Byo as a leather industry SEZ: key imperatives going forward

THE failure to absorb hides and skins produced locally by Zimbabwe’s ailing leather industry remains a major stumbling block to value addition initiatives in the sector.

Most of the hides and skins ended up being exported in their raw form, resulting in the loss of jobs. The troubled leather industry is operating at around 30 percent of capacity, with availability and cost of electricity being one of the impediments to increased capacity utilisation.

A total of 5440 tonnes of raw hide including crocodile skins worth US$28 million was exported between January 2011 and December 2011. During the same year, 2,2 million pairs of footwear were produced while four million pairs of mainly cheap synthetic shoes were imported, essentially making Zimbabwe a net importer of footwear.

This article will detail the history of the leather industry in Zimbabwe to see where we have gone wrong as a country with the aim of bringing the former glory days of Zimbabwe’s manufacturing industry back especially at this juncture in our history when Bulawayo has been declared a Special Economic Zone (SEZ) for textiles and leather but it finds itself with archaic machinery and disused factories which will take more than mere machoistic policy pronouncements to get back on their rails of productivity again. Leather industry history in Zimbabwe Mass footwear production started in Southern Rhodesia in 1939 with exports to Bechuanaland (later Botswana), Kenya, Northern Rhodesia (later Zambia) Nyasaland (later Malawi) and South Africa. In 1965, the United Nations imposed international sanctions until 1980 that forced the country to speed up import substitution. This resulted in total hides being supplied by local farmers with almost the entire domestic requirement for footwear satisfied by local production.

In the 1970s, there were about 10 million cattle in Zimbabwe including one million high grade breeding stock in the commercial farms. Commercial farms were the main source of cattle hides due to 20-30 percent off-take compared to two to five percent off-take rate in the communal and smallholder sector with a larger population.

The Footwear Manufacturers and Tanners Association (FMTA) was formed in 1980 under the umbrella of the Confederation of Zimbabwe Industries (CZI) to look after the interests of tanneries and footwear manufacturers.

Zimbabwe was also included in several Tannery Rehabilitation Programmes between 1987 and 1995, whereby equipment was provided to improve and expand the operation of local tanneries and a training school for manufacturers was created. At that time, the Zimbabwe Bata Shoe Company also had a fully equipped laboratory and footwear training centre inside the factory complex in Gweru. 1980s leather and manufacturing performance Much of Zimbabwe’s industrial growth took place within a protective import-control regime via the foreignexchange allocation system, which conferred an umbrella of protection as imports that competed with domestic production were effectively barred. Consequently, a heavy concentration developed in many sectors of the economy. However, the import-substitution industrialisation strategy which had done well during the Federation and UDI years began to show signs of distress in the mid and late 1980s. The deliberate policy of compressing imports to manage the balance-of-payments situation left capital stock in an obsolete and depleted state.

The manufacturing sector itself became a net user of foreign exchange. Although it contributed 32,1 percent of export earnings in 1984, it accounted for 90,6 percent of imports during the same year. Furthermore, the high level of protection created a monopoly structure whereby 50,4 percent of manufacturing products were produced by single firms. This meant that 80 percent of goods produced in Zimbabwe were monopoly or oligopoly products.

Export performance was lackluster, on the whole, with exports declining between 1981 and 1986, and growing by about 6,8 percent between 1986 and 1990. Manufactured exports rose from 29 percent of total merchandise in 1981 to 36 percent in 1990. The sluggish manufacturing export growth that was recorded provided ammunition to those who were pressing for structural adjustment in the 1980s. Their diagnosis of this sluggishness rested on the claim that it was largely a consequence of a negative incentives system that placed manufacturing at a severe disadvantage by disproportionately rewarding domestic market production.

The incentives system was believed to lead to a severe anti-export bias for the whole economy, but especially for the manufacturing sector. Furthermore, the World Bank’s own record in supporting the export orientation of the sector was inconsistent in the 1980s. After its loan to finance an Export-Revolving Fund (ERF) for the sector proved quite successful in the context of a controlled forex allocation system, the World Bank withdrew at the eleventh hour from extending the funding unless the trade regime was liberalised.

This particular instance gave the impression that the judgment was not based on whether policies were working but whether they were working according to market dogma. The inconsistency of the World Bank’s position can be partly assessed by comparing this decision to its initial pronouncements on export promotion and trade liberalisation. Prior to Esap, it had argued that there would remain a strong case for the maintenance and improvement of specific export-promoting measures such as the ERF to encourage at least short-run growth. Furthermore, it had originally counselled against hasty trade liberalisation. Liberalisation attempts in other countries have shown that trade liberalisation without appropriate exchange rate and macro-economic management is not sustainable. Zimbabwe’s own experience in the immediate postindependence period illustrated the risks of liberalising imports with an inconsistent exchange rate and macroeconomic framework.

In the Esap document and during the adjustment process, these cautious admonitions were thrown to the winds. And yet, the macro-economic context in 1990–93 was hardly suitable for the immediate and hasty trade liberalisation.

In view of the above, one would have expected the manufacturing sector to oppose moves towards liberalisation as it had invested heavily in production for the domestic market. However, by 1987, balanceof-payments problems became more binding as export receipts dwindled. At the same time, controls were intensified, culminating in the 1987 exchange-control measures that suspended dividend and profit remittances. Remittances of blocked funds were also stopped, except where this was done via Government’s four percent bonds.

The manufacturing sector became increasingly aware of the need to increase exports in order to generate more foreign exchange, and lobbied for export incentives in addition to the Export Revolving Fund (ERF), which had been introduced in 1983 with the help of the World Bank.

The sector was wary of the liberalisation of imports of goods produced at home, but was even more worried about the stricter price controls, as well as its inability to retrench workers. When the foreign-exchange constraint became even more binding, especially following the 1987 economic slowdown, calls for a gradual liberalisation of the economy grew louder.

The World Bank capitalised on this changed view by the manufacturing sector to press for market-led reforms.

In addition, the World Bank refused to renew the ERF unless market reforms were carried out. Studies undertaken by a number of committees set up in 1989 showed that industries were generally supportive of the reform programme. Thus, by 1990, there was overwhelming pressure on Government in business circles to undertake market reforms. Leather industry performance during Esap The textiles sub-sector accounted on average for 10 percent of total manufacturing output between 1985 and 1995, while clothing and footwear represented on average 6,2 percent of manufacturing gross output over the same period. The share of the manufacturing sector in GDP averaged 21 percent during the respective period.

While the textiles sub-sector produced on average 11 percent of total manufacturing output during the period before economic liberalisation (1985-90), its share declined to an average contribution of nine percent during the period of Esap (1991-95). The share of the clothing and footwear sub-sector in manufacturing output declined from an average of seven percent during the pre-Esap period to six percent during the period of Esap.

Following the introduction of Esap, the share of the clothing and footwear sub-sector dropped from seven percent in 1990/91 to five percent by 1995. The share of the manufacturing sector in GDP declined from a high of 27 percent in 1992 to 19,2 percent by 1995 and 7,2 percent by 2002.

The decline during the Esap period (1991-95) was mainly due to the influx of competing cheap imports, while the further decline after 1995 reflected both the liberalisation of trade and the current economic crisis.

This indicates that the manufacturing sector suffered de-industrialisation following the liberalisation of trade since 1991, while the textiles sub-sector was the worst affected. In my next article I will endeavour to look at what happened in the leather industry post 1997 and how this sector can possibly be revived through value addition and beneficiation for economic prosperity and employment creation not only for the de-industrialised Bulawayo but for Zimbabwe as a whole in its quest for greater revenue generation.

Butler Tambo is a Policy Analyst who works for the Centre for Public Engagement and can be contacted on butlertambo@gmail.com or +263776607524.