Whenever a nation is afflicted by a crisis its driving ambition in the aftermath of such a crisis is always to reignite economic growth.
This has been the case the world over in the wake of the Covid pandemic and the ensuing economic crisis from stagnant or subdued economic activity. In the global context, there has been some respite for most nations as they have instituted stimulus packages to jolt their economies back to life and to provide critical financial lifelines to the citizens of their countries.
Good for them. Africa generally is almost always disproportionately adversely affected by global economic shocks.
Many of these shocks are seldom of Africa’s own making and yet the continent pays a precious price for them. This is because many of the countries that make up this continent are generally very vulnerable economically.
When an economy is vulnerable in terms of either being overly reliant on one natural commodity for its income like Ghana was reliant on cocoa exports after its independence, like Zambia was on copper and Zimbabwe has been on tobacco and minerals, then that country becomes highly susceptible to economic devastation when global shocks occur like a sudden fall in the prices of the main commodity or commodities it produces or a once in a lifetime black swan event like Covid occurs.
Such occurrences often post a serious existential threat to the livelihoods of the countries that constitute southern Africa whose economies can be best described as fledgling at best.
The most desirable growth for a country especially after a crisis or a shock will always be export-led growth.
The lingering question for governments in southern Africa is how to find ways to increase their ability to sell domestically produced goods in global markets. This ability is known as export competitiveness. The central theme of policy for governments in Zimbabwe, South Africa, and that region should be the development and growth of exports. This is critical as exports should become the goal of economic policy.
Export-led economic growth provides positive externalities for a country because by implication it means participation in global markets. The benefits that would accrue to a country pursuing economic growth through exports include among others:
Reallocation of existing resources, as countries seek to optimize their resources, they will tend to allocate critical inputs to those activities that derive the most value in terms of generating exports.
Labour training, when export-led growth is integrated with advancements in industrial capability, foreign direct investment, and capital formation in this space, a country should also experience incremental increases in labour productivity and the transfer of skills.
Increased capacity utilization, when a country’s focus is on export-led growth, it should prioritize industrial development and provide critical support to the manufacturing sector. This is sector sustains export-led growth in the economy because it adds value to the products a country produces.
When the main thrust of a country is growth in exports this invariably leads to growth in capacity utilization of that nation’s factories. Capacity utilization refers to the manufacturing and production capabilities that are being utilized by a nation or enterprise at any given time.
It is the relationship between the output produced with the given resources and the potential output that can be produced if capacity was fully used.
Again, this benefit can only be fully appropriated assuming that growth in exports comes on the back of integration with increased industrial capability stemming from the increased capital formation. Should countries in southern Africa pursue export-led growth strategies then investment in technological processes is a prerequisite. Investment in technology will enhance the efficiency and productivity of the industrial sector and that will lead in the long term to technological progress.
Relax current account pressure, the current account records a nation’s transactions with the rest of the world—specifically its net trade in goods and services, its net earnings on cross-border investments, and its net transfer payments—over a defined period, such as a year or a quarter. Alternatively, the nation’s current account is its imports, exports, net income, asset income, and direct transfers. A positive current account means the nation earns more than it spends. A negative account means it spends more than it earns.
A negative current account is an opposite.
When exports receipts increase it means from the definition given that the country that pursues this strategy will find itself in the desired position where it earns more than it spends. This in the long run will lead to the country becoming less reliant on balance of payments support from multilateral lenders and repaying its debt obligations. For a country like Zimbabwe, it is imperative that the southern African country pursues this strategy as the increased foreign exchange receipts will provide desperately needed foreign currency and monetary stability.
Expansion of exports is one of the main determinants of economic growth in addition to increasing the amounts of labour and capital in an economy. Exports should therefore be viewed as an engine of growth. This strategy of economic growth is not unprecedented.
There are success stories. Trade has been the main engine of growth in South East Asia. According to the World Bank, Hong Kong (China), Taiwan, Singapore, and the Republic of Korea have been successful in achieving high sustained rates of economic growth since the early 1960s because of their free-market outward-oriented economies.
The success of these countries has led policymakers and researchers to regard export-led growth to be considered conventional wisdom.
This strategy going into 2022 and beyond is almost full proof as multilateral lenders like the World Bank, IMF and the international banking community all show a favourable disposition toward export growth-oriented economies. This should be appealing for nations in southern Africa like Zimbabwe and South Africa which are in critical need of balance payment support. South Africa is especially vulnerable because its currency has become increasingly vulnerable to pronouncements by rating agencies on their outlook which most of the time tends to be negative or adverse.
It needs to be understood that historically the countries that make up southern pursued inward-oriented policies under what can best be described as import substitution. Zimbabwe especially has continued this strategy post its independence in 1980.
This strategy has generally had poor economic results and Zimbabwe is no exception. Much of the poor economic achievements in the case of Zimbabwe have been characterized by declining economic growth, foreign currency shortages, rising and unsustainably high unemployment, rising inflation, and declining real household incomes.
The question is how to become an export-led growing economy
It is obvious at this point that growth led by exports is a must. It leaves the question of how southern African nations can achieve this so that they can appropriate the benefits. The primary requirement of export-led growth is for countries to implement adjustment and stabilization programs to correct imbalances in their respective basic macroeconomic indicators.
One of the essential preconditions for export-led growth to occur will be to pursue free-market economic models through the liberalization of international trade. This may involve opening local markets to foreign goods to get access to other markets.
This implies reduced state intervention in private enterprise. Its role must be redefined and restricted mainly to promoting and creating a conducive environment in which the free markets can thrive. Liberalization of capital flows and attraction of foreign direct investment.
Promoting exports therefore will enable southern African countries to correct imbalances in the external sector and at the same time assist them in ensuring that their domestic economies make a full recovery in the event of a crisis.
In addition to pursuing the free markets, stimulation of economic growth will require the use of diverse mechanisms and instruments like subsidies and tax exemptions. Some of these may not be practical in the case of southern African countries with Zimbabwe being a case in point.
The small southern African country is strapped for cash and must deal with dwindling revenue and tax base so it can scarcely afford to provide subsidies consistently over a long period of time without placing itself under considerable financial strain.
The unique case of Zimbabwe
The nation has seen its economy for the last 2 decades undermined by poor performance and growth however many in business and political circles are starting to realize the need for export competitiveness. This export competitiveness has been cited as the main reason the government of that country abandoned the multi-currency regime which had been in force since 2009.
There is merit in this argument in the sense that conventionally speaking a country with a weaker currency relative to its trading partners will benefit from increased exports as the goods that it manufactures become more competitive on the global markets.
The United States dollar which was the main currency in the basket of currencies used in Zimbabwe was reasoned to be too strong for the southern African country to adopt as a sole medium of exchange because it made Zimbabwean produced goods more expensive relative to those produced by the country’s trading chief of those is South Africa which for the last 10 years has seen its currency gradually and consistently weaken against the greenback, making Zimbabwean products expensive in the process.
This argument though sound in terms of conventional and orthodox economic theory, it is shortsighted in the sense that it makes several faulty assumptions about the state of the manufacturing sector where Zimbabwean goods are produced. The line of thinking that the use of a currency too strong relative to Zimbabwe’s trading partners undermines the competitiveness of exports assumes that the manufacturing sector in Zimbabwe is sound and efficient.
This line of thinking also presupposes that the only obstacle in the way of making Zimbabwean exports competitive is the issue of currency. The reality on the ground is different.
There are serious challenges obtaining on the ground in terms of the manufacturing sector in the country that cannot be mitigated by a weak currency alone. Pursuing an export-led growth strategy will be difficult for Zimbabwe over and above the adoption of perennially weakening Zimbabwe dollar for the following reasons:
Firstly, the bulk of Zimbabwe’s exports comprises raw and unprocessed goods with no value addition. This means that the country misses out on the potential revenues it could earn if it exported value-added goods. Value addition is achieved in the manufacturing sector which is not in optimal shape.
Zimbabwe exports raw minerals and tobacco. The country is not a price maker for any of these products making it susceptible to the whims of the world market prices which can be good one day and bad the next. Production of raw goods means the nation is subject to volatile world market prices for its products. An export-led growth strategy will be difficult to implement in such an instance.
The manufacturing sector for its part has been plagued by decades of underinvestment in manufacturing equipment to such an extent that if an individual were to take a trip to the manufacturing hub of Zimbabwe which is Bulawayo, it would not be unheard of for that person to find equipment in factories dating back to the 1940s.
How can such manufacturers be competitive against companies in other countries that have consistently invested in their productive capacity? These companies would obviously have lower average costs of production which would make them more competitive relative to those using antiquated equipment in their manufacturing processes. Zimbabwe’s industrial capability is severely undermined by many years of underinvestment.
Secondly, the country has some of the highest costs in terms of inputs like energy and labour costs.
This adds cost to production and makes goods uncompetitive, however, coupled with this fact is that critical inputs necessary for production are either in short supply or in erratic supply at best. For example, an essential input in the production of any good is the constant supply of power or electricity.
Zimbabwe has for a long time had rolling blackouts which at the height of the power shortages would see power not being available for up to as long as 23 hours.
In a situation like that factories would not be able to produce because there simply would not be the electricity for them to power the machinery that they use in the manufacturing process.
During the times that the power is available, it is more expensive relative to the countries with which Zimbabwe trades. The same is true when it comes to fuel which in Zimbabwe is more expensive than it is in South Africa and Zambia both of which the country trades with.
Infrastructure which is another critical factor in export competitiveness needs revamping in Zimbabwe. Infrastructure facilitates the movement of goods and services and countries whose exports are highly competitive have infrastructure that is in good condition to the extent that it ensures competitiveness.
For countries to successfully pursue export-led growth it is important that they prioritize development and growth in infrastructure. A useful anecdote to show how uncompetitive Zimbabwean exports are despite the argument for a weaker currency can be seen in the case of infrastructure. For instance, in Zimbabwe, manufactured goods are transported by road.
Even bulk minerals are transported by road using haulage trucks and there is very little cargo that is transported by rail which is significantly cheaper.
This alone means that Zimbabwean goods will tend to be more expensive relative to its trading partners with much better machinery and much better infrastructure as well as, much more competitively priced inputs.
There are benefits to be gained from export-led growth. Zimbabwe can appropriate them. Among the countries that make up southern Africa, it needs growth from this area the most.
However, before it can reap the benefits of pursuing this it should take a hard look at and prioritize its manufacturing sector and address the challenges in that sector.