Zim’s ailing industries on the brink

PHILLIMON MHLANGA


Zimbabwe’s industries are on the margins owing largely to the government’s haunting policy missteps in the past two years, which has resulted in opportunities for increasing returns being entirely absent.


It has become clear that a large degree of diminishing returns or shrinking production and rising production costs are industries’ biggest threats. Most local industries have reported a steady decline in output and the situation is highly complex and can’t drive future revenues, suggesting the industry is on the brink of terminal decline, a function time that occurs before death.


The consequence of such de-industrialisation, which has become the dominant mechanism in Zimbabwe’s economy has created a zerosum economic game, a sad part of vicious circles.


A long string of lower-income and higher costs have forced some to
close.


Those still operating are teetering on the brink and are scaling down operations due to the turbulent economic environment. Returns have been slowly fading for some time now.


There are also common trends that are putting pressure on the industries, whose restructuring efforts are failing.


These include severe liquidity constraints, foreign currency shortages compounded by rising operating costs.


The devastating high inflation, mounting local currency volatility, the sharp reduction in disposable incomes following the reintroduction of the Zimbabwe dollar combined by fuel and electricity challenges.


Industrialists who spoke to Business Times on condition of anonymity said it shows the poor judgement in the number of the Finance and Economic Development Minister, Mthuli Ncube and central bank governor John Mangudya’s fiscal and monetary policy measures respectively.


“These had material impact on the operating environment, which has remained fragile and uncertain, making it difficult for us to implement our growth plans. Unless deeper roots of the problems are confronted, the present failure is tied to a number of blind spots that make it difficult or impossible,” an industrialist told Business Times this week.


Another industrialist said: “Currency depreciation, foreign currency shortages, runaway inflation and interest rates have a negative impact on industries. As a result, industries are struggling to put in place strategies to mitigate the impact of the associated risks.”


Ncube and Mangudya however, expect a “hockey stick” recovery of the economy, that is, a surprise turn of fortunes.


Industrialisation is vital as it increases employment and wages.


It’s the core of import substitution, which the government has been advocating for in the past few years. An increase in production as a general rule will also reduce costs.

Capital per se, is viewed as the key to growth.


But, due to poor government policies in recent years, Zimbabwe’s industrial structures when given loans are unable to absorb such capital profitably because interest payments often exceed the rate of return on investments made.

There is also a pedestrian view or otherwise that capital per se propels the capitalist engine, in this case funders.


Consequently, the demise of local industries has created an army of unemployed and underemployed where people are employed but not working at their full capacity, in their own backyard.


The present failure, analysts said, is tied to a number of blind spots that make it extremely difficult if not impossible, chief among them being Zimbabwe government’s policies, which can best be described as “dead-end”.


While Mangudya and Ncube have been seeking to push production frontiers across all sectors of the economy, a stark contrast has emerged.


Analysts said Ncube and Mangudya appeared to be borrowing from the Morgenthau Plan, where allied countries occupying Germany after World War 11 proposed to deindustrialise Germany, in sharp contrast to the Marshall Plan (an American plan to re-industrialise European economies enacted in 1948).


They said Ncube and Mangudya’s de facto Morgenthau Plan has proved exceedingly successful in deindustrialising Zimbabwe following the closure of many companies in the country.


Analysts said local industries need targeting, nourishment and protection because in their simplest form, it’s difficult for them to survive.


Analysts say Ncube and Mangudya’s policy instruments favour rentseeking and have tilted playing fields to cronyism, something which undermines the development potential of industries because of government policies’ palliative effects.

The present approach is heavily tilted in favour of palliative economics, which has taken the place of developmental economics.


In other words, these policies are only meant to ease the pains of economic misery rather than to eradicate the problem permanently through economic development policies.


Several analysts say the current industrial policy causes some cronies to
get rich.


But an economist with a local commercial bank thinks otherwise.


“Crony-free economics only exists in neo-classical models,” he said adding: “After all, capitalism is about getting away from perfect competition.

The most important thing good business schools teach is how to escape from the situation of perfect competition.”


The big question, however, remains: Is economic development achievable under perfect competition?


Others say economic development is caused by structural changes which break the equilibrium that creates rents.


Zimbabwe’s economy was in a deflationary environment during the 2015/16 period. But, at the end of May this year, annual inflation hit 786%.


Mangudya said the economy is driven by inflation expectations adding that there was a strong correlation between inflation and inflation expectations where the focus is on the replacement price.


Experts say of all the blinds spots of standard economics, the most important of all its assumptions is the “equality assumption” that all economic activities are qualitatively alike as carriers of economic development.


But, the winds of the Zimbabwe markets did not bow their way to
this assumption.


In fact, government’s policies, especially those by Ncube and Mangudya, created a lot of superfluous machinery in de-industrialising Zimbabwe, leaving cemeteries of rusting machine parks in industries across the country, especially in the capital Harare to Bulawayo.


Trust in Ncube is waning by the day as his promises of a better life have come to nought with the life for the ordinary person becoming increasingly unbearable and painful.


Ncube vowed to turn the country’s fortunes around within half a year when he was a surprise pick by President Emmerson Mnangagwa in September 2018.


“If you give me six months, you will see changes, significant changes,” he said at the time and although there are changes, they are not what Zimbabweans expected.


The reintroduction of the local currency worsened the situation.
And the market refused.


With the stroke of a pen, people’s earnings were rendered worthless
and many protested the move but with little choice grudgingly accepted the lathered currency.


Apart from expanded industry graveyard, the situation for workers
in Zimbabwe is dire.


The combination of de-industrialisation and de-construction of the State has created a large scale of unemployment and many people have been forced to turn to vending to eke out an honest living.


There is sustained wage compression of between 40-50% of what
they were last year.

There is low production and productivity owing to structural rigidities brought by limited access to external funding.


There is also a confidence deficit in the whole environment.


Apparently, the industry is constrained.


Last year, manufacturing capacity utilisation declined by 11.8 percentage points to 36.4% from 48.2% recorded in 2018, according to Confederation of Zimbabwe Industries (CZI).


This year, capacity utilisation is expected to decline to less than 20%
Industry and Commerce Minister, Sekai Nzenza, gave a message of
hope.


“There is no doubt obviously that we are going through a bumpy road.


Inflation remains very high and there is uncertainty in the market.

But, government focus has shifted to productivity and job creation,” Nzenza told Business Times.


Other analysts say economic development is the result of synergies and increasing returns.


But, Zimbabwe’s industrial policy creates “rent-seeking” and “cronyism”, which appear to be the only game in town.

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