Subsidies as factors of production

SUBSIDIES are known to stimulate production. Over the years, nations have concentrated on agricultural production support for staple crops.

In Zimbabwe, agricultural products are the major basis of raw materials. However, for some strange reason, our agro-based products are being overpowered by imports.

The 2016-17 summer cropping grain output has been compensated remarkably well above our neighbours’, with cereal production improving. The outlook is indeed promising. In retail outlets, the situation is not amusing as there are at least five substitute products for nearly every locally manufactured item.

And these imports generally cost less, meaning Zimbabwe is carrying a dripping container. It means for every dollar we generate, 83 cents goes out of the country.

It is worse in the case of hardware and capital goods.

The support rendered to agriculture must likewise go towards manufacturing so that our maize does not become a straight-run.

We must extract maize gel for cooking oil, process mealie-meal and use spent grains for stockfeed.

In addition, we should be able to extract tallow for soap manufacturing, process hides for leatherware, get beef for meat and bone meal for stockfeed.

Prime products need to be processed further, and support in the form of subsidies is a lifeline to those who value-add agro-produce, especially as functioning currencies stack odds against them.

Output-based subsidies will protect domestic industries, increase output and employment and generate foreign currency. Enhanced manufacturing systems have far more benefits than can be imagined as the multiplier effect downstream on other service providers is immense.

Ad valorem subsidies will encourage production.

For example, a company with an output of, say, 100 000 units could get rebate to procure maize from the Grain Marketing Board at US$240.

Those who manufacture between 100 001 units and one million units could get rebate to purchase maize at US$180.

Those in excess of one million units could procure maize at US$120.

Such subsidies will reduce the unit prices of products, an innovation that makes sense to businesses to produce in Zimbabwe rather than for them to make toll manufacturing arrangements in neighbouring countries in order to compete locally.

Subsidies must also be sensitive to emergent businesses so that opportunities open up for more companies.

They are a factor of production as they drive unit prices downwards.

However, subsidies tend to have a downside if weak monitoring and evaluation systems drive Government expenditure and debt.

A food processor could claim rebate to procure cereals at a discount and submit the same maize meal as an agro-producer without any processing taking place.

This anomaly cannot overshadow the stimulus effect of subsidies and its potential to re-invigorate our economy at manufacturing stage.

The support rendered to agriculture must likewise go towards manufacturing so that our maize does not become a straight-run.