De-industrialisation: Unemployment and vendors’ crisis demystified
By Brighton Musonza
The growing disturbing scenes of street vendors in urban centres across the country, where millions of unemployed men and women of all ages who have not had the chance to escape the borders; have set stalls on pavements, car parks selling food, clothing, mobile phone accessories, domestic appliances and even goats, is a clear sign of the scale of depth of the de-industrialisation that needs urgent debate in the realms of the economic fault-line.
When a shock you predicted happens, it is still a shock. Zimbabwe’s economy was expected to struggle; but the intensity of the on-going major deindustrialisation process of social and economic changes resulting in significant reduction of the country’s industrial capacity, particularly in the heavy industry or rather manufacturing industry in general is a shock to the system.
Zimbabwe’s economy remains fragile with an unsustainably high external debt and vulnerable to many structural challenges, more worrying is the massive accelerated de-industrialisation and informalization.
The grimness of a business environment in a state of complete stagnation.
This article will attempt to pierce this new phase of Zimbabwe’s economic meltdown; albeit, giving prominence to one the modern times, unreported total wipe out of the industrial base built over a century. But; where has it gone wrong; again?
Why are people in the streets and not at work? Why are factories closing? Can we decouple Zimbabwe’s new phase of economic turmoil from the 2008 record hyperinflation? Why are business executives, industrialists, economic commentators not making their voices heard?
Does the country’s leadership have the will and depth of intellectual capacity, skill and knowledge base to quantify and qualify the impact of their actions or omissions? Is the Empowerment and Indigenisation policy the new Mr Killjoy?
More importantly; is “informal sector” the new name of unemployment? Can Zimbabwe formalise (mabhindauko or kusvaga-tsvaga, guma-guma) the informal? Is in-formalisation any different to or characteristic of deindustrialisation? Is deindustrialisation the elephant in the room?
Deindustrialisation – what is it?
First it is essentially important to explain the characteristics that describes the current sorry state of what used to be Zimbabwe’s manufacturing industry and the problems the country is now facing. Later; an in depth analysis of the historical context of the build-up of the country’s industrial base since the arrival of the white settler.
Without exploring and understanding the level of the depth of the crisis; it is difficult to know more about the unknowns that should be known to inform our knowledge base for known and unknown solutions. Zimbabwe is in urgent need to know both the unknowns and the knowns to get things right.
When a country is teetering into the dire unemployment situation – becoming a spectacle of its own desperate subjects strewn in the street pavements; selling anything to each other prompting doomsayers to fear for the worse – you know its business must resort to special measures to survive.
In their descriptive forms; industrialisation, deindustrialisation, and reindustrialisation refer to changes in the share of the manufacturing sector in GDP and or employment and therefore an examination of the sharp decline in the country’s manufacturing sector will explain how far deep the country is finding itself in this serious predicament.
Critically important is essential for us to chronicle the fall of the Zimbabwean manufacturing sector as this is the symptom of the problem. Manufacturing sector in most economic schools of thought is an ‘engine of growth’.
Furthermore important to note is that, a share of mining employment as a proportion of GDP is, to a significant extent regarded as outside a country’s control given that it derives in part from its mineral endowments.
This article therefore will specifically explore the troubled Zimbabwean manufacturing sector and of the changes in its proportional share in employment on Gross Domestic Product (GDP).
The fall in the share of manufacturing employment in Zimbabwe is therefore generally characterised in the economics and business management literature as deindustrialisation – it is essentially important that nation states in of any serious unemployment situation like Zimbabwe usually start work to target this sector for recovery to boost economic growth and jobs prospects for their people.
Scale of industrial (Manufacturing) decline
The scale of the Zimbabwean industrial catastrophe can best be measured by reference to the research paper by the London based Overseas Development Institute (ODI) – “Industrialisation in Sub-Saharan Africa (Zimbabwe)”.
At the time of publication in 1988; the research paper put forward the argument that Zimbabwe’s manufacturing sector had exponentially expanded over a time span of more than 60 years to become one of the most advanced and diversified in Sub-Saharan Africa.
It is argued that level in that period extending into the early 80s, the sophistication of the Zimbabwean economy as put forward by the ODI report said; with the pivotal place occupied by country’s manufacturing industry, and with favourable domestic policies and supportive external environment, there were suggestions that Zimbabwe could and perhaps with South Africa was potentially the first country in Sub-Saharan Africa to join the ranks of the handful of Newly-Industrialising Countries (NICs), which at the time was confined to Asia and Latin America.
The sharp decline in Zimbabwean manufacturing in the last twenty years since the country adopted IMF-World Bank markets liberal reforms and leading into the longstanding internal political conflict is the most prominent in terms of employment job losses and it explains why the de-industrialisation debate should be on the pick of discussion in pursuit of the larger economic agenda.
This de-industrialisation reflects in essence the declining importance of the manufacturing sector relative to other sectors – hence any attempts to relegate jobs in this sector as a policy choice in favour of the informal sector is an exercise in futility.
The grim situation in the Greek crisis should serve as a reminder of the dangers of the informalisation of the economy. For decades the country peddled the idea of over reliance on the growth of informal sector such that nine in every ten of its 750 000 companies are informalised SMEs of which it has struggled to get them to pay tax.
Just like Zimbabwe; of the estimated one million Greek companies that existed in 2010, about 250 000 have declared bankruptcy, chocked by falling demand or lack of capital.
Balance of payment and structural regression
In proportional terms, Zimbabwean locally manufactured goods are presenting a trend of sharp decline in share of external trade, and this is reflected in the progressive failure to achieve sufficient exports to maintain a viable economy in the external balance.
Zimbabwe’s Balance of Trade has averaged -422.44 US$ million between 1991 and 2014. Trade deficit was $2, 9 billion in 2014 and it was projected to narrow to $2, 8 billion in the period 2015 but by January 2015 it got to $3 billion.
The balance of trade deficit has accumulated to the extent that the country is unable to procure critical inputs and energy imports to sustain further production of goods, and thus initiating a further downward spiral of economic decline leading to factory closures.
Unemployment is the greatest problem facing Zimbabwe today and with it there are threats to the socio-political stability. According to a damning report by the African Development Bank; Zimbabwe is experiencing a structural regression, with the acceleration of de-industrialisation and in-formalisation of the economy.
Measure of industrial decline
Going back on time; to measure the depth of the current state of industrial carnage; eighty years ago – Zimbabwe’s ‘ manufacturing sector was already responsible for 10 percent of the country’s Gross Domestic Product (GDP). It employed 7 percent of the formal sector labour force and accounted for 8 percent of total export earnings.
To put this into context, the Overseas Developed Institute (ODI) says data for most of Sub-Saharan Africa in the three decades preceding the research; showed that at least 70 percent of countries’ ratio of Manufactured Value Added (MVA) to GDP was less than 10 percent.
In over 56 percent of the countries’ manufactured exports accounted for less than 10 percent of total national exports and in over 40 percent of countries’ fewer than 10 percent of employees were working in the manufacturing sector.
What these comparisons highlight therefore is that an assessment of Zimbabwe’s contemporary industrial performance marked by 8 percent ratio of Manufactured Value Added (MVA) to the GDP; at some point, was placed firmly within an extremely high-end band.
How far we have deviated from that course is summed up well by the Zimbabwe Confederation of Industries (CZI) President Busisa Moyo’s recent statement in his attempts to explain the vendor crisis.
“What we are seeing is a manifestation of the economic problems in the country: the people are unemployed,” – Mr Moyo said. “These are people who were in industries and farms and now have no means to make an income.
“In the long run, we are going to see only more manifestations… What it means for government is that due attention has to be paid to protect those industries that remain, and facilitate their recovery.”
Official figures show that at least 4,600 companies were closed between 2011 and October 2014 last year, and thousands losing their jobs. At least 60 percent of all companies are currently under judicial management (Administration).
There are many notable names that have been wiped off in the manufacturing land marks – some of the key names include Cairns Holdings. The government in recent years has battled and failed to save the food and beverages processing giant.
Cairns Holdings’ strategic importance can be explained by the Reserve Bank at some point holding a 63.3 percent interest. Recent attempts to find investors from China and Russia have proved to be in futile.
Another practical contemporary example would be to assess the following business decision simulation model; to stay competitive in both exports and defend its domestic markets from imports, the country’s biggest dairy Dairybord (Pvt) Limited will have to evaluate its dairy products packaging policy with the decision whether it sticks to two local packaging suppliers; Flexible packaging (Pvt) Limited or Saltrama Plastics (Pvt) Limited – in that decision, Dairybord will factor in the exchange rate and possibly end up buying plastic packaging from South Africa?
Meanwhile; Saltrama Plastics founded in 1947 and at one stage was the largest plastic company in Africa would have lost out on its key accounts with Dairybord (Pvt) Limited.
The other question is; would Saltrama Plastics or Flexible Packaging still be able to stay competitive in regional markets given the strength of the dollar against regional currencies? – What would have been the fate of Saltrama Plastics 200 employees? These are the practical contemporary examples of questions managers in industry are facing every day.
Macroeconomics – inactive monetary policy
Upon his re-election President Robert Mugabe promised to create 2,2m jobs in the five years of his current term. Inauspicious signs of the economy descending on a tailspin have been glaring since his inauguration and any other time before that. The UN Development Programme estimates that the unemployment rate is 90%.
Figures from the Retrenchment Board, a government agency, paints a gloomy picture and indicate that nearly 100 companies shut down and over 1 000 people were retrenched in the first quarter of 2015.
Zimbabwe’s economic problems are largely structural but there are notable macroeconomics related problems caused by the inactive monetary policy caused by the adoption of currency substitution (dollarisation).
Optimising and mixing up various monetary policies tools like include; inflation control, money supply, interest rates and exchange rate mechanisms is the only way jobs can be created because those are instruments that determine the cost and supply of money for both investment and consumer spending levels.
With the adoption of the dollar President Mugabe knows too well that he has no leverage due to an inactive money supply (We leave the currency for next instalment).
The poor performance of domestic revenue inflows and the rise in recurrent expenditures is continuously constraining fiscal space, while the continued use of the multi-currency regime result in monetary policy largely remaining unchanged.
Zimbabwean economic growth is in this state because consumers, businesses and the government have no access to credit. The fact that the country has no meaningful lines of credit or reserves reflects on the Reserve Bank of Zimbabwe’s inability to act as lender of last resort and companies and are running into refinancing difficulties.
There is no visible leverage on the central bank to influence the supply side of money and we can as well fairly say there is no fiscal room for manoeuvre.
Consumer spending is an important anchor of economic activity, although this alone may not be enough to lift growth to levels required to slash unemployment. Liquidity problems have always been cited as a source of many of the myriad of problems in Zimbabwe.
The Reserve Bank of Zimbabwe has persistently raised issues of inefficiencies and challenges characterised from severe and persistent liquidity problems which it says have made it difficult for local productive sectors to access sufficient credit; lack of competitiveness of locally produced goods due to high costs of production resulting in the huge importation of finished goods, and it cited these as the reasons behind widening current account and trade deficit.
Top of the list of the problems; the adopted United States dollar has appreciated 17 percent against major currencies in the last three years as a result of the growth of the United States economy and mounting speculation of interest rates hike. This is making the country less competitive compared to key regional trading partner South Africa, whose rand has depreciated sharply 28 percent against the dollar.
Labour and utility costs
Alongside this; factored on the premium strength of the strong currency in use, the country’s minimum wage levels indicate higher labour costs compared to regional counterparts.
Zimbabwean industrial unit output is also subjected to unreasonable higher energy (electricity) costs than their regional counterparts.
According to the Economic think tank, Zimbabwe Economic Policy and Research Unit (ZEPARU) commissioned by the Ministry of Industry and Commerce; in Zimbabwe, users pay an effective tariff of 14, 5 cents per kilowatt hour, while the average tariff of the 4 neighbouring countries (Botswana, Mozambique, South Africa and Zambia) at the lowest level of commercial consumption is 8.3 US cents per KWh, which is 57 percent of what Zimbabwean businesses pay.
Industrial policy reforms
In the absence of any new meaningful authoritative industrial policy since independence Zimbabwe has largely kept the same pre-independence industrial structure from 1980 when the country won its independence.
The 2011-2015 industrial policy framework document spells out the overall objective is to restore the manufacturing sectors contribution to GDP from the current 15% to 30% and its contribution to exports from 26% to 50% by 2015.
An average real GDP growth of 15% is targeted under this policy framework. But, as is always is the case with Zimbabwe; the situation on the ground is different.
From outside the politics, and the political argument; a technical industrialist point of view would have said; instead of the existing costly, rabid and highly charged emotive egocentric method in pursuit of political correctness in the Indigenisation and Economic Empowerment policy which somewhat hulks over the purported industrial policy – rather, Zimbabwe needed a new Industrial Policy presided by an all stakeholders conference.
To support this argument; empirical findings by the Confederation of Zimbabwe Industries (CZI) found that; as a result of the Unilateral Declaration of Independence (UDI) between 1965 and 1980 and the subsequent sanctions against white minority Rhodesian government, Zimbabwe’s manufacturers have always been forced to be their own suppliers by carrying out the majority of operations in-house.
The generic operations of local factories have always needed raw materials that simply could not be imported because of sanctions, and hence they have always sourced locally or produced them for themselves. A good example is the Dairybord Limited – Saltrama Plastics (Pvt) Limited above.
Therefore; by understanding the colonial industrial model; a new Industrial policy would have been the basis of political parties’ shaping their manifestos. Also this would have been factored in the process of dismantling, re-build and reconfigure the new industrial order to the ever changing outside world were the country exports its goods.
An all stakeholders Industrial Policy conference would have discussed the progressive character of manufacturing in terms of productivity (as a source of economic growth), innovation (as a source of productivity) and international trade (as a source of export income and also productivity).
Manufacturing trend 1930-2015
On an annual basis, the share of the manufacturing sector in GDP for Zimbabwe peaked at 26.9 percent in 1992 before collapsing to 7.2 percent by 2002. Various Confederation of Zimbabwe Industries (CZI) manufacturing sector surveys suggests that industrial capacity utilisation has declined sharply from 35.8 percent in 2005 to 18.9 percent by 2007 and to less than 10.0 percent by 2008.
There was recovery, with an increase to 33.0 percent recorded in 2009 under the coalition government, 43.7 percent in 2010 and 57.2 percent in 2011, before declining again to 44.2 percent in 2012 and 39.6 percent in 2013.
In 2004, 80 percent of jobs in Zimbabwe were in the informal sector, with the 2011 Labour Force Survey suggesting the rate had further increased to 84 percent.
In the evolution of Zimbabwe’s manufacturing sector historical trend perspective, the most significant record is that substantial and almost uninterrupted expansion of the country’s manufacturing sector has taken place in the 50 years between 1938 and 1988.
According to the Overseas Development Institute (ODI), not only has rapid manufacturing expansion been achieved but the sector has played an increasingly important role in the overall economy.
In real terms, manufactured value added (MVA ) doubled in the six year period 1938 to 1944, doubled in the four years to 1948 and doubled again in the seven year period to 1955. By this time the MVA/GDP ratio had risen to 15%, up from the 10 % level achieved in 1938 (the year when reliable data was first collected).
The steady expansion achieved over the past 35 to 40 years prior to 1988, with the exception of a short period in the mid to late 1970s when both real MVA and the MVA/GDP ratio fell and, more in the period 1982-84 when the volume of production contracted.
The most marked expansion – in terms of both real increases in value added and in the contribution of MVA to GDP – occurred during the first full nine years of the Unilateral Declaration of Independence (UDI) period (1966 to 1975) and the first few years of the Independence period.
Tracking it back to the 1930 and in 1938, when the first industrial census was taken, and not only had the iron and steel foundries and mills been built and the Rhodesian Iron and Steel Corporation (RISCO) later re-named ZISCO, was established’, but the country was already exporting goods manufactured in each of the International Standard Industrial Classification (ISIC) sub –sectors. By that, the country’s manufacturing sector was contributing 10 percent to the GDP.
By 1985-86 the manufacturing sector was responsible for just over 25 percentage of GDP, with net output valued at over $2. 5 billion (US$1. 5 billion). It was the second largest modern employment sector, employing some 160, 000 people, 16 percent of the formal sector labour force.
In 1985, the exports of manufactured products totalled ZIM$726 million (US$450 million), almost 50 percentage of domestic exports. Over the two year period, 1983-84, 18 percentage of total gross fixed investment originated in the manufacturing sector, valued at $215 million for each year.
In 1987, Zimbabwean exports were 33 percent of the GDP and when the country fell headlong in 2008; they were only 9.9 percent of the GDP. The country recorded a record low of US$156.41 million in March of 2014.
In January 2015, Zimbabwe exported $231 million and in March this year exports declined by 27, 6 percent to $188, 7 million. In the first quarter of this year, the cumulative trade deficit is recorded at $853,6m.
Capital and Commodities Market fluctuations
The “sources ” of growth of Zimbabwe’s manufacturing sector in the 30 year period between 1952 to 1983 have been calculated and decomposed into their three constituent elements; import substitution, domestic demand and export growth.
The Zimbabwean economy is externally oriented, dominated by old-colonial and foreign capital, and it is vulnerable to fluctuations in the world price of commodities that makes the economic growth and industrial employment extremely sensitive.
Added to that; the strength of the dollar, is proving to be devastating to local production because it has reduced competitiveness of local products in the export markets. On the other hand foreign companies selling their products in Zimbabwe are profiteering from higher exchange rate factored premium prices charged in Zimbabwe.
The profits realised by these foreign companies are not adding any value to the domestic economy; they are not being retained on local Balance Sheet for re-investment. They are not being deposited in local banking system or re-invested to improve efficiencies and productivity; so they are not contributing to the job creations.
The empirical analysis of changes in the level and share of Zimbabwe’s manufacturing employment over the period 1930–2015 brings out the fore the acute fall of what could conventionally be characterized as deindustrialization. Zimbabwe’s deindustrialisation is largely associated with half-backed socialist populist policies premised on the desire to stay longer in power – not from an economic reasoning.
Zimbabwe is experiencing what is considered to be ‘acute premature’ deindustrialisation, in the sense of commencing at the lowest levels of per capita income than what is generally the case. Premature deindustrialization has particularly severe negative effects on long-term growth and it can turn living standards upside down; hence today bread on breakfast is now a luxury.
Amongst some of the economic structural problems facing Zimbabwe; deindustrialisation has received relatively little attention in the debate – there is little systematic discussion of the relationship between trade, growth and the sharp declining of manufacturing employment.
Lest we forget; the faster growth in manufacturing is associated with faster aggregate growth, productivity growth in manufacturing is endogenous to the growth of manufacturing output, and aggregate productivity growth is positively related with the growth of manufacturing output and employment.
Investment Climate
There are limited strides from the government on the policy front to improve the investment climate, there are still some challenges. The investment climate remains fragile and uncertain. This is being weighed down by the downside risks arising from the lack of a clearly agreed policy framework and resolve within the government.
According to the World Bank’s recent “Doing Business Indicators”, Zimbabwe has slipped from a ranking of 157 out of 185 countries to 173. Impediments to investment include limited resources and high cost of capital, dilapidated infrastructure, obsolete technologies, and power and water shortages.
A shortage of official and private external financing because of perceived risks, and the low level of banking sector deposits in a recovering economy have significantly affected the performance of key sectors of the economy: agriculture, mining and manufacturing
The country has suffered from massive human capital flight, dilapidated and outdated equipment and undercapitalization.
The country also faces challenges and risk of fragility in the political and socioeconomic context. The country is stuck in the risks associated with the latent succession struggles and infighting in the ruling party.
This has compromised focus on development issues. This has seen the politicisation of public institutions which is limiting room to adopt checks and balances, foster greater access to justice, and build more transparent and accountable public financial management.
Finally; I conclude by saying, apart from sorting out the structural defects of the economy; Zimbabwe is a country in urgent need of a reindustrialisation plan. Policy interventions are needed to be able to reverse the existing debilitating premature deindustrialisation.
However, it needs courage to acknowledge that it is generally difficult to build up lost production capacity, because of micro-level factors such as loss in market share, fixed capital, networks both in input sourcing and output markets, skills, tacit knowledge, and the other institutional qualities that are built up over time.
The types of policies relevant to meeting these challenges maybe beyond the scope of the current Zimbabwean leadership – but it is important that Zimbabwean industrialists, economic commentators and many in business start building up treasure troughs of business, industrial and economics literature that sparks the basis for national debate.
What we can say is that, if Zimbabwe wants to pursue re-industrialisation, it cannot be ‘business as usual’. Decisive and effective industrial policies are required, along with a macroeconomic environment that does not contribute to the further emasculation of industry.
Brighton Musonza is an Asset Management; Portfolio Client Accountant for a United Kingdom Investment company. He is also a student at the UK Business School. He can be contacted at [email protected]. This article was first published by The Zimbabwe Mail.
