16 Jun The Budget: Trade and Competition
PART ONE: What the Finance Minister means by ‘competitiveness’ – and what it really means
The Finance Minister’s ingratiating praise of his boss, His Excellency the President, Cde R.G. Mugabe, came with this quote. “We can swim with the current, but on matters of Principle, we should stand like a rock.” Given the wheeling and dealing within his party, he cannot have meant moral principle. Nor, with the party’s degrees in violence and systematic rigging of elections, can he have meant democratic principle. But since he was presenting his budget before the President in the ‘august House’ – he must have meant economic principle.
His economic arguments on competitiveness had, however, an inauspicious start. He has rebranded the National Incomes and Pricing Commission as the National Competitive Commission. Zimbabweans will recall that the Income and Prices Commission was formed in 2007 by the government to enforce price controls – while it was fuelling hyper-inflation by the uncontrolled printing of money! Now that it is called the Competitive Commission, the Finance Minister believes that it can help build competitiveness – by propping up mismanaged and debt-ridden state companies with protectionist measures.
What everyone else means by competitiveness is exactly the opposite of what the Finance Minister means by competitiveness. When economists speak of competitiveness, they mean the ability of economies and companies to compete on the global market for goods and services. Competitive economies include the United States, most European countries, plus the East Asian tigers, China, and others, like Australia and Canada. There are also tens of thousands of huge, competitive companies within these economies, whose products and services span the globe.
A Matter of Principle
There is no dispute about the benefits of trade. The gains from trade within competitive markets were laid down by Ricardo’s economic principle of comparative advantage two centuries ago. Today, the World Trade Organisation is mandated to promote fair trade and competition based on this principle. Its primary task is to level the playing field by reaching international trade agreements that reduce both tariff and non-tariff barriers to trade as much as possible. International trade pacts give substance to this principle. In June 2015, for example, Zimbabwe was a signatory to the African Continental Free Trade Area. One of the pacts’ three pillars is to promote trade by the elimination of all significant trade barriers.
So, what did our Finance Minister do to promote trade and ‘competitiveness’? He has done exactly the opposite of what this treaty aims to achieve. He has raised tariffs and non-tariff barriers. The Minister’s misplaced idea of competitiveness is to push up the costs of imported goods so that Zimbabwean companies can compete with these goods on the domestic market. But this short-sighted decision will serve only to reduce our competitiveness where it really counts – on international markets.
When faced with a widening and unsustainable trade deficit of $3b, where imports far exceed exports, the government can either chose to promote exports or limit imports. Economic theory and all evidence from the fastest growing economies demonstrate that promoting exports through international competition and trade is the preferred option. So why did the Finance Minister choose the import substitution route, which constrains trade and makes the economy dependent on very limited domestic demand?
Relying on the Zimbabwe National Competitive Report, the Minister claims that high input costs of everything from labour, power, and water to the cost of finance, high taxes, and technology make Zimbabwe uncompetitive internationally. His strategy is therefore to implement “ease of doing business reforms” to reduce costs, while imposing tariffs to protect industries to make them more competitive domestically. As a bonus, the government will earn desperately needed customs duties from imports.
Despite its aura of plausibility, this strategy is wrong on two counts. The first is that an import substitution strategy imposes heavy costs on the government, the economy, and the people of Zimbabwe. And, second, high inputs costs are only a symptom of a much deeper malaise that makes Zimbabwe so uncompetitive. The real root of the problem is the system of political patronage that has trapped Zimbabwe in a downward spiral of low productivity. This will be the subject of next week’s article.
The Poor Bear the Heaviest Burden
When the Finance Minister says that he has to ‘level the playing field’, he really means that he is imposing import duties to raise the cost of competitively-priced imported goods to the level of over-priced locally produced goods. When he says that duties will enable local companies to become more ‘competitive’, he really means that he is protecting mismanaged and loss-making state enterprises and companies from competition. When he says that duties will protect jobs, he doesn’t realise that higher prices will dampen demand and reduce overall employment. And when he says that this will increase revenues of a cash-strapped government, he forgets to mention that these duties will be paid by struggling Zimbabwean consumers.
That fact is this: import duties are paid to the government, but it is the Zimbabwe consumer who bears the cost. They are a tax that increases the price of goods paid by Zimbabweans – thousands of whom have been retrenched and forced to eke out a living in the informal sector. The burden is particularly onerous when the government imposes an outright ban on goods, such as second-hand clothing. Not only are consumers denied choice and forced to pay more for locally produced goods of inferior quality, but it deprives informal sector vendors of their livelihoods when they can no longer trade in these goods. It therefore hits the poorest hardest.
But Zimbabwe must also bear other heavy costs of the government’s trade restrictions. The Finance Minister will spend millions of scarce taxpayer dollars to enforce import controls regulations at our border crossing, when this money could be better spent on other priorities such as health and education. Millions of dollars more will be lost in ‘leakages’ to scandalously corrupt customs and border officials. Informal cross-border traders, with few alternative livelihood options, will face the indignity of searches, be treated like criminals, and face the prospect of having their few precious goods confiscated, or be forced to pay bribes that they can ill-afford.
With crooked officials on the look-out for bribes, every truck, trader and traveller is searched. No wonder trucks are held up for days at Beit Bridge – imposing huge costs on companies doing business with Zimbabwe. And no wonder tourists avoid visiting Zimbabwe when they are made to wait for hours in the scorching sun – and when those who pay bribes are ushered to the head of long queues. Millions of dollars have been lost by our tourism industry because Beit Bridge’s notorious inefficiency and corruption frightens away potential visitors, who understandably decide to spend their holidays in friendlier countries. Just imagine the financial and job losses that hotels and resorts have suffered due to the Government’s misconceived policies of erecting and policing unnecessary trade barriers.
If there was ever any doubt about the cost of trade restrictions and the benefits of free trade, the Copenhagen Consensus commissioned 60 teams of economists, business executives and development leaders to find out which of the UN’s 169 sustainable development goals provided the best value for money. They found that the most beneficial measure by far was lowering barriers to trade. Completing the treaty currently under negotiation at the World Trade Organisation, for example, would bring developing countries an astonishing $3,426 for every dollar spent (The Economist, 14 January 2015).
It is time for the Finance Minister to think afresh and implement Zimbabwe’s obligation to eliminate trade restrictions in terms of the African Continental Free Trade Area.
Dale Doré is a member of Transform Zimbabwe’s Presidential Advisory Team