Joseph Simumba

Since 2013, the Kwacha has lost more than forty percent on the back of falling metal prices and legislative drawbacks. As it is well known, Zambia’s exports strongly depend on metals: copper and cobalt. About three quarters of foreign earnings still accrue to metals, a feature that has amplified the exposure of the country to global fluctuations.

Zambia can achieve remarkable economic growth that can reduce poverty and create descent employment by industrializing. Recent renewed interests towards industrialization by the Government and SADC are laudable.

But accelerating industrialization depends on competitive production and exporting of high quality manufactured and agro-processed products. The World Bank estimates that the cost of production and trading are much higher in most SADC countries. Costs are especially high in landlocked Zambia: for instance the cost of exporting a standard 20-foot container is twice that in South Africa, Malawi, Namibia and Kenya and a third higher than in Congo DR and Zimbabwe.

The global shifts in the relative costs of manufacturing pose further challenges given Zambia’s weak domestic production, rising energy shortages, high cost of credit, adverse currency fluctuations, skills mismatch, unstable taxes and low innovation.

A large number of potential producers and exporters fail to participate in high value supply chains and more than half of all exporters suffer ‘infant’ mortality as they fail to export beyond their first year.

This begs the question: what must Zambia and SADC do in order to boost industrialization and improve their share of export trade?

There are several answers but four stand out. The first reflects the work of Nobel laureate Paul Krugman and others á la monopolistic competition. The main idea is increasing returns to scale or competitive advantage. This relates to specialized expansion of industrial production for new product varieties, new systems and organization structures and enlarged markets.

The practical wisdom offered by this work is that new products and enlarged markets naturally capture monopolistic ‘profits’ that accrue to differentiated products and gains due to intellectual property protection for new discoveries. These gains accrue beyond those from traditional comparative advantage.

History confers that the ‘great’ industrial revolutions in Europe, Russia, United States, and Japan in the nineteenth century were reinforced by new manufacturing processes and the invention of efficient energy sources that enhanced product variety. This reinforced a rapid rise in employment, output, capital and average incomes.

Zambia and SADC require serious concerted efforts of Government(s), the private sector and cooperating partners to stimulate innovation and enlarge product markets. However, markets in Zambia and SADC suffer ‘market failure’. Market prices often diverge sharply from private marginal costs due to three reasons at least: (i) There is uncertainty about new products that can be produced profitably and ways to produce them (ii) public inputs notably infrastructure, legislation, transport and accreditation tend to be inadequate if not missing (iii) there is a failure to sequence and coordinate private and public investments in a manner that supports product development and market enlargement. Earlier attempts to correct market failure relied on prohibitive tariffs and excessive subsidies. These measures are, however, now forbidden under international treatises governing fair production and trading.

An alternative approach is to invest in Research and Development (R&D). Admittedly, only very large firms can fund Research and Development (R&D) activities under suitable legislative assurance and fiscal incentives. R&D amounts to investing under uncertainty. Huge sums of money need to be invested in laboratories and personnel without any sure guarantee of future profits.

Globally R&D is a heavily subsidized industry and as it is predominated by universities and specialized research laboratories that dominate patent ownership. They earn large royalties paid by businesses that acquire rights to use their discoveries. Most countries in SADC, lack equivalent public financed innovation foundations that can anchor original scientific discoveries and propagate value addition which has now become knowledge intense.

South Africa’s has invested in a public National Research Foundation currently valued at over US$200m; The US National Science Research Foundation received $7.3 billion in 2015 US Appropriations Act while the Science and Innovation Network in the UK received £5.8bn from the national treasury in 2015 and it has already developed 8,500 new food and drink products under the "the Newton Plan for Science and Innovation".

There is still good scope for Zambia and much SADC to adequately invest in R&D. First, Zambia and SADC need to affirm funding targets. It is not unusual to find 3% of Gross Domestic Product committed towards funding R&D. A competitive funding mechanism is required to accompany R&D disbursements. Zambia can benefit better R&D investments within the agriculture, food and beverages and wood and paper products sectors, for a start.

Infrastructure is a second issue for Zambia and SADC. A better balance between ‘soft’ and ‘hard’ infrastructure is required. The gains from trade facilitation continue to be limited by weak trade promotion. The abolishment of administrative and border delays have occurred without accompanying support to abolish barriers that constrain firms to initiate exporting in the first place.
Thirdly, financial lending is concentrated in shorter term high interest yield products that are inappropriate for financing the expansion of productive capacity. Public initiatives that offer affordable long-term finance like the Development Bank of Zambia (DBZ) and the Citizens Economic Empowerment Commission (CEEC) are inundated by politics. Zambia needs a competitive long-term capital market that is transparent, predictable and independent.

One niche is to strengthen and align the Industrial Development Corporation (IDC), DBZ and CEEC so that IDC fosters industrial capabilities towards new product and process development while DBZ and CEEC can deal with large corporate and SME financing respectively. This can balance and coordinate investments at the downstream, upstream and horizontal levels.

Lastly, Zambia and SADC require vertical specialization strategies. High value production has evolved since the eighties and now involves a complex sequence where production occurs across several countries. The iPhone and Samsung Galaxy that have evolved in testimony of the supremacy of new product development for industrial growth serve as classic examples. Therefor SADC require developing robust regional value chains that induce economies of scale and tangible benefits.

The author is a researcher at the Zambia Institute for Policy Analysis and Research (ZIPAR).
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