AfCFTA demands industrial efficiency

The African Continental Free Trade Area (AfCFTA) is being implemented steadily, if a little slowly, and all businesses across the continent need to be feeding in the growing opening of borders and falls in tariffs for themselves and their competitors into their planning.

But Zimbabwean businesses appear to be hoping for the best. Zimbabwe’s main exports are minerals and agricultural products, with very modest manufacturing exports.

The bulk of imports are manufacturing raw materials, production machinery and equipment for all sectors, and manufactured goods.

The present mining and agricultural sectors will not be seriously affected, positively or negatively, by AfCFTA.

Exports of the output from these sectors are largely unhampered by customs tariffs and the pricing is set in global markets.

If anything they will pick up some more business within Africa as economies grow, creating customers, and transport and movement costs continue to fall as transport networks grow.

Miners and farmers and the agricultural parastatals need to be aware of trends and be ready to fill gaps in continental markets, and be ready to react if prices of some crops fall below the Zimbabwe price, but since most harvested crops in their raw state are high bulk and low value, so transport costs can form a significant percentage of landed prices, there is unlikely to be much competition.

Where the serious problem arises is in manufacturing, and here there are a wide range of factors.

For most of the last 57 and a half years Zimbabwean manufacturers have enjoyed fairly high levels of protection within their local market, largely through import controls and import licensing.

There have been customs duties providing a bit more protection, but these have been modest with the main element being Government restrictions on imports and on the de facto restrictions from foreign currency shortages and the need to be allocated foreign currency making it difficult to import too many finished products.

An inkling of the sort of problems that manufacturers could face came with dollarization and the placing of most manufactured goods on open general import licence.

The switch to the US dollar and the ending of import restrictions meant that imports of manufactured goods were only limited by the size of the market.

The only advantage that Zimbabwean manufacturers had was the customs duties, generally around 20 percent.

There were a range of other problems related to the subsequent collapse of a lot of local industry.

For a start the closure of free trading relations at UDI in 1965 had the same effects of other attempts for autarky around the world.

There was a boom in local manufacturing for the next 20 years as industrialists who could make local substitutes for previously imported items could go all out; the only real restriction was that the foreign currency requirements of the local manufacturer had to be less than the foreign currency needed to import the foreign finished goods.

There was also a degree of lack of support for luxury goods that required a fairly high foreign currency component, even if this was less than the what was needed for the finished articles.

South Africa was seeing much the same during the apartheid years.

There had been by African standards a reasonable industrial base largely built in the world wars when the German submarine fleet played havoc with international trade, but the apartheid regime pushed Government investment into heavy industry and continually forced the private sector into ever greater percentages of local content into what it made, creating a major industrial giant.

In Zimbabwe, Ian Smith added a few extra illegalities to his illegal activity by forcing foreign subsidiaries of foreign companies, mainly British companies, to remain in production under their local management and without remittance of profits, and nationalised those who declined to do so.

At independence the Zimbabwean Government retained the import controls, foreign currency allocation controls, and pressure for local production.

The changes were to open the doors to black Zimbabweans, and to allow locals and the Government to buy out the local subsidiaries of British companies, which considering that this happened when Margaret Thatcher was busy totalling the British industrial base largely meant a few extra pounds for the shareholders of the companies going bankrupt.

Autarky does create rapid industrial expansion. For example, East Germany for some years grew faster than West Germany and North Korea faster than South Korea, and while communism and the subsequent control of capital investment by the state helped, this was largely the result of banning imports of manufactured goods that good possibly be made locally.

But most autarkies then face the same problem: lack of replacement investment so machinery becomes obsolete and then collapses.

Zimbabwe started seeing some of this in the later 1980s and early 1990s and that led to ESAP, a well-intentioned solution but one that opened the floodgates to imported goods instead of seeing manufacturers taking on the world.

We then had hyperinflation, making life very difficult for those trying to replace production equipment as the economy declined, and then came dollarisation.

Dollarisation killed a lot of industry, largely by pricing local manufacturers out of their home markets and destroying a lot of liquid capital. South African exporters were able, even with customs duties, to undercut Zimbabwean manufacturers who in any case found it hard to raise the capital to replace their aging equipment.

There were two main pressures from the industrial sectors, first for much better protection and secondly, and smarter, to switch from the US dollar to the South African rand as the currency of choice so at least competition was easier to cope with.

Eventually the import licence regime was restored for a range of products before the final industrial collapse, and then the return of local currency, first de facto and then legally, allowed industry to grow fast again.

But it was still largely reliant on the local market in a small country.

AfCFTA thus represents the same challenge, the end of import controls and the insistence by far too many to at least cost in US dollars, with the partial return of dollarisation.

We can already see for a range of goods the imported article being cheaper than the local article.

Sometimes this is just inefficiency, sometimes it is an insistence on high mark ups, and sometimes it is costing in US dollars. Examples abound.

In the soft drinks industry the near monopoly built up over the years within the Delta stable was challenged by new-comer Varun Beverages, who went for very tight control and small mark-ups on high volumes, with pricing a little over half the existing and very similar products; guess which company is continually expanding its factory.

There are others in this position. The only vague advantage available under a fully implemented AfCFTA will be transport costs, but everyone is building better roads.

Brand loyalty is ever more dubious, being replaced by wallet loyalty.

The Varun approach did include the licence from a major global American company, which minimised the brand loyalty to the other one.

So local manufacturers will have to reform, boost their efficiencies and productivity per dollar costs and probably have to switch to more local currency costing, or least use something like the rand or Kenya shilling to do costing.

With that, and the right products, they will have an opening into the South African market, the second largest in Africa and with low transport costs.

The exceptionally unequal South African market appears to have potential openings for the middle range goods and services. Another area that people need to think about is the licensing of products from countries outside AfCFTA.

South Africa does this with its motor trade for example, and that is a possible opening with other manufacturers for Zimbabwe once the Disco steelworks are producing sheet steel of high quality.

In fact one reason for the huge investment by Tsingshan must have been to build a large steelworks within AfCFTA, to get round the tariff barriers that Africa as a whole will erect against non-continental suppliers.

So, AfCFTA can easily boost Zimbabwe’s economy, but for that to happen the manufacturing sector is going to have to take it seriously following the options that it must have the right products of the right quality at the right price, with efficiency a must, and costing to be on the basis of high volume at low mark-ups.

The days of the protected market will be dead.-ebusinessweekly