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Alfred M. Mthimkhulu
Import substitution is an intuitively appealing policy: A country gears-up to produce its basic requirements and becomes self-sufficient; in so doing, the country conserves scarce foreign currency and uses it to import capital goods for its manufacturing sector; overtime the manufacturing sector is established and begins to export value-added goods. Very appealing. But does it work in practice?
The question reminds me of my first real-world tutorial on import substitution some 20 years ago.
My employer then was one of two sponsoring stockbrokers in the listing of Powerspeed Electrical.
To make sure his protégée understood Powerspeed, my boss walked me through Rhodesia’s industrial policy. That policy was import substitution.
The policy brought forth numerous companies including conglomerates such as Mashonaland Holding from which Powerspeed was being spun-off through a dividend in specie transaction.
Some of the firms from that era were listed on the Zimbabwe Stock Exchange including Apex Corporation, Commercial and Industrial Holdings and Gulliver Consolidated Industries.
Today some of them no longer exist or have lost their lustre while others like Capri were taken over through reverse listings by the likes of Innscor Africa.
Interestingly, these yesteryear industrials did not export much.
Their production technologies were also predominantly homemade. I am of course generalising in this recap drawing from my experience in tracking ZSE-listed firms over decades. What would be most welcome and indeed more informative is a detailed study of these firms’ production output, productivity levels and financial performance during the import substitution era (1960s to 1980) and after the economy was liberalised in the 1990s.
Such firm-level studies enrich a country’s industrial policy freeing it from misplaced nostalgia and ensuring that errors of the past are not carried forward while small patches of success are scaled-up.
In this regard, new research centres such as the Zimbabwe National Productivity Institute as envisaged in the National Development Strategy 1 must indeed be set up and capacitated to address these policy research gaps.
Since we are short of own firm-level analyses, we might as well review evidence from elsewhere to see if import substitution works.
Such a review will inevitably lead us to the works of economists such as Raúl Prebisch, W. Arthur Lewis and Jagdish Bhagwati among others.
After the Second World War, most of them argued for and implemented import substitution in numerous countries from Argentina to Ghana to India.
By the way, these were not wannabe economic policy researchers but influential policy makers too.
Raúl Prebisch for instance was the first Executive Secretary of the United Nations Economic Commission for Latin America (1949 – 1963) and thereafter first Secretary General of the United Nations Conference on Trade and Development (1964 – 1969).
In the 1950s, empirical evidence from countries implementing import substitutions started to come in. Raúl Prebisch and others reviewed it.
It was not good. Import substitution was not the magic pill that would transform the global south to look like the global west. It was not just the lack of economic growth and industrial development that was worrying but the high costs of managing the policy which included rationing foreign currency, supervising multiple exchange rates, monitoring imports, continually revisiting import tariffs of one product after another.
It was too much work with no flickering light anywhere in the tunnel to sustain hope.
By 1960s, import substitution was being abandoned except in countries like Rhodesia, apartheid South Africa and several others in eastern Europe.
The thing is, import substitution is fundamentally flawed and we can see the flaws by simply reflecting on it systematically.
Let us begin by acknowledging that it is difficult to industrialise without capital goods — capital goods being machines and technologies (including skills) to make the machines.
In addition, machines are not only expensive but require foreign currency. Furthermore, countries aspiring to industrialise produce primary goods (cotton, tobacco, gold etc) and primary goods generate little and volatile foreign currency earnings. We must also acknowledge that workers in farms and mines earn less than peers producing value-added goods — and the same applies to their respective employers.
The comparatively lower incomes of primary producers limit their capacity to import capital goods and more so because primary goods prices fall over time while capital goods get more complex and expensive.
At best, the poor country manages to just keep its head above water but in reality, by focusing more on limiting imports than striving to increase exports, the poor country sinks deeper into despair and debt. As time passes, it becomes more and more difficult to improve the economy.
One medication for this economic ailment caused by import substitution is Foreign Direct Investment (FDI).
Unlike portfolio investment which comes in merely to buy shares in already listed companies, FDI sets up brand new projects, for instance a global car manufacturer setting up a plant in Gwanda. Such a venture would require new infrastructure before the projects kicks off.
The venture will bring in new skills and technologies thus broadening local skills. Just as vendors flock to sell merchandise at informal gold miners’ hangouts, new firms would emerge in Gwanda to directly and indirectly serve the new plant. That means many new jobs.
The sweetest outcome of FDI projects is that the more such projects a country attracts, the higher the exports.
Why? Because FDI projects target foreign markets, not the local market. It makes no economic sense to target 15 million Zimbabweans who have little disposable income. As exports rise, the country’s trade account improves and the currency stabilises.
Without FDI or significant capital inflows, import substitution in our times will fail much more resoundingly than it did in the 1950s because the world is now more integrated than then.
But since it is so difficult to attract FDI, poor countries end up chanting dated and populist industrial policies such as import substitution.
The policy is, after all, intuitively appealing. It resonates with the local industrialists as it does with the masses.
Does Zimbabwe intend to go that route?
“Our goals” writes Finance Minister Mthuli Ncube in a recent article, “can only be achieved with an empowered and emboldened private sector.
We must be open and competitive, with sound macroeconomic policies anchored on fiscal discipline, monetary and financial sector stability, and a business-friendly environment which promotes both foreign and domestic investment.”
As much as the rhetoric on import substitution and ‘Buy Zimbabwe’ seems strong, it misrepresents Zimbabwe’s development policy and risks creating small and inefficient firms that will only serve the local market instead of emboldening the private sector to venture into growth-enhancing foreign markets.
The next article will continue this conversation with some focus on India whose policy mantra “Atmanirbhar Bharat” (translating to self-reliant India) is underpinned by concurrent emphasis on local production, SMEs’ development and a dynamic drive to attract FDI.
For feedback and comments: Email: [email protected], Twitter: @mthimz
Bongani Ndlovu