Import Substitution Industrialization and the Effects of Globalization on the Manufacturing Sector in Zambia

Table of Contents

Abstract

Abbreviations and Acronyms

1 Introduction
1.1 Background
1.2 Statement of the Problem
1.3 Objectives of the Study
1.4 Methodology of the Study

2 Review of literature
2.1 Import Substitution Industrialization
2.2 Infant – Industry Argument
2.3 Trade Liberalization
2.4 Structure of the Zambian Industry
2.5 Genesis of the Economic Crisis in Zambia
2.6 Zambia’s Experience of Globalization and its Effects on the Industrial Sector

3 Study Findings and Comments
3.1 The Impact of Globalization on the Zambian Economy
3.2 Regional Economic Integration and Zambia Manufacturing Sector Growth
3.3 Pre -Trade liberalization Performance of the Manufacturing Sector
3.4 Post-trade liberalization Performance of the Manufacturing Sector
3.5 Attributes to the Manufacturing Sector Performance Variations
3.6 Effects of Trade Liberalization on Manufacturing Sector Employment
3.7 Government Initiatives in Post-trade Liberalization period 1993 -1995 and beyond

4 Government’s Options for Manufacturing Sector Growth – The Way Forward

5 Conclusion

Bibliography

Abstract

The paper discusses the essence of the Import Substitution Industrialization (ISI) policy adopted by the Zambian government prior to trade liberalization and the effects of globalization on the growth and development of manufacturing sector thereafter. Specifically, the paper analyses the merits and effectiveness of the ISI policy on the growth of the Zambia industry with particular emphasis on the impact of globalization and trade liberalization on the Zambian manufacturing sector and the government possible measures and instruments necessary to maximize the benefits of globalization.

The paper proves the heavy impact of trade liberalization on the manufacturing sector in peak period of its implementation. As for the import substitution policy and the effects of globalization on the growth and development of manufacturing sector, the paper also cites these among many other factors as major attributes to a greater extent to the failure of the manufacturing sector to perform to expectation over the peak period of trade liberalization. Government policies to cushion itself from the effects of globalization and to revitalize the manufacturing sector are equally proved to have brought about some favorable results despite the many constraints that the sector has had to face over the years of trade liberalization. The paper concludes by emphasizing the need for the government to continue pursuing policy measures strategically focused on the growth of the sector by seriously taking into consideration its backward and forward linkages in the economy.

Keywords: Import Substitution Industrialization, Manufacturing, Globalization, Trade Liberation, Regional Economic Integration.

Abbreviations and Acronyms

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1 Introduction

1.1 Background

In an effort to increase productivity and economic gains within the country, most of the developing countries in the 1980s adopted the Import Substitution Industrialization (ISI) strategy. This strategy was adopted for inward economic growth as remedy to the even increasing poverty levels which were being experienced in most of the developing economies, greatly attributed to the economic structure that existed at the time, mostly dominated by raw agriculture and mining activities without much benefit from international trade. It was this background that formed the basis for the infant-industry argument for national industrialization in most of the developing economies.

However, at the onset of the structural indebtedness of developing economies that arose from ISI related policies, the ISI had to be abandoned by most of the developing nations, Zambia inclusive, in 1990s. This was mostly instigated by International Monetary Fund (IMF) and the World Bank through their structural adjustment programs of market driven liberalization. The structural adjustment programs entailed developing economies embracing globalization by integrating their economies into a single global market open to competition. Negatively, most of the developing nations could not cope with such developments having excessively protected their industries from competition under the “infant- industry argument” which advocated for protective tariffs to enable infant-industries in developing economies to establish themselves inwardly before exposing them to international competitive trade. Zambia as one such developing economy have had to experience both effects of import substitution industrialization and the impact of globalization on most of its economic sectors due to trade liberalization. One such sector heavily impacted was the Manufacturing sector. It was these experiences that formed the essence of the study.

1.2 Statement of the Problem

At independence, Zambia inherited an economy that was heavily dependent on the production of copper, besides other minerals such as lead, zinc and cobalt. Relying on the revenues provided by the lucrative copper prices in the sixties and early seventies, Zambia established an economic structure based on extensive government control over most aspects of the economy. Much of Zambia’s emphasis on the development agenda laid on industrial manufacturing activities aimed at processing of raw materials and intermediate goods for local consumption as well as for export. To achieve this development agenda, the government adopted the Import Substitution Industrialization (ISI Strategy aimed at inward diversification of the economy in the production of consumer, intermediate and capital goods.

By adopting the ISI strategy, most of the industrial sectors experienced considerable growth. The manufacturing sector, which was the main focus of the study for example, did “experience growth at considerable rate with its output increasing steadily at an average rate of 14.2 percent per annum in the period 1968 – 1975” (Turok, 1979, p101). The impressive expansion in the industrial manufacturing output in the period was also largely due to the protective measures such as high tariff barriers which were largely offered to government owned local industries. The trend however changed at the advent of the economic crisis in the country after 1975. This was attributed to the decline in copper earnings that made it difficult for the manufacturing industry to cope with the crisis. The crisis made it difficult for the sector to recapitalize itself due to lack of foreign exchange to import most of the inputs required to enhance its productivity. The situation even forced most of the manufacturing industries to cut down their production capacities.

The non-availability of foreign exchange within the manufacturing sector was a serious challenge as it made it difficult for the sector to strive even on the local market. This was despite most of the sector’s products being targeted at domestic market without recourse to exports “in line with government policy that restricted the exports of manufactured products” (Gulhati 1989, p23). This meant that the sector had no choice but to strive to sustain its production capacity within the limited foreign exchange available. Due to the economic crisis that the government experienced in the 1990s, it was left with no choice but to undertake fully-fledged trade reforms as an alternative solution. One such solution was to open up the economy to competition as recommended by the IMF and World Bank. It was the opening up of the economy to international competition that brought a lot of challenges to the manufacturing sector. One such challenge was the “loss of large segments on the home market to foreign imports’ as a result of cheap imports from the global market” (Chikoti and Mutonga, 2002, p3). The loss of the local market to foreign imports hampered the manufacturing industry from becoming a lead industry for exports.

1.3 Objectives of the Study

The objective of the study was mainly to discuss the essence of the ISI policy adopted by government prior to trade liberalization and the effects of globalization on the growth and development of manufacturing sector in Zambia. Specific objectives of the study were to analyse the merits and effectiveness of the ISI policy on the growth of the Zambia industry with particular emphasis on the manufacturing sector; to analyse the impact of globalization on the Zambian economy; to analyse the effects of trade liberalization on the manufacturing sector and the effectiveness of measures which were undertaken by government to cushion the effects of globalization and finally to provide some options to government on some possible measures and instruments necessary for the country to maximize the benefits of globalization.

1.4 Methodology of the Study

Considering the limitations of the study, the study had to be limited to desk research. Most of the vital documentation were analysed in line with the study objectives. To verify data, various stakeholder institutions were contacted and interviews conducted on the authenticity of the data and possible interventions by government on its quest to enhance the benefits of globalization. Among the key stakeholder institutions were the Central Statistics Office, Ministry of Finance and National Planning, Ministry of Labour and Social Security, Manufacturing Association of Zambia, Economics Association of Zambia, Zambia Federation of Employers and the Zambia Chamber of Commerce.

2 Review of literature

2.1 Import Substitution Industrialization

Import substitution industrialization (ISI) from the layman point of view meant the replacement of foreign imports with domestic production. This implied “the reduction of dependency on foreign products by replacing them with the locally produced ones” (Osei-Hwedie, 2005, p1). By adopting the ISI strategy, imported goods from the developed economies were to be foregone in preference to those to be produced internally. The essence of the ISI was to enhance the development of the local market to the level of self-sufficiency in the production of the goods suitable and at the dictate of the local market. Most of the ISI policies were premised on the infant industry argument where the local industries were made to operate under protectionist trade policies to enable them to develop inwardly.

The protectionist trade policies were meant to enable “infant” industries to develop first to the level of accumulating enough capital and sufficient industrial knowledge to enable them to compete favorably on the world market. The idea of pursuing inward-looking protectionist trade policies such as imposing high tariffs on imported goods were mostly aimed at deterring local consumers from demanding more of the imports at the expense of the locally produced goods. By implication, import substitution did not therefore mean import elimination but as a means of providing opportunities to the country in its industrialization efforts. This was mainly in the solicitation of importation of essential goods such as petroleum, chemicals, and the raw materials necessary for its industrial production. In other worlds, the real objective of import substitution was not therefore to only trade but also to enhance the local industries to the level of adding value to the local products to make them competitive internationally.

2.2 Infant – Industry Argument

As alluded to earlier, Government protection tendencies of the local industries was conceptualized from the infant –industry argument which advocated for protectionist trade policies for purpose of allowing new and undeveloped local industries to establish themselves first before subjecting them to international competition. The argument bordered on the notion that an infant industry did not have the ability to compete with mature established industries due to its smallness in terms of economics of scale and therefore had to be large enough to harvest the economics of scale in production to become competitive. The temporary shielding of infant domestic industries from severe competition gave them the opportunity to develop and become efficient producers to compete effectively with more mature and efficient foreign industries. Taking into consideration the historical differences in levels of economic development between domestic and foreign industries, it therefore followed that the provision of protection to infant – industries would correct the perceived misallocation of world resources in favour of well-established and technically developed foreign industries.

Historically, it was found that even among the new industrialized countries, protective measures on infant –industries had to be put in place before fully exposing them to international competition. For example, Great Britain, which in the mid –nineteenth century, was the leading industrial country made it difficult for Germany to compete with its older and more established British industries (Sorderstein,1980,p196). In spite of having a free market economy, Germany had to ensure that her local industry was fully developed in production efficiency before letting it to stand up to the British industry on the international market. The south-east Asian economies such as that of Japan and South Korea were purported to have recorded a lot of inward successes in its industry development through the protectionist tendencies over its industries by successfully promoting steel and car production and cooperative efforts in basic research – especially in electronics (World Development Report, 1987, p70). These economies’ successful performance suggested that intelligent government intervention in industry by offering protection, promoted specific industrial activities to enhance industrial productivity.

2.3 Trade Liberalization

The argument on trade liberalization laid on its effect on infant domestic industries. The argument was that a liberalized trade regime would lead to a substantial rise in the importation of goods and services at the expense of the local products. The issue was that foreign products which were presumed to be of high quality and cheaper than the local products would therefore lead to an increase in their importation as consumers’ demand for them increased. Consequently, this would lead the demand for local products to decline, eventually leading to domestic industries losing market to foreign industries which were usually competitively favored in international trade due export subsidies offered to them to boast their exports as a way of expanding their international market. Without government putting in place appropriate protective measures, this would have had devastating effects on the local industry as continued increase in imports of the subsidized foreign products into the domestic economy would not only make the local industry to loss market but equally fold up in the long run.

There was also the argument that unfair competition in international trade had had a negative effect on manufacturing sector employment. This was because in situations of unfair competition, the perception was that the levels of unemployment in the domestic economy would essentially increase once local industries fold up in the face of stiff competition with technologically advanced financial resource endowed foreign industries. In the long run, the economy would be reduced from a producing nation to a market for foreign manufactured goods. This was especially eminent when the free market economic policies were adopted by an economy in transition from government controlled to a free market system without accompanying foreign investments and establishment of new industries to contain the rising unemployment levels.

2.4 Structure of the Zambian Industry

Notably, the Zambia industrial sector had been, prior to liberalization, dominated by the parastatal sector with the government owning major shares in most of the key industrial units. The protection of the parastatals dominated the industrial sector and consequently this dominance stifled competition and initiative as most of the industrial units which were created had no rival units to offer credible competition. It was this lack of credible competition that resulted in low quality products and imposition of high prices as most of the parastatals become effective monopolies. On the other hand, lack of initiatives and innovations in running these parastatals brought about inefficiencies into the industry as most of industrial units were not able to initiate ways and means of how there were to improve their production techniques. The problem was further compounded by the political bureaucratic structures that existed and allowed no independence in the running of these industrial units. The lack of initiatives and innovations in the industrial units plunged them into economic crisis. Ultimately this led to declining capacity utilization in most industries and many of them become inefficient.

Despite the economic crisis and the industrial inefficiencies the country was experiencing, the government vigorously went ahead with its industrial programmmes. It was not until the gravity of the crisis was heavily felt that some projects such as the Iron and steel industry which was to have been established in the country and planned to resume operations by 1981 had to be abandoned. The government policy framework of ISI of tariff barriers to nurture the local infant industries could not even help to resuscitate declining industrial sector. As the economic crisis worsened, government’s efforts to reform the industrial sector in the late 1980 proved unsuccessful. This was evidently clear as most of the parastatal industrial units found themselves with no capacity to help in the diversification of the economy to the country’s national comparative advantage. The ushering into government of the Movement for Multi-party Democracy (MMD) in 1991 brought dramatic change to country’s economic policy framework.

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