declining share of Zimbabwe’s external trade, so that there has been a progressive failure to achieve a sufficient surplus of exports over imports to maintain a positive economy in external balance and equilibrium. A continuing state of balance of trade deficit that has accumulated to the extent that Zimbabwe as a country is unable to pay for necessary imports — critical machinery and equipment to sustain further production of local goods, thus initiating a further downward spiral of economic decline.

There is argument that some studies conducted have put Zimbabwe’s unemployment levels at 10 percent. I have said to my MBA students that, such studies depended on the researcher’s definition of unemployment, where for example selling tomatoes in the streets could have been counted as a form of employment.

However, judging from the fiscal challenges that the Government of Zimbabwe is facing, it is clear that de-industrialisation in Zimbabwe has seriously affected unemployment levels in this country, because there is a correlation between loss of formal employment and reduction in Government taxation revenues. As more companies, especially in the manufacturing sector or industry closed down, throwing hundreds of people into the streets, it meant a double or dual reduction or withdrawal in the fiscal revenue contribution — bearing in mind that companies on their own are institutional taxation payers, at the same time their employees are individual taxation payers and contributors to the fiscus.

In conclusion, de-industrialisation in Zimbabwe means that the economy is almost wholly dependent on primary or commodity export earnings, which is not sustainable because of commodities’ vulnerability to volatility in prices and economic changes in the commodities consuming countries. De-industrialisation has also affected the country’s ability to substitute imports.

We need to think seriously about getting our industries fully functioning again.

Dr Bongani Ngwenya is a Bulawayo-based economist and senior lecturer at Solusi University’s Post Graduate School of Business. mailto:ngwenyab@solusi.ac.zw/ nbongani@gmail.com