adminDr Gift Mugano
In recent years, the employment costs alone are hovering above 80 percent of total expenditure leaving no room for capital expenditures like infrastructural development. Proposals from multilateral financial organisations and other quarters are that the employment costs should be lowered down to 40 percent levels of the total budget.This is fundamentally OK. There is certainly need to balance capital expenditure and recurrent expenditure. Ideally, depending on country circumstances, a national budget must allocate at least 30percent of its revenue towards capital expenditure and at most 70 percent of the total revenue towards recurrent expenditure.
The challenge we face as a country is that the fundamental problem we face is dwindling sources of finance and in view the debate to rationalise public expenditure by seeking to retrench the civil servants as proposed by some quarters is tantamount to surrendering the struggle for two reasons.
First, the conventional wisdom to cut employment costs ignores the possible costs associated with it such as decay in public service. Obviously, most of the people who are likely to be sacked are critical employees who have a mandate to provide critical services in Government institutions.
Public institutions such as defence, home affairs, for example, are silent enablers which works quietly underground when things are OK. However, if something goes wrong, in the system, the effects are visible and painful. Think of the birth certificate registration.
Second, our problem is bigger than cutting costs. Our bigger problem is tight fiscal space. Our $4 billion budget is too small. It is the size of a company in South Africa. So, the moment we accept that we must rationalise our costs without strong effort to increase fiscal space we are losing it! If we raise the revenue inflows holding wages and salaries constant we will see out employment costs going down to levels we want.
The million dollar question is how do we raise revenue? There are already proposals in the national budget aimed at increasing fiscal space such as promotion of agribusiness linkages and value chains.
This is one way which is immediate and very effective. What was not mentioned in the budget which must complement the business linkages is local content.
Even though there is mention by the budget on the need to forge business linkages, the framework and incentives are not spelt out. Interestingly, Ministry of Industry and Commerce and Ministry of Small and Medium Enterprises and Cooperative Development has begun work on business linkages has.
To build the momentum, it is important that this discussion revisit business linkages and tie in with local content approach since they are effective tools which can be used to enhance productivity and revenue.
Business linkages covers a wide range of areas such as procurement, distribution and sales, contract farming, franchising and leasing, sale of financial services, ICTs, outsourcing non — core functions and productive inputs and tools.
For Zimbabwe, since the economy is now dominated by small and medium enterprises (SME), key to these programmes is capacity building of SMEs to meet the needs of a large firm.
There are traditionally three forms businesses linkages can take. Firstly, companies can forge SMEs linkages in their own value chain. This is usually complemented by supplier and channel development measures of various kinds such as contract farming.
A good example is the Delta out growers’ scheme. Over 4 500 smallholder and 250 commercial farmers are benefiting from a Delta Corporation contract scheme for the production of malting barley, malting sorghum, adjunct sorghum and maize in Zimbabwe.
Over the years Delta beverages has supported farmers in Zimbabwe through procurement of the raw materials, provision of agricultural services unit that provides farmers with prescribed grain varieties, fertilisers and pest control chemicals, and conducts research to develop improved seed varieties.
Delta will be guaranteed of good quality through put and the supply chain management becomes easy.
The farmers’ financial burdens are a thing of the past. Delta beverages have not only integrated backwards but also forward as well especially in the distribution of the beverages.
This vertical integration has continuously reinforced their brand in the local market which everyone wants to be associated. This is a business model which most established businesses in Zimbabwe must follow.
Secondly, companies can also focus on SMEs development and linkages beyond their value chain. Companies have an obligation to undertake this strategy for corporate social responsibility reasons.
Companies especially those engaged in mining have a responsibility of mitigating the costs they are imposing on the environment. In this case, mining firms may support “beyond the value chain” SMEs development and linkages in their locality and even beyond.
The mining companies in Zimbabwe over the years have provided various forms of infrastructure such as roads, schools, hospitals, water, and electricity, and also support for adjacent agricultural projects in many towns that have developed around mining in Zimbabwe, for instance, Shurugwi, Zvishavane, Hwange, Kadoma, Bindura and Bulawayo, among others.
Finally, companies may opt to strengthen the enabling environment for SMEs development and linkages through the establishment of schools and vocational institutes for SMEs, credit bureau and SMEs Association.
We want to see established firms joining hands in building a decent place for the popular Glen View furniture manufacturers with both factory and warehousing facilities.
This will give impetus to the manufacturers. As a result, these furniture manufacturers will be well organised and their marketing strategy will be easy. At the moment they are the mercy of rains and unpredictable fires yet established firms can do more to support them especially those in the same value chain and the blue chip companies in the mining sector.
At a macro level, business linkages will bring a great deal of business which inter — alia include but not limited to reduction in trade deficit, improvement in liquidity and ultimately increase in revenue generation and employment.
With respect to local content, the aim of local content requirements is to create rent-based investment and import substitution incentives.
Local content requirements are provisions (usually under a specific law or regulation) that commit foreign investors and companies to a minimum threshold of goods and services that must be purchased or procured locally.
From a trade perspective, local content requirements essentially act as import quotas on specific goods and services, where governments seek to create market demand via legislative action.
They ensure that within strategic sectors — particularly those such as minerals with large economic rents, or vehicles where the industry structure involves numerous suppliers — domestic goods and services are drawn into the industry, providing an opportunity for local content to substitute domestic value-addition for imported inputs.
Thus in contrast to the traditional protected export platform proposed by many development advocates in the 1960s and 1970s — local content requirements seek to attract foreign direct investment (FDI) by firms.
Moreover, through local content requirements, government can achieve these goals often without sharing in the risk of commercial undertakings.
Local content requirements are often paired with investment incentives, as part of a “carrot and stick” approach to attracting FDI.
While the use of local content measures has attracted outsized attention inside and outside the World Trade Organisation, Governments (both developed and developing) employ a range of measure to attract investment, using a “carrot and stick” approach.
On the “stick” side, governments use performance requirements, which can be generally understood (as defined by United Nations Conference on Trade and Development in 2003) as stipulations — whether related to local content, export performance, technology transfer, R&D, employment and domestic equity/ownership imposed on investors, requiring them to meet certain specified goals with respect to their operations in the host country.
The specific policy goals — strengthening infant industries, increasing revenue, improving the balance of trade and lowering unemployment — are not always accounted for in the decisions of private economic agents. The use of some measures is restricted at various levels — the WTO Agreement on Trade-Related Investment Measures (TRIMs) prohibits the use of measures related to local content, trade balancing, export controls and certain foreign-exchange restrictions, and certain bilateral treaties limit the use of other performance requirements.
These measures however are nonetheless widely used by governments to align investment with industrial planning.
On the “carrot” side, governments use a range of investment incentives to offset costs incurred by firms that choose to establish in the host market. These incentives range from direct transfers — e.g. grants (for R&D projects or new capital investment) and dedicated public-private investment funds — to indirect transfers, such as low- or no-cost government services in marketing and distribution.
The sum of government resources used for investment incentives is significant: available information indicates that, in 2003, 21 developed countries spent nearly US$250 billion on subsidies; the total for the world was more than US$300 billion in that year, with state and local incentives in the United States (US$50 billion) nearly equally the total subsidies in developing countries.
This carrot-and-stick approach has been used successfully by several countries as an integrated package of industrial planning policies. Chile, for example, successfully used cash subsidies and local content requirements — prior to their phase-out under Chile’s WTO obligations — to develop a more diversified exporting base, with small and medium-sized enterprises in particular seeing a rapid increase in growth and export volumes.
The agro-economy of the State of Punjab successfully “revolutionised” its local contents mainly in the use of export obligation and dividend balancing measures; the Indian government has also used export obligations to develop joint ventures in the domestic car manufacturing industry.
Malaysia employed a combination of “pioneer status” tax incentives with employment requirements from the 1960s through the 1990s to achieve dramatic increases in manufacturing employment — from 318,000 in 1970 to 2.1 million persons in 2000; corresponding to a doubling of its share of total employment to 23percent, and contributed to a reduction of unemployment to below 4percent.
Local content requirements can be both explicit and implicit. In their most direct and explicit form, local
content requirements can be explicit (i.e. numerical or qualitative) targets contained in national legislation or industry-specific regulations that specify a minimum share of locally-sourced goods and/or services (or conversely a maximum ceiling for imported inputs).
Other, less direct, forms include the creation of “weighting” or “scorecard” systems where local content is one of usually several criteria (including export performance and whether or not the sector in question has been designated as strategic by the Government).
This mixed system generally arises in the case of subsidy programmes — such as the Nigerian Export Expansion Grant to encourage non-oil manufacturing — where the score determines the level of subsidy to be received, or for targeted goals within government procurement to ensure that government purchases are in line with employment policies and targets.
Local content requirements may not necessarily need to be de jure (i.e. written in legislation, regulations or directives); for public procurement where selection processes can be heavily influenced by political considerations, a statement by relevant government officials that local content will be given heavy weighting in tender assessment could suffice to serve as a clear signal to potential bidders that a de facto local content standard will be applied.
Local content can take many different forms, affecting any number of sectors. Local content requirements can be fashioned for virtually any good or service
that can be used as an input into most goods and services. This can include inter alia:
Minimum thresholds on the amount of locally-sourced materials for the production of goods – usually expressed as a percentage of volume, tonnage, length (e.g. for cables), or number – particularly for large/heavy industrial
inputs;
Minimum thresholds on the amount of locally-sourced expenditure or man-hours for the use of services, ranging from engineering and transport to financial services and insurance;
Explicit or implicit requirements that companies/entities take local content development into account in their project and strategic planning, or when undertaking feasibility studies; and/or
Requirements for companies, operators or investors to locally establish facilities, factories, production units or other operations for the purposes of carrying out any production, manufacturing or service provision currently being imported.
Although restricting trade is not always the primary aim of local content requirements, they can have significant impacts on trade. In a scenario where both
(a) local content targets are high (i.e. greater than 20-30percent) and
(b) enforcement and compliance mechanisms are effective at both the sector and product level, a Government’s use of local content requirements can dramatically affect the investment and sourcing patterns of firms in the host country market, and by extension on trade.
For example, the use of targeted local content policies by the Thai Government in its automobile sector led to a 77 percent decrease in the value of imported parts and components in each domestically assembled vehicle; similar measures imposed by the South African government in its vehicles sector from 1965 to 1985 resulted in a nearly one-quarter decrease import penetration ratios.
In these countries, Thailand and South Africa, their trade balances improved due to enactment of local content.
The local content and business linkages measures provide sustainable solutions to our economic challenges.
At the very least we must try to avoid desperate measures like cutting labour force and unjustifiably raise spot fines to $100.
If we to cut labour force in civil service we must only remove the ghosts workers.
The $100 spot fine is both anti-development as it discourage savings as people have to carry cash which should be in the bank and threat to people’s security.
Dr Mugano is an Economic Advisor, Author and Expert in Trade and Competitiveness. He is a Research Associate of Nelson Mandela Metropolitan University& Visiting Lecturer at the University of Zimbabwe’s Graduate School of Management. Feedback: +263 772 541 209 or [email protected]
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