Import Substitution

Import substitution refers to government strategies that emphasise replacement of agricultural and industrial imports to encourage local production for local consumption. Zimbabwe imported goods worth US$6,85 billion in 2018, a 38% increase from 2017.[1]

Background

From a continental perspective, 50% of Zimbabwe’s total imports by value in 2018 were purchased from fellow African countries which are South Africa, Zambia, Mozambique and Mauritius. Asian trade partners supplied 38,7% of Zimbabwe’s total imports while 11,3% worth of goods originated from European nations, Australia, North and Latin America. A closer look at the import bill shows that petroleum oils, machinery, electrical equipment, motor cars, vehicles and vehicle parts make up 55% of the import bill. However, the real concern is on billions spent on goods that are (or can be) produced locally and products that used to be produced in Zimbabwe.

As of May 2019 Zimbabwe imported agricultural products (maize, wheat, soya and soya bean oil, processed cereal, tea and potatoes) worth US$350 million; fertilizers and agricultural chemicals worth US$295 million; plastics and plastic-related products worth US$263 million; pharmaceuticals worth US$250 million; industrial and home chemicals worth US$200 million; iron and steel products worth more than $160 million; animal, vegetable fats, oils, waxes worth US$150 million; tissue paper, facial paper, newsprint and paper products worth US$100 million; skin care, fake hair and beauty products worth US$40 million; flavoured water worth US$25 million and buses worth US$20 million.

Remedy and challenges to the High Import Bill

The cost of production in Zimbabwe is one of the worst in the SADC region, as a result imports can be landed in Zimbabwe at cheaper prices than most locally-produced goods. This explains why flavoured water, tissue paper, beverages, fruits, milk and other fast moving consumer goods from South Africa can be sold at competitive prices on the local market despite the transport component importers pay.

After realising the negative impact of importing locally available products, Zimbabwe passed Statutory Instrument 64 of 2016 (Statutory Instrument). The policy was a silver bullet for the local industry as capacity utilisation rose by more than 13% within 6 months from July to December 2016. Capacity utilisation in the industry was falling due to foreign currency shortages and renewed growth in merchandise imports into the country. SI 64 was later revoked by the passing of Statutory Instrument 122 in 2017 and lifting of import restrictions in October 2018. It has become imperative for the country to implement import substitution strategies that identify producers of all imported goods that make up billions in imports every year.

Rhodesia's Import Substitution Story

Rhodesia faced serious sanctions but the country rapidly developed notwithstanding. This was through a clinical import substitutions strategy which was a joint venture between government and the business community. It is to the advantage of the government at a particular point in time to learn from the past, regardless of how they may feel about it. After all, as Karl Max once noted, men make their own history, but they do not make it as they wish; it remains educated by and predisposed to the past. That is one thing that cannot be changed. Lessons learnt are as follows:

  • The first lesson is that leadership integrity and accountability were at the centre of the success of Rhodesia’s import substitution project. In addition, there was cooperation between government and the business sector. A symbiotic relationship between government and the business sector is always a critical success factor where government facilitates and makes easy the implementation of economic projects of national interest.
  • Second, as a matter of strict policy, no raw material should leave the country unprocessed. Vertical integration of industry is primary at all costs. If no raw materials are to leave the country, it requires that the country has to develop the capacity to process them first (local value addition). This can be achieved by investing heavily in production facilities and rehabilitating the infrastructures, especially in the railway network, power and water.
  • Third is implementation of selective subsidies, but these must be price subsidies and not input subsidies. In other words, finished products are subsidised through their sell price only. This avoids a parallel market for inputs developing. It also avoids profiteering at input level as is has been the case where, for example, speculators buy fertiliser or cement in bulk to make super-profits, thereby creating artificial shortages and increasing production costs unnecessarily.
  • Fourth, there must be very strict import control measures with strong accountability and fairness. Before importing, companies must first prove that they cannot source inputs locally and this further encourages local supply companies to grow. The middleman has no place in that process.
  • Fifth, incentives for industry to build local production capacity must be put in place. For example, building a manufacturing plant must have huge tax incentives while in the agricultural sector, for example, farmers must be able write off costs for infrastructure development like irrigation which ultimately ensure food security and exports. In fact, incentives and not penalties work more effectively. This policy must apply to key productive sectors, including tourism.
  • Sixth is the issue of buying local goods; the government needs to take the lead. A huge import bill for motor vehicles must be a thing of the past as the government develop local capacity to assemble, if not make, local cars. Leading by example here is key and the government and business must take the lead. The rehabilitation of Willowvale Motor Industries and capacitating of Quest Motors, for example, must play a central role in any import substitution strategy.

Calls for Improvement in Zimbabwe import substitution

Statistics from the Reserve Bank of Zimbabwe’s Foreign Exchange Auction System in July 2020 revealed the need for the country to urgently improve its import substitution mechanisms for enhanced economic growth. From the last foreign currency auction, nearly five hundred thousand (500 000) United States dollars was channelled towards paper and packaging which used to be produced in abundance by local entities.

It was against this background coupled with the closure of the South African border that economists called for an urgent need for local manufacturers to up their game to sustain and create a balance between Zimbabwe’s import requirements and foreign currency generation capacity. For Zimbabwe to be spending the limited foreign currency on consumables like paper and packaging, it is highly unsustainable especially when one considers that top foreign currency earners for the country are finite mineral resources.[2]



References

  1. Victor Bhoroma, [1], Zimbabwe Independent, Published: 10 May, 2019, Accessed: 21 October, 2020
  2. [2], The Zimbabwe Mail, Published: 11 July, 2020, Accessed: 21 October, 2020