Saturday, November 28, 2020

The weak link between industrial and trade policies

A 2009 government commissioned study undertaken by Farai Zizhou to establish the link between Botswana’s industrial and trade policies found overwhelming evidence that the link is extremely weak, compounded by the formulation of trade policy, such as tariff policy, largely divorced from the country’s industrial policy considerations.

This is despite the fact that the authorities in Botswana still has some leeway to formulate and implement complementary policy measures within the boundaries set by the Southern African Customs Union (SACU) trade policy, which, for a long time, was determined by South Africa.

External trade indicators suggest that industrial policy initiatives, such as export diversification policy, have not yielded positive changes in the contribution of manufacturing to overall export performance. SACU manufacturing tariffs still offer a level of protection that has a price raising effect on inputs into the country that would otherwise benefit from a low tariff regime.

The study, titled: “Linkages Between Trade and Industrial Policies in Botswana” observes that Botswana has deliberately targeted industrialization as a strategy to overcome the high concentration of economic activities and welfare of the country on diamonds. The strategy has involved financial support upon the setting up of new industries, as well as support for citizens to engage in new business ventures.

A local procurement programme for the government departments has been operational since 1976, with reforms on its operational modalities being undertaken over the years. Most of the policy reforms undertaken by government have been assisted by informed by research by local research and academic institutions. Multilateral organizations have also played a role in an advisory capacity as well as in research support.

According to Zizhou, the trade policy has centered on negotiating for preferences for Botswana’s products whilst securing import requirements at competitive prices. An outward oriented industrial and trade policy puts emphasis on openness and competitiveness at the global level.

Most of Botswana’s manufactured exports are sold under preference, whilst diamonds are sold to Europe duty-free. Beef is sold preferentially to the European Union (EU) under quota. Textile markets are SACU (duty-free) as well as the United States of America (duty-free under the Africa Growth Opportunity Act (AGOA) arrangement). South Africa accounts for more than 85 percent of Botswana’s imports and these are free under the SACU arrangement.

Botswana now has duty-free access to markets of the majority of Southern African Development Community (SADC) states following the attainment of the SADC Free Trade Area. Botswana also enjoys bilateral duty free agreements with Zambia, Malawi and Zimbabwe. South Africa and Zimbabwe are the most important destinations for manufactured exports, it was observed at the time the study was undertaken and the scenario has since been overtaken by other unfolding events.

The Zizhou study further found that the government’s policy of empowering citizens through local preference schemes runs counter to SACU free trade. “This situation reflects the difficulty faced by new entrepreneurs to build competitive industries in a market place dominated by big and well-established  producers based in neighbouring South Africa. SACU rules of origin largely contributed to the demise of one of Botswana’s largest non-diamond investments that had been set-up to assemble motor vehicles”, argues the research study.

The study further acknowledged that external trade indicators suggest that industrial policy initiatives, such as export diversification policy, have not yielded positive changes in the contribution of manufacturing to overall export performance. SACU manufacturing tariffs still offer a level of protection that has a price raising effect on inputs in Botswana that would otherwise benefit from a low tariff regime.

“However, considering all factors that impact on manufacturing in Botswana and the trade in manufactured products, this author concludes that trade policy has been weak in its support for industrialization in the country. The reform of SACU, however, now offers Botswana better prospects to strengthen the link between industrial and trade policies in a mutually supportive way”, it is submitted by the report.

The research study adopted a trade policy definition as the set of government policies that govern the exchange of goods and services between custom territories. Trade policy includes: customs tariff policy; treatment of non-tariff barriers; trade agreements; export support programmes; export taxes and export bans; trade defence mechanisms such as import bans; safeguard measures; as well as trade restrictive measures such as single channeling market.

Industrial policy refers to the set of government policy measures that define and lay down the rules for the establishment and/or growth of manufacturing activities in Botswana. Industrial policy measures include establishment rules; role of the state in industrialization; incentives such as free or subsidized land; taxation regime; establishment grants etc; reserved sectors policy; as well as import substitution support programmes.

Industrial and trade policies are often used as tools, jointly or separately, to raise productivity and industrial competitiveness to ultimately improve the economic well-being of the people, and Botswana is no exception in this regard.

Government deliberately took measures to promote economic diversification, especially following the discovery of diamonds. This was done, for example, by avoiding real appreciation of the Pula to ensure competitiveness of other traded goods.

Government’s overall policy orientation with respect to industrialization has been that of minimum intervention, as least insofar as direct participation in economic activities is concerned. Government’s role is limited to that of a service and infrastructure provider or facilitator of industrial development.

 However, as an exception to this rule, government is a direct participant in industrial development through the Botswana Development Corporation (BDC) whose thrust has been in green field investments which private investment did not initially consider profitable or in joint venture investments where the investment outlay required was greater than what local private investment could provide.

According to Zizhou, Botswana, had, and still has, little option but to pursue outward oriented industrial and trade policies whilst at the same time nurturing citizen involvement in economic activities beyond subsistence farming. An outward oriented industrial and trade policy puts emphasis on openness and competitiveness at the global level.

In the case of Botswana, scholars have concluded that the country “has been fairly successful in its industrialization programme, contrary to the popular belief that state involvement leads to de-industrialization”.

In summary, therefore, it seems there is significant consensus among several authors on the key role that governance issues have played in ensuring the perceived success of Botswana’s development strategy.

Botswana also embarked on economic diversification into other non-diamond mining activities, manufacturing, and services such as tourism, was necessary to generate employment opportunities for citizens as mining was considered highly capital intensive and incapable of creating significant job opportunities.

“The desire to encourage manufacturing was strengthened by government’s belief that the manufacturing sector could contribute significantly to the creation of jobs whilst encouraging entrepreneurship among Batswana for the long term sustainable development of the country. Government therefore adopted a number of initiatives”, it is submitted in the report.

It is acknowledged in summary that “government deliberately took measures to grow productive activities that hitherto did not exist using a wide range of policy instruments”.

On trade policy, the research observes that Botswana’s neighbouring of South Africa, Africa’s biggest and most industrialized economy made it difficult over the years to develop the country’s industrial sector.

It is noted that Botswana does not have an independent trade policy. “Instead, the trade policy is defined at the SACU level in which Botswana now plays an active role, unlike in prior years, especially before 2004, when South Africa called the shots”.

Zizhou concludes that there is need to reform both trade and industrial policies to ensure that Botswana’s success translates into higher standards of living for the greater part of the population in a sustainable way. Finally, Botswana must strive to remove discriminatory industrial policies as a way of encouraging greater foreign direct investment given the limited internal capacity.

In another 2016 research study titled “the Evolution of Trade Policy in Botswana”, the authors, Malefa Malefane and Nicholas M. Odhiambo acknowledge that Botswana has become active in implementing trade-related interventions in order to assist the country’s broader economic objectives. The implementation of these interventions has shaped the focus of Botswana’s key strategies that are aimed at assisting the economy.

Initially, Botswana adopted import substitution industrialization through its first Industrial Development Policy (IDP). The IDP operated from 1984 to 1998. The limitation of the IDP was that it mainly focused on industry production for the domestic market. However, since 1998, Botswana replaced the import substitution industrialization with the export-led growth strategy. The export-led strategy currently serves as the key strategy for the economy of Botswana.

In line with the commitment to pursuing the export-led strategy, the government has, since 1997, developed new policy frameworks to assist in achieving the country’s trade and investment goals, particularly in respect of diversifying the production base.

According to the research, over and above diversification and private sector development, Botswana’s economy has also been influenced by increased policy effectiveness. In 2013, the mid-term review of the National Development Plan 10 was carried out in order to identify the issues that needed critical attention during the second phase of the development plan.

During the review, it emerged that more attention was needed toward efficient resource allocation and increased policy effectiveness. In addition, macroeconomic stability, increased global competitiveness, governance, and factor productivity were also emphasized.

In 2009, Botswana adopted a new trade policy whose focus is a clear attempt by the government to address the country’s strengths and inherent challenges. The identified challenges include dependence on a limited number of commodity exports and a fewer export markets, a small industrial base, as well as a relatively small market.

The authors concluded that “the developments in Botswana’s trade policy conform to the country’s intention to achieve a more open and well-diversified economy. In support of the broader economic objectives, there have been notable changes in Botswana’s trade policy, particularly in the tariff-based instruments of trade policy. One of the highlights was the reduction in restrictions imposed through tariff-based measures, especially on the regional trading partners”.

The study also observes that the performance of Botswana’s trade-sector over the past years reflect the achievements in the economy as well as the economic downturns that the country went through at some point. The changes in trade performance have been witnessed in the country’s trends in export growth, import growth, and trade openness.

The growth in Botswana’s exports and imports has evidenced a number of cyclical movements over the past decades. There have been not only periods of steep declines in the growth rates of exports and imports but also periods marked with increases in the growth of exports and imports.

Given the developments in Botswana’s trade sector and the macroeconomic policy interventions, the composition of Botswana’s principal exports evolved over the years. Other exports from the secondary sector also comprised Botswana’s principal exports.

The study also concludes that Botswana’s membership in various trade agreements has also been of critical importance in influencing the country’s trade sector. Of these trade agreements, the SACU and SADC have influenced the country’s trade policy instruments significantly as they have mandated the country to adopt a free trade agreement with its Southern African trading partners.

Apart from the enforcement of freer trade, the adoption of an export-led strategy in 1998 also anchored the country’s trade sector. Trends in export and import growth reveal that in the recent years, some fluctuations were experienced, some of which corresponded to the global economic crisis.

The performance of the country’s trade openness has increased in the recent years, which reflects some of the improvements in the country’s trade sector. 

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