Will local industry get protection through Statutory Instrument (SI) 64 of 2016?

Source: Will local industry get protection through Statutory Instrument (SI) 64 of 2016? – Sunday News August 21, 2016

Economic Focus with Dr Bongani Ngwenya

THE primary goal of import restriction, either by a complete ban or import quota is to reduce imports and increase domestic production of goods, services, or activities, thus protect domestic production by restricting foreign competition. An import quota is a limit on the quantity of goods that are produced abroad and sold domestically.

It is a type of protectionist trade restriction that sets a physical limit on the quantity of goods that can be imported into the country in a given period of time. If a quota is put on goods, less of the goods are imported. Quotas, like other trade restrictions, are used to benefit the producers of goods in the domestic economy at the expense of all consumers of the goods in that economy.

The domestic and foreign goods are homogeneous, and are supposed to be produced by competitive firms in both domestic country and foreign country. As the quantity of importing the goods is restricted, the price of the imported goods increases, thus inducing domestic consumers to purchase domestic products at higher prices.

In June, the Government decided to implement the Statutory Instrument (SI) 64 that restricts importation of basic goods such as coffee creamers, camphor creams, white petroleum jellies, plastic pipes and fittings, building materials, baked beans, cereals, bottled water, second hand tyres and many more products.

Argument for local industry protection:

Well, there’s a case for it, that the industry in this country and the Government has been making quite often, but I don’t agree with the rationale. The argument is that the local industry is facing stiff competition from the influx of cheaper imports. While there is a possibility of an increase in domestic production of goods, as the restriction of imports imposed by the Statutory Instrument (SI) 64 of 2016 is being effected, the expected decrease in the marginal cost of production with cumulative production may not be realised at full potential in our situation.

In addition to the price of de-industrialisation that Zimbabwe has to pay, which I wrote about in the last Sunday’s instalment, there is a structural problem of production cost and cost of doing business in Zimbabwe as a result of dollarisation.

Immediately when Zimbabwe adopted multi-currency regime, Zimbabwe was turned into a high cost of domestic production and investment country, compared to its regional trading partners in the Sadc for example.

Not very far in the past, the very same industry was seized with this challenge. The Confederation of Zimbabwe Industries for example was muting the possibilities of an internal devaluation, which I responded to in one of my articles and explained the reasons why that option could not work in the Zimbabwean situation — that is, in the absence of an exchange rate. It is impossible to devalue another country’s currency.

A country can only devalue its own sovereign currency. The question is how can we deal with this challenge of being a high cost country as a result of dollarisation, in order to keep the price of our locally produced products affordable to the consumers? The other question is, is our industry really suffering from the “infant industry” syndrome that we seem to be borrowing from as an argument for protection? It’s called the “infant industry” argument — when an industry is in its infancy, the argument goes, and it needs Government protection to get started or it will be swallowed up by international competition.

The problem is that the infants never grow up, because once the protections are established, they become “special interests” who are well-protected and never go away. We are about eight years from hyperinflation era around 2008, and our industry has failed to recover. Instead we have experienced a massive de-industrialisation taking place, coupled with declining foreign direct investment inflows. Zimbabwe’s case is not a case of “infant industry”, but a case of dead industry because of de-industrialisation. Zimbabwe’s situation may not be remedied by import restriction. It requires, initiation of “industrialisation” targeted economic reforms. An economy cannot be sustained by fire-fighting measures all the time. Import restriction is a fire fighting measure, so were the quasi-fiscal activities by the then Reserve Bank Governor Dr Gideon Gono during the period leading to hyper-inflation.

The argument is, I am failing to see the justification for “infant industry” in our situation. Elsewhere in the world, for example, in Japan, the auto industry in the 1960s was just getting started and faced harsh competition from the established USA giants. They got lots of protection as an infant industry. If we read the news today, Ford & GM still have trouble in getting their cars sold in Japan, and trade negotiators regularly and normally complain about automobile protectionism, even though Toyota, Nissan, and the rest are clearly no longer “infants.”

Our industries do not necessarily fall in this category, notwithstanding the fact that, yes, the industry is coming from an experience of hyperinflation and economic meltdown. The biggest challenge is that when we abandoned the Zimbabwe dollar and adopted multi-currencies, we only thought of our economy having to recover from that experience, and failed to look at the economic melt-down experience as an opportunity to institute necessary economic reforms to avoid going back to economic challenges again.

Infant industry protection does make sense of course if there are international competitors and there is that strong industrial policy to want to see the local industry thriving in the country. But we should always interrogate why we want the industry in our country — how do we, as an industry and an economy in general offer some competitive advantage in the long run that will meet and beat the regional competition?

In conclusion, the problem with protectionism is that the guy getting the monopoly has a big stake in it, and will spend millions to lobby for it. So the monopolist lobbies and makes arguments like “infant industry” and wins, and maintains his monopoly indefinitely. Food for thought.

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