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Part II. Country studies

7. Zimbabwe
8. Tanzania
9. Nigeria
10. Kenya
11. The Ivory Coast
12. Mauritius
Appendix: Survey questions

7. Zimbabwe

Introduction
Textiles and clothing
Footwear
Agricultural machinery
Conclusions
Bibliography

Dan Ndlela and Peter Robinson

Introduction

Phases of industrialization

Beginnings of industrialization

Industrialization began in what was then Southern Rhodesia in the early decades of the twentieth century. By the early 1940s the country had a relatively sophisticated industrial base, ranging from the only integrated iron and steel plant in Sub-Saharan Africa to basic consumer goods industries. Around 10 per cent of GDP and 8 per cent of exports were derived from the manufacturing sector (Riddell, 1988, p. 2).

During the Second World War further import substitution took place. The establishment of the Federation of Rhodesia and Nyasa-land created a common market in what is now Malawi, Zambia and Zimbabwe. Much of the manufacturing investment to serve this market was located in Southern Rhodesia and the enterprises concerned became accustomed to serving markets in the other two countries.

The UDI period

The breakup of the Federation in 1963 was followed in 1965 by the Unilateral Declaration of Independence (UDI) by the minority government in Southern Rhodesia. Trade sanctions led to a new era of inward-looking import-substituting industrialization. In 1965 manufacturing accounted for just 17 per cent of GDP. By the end of this period, in 1980 this figure had risen to 24 per cent and the range of products produced had risen dramatically. Significantly, however, the ratio of manufactured exports to gross output dropped from about 27 per cent to 15 per cent (in 1992 this ratio was expected to be about 20 per cent), while the sector's utilization of foreign currency for raw material and capital equipment imports rose sharply.

Several features of the growth of the manufacturing sector during this period are important in understanding subsequent developments. The government created an extensive set of controls to ration foreign exchange (forex), for both investment and recurrent expenditure. With forex allocation reinforcing the tendency to monopolization in a small market, price controls were also established. These were intended to protect both producers, purchasing capital and intermediate goods from the manufacturing sector, and final consumers, especially regarding foodstuffs. Due to the political and economic repression of the black majority, a significant part of the consumer goods sub-sectors developed to serve an extremely narrow market with a surprising range of goods.

With the industrialists and the government of the day sharing a determination to overcome the impact of international sanctions, the system of controls was made to operate effectively and the highly protected system that they constituted did not lead to the gross inefficiency which has characterized other import substitution regimes. The need to adapt and innovate led to the development of a wide range of technical skills, particularly in various branches of engineering. The strong orientation to market requirements led to a proliferation of products, often produced within large, vertically integrated conglomerates.

With the strong domestic market orientation and international sanctions in place, the development of exports from the manufacturing sector was limited. The main market was South Africa, which did not abide by sanctions. Trade between the two countries was fostered through the 1964 bilateral trade agreement. This allowed Rhodesian manufacturers of items such as textiles, clothing, leather and footwear, processed food and furniture to export under preferential conditions to South Africa.

Post-independence

At independence, the new government maintained the panoply of controls over the economy, with the apparent intention of using state intervention to redirect development to benefit the mass of the population. However, the application of the controls in the absence of the rapport with the private sector that had existed under the previous regime, and the introduction of new controls on wages and labour relations, led to a situation in which the bureaucracy became a major obstacle to the running of any kind of economic enterprise. As foreign currency availability emerged as the main macroeconomic constraint, competition for access to imports became a major preoccupation for economic entities in all sectors, whether private or public.

The government's initial response was to introduce new incentives for exporters. The Export Incentive Scheme, whereby an exporter is paid 9 per cent of the f.o.b. value of exports (in Zimbabwe dollars), was introduced in the early 1980s. This was followed in 1983 by the Export Revolving Fund (ERF), which allowed exporters to have access in advance to the foreign currency needed to purchase the imported inputs required to manufacture goods for specific export orders (the ERF was scrapped in the first quarter of 1993). The ERF was targeted at the manufacturing sector; the Export Promotion Programme (EPP) catered for the mining and agricultural sectors. The Industrial Bonus Scheme allows a supplementary foreign currency allocation to be made on the basis of incremental exports achieved.

During the 1980s there had been a running debate with external agencies, particularly the World Bank, on the merits or otherwise of scrapping the foreign currency controls inherited at independence and adopting a programme of trade liberalization. The intention of such a programme would be to move towards a more open economy, forcing industries which had grown up under sanctions to face international competition and become more export oriented.

An initial study undertaken at the instigation of the Bank concluded that a high proportion of Zimbabwean industry was inefficient and should be closed down, including the iron and steel plant. The government found the conclusions unacceptable, and examination of the report revealed a poor application of domestic resource cost methodology, which would not anyway give definitive answers about long-term comparative advantage. Later and more careful studies by the Bank itself found Zimbabwean industry to be remarkably efficient, the operation of foreign exchange allocation and investment licensing having avoided many of the problems found in other countries with similar trade regimes. Even capital goods received a positive verdict. 'The conclusion that the capital goods industry in Zimbabwe is largely efficient is puzzling, since the same pervasive policy interventions in other African countries have led to disastrous results' (World Bank, 1989, p. 46).

The Bank's surprise has not led it to abandon its call for trade liberalization, or, for that matter, to draw any useful lessons for other African countries about what can be achieved by way of industrialization under a carefully managed import substitution regime. The argument for trade liberalization in Zimbabwe has just shifted ground: 'since most industries are efficient, they no longer need protection.'

Although it was not in a situation of economic crisis, in which the Fund/Bank would be able to set the main lines of policy, Zimbabwe itself has decided to embark on a comprehensive structural adjustment programme, of which trade liberalization constitutes a central element. The government's decision does not seem to have been directly related to efficiency considerations but was motivated by the political threat from the rapidly growing number of unemployed, many with a relatively high level of education, and the consequent need to move the economy from a lacklustre 3 per cent p.a. GDP growth rate to at least 5 per cent p.a., with a much higher rate of job creation than was achieved in the 1980s.

The strategy now being pursued is to borrow the foreign currency needed for investment, reduce bureaucratic requirements for investment and the conduct of business, while also liberalizing trade in order to make the productive sectors far more outward-looking and to improve the availability, price and quality of goods (consumer and producer goods) on the local market. The overall success of the programme hinges on whether the export response is adequate and sustainable, enabling repayment of the borrowed funds and a diminution of the foreign currency shortage which in the past has been the major constraint on growth and development.

The phasing of liberalization was designed to maximize export performance, while giving industries time to adjust before facing competition from competitive imports. Thus the importation of production inputs was to go onto Open General Import Licence (OGIL) before outputs, with priority for inputs for sectors in which export volumes are assured or for linkage' sectors which do not directly export but are important in the export chain. Sectors where the export price has traditionally been lower than the domestic price are to have their inputs liberalized last, the intention being that they should earn the foreign currency they need through an Export Retention Scheme (ERS).

The ERS was thus introduced at the same time as a start was made on putting imported productive imports onto OGIL, from mid-1990. The ERS allows exporters to retain a proportion of the foreign currency earned to be used to import raw materials, spare parts or capital equipment. For the manufacturing sector, the retention rate was initially set at 7.5 per cent but was raised to 15 per cent from the end of 1991 and 25 per cent and 30 per cent for the two halves of 1992. It was increased to 50 per cent in April 1993. The restrictions on the use of ERS funds were removed (except for a small negative list) and trading was allowed from January 1992.

The ERS has clearly been intended as a major inducement to Zimbabwean firms to seek out export markets. Another important factor has been exchange rate policy. Since a devaluation in 1982, Zimbabwe has operated on a sliding peg exchange rate, which has served to offset an inflation rate of 15-20 per cent, generally higher than Zimbabwe's trading partners. In the third quarter of 1991, however, the Zimbabwe dollar was devalued drastically, moving from Z$3 to Z$5 to the US dollar, but was kept at that level during 1992.

Inflation rose rapidly, however, reaching 40-50 per cent by the end of 1992, and further depreciation of the currency was undertaken in early 1993. By February, the rate was Z$6.3 to the US dollar and since then it has been at around Z$6.5 to the US dollar. If exports are to be kept competitive, continued high inflation will require further devaluations to be made. Fortunately, in the first and second quarters of 1993, inflation fell to around 30 per cent.

Finally, mention should be made of post-independence trade agreements which have a bearing on exports. Zimbabwe has joined the Lomé Convention between the African and Caribbean States and the European Community and also the Preferential Trade Area for East and Southern Africa (PTA). Lomé has been extremely important for exporters of manufactured goods but the PTA agreement has had little overall impact on trade.

Other arrangements were disturbed by the PTA, however. In particular, when both Malawi and Zimbabwe joined the PTA the bilateral agreement between those two countries was dropped, resulting in a sharp fall in Zimbabwe's exports to Malawi. On the other hand, the bilateral agreement with South Africa was continued and consolidated in 1987 and another round of negotiations to extend the agreement is presently in progress.

As Botswana is not a member of the PTA, the bilateral trade agreement with Botswana has continued and has provided an important opportunity for Zimbabwean exporters. The Botswana agreement has also, however, provided opportunities for Zimbabwean companies (particularly in textiles and clothing sub-sectors)

to expatriate capital through transfer pricing, and has thus been controversial. A move by the Zimbabwean authorities to insist on the payment of a surtax which effectively removes the preferential access that Botswana-made goods previously enjoyed in Zimbabwe has resulted in retaliatory action by Botswana. This has had severe implications for Zimbabwean exporters.

Context of the study

Economic conditions in 1992

Even without experiencing one of the most severe droughts this century, 1992 would have been a difficult year for the economy. A critical element of the Economic Reform Programme is that government should significantly reduce its budget deficit through contraction of the public sector and the elimination of subsidies to parastatals. While progress was made on the elimination of subsidies, the additional burden imposed by the drought resulted in a much higher deficit during 1992 than had been planned, with the result that government appropriated an excessive share of liquidity in order to finance the deficit.

With the simultaneous opening up of the money market and the rapid escalation of inflation, interest rates rose to unprecedented levels (40 per cent as compared with the 10-15 per cent that had prevailed between 1965 and 1991). Delays in the payment of export incentives exacerbated the liquidity situation of many firms. With delays of six months not being uncommon, the value of the incentives was eroded. When the amount involved is as much as 5 per cent of annual turnover, which is not uncommon, this has had a negative effect on performance, including a company's ability to compete effectively in export markets.

While the liquidity squeeze led to much more efficient holding of stocks by the manufacturing sector, it also led to postponement of the investments which were meant to provide growth under the structural adjustment programme and, in many cases, a contraction in current production. Contract workers and some full-time workers were laid off during 1992 and short-time working was introduced. Tracing the economic links back, it is clear that government's reluctance to shed jobs in the bureaucracy led directly to conditions of high inflation and tight liquidity, resulting in companies in the productive sectors laying off workers. The loss of productive sector jobs, rather than unproductive bureaucratic jobs, is a major source of concern.

Besides the problems of liquidity and interest rates, production and investment were also limited by the state of infrastructures such as electricity, telecommunications and rail transport. Poor performance in these areas is a legacy of the neglect of maintenance, investment and management of key parastatals during the 1980s. The Zimbabwe Investment Centre (ZIC), which was meant to overcome the bureaucratic impediments to investment, has failed to do so. While ZIC procedures are acceptable for a large project and may produce faster results than a few years ago, this is not the case for small projects. Having to complete ZlC's 20-page questionnaire for a Z$100 000 import order (as cited by one of the respondents) was an unacceptable and unnecessary burden. Some changes to improve this have been introduced during 1993.

Other problems faced by the manufacturing sector, specifically highlighted by sample firms, were endless delays and obstructionism from the Department of Customs and the new policy on pre-shipment inspection of imports, which was seen as causing delays and unnecessarily raising the costs of imports. On the growing shortage of skills, the productive sectors were concerned that, while tax and other policies were encouraging a 'brain drain' of Zimbabwean skills, the policy on the recruitment of expatriate workers (on a short- or long-term basis) continued to be unnecessarily restrictive. Allowing ERS funds to be used for this purpose was seen as one way of reducing the impact of this constraint. This has not yet been implemented.

Although most of these problems ought to be resolvable by decisive government action, in practice they remained in 1992 an on-going drain on the energies of the productive sector. Over and above these issues, the impact of the drought in 1992 was devastating. From being an exporter of foodstuffs such as maize and sugar, and self-sufficient in most other food items, the country was obliged to find the resources to import two million tonnes of maize (the staple), plus sugar, cooking oil and a range of inputs to manufacturing that normally derive from the agricultural sector, including cotton lint. Mismanagement of the dwindling water resources in Kariba led to severe curtailment of hydro-electricity generation, requiring periodic load shedding and the subsequent implementation of a rationing system that cut supplies to manufacturing sector enterprises by 20-30 per cent as compared with their averages for the previous year.

Official estimates of economic performance are that GDP in 1992 fell by 7.7 per cent in real terms. The contribution of manufacturing fell by a larger amount (9.5 per cent), a reflection of a combination of the supply constraints such as water and electricity shortages and a precipitous fall in domestic demand. One of the legacies of the previous trade regime is the conviction that export performance should be subsidiary to a solid foundation in the domestic market. 50, although some firms responded to the decline in the domestic market by aggressively seeking out compensating exports, others were more hesitant.

Priority issues for investigation

Considering that the tight protection which has been in place at least since international sanctions were imposed against Rhodesia in 1965 is being rapidly dismantled, with the monetary and fiscal environment simultaneously altered, it is not surprising that a major preoccupation of exporters in Zimbabwe is with the policy framework. The emphasis in the current study is not on policy but on the areas of technology, product development and the firm's ability to adapt to changing world market conditions.

Although these issues are of considerable interest from the viewpoint of economic theory,² as will be seen from the case studies, these are areas in which Zimbabwean companies, or at least the larger ones, are confident. They see the challenge of exporting to be more one of finding a niche in overseas markets (or, to be more accurate, a series of niches) and ensuring that stringent delivery time and product quality standards are met, or of competing, increasingly with South African companies, for scarce foreign currency held by importers in regional markets. As trade liberalization proceeds, however, and Zimbabwean companies have to compete with imports of final goods, the challenge of achieving sustained productivity increases will be a real one. In the past, the protected domestic market was always available to cross-subsidize exports implicitly, the motivation for exporting lying in the incentives on offer, particularly the foreign currency incentives.

Manufacturing sector in Zimbabwe and choice of sub-sectors

In 1992, manufacturing constituted about 24 per cent of GDP when measured in constant (1980) prices, or 30 per cent in current prices. Manufactured exports, which included semi-processed minerals and agricultural products such as ferrochrome and cotton, are estimated to have accounted for 33 per cent of merchandise exports.

Recurrent imports for the manufacturing sector were larger than this, however. The proportion of productive sector employees working in manufacturing was estimated at 37 per cent.

Manufacturing had been set to expand rapidly under the structural adjustment programme but, as already mentioned, the drought led instead to a sharp reduction, with the volume of production falling by over 9 per cent. Not only sub-sectors dependent on agricultural inputs were directly affected: all of industry suffered from the sharp fall in incomes and hence reduction in domestic demand, while on the supply side firms had to contend with shortages of electricity and, in cities such as Bulawayo and Mutare, severe shortages of water.

As regards the choice of sub-sectors for the study, textiles and clothing were required to be chosen for comparison purposes, and are anyway critical sectors in Zimbabwe's drive to increase manufactured exports. Due to the strong linkages between them, it was found convenient to discuss textiles and clothing together (see pp. 152-48). Footwear, with backward linkages to leather production, was chosen because it is a commodity being exported into both regional and overseas markets. While entry barriers are relatively low in footwear exporting, competition is fierce (see pp. 171-3). Finally, agricultural machinery was chosen so as to include some aspect of Zimbabwe's engineering capabilities. Zimbabwean agricultural machinery has been developed for local conditions and the export market is limited to regional markets in which similar conditions apply (pp. 181-5).

To provide some quantitative measure of the size of the sub-sectors being studied, Table 7.1 gives an estimated breakdown of the manufacturing sector's contribution to GDP, exports and employment. This clearly shows that textiles and clothing are very significant in the manufacturing sector, particularly as regards employment. Footwear and leather, and agricultural machinery, on the other hand, are relatively minor sectors, with modest contributions to GDP, exports and employment.

Table 7.1 Estimated contribution of sample sub-sectors to manufacturing GDP, exports and employment 1992

Note: Exchange rate during 1992 was approximately Z$5 = US$1

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