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Manufacture goods to boost economy

Opinion & Analysis
"We must unite for economic viability, first of all, and then to recover our mineral wealth in southern Africa, so that our vast resources and capacity for development will bring prosperity for us and additional benefits for the rest of the world,” Kwame Nkrumah (1964).

By Vince Musewe

“We must unite for economic viability, first of all, and then to recover our mineral wealth in southern Africa, so that our vast resources and capacity for development will bring prosperity for us and additional benefits for the rest of the world,” Kwame Nkrumah (1964).

According to Reserve Bank of Zimbabwe (RBZ) governor John Mangudya, the United States dollars auction system has disbursed a total of US$1,7 billion to date, where 1 632 companies and 2 887 small-to-medium enterprises (SMEs) have benefited.

Most of the funds have been channelled to the productive sector for the local manufacture of goods. He further estimated that 65%-70% of local retail products, which we consume, are being produced locally.

The stimulation of local manufacturing industry is fundamental to economic recovery. Our banking sector needs to finance this effort supported by the RBZ, industry and SMEs ministries.

According to Finance ministry permanent secretary George Guvamatanga, as at June 2021, the banking sector held US$1,7bn in deposits which must still be unleashed into the industrial sector aggressively to trigger economic recovery.

We have to fundamentally restructure our GDP so that its contributors add more value. Our continued dependence on primary products for export earnings curtails our potential and externalises potential internal wealth creation, entrepreneurship, innovation, jobs and disposable incomes. We have to modernise and industrialise so that, as much as possible, we manufacture what we consume and export more manufactured products to AfCTA (African Continental Free Trade Area).

Manufactured exports are 5% of our total exports. An industrial revolution should, therefore, be at the centre of our recovery strategy.

According to the National Development Strategy One (NDS1) for the period 2021 to 2025:

“Structural transformation is anchored on promoting inclusive and sustainable economic growth, full and productive employment and decent work for all and targets to achieve higher levels of economic productivity through diversification, technological upgrading and innovation, with a focus on high-value added and labour-intensive sector.”

The strategy seeks to increase secondary products share of GDP to 15% by 2025 from the current 10,6%. The share of value added exports is projected to be $1,3bn by 2025 from the current $720m.

Further priority will be to develop and strengthen already existing value chains, beneficiation of minerals and in the process promoting linkage of SMEs with large corporates.

The strategy will also prioritise decentralisation of industrialisation initiatives in line with the policy thrust of devolution and decentralisation. Value addition and beneficiation industries will be located in specific provinces and districts where the endowments are located for the benefit of locals.

The value chains identified include agro-based, pharmaceutical, bus and truck assembly,   iron and steel, general engineering, and plastic waste.

Also, included are mineral beneficiation value chains which include gold ore to bullion processing, diamond cutting and polishing, base metals (nickel, copper, iron, cobalt) recovery from PGMs, coal to coke, and chrome to ferrochrome.

I want to point out the work done by Erik Reinert in his book “How rich countries got rich and why poor countries stay poor.”

Central to his insights is that countries which wish to industrialise must endeavour to emulate industrialised countries and rather look and understand what they actually did to industrialise as opposed to what they may prescribe to other countries who wish to take the same path.

Reinert studied 500 years of economic developmental policies in what are now industrialised countries and what is indeed striking, is that the industrialised economies took a route which they actively discourage developing countries to take.

In turn, developing countries have tended to take as given that the Western-based institutions such as the World Bank and IMF have got it right and yet IMF policies have resulted in developing countries specialising in being poor by focusing on economic activities which do not create increasing returns.

Deindustrialisation, increasing poverty and low incomes particularly in Africa remain in place many years later. In his book, Reinert suggests what he terms “the toolbox for economic emulation and development” for those countries which wish to implement sustainable developmental policies through industrialisation. His advice is informed by the policies which the industrialised countries actually implemented and not what they say.

First, it is important to target, support and protect economic activities which yield increasing returns. The export of primary products to developed economies keeps poor countries poor and they must move away from such economic activities which create decreasing returns and move towards manufacturing and services sectors which create increasing returns.

Decreasing returns occur when the unit costs of production increase with increased volumes while increasing returns are those activities where unit costs decrease with increase in volumes.

Second, temporary monopoly rights, patents and protection must be provided for local companies which are involved in increasing return activities including geographical exclusivity.

It is necessary to provide all the necessary support and to protect such economic activities from foreign competition until such time these sectors are able to compete globally. This allows such economic activities to grow and build the necessary economies of scale.

Third, establish a manufacturing sector at all costs. “It is better to have a badly managed manufacturing sector than none at all.”

The synergies or direct and indirect linkages created by a manufacturing sector are critical for development. A manufacturing sector increases value addition and GDP, increases employment levels and incomes and also solves the balance of payments problem.

Fourth, offer tax breaks for targeted activities, thus easing the cost of doing business. Also offer cheaper credit and export incentives for value-added exports in order to encourage their local manufacture.

Fifth, establish export taxes for raw materials, thus making it unattractive to export raw products and more expensive to foreign buyers. This must be coupled with the promotion of import substitution and deliberate consumption of locally made goods. It will be necessary to develop local manufacturing capacity using these raw materials.

There is nothing complicated here, it’s a matter of consistent policies and creating access to long-term capital, preferably our own capital. In my opinion, the Industry and Commerce ministry needs to play a central role as the driver of our industrialisation strategy.

One thing we seem to be ignoring is the issue of the fourth industrial revolution (industry 4,0). Other countries have set up taskforces working closely together with industry to see how they can adopt new technologies to accelerate industrial development.

Africa has missed the three industrial revolutions and is about to miss on the fourth rapid wealth creation industrial invention. Every new technology creates wealth. The concept of industry 4,0 involves many technologies creating hitherto unknown synergies which will create new industrial manufacturing possibilities. One thing that is certain is that those countries which ignore this new wave will do so at their own peril. The challenge to developing countries and governments is the urgent recalibration of their industrial development plans and the creation of new ecosystems which facilitate early adoption. This, of course, must be based on the provision of the necessary capital and the banking sector has a key role to play.

  • Vince Musewe is an independent economist, you can contact him at vtmusewe@gmail.com

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