RBZ must support currency move with more reforms

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By Gilbert Muponda

THE recent floatation of the Zimbabwe dollar is a step in the right direction which will need to be supported by other measures to encourage exports. Non-resident Zimbabweans have played a critical role in earning foreign currency for the nation in the absence of export earnings growth.

Zimbabwe needs a well structured Export-Oriented Industrialisation (EOI) which others refer to as export substitution industrialisation (ESI).This is a trade and economic policy aiming to speed-up the industrialisation process of a country through exporting goods for which the nation has a comparative advantage compared to other nations.

Export-led growth often means opening domestic markets to foreign competition in exchange for market access in other countries (international engagement). Reduction of tariff barriers, floating exchange rate, and government support for exporting sectors are all an example of policies adopted to promote EOI, and ultimately economic development.

Export-Oriented Industrialisation was aggressively and effectively adopted for development of the national economies of many Asian nations including Hong Kong, South Korea, Taiwan and Singapore after World War II.

The development and aggressive implementation of ESI is imperative for Zimbabwe if the benefits of a floated currency are to be realised. If currency is floated without any plan to increase exports and earning for foreign currency then the currency situation will not improve and the Zimbabwe dollar will be in a permanent state of collapse. The whole idea of floating the currency is based on the belief that exports and other foreign currency inflows will improve. However, for this to happen, there is need for more measures to build investor confidence and encourage investment in the areas which will improve foreign currency inflows.

Whilst this has worked elsewhere, if not done properly it can ruin local industries because of dumping of cheap quality imports as what happened to Zimbabwe’s textile industry which was destroyed by imported used clothing.

The 1998 economic crisis hurt the economies of countries that used export-oriented industrialisation. It is criticised for its lack of product diversity, which makes the economies potentially unstable. This is so because nations normally have to focus on narrow product range and then develop clear advantages in costs and quality.

Zimbabwe has various areas in which it had comparative advantages. These include horticulture, tobacco production and high quality beef. These are areas in which Zimbabwe can re-focus on, whilst developing other new areas.

Export-oriented industrialisation is often contrasted with import substitution industrialisation. It grew as a reaction to import substitution. Import substitution industrialisation (ISI) is a trade and economic policy based on the premise that a country should attempt to substitute products which it imports (mostly finished goods) with locally produced substitutes. ISI could be outward-looking in that it promotes exports (like in Asia, especially South Korea, Malaysia and Singapore) or inward-looking without significant links to world markets (like in Latin America).

External competition by imports in the markets of the targeted industries is discouraged by tariffs. Policies to pursue ISI have a strong protectionist component and are not favoured by advocates of absolute free trade, as they will most likely lead to retaliatory measures by other countries.

Traditionally, trade was regulated through bilateral treaties between two nations. For centuries under the belief in Mercantilism, most nations had high tariffs and many restrictions on international trade. In the 19th century, especially in Britain, a belief in free trade became paramount. This belief became the dominant thinking among western nations since then despite the acknowledgement that adoption of the policy coincided with the general decline of Great Britain.

In the years since the Second World War, controversial multilateral treaties like the GATT and World Trade Organisation have attempted to create a globally regulated trade structure. These trade agreements have often resulted in protest and discontent with claims of unfair trade that is not mutually beneficial. Nations such as Zimbabwe need to watch these treaties carefully as they can easily result in product dumping (poor quality imports) and ruin local industries similar to what happened to the textile industry which was ruined by cheap used clothes from the Far East in the 1990s when Zimbabwe was pursuing ESAP.

Free trade is usually most strongly supported by the most economically powerful nations, though they often engage in selective protectionism for those industries which are strategically important such as the protective tariffs applied to agriculture by the United States and Europe. The Netherlands and the United Kingdom were both strong advocates of free trade when they were economically dominant, today the United States, the United Kingdom, Australia and Japan are its greatest proponents.

However, many other countries (such as India, China and Russia) are increasingly becoming advocates of free trade as they become more economically powerful themselves. As tariff levels fall, there is also an increasing willingness to negotiate non tariff measures, including foreign direct investment, procurement and trade facilitation. The latter looks at the transaction cost associated with meeting trade and customs procedures.

For Zimbabwe and Africa, it is critical to develop certain areas such value addition on minerals and agro-produce which will help in increased export value plus give voice on international trade area.

Traditionally, agricultural interests are usually in favour of free trade while manufacturing sectors often support protectionism. This has changed somewhat in recent years, however. In fact, agricultural lobbies, particularly in the United States, Europe and Japan, are chiefly responsible for particular rules in the major international trade treaties which allow for more protectionist measures in agriculture than for most other goods and services. This places Africa at a disadvantage given the lack of clout in many trade negotiations since the value of its exports are relatively low (with the exception of oil in recent times).

The emergence of oil and other mineral wealth on the African continent presents Africa with a new platform to negotiate better terms of trade. Such negotiations are better done as a block than as individual countries. This is why is critical that Zimbabwe’s economic and political crisis be resolved so that the country can play a more leading role in SADC as the trade block positions it self among other trading blocks.

Gilbert Muponda is a Zimbabwe-born entrepreneur. Email: gilbert@gilbertmuponda.com. This article appears courtesy of GMRI Capital

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