Embrace local content to spur growth

Zimbabwe remains in trade deficit. Statistics over the years show that in most cases our exports are half the import bill. One factor that has led to lesser exports is instability in regional currencies due to the strengthening United States dollar.

LACK of production and an almost non-existent manufacturing sector was forcing producers to import raw materials from outside the country. However, Zimbabwe can easily reduce its trade deficit if it embraces local content.

The aim of local content requirements is to create rent-based investment and import substitution incentives. Local content requirements are provisions (usually under a specific law or regulation) that commit foreign investors and companies to a minimum threshold of goods and services that must be purchased or procured locally.

From a trade perspective, local content requirements essentially act as import quotas on specific goods and services, where governments seek to create market demand via legislative action.

They ensure that within strategic sectors - particularly those such as minerals with large economic rents, or agriculture where the industry structure involves numerous suppliers - domestic goods and services are drawn into the industry, providing an opportunity for local content to substitute domestic value-addition for imported inputs.

Thus - in contrast to the traditional protected export platform proposed by many development advocates in the 1960s and 1970s - local content requirements seek to attract foreign direct investment (FDI) by firms.

Moreover, through local content requirements, government can achieve these goals often without sharing in the risk of commercial undertakings.

Local content requirements are often paired with investment incentives, as part of a “carrot and stick” approach to attracting FDI.

While the use of local content measures has attracted outsized attention inside and outside the WTO, governments (both developed and developing) employ a range of measure to attract investment, using a “carrot and stick” approach.

On the “stick” side, governments use performance requirements, which can be generally understood (as defined by United Nations Conference on Trade and Development in 2003) as stipulations - whether related to local content, export performance, technology transfer, research and development (R &D), employment and domestic equity/ownership - imposed on investors, requiring them to meet certain specified goals with respect to their operations in the host country.

The specific policy goals - strengthening infant industries, increasing revenue, improving the balance of trade and lowering unemployment - are not always accounted for in the decisions of private economic agents.

The use of some measures is restricted at various levels - the WTO Agreement on Trade-Related Investment Measures (TRIMs) prohibits the use of measures related to local content, trade balancing, export controls and certain foreign-exchange restrictions, and certain bilateral treaties limit the use of other performance requirements.

These measures however are nonetheless widely used by governments to align investment with industrial planning.

On the “carrot” side, governments use a range of investment incentives to offset costs incurred by firms that choose to establish in the host market. These incentives range from direct transfers - eg grants (for R&D projects or new capital investment) and dedicated public-private investment funds - to indirect transfers, such as low or no-cost Government services in marketing and distribution.

The sum of Government resources used for investment incentives is significant: available information indicates that, in 2003, 21 developed countries spent nearly $250 billion on subsidies; the total for the world was more than $300 billion in that year, with state and local incentives in the United States ($50 billion) nearly equally the total subsidies in developing countries.

This carrot-and-stick approach has been used successfully by several countries as an integrated package of industrial planning policies.

Chile, for example, successfully used cash subsidies and local content requirements - prior to their phase-out under Chile’s WTO obligations - to develop a more diversified exporting base, with small and medium-sized enterprises in particular seeing a rapid increase in growth and export volumes.

The agro-economy of the State of Punjab successfully “revolutionised” its local contents mainly in the use of export obligation and dividend balancing measures; the Indian government has also used export obligations to develop joint ventures in the domestic car manufacturing industry.

Malaysia employed a combination of “pioneer status” tax incentives with employment requirements from the 1960s through the 1990s to achieve dramatic increases in manufacturing employment - from 318 000 in 1970 to 2,1 million persons in 2000; corresponding to a doubling of its share of total employment to 23 percent, and contributed to a reduction of unemployment to below 4 percent.

Local content requirements can be both explicit and implicit. In their most direct and explicit form, local content requirements can be explicit (ie numerical or qualitative) targets contained in national legislation or industry-specific regulations that specify a minimum share of locally-sourced goods and/or services (or conversely a maximum ceiling for imported inputs).

Other, less direct, forms include the creation of “weighting” or “scorecard” systems where local content is one of usually several criteria (including export performance and whether or not the sector in question has been designated as strategic by the Government).

This mixed system generally arises in the case of subsidy programmes - such as the Nigerian Export Expansion Grant to encourage non-oil manufacturing - where the score determines the level of subsidy to be received, or for targeted goals within government procurement to ensure that government purchases are in line with employment policies and targets.

Local content requirements may not necessarily need to be de jure (ie written in legislation, regulations or directives); for public procurement where selection processes can be heavily influenced by political considerations, a statement by relevant government officials that local content will be given heavy weighting in tender assessment could suffice to serve as a clear signal to potential bidders that a de facto local content standard will be applied.

Local content can take many different forms, affecting any number of sectors. Local content requirements can be fashioned for virtually any good or service that can be used as an input into most goods and services. This can include inter alia: ◆ Minimum thresholds on the amount of locally-sourced materials for the production of goods - usually expressed as a percentage of volume, tonnage, length (eg for cables), or number - particularly for large/ heavy industrial inputs; ◆ Minimum thresholds on the amount of locally-sourced expenditure or man-hours for the use of services, ranging from engineering and transport to financial services and insurance; ◆ Explicit or implicit requirements that companies/entities take local content development into account in their project and strategic planning, or when undertaking feasibility studies; and/or ◆ Requirements for companies, operators or investors to locally establish facilities, factories, production units or other operations for the purposes of carrying out any production, manufacturing or service provision currently being imported. Although restricting trade is not always the primary aim of local content requirements, they can have significant impacts on trade.

In a scenario where both (a) local content targets are high (ie greater than 20-30 percent) and (b) enforcement and compliance mechanisms are effective at both the sector and product level, a Government’s use of local content requirements can dramatically affect the investment and sourcing patterns of firms in the host country market, and by extension on trade.

For example, the use of targeted local content policies by the Thai Government in its automobile sector led to a 77 percent decrease in the value of imported parts and components in each domes- tically assembled vehicle; similar measures imposed by the South African government in its vehicles sector from 1965 to 1985 resulted in a nearly one-quarter decrease import penetration ratios.

In these countries, Thailand and South Africa, their trade balances improved due to enactment of local content.

So, for Zimbabwe, local content is a panacea to economic woes: liquidity challenges, unemployment, balance of payment problems and export growth. Our companies say with possible linkages with the agricultural sector must start now to source their inputs from local farmers say through contract farming.

This will obviously raise productivity of the sector through direct funding by cash rich companies as witnessed in the tobacco industry or farming schemes supported by Delta Beverages.

Rather than having these initiatives happening in an isolated manner, Government must have a deliberate local procurement policy aimed at making it a national requirement to support local trade.

Trade liberalisations without safety nets measures like local content requirement are suicidal. A number of countries as shown in this discussion embraced local content measure to safeguard their economies from the damaging effects of free trade.

South Africa, in 2012, promulgated the local content act which requires of trade/ procurement constituting 75 percent of total procurement to be done in South Africa.