Monday, 12 September 2011

The logic of indigenisation - the case of chrome

An interesting opinion piece in Zimbabwe's Financial Gazette (picked up on AllAfrica) got me thinking. The article is written by a local, 'indigenous' chrome mining entrepreneur whose business is suffering significantly because of a national ban on the export of the chrome raw materials (if that is the correct term). The logic of the government's ban is that if people are unable to export the raw material, they will be forced to invest in processing. It's logic that should be familiar to anyone who has followed the debates over the years about how best to develop economies.

Many people argue that exporting raw materials is not the best use of a country's mineral wealth. Processed goods fetch higher prices and those who export the raw materials lose out on significant income to those who buy raw materials and do the processing. This all comes back to ideas of comparative advantage and making the best use of what you have. The article points out, however, that setting up processing costs a lot of money (which Zim isn't necessarily ideally placed to attract in the form of FDI) and locally-processed metals are only competitive if the costs of processed metals are lower than the international price.

Of course, there are plenty of economies that have done well by pushing processing. But in many of them, government has been a heavy investor. That seems unlikely in a country where funds are so limited that prison farms are being set up - so that prisoners can produce the food they eat - in order to deal with wide-spread prison population malnutrition. If the country cannot attract investment and the government can't support the development of a processing industry with cash, is it logical to go this route? Especially when inputs such as labour and electricity are problematic?

A second thought is directly related to the issue of indigenisation. Whatever your thoughts on indigenisation, given that it is government policy, it would seem to make sense for the government to institute policies that support 'indigenous' entrepreneurs. If this ban is going to close locally owned businesses, isn't it contrary to the stated objective of the policy? Indigenisation is always going to be a complicated and controversial process. People will lose out. But if it is going to be successful, surely supporting existing locally owned businesses would be an important part of the policy? I don't know a lot about this and I'm not an expert on how economies become successful, so I'm just talking but it would seem to me that the unintended consequences of this 'good idea' are likely to do more harm than good.

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