Economics of import substitution
THERE has been a lot of commotion and confusion over Statutory Instrument 64 of 2016, which controls a number of commodities from open imports with media calling it a “ban”. It should be clear that this is not a ban, in the importation of the products,s, which include baked beans, coffee creamers,s, building material among others, but a control.
Any importer who wisheshes to bring in productsducts stated in the SI should apply for an import permit before theyhey can bring the product.uct.
The licensing of importsmports is an exampleample of the imports substitution approach.h.
It basically substitutes externallyy produced goods andnd services, especiallyy basic necessitieses such as energy, food and water, with locally producedd ones.
The notion of import substitutionion was popularisedsed in the 1950s and 1960s as a strategytrategy to promote economic independence and developmentevelopment in developing countries.s.
This initial efforteffort failed due in large part to the relative inefficiency of Third World production facilities and as a result their inability to compete in a globalising marketplace.
Import substitution came into being as a means to promote national (buy local campaigns) and regional development.
To understand the rationale for import substitution, one must first understand the basic forces at work in a local economy.
Local economies are often described by what economist Avik Basu terms a “leaky bucket” model in which the bucket represents the local economy and money can both circulate within the bucket and flow in and out.
Money circulates within the economy when money that is earned locally is also spent locally. This requires that some money exists in the bucket to begin with — one way this happens is when local goods and services are purchased by consumers outside the region. Another source of inflow comes from businesses which decide to set up shop locally and generate jobs that pay local workers. The “leak” in the bucket that allows money to escape from the economy is created when goods and services from outside the region are ppurchased with local money. It is typicatypically assumed that a roburobust economy requires both the availability of capital and its circulation within an economy.e Local economic developmendevelopment often focuses on attracting businesses uunder the assumption that the jobs generated by those businesses will generatege local income and, in turn, local spending of suchsu income. In terms ofo the leaky bucket, it focuses on ensuring ththat money continually flows into the local economye so that there will be at least some aavailable for circulation. But continuouslyc filling the bucketb is not the only optionop — one can also keep more money circulating within thet local economy byb plugging the leakage of capital from the system.sy Import substitution constitutes one approach to plugging these leaksleaks. ZimbabZimbabwe has been experienciexperiencing a severe cash crisis which has been partly attributed to a surge in iimports and externalisation. So by controlling imports, the cash leakages will to a certain extent be reduced. Information from Zimra clearly shows why import permits may be required: Permits are required by certain ministries as they form part of their jurisdiction in protecting their clients and interests. For instance you cannot import agricultural products without the knowledge of the Ministry of Agriculture for wide-ranging reasons. They want to monitor whether one is not importing banned GMOs products or invasive disease-ridden material into the country. In most cases, permits are required to protect the society. Say in the case off importation of medicines, the Ministry of Health and Child Care has to ensure that proper, unexpiredd drugs are regularisedd upon importation;n; or for radioactiveve material, the import permit/licence is only granted too professional licensedd and registered handlers.
Permits protect local industries, for instance certain agricultural products require permits so that they are not imported in excess thus stifling sales of local products.
Permits and licences ensure that there is a c c ount abi l i t y and maintenance off peace in the country.
For example to importmport firearmsfirearms you need a permit and licence and before you can get that permit, your operations have to be regularised and authorised.
This saves the country from infidels importing guns and other firearms as they wish.
Permits also assist other government departments in raising revenue for their operations and in collecting trade statistics.
For instance the permits issued to oil companies help the energy and power development ministry in providing economic statistics like how much was imported and this helps regularise the sector.
With the SI 64, the permits are to be issued to protect local industries, account for imports coming into the country as well as address the widening current account deficit.
The government is implementing a form of import substitution policy.
In terms of the legality, the WTO says that the agreement on import licensing procedures says import licensing should be simple, transparent and predictable so as not to become an obstacle to trade.
For example, the agreement requires governments to publish sufficient information for traders to know how and why the licences are granted.
It also describes how countries should notify the WTO when they introduce new import licensing procedures or change existing procedures.
The challenge then arises when other countries retaliate by imposing similar measures which then means our products will find it difficult to get into those countries.
The CZI 2015 Manufacturing Sector survey found out that the major constraint to capacity is low demand for domestic products, with respondents stating the above as the reason for underutilised capacity. This is a sure sign ththat local industry absorbs dedemand arising from the mmove.
CZI has advocated for titime bound protection or iincubation.
This should be done while simultaneously address ing inefficiencies at national and company level.
At national level, there are infrastructural rigidities, labour costs, electricity tariffs which must be addressed if the industry is to fully benefit from these interim measures.
At company level, businesses should eliminate the ininefficiencies within the prproduction process and ensensure every process and activity is generatingge value for the customer.
To that end, CZI has been assisting members to adopt lean management practices which focus on creating a continuous improvement culture that engages employees and reducing the intensity of time, materials and capital necessary for meeting customers’ needs.
In terms of addressing the widening current account deficit, there are two approaches that can be used which include stimulating exports or depressing imports.
The government has therefore made a deliberate move to reduce imports of nonessentials and goods that can be locally manufactured.
The RBZ has also started working on export incentives by introducing a five percent incentive for exporters.
For goods that are locally available, government should lead by example by procuring locally.
A minimum local content clause should be included in the procurement systems. The import licensing system can work only for so long, provided there is proper monitoring and evaluation.
There is need for monitoring the situation closely in order to ensure that the country is then not affected by shortages/ unjustified prices increases/low quality products.
Key information should look at current installed capacities of some of the products versus what the demand is locally for such products.
This strategy on its own is, however, limited to stimulate the development of the national industry, because it cannot completely eliminate the dependence on imports, it is still largely dependent on imports, and it will only change the structure of imported goods.