Zimbabwe’s status quo cannot sustain free trade rules.

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Harare: – The African Continental Free Trade Area (AfCFTA) has been signed by 54 of the continent’s 55 nations. To date, the trade pact has been ratified by 35 member states (Zimbabwe included) meaning that the AfCFTA is now in effect for those members.

In economics, a free trade area is a grouping of countries within which tariffs and non-tariff trade barriers between the members are generally abolished but with no common trade policy toward non-members. Real world examples include the United States Mexico Canada (USMCA), a revised version of North America Free Trade Area which came into effect in July 2020.

The AfCFTA is expected to create the world’s largest free trade area as measured by number of countries participating. This agreement links about 1.3 billion people across 55 nations with combined GDP worth US$3.4 trillion. Economic analysts estimate that the pact has a potential to lift about 30 million people out of extreme poverty and raise income levels of about 68 million Africans living on less than US$5.50 per day. The pact also aims to reduce all trade costs by eliminating 90% of tariffs and create a single market with free movement of factors of production.

The trade pact offers member states opportunity to diversify exports, accelerate growth, increase foreign direct investment (FDI), employment opportunities, competitively integrate into the world economy as well as broaden economic inclusion among other benefits. Mo Ibrahim Foundation estimates that if the pact is successfully implemented, it could generate combined spending (consumer and business) in excess of US$6.7 trillion by end of 2030.

In the long term, Zimbabwe will benefit from the AfCFTA as the country has one of the best developed human capital the continent has to offer. According to the World Bank 2020 human capital index (HCI) update, Zimbabwe has an HCI score of 0.47 ahead of South Africa (0.43), Nigeria (0.36) and only lags behind Kenya (0.55) in the entire Sub-Saharan Africa. A skilled work-force is one of the key factors which attracts foreign direct investment thereby adding capital to expand local firms. Also, thanks to decades of economic decay, International Labor Organization (ILO) considers the country as a low wage economy. Low wages have powered China’s magic growth in the last 4 decades as it attracted massive FDI inflows from high wage advanced world.

Furthermore, the country is blessed with a vast majority of the most sort-after minerals including 17 rare-earth metals such as cerium and thulium. Zimbabwe also boasts of a conducive environment for agricultural activities. During its hay days before chaotic land reform process early 2000s, the country was considered as Africa’s breadbasket. A breadbasket is a region which because of richness of soil or advantageous climate, produces large quantities of grains.

With Africa being the least industrialized continent, these 2 sectors (mining & agriculture) are going to be critical for its industrialization process years ahead. As it stands, the continent export most of its commodities in raw form and import value added finished products such as steel and clothing. So, given a free trade area of 1.3 billion people, Zimbabwe will greatly benefit if it harnesses its huge natural resource endowment by reviving manufacturing value chain.

More so, friendly weather conditions throughout the year, beautiful landscapes and huge game parks for safari makes Zimbabwe one of the best tourist destination on the continent. With free movement of people across borders, the country can rack billions of revenues in tourism.

Zimbabwe has high potential to become a top beneficiary of the AfCFTA. However, in my view, it is premature to quickly implement the trade pact given the status quo. In other words, the country is not ready yet for a free trade set-up.

The country is battling exchange rate volatility and high inflation. Average inflation in the Sub-Saharan Africa (SSA) stood at 10.6% in 2020 while that for Zimbabwe was recorded at 637.4%. Fast forward to 2021, inflation level remains high (3-digit) relative to other members. In a free trade area, countries with volatile exchange rates and high inflation experiences high capital flight and massive dumping of cheap foreign goods. For instance, the milling industry has complained about influx of cheap mealie-meal imports crowding-out local players. So, in order to compete with foreigners, prices should be relatively stable and low.

Also, the local industry requires a massive re-tooling exercise as it is lagging behind in technology adoption. Most of the technology used is outdated and does not befit the 21st century. All this increases the cost of domestic production thereby rendering domestic firms internationally uncompetitive. Therefore, quick exposure of these inefficient local firms to foreign competition leads to their total extinction. This will be good for consumer welfare but not for the interest of national security and Zimbabwean pride. Erecting trade barriers and import substitution policies are the only way to shield our inferior industries until they are capable to internationally flex muscles and compete.

Moreover, given high level of domestic financial disintermediation and inability to access credit lines from IFIs, it means most of government projects espoused in the National Development Strategy will be financed using domestic resources like treasury bill issuance (borrowing), import tariffs and customs duty among other means. Latest Q4:2020 statistics shows that trade barriers contributed about 18.52% of that quarter revenues (import VAT at 10.83% & customs duty at 7.69%). Removal or reduction of these barriers will deal a big blow to fiscal revenues thereby inhibiting economic recovery and growth.

I am also worried by the quality of our institutions. The world’s renowned development economist Amartya Sen defined institutions as ‘rules of the game’ and he emphasized that they are critical to any country’s economic development. However, our institutions are heavily compromised thanks to rising public corruption and lack of state funding. Generally, environmental and worker protections are minimal in free trade especially for a developing world set-up since only the cheapest and fastest methods of creating jobs will be prioritized.  To safeguard the environment and citizens, responsible & quality institutions should be a pre-requisite before a free trade is implemented.

In a nutshell, there are critical prerequisites yet to be fulfilled before Zimbabwe can implement AfCFTA to attain a net-gain from participation. Some of these include inter-alia sustained macroeconomic stability, elimination of existing structural rigidities, stable politics, institutional reform and capacitation of local industry. After all success of trade pacts anywhere globally depends on the strength of the so-called initial conditions!

Harare: – The African Continental Free Trade Area (AfCFTA) has been signed by 54 of the continent’s 55 nations. To date, the trade pact has been ratified by 35 member states (Zimbabwe included) meaning that the AfCFTA is now in effect for those members.

In economics, a free trade area is a grouping of countries within which tariffs and non-tariff trade barriers between the members are generally abolished but with no common trade policy toward non-members. Real world examples include the United States Mexico Canada (USMCA), a revised version of North America Free Trade Area which came into effect in July 2020.

The AfCFTA is expected to create the world’s largest free trade area as measured by number of countries participating. This agreement links about 1.3 billion people across 55 nations with combined GDP worth US$3.4 trillion. Economic analysts estimate that the pact has a potential to lift about 30 million people out of extreme poverty and raise income levels of about 68 million Africans living on less than US$5.50 per day. The pact also aims to reduce all trade costs by eliminating 90% of tariffs and create a single market with free movement of factors of production.

The trade pact offers member states opportunity to diversify exports, accelerate growth, increase foreign direct investment (FDI), employment opportunities, competitively integrate into the world economy as well as broaden economic inclusion among other benefits. Mo Ibrahim Foundation estimates that if the pact is successfully implemented, it could generate combined spending (consumer and business) in excess of US$6.7 trillion by end of 2030.

In the long term, Zimbabwe will benefit from the AfCFTA as the country has one of the best developed human capital the continent has to offer. According to the World Bank 2020 human capital index (HCI) update, Zimbabwe has an HCI score of 0.47 ahead of South Africa (0.43), Nigeria (0.36) and only lags behind Kenya (0.55) in the entire Sub-Saharan Africa. A skilled work-force is one of the key factors which attracts foreign direct investment thereby adding capital to expand local firms. Also, thanks to decades of economic decay, International Labor Organization (ILO) considers the country as a low wage economy. Low wages have powered China’s magic growth in the last 4 decades as it attracted massive FDI inflows from high wage advanced world.

Furthermore, the country is blessed with a vast majority of the most sort-after minerals including 17 rare-earth metals such as cerium and thulium. Zimbabwe also boasts of a conducive environment for agricultural activities. During its hay days before chaotic land reform process early 2000s, the country was considered as Africa’s breadbasket. A breadbasket is a region which because of richness of soil or advantageous climate, produces large quantities of grains.

With Africa being the least industrialized continent, these 2 sectors (mining & agriculture) are going to be critical for its industrialization process years ahead. As it stands, the continent export most of its commodities in raw form and import value added finished products such as steel and clothing. So, given a free trade area of 1.3 billion people, Zimbabwe will greatly benefit if it harnesses its huge natural resource endowment by reviving manufacturing value chain.

More so, friendly weather conditions throughout the year, beautiful landscapes and huge game parks for safari makes Zimbabwe one of the best tourist destination on the continent. With free movement of people across borders, the country can rack billions of revenues in tourism.

Zimbabwe has high potential to become a top beneficiary of the AfCFTA. However, in my view, it is premature to quickly implement the trade pact given the status quo. In other words, the country is not ready yet for a free trade set-up.

The country is battling exchange rate volatility and high inflation. Average inflation in the Sub-Saharan Africa (SSA) stood at 10.6% in 2020 while that for Zimbabwe was recorded at 637.4%. Fast forward to 2021, inflation level remains high (3-digit) relative to other members. In a free trade area, countries with volatile exchange rates and high inflation experiences high capital flight and massive dumping of cheap foreign goods. For instance, the milling industry has complained about influx of cheap mealie-meal imports crowding-out local players. So, in order to compete with foreigners, prices should be relatively stable and low.

Also, the local industry requires a massive re-tooling exercise as it is lagging behind in technology adoption. Most of the technology used is outdated and does not befit the 21st century. All this increases the cost of domestic production thereby rendering domestic firms internationally uncompetitive. Therefore, quick exposure of these inefficient local firms to foreign competition leads to their total extinction. This will be good for consumer welfare but not for the interest of national security and Zimbabwean pride. Erecting trade barriers and import substitution policies are the only way to shield our inferior industries until they are capable to internationally flex muscles and compete.

Moreover, given high level of domestic financial disintermediation and inability to access credit lines from IFIs, it means most of government projects espoused in the National Development Strategy will be financed using domestic resources like treasury bill issuance (borrowing), import tariffs and customs duty among other means. Latest Q4:2020 statistics shows that trade barriers contributed about 18.52% of that quarter revenues (import VAT at 10.83% & customs duty at 7.69%). Removal or reduction of these barriers will deal a big blow to fiscal revenues thereby inhibiting economic recovery and growth.

I am also worried by the quality of our institutions. The world’s renowned development economist Amartya Sen defined institutions as ‘rules of the game’ and he emphasized that they are critical to any country’s economic development. However, our institutions are heavily compromised thanks to rising public corruption and lack of state funding. Generally, environmental and worker protections are minimal in free trade especially for a developing world set-up since only the cheapest and fastest methods of creating jobs will be prioritized.  To safeguard the environment and citizens, responsible & quality institutions should be a pre-requisite before a free trade is implemented.

In a nutshell, there are critical prerequisites yet to be fulfilled before Zimbabwe can implement AfCFTA to attain a net-gain from participation. Some of these include inter-alia sustained macroeconomic stability, elimination of existing structural rigidities, stable politics, institutional reform and capacitation of local industry. After all success of trade pacts anywhere globally depends on the strength of the so-called initial conditions!

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