adminEconomic Focus with Dr Bongani Ngwenya
DURING the Zimbabwe-South Africa Industry and Trade Initiative held in Zimbabwe recently, Industry and Commerce Deputy Minister Chiratidzo Iris Mabuwa said while it was a noble venture for the South African companies to come and invest in the country, it was also imperative to protect the local manufacturers in the business climate.
She said there was need for firms to engage in mutually beneficial deals.
“We have to understand the Sadc rules of origin in relation to finished goods. The rules require countries to trade with products originally manufactured in those respective countries. This will help improve competitiveness of doing business and quality of local products. It also helps to facilitate value addition and beneficiation of goods,” she said.
In economics, the concept of “protectionism” is a policy of restraining trade between countries or states, as compared to “free trade”, through methods such as tariffs imposed on imported goods, restrictive quotas, and a variety of other Government regulations designed to allow fair competition between imports and goods and services produced domestically.
Accordingly, protectionism policies protect the local businesses and workers within a country by restricting or regulating trade with foreign nations.
In recent years, protectionism has manifested itself through popular anti-globalisation and anti-immigration movements in certain sections of the world. The policy of protectionism contrasts with the policy of free trade, where Governments reduce as much as possible the barriers to trade within and across nations. In other words, protectionism would be against “free trade” agreements between Sadc and Comesa for example, that Zimbabwe is a signatory to.
There is a broad consensus among economists that the impact of protectionism on economic growth (and on economic welfare in general) is largely negative, although researchers have pointed out that the magnitude of this impact varies considerably across countries and crucially depends on the macro-economic and policy environment of each country.
Arguments for protectionism
The argument for protectionism in our case is that our local manufacturers have suffered huge losses and minimum growth rate due to cheap imports that have continuously flooded the country.
As a result, the Government has been working on a National Competitive Act to protect local producers and improve the country’s business competitiveness.
The Act is meant to address factors that are making the economy uncompetitive by coming up with the National Competitive Act which will work as a guideline for the National Competitiveness Commission (NCC) which will be set up to spearhead improvement of doing business and support local manufacturers and ensure that smooth flow of doing business in Zimbabwe.
There are several arguments for protectionism in economics in general. However, I believe that the Government has been motivated by the “Infant Industry Argument”, which is postured as the most important argument for protectionism. The proponents of “protectionism” believe that infant industries must be protected in order to allow them to grow to a point where they can fairly compete with the larger mature industries established in foreign countries. They believe that without this protection, infant industries will die before they reach a size and age where economies of scale, industrial infrastructure, and skill in manufacturing have progressed sufficiently to allow the industry to compete in the global market.
However, protectionism should be regarded with caution because it is naturally against the spirit of “comparative advantage”, where for example, through free trade Zimbabwe could be concentrating on the production of those goods that it has a comparative advantage, and let or allow its trading partners to meet the gap.
On the other hand, since protectionism acts solely on imports it has been argued that protection cannot promote export-led growth.
Strictly speaking this is true, though some people may want to argue that, its “bookish economics”.
By encouraging import substitutes, protection can expand the domestic traded goods sector.
In terms of the “foreign trade multiplier”, the means of expansion operates through reducing the propensity to import and thus reducing the leakages from the domestic economy.
As such, the objective of protection in an underemployed economy like ours would be to reduce the propensity to import competitive goods, and not to reduce the volume of such imports.
If the policy was successful, the rise in domestic incomes should encourage more imports of complementary and subsequently competitive goods.
The foreign trade multiplier simply indicates that a fall in import propensities can increase domestic demand and stimulate domestic output.
The question is, does our local manufacturing industry have that capacity at the moment to stomach the inevitable? Put crudely, in terms of domestic product competitiveness, do we really have an industry yet to want to protect at the moment? Again for my critics, I am not suggesting that there is no manufacturing industry in Zimbabwe. My argument is that the current heavy and unsustainable import bill is not a result of the influx of cheap goods, but a result of lack of domestic product competitiveness and productive capacity to meet local demand of these goods.
To fill that gap, there would always be an influx of cheap imports until a certain level of import substitution has been reached in the domestic market and economy. It is when that level of import substitution has been reached that protectionism can achieve the intended purpose.
The intended purpose of increased domestic competitiveness as a result of the effect of tariffs that make domestic products more price competitive is relative to the foreign products in the home market.
This gives rise to a process of import substitution in domestic production and consumption. As a result, domestic production would be expected to be at levels that would be able to meet the domestic consumption demand, of which I believe we are still way off.
In the long run protectionism is counter balancing to the spirit of free trade, comparative advantage, economic growth and globalisation. Protectionism is frequently criticised as harming the people it is meant to help, in favour of free trade. Free trade thrives on the economic principle of comparative advantage, and shows that the gains from free trade outweigh any losses as free trade creates more jobs than it destroys because it allows countries to specialise in the production of goods and services in which they have a comparative advantage. Protectionism results in deadweight loss; that is, loss to overall welfare and it gives no-one any benefit, unlike in a free market, where there is no such total loss.
In conclusion, it is my hope that the protectionism policy that is being proposed is going to be a temporary measure to give local manufacturing industry some breathing space and sigh of relief. Otherwise if we really want to see our economy growing, we should be freeing our local market more to potential outside investors as well.
Dr Bongani Ngwenya is a Bulawayo-based Economist and Senior Lecturer at Solusi University’s Post Graduate School of Business. Feedback: [email protected]/ [email protected].
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