Zimbabwe an Industrialsector Memorandum

ReportNo. 6349-ZIM Zimbabwe An IndustrialSector Memorandum

Public Disclosure Authorized May22, 1987 IndustrialDevelopment and Finance Division Easternand Southern Africa Region

FOR OFFICIAL USE ONLY Public Disclosure Authorized Public Disclosure Authorized

Public Disclosure Authorized Documentof the World Bank

Thisdocument has a restricteddistribution and may be usedby recipients onlyin the performanceof theirofficial duties. Its contents may not otherwise bedisclosed without World Bank authorization. CtRR!NCY aQUIVA-lS

Currency Unit

Zimbabwean Dollar (Z$)

Exchange Rates

Calendar 1985 February 1987

US$ 1.00 Z$ 1.61 US$1.00 = Z$1.63 Z$1.00 US$ 0.62 Z$1.00 - LTS$0.61

Fiscal Year

July 1 to June 30

GLOSSARYOF ABBREVIATIONS

AFC - Agricultural Finance Corporation AIPC - Agricultural Inputs Priority Committee AMA - Agricultural Marketing Authority CZI - Confederation of Zimbabwean Industry ELCC - External Loans Coordinating Committee FIC - Foreign Investment Committee IDC - Industrial Development Corporation IPC - Investment Projects Committee MIT - Ministry of Industry and Technology NCD - Negotiable Certificate of Deposit OPIC - Overseas Private Investment Corporation RBZ - Reserve Bank of Zimbabwe SABLE - Sable Chemicals Industries, Ltd. UDI - Unilateral Declaration of Independence ZDB - Zimbabwe Development Bank ZFC - Zimbabwe Fertilizer Co., Ltd. ZIMPHOS- Zimbabwe Phosphate Industries, Ltd. ZISCO - Zimbabwe Iron and Steel Co. - 1- BFOROMCIAL USE ONLY

AN INDUSTRIALSECTOR M1(ORANDUN

TABL! OF CONTENTS

Page No

PART1: MXCUTIVE SUHARY x - xxiv

INTEODUCTION ...... , 1

PART2: MAINRKPORT

I1. HISTORICAL BACKGROUND ...... , ***** 3

The InitialPush: World War II...... 3 The Federationof Rhodesiaand Nyasaland,1953-1963.."460.... 4 UnilateralDeclaration of Independence,1965-808...... 5 EconomicPolicies and Performanceduring Sanctions...... 6 Policies...... 6 Performance...., *..*.*.. .****.*** ** ***.**...... 8 Sourcesof ManufacturingGrowth...... 12 Independence to the Present...... 13

II. PRESENTSTRUCTURE OF THE MANUYFACTURINGSECTOR ...... , 17

Sizeof Manufacturing Sector...... , . . . 17 Structureof Productionby Subeector...... 17 FinancialCharacteristics...... , 19 Ownershipand GeographicalLocation...... 21 ManufacturingEmployment ...... , 21 Import Dependence 25 Manufactured Exotr.. 26 Structureand Age of CapitalStock ...... 28 Investment Lvl ...... ,,,,,,,30

This reportis based on the findingsof an industrialsector mission that visitedZimbabwe during October-November, 1985. Missionmembers were: Messrs. Pedro Belli (economist,mission chief); Luciano Borin (chemical engineer);Carl Dahlman(industrial economist); Reginald Grills (consultant, textileengineer); William Haraf (consultant,financial economist); William Harvey (consultant,steel engineer). Messrs.Edward Mangan, (steel engineer), William Steel (industrialeconomist), and R. Venkateswaran,(financial analyst), contributedto the draftingof the report. Mr. HowardPack (consultant, industrialeconomist) contributed to the analysisof the textilesubsector. Ms. Hilda Luz Sciovilletyped the report.

This documenthas a restricteddistribution and may be used by recipientsonly in the performance of their officialduties. Its contentsmay not otherwisebe disclosedwithout WorldBank authorization. - iii -

Page No.

Choice of Technology...... e...... * ...... 34

III. POLICy mNVIRO1fMNT...... 36

Introduction ...... 36 Foreign Exchange Allocation System...... 36 Exchange Rate Level and Exchange Rate Management ...... 37 Investment Controls ...... * * * * * * * * * ** S ...... 39 Price Controls...... 41 Trade Rele...... 44 Customs Duties .o..oo.....oo...... o...... o...... eo...... 44 Export Incentives...... 44 Financial Policy and its Impact on Industry...... 45 Labor Las...... 47 Effects of Control Systems on Industrial Incentives and Performancee o*oooooooosooo*...... S,oo* 52 Implicit Taxes and Subsidies...... 52 Transport Costs and Anti-Export Bias...... 55 Uneven Sectoral Protectiono...... o... .. o..... o...... 57

IV* ZYMC"1ENCY.. o...... o....soseesoooososo 60

Capital Output Ratios o...... o....oo...... o.....o..oo..o...... o...60 Protection and Domestic Resource Cost...... 63 Technical Efficiency in the Textile Subsector ...... 66 Economic Efficiency in the Textile Subsector...... 68 Efficiency in Steel and Fertilizer Manufacturing...... 69 Problems with the Present System...... 70

V. FEODMMFNDATIONS 73

Alternative Policy Modifications 76 A Second Best Alternative.6.6.5.5.. .o. .. .. 6 *e. .*... 81

PART 3: SUBSECTORALSTUDIES 83

VIe TEXTILES ...... ,84

Introductioloooosooooeosoosooeaoo neso 84 Markets ~~~~~~~~~~~~~84 - iv -

Page No.

Garment Exports...... 85 Machinery & Equ npment,. . , 85 Age of Machinery...... *...... ***.es.*..,,,... . .e 85 Conditions of Machinery.os e.g...... ,.,..,,,.*...,*.,...., 86 Quality of Management...... 86 Efficiency..,,,...... ,..,,,..,,,...... ,, ,. 87 Machine Efficienciese s.., e..s...... ,O, g . ,.87 LaborProductvity ...... g.,...... g 88 Energy Utlization,...... e,, 89 Domestic Resource Cost...... , ,eg 90 Relative Total Factor Productivity...... 90 Constraints ...... , ,., ,., , 94

VII. FERTILIZERS ...... g..*5g.,, ,,.,,96

Introduction...... ,,,, ,,,, ,,...... 96 M a r egg ek geeegge e *5 eggsts.... g 5 ee egggg.gge.e ..... s ggeeec e 96 5 ,.,,,,,,,,....555g55e5e *598 Sable Chemicals Industries, Ltd. (SABLE)....,,,,,,,,,...... 98 ZimbabwePhosphate Industries, Ltd. (ZIMPHOS) ...... gee.e. 99 ZFC and Windmill.....

Managementdmll. .. *5ee ...... gg eege e. ss 100 Economic Efficiency 101 Constraints ...... gge...se...... esesee. 555C.1 0 1eeggO Pyrites. c.ge .5 .e..... sSce .g.g.. e.g e,.. .101 Pricing Structure...... , . ... , e ...... e 102

STonLCIII. (ZIS.O) ...... 104

HistoricalBackground. . e .e to. e. s e . ee e .. e. 104le GeneralDescription...... ,.,.. ,, .104 Markets...... e,,,C.,,,,,,, geg.ggg ,gg 5e5e55g 105 Efficiency...... e5e,, ,, eg.ee g *..ee.g*ae c ee.a.. 110 Technical Efficiency.gg.geggeg.e.. go gee. . e. s ,ee.e. 110 Economic Efficiency ...... 112 Constraints.. .. ssge..eg eeee*e.g...e.g ,,,.,,. 5e. .5 ,.,e115 Alternative Possibilities for ZISC0 .. 115

STATISTICAL APPENDIX .. ,.g ..... g.. 118-164 - v -

LIST OF T3ZT TABLES

Page No.

CHAPTR 1:

I.1 Selected Economic Indicators, 1939-1953...... 3 I.2 Common External Tariff of the Federation of Rhodesia and Nyasaland ...... ,, 4 1.3 Selected Economic Indicators, 1954-1965...... 5 I.4 Inflation and Interest Rates, 1966-1979...... 7 I.5 Effects of Sanctions on Exports...... 9 I.6 Expenditure on GDP, 1973-1975, Selected Years...... 10 I.7 Sources of Industrial Growth, 1965-79...... 12 I.8 Subsectoral Structure of Production, 1967, 1975, 1979, 1982...... 13 I.9 Growth Rates of the Main Productive Sectors and Demand Components, 1980-84...... 14 1.10 Sources of Industrial Growth, 1979-82...... 15 1.11 Real Growth Rates of Exports, 1980-84, Percentages...... 16

CHAPTERII:

II.1 Selected Economic Indicators, 1970-84...... 17 II.2 Distribution of Manufacturing Units, Output, Exports, Employees, and CapitalStock...... 18 II.3 Structural Characteristics of Manufacturing Subsectors.. 19 II.4 Main Financial Indicators of the Public Traded Companies 1 9 8 0 -84 ~~~~~~~~~~~~20 II.5 Sources and Uses of Funds of Fifty-Two Publicly Traded Companies, 1980-1985...... 20 II.6 Percent Distribution of Employment by Sectors...... 22 II.7 Skill and Racial Distribution of Manufacturing Employment Compared with Total Employment in Non-EducationalEstablishments 1981..81...... 23 II.8 Nationality of Professional Skilled and Semi-Skilled Employed: Manufacturing and Total Employed in Non-Educational Establishments 1981...... 24 II.9 Balance of Trade of the Manufacturing Sector, 1982...... 25 II.10 Shares of Total Exports...... 26 II.11 Export Growth Rates at Constant 1980 US Dollars...... 27 II.12 Distribution of Capital Stock According to Sector and Type of Investments, 12.2 28 I1.13 Unit Cost Comparison Between Open-End and Ring Spinning under Alternative Wage Rate Assumptions..... 35 II.14 Unit Cost Comparisons between Three-Loom Technologies under Alternative Wage Rate Assumptions...... e35 - vi -

Page No.

CHAPTUIII:

III.1 Exchange Rate Premium, 1980-83 ...... 39 III.2 Concentration of Manufacturing Firms, Employment, and Output, ...... 1 982 . 40 III.3 Domestic Prices of Steel and Fertilizer Products Relative to Production and Opportunity Costs, 1985.. 43 III.4 Real Effective Rate for Industrial Exporters..... so... 45 III 5 Real Deposit and Lending Ratesa...o.....t es...... o48 III.6 Evolution of Minimum Wages, 1980-85...... 50 III.7 Indices of Average Real Earnings, 1970-84...... 51 III.8 MinimumWage Compared to Other Developing Countries.... 52 III.9 Prices in Harare Relative to Prices in Washington, D.C. Metropolitan Area... 53 III.10 Share of Value Added Produced at Various Prices Relative to International Prices...... 54 III.11 Selected Domestic Prices Compared to Export Prices..*.. 56 II.12 Distribution of Value Added in Manufacturing According to Effective Rates of Protection Received...... 58

CHAPTERIV:

IV. 1 Manufacturing Sector: Capital and Labor Inputs per Unit of Net Outu. u t putooooooo000000 62 IV.2 Distribution of Value Added According to Domestic Resource Cost Incurred...... 64 IV.3 Estimates of Overall Spinning and Weaving Efficiencies. 66 IV.4 Labor Productivity in the Textile Sector Relative to Productivity in Various Countries ...... 69 IV.5 Average Sector-Wide Unit Labor and Equipment Require- ments and Total Factor Productivity Relative to Best srac tion for 70 IV.6 Domestic Resource Cost Calculations for Steel Manufacturing...... , 71 IV.7 Domestic Resource Cost Calculations for Fertilizer Mauactrngoo fa ctu ring6o6*040*,,**o 72

CHAPTERV:

V.1 5-Year Plan Targets Compared to Past Achievements in Manufacturing ...... ! ! ...... oooosso 73 - vil -

Page No.

CHAPTERVI:

VI.1 FOB Value of ClothingExports...... 85 VI.2 EstimatedCost of RenovatingCapital Equipment in Textile Subsector...... *****...... * * *... , 86 VI.3 Estimatesof OverallSpinning and WeavingEfficiencies. 88 VI.4 Labor Productivityin the TextileSector Relative to Productivityin VariousCountries...ntrles...... 89 VI.5 DomesticResource Cost in TextileManufacturinguring... 90

VI.6 Unit Labor and EquipmentRequirements and Relative Total Factor Produictivity...... s... ecee...... 9y VI.7 AverageSector-Wide Unit Labor and Equipment Requirementsand Total Factor ProductivityRelative to Best Practicein SelectedCountries ...... 92 VI.8 HoursWorked per Year in TextileSubsector ...... 94

CHAPTR VII:

VII.1 GrowthRates of FertilizerConsumption, 1970-1985, Selected Yeas. 98 VII.2 SABLE - HistoricalProduction...e...... 99 VII.3 ZIMPHOSHistorical Productione...... , 99 VII.4 Comparisonbetween Domestic and World Prices of Fertilizers...... 100 VII.5 Indicatorsof EconomicEfficiency in the Fertilizer Subsector.. ... *...... geecee. , . ... *e*...... 101

CHAPTERVIII:

VIII.1 Key Financialand EconomicIndicators of ZISCO, 1980-1984...... 105 VIII.2 Sales of ZISSCO.. 106 VIII.3 Export Prcs 107 VIII.4 NominalProtection for Steel Products,1984 8 4...... 108 VIII.5 DomesticList and Net ExportRebate Priceslc...... es. 109 VIII.6 Comparisonof DomesticList Priceswith Estimate ProductionCosts... ecee..... * *. 110 VIII.7 Key Efficiency Indicators in Steel Mill s 110 VIII.8 OperatingCosts at ZISCO Comparedwith those in Brazil. 112 VIII.9 Estimated Domestic Resource Costs for ZISCOSo.e.C.OeeCO 114 - viii -

STNOPSIS

Zimbabwegained politicalindependence in 1980, fifteenyears after the previousregime unilaterally declared independence from Great Britain. During these fifteenyears, known as UDI, the countryhad to adjustits economyto economicsanctions levied against it by most United Nationsmember countries. The authorities,faced with a drastically reducedworld market as a result of sanctions,geared the economyto operatewith a reducedexternal sector, both in terms of importsand exports. In the process,they imposeda superstructureof economic controlsthat affectedvirtually every facet of economiclife and especiallythe allocationof foreignexchange, and investmentand pricing decisions.Some of the most importantadjustments took place within the industrialsector. Suddenly isolated from outsidecompetition, it turnedto import substitutionas a way of life. When economicsanctions were liftedwith formalIndependence from the UnitedKingdom, the new Governmentfaced a new set of circumstancesand a new challenge,the challengeof re-integratingZimbabwe to the world economy. Six years after Independence,however, the inheritedpolicy environmentis still substantiallyunchanged from UDI days. This report attemptsto answer three main questions:(i) to what extent is the industrialsector equipped to respondto the country'sexport needs; (ii) to what extentis the policyenvironment adequate to stimulategrowth and diversificationof manufacturingproduction; and (Mi) are any policy changesrequired to take advantageof the new opportunities. - ix -

PART 0143: EXCUTIVE SUMMARY x -

AN INDUTRIAL SCTO)R N0ORMIDW Enurv SU - IZDCUTIVI8SINAR

Introduction i. The Government of Zimbabwe's First Five Year National Development Plan for 1986-1990 singles out the manufacturing sector as the "key for changing the structure of the Zimbabwean economy and for achieving rapid growth ... and development." Among other things, manufacturing output, exports, and employment are targeted to expand at 6.5X, 8.2% and 2% per year, respectively. During 1980-84, growth of manufacturing value added was a third of the Plan's target; growth of exports was less than one-tenth, and growth of employment just over one-half. These targets, then, constitute a major challenge for the sector. The analysis of this report indicates that the achievement of these targets would require significant policy changes. ii. The current state of the sector needs to be assessed in a context inherited from the previous regime. In response to the Unilateral Declara- tion of Independence (UDI) in 1965, the bulk of the country's trading partners, with the major exception of South Africa, applied sanctions that, despite significant evasions, had a major impact on the availability of foreign exchange. In response to sanctions, the previous Government imposed a wide-ranging system of economic controls on a relatively market- oriented and open economy--exportsand imports were on the order of 35% of GDP in 1965--with the aim of keeping the economy going despite the restrictions on external trade. The core of the system was the comprehensive rationing of foreign exchange, supported by investment regulation and price controls. iii. Although sanctions disappeared with Independence in 1980, the system of economic controls designed during UDI remains substantially unchanged. One of the main purposes of this report is to assess whether this system of incentives is still adequate for dealing with Zimbabwe's changed circumstances. The report describes the historical evolution and present structure of the industrial sector, examines the effects of current policies on its performance and structure, and assesses the case for policy changes to support future industrial growth. This summary presents a con- densed account of the conclusions,starting with an overview of the policy framework. iv. The report draws on two previous studies prepared for the Minis- try of Industry and Technology--a 1985 report by UNIDO and a 1983 report by Dr. D. Jansen. However, much of the analysis is new, and the conclusions are based both on general analysis of the sector and the results of analysis of three subsectors--ironand steel, textiles and fertilizers. - xi -

The PolicyFramework

ForeignExchange Allocation v. The foreignexchange allocation system is the core of the current policy environmentand has a pervasiveinfluence on the whole structureof pricesand patternof activityin the economy. In its presentform, the foreignexchange rationing exercise begins with a six-monthprojection of the balanceof paymentswithin a four-yearhorizon. Given expectedinflows of foreignexchange, the Governmentdeducts legally committed uses (e.g., externaldebt service,profit remittances)and sets aside enoughto main- tain internationalreserves at an adequatelevel. It then allocates foreignexchange to priorityuses (e.g.,imports of fuel, medicines, tires). The remainderis allocatedto industry,agriculture, mining and commerceon the base of the assessedneed, using historicalshares as a startingpoint for the firm-by-firmallocation, but modifiedfor new entrantsand for changesin the needs of existingfirms.

ExchangeRate Management vi. The Zimbabweandollar is not peggedagainst any currency. Com- pared to a basketof currenciesof its main tradingpartners, however, the Zimbabweandollar has depreciatedby about 26% in real terms sitce 1965-- the year immediatelyprior to the introductionof foreignexchange rationing. The bulk of this long-termmovement occurred during the UDI period, when the real depreciationwas largelya consequenceof a relativelylow domesticinflation rate. In the first two years after independe-Acethe exchangerate appreciatedby about 20% in real terms. The authorities devaluedby 20% in December1982, and have subsequentlymaintained a flexibleexchange rate policyinvolving frequent small movementsagainst a basket of currenciesof Zimbabwe'sprincipal trading partners. The effect of this has been a steadyreal depreciationand the real effectiveexchange rate is now below its 1980 level. Despitethis real depreciation,there is still excessdemand for foreignexchange for both currentand capital accounttransactions at the currentexchange rate, and foreignexchange rationingis essentialto the maintenanceof externalbalance.

InvestmentControl vii. All new investmentsor expansionsinvolving the use of foreign exchange,either for purchasesof capitalequipment or currentinputs, have to be submittedfor approvalto the InvestmentsProjects Committee (IPC). In practice,the main criteriafor approvalare that ex ante the project not be a net user of foreignexchange during any twelve-monthperiod of its expectedlife and that it does not competewith local productionunless it - xii -

also producesfor export. Comprehensivefinancial or economicanalysis is not undertaken. The assessmentof foreignexchange use also takes account of any use of foreignfunds. Projectsrequiring more than the equivalent of Z$2.5 million(US$1.6 million) in foreignloans need additionalapproval from the ExternalLoans CoordinatingCommittee. In addition,projects with more than 15% foreignownership must obtain the approvalof the Foreign InvestmentCommittee. These criteria,however, have recentlybeen relaxed for emergingentrepreneurs.

Price Controls viii. Price controlsapply to all goods exceptexport goods, goods sold by publicauction, second hand goods (otherthan used automobiles),food and drink sold for consumptionon the premises(except beer), eggs in the shell, fresh flowers,fresh vegetables,and fresh fruits. There are three types of price controls:specific price controlsthat set the actual price (e.g.,on bread,maize, milk, vegetableoils), controls over the pricing formulafor the particulargood (e.g.,on motor vehicleparts, agricultural implements,chemicals, fertilizers), and controlsover the mark-up at the wholesaleand retaillevel (mostlyapplied to consumergoods).

Overviewof the PolicyFramework ix. Much of thie reportis concernedwith assessinghow the above set of policies has influenced the pattern of development of the manufacturing sector. However, it is worth stressingat the outset that the policy framework has a pervasive influence on the overall pattern of economic activityin Zimbabwe. A principalcharacteristic of the core policies---!he combinationof administeredforeign exchange with excessdemand for foreign exchange at the current exchange rate--is that it confers a high degree of protection on activities oriented toward the domestic market, from both importsand, in many cases, from potentialdomestic firms. It also allows a highlyvariable degree of protectionfor individualactivities to evolve. This especiallyfavors domesticallyoriented manufacturing activities and non-tradedactivities (largely in the servicesectors). It is relativelydisadvantageous to the agricultureand miningsectors. It is beyond the scope of this report to analyze these intersectoral isues, but tlis provides an important context for the assessment of the relationship between the policy framework and the performance of the manufacturing sector.

x. After providingan outlineof the generalcharacteristics of the manufacturingsector, the reportassesses the threekey areas in which the above policieshave an impacton its past and potentialfuture performance: the impactof protectionon growth and efficiency; the impactof the policy frameworkon exportperformance; and the issue of investment.

GeneralCharacteristics of the IndustrialSector

xi. At present,Zimbabwe's industrial sector stands out in the Sub- SaharanAfrican context in a number of respects. First,it is unusually well developed. Manufacturingcontributes about one-quarterto GDP - xiii -

(roughlythree times as much as the averagefor developingAfrican countries). It is the secondmost importantsource of employment--after agriculture--andaccounts for about 17% of total export revenues. Manufac- turingproduction is also highly diversified,with productionof virtually all consumerproducts, a wide range of intermediateproducts (including iron and steel)and a small, but significant,range of capitalgoods. xii. Second,manufacturing firms are generallyin good financial health. Most firms have very low levels of debt, with averageleverage ratiosof 0.73 and long-termleverage ratios of only 0.17. These finan- ciallysound firms are conservativelymanaged, using mostlytheir own resourcesto financecapital expansion. An analysisof the sourcesand uses of funds in 1980-85shows that internallygenerated funds provided nearlythree quartersof new resources,with increasesin long-termdebt addinga modest one-tenth. One-halfof these new resourceswere used to acquirefixed assets. xiii. Third, there is an unusuallyhigh share of privateand foreign ownershipfor Sub-SaharanAfrica. Privateand unincorporatedenterprises accountfor about 86% of recordedmanufacturing output, with parastatalsin foodstuffsand textilesaccounting for about 10% and publicfirms under the IndustrialDevelopment Corporation for about 4%. Estimatesof the extent of foreignownership vary widely. The Confederationof ZimbabweanIndustry estimatesforeign ownership somewhere in between 30% and 60%, whereasother studiesput it at between25% and 50%. The substantialparticipation of foreignfirms provideseasy access to technologyand marketinginformation. On the other hand, to the extentthat foreignfirms may be tied to multinationalconcerns, they may hinder exportsin responseto globalcor- poratestrategies if these exportscompete with subsidiariesin other countries. Reductionof foreigncontrol has been a policyobjective since Independence.

xiv. Fourth,industrial activity is highlyconcentrated both in terms of productsand location. In 1982, of 6,000 identifiableproducts one-half were being manufacturedunder monopolyconditions (one firm) and four- fifthsunder oligopolyconditions (at most three firms)and productionwas concentratedaround the main urban centers. In terms of spatialconcentra- tion, Harare,the country'slargest city, accountsfor about one-halfof manufacturingoutput and employment. Bulawayo,the secondlargest city, accountsfor about one-quarterof manufacturingoutput and employment. The Kwekwe-Redcliffindustrial complex contributes 7% to manufacturingoutput and about 5% to overall manufacturing employment. Together, these three centers contribute 82% of total manufacturing output and account for 79% of manufacturing employment. - xiv -

xv. Fifth, the range and diversity of production of the manufacturing sector has made it less dependent on imports than the manufacturing sectors of many other countries at similar stages of development. About a quarter of the value of gross manufacturing output represents input purchases from other manufacturing industries and there are also substantial linkages with agriculture, mining, and construction. These linkages enable Zimbabwe's manufacturing sector to use relatively less foreign exchange per unit of output and to come very close to being self-sustaining in terms of foreign exchange. In 1982 only about one-quarter of the inputs into manufacturing were imported (compared to 73% in Ghana, for example). Preliminary estimates for 1984 indicate that industrial exports were equivalent to about 85% of the sector's imported current inputs. This proportion compares favorably with other countries such as Tanzania (20% in 1985), Ethiopia (22% in 1981), and Ecuador (43% in 1980). This characteristic means that an export drive would soon have a positive impact on the balance of trade.

Protection, Growth and Economic Efficiency xvi. Protection has played a large role in the evolution of this diversified, financially sound and highly concentrated industrial sector. Much of the sector was formed prior to UDI, and, especially after World War II, it emerged as the industrial center for Central Africa. In the 1950s, this was facilitated by the formation of the Federation of Rhodesia and Nyasaland that provided protection through tariffs for the manufacturing sector. With UDI, manufacturing firms lost the bulk of the established Central African export market. At the same time the new set of policies provided firms with a major increase in protection. Through the foreign exchange allocation system, imports that competed with domestic production were effectively barred (including imports from South Africa, according to the information available to the mission). xvii. Despite a significant fall in exports, the manufacturing sector thrived in the new conditions during the first seven years of sanctions. Sanctions made international trade difficult, but with the help of the removal of external competition from the domestic market and initially low capacity utilization--a product of high investment during the Federation-- Zimbabwean entrepreneurs were able to respond quickly to the changed domestic cor*itons In fact, by satisfying a growing domestic demand and subs- tituting imports, manufacturing output grew at 8% per year between 1966 and 1974. From 1975 to 1980, manufacturing output declined at a rate of 2% per year as the liberation war intensified and macroeconomic conditions worsened. Nevertheless, the initial growth spurt was so strong that by 1980 industrial output was double that of 1966. The source of this growth was mainly domestic demand expansion and some import substitution, with export expansion playing a negligible role. xviii. Industrialization behind some form of protective barrier is a common phenomenon in developing countries. Zimbabwe's case is unusual in that the high levels of protection conferred by the foreign exchange - xv -

allocationsystem were imposedon a sector that was alreadyfairly well- developed,as roughlyone-half of Zimbabwe'smanufacturing capacity was alreadyin place at the time of sanctions. xix. This unusualevolution is importantto assessingthe consequences of the system. High protectivebarriers in countrieswith relativelysmall economiesusually give rise to inefficientindustrial structures because the small domestic market does not permit taking advantage of economies of scale. In Zimbabwe, many industrial f'.rmsremained relatively efficient by internationalstandards. Previousstudies have shown that as much as one- half of the industrial value added is being produced under efficient conditions (DRCs below one) and that only about 12X can be labelledas being producedunder very inefficientconditions (DRCs above 2). This type of study has to be treatedwith caution,owing to data problems,but both spot checks of these findingsand alternativeassessments of efficiencythat were undertakenin connectionwith this report,also showed that average levelsof industrialefficiency are relativelyhigh for a highlyprotected sector. xx. Overallmeasures of industrialefficiency, however, hide marked disparitiesin efficiency,both betweensubsectors and betweenfirms in individualsubsectors, that are reflectedin a high dispersionin indicators of efficiencyfound in these previousstudies. The systemof incentives permittedthe establishmentand survivalof inefficientfirms alongsideefficient ones. Thus, dispersedthrough every subsector,there are now firms as efficientas any in developedcountries, as well as very inefficientones. The limiteddegree of domesticcompetition together with the high degree of protection,prevented the winnowingout of poor perfor- mers, leadingto inefficientresource allocation, and as a consequence, lower outputand employment. xxi. Thus, althoughthe systemof controlsserved Zimbabwebetter than many developingcountries, it took a toll. The first underlyingproblem is that the protectionconferred by the foreignexchange allocation system, complementedby price controls,allowed relativeprices to evolve in a manner that was severelyout of line with respectto internationalprices (some as much as five times above,others as much as one-halfbelow), and some sectors (e.g.,domestic appliances) grew despitehigh-cost and inefficient production. xxii. These price distortionsare in effect implicittaxes and subsidies that often unintendedlyconflict with Governmentobjectives. For example,in 1984 the agriculturalsector implicitlytransferred about US$17 millionto the fertilizercompanies via higher domesticfertilizer prices. Similarly,domestic consumers of ZISCO'ssteel products receivedabout US$5 millionin subsidies. Relativeprice distortionsstimulate investment in activitiesthat may be financiallyattractive, but not appropriatefrom - xvi -

economicand social viewpoints,while discouraginginvestment in activities that may have high rates of economicreturn. One major consequenceof this impact on relativeprices is the pervasiveanti-export bias--discussed in the next section. xxiii. The secondproblem is the highly conservativebias of the system. The protectionfrom externaland domesticcompetition with largely cost-basedprice controlseffectively preserves the profitsof existing firms and exacerbatesthe anti-exportbias. It has also allowedthe relative neglectof marketing,through severing entrepreneurs from day-to-day marketingstruggles. This conservativebias is particularlyimportant, if, as will be argued below,a dynamicprocess involving shifts in the structure of productionand marketswill be necessaryfor sustainedgrowth in the future. xxiv. A third problemconcerns capital accumulation. By ignoringcosts and benefitsstemming from the use of domesticresources and placinga high premiumon benefitsdenominated in foreignexchange, the investmentapprov- al system inhibitedinvestment, erected formidable barriers to entry,and contributedto the high degreeof concentrationin the sector. xxv. Finally,by administrativelyadjusting imports co the foreignexchange available,the systemdeprived the authoritiesof the most visible signs of disequilibriain the externalaccounts, namely changesin the stock of internationalreserves and movementsin the nominalexchange rate. Also, by allowingZimbabwe to operatewith an exchangerate higher than would have prevailedwithout rationing,the systemcreated a "foreign exchangeshortage."

Exportsand the IncentiveSystem xxvi. Manufacturedexports today are a quarterlower in real terms than in 1965 and the share of manufacturingoutput that is now exportedhas fallenfrom about 20% at the time of UDI, to less than half that proportion. In view of the key role of manufacturedexports to the provisionof foreignexchange for futuregrowth, as clearlydescribed in the Plan, this is a centralconcern. xxvii. An analysisof the sourcesof growthduring UDI shows that about three-quartersof the growththat took place in the industrialsector was to satisfythe expansionof domesticdemand, while about one-quarterwas to substituteimports. Manufacturedexports declined in volumeterms and, as a consequence,export expansion played a negligiblerole in the growthof most subsectors,except for ferro-alloysand iron productswhere exports accountedfor 35% of its growth. The impositionof sanctionsexplains some of the poor performance,especially in the initialyears of UDI, but is only part of the explanation.Indeed, in contrastto the highly protected - xvii -

manufacturing sector, both the miningand agricultural sectors enjoyed relatively high rates of export growth, at least until the liberation war intensified. xxviii, With the advent of Independence, the export market became again readily accessible, yet the pattern of growth for the period 1979-82 was remarkably similar to that of UDI. Domestic demand expansion accounted for 80% or more of the growth for all sectors but one and import substitution accounted for most of the remainder of growth in this period. Manufactured exports have also experienced substantial fluctuations from year to year since Independence. After an initialsurge of 14% in volume terms in 1980, exports of manufactures declined by 16% in 1981 and 22% in 1982, and then grew by 11% in 1983 and 26% in 1984. The 1983 growth was entirely due to iron and steel, but in 1984 it was highly diversified: iron and steel contracted, while exports from the remainder of the sector grew by an estimated 69%. In 1985 preliminary figures suggest that any real growth was due to iron and steel again. xxix. A principal conclusion of this report is that both the very weak long-term export performance and the fluctuations since Independence are largely a consequence of the incentives system that places manufacturing exports at a severe relative disadvantage compared with production for the domestic market. There are other factors as well, of course. Zimbabwe's landlocked position also leads to relatively high costs of trading compared with some countries. This was exacerbated by the loss of the Central African market in 1965, and has probably worsened again with the difficulties over transit via the Mozambican port of Beira in the past few years. However, high transport costs do not explain the long-term decline in exports or the recent fluctuations. xxx. The incentives system leads to a severe anti-export bias 4r the whole economy, but especially the manufacturing sector, in three ways. First, the protection conferred by the foreign exchange allocation system leads to major price differentials between domestic and export sales--the mission found differenc-es of between 18% and 90%. This makes exports far less attractive than domestic sales. For example, export sales brought 34% less revenue than domestic sales for textile firms. As noted above, the manufacturing sector is The primary beneficiary of this protection; equally important, the degree of protection and consequently the degree of anti- export bias is highly variable across manufacturing activities. Second, the lack of domestic competition makes domestic sales an easier and a more reliable activity compared with exports. Third, to the extent that the ex- ckange rate is overvalued i.e., above an appropriate level for medium-term growth, this reduces the profitability of exporting.

xxxi. The role of the anti-export bias in the inherited incentive system explains the initially weak export performance after Independence. In 1980-81, the combination of a profitable and expanding domestic market and an appreciating real exchange rate provided a poor environment for exports. - xviii -

This was exacerbated in 1982 by the effects of cutbacks in foreign exchange allocations on the sector; a natural response to tighter rationing of foreign exchange was to have a sharper reduction in less profitable exports. However, this was subsequently compensated by three policy changes: the devaluation of the Zimbabwean Dollar in December 1982 and subsequent flexible exchange rate management; the introduction of an export incentive system from 1982 that, in addition to an existing duty drawback system, raised the effective incentive for exporting; and the extension of an export revolving fund, in 1983, to provide automatic allocation of foreign exchange for inputs for manufactured exports. These measures significantly reduced the average degree of anti-export bias in 1983-84, especially in the context of the depressed domestic market, and explain the sharp growth in exports (other than iron and steel) in 1984. xxxii. The policy changes introduced since Independence are important, but they provide only a shaky basis for sustained export growth. First, the short-run success was in part due to the weak state of the domestic market. There is evidence that some firms were exporting at little or no profit--as long as export prices covered variable costs this made financial sense (labor costs are part of fixed costs in the short run owing to the strong labor security legislation). Growth in domestic demand (as occurred in 1985) would lead to reduced export sales. Second, the changes failed to tackle the problem of the highly variable degree of protection and consequently the high variability in anti-export bias for the domestic market. Although the average level of anti-export bias was reduced, its variability was not.

xxxiii. Labor Costs. Relatively high labor costs in terms of foreign currency also militate against exports. The current minimum wage, conver- ted at the present exchange rate, is four times higher than in Sudan and Zaire, one and one-half times higher than in Brazil, and about the same as in Mexico. The average pay in the manufacturing sector is about as high as in Chile and higher than in Korea, countries with almost three times Zimbabwe 's per capita GDP. High labor costs contribute to making exports uncompetitive in world markets. Of course, labor costs relative to other countries would be brought down with an appropriate exchange rate. Indeed, the minimumwage has declined in US dollar terms some 18% as a result of a depreciation of the Zimbabwe dollar vis-a-vis the US dollar. Exchange rate movements that exceed domestic inflation would further improve competitiveness.

Capacity Utilization and Investment Levels

xxxiv. The existing capital stock in the manufacturing sector has two striking characteristics: it is highly utilized and it is old. Zimbabwe's manufacturing sector is working at about 80% of capacity. There are, of course, significant variations--many firms are working around the clock all - xix -

year long while othersare at much lower levelsof capacityutilization. Yet the averagedegree of utilizationis high, especiallyby Africanstand- ards. This is a reflectionof the fact that Zimbabwe'sforeign exchange shortage,and the overalldegree of disequilibrium,is much less severe than in other Sub-SaharanAfrican countries,where cepacityutilization is often a fractionof installedcapacity. For firmsworking at high levels of capacityutilization, more abundantforeign exchange could improvetheir efficiencyof resourceuse--by, for example,allowing textile firms to substituteimported man-made fibers for domesticcotton, or vice-versa, dependingon relativeprices--but it would not increasetheir outputsubs- tantially. xxxv. Foreignexchange shortage has, however,been an acute problemfor investmentand renovationof capitalstock. Investmentlevels in manufac- turingpeaked in 1974-75,and have been low in recentyears--60% lower than in 1972 and 40% lower than in 1980-81when the Governmentincreased foreign exchangeallocation for investment.Mission estimates indicate that investmentlevels in 1974-82were not adequateto cover estimateddeprecia- tion of equipment,suggesting either that the capitalstock actuallycon- tracted,or that the sectorwas workingwith equipmentthat had outlived its economicusefulness. Subsectoraldata supportthe latterhypothesis. Of the three sectorsstudied, the textilesubsector was the one with the highestinvestment rate since Independence.Neither steel nor fertilizer had undertakenmajor investmentssince the mid-1970s. Yet even in the textile sector spinningequipment is, on average,20 years old, while looms are about 16 years old. In the fertilizersubsector the main facilities date back to 1972, with some datingback to 1979. In the steel subsector, one blast furnacewas builtin 1961, the other in 1975, along with oxygen convertorsand continuouscastirg mills. Equipmentin other sectorsis similarlyold. In the paper subsector,the newestmachine in a sampleof respondentfirms dates back to 1952,with some datingback to 1926, and in soaps and detergentsto 1978 (the newest)and to 1959 (the oldest). Only in the paper suh6ectorhad this equipmentundergone modernization. Given that the sectoris workingclose to full capacity,any prolongedexport drive would soon fizzleout unless sustainedwith new investment.

xxxvi. Entrepreneurscite severalreasons for the low investmentlevels, some of them politicalin nature,some economic. Among the economic reasons,the shortageof foreignexchange is the most frequentone--foreign exchangerationing at the prevailingexchange rate has clearlyheld investmentbelow levels desired by manufacturingfirms. Virtually all investmentprojects require imported capital goods or importedcurrent inputs and hence must be approvedby Government. Accordingto UNIDO,in 1984 for every projectapproved, four were rejectedlargely, although not exclusively,because of foreignexchange shortage. Low profitsand ensuing pessimisticexpectation also partiallyaccount for low investmentlevels up to 1984. For the 52 publiclytraded companies, pre-tax profits fell from - xx -

16% of sales in 1980 to 6% in 1984 and returnson equity fell from 16% in 1980 to 7% in 1984 beforepartially recovering in 1985. The uncertain politicalsituation in the regionis also cited as cause for concern. xxxvii. In additionto the effectof foreignexchange rationing on investmentlevels, it also affectsinvestment choices. As noted above, of the three subsectorsstudied only textileshas undertakenmajor investments since Independenceand the investmentthat has taken place has been remarkably labor-saving.For example,almost all of Zimbabwe'srecently installed capacityin spinningand weaving is of the most modernvariety; it generatesconsiderable less employmentper dollar of investmentthan con- ventionalmachinery and the unit cost of outputis higher,bringing no apparenteconomic benefit to the firm. Yet a bias towarda capital- intensiveinvestment choice would be expectedwithin the currentincentives system. If an allocationcan be obtained,then the foreignexchange for capitalgoods importsis cheap relativeto domesticprices; uncertainty over futureallocation provides an added incentiveto invest in the most modernequipment; the domesticcost of investmentfinance is low; and the labor securitylegislation provides an incentiveto minimizeemployment levels.

xxxviii. Low investmentlevels are a seriousbarrier to growthbecause capacityutilization is alreadyhigh and a good proportionof Zimbabwe's capitalstock is old and needs to be renovated. Whatevermedium-term growth the sectorcan attainmust be accompaniedwith capacityexpansion and renovationof capitalstock.

PolicyRecommendations

xxxix. Attainingthe industrialgrowth and employmentgoals of the First Five Year NationalDevelopment Plan will requiresignificant changes in the industrialsector. The past patternof growthcannot be repeatedbecause the manufacturingsector will have to play a differentmacroeconomic role, if overallgrowth of GDP is to be sustained. In particularthe resource- based sectors (and especiallymining) cannot be expectedto providea surplus of foreignresources to financethe continuedexpansion of manufacturing as in the past, both due to terms of trade lossesfor primarycommodities and to constraintson the rate of volumegrowth in these sectors. This impliesthat increasedefficiency in the use of both domesticand foreignresources, with an improvementin the net foreignexchange position of the sector,will be essentialfor future industrialgrowth, just as the expansionof manufacturedexports will be crucialto aggregategrowth in the economy. This is likelyto requirechanges in the structureof output towardgreater specialization in efficientactivities than now existsin Zimbabwe.

xl. lnvestmentwill be the key vehiclein effectingthis change. Zimbabwe'saged and heavilyutilized capital stock severelylimits growth throughmore intensiveutilization of installedcapacity. Unlike many - xxi -

other countriesin Sub-SaharanAfrica, where dramaticproduction gains are possiblethrough a reallocationof currentresources, Zimbabwe must achieve these gains mainly throughincreased capacity. For this changesto occur, it will be necessaryto tackle the problemswith existingpolicies outlined above. Changesin incentivesthat indirectlyencourage appropriate new investmentare of particularimportance in Zimbabwesince the industrial sector is primarilyin privatesector hands. However,it should be stress- ed that it is of equal importance that any further public investment in manufacturing be guided by appropriate incentives. xli. The Governmenthas a wide range of policyalternatives. However, the analysisof this reportindicates the goal of sustainedgrowth of industrialoutput, employment and exports can be most effectivelyrealized by the formulationof a consistentpackage of policy changesthat would have as its core the combinationof furtherexchange rate movementand reform of the foreignexchange allocation system, complemented by changes in investmentregulation and price controlsand a supportivemacroeconomic framework. This reportassesses the key areas of policyaction, but does not go into the phasingof possiblepolicy changes. However,because of the key role of investmentand the fact that investmentdecisions are by nature long-termand requirea gestationperiod, it is importantto provide clear and coherentsignals on the futureincentive environment to convince the privatesector of the directionand permanenceof any changes.

xlii. Furthermovement of the exchangerate (in real terms)would help attenuatethe anti-exportbias by raisingthe profitabilityof exportsboth in absoluteterms and relativeto domesticsales. It would raise domestic prices of importsand lower labor costs relativeto other countries, improvingZimbabwe's competitive position in world marketsand protecting domesticindustry from outsidecompetition. In additionto its impacton the manufacturingsector it would also lead to shifts in overallrelative pricesin the economy that would encourageresource movements into the productivesectors in general,and exportingactivities in particular. Over a periodof time exchangerate movementwould increaseforeign exchange availability through increased export earnings and relax one of the most serious constraints on growth.

xliii. Liberalizationof the foreignexchange allocation system will be criticalto the provisionof incentivesfor resourcesto move into appropriateactivities. As discussedabove, quantitative rationing of foreignexchange has led both to a patternof relativeprices that do not reflectthe structureof economic costs for Zimbabwe and is strongly biased towardmaintenance of the statusquo throughprotection of existingactivities. The reductionin the high degreeeof firm-specificprotection is an importantstep in the overallpackage of measuresrecommended here. This would requirea significanttrade liberalization.However, the reportis not advocatingthe full removalof protection,but ratherthe substitution - xxii -

of tariffsfor the existingvariable quota system. The benefitsfrom a shift from a quota to tariff-basedsystem of protectionare well-documented from internationalexperience. Zimbabwe'scurrent tariff schedule, though not ideal,has a relativelymoderate spread in rates of protectionby the standardsof developingcountries and providesa reasonableinitial framework. xliv. Reform of the foreignexchange allocation system will change the pattern of incentivesfor investmentin the economy. It will have to be complementedby measuresthat allow factorsto move into relativelyprofit- able activitiesif the benefitsare to be realized. This will necessitate domesticderegulation, especially of investment. In particular,it will be importantto ensure that firms have the resources(including of foreign exchange)to invest as requiredto meet foreigncompetition. However, it is importantthat any reformof investmentregulation take place in the contextof a concurrentor plannedprogram of trade liberalization,otherwise therewould be incentivesfor resourcesto flow into highly protected activitiesat a high cost to the economy. xlv. The price controlsystem would also be effectedby reformof the foreignexchange allocation system. Since the bulk of controlsare largely ceilingsthat relateto productioncosts, they would graduallybe rendered unnecessaryby the introductionof competingimports. Competitionwould effectivelytake over the role of price controlsin limitingmonopoly profits. Where specificprices of industrialproducts are set, decontrol would be necessary to support trade liberalization. i.lvi. The broad changes in the incentive system would provide a much more favorable environment for export growth. However, there would remain a strong case for the maintenance and improvement of specific export- prom-o,ingmeasures, to encourageshort-run export growth, especially if the broaderchaages are implementedover a period of time. The main existing .teasures--theduty drawback,the export incentiveand the export revolving fur.d(ERF)--provide an adequatestarting point. It would be advisable, however,to phase out the exportincentive if it carriesthe risk of countervailingduties, or other retaliation,when injuryis causedto tradingpartners. In addition,both the duty drawbackand ERF could be improvedto ensureadequate and quick accessto new and indirect exporters. In the future there may also be a need to improve the availability of credit to aew exporters. Finally direct trade promotion activities to improve information on exporting at home and abroad plays a useful complementaryrole. xlvii. Reformof the incentivessystem would have to be supportedby macroeconomicmeasures to ensure that the processis not jeopardizedby short-runexternal imbalance, and to allow for growth in aggregate - xxiii -

investment. This will requireappropriate exchange rate and demand managementpolicy. Appropriateexchange rate movementscould be effected by the continuationof a flexibleadministered rate. However,careful monitoringof the externalaccounts would be necessaryto ensurethat the pace of exchangerate adjustmentis consistentwith the degreeof import liberalizationbeing introduced. As an alternative,the Governmentcould consideradopting a market-determinedexchange rate throughthe removalof rationingof foreignexchange for current(though probably not capital) transactions,either via a floatingrate or a foreignexchange auction. xlviii. Other complementarymeasures are neededto encouragea higher rate of capitalaccumulation and a more efficientallocation of capital resources. Significantprogress in reducingthe publicsector deficitis anotherimportant element of the strategy. This would encouragefinancial savingsfor private capitalaccumulation and allow the RBZ more freedomto focus on stabilizingthe growthof money and creditat non-inflationary levels. Failureto reducethe deficitwould put much greaterpressure on the exchangerate in maintainingexternal balance during trade liberalization. The manner in which the deficitreduction is achieved,however, is crucial. Preferably,it shouldbe done throughexpenditure reduction, but not throughincreased taxes, as there is evidencethat high marginaltax rates are alreadydistorting savings and investmentdecisions. A strategy of deficitreduction through increased taxes on capitalor incomemight exacerbaterather than alleviatethe capitalaccumulation problem.

xlix. Liberalizationattempts in other countrieshave shown that trade liberalizationwithout appropriateexchange rate and macroeconomic managementis not sustainable.Zimbabwe's own experiencein the immediate post-Indiependenceperiod illustratesthe risks of liberalizingimports with an inconsistentexchange rate and macroeconomicframework. The increased allocationsof foreignexchange in the expectationof higherexternal assistanceand exportsin 1980-82,in the?context of both an overvalued exchangerate and expansionarydomestic demand led to quick depletionof internationalreserves and to an eventualreduction of foreignexchange allocations.

1. Zimbabweis in a betterposition than many other Africannations to undertakea liberalizationprogram. Industrialfirms are in sound financialcondition and the bulk of the sector alreadyhas the capability to competewith imports. The existingtariff schedule, together with transportcosts, would be sufficientto providemost existingfirms with an adequateumbrella of protectionand permitthem to compete,within Zimbabwe,on an equal (or better)footing with foreign-basedfirms. This - xxiv -

is not to deny that a liberalizationprogram, coupled with exchangerate adjustment,would have a substantialimpact on the profitabilityof many firms. Some export-oriented,relatively efficient enterprises, such as ZISCO--now operating at a loss--would experience a major improvement in financial performance. Others, now financially sound, but economically inefficient,would be negativelyaffected. The latterfirms would have to increasethe efficiencyof their operationsor else be forcedout of the market. But the evidenceon the sectorassessed in this reportsuggests the amountof disruptionin inefficientfirms would be relativelysmall. In additionto providingthe basis for sustainedgrowth over the medium term, this impliesthat the short-runimpact of the proposedpolicy changes on industrialoutput and employmentwould also be beneficial. -1--

INTIOOUCION

Mining and agriculturedominated Zimbabwe's economy before World War II. Mining employedabout 93,000workers in 1938 and the country's economicperformance was closelytied to world prices for gold, asbestos, and chromeore, the country'sprincipal mineral exports. In contrast,the manufacturingsector employedabout 18,000workers and accountedfor about one-tenthof exportsand Net DomesticOutput. At the time of Independence In 1980,manufacturing accounted for about 16% of expcrtsand a quarterof GDP--morethan miningand agriculturecombined--employed about 150,000 peopleand produceda wide range of consumergoods. Outsideof the Republicof SouthAfrica, Zimbabwe's manufacturing sector was largerand more diversifiedthan that of any other Sub-SaharanAfrican country.

The growth of the industrialsector in the interveningyears was nothing short of remarkable, all the more so because it took place in exceptional circumstances, circumstances that have now disappeared. Yet, the economicpolicies adopted to meet the challengeof these exceptional circumstancesare still in place. The Zimbabweanauthorities are examining appropriateways of using these policiesor modifyingthem to take advantageof Zimbabwe'snew circumstances,especially the ability to use world marketsto Zimbabwe'sadvantage. This report aims at helpingthe authoritiesin these deliberations.

The report is the IBRD's firstattempt to understandthe past performanceand assess the growth prospectsof Zimbabwe'sindustrial sector. As such, it aims at gatheringthe main conclusionsof previous studiesand providinga steppingstone for futurestudies. After a brief historicalintroduction, the reportprovides a descriptionof the structure of Zimbabwe'sindustrial sector, then analysesthe adequacyof the policy environmentto today'scircumstances, and finallylooks at the effectsof these policieson the performanceand structureof three subsectors. The reportalso includesan analysisof the financialsector and its relation to industrialgrowth. - 2 -

PART 0: MAINll!ORT 3

The Initial Push: World War II.

1.01 Three eventswere of signal importance in the growth of the manufacturing sector: the breakout of World War II, the creation of the Federation of Rhodesia and Nyasaland in 1953, and the Unilateral Declara- tion of Independence (UDI) in 1965. The outbreak of World War II interrup- ted Zimbabwe's (then known as Southern Rhodesia) normal trade routes and rendered certain imported item either unavailable or very costly, providing temporary protection to Southern Rhodesia's economy. The war also brought British armed forces training camps to Southern Rhodesia in 1940, increasing the European population by about 202 and stimulating demand for construction and other services. With the end of the war, Southern Rhodesia's temporary umbrella of protection disappeared but the international economic boom that followed the war stimulated the demand for its exports, and to some extent compensated for the disappearance of the protective shield. Between 1939 and 1953 gross manufacturing output rose at an annual rate of nearly 122 per year. At the end of the period, the ratio of net manufacturing output relative to Net Domestic Product had doubled, from less than one-tenth to about one fifth, and the share of manufacturing exports relative to total exports had mre than tripled, from about one-tenth to about one-third, as Table I.1 shows. 2/

Table I.1: ZIMBABWE- SELECTEDECONOMIC INDICATORS, 1939 - 1953

Annual Item 1939 1953 Growth Rates

Net Domestic Product at 1939 Prices (1939-100) 100 251 6.82

GrossManufacturing Output Volume Index (1939-100) 100 470 11.7%

Net Manufacturing Output as % of NDP 8.5% 19.4Z n.ae a/

Share of Manufactures in Total Exports 8.9% 31.0% 23.1%

a/ Not applicable. Source: Doris Jansen, Zimbabwe: Government Policy and the Manufacturing Sector, mimeo, 1983.

1/ Most of the first chapter's historical material is taken from Doris Jansen, Zimbabwe: Government Policy and the Manufacturing Sector, mimeo,1983. 2/ Shares relative to NDPavailable for earlier years are not comparable to shares relative to GDP (available for later years), but both give an idea of changes through time. See, Jansen, ibid. p.18. -4-

The Federationof Rhodesiaand Nyasaland,1953-1963.

1.02 The formationof the Federationof Rhodesiaand Nyasalandin September1953, which resultedin the eliminationof all trade restrictions and tariffsbetween the three coloniesthat comprisedit, providedan en- largedprotected domestic market and furtherstimulated the growth of SouthernRhodesia's industrial sector. By the end of 1956,the countries that are now known as Zimbabwe,Zambia, and Malawi,had adopteda common externaltariff with moderateduty rates (TableI.2) and formeda true commonmarket. The Federationprovided Southern Rhodesia with the opportunity to displacethe Republicof South Africa as Zambia'sand Malawi's main supplierof industrialgoods. Whereasprior to 1953 both the Republic of South Africaand SouthernRhodesia had been able to export duty-freeto NorthernRhodesia and Nyasaland,now only SouthernRhodesia could do so. Behinda uniformtariff wall, SouthernRhodesian goods becamemore attractive to NorthernRhodesia and Nyasalandbuyers relative to South African goods.

Table I.2: ZIMBABWE- COMMONEXTERNAL TARIFF OF THE FEDERATIONOF RHODESIAAND NYASALAND

Rates on Revenue Protected Schedule Trading Partners inputs items items

D UK, Colonies, S. Africa, before 1960 0% 5%-1O% 1O%-20%

C Other Common- wealth, S. Africa after 1960 0% O%-20% 1O%-20%

B Most Favored Nations 5% 20%-25% 20%-35%

A All Others 10% up to 40% 20%-35%

Source: Jansen, op. cit., p. 23.

1.03 For SouthernRhodesia, the creationof the Federationdoubled its domestic market. Although the country accounted for only about a third of the Federation'spopulation, its GDP was equal to that of the two other countriescombined. More importantly,Southern Rhodesia's manufacturing sectorproduced nearly four-fifths of the Federaltotal, placing it in an enviableposition to becomethe Federation'smain industrialcenter. SouthernRhodesian manufacturers, anticipating a growingdemand, invested about one-third of their output in 1956-60 and movedthe sector into a position of excess capacity by the late 1950s. -5-

Table I.3: ZIMBABWE- SELECTEDECONOMIC INDICATORS 1954-1965

1954 1957 1960 1963 1965

ManufacturingGross Output as X of GDP 14.6 15.0 16.0 17.2 18.8

Investmentas x of GDP 27.8 33.9 23.9 14.7 13.2

Investmentin Manufacturing as % of GDP 3.1 5.0 4.1 2.8 2.0

Investmentin Manufacturing as X of Manuf. Gross Output 21.1 33.2 25.7 16.2 10.4

Source: Jansen,op. cit., Vol II, p. 27, missionestimates.

1.04 Economicactivity during the first six years of Federallife was brisk. Between1954 and 1960, the Federation'sGDP grew at an annualrate of about 6%, while SouthernRhodesia's grew at about 7.2%. The manufacturingsector, taking advantageof its enviableposition, grew at about 11% per year.3 / Duringthe period,manufacture's share of GDP rose from 15% to 16%, as Table I.3 shows.

1.05 By the end of the Federationin 1963, SouthernRhodesia's economy had becomean extremelyopen one, with importsand exportsbeing equivalent to about one-thirdand one-halfof GDP, respectively.The manufacturing sector,in particular,was exportingnearly two-fifthsof its production (equivalentto about one-thirdof all exports).4 /

UnilateralDeclaration of Independence,1965-1980.

1.06 On November11, 1965 the Smith Governmentunilaterally declared Rhodesiaindependent of the UnitedKingdom. In retaliation,Britain (i) excludedRhodesia from the sterlingarea and frozeall Rhodesianassets; (ii) prohibitedall capitaltransactions between the United Kingdomand Rhodesia;(iii) placedan embargoon all trade with Rhodesia(except goods considerednecessary for "humanitarian"purposes); and (iv) terminatedall officialaid.

3/ Jansen,op. cit., p. 26.

4/ IBRD, "Zimbabwe: CountryEconomic Memorandum, Performance, Policies and Prospects",Report No. 5458-ZIM,Table 3.08, p.107. - 6 -

1.07 A majorityof UnitedNations members joined Britainin these sanctions. Participatingcountries accounted for about two-thirdsof Rhodesia'sforeign trade and includedZambia, at the time Rhodesia'sbest customer. There were, however,some notableexceptions: The Republicof South Africa,Portugal (that then includedRhodesia's neighbor, Mozambique),Malawi, and Switzerland.

1.08 Rhodesiawas not totallycut off from world trade,but the sanctions took their toll. In the first year of sanctionsthe volumeof both imports and exports declined by 36x; it was not until 1973 that real exports regained their 1965 level. Moreover,Rhodesia had to import at a premiumand sell at a discount. The countrieswilling to tradewith the outcastwere willing to do so only at a price: between 1965 and 1966, Rhodesia'sterms of tradefell by 18%.5/

EconomicPolicies and Performanceduring Sanctions

Policies

1.09 Informationconcerning both economicperformance and policies duringUDI is extremelyscarce. The sparse informationavailable conveys the impressionof a tightlyrun economywith stable prices,high savings and investmentrates, positive real interestrates, and a slowlydeprecia- ting currencyin real terms. There was also a great deal of Government intervention,with close cooperationfrom the privatesector. Sanctions forced the Smith Governmentto take severaleconomic measures that still exert profoundinfluence on Zimbabwe'seconomic life. To deal with the foreignexchange shortfall, the SmithGovernment introduced a systemof importquotas and administrativeallocation of foreignexchange that remainsin place to this day. In particular,the Governmentbegan to allocateforeign exchange to each firm on the basis of what it estimated would be the total foreignexchange available to the country. Based on this global estimateand on each firm's importsduring the base year (1965),the Ministryof Trade and Commercethen allocatedforeign exchange to each coomercialand industrialimporter. Manufacturingfirms (indeed all importers)could then purchaseforeign inputs either by receivingan allocation,or by obtainingthe inputsfrom an importerwho had receivedan allocation.

1.10 This measureby itselfprovided manufacturing with a comfortable umbrellaof protection,as importsthat competedwith domesticproduction were effectivelybarred. Eventually,the Governmentwent even furtherand placedcontrols on investmentin order to preventthe duplicationof facilitiesand ensure that whatevernew projectswere undertakenwould either be fully fundedfrom externalsources, or would not place a drain on

5/ Jansen, op. cit., p. 36. -7-

CentralBank internationalreserves. Thus, only projectsthat either(i) did not use foreignexchange, or (ii) substitutedfor importe (or generated exports)were approvedby Government. Projectswhich requiredimported capitalequipment but whose final outputwas solelyfor the domesticmarket would ordinarilybe turneddown. The foreignexchange allocation system coupledwith the investmentcontrol system protectedRhodesian firms from both outsideand domesticcompetition.

1.11 Althoughthe documentationconcerning the exact natureof the economicpolicies pursued is not available,economic indicators show that duringthe first seven years of UDI priceswere L'orestable in Rhodesia than in the industrializedcountries, and that domesticinterest rates, adjustedfor exchangerates variations,were higher than in the industrial- ized countries(Table 1.4). Real yields on Governmentbonds, for example, were higher in Rhodesiaduring this period than real yields on 3-year Treasurybills in the UnitedStates. Althoughthe capitalaccount was tightlycontrolled and interestrate arbitragewould not have been possible,during the first half of UDI there was no economicincentive to place money outsideRhodesia. This may accountfor the high degreeof fi- nancialdeepening present at the time of Independence.

Table I.4: ZIMBABWE- INFLATIONAND INTERESTRATES, 1966-1979 (Percentages)

Item 1966-73 1974-79

AnnualizedInflation Rate 2.0 10.0 InternationalInflation Rate a/ 5.6 10.7 RhodesiaGovernment Bond Yield 6.4 6.5 DomesticReal InterestRate 4.3 -3.2 Z$ Equivalentof EurodollarRate b/ 5.7 11.8 a/ Annualincrease in ManufacturingUnit Value Index. b/ Eurodollarrate adjustedfor exchangerate movements. Yield shows what Rhodesianinvestors would have receivedin Z$.

1.12 Internalprice stabilityhelped Rhodesia improve its competitiveness vis-a-visthe outsideworld: in 1964-73,the real exchangerate de- preciatedabout 9Z with respectto a basketof currenciesof what were to become its main tradingpartners in 1982, improvingRhodesia's competitive position(Figure No. I.1). This real depreciationwas solelydue to the lower Rhodesianinflation rate as the nominalcross rates were virtually unciiangedduring the period. -8-

Figure I.1

Zimbabwe: Real Exchange Rate, 1965-73 (194100)

98 -7T >------t

97 -4 -+''-

3 ------1 " ~~~~~~~~, .. __------,,,1

I~ ~ ~~ ~~ ~ ~~ I i ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~

, II \ I

190 partnr1966 in19671982= 1968 1909 1970 1971 1972 1973

Based on a basketof currenciesof Zimbabwe'smain trading partners in 1982.

Performance

1.13 Economic performance during UDI falls into three distinct periods. During the first year,economic activity faltered as the economy reeledunder sanctions. The next sevenyears were characterizedby a sus- tainedrecovery during which Rhodesiaattained the fastestgrowth rates in any sevenyear periodin ita history,doubling its industrialoutput (as measuredby value added)and essentiallyconstructing the productivecapacity now in place. The last five years of UDI witnesseda deteriorationin externalconditions and in economicpolicies-the latterbrought about mainlyby excessivelyslow responseto the changein externalcircum- stances. Manufacturingproduction contracted from 1974 to 1979 and only exceededits 1974 output levelafter Independence.

1.14 Exportsdeclined by about one-fifthduring the first five years of sanctions. Manufactures and agriculture took the brunt of the impact, as metals and minerals actually increased 7% per annum during this period, - 9 -

(TableI.5). Sanctionsnot only disruptedtrade in manufacturedgoods, but they also forceda changein the sector'sexport orientation. From 1953 to 1965 the share of exportswith' respect to total manufacturingoutput had risen from 16% to 21% and the share of manufacturedexports in total exports had gone up from 19% to 25%.6/ With sanctions,Zambia, a major industrial-goodsclient, reduced its importsfrom Rhodesiaby one-thirdin the firstyear of sanctions. With trade restrictedto South Africa, Switzerland,Portugal (including Mozambique), and Malawi,industrial exportsfell in absoluteterms almost 25% (in currentprices) in 1966.

Table I.5: ZIMBABWE- EFFECTSOF SANCTIONSON EXPORTS

Annualized Exports i.n1970 GrowthRates as % of Exportsin 1965 Item 1965-1970

Agriculture -0.9 95 Metals/Minerals 7.0 140 Manufactures -9.2 62

TOTAL EXPORTS -3.9 82

Source: CentralStatistical Office, Statement of ExternalTrade, variousissues; mission estimates.

1.15 Initially,the fall in export earningsand the adversechange in the terms of tradehampered economic performance and GDP declined4.6% in 1966. But the economyrebounded in 1967 and for the next sevenyears real annualGDP growthaveraged 8.9% and never fell below 4%.7/ Although foreignsavings virtually vanished, national savings more than made up for the shortfall,increasing from 7.5% of GDP in 1965 to 19.4%in 1970 and to 24.2%in 1975. Practicallyall of the additionalsavings came out of privateconsumption, which fell from 78.1%of GDP in 1965 to 66.9% in 1970 and to 60.7% in 1975,while Governmentconsumption's share of GDP remained stable (Table1.6). The investmentrate also rose from 15.5%of GDP in 1965 to 20.6%in 1970 an6 29.1% in 1975. This high investmentrate partiallyexplains GDP's fast growth rate duringthe first seven years of sanctions.The manufacturingsector, executing a programof import substitutionbehind a protectivebarrier that it had never enjoyedeither duringWorld War II or the Federalperiod, grew at an annualrate of nearly 8%. The impactof the sudden contractionof the externalmarket was more

6/ This definitionof "industrialexports" does not coincidewith the definition used later in this report and hence shares are not comparable to present day shares.

7/ Jansen, op. cit., p. 40. - 10 -

than offset by the expansion of the domestic market stemming from the strict rationing of imports. Manufacturing industries were able to main- tain a high rate of growth by switching from export to domestic sales. The need to supply nearly all of domestic demand also stimulated innovation and diversification of manufacturing production.

Table I.6: ZIMBABWE - EXPENDITURE ON GDP, 1963-1975,SELECTED YEARS (Percentages)

Statistical Discrepancy 1963 1965 1970 1975

Gross Domestic Product 100.0 100.0 100.0 100.0

Resource Gap -2.6 4.7 -0.8 2.6 Imports (G+NFS) -35.4 -37.1 -29.2 -32.2 Exports (G+NFS) 38.0 32.4 30.0 29.6 Statistical Discrepancy -5.4 -12.1 -0.7 -1.4

Total Expenditures 92.0 104.7 99.2 102.6

Consumption 78.9 89.2 78.6 73.5 Gove.rnment 12.8 11.1 11.7 12.8 Private 66.1 78.1 66.9 60.7

Investment 13.1 15.5 20.6 29.1 Fixed 13.9 13.3 16.2 23.4 Change in Stocks -0.8 2.1 4.4 5.7

Domestic Savings 15.7 10.8 21.4 26.5 Net Factor Income -4.5 -3.3 -1.9 -2.3 Current Transfers 0.0 0.0 0.0 0.0 National Savings 11.2 7.5 19.4 24.2

Financing for Investment 13.1 15.5 20.6 29.1 National Savings 11.2 7.5 19.4 24.2 Foreign Savings 2.0 8.0 1.1 4.9

Source: IMF, 1984 IFS Yearbook, p. 680; mission estimates.

1.16 The world recession of 1974-75, the rise in oil prices of the early 1970s, and the intensificationof the War of Liberation in Rhodesia brought the boom to an end. In 1974 the terms of trade deteriorated by 4% and they continued to deteriorate in each of the next five years, giving Rhodesia a cumulative adverse shift of 36% during 1974-79. Manufacturing output declined 6% in 1976 as a result of the need to reduce foreign exchange allocations to manufacturing in order to meet higher energy imports in 1975. Construction fell in 1976 as many private sector projects were - 11 -

Figure I.2

Zimbabwe: Real Exchange Rate, 1973-79

91 00 ~~ ~ ~ ~ ~ 110

8 ------

82 t t Figure-1- t-- -.. __ ---- t -r1---*4\---.' ---- -. ~ so-t------

cancelled.77 -, The- dontr __ con-tine in 197 and 198- Weak demnd coule 1973 1074 1975 MO7 1977 1978 1979 witacut-e shorage of esetia imore maeil See note to Figure I.1 ra nd ciey cancelled. The downturn continued in 1977 and 1978. Weak demand, coupled with acute shortages of essential imported raw materials and machinery, owing to reduced foreign exchange allocations, caused manufacturing output to decline 13.6% between 1975 and 1978. The share of fixed investment in GDP fell from 23% in 1975 to 15% in 1979; investment in manufacturing, relative to manufacturing output, fell from 26% to 8%. As a result of all of these factors, manufacturing value added in 1975-1980 grew at an anemic 1.9% per year; manufacturing employment grew only 0.4%, as discussed in Chapter II.

1.17 Real interest rates turned negative, as inflation increased during this period to (10% per year) while nominal interest rates remained stable. To be sure, Rhodesia was not alone--real interest rates were also negative in the United States. But, unlike the first half of UDI, interest rate arbitrage became economically attractive, as Eurodollar yields (denominated in Z$) surpassed yields on Rhodesia Government bonds. The difference in yields stemmed not from difference in interest rates, but from the nominal depreciation of the Zimbabwe dollar with respect to the US dollar. The Smith Government continued with stable domestic interest rates while depreciating the currency, allowing inconsistencies to creep into its macroeconomic policies. Thus, while interest rate policies stimulated - 12 -

capitalflight, the real exchangerate continuedto depreciate.Towards the end of UDI, the Zimbabweandollar was about 20% lower in real terms than in 1964 (FigureI.2).

Sourcesof ManufacturingSector Growth 1965-1979

1.18 Given the effectof sanctionson manufacturedexports and the effectof the foreignexchange allocation system on the supply of imported manufactures, domestic demand provided the main growth impetus to the manufacturing sectorduring UDI. Importsubstitution played a secondarybut importantrole, and export expansionplayed a negligiblerole. Indeedin some cases there was export contraction,as Table I.7 shows.

Table No. I.7: ZIMBABWFE- SOURCESOF INDUSTRIALGROWTH, 1965-79 (Percentages)

Export Import Demand Subsectors Expansion Substitution Expansion

Beer Wine & Spirits -2.8 1.2 101.6 Fertilizers -1.5 23.4 78.1 RubberProducts 1.2 19.6 79.2 PlasticProducts 0.0 51.4 48.6 Ferro Alloys & Iron Products 35.9 14.3 49.8 Textiles 4.7 26.8 68.5 Clothing& Footwear 7.3 8.0 84.7 Paper,Printing & Publishing -1.4 19.6 81.8 Non-metalMin. Products -0.5 3.6 96.9 Wood & Furniture 4.4 14.9 80.8

Source: CentralStatistical Office, Statement of ExternalTrade and QuarterlyDigest of Statistics,various issues; mission estimates.

1.19 The effect of sanctionson the structureof the manufacturing sectorwas surprisinglysmall. UDI stimulatedincreasing variety of productionwithin the major subsectors,but relativelylittle shift in their shares of total production,as shown in Table I.8. It is importantto note that the manufacturingsector was not born under sanctions,and that, by the mid-1960s,there alreadywas significantproduction of intermediateand capitalgoods as well as of consumergoods. The doublingof manufacturing productionthat took place between1965 and 1974 came on top of an already developedsector. This means that the expansionthat took placeunder UDI was superimposedon an export-oriented--probablyefficient--sector that had been born under a moderateumbrella of protection.The originsof the Zimbabweanindustrial sector, then differfrom those of many less-developed countrieswhere industrialsectors were born as a resultof protection. - 13 -

Table 1.8: ZIMBABWE- SUBSECTORALSTRUCTURE OF PRODUCTION, 1967, 1975, 1979, 1982 (Percentage of total gross output)

Subsectors 1967 1975 1979 1982

Foodstuffs 24.6 19.7 23.5 25.0 Drinks & tobacco 9.4 7.0 7.5 7.4 Textiles & ginning 9.2 10.4 11.2 9.4 Clothing & footwear 8.5 6.8 6.1 6.7 Wood & furniture 3.7 2.8 3.1 3.2 Paper, printing, etc. 5.8 5.7 4.7 5.2 Chemicals, petroleum 13.3 14.0 13.3 14.8 Non-metallic mineral products 3.1 3.7 2.6 3.0 Metals & products 14.5 22.1 21.5 18.1 Electrical machinery 4.1 3.0 2.7 3.0 Transport equipment 2.8 3.9 2.7 3.1 Other 1.0 1.0 1.2 1.2

Total manufacturing 100.0 100.0 100.0 100.0

Volume of Production (1964-100) n.a 201.9 192.2

Note: Totals may not add up due to rounding.

Source: IBRD, Zimbabwe: Country Economic Memorandum, op. cit., Table 8. 7,(current3 prices)

Independence to the Present

1.20 The first two years of Independence brought unprecedented rates cf economic growth to Zimbabwe. GDP, which in 1979 was 12% below the 1974 level, grew 16% in 1980 and in 1981, recouping all that had been lost between 1975 and 1979 and adding some 17% to boot. This boom was the result of several factors. First, in 1980 the terms of trade turned 24% in Zimbabwe's favor, for a windfall gain equivalent to about 6% of GDP. Second, aggregate demand rose as investment soared and consumption expanded rapidly. At the same time, the Government relaxed the foreign exchange constraint on capital and intermediate goods imports, allowing the manufacturing and services sectors (including construction) to meet the increased demand and grow about 15% (Table 1.9). In 1981 good weather, coupled with higher prices for agricultural goods produced bumper crops and the terms of trade improved again, this time by some 11%. Investment continued to soar and consumption to grow fast. All this bonanza was accompanied by still higher allocations of foreign exchange, which went from Z$530 million in 1979 to Z$868 million in 1981 (or US$780 and US$1260, respectively). The manufacturing sector expanded nearly 10%. Imports rose but without a corresponding increase in exports, leading to a deficit in the current - 14 -

account of the balanceof paymentsequivalent to about 12X of GDP in 1981. Inflation,fueled by high CentralGovernment deficits (on the order of 10% of GDP), rose to 132 in 1981, contributingto a 10% real appreciationof the Zimbabwedollar. The manufacturingsector, then, was confrontedduring the first two years after Independencewith fast-growingdomestic demand and with a slowlyeroding competitive position vis-a-vis the outsideworld --a fatal combinationfor exportsthat resultedin an actualdecline of manufacturedexports of 29% in the two years.

Table 1.9: ZIMBABWE- GROWTH RATES OF THE MAIN PRODUCTIVESECTORS AND DEMANDCOMPONENTS, 1980-84 (Percentages)

Item 1980 1981 1982 1983 1984

Agriculture& Forestry 3.2 8.3 1.2 -6.4 12.8 Mining & Quarrying -2.4 -4.9 4.8 -0.4 4.2 Manufacturing 15.1 9.9 -0.5 -2.9 -4.8 Other Sectors 14.7 18.8 -0.7 -3.3 0.3

Consumption 15.1 12.0 3.1 8.0 n.a. Investment 45.7 75.0 17.6 -43.1 n.a. of which: Fixed CapitalFormation (19.2) (36.9) (7.9) (-16.8) n.a. GDP at ConstantMarket Prices 15.6 15.7 -0.6 1.7 0.6

Memorandum Items: Terms of Trade Index (1980-100) 100.n 111.2 108.3 104.2 106.1 Gross Domestic Income Growth Rate 22.4 18.3 -1.3 1.0 0.8

Source:Central Statistical Office, Quarterly Digest of Statistics, March 1985; missionestimates.

1.21 In 1982 the terms of the trade turnedagainst Zimbabwe (some 3%) and exportearnings, measured in US dollars,declined some 5%. The balance of paymentscurrent account deficit was again equivalentto 15% of GDP, and the CentralGovernment deficit was nearly one-tenthof GDP. It becameevident that a stabilizationprogram was necessary. Domesticdemand was curbedthrough tax increases,cuts in Governmentexpenditure, tight controlover domesticcredit, and a generalwage freeze. The demand contractionwas keenly felt as manufacturingfell 0.5% and GDP 0.6%. In addition,Zimbabwe suffered from one of the worst droughtson recordand agriculturalvalue added fell by 6% in 1983.

1.22 From 1979 to 1982,domestic demand continuedto be the main source of growth for manufacturing(Table I.10). Followingthe suspension of sanctions,manufacturing became, surprisingly, even more inward- looking. The iron end metal productssubsector, for example,for which ex- - 15 -

ports had been an importantsource of growth duringUDI, cut down its exports; other subsectorsshowed remarkably little change, almost as if sanctions had been still in effect.

Table 1.10: ZIMBABWE- SOURCESOF INDUSTKLiALGROWTH, 1979-82

Export Import Demand Subsectors Expansion Substitution Expansion

Beer, Wine & Spirits 0.0 1.4 98.6 Fertilizers -0.1 2.9 97.2 Rubber Products 0.0 17.3 82.7 PlasticProducts 0.0 31.4 68.6 Ferro Alloys & Iron Products 0.1 0.6 99.2 Pulp & Paper -1.6 13.6 88.0 Textiles -4.5 7.4 97.1 Clothing& Footwear -4.8 -5.6 110.3 Paper, Printing& Publishing 0.5 -3.0 102.4 Non-metal,Min. Prod. 3.7 11.6 84.7 Wood & Furniture 6.2 2.4 91.5

Sources: CentralStatistical Office, Statement of Externalrrade and QuarterlyDigest of Statistics,various issues; mission estimates.

1.23 In retrospect,this growth patternis understandable.Zimbabwe's manufacturingsector had been wor Lng close to full capacityat leastsince Independenceand, as will be discussedin ChapterIII, pricesfor domestic sales are much higher than for exports. The real appreciationof the Zimbabwedollar during the first two years afterIndependence made exports less profitable;the severe cuts in foreignexchange allocations restricted access to inputs. Faced with growingdomestic demand, higher profits in the domesticmarket than in exports,a virtualmonopoly in the domestic market,near full capacityutilization (estimated at about 80% by both UNIDO and D. Jansen),and a more bindingforeign exchange constraint, Zimbabweanmanufacturers turned to the domesticmarket ratherthan to a highly competitive,riskier, and less profitableexport market.

1.24 After the crunchof 1982, the authoritiesbegan to adopt expenditure-switchingalong with expenditure-reducingmeasures. First,they devalued the Zimbabweandollar 20% in December1982 and followedwith other devaluationsthat togetherbrought the real value of the dollar down some 11% in real terms in 1983. Second,they extendedexport credit terms for industrialproducts from three to six months. Finally,they establishedan export revolvingfund for importsof raw materialsand other inputsused in the productionof exports,effectively removing the foreignexchange constraint in exportactivities in the manufacturingsector. To reducethe deficit in the currentaccount of the balanceof payments,the authorities reducedforeign exchange allocations even furtherto US$680million (equivalent to a 30% decline in real terms). Ms a result, although manufacturing outputdeclined about 2.5% in 1983, anufacturedexports increased almost 11% and an astounding26% in 1984,as Table I.11 shows. - 16 -

Table I.11: ZIMBABWE:REAL GROWTH RATES OF EXPORTS, 1980-84 (Percentages)

1984 Item 1980 1981 1982 1983 (preliminary)

Exports of Goods -3.3 -4.8 14.1 -4.4 6.1

Manufactured Exports 14.2 -16.0 -22.0 10.9 25.8 of which: .ron & Steel (15.3) (-39.2) (-1.2) (27.4) (-23.6) : Otiier Manu. (13.4) (2.4) (-31.8) (0.3) (68.9)

Source: Central Statistical Office, Statement of External Trade, various issues; missionestimates.

1.25 Several conclusions may be drawn from the post-Independence experience. First, it is evident that sanctions were not a binding constraint on manufactured exports. The latter rose some 14% in real terms in the first year after sanctions were lifted, but fell some 16% the following year and some 22% the year after. Some of the fall may be attributed to a decline in steel exports owing to technical problems at ZISCO, but in 1982 the decline stemmed from cuts in foreign exchange allocations that resulted in shortages of imported inputs. The shortage of foreign exchange, then, was more binding than sanctions. When in 1983 the foreign exchange constraint was removed from export activities, exports boomed. Second, depressed domestic demand favored exports. As will be discussed in Chapter III, domestic prices are substantially higher than export prices so that if exports entail diverting production from the domestic market, exporting has a high opportunity cost for the firm. But with domestic demand depressed, manufacturers were able to shift production away from the domestic market towards exports with ease and little, if any, opportunity cost. If domestic demand were to pick up, exports would probably fall again. Third, installed capacity could soon become a constraint on exports. In 1981 capacity utilization was at an all-time high, with about one-quarter of subsectors working at over 90% capacity and about one-half working at over 80%. Again, were domestic demand to pick up, installed capacity would soon become a constraint. To sustain an export drive over a period of more than a couple of years, additional capacity would be needed. To make exports more attractive, their price, relative to domestic prices, nmst increase; in fact, the absolute as well as relative price of exports (in Zimbabwe dollars) must increase. Fiiially, management in the industrial sector responds quickly to incentives, as attested by their reaction to the establishment of the export revolving fund. With proper incentives, it would probably establish manufacturing among the leading exporting sectors once again. The next three chapters will explore these themes in more detail. - 17 -

II. PRESENTSTRUCTURE OF THE NAWACTURING SECCR

Size of Manufacturing Sector1/

2.01 The relative importance of Zimbabwe's manufacturing sector stands out in the African context. Manufacturing contributes about a quarter of value added to GDP (roughly three times the average for developing Afri- ca), it is the third most important source of employment in the economy, and accounts for about 17% of total export revenues. These features, together with its diversity and potential role in exports, give it a major role to play in Zimbabwe's on-going economic recovery and future development. Table II.1 gives some selected economic indicators of manufacturing's importance and past performance.

Table II.1: ZIMBABWE - SELECTED ECONOMIC INDICATORS, 1970-84

1984 1985 Indicator 1970 1975 1980 estimate

Manufacturing GDP (millions 1980 Z$) 513 729 802 811 847

Share in total GDP (%) 21.0 23.5 24.9 22.8 22.9

Employment (thousand) 115 156 159 167 169

Wage share of value added 53 54 55 63a/ n.a. (percentage)

Average annual growth rates (x): 1970-75 1975-80 1980-85

Manufacturing GDP 7.3 1.9 1.1

Employment 6.3 0.4 1.2 a/ 1982 figure.

Source: IBRD, Zimbabwe: Country Economic Memorandum, op. cit., Tables 1.02, 2.02, and Republic of Zimbabwe, First Five Year National evelopment Plan, 1986-1990, April 1986, mimeo, Vol. 1, pp. 13 and 19; mission estimates.

Structure of Production by Subsector

2.02 At present, three subsectors--foodstuffs,chemicals, and metal products--account for over half of the sector's total value of production. Metal products, in particular, dominates in terms of number of firms, net output, employment, exports, and capital stock, as shown in Table II.2.

1/ The discussion refers to recorded manufacturing enterprises, which excludes a substantial number of artisanal, informal and home manufacturing activities - 18 -

Table II.2: ZIMBABWE- DISTRIBUTIONOF MANUFACTURINGUNITS, OUTPUT,EXPORTS, EMPLOYEES, AND CAPITAL STOCK (Percentage)

No. of Net Capital Subsectors units output Exports Employees stock

Foodstuffs 11.1 15.9 7.4 14.9 15.3 Drinks& tobacco 3.9 10.9 0.9 7.5 9.1 Textiles& ginning 4.9 8.6 20.9 11.8 9.7 Clothing& footwear 10.9 8.9 3.9 12.4 3.2 Wood & furnicure 7.2 3.9 3.3 7.3 2.2 Paper,printing, etc. 8.4 6.7 0.9 5.4 5.0 Chemicals,petroleum 9.2 12.7 5.4 7.3 13.5 Non-meta'llicmineral products 4.3 4.5 0.6 4.4 6.5 Metals & products 29.9 23.3 53.1 24.0 32.4 Transportequipment 3.4 2.9 1.3 3.0 2.3 Other 6.9 1.5 2.4 1.9 0.8

Total manufacturing 100.0 100.0 100.0 100.0 100.0

Source:IBRD, Zimbabwe:Country Economic Memorandum, op. cit., Tables, 1.02, 2.02.

2.03 Foodstuffsis the secondmost importantsubsector in every category but exports. After these two subsectors,the rankingvaries greatly accordingto the category. For example,textiles and ginningare second most importantin terms of exports,but sixth in terms of net outputand fourthin terms of capitalstock (Table1I.2). The importantpoint, however, is that Zimbabwe'sindustry is noteworthyin terms of range and diversity. Even by the mid-1960s,there was significantproduction of intermediateand capitalgoods as well as consumergoods, and no major subsector was negligiblein terms of output. UDI stimulatedincreasing variety of productionwithin these major subsectors,though relativelylittle shift in their sharesof total production,as discussedin paragraph1.20.

2.04 Table II.4 presentssome indicatorsof capitalintensity and productivity at the subsector level. The chemicals subsector has the highest capitalper worker,which is translated into the highest labor productivity (bothgross and net of purchases). Beveragesand tobacco,likewise, have relativelyhigh capitalper worker and high productivity.The non- metallicmineral products and the metals and metal productssubsectors, on the other hand, are relativelycapital-intensive, but they have averageor below-averageproductivity per worker and the lowestoutput/capital ratios. This indicatessome problemsin translatingcapital expenditures into higher efficiencyand productivity. - 19 -

Table Il.3: ZIMBABWE- STRUCTURALCHARACTERISTICS OF MANUFACTURING SUBSECTORS (ThousandZ$)

Gross Output Capital Net Output Net Output per per per per as x of as % of Subsectors Unit Worker worker worker Gross Capital Output

Foodstuffs 5186 29.9 21.7 7.5 25 35 Drinke& tobacco 4336 17.4 25.8 10.3 59 40 Textiles& ginning 4514 14.5 17.5 5.2 36 30 Clothing& footwear 1427 9.7 5.5 5.1 53 93 Wood & furniture 959 7.3 6.5 3.8 52 59 Paper,printing, etc. 1434 17.3 20.0 8.9 52 44 Chemicals,petroleum 3137 30.5 39.2 12.3 40 31 Non-metallicmineral products 1627 12.1 31.1 7.3 60 23 Metals & products 1567 15.1 28.9 6.9 46 24 Transportequipment 2040 17.9 16.4 7.0 39 42 Other 396 10.9 9.0 5.5 51 61

Total manufacturing 2235 17.3 21.3 7.1 41 33

Source: UNIDO,Study of the ManufacturingSector in Zimbabwe,1985. Tables2.6 and 2.7.

FinancialCharacteristics

2.05 The strengthof the balancesheet is anotheroutstanding charac- teristicof Zimbabwe'smanufacturing firms. Zimbabwehas a stock exchange presentlylisting fifty-two companies, accounting for about one-halfof sales in the manufacturingsector in 1981. The missionanalyzed the performanceand financialcharacteristics of these 52 companieson the basis of their publishedbalance sheets and income statements. These firms showedunusually strong balance sheets, with averageleverage of only 0.73 for the six year period 1980-1985. Most of the debt was short-term,as in- dicatedby the low long-termleverage ratio of 0.17 and a currentratio 2 / of 1.4:1. These ratiossuggest that manufacturingfirms in Zimbabwedraw lightlyupon financialinstitutions and work mostlywith their own resources. The surprisinglyhigh currentratio indicatesthat most of their debt is short-term,with only about one-quarterof their total liabilitiesbeing long-term. The indebtednessof these firms rose slight.iyin 1982-84,with the slowdownof economicactivity, (leverage ratio rose to about 0.76), but declinedagain in 1985 to 0.68 with improvementin economicconditions. Table II.4)

2/ currentratio - currentassets/current liabilities. - 20 -

Table II.4: ZIMBABWE- MAINFINANCIAL INDICATORS OF THE PUBLICLYTRADED COMPANIES,1980-1984 a/

1980 1981 1982 1983 1984 1985

Pre-taxProfit as % of Sales 16.0 13.8 8.4 6.0 6.0 7.5 After-taxProfit as Z of Sales 11.1 10.1 5.2 3.8 3.7 5.4

Return on Equity 16.0 15.5 8.8 6.5 6.7 10.3 Return on Total Assets 9.5 9.0 4.9 3.7 3.8 6.1 EffectiveTax Rates 30.8 27.4 38.2 37.4 38.8 27.8 Pay-outRatios 50.9 42.7 56.8 54.6 47.8 37.9

Leverage 0.69 0.71 0.78 0.76 0.76 0.68 Long-TermLeverage 0.17 0.19 0.25 0.28 0.29 0.20 a/ Based on number of respondentfirms which variesfrom year to year. For most years, 52 publiclytrade firms were includedin the sample; for 1985 the samplewas somewhatsmaller.

Source: StatisticalAppendix Table 6; missionestimates.

2.06 An analysisof the sourcesand uses of funds conveysthe impres- sion of aptly and conservativelymanaged firms, with internallygenerated funds (profitsand depreciation)providing nearly threequarters of new resources in 1980-85, and acquisition of fixed assets absorbing one-half of these new resources. An interestingpoint is that dividendsand taxes were almostexactly matched (18X each),indicating that the fisc and the shareholdersclaimed an equal share of the funds generatedduring this period.

Table II.5: ZIMBABWE- SOURCESAND USES OF FUNDS OF FIFTY-TWO PUBLICLYTRADED COMPANIES,1980-1985 (Percentages)

Sources:

Profits 56.2 Depreciation/Non-cashItems 19.9 Net Increasein Long-TermDebt 10.7 Increasein Share Capital 7.5 Other Sources 5.7

Uses:

Net Acquisitionof Fixed Assets 49.0 Dividends 18.0 Taxes 18.5 Other Uses 14.5

Sources: StatisticalAppendix Table 6, missionestimates. - 21 -

Ownershipand GeographicalLocation

2.07 Ownership. Privateand unincorporatedenterprises account for 86% of recordedmanufacturing turnover, with parastatalsin foodstuffsand textilesaccounting for 10% and public firms under the Industrial Development Corporation for 4% (mainlyin metals).3/ The predominanceof private ownershipis a positivefeature of Zimbabwe'smanufacturing sector in terms of abilityto respondto competitivepressures and incentives.

2.08 Estimates of the extent of foreign ownership in the manufacturing sector vary widely according to the definition of foreignownership used and according to the different extrapolationsfrom samplesurveys to the sector as a whole. Legally,any firm with more than 15% equity in foreign hands is foreign-owned.This definitionmay give rise to the widelyheld belief that about 80. of the industrialfirms are foreignowned. The Con- federationof ZimbabweanIndustry (CZI), estimates foreign ownership at somewherein between30% and 60%. Both UNIDO and Doris Jansen estimateit at between25% and 50%.

2.09 Reductionor foreigncontrol has been a policyobjective since Independence.The substantialparticipation of foreignfirms in Zimbabwe's manufacturingsector, however, could be viewedas giving it access to the technologyand marketinginformation needed to developexports and more efficientdomestic production. Both objectivescan be pursuedby retaining some foreignparticipation, but reduc.ngit to minoritycontrol.

2.10 Location. In Zimbabwe,as in many countries,industrial activity is highly concentrated.Harare (includingChitungwiza), with only 11% of the country'spopulation, accounts for 50% of manufacturingoutput and about 46% of manufacturingemployment. Bulawayo,the secondlargest city with 5% of the total population,accounts for 23% of manufacturingoutput and 28% of manufacturingemployment, and the Kwe Kwe-Redcliffindustrial complex (ZISCO'ssite) contributes7% to manufacturingoutput and 5% to overallmanufacturing employment. Togetherthese three centerscontribute 82% of total manufacturingoutput and accountfor 79% of manufacturingemployment. In the five-yearperiod 1977-1982there has been a slightin- crease in industrialconcentration in these three areas,although with a fall in the Kwe Kwe-Redcliffshare. StatisticalAppendix Table 4 provides the detailson industrialconcentration and recent trends.

ManufacturingEmployment

2.11 The manufacturingsector, the third most importantemployer after servicesand agriculture,employs the highestproportion of skilledworkers and professionalsand has contributedone-third of net employmentcreation in recentyears (TablesII.6 and II.7). This impressiveperformance took

3/ UNIDO, Study, op. cit., Table 2.11, p. 45. - 22 -

place mainly between 1965 and 1975, when manufacturing employment nearly doubled. From 1975 to 1984, manufacturing employment grew, but at snail's pace--0.4% per year. To be sure, even this sluggish rate of growth outdid that of the economy as a whole, for employment declined during these years, despite a modest upturn in 1980-84. This is particularly worrisome in view of the estimated 80,000 who leave school every year in search of a job. There is no doubt that the drought of 1981-84 was an important cause in the fall of employment--agricultural employment accounts for the total decline -- but even in the hey days of employment creation, no more than 30,000 jobs were created annually. This is well below the 80,000 annual school leavers.

Table II.6 - ZI1M4MA:PERCr DISTXBUIICNOF EwD'1 BYSCIEtWS (Percentage)

Contribution to net increase in epalcyment 1965 1970 1975 1980 1984* 1984-85

Agriculture, Forestry & Fishing 39.5 34.9 34.6 32.4 25.7 -10.5 Mining and Qarying 6.3 6.7 6.0 6.6 5.3 2.8 Maifacturing 10.7 13.4 14.9 15.8 16.1 30.0 Electricity andWater 0.7 0.7 0.7 0.7 0.7 0.6 Costruction 3.6 5.0 5.8 4.2 4.5 6.9 Public AdMmnistratimn 4.0 4.6 4.7 7.0 8.5 20.4 E&cation 3.9 3.6 3.4 4.1 8.2 19.3 OtherServices 31.2 31.2 30.1 29.2 30.9 30.2 Total (Thcusands) 747.5 853.3 1,050.2 1,009.9 1,034.0 286.5

* Basedon June 1984data.

Source: Central Statistical Office, Quarterly Digt of Statistics, March1985, Table 6.1, p. 6; ,idssion estimates.

2.12 Compared to total employment in non-educational establishments, manufacturing has a relatively larger percentage of skilled and semiskilled workers, the vast majority of which are African (see Table II.7). According to the National Manpower Survey carried out in 1981 nearly half of employment in the manufacturing sector is semi-skilled, skilled or professional. - 23 -

Table II.7: ZMAIE - SKLLAND RIaL D1S9BII= CNFMEACU3RDG EM Ir U]MaWRED WilHMUTAL ElNWDUIr DNNMLNSiWiNNSNti4U1ATIQIAL 1981 (-)

Siam of Mamufacturing Total in Nar-ekaetional In Total Nbneducationl EatablWhu.nts a/ Establtshtents

A. Profeuiaml Sdllad, Seml-d.4Ued 43.3 37.0 24.9

of wtkddh

African 78.3 74.7 26.1 Euvpean 18.9 22.2 21.3 Asian/Cblored 2.8 3.1 22.0

1. rofeuuicnal 3.6 4.6 16.9 of whidh:

African Z3.9 39.0 10.3 Europen 71.6 56.7 21.3 Asian/Colored 4.5 4.2 18.0

2. Skilled 13.4 10.9 26.4 of wich:

African 67.7 61.1 29.2 Europan 27.9 34.6 21.3 Asian/Colored 4.4 4.3 27.3

3. SemL4ciIled 26.4 21.6 26.1

African 90.5 89.0 26.5 Europenm 7.0 8.6 21.2 Asian/Colored 1.7 2.3 18.7

B. Urndlled b/ 56.7 63.0 19.2

UTAL 21.3 100.0 21.3

8/ The total for all psam repwted (includig persw reported in edzcatiaual estab1istuents) wa 862,014. Teir ddU category bredcwduen 8 foliaes: 66,826 profeminal, 105,745 skllled, 176,001senak-iUlled and 513,442 wrmkilled

b/ Racial breaikA&nfor unjiJLled mm nDt available.

Source: Mlnistry of Marwer Plwmingand Dewekponnt. NatiomalMsnQcwer &irvey 1981, pp. 167, 174 and 307. - 24 -

2.13 In the category professionals, manufacturing is more dependent on foreigners than the rest of the economy. More than 70% of the professionals in the manufacturing sector are Europeans, a higher proportion than in non-ec.sational establishments as a whole (56.7%). In addition, the percentage of non-Zimbabwean citizens among professionals in manufacturing (30.2X) is significantly higher than in non-manufacturing employment as a whole (21.9%), as Table II.8 shows. The dependence on foreigners has made the manufacturing sector more vulnerable to the large emigration flows that have taken place in Zimbabwe in the past 10 years.

TableII.8: 7JMBAE - NATI(AITY (F PROgFESSICNL3LLD AND 94-SCaILI EMPOUED: M&UFACJRNG ANDTUMAL EMWYED IN NON-EWJCNATL ESEULISHiS 1981 (Percentages)

Shareof Mmnufacturing Total in Non-educational in Total Non-educatiowal Manufacturing Establishments a/ Establishments

Professianal 8.4 12.4 16.9 of which:

Zimhabhan 63.6 72.1 14.9 alai 6.2 6.0 17.5 NkrnZimbab,*en 30.2 21.9 23.3

*killed 31.0 29.3 26.4 of which:

Zimbahoi_.n 80.9 81.2 26.3 European 3.3 3.0 29.3 Asian/Colored 15.8 15.5 26.3

Semi-Skilled 60.6 58.3 25.9 of wtiich:

Zimbah4ean 88.3 88.4 25.9 Dual 0.5 0.8 14.2 Non-Zimbabwean 11.2 10.8 26.9

Total Professional 24.9 100.0 24.9

Ziubabwean 83.9 84.3 24.8 Dulal 1.8 2.1 21.6 Non-Zimbabwean 14.2 13.6 26.0 a/ Total professional, skilled and semi-skilled was 298,391 of which 24.9%, or 74,373, werein umifacturing.

Source: Ministry of Manpeier Planning and Development,National ManpowerSurvey 1981, pp. 179, 186. - 25 -

Import Dependence

2.14 Use of domestic rather than imported inputs is an important fea- ture of the manufacturing sector. In 1982, only 25% of inputs into manufacturing were imported (Table II.9), compared to 73% in Ghana, whose (pre- viously) well-developed industrial sector also has experienced a sustained period of import scarcity.4/ Only the chemicals and the transport equipment subsectors imported over half of their inputs.

Table II.9: ZIMBABWE- BALANCEOF TRADE OF THE MANUFACTURINGSECTOR, 1982 (MillionZ$)

Exported Imported Gross Value Imported Trade Share Share of Subsectors Output Added Inputs Exports Balance of Output Inputs

Foodstuffs 788 198 14 20 6 2.6% 2.4% Drinks & Tobacco 229 136 22 2 -20 1.1% 24.0% Textiles & Ginnlnga/ 302 107 45 58 13 19.1% 23.0% Clothing & Footwear 211 111 39 11 -28 5.1% 39.0% Wood & Furniture 94 49 6 9 3 9.6% 14.0% Paper, Printing, & Publi. 163 84 19 2 -17 1.5% 24.0% Chemicals & Petroleum 395 159 123 15 -108 3.8% 52.0% Non-metallic Mineral Products 94 57 6 2 -4 1.8% 16.0% Metals & Products 639 291 143 147 5 23.0% 41.0% Transport Equipment 94 36 34 4 -31 3.7% 60.0% Other 37 19 5 7 2 17.6% 25.3%

Total Manufacturing 3,048 1,249 456 277 -179 9.1% 25.3%

Memrandum Items: Textiles Excluding Cotton Ginning 251 n.a n.a. 6 n.a. 2.4% n.a.

Totals Excluding Cotton Ginning 2,997 n.a n.a. 225 n.a. 7.5% n.a. a/ Includesginned cotton.

Source: UNIDO,Study of the MainufacturingSector in Zimbabwe,nimeo, Sept. 1985;mission estimates.

4/ IBRD, Ghana: Industrial Policy, Performance and Recovery, 1985, Report No. 5716-GH, Annex table 24. - 26 -

2.15 As might be expectedfrom the discussionin ChapterI, substantial inter-industrylinkages within manufacturingalso exist. About a quarterof the value of grossmanufacturing output represents input purchases from other manufacturingindustries, and a breakdownof theseflows into 33 industriesreveals that input-outputlinkages occur in about three- quartersof all the possiblecases. The metalsand metal productssubsector is an especiallyimportant input into all other subsectors,providing 31% of total intersectoralinputs. Manufamttrin4(as both a purchaserand a supplier)also has substantiallinkages wiLh agriculture,mining, and construction.

2.16 These linkagesenable Zimbabwe's manufacturing sector to use less foreignexchange per unit of output than manufacturingsectors in other countries,but they do not make the sector totallyindependent of imports becausethe possibilitiesfor substitutionof one input for anotherare few. For example,in the textilesector, imported inputs consistof man- made fibers,chemicals, and dyestuffs. Cotton can be used insteadof man- made fibers,but there are no domesticsubstitutes for chemicalsand dyestuffs. In the fertilizersector, imported ammonia accounts for about one-thirdof total ammoniainput (the balanceis producedlocally). Ammo- nia is essentialfor the productionof amonium nitrate and has no local substitute. Furthermore,the sectorstill relieson importedcapital equipment. A medium-termprogram to raiseexports, then, would probably increasethe sector'simport requirementsboth for inputsand to expandand replacecapital equipment.

ManufacturedExports

2.17 Manufacturedexports (SITC 5-9 minus 68 and ferro-alloys)accounted for about 17% of totalexports in 1984,as Table II.10 shows. Although iron and steel accountfor about one-quarterof total manufactured products,the range is wide and exportsaccount for about one-tenthof total sales for the sector as a whole.

Table II.10: ZIMBABWE- SHARESOF TOTAL EXPORTS (At currentprices)

1965 1970 1975 1979 1980 1984

Agriculture 41.2 34.3 44.9 37.2 32.8 41.1 Metals/minerals 19.8 37.6 30.2 30.2 31.5 26.0 Manufactures 25.3 21.6 16.9 19.2 18.3 16.8 Iron and Steel (2.9) (4.8) (2.5) (8.7) (8.4) (3.9) Other Manufactures (22.4) (16.8) (14.4) (10.5) (9.9) (12.9) Other Exports 13.7 6.5 8.0 13.4 17.4 16.1 Gold (4.2) (4.2) (6.3) (9.3) (12.7) (11.1) Migrant'seffects - - - (3.6) (4.1) (3.5) Re-exports 9.5 2.3 1.7 0.5 0.7 (1.5)

TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 minm X ===Wm-mm ==o" mum==D

Source: CentralStatistical Office, Statement of ExternalTrade, various issues;mission estimates. - 27 -

2.18 In 1965, non-metalmanufacturing contributed 221 of export revenues. Sanctions,and the incentivesystem, however, had a strong negativeeffect on manufacturedexports which declined3.5% per annum in real terms over 1965-79(Table 11.11). Given the strongpositive performanceof manufacturingoutput duringmost of this period,the declinein exportscan be attributedlargely to the increasein domestic absorption,as discussedin ChapterI.

Table I1.11: ZIMBABWE- EXPORTGROWTH RATES AT CONSTANT1980 US DOLLARS 19W5-84

Actual Sector 1965-79 1980-84

Agriculture 1.5 9.2 Metals/minerals 4.9 -4.6 Manufactures -3.5 0.6 Gold 4.0 Total a,' -04 3.o

a/ Includesmigrants' effects and re-exports.

Source: CentralStatistical Office, Statement of ExternalTrade; missionestimates.

2.19 The share of manufacturingoutput that is exportedhas fallen from about 20% at the time of UDI, to less than half that proportionnow. The declinein exportshare was particularlysharp over 1978-82. Although 1982 was an exceptionallybad year and manufacturedexports have revived since, there is cause for concernabout the abilityof Zimbabwe'smanufac- turingsector to recaptureexport markets as its productionrecovers. Manufacturedexports today are a quarterlower in real terms than in 1965. It is not, however,a questionof simplyre-entering old markets. Condi- tions have changedconsiderably, both in internationalcompetition in these productsand in neighboringmarkets. To penetratetoday's markets, Zimbabweneeds adequatepolicy environment, capital stock, and productivity.

2.20 Owing to Zimbabwe'srelatively small dependenceon importedinputs, the balanceof trade for the manufacturingsector is more favorable than for many countriesat similarstages of development.As Table I1.10 shows, in 1982-a very bad year for manufacturedexports-the sector'sexports coveredabout 60% of the sector'srecurrent input requirements.This estimateis on the high side because,in Table II.10,exports of manufactured goods includeginned cotton. Excludingginned cotton from exports and assuming that inputs would have remained at the same level, the sector would have covered about 50% of its import requirements. Industrial exports were 51% higherin 1984 than in 1982, but industrial production - 28 -

declined. This means that use of recurrentinptuts for the sectoralso declined and that the sector balanceof trade improvedconsiderably. In fact, the missionestimates that in 1984 industrialexports may have been equivalent to about 85% of the sector'simported inputs-a very high and unusual proportionfor a countryat Zimbabwe'sstage of development. The proportion, for example,was 22% for Ethiopiain 1981; 20% for Tanzaniain 1985, and 43% for Ectuadorin 1980.

Structureand Age of CapitalStock

2.21 Three subsectors--metalsand metal products,foodstuffs, and chemicalsand petrochemicalproducts--account for 61% of the total capital stock. Roughlyone third of the total capitalstock is land and buildings, and two thirds is plant, equipmentand vehicles. The capital-laborratio for the sectoras a whole is about Z$21 thousand(US$13,000) per employee. The most capitalintensive subsector per unit of labor is chemicaland petroleumproducts (Z$39,000), followed by non-metallicminerals (Z$31,000), metals and metal products(Z$28,000), and drink and tobacco(Z$29,000). The most capitalintensive per unit of value added,however, is non-metallic minerals,followed by metalsand metal products,textiles, and chemicals, all of which are above the nationalaverage of 3.01 (see Table II.12).

Table II.12: ZIMBABWE- DISTRIBUTIONOF CAPITALSTOCK ACCORDING 10 SCIUR ANDTYPE OF INVESTMENTS,1982

Capital Stock in Land & Plant & Subsector Capital- Buildings Equipment Vehicles Total (Million Output Percentages 1982 Z$) Ratios

Foodstuffs 6.7 6.7 1.8 15.3 573 2.89 Drinks & Tobacco 3.6 4.4 1.1 9.1 341 2.50 Textiles 2.8 6.6 0.2 9.7 363 3.38 Clothing& Footwear 1.1 1.8 0.3 3.2 120 1.08 Wood & Furniture 0.6 1.1 0.4 2.2 84 1.70 Paper,Print. & Publish. 1.3 3.4 0.4 5.0 189 2.25 Chemical& Pet.Prod. 3.6 9.0 1.0 13.1 507 3.19 Non-metalMineral Prod. 2.2 3.7 0.6 6.5 243 4.28 Metals& MetalProd. 7.8 23.1 1.6 32.4 1219 4.19 Transport Equipment 1.1 1.0 0.2 2.3 86 2.36 Other 0.2 0.5 0.1 0.8 31 1.63 TOTAL 31.1 61.3 7.7 100.0 3756 3.01

Source:Statistical Appendix Table 8; missionestimates. - 29 - Ligure II. 1 Zimbabwe: Age Distribution of Spinners

30P1 5

/, r,.1 / /

; 70- u',,','',/ '.- A

Fi ure 11I_ 'S 1 K' ;,' "...... ' Zimbabwe-, Age D)istributioi-i of Looms

70 - { ''A; ,v

Pro-51 60 65 70 75 S0 65 Tear of Design

I 40o

50 -5 00707008 - 30 -

2.22 The most completedata concerningti.e age of the capitalstock comes from the textilesubsector. In this sub'e tor, the vast majorityof the equipmentwas in place in 1975 and is at 1 t ten years old. Nine- tenthsof the weavingequipment dates back to 1975 and about one-quarteris of 1965 vintageor older,as Figure 11.1 shows. More investmenthas taken place in spinningequipment recently so that there are more new machinesin place. Nevertheless,nearly 70X of the spinningequipment is of 1975 vint- age or older.

2.23 In the fertilizersubsector, the main facilitiesconsist of an ammoniumnitrate plant, a nitric acid plant, two sulfuricacid plants,and one phosphoricacid plant. The ammoniumnitrate and nitricacid plants were commissionedin 1979; the rest date to 1972. In the steel subsector, there are two blast furnacesnow in operation,one built in 1961 and the other in 1975. The oxygen convertorsand the continuouscasting mills were also built in 1975. The other main facilities--thebar mill and the rods mill--areof 1975 vintageor older. In the paper subsector,the newestmachine in the sampleof respondentfirms dates back to 1952, with some dat- ing back to 1926,with modernizationshaving been undertakenin the 1980's. In the soap and detergentssubsectors machines dated to 1978 (newest) and to 1959 (oldest).

2.24 Other evidencealso points in the same direction. A survey conductedby the Confederationof ZimbabweanIndustry (CZI) indicated that the main reasonsfor wantingto replacecapital were:

1. Capitalworn out 61.5% 2. Shortageof spare parts 18.2% 3. Too costlyto operate 11.4% 4. Productivitytoo low to maintaincompetitiveness 7.1% 5. Other reasons 2.2%

InvestmentLevels

2.25 Investmentlevels peaked around 1974-75. With the intensifica- tion of the War of Liberationand the declineof economicactivity during the mid-1970s(see ChapterI), investmentin manufacturingdeclined preci- pitouslyin 1976 and continuedto declineuntil after Independencein 1980 (see Figure 11.3). In fact, total investmentin manufacturingin the years 1976-79was about equal to the investmentundertaken in 1975. The low gross investmentlevels of recentyears mean that the sector is working with equipmentthat is past its useful economiclife. In the absenceof net investmentand time series figureson the capitalstock, the mission estimatedthe capitalstock from 1970 to 1982 based on gross investment figuresand the UNIDO estimateof capitalstock in place in 1982. Economic life was assumedto be 40 years for buildings,15 years for plant and equipment,and 5 years for vehicles. The resultingestimates were subtractedfrom gross investmentfigures and the capitalstock adjusted accordingly. The resultsimply that the capitalstock in plant and equipmentwas higher in 1976 than in 1982, about the same in - 31 -

vehicles,although lower In land and buildings. It is unlikelythat the capitalwas depleted;the most likelyhypothesis is that investment in 1975-82added to existingequipment and that the manufacturingsector kept old machinesworking. Given the rationingof foreignexchange and the high transaction costs implicit In its procurement, keeping old equipment working probably makes financial sense for the firms, even if maintenance costs are high. The mission's findings at the subsectorallevel indicate that firms added new machinery,but did not discard old equipment. The three subsectorsstudied in detailhave Investedlittle since 1975. All three subsectorsare workingwith ratherold equipmentand only the textilessubsector had added modernequipment since 1975.

2.26 Investmentincreased again after Independencein 1980 and 1981, but fell duringthe followingthree years. Comparedto the 1975 peak, averageannual investment in 1980-83was down by about one-half. Although investmentdata for 1984 and 1985 was not availableat the time that the missionwas in the field, business surveys and other data indicate that investment continued low in 1984, but began to recoverin 1985. The Business OpinionSurvey of the BusinessSchool of the Universityof Zimbabweshows that the numberof firms with investmentplans in December1984 was lower than in 1981 and that the volume of investmentplanned in December1984 and June 1985 for the followingsix monthswas only one-fifthof that planned in mid-1981. Foreignexchange allocations approved by the IPC for new investmentprojects fell from Z$26 millionin 1983 to Z$14 millionin 1984, but recoveredto an estimatedZ$16 millionin 1985. Finally,net fixed asset acquisitionsof the 52 publiclytraded companies was only 10% of net fixed assets in 1984, comparedto 15% in the preceedingfour years.

2.27 There is generalagreement that the main reasonfor the low investmentlevels is the rationingof foreignexchange. Virtuallyall investmentprojects require imported capital goods and, therefore,IPC approval. In 1984, for example,the foreignexchange component of industrial projectssubmitted to IPC was some 70% of the total projectvalue. Accordingto UNIDO, for every projectapproved, four were rejected. The high rejectionrate was attributedlargely, although not exclusively,to foreignexchange shortage.

2.28 Low profitsand the ensuingpessimistic expectations also partiallyaccount for the investmentdecline. For the 52 publiclytraded companies,for example,pre-tax profits as a percentageof sales fell from 16% in 1980 to 8.4% in 1982 and to 6% in 1984. Return on equityalso fell, from 16% in 1980 to 6.7% in 1984,while returnon total assetsdropped, from 1.8% in 1980 to 0.2% in 1984. Despite these negativetrends, cash flow remainedhealthy; firms had cash surplusesin four out of the five years and high dividend-payout ratios equivalent to about 45% to 55% of net profits. Of the total investmentthat took place, 58% was financedwith internalcash generation,27% with long-termdebt, and 15% with new share capital. Consideringthat these firms were almostfree of debt and that comercial banks were liquid,higher investmentlevels could easilyand prudentlyhave been financedwith debt. Lack of investiblefunds, therefore, was probablynot a constraint. - 32 -

ZIMBABWE:Capital Stock Estimates, 1370-U

1.1 - N

I-I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 0.7-4 0 - ? N 1 i |~~~~~~~~-1

x hAfASaX Vl> hq

0.2 - irp! v,tir r< 0.1

1@N 1371 1¶72 1375 1374 1371 1976 1377 1376 1379 1360 19U1 1962 136

Erz illn= Ez ihn Vohkb

ZIMBABWE:Gross Fixed CcPital FormaflonIn Manufaturing.1 70-83 360 -~ , - - - -,. ,.,...... ,*.

340-

320 --

300--

260 - 240- * 220- c 200, A 160~*

140 -1 120- 100-

00 -

704- 11 1 1 1362 13 1970 1971 1972 1973 1974 1975 1976 1977 1979 1979 1I@0 1981 1982 19U - 33 -

2.29 The business climate, however, was bearish from 1981 to the middle of 1984. Thus, in April of 1981, 38% of the firms expected business to improve and 37% to remain stable. By December of 1981, only 15% expected an improvement; a year later, only 8%. At the time that the mission was in the field, firms were becoming more bullish, yet the external environment, particularly the situation in the Republic of South Africa, was st'll a cause for concern. As one senior Zimbabwean executive put it: "Son, you are sitting in the middle of Africa. The countries around you are falling apart. Eighty percent of your production has to go through South Africa. Why would you invest in Zimbabwe?"

2.30 Government policies wera also cause for concern. UNIDOcites Go- vernment's failure to enunciate a detailed industrial strategy, especially uncertainty about the future pattern of State involvement in the sector and about taxation levels, profit repatriations, and definitions of what will constitute foreign/local enterprises. For foreign investors, UNIDOcites two additional reasons: the country's negative image in the outside business community, and the absence of an agreement with the United States Overseas Private Investment Corporation (OPIC).

2.31 The mission's findings at the subsectoral level show a combination of these factors, each working to hold investment down in each subsector. In the fertilizer subsector for example--considered of strategic importance by the Government--investment has been held back by low profit rates. In one company, shareholders are allowed a 22.5% pre-tax return on the issued share capital. This translated into an after-tax return of 7.3% on shareholders' equity in 1984 and 7.5% in 1983; yields on Post Office Bank savings accounts were 8.5%-10% during the same period. The shareholders of this company certainly had no incentive to invest, as interest on Post Office Savings Bank accounts are tax-free. Another fertilizer comp' ky is allowed a 17.5% return on fixed and working capital, which in these two years translated into an after-tax return on shareholders equity of about 15%--a more adequate return in view of the alternative yields in the country. Of course, neither of these yields would be attractive for a foreign company because the devaluation of the Zimbabwe dollar would have brought them down to nil or even less than zero when denominated in US dollars. Both of these companies had dividend pay-out ratios of nearly 100%. In ZISCO, lack of investible funds and lack of decision about Its expansion plans have held investment down. On the other hand, shortage of foreign exchange was the principal cause cited by managers in the textile subsector as the main constraint to their investment plans.

2.32 The economic situation has improved since mid-1984 and with it the business climate. Thus, in June 1985, 64% of the firms in the Univer- sity of Zimbabwe's Business Survey were bullish and 23% expected no change. By December 1985 only 42% expected improvements, but the number of firms that expected either no change or an improvement was still 87%. To the extent that business climate has been a constraint on investment, the more optimistic outlook augurs well for the future. - 34 -

Choiceof Technology

2.33 Of the three subsectorestudied in more detailby the mission, only the textilesubsector has undertakensubstantial investments since In- dependence. The equipment purchased in this subsector in recent years has been remarkably modern and labor-saving.

2.34 The relevant technologies that can be employed in spinning and weaving can be represented in a continuum of choice between conventional and very modernequipment 5/ in the following schematic outline:

Conventional Spinning Very Modern I~~~~~~~~~~~~~~ .. I 1. Ring spinning 2. Ring spinning 3. Open-end with automated spinning material movements

Conventional Weaving Very Modern l Il I.Automaticlooms 2.Automaticlooms 3.Automaticlooms 4.Automaticlooms with mechanical with uniform with airiet with gripper weft insertion attachments weft insertion weft insertion

2.35 Almost all of Zimbabwe'srecently installed capacity in spinning and weavingfalls into category3 (i.e.,very modern). Such modermequip- ment generatesconsiderably less employmentper dollarthan does conven- tionalmachinery. Indeed,much of this equipmenthas not been widely adopted until recentlyin developedcountry textile mills despitetheir much higherwage rates (StatisticalAppendix Table 35).

2.36 Cost calculationsindicate that less modern,more laborintensive technologies would be less expensive per unit of output than the technology actually chosen, suggesting entrepreneurial mistakes in the choice of technology. Given the high degree of sophisticationand efficiencydemonstrat- ed otherwise,an entrepreneurialmistake would seem unlikely. Other expla- nationscould includeclever purchases of second-handequipment, labor laws, or foreignexchange shortage.

5/ Still a thirdcategory, preconventional technology is availablefrom some countriessuch as South Korea. This additionaldimension of choice is not consideredhere as it does not appearto be economically relevantat currentZimbabwean wage levels. - 35 -

Table II.13: ZIMBABWE- UNIT COST COMPARISONBETWEEN OPEN-END AND RING SPINNINGUNDER ALTERNATIVE WAGE RATE ASSUMPTIONSa/

Unit Costs Wage Rate: Ring Spinning Open-end

Full Market Price 100 105 One-half Market Price 100 106

a/ To emphasize relative cost, unit cost is set at 100 for ring Spinning In each case. Interest rate was assumed at 15% in both cases.

Source: Direct firm information; missionestitates.

2.37 The cost dlfferences shown in Tables 11.13 and II.14 may not have materialized in Zimbabwe as firum report having purchased much of this equipment second hand. Clever purchases of used equipment may well have resulted in sufficiently low acquisition costs which alter the results shown in these tables. It is also clear that given existing labor legislation, particularly the difficulty involved in laying off workers, that firm may be willing to pay a short-term cost premium even with new equipment in order to achieve greater cost flexibility in the long run. One un- intended result of such labor legislation is the encouragement of equipment purchases that reduce total employment opportunities in the textile sector.

Table II.14: ZIMBABWE- UNIT COST COMPARISONSBETWEEN THREE LOOM TECHNOLOGIESUNDER ALTERNATIVE WAGE RATE ASSUMPTIONSa/

Unit Cost Wage Rate: Conventional AirJet S

Full Market Price 100 110 246 One-half Market price 100 121 294

a/ Transformation cost in weaving, excluding cost of yarn.

Source: Direct firm information; mission estimates.

2.38 Another factor militating in the same direction is recurrent foreign exchange shortages. Given the perception that firum in other countries will adopt newer technologies over time, Zimbabwean firms may ration- ally try to protect themselves by buying the most modern equipment whenever they can obtain the foreign exchange. The short-term excess in average costs of production may be viewed as a premium against longer term loss of competitiveness, should unavailability of foreign exchange preclude the up- grading of equipment. - 36 -

III. POLICYEVIROhOUNT

Introduction

3.01 Zimbabwe'sindustrial policy environment dates back to UDI and consistsprincipally of three basic instruments: the foreignexchange allocationsystem and its attendantexchange rate managementsystem, the price controlsystem, and the investmentcontrol system. Taxationand labor laws also affect industrialstructure and growth,but to a lesser extent than the three controlsystems. This policyenvironment arose largelyto cope with the reductionin foreigntrade due to sanctions,but it had important,if unintendedside effects. First,it affordedindus- trial firms an unusualdegree of protection. Second,it engenderedincen- tives to direct resourcesto particularsectors in the economyand to particularsubsectors within industry. Third, it accentuatedthe natural exportdisadvantage inherent in Zimbabwe'slandlocked position by making domesticsales far more profitableand safer than exports (i.e.,it introduced an anti-exportbias). Finally,by isolatingZimbabwean managers from outsidecompetition, the environmentalso fostereda managerialorientation towardsproduction rather than marketing,and by erectingformidable barriersto entry,it tendedto protectestablished firms againstdomestic competitionto the detrimentof all newcomers,but especiallyof emerging businessmen.Although both externaland domesticconditions have changed significantly since Independence, the policy environment remains virtually intact. The critical question to be examined in this Chapter is the extent to which the system of direct controls and implicit industrial protection remains appropriate to foster growth in Zimbabwe's changed circumstances.

ForeignExchange Allocation

3.02 The three main controlsystems-foreign exchange allocation, investment,and priceswere institutedanticipating a reductionof foreign exchangeearnings and difficultaccess to imported goods as a result of sanctions. To reduce the demand for foreign exchange, the Smith Government clamped down on imports and relegated the exchange rate as an adjustment mechanismto a secondaryrole. Equilibriumin the externalaccounts was attainedthrough rationing and discretionalforeign exchange allocations rather than exchangerate adjustments.This systemhas undergonesome modificationssince Independence,but it surviveslargely intact from UDI days. In its presentform the rationingexercise begins with a six-month projectionof the balanceof paymentswithin a four-yearhorizon. Given expectedinflows of foreignexchange, the Governmentdeducts legally com- mitteduses (e.g.,external debt service,profit remittances, etc.) and sets aside enough to keep internationalreserves at an adequateinterna- tional reserveposition. It then allocates foreign exchange to priority uses (e.g.,imports of fuel, medicines,tires). The remainderis allocated to industryand commerceusing historicalshares as a basis for the firm by firm allocation. These sharesare modifiedfor new entrantsand changesin the needs of existingfirms. - 37 -

3.03 Throughthe foreignexchange allocation system the Government controlsthe use of foreignexchange almost completely,and it also heavily influencesinvestment, interest rates, and prices. Althoughafter twenty years of experiencethe bureaucraticmachine functions smoothly and the privatesector has learnedto adjust to the system'sidiosyncracies, the discretionalallocation of foreignexchange has major shortcomingsthat no degree of administrativeefficiency and entrepreneurialadaptability can overcome. These shortcomingshave to do with resourceallocations with incentivesto use resourcesefficiently, and with depressingeffects on economic growth. The systemof foreignexchange rationing allows the maintenanceof an exchangerate at which there is excessdemand for foreign exchange,without causing overt balanceof paymentsproblems, as external accountsare broughtinto balancethrough a forcedreduction of importsand not throughadjustments in the exchangerate or the level of international reserves. This means that two of the most visiblesigns of disequilibrium in the externalaccounts are not availableto the Zimbabweanauthorities.

3.04 The foreignexchange allocation system acts as a variablequota system (i.e.,the amountsof goods importedinto the countryare determined by quotas assignedby the Government). The amountof the quota is decided twice a year accordingto projectedforeign exchange availabilities and Go- vernmentpriorities. As all quota systems,it protectsexisting firms from internationalcompetitive pressures. In Zimbabwethis protectionis vir- tuallyabsolute. First,importation of goods that would competewith domesticproduction is not permitted,allowing industrial firms to operate within the domesticmarket without externalcompetitive pressures. Second, foreignexchange is deniedto entrepreneursw'shing to start new firms that would producegoods alreadyin domesticproduction, protecting established firms from domesticcompetition as well. This is one of the reasonswhy there is such a high degree of industrialconcentration in the Zimbabwean industrialsector, as discussedin paragraph3.11. The foreignexchange allocationsystem has other shortcomings,but they are so intimatelyrela- ted to the investmentand price controlsystems that the discussionof these weaknessesis betterdone for the three systemsas a whole.

ExchangeRate Level and ExchangeRate Management

3.05 Exchangerate managementin Zimbabwehas been among the best in Sub-SaharanAfrica. The authoritieshave not peggedthe exchangerate to any particularcurrency, but administera flexibleexchange rate policy with frequentadjustments in the exchangerate. As a result,vis-a-vis a basket of currenciesof Zimbabwe'smain tradingpartners, the exchangerate has depreciatedsome 26% in real terms since 1965--thelast year with relativelyfree trade in which the externalaccounts could be characterized as havingbeen in equilibrium.Despite this relativelygood managementof the exchangerate, however,the authoritiesexert virtuallycomplete controlover the allocationof foreignexchange and there are strong indicationssuggesting that there is excessdemand for foreignexchange and that discretionaryallocation is necessaryboth to limit the overalldemand of foreignexchange as well as to direct its use to priorityactivities. - 38 -

3.06 There are severalmanifestations of excessdemand. First,annual requestfor foreignexchange allocations received by the authorities exceed by a wide margin the overallsupply of foreignexchange. Second,in those yearswhen therewas an attemptto liberalizeallocations, the supply was more than exhaustedand internationalreserves declined. Thus, total allocationsincreased from Z$530 millionin 1979 (US$360million) to Z$746 million (US$479million) in 1980 and to Z$868 million (US$597million) in 1981. The entireallocations were exhausted. Importsof goods (at current prices)rose parl passu with foreignexchange allocations-by 52% in 1980 and by 26% in 1981. Net forelgnassets fell, from Z$261 millionat end- 1980 to Z$54 millionat end-1981. The currentaccount deficit of the balance of paymentswas equivalentto about 11.52of GDP in 1981. In 1982 allocationshad to be cut to Z$717 million (US$543million) and even furtherin 1983 and 1984.This requiredbelt tighteningthat brought imports (current prices)down by about one-quarterin 1983 and a further6% in 1984 (fromabout 24% of GDP in 1982 to 18% in 1984). In short,imports have been as high as allowedby the foreignexchange constraint, and higher than exports,suggesting that there is excessdemand. Finally,interviews with the managersof industrialfirms pointedto "foreignexchange shortage"as the main constraintto the expansionof outputand investment.

3.07 It is extremelydifficult to assesshow much excess demand there is becauseone of the principalshortcomings of the presentsystem is the fact that the more tellingsigns of disequilibriaare not available. For this reason,it is also difficultto estimatethe level of the exchange rate that would bring the externalaccounts into equilibrium.A useful source of comparisonin other countries-theblack or parallelmarket rate--isnot readilyvisible in Zimbabwe. There is no officiallysanction- ed parallel market and no readily apparent organized black market. Never- theless therehave been attemptsto measurethe divergencebetween the officialexchange rate and the rate in the probablythin blackmarket. A 1982 study estimated that the black market rate for importlicenses was twice the officialrate. The same study reportedthat the price of Kruger- rands--aclose substitutefor a convertiblecurrency-commanded a price 2.8 times higher than the world market price at the officialexchange rate in 1982. Anotherpublication, the World CurrencyYearbook, estimates that the black market rate for unlicensedtransfers abroad was as high as 128% and as low as 30% above the officialrate in the period 1980-83(see Table III.1). Casualconversations with businessmenindicated a 100% premiumfor the black market rate. Since the black marketrate inevitablyreflects not only scarcitypremia, but also risk and demandfor capitaloutflows, the overvaluation of the currency for current account transactions is likelyto be less than 100%. Nevertheless, on the basis of the real changes in terms of trade and historically low volume growth in exportsa significant depreciationof the real exchangerate--of at least 20%-- would probablybe necessary for the achievement of long-run equilibrium on the current account with the prevailing tariff schedule, assuming the Governmaent is successful in maintaining positive net inflows on the capital account over the next decade. - 39 -

Table III.1: ZIMBABWE- EXCHANGERATE PREMIUM,1980-83

1980 1981 1982 1983

OfficialRate (US$/Z$) 1.57 1.39 1.09 0.95 BlackMarket Rate (US$/Z$) 0.94 0.84 0.80 0.42 Black Market Rate Premium (x) 67.80 65.40 30.40 128.70

Source: World CurrencyYearbook. 23rd Edition,p. 851; missionestimates.

3.08 These rates,are of course,merely indicative. The exchangerate that would be consistentwith externalequilibrium could be ascertainedby continuedadministered adjustments, or by the removalof foreignexchange rationingfor currenttransactions and adoptionof a market-determined rate. The importantpoints, however, are that there is overvaluationof the exchangerate for currenttransactions and that the degree of over- valuationis not severe by Sub-SaharanAfrican standards. As a consequence of the overvaluatinx,importers do not pay the full cost to society for the goods that they import and exporters receive a smaller amount for their exports. The Government, standing in the middle and discretionally alloca- ting the scarceforeign exchange, effectively taxes exportersand subsidizes importers. Foreignfirms also, in effect,receive subsidies when they remitprofits, as they purchaseforeign exchange for this purposeat the officialexchange rate.

InvestmentControls

3.09 In a furthereffort to save foreignexchange by avoidingthe duplicationof facilities,the Smith Governmentalso institutedstrict controls over investments.As in the case of the foreignexchange allocation system,the institutionsconceived under UDI survivesubstantially unchanged. At present,all new investmentsor expansionsinvolving foreign exchangehave to be submittedfor approvalto the InvestmentProjects Com- mittee (IPC),a committeechaired by the Ministryof Industryand Technol- ogy (MIT). Projectsrequiring more than the equivalentof Z$2.5 million (US$1.6million) in foreign loans requireadditional approval from the Ex- ternalLoans CoordinatingCommittee (ELCC). Projectswith more than 15% foreignownership require additional approval by the ForeignInvestment Committee(FIC). Investmentsrequiring no foreignexchange for either capitalequipment or recurrentinputs need not be submittedfor approval.

3.10 The IPC does not conducta thoroughfinancial or economic analysis of projects. Since its inception, its main preoccupationhas been with the effects of new projects on the country's balance of payments. Thus, to receive IPC approval a project should: (i) replaceessential imports and/or produce exports; (ii) recoup the initialforeign exchange outlay within twelve months and continue saving foreign exchange throughout its life; (iii)not producegoods alreadyin localproduction, unless it - 40 -

also producesfor the exportmarket; (iv) sell at competitiveprices and satisfactoryquality; (v) show firm export orders,preferably on a continuingbasis. Althoughthese criteriaappear unduly stringent,they are not strictlyenforced. In practice,the first two criteriaare the most important. IPC approvalis grantedto any projectthat, ex ante, is not a net user of foreignexchange in any twelve-monthperiod duringits projectedlife and that does not competewith local productionunless it also producesfor export.!/ Historically,other criteriahave weighed very little. Since Independence,the Governmenthas statedthat IPC criteriawould be modifiedto favor local investorsand emerging entrepreneurs,but at the time of the writing of this report,the new criteriahad not yet been made public. IPC, however,has allowedemerging entrepreneursto establish,on an exceptionalbasis, new firms that did not satisfythe first two criteria.

3.11 The criteriathat the projectbe a net non-userof foreign exchangeto receiveapproval has impededthe establishmentof firms that at least ex ante are set up to exploitdomestic markets exclusively without either increasingexports or substitutingimports. Zimbabwe's industrial investmentprojects have been sifted accordingto these criteriaduring the past 20 years and, as a result,there is now a high degree of industrial concentration.Half of the over 6,000 identifiableproducts produced in Zimbabweare manufacturedunder monopolyconditions and an additional30% under oligopolyconditions (three firms or fewer).2 / Over half of productionand employmentis in the 11% of firmswith more than 500 workers (TableII1.2). Establishedfirms, then, not only enjoy protectionfrom outsidecompetition, but also from actual and potentialdomestic competitors.

Table III.2: ZIMBABWE- CONCENTRATIONOF MANUFACTURINGFIRMS, EMPLOYMENTAND OUTPUT,1982

Size of Firm Accordingto Number of Employees

less than 50 51-100 101-500 501-750 750 or more Total

No. of units (%) 52.3 15.3 21.4 3.2 7.8 1,344 Employment(%) 7.8 7.9 31.4 9.5 43.4 176,223 Output (%) 8.0 8.0 31.0 12.0 41.0 100.0

Source:UNIDO, Study of the ManufacturingSector in Zimbabwe,1985, Table 2.3.

1/ Externalfinancing is consideredan inflow. Projectswith external financing,therefore, are not considerednet users of foreignexchange duringthe constructionperiod.

2/ UNIDO,Study., 2p. cit., p. 29. - 41 -

3.12 The investmentcontrol system has also contributedto low investment levels. At the beginningof UDI the investmentcontrol system was probablynot bindingbecause opportunities for substitutingimports were ample;investment in manufacturingduring 1970-74grew at 23.6% per year. Investmentbegan to declinein 1975 and, despitea modest recoveryin 1979- 81, it is still lower than duringthe mid-1970s. As discussedin Chapter II, the downturnin economicactivity after 1974 and the intensificationof the War of Liberationaffected investment negatively. But in recentyears the investmentcontrol system has also kept investmentdown, owing largely to the rationingof foreignexchange by the IPC, as noted in paragraph 2.27.

3.13 In retrospect,this high rejectionrate is not surprising.The main selectioncriteria, that the projectnot be a net user of foreignexchange,is equivalentto weightingforeign exchange with an extremelyhigh shadow price--a shadow price that is practically infinite-or completely ignoring net benefitsderived from the use of domesticresources. This is a very difficulthurdle to overcome. This can be seen in the following illustration.Take a projectwhose benefitsoverweigh its costs. Let the foreignexchange benefits and costs be denotedby B* and C*, respectively, and domesticcurrency benefits and costs by B and C. Since the project's benefitsoutweigh its costs,

(B*+B) - (C*+C)> 0

We can regroupbenefits and costs as follows:

(B*-C*)+ (B-C) > 0

Accordingto IPC criteriaif the projectis a net user of foreign exchange (i.e.,if (B*-C*)( 0) then permissionis denied. This means that no matter how large the net domesticcurrency benefits may be (i.e.,no matter how large (B-C) may be), as long as (B*-C*)- 0, the projectis not approved. This is ,equivalentto ignoringthe quantity(B-C) or giving (B*-C*)an extremelyhigh weight.

Price Controls

3.14 The price controlsystem attempts to reducethe cost of basic foodstuffsand the scarcityrents that could arise from the foreignex- changeallocation and the high degree of concentrationspawned by the investmentcontrol system. In tryingto solve these problems,price controls create other problems. First,price controlsare not equallyeffective for all types of goods. Second,because price controlsare largelyenforced on a cost-plusbasis, they allowedthe evolutionof a domesticprice structure substantiallydivergent from that prevailinginternationally. Finally, in spite of the price controls,the overallpolicy environment,including rationingof foreignexchange and investmentcontrols, allows most domestic - 42 -

prices to becomenoticeably higher than export pricesmaking the domestic market far more lucrativethan exports. In combinationwith the monopolisticstructure of the sectorand the overvaluationof the exchange rate,price and investmentcontrols together render the domestic market not only far more lucrative,but much less risky. The safer and more lucrativedomestic market resultsIn a stronganti-export bias.

3.15 Price controlsare enforcedin at least five differentways, accordingto the type of good. In some cases,the Government,sets the price of the good, in some others,the authorities,approve a pricingformula, in yet others,the authoritiesapprove mark-ups over cost. The most strict type of price controlrequires prior ministerialand Cabinetapproval and covers a handfulof basic consumergoods (bread,milk, sugar,beef, maize- meal, vegetableoils and fats, Kapentafish), threekey intermediateinputs (chemicalfertilizers, cement, and petroleumfuels), and motor vehicles (passengercars, motorcycles, and light commercialvehicles). For a second type of good there is also strict control over the actual price of the good, but only ministerial approval is required for price changes. These goods include agricultural seeds,newspapers, batteries, tires, pork and poultry products, paper and paper packing material, plastic packing bags, and glass and metal containers.A third categorycovers thosegoods for which the importer'sor localproducer's pricing formula must be approved by the Ministryof Trade and Commerce(MTC). These goods includemotor vehicleparts; agricultural tractors, implements, equipment, and chemicals; lubricatingoils; jute grain bags;explosives and accessories;educational and technicalbooks; typewriters; cash registers;calculators; duplicating and copyingmachines, and drugs. Other essentialand popular consumer goods are subjectto maximummark-ups at the wholesaleand retaillevel, rangingfrom 10% to 30% and from 10% to 50%, respectively.The fifth and final categorycovers all othergoods for which the mark-upis limitedto the mark-up that existedin December1981. Goods for which thereare no price controlsinclude export goods, goods sold at publicauctions, second- hand goods (exceptmotor cars),food and drink sold for consumptionon the premises(except beer), eggs in the shell, and fresh flowers,vegetables, and fruit.

3.16 There is littledoibt that both by design and implementationpri- ce controlsare not equallye'fective for all types of products. Retail dealersare requiredto disrlayall prices clearlyand there is a special inspectoratesection in the "fTCto monitorprices. However,at the time that the missionwas in the fi'ld, there were only 69 inspectors for the entire country. The mission was able to determine that for commodity-like products (e.g.,steel products, cement, fertilizers) enforcement is effective and price ceilingsare binding. For other products(e.g., textiles, small appliances), enforcement is loose because firms differentiate their products to escape price controls, even if they only succeed temporarily. Moreover,the base used to calculatethe profitmargin is a a vague con- cept. As one managerput it: "my margin is 20%." When asked 20% of what, he answered:"20% of everythingthat I can put in." For productsthat are manufacturedin batch processesor that are essentiallyunique (e.g.,capital goods manufacturedto specifications),enforcement is non-existent.Fi- nally,entrepreneurs always find ways of legallyescaping price controls. - 43 -

For examplebusinessmen have establishedsuperfluous distribution layers in order to boost the price betweenfactory and final consumer. At each step along the way the legal marginwas charged,but the sum total resultedIn grossly inflated overall margins. Anether example involved avoidance of price controls on automobiles assembled in Zimbabwe; dealers stopped selling them, but began offering long-term leases instead. Although some of these loopholeshave alreadybeen plugged,experience in Zimbabwe and other countriessuggests that there is a never ending race betweenthe authorities pluggingloopholes and the public discoveringnew ones. The end result is unequaltreatment for differentsubsectors and higherprofits for activitiesthat more successfullyescape controls. This treatmentcreates incentivesfor expansionof the activitiesthat are more successfulin es- capingcontrols.

3.17 The mechanismsfor settingprices are not consistentand often obey historical rather than economic reasons. For example,the price of ammonium nitrate is set so as to guarantee the manufacturer a pre-tax return of 22.5Z per annum on the issuedshare capital. The price of phosphate fertilizers,on the other hand, is set so as to guaranteethe manu- facturera 17.5% returnper annum on fixed and workingcapital. Pricesfor compoundfertilizers are set accordingto cost-plusformulae not directly relatedto profit rates. The disparatetreatment arises from agreements- some of them datingback to UDI, enteredinto betweenthe variousfirms and the Government. Pricingof steel products,on the other hand, is unrelated to either costs of productionor to opportunitycosts. As Table III.3 shows, the price of only one of ZISCO'smain productscovers production costs.

Table III.3: ZIMBABWE- DOMESTICPRICES OF STEEL AND FERTILIZERPRODUCTS RELATIVETO PRODUCTIONAND OPPORTUNITYCOSTS, 1985

DomesticPrice as Z of: ProductionCost OpportunityCost

Blooms & Billets 128.9 105.5 Medium Mill Sections 99.0 84.2 LightMill Sections 82.8 88.7 Bar/RodSections 97.0 88.9 AmmoniumNitrate 113.4a/ 106.0 Triple Superphosphate From Pyrites 129.3 120.1 From ImportedSulphur 'Q0.4 120.1 CompoundFertilizers n.a 144.1

a/ Cost excludesdepreciation. - 44 -

The Trade Regime

CustomsDuties

3.18 Customsduties have not playedan importantrole in the develop- ient of the Zimbabwean industrial sector. Protection has been accomplished ainly throughthe foreignexchange allocation and investmentcontrol sys- t,"ms rather than through customs duties, as is the case in many developing countries. C.ustoms duties,since the time of the Federationof Rhodesia and Nyasaland,have been moderateand have servedmainly as a sourceof fiscal revenues. Rates are mostly ad valoremand appliedto the CIF value accordingto the followingschedule:

Most raw materials: Free to 5% Most others: 25-30% Petrol: 40% Luxuries: 35% Motor cars: Maximumof 50%

In addition,there is an importsurtax of 20% leviedon the FOB value of all importsexcept petrol, medical, surgical, and other goods limitedby internationaltreaty. Governmentimports and capitalgoods for statutory bodies are also exempt. Industrial firms can obtain a rebate of duties but not of the surtax and also enjoy the benefits of an export drawback scheme for both customsduties and surtax leviedon importedcurrent inputs for exportproduction. In the 1981-84period, customs duties as percentof importsof goods increased every year, ranging from 9.5% in 1981 to 24.6% in 1984. Accordingto the Jansen report,in 1981 industrialdomestic priceswere, on average,only 9% above borderprices, with only a minority of firms chargingprices 30% or more above the comparableinternational price. This findingsuggests that the price systemhas been successfulin keepingfirms from reapingmonopoly rents. It also suggeststhat the vast majorityof Zimbabweanfirms would be able to competein the domestic marketwith importsunder the presentimport duty schedule.

ExportIncentives

3.19 In additionto the import duty drawback,export incentives include an outright9% export subsidyapplicable to all manufacturedgoods. In theory,the importduty drawbackplaces the manufacturerin a position equivalent to that that would have prevailed if there had been no import duty. In practice, there is a difference if there is a lag between the time that the manufacturer pays the import duty and the time that he receives the rebate, for he incurs a cost equivalent to the interest foregone on the amounts involved. Similarly,if there are delays in receivingthe exportsubsidy, these delaysdecrease its value. In Zimbabwe,manufac- turersclaim that the delay is about six months,which would reduce the value of the subsidyby some 7%, to about 8.4%.

3.20 Exportssubsidies increase the value of exportsby the amountof the subsidyand in that respectincrease the effectiveexchange rate received by exporters. The missioncalculated that the effectiveexchange - 45 -

received by exporters of manufacturers in Zimbabwe from 1980 through1985 increased by 1602 in the period, as shown in Table III.4.

3.21 The effective exchangerate, however, is only part of the pic- ture. Althoughin nominalterms an exportermay be receivingmore Zimbab- wean dollarsin 1985 than in 1980,the pricesof inputsand labor may have increasedsince, loweringthe purchasingpower of every Zimbabweandollar received. The consumerprice index providesimperfect, but usefulmeasure of such cost increases. The effectiveexchange rate, adjustedfor inflation providesan idea of the purchasingpower of each dollar of exports over time. In Zimbatwe,the devaluationof the currencyhas been more pronounced than price increases,leading to a 30% improvementin the exchange rate recelvedby exportersof manufacturesIn 1980-85,as Table III.6 shows. This explainsin part the recoveryof manufacturedexports in 1983-84.

Table III.4: ZIMBABVE- REAL EFFECTIVERATE FOR INDUSTRIALEXPORTERS

1980 1981 1982 1983 1984 1985

NominalRate (Z$/US$) 0.643 0.689 0.757 1.011 1.244 1.612 ExportSubsidy (Z$) 0.022 0.000 0.031 0.067 0.097 0.126a/ EffectiveRate (Z$/US$) 0.665 0.689 0.788 1.078 1.341 1.738 ConsumerPrice Index (1980 - 100) 1.000 1.131 1.252 1.541 1.852 2.006 Real Rate (Z$/US$) 0.665 0.609 0.629 0.699 0.724 0.866 Real Rate Index (1980* 100) 100.0 91.7 94.7 105.2 109.0 130.3 a/ Assumessame percentageas in 1984.

FinancialPolicy and its Impacton Industry

3.22 Financialpolicy can have an importantinfluence on the performance of the manufacturingsector throughits impacton interestrates and creditallocation. In the past, access to creditfor working capitalor fixed investmenthas not been perceivedas a constrainton the sector. There is no interventionin the allocationof creditto the privatesector and short-runmonetary management by the ReserveBank has maintainedstable nominalinterest rates. Nevertheless,there are areas of concernfor the future both in the area of the workingsof the financialsector in the macroeconomyand in the mlcroeconomicallocation of credit.

3.23 The core of the macroeconomicconcern is that the creditrequire- ments of manufacturing could be crowded out by publicsector borrowing. Both the CentralGovernment budget and the AgriculturalMarketing Authority have been major users of domestic financialresources--the budget primarily from the institutionalinvestors and the post office,the AMA mainlyfrom - 46 -

the commercialbanks. Crowdingout via the financialsystem has not occurredto any significantextent in the past. The maintenanceof low interestrates is evidenceof this given the lack of credit rationing. Indeed,as Table 1II,5 shows,real depositrates (nominalrates deflatedby the consumerprice index)have been negativein real terms since Independence,and most lendingrates only became positivein 1983 or 1984. However,the primaryreason for the coexistenceof a large publicsector borrowingrequirement and the absenceof crowdingout in this period is the foreignexchange allocation system. Access to foreignexchange for working and fixed capitalhas been the predominantconstraint on the activitiesof firms,and the demand for credit has been correspondinglydepressed. The share of privatecredit in GDP fell from 18% in 1983/84to 15% in 1985/86--themanufacturing sector forms only one componentof total private borrowing,but it has generallyfollowed this overalltrend. If productive investmentis to rise, and this will be essentialto futuregrowth, then the demand for credit by the manufacturingsector would also recover. A reductionin the public sectorborrowing requirement would then be necessaryto avoid crowdingout eitherby creditrationing or significant increase in interestrates for the privatesector.

3.24 The secondarea of concernis the conservativebias of the financialinstitutions in their lendingpolicies. Almost all private sector lendingby privatefinancial institutions in Zimbabwegoes to well-establishedfirms. Lendingdecisions are generallymade on the basis of prior earnings,credit history and the strengthof their balancesheet as a measureof creditworthiness. Banks, in particular,lend on a term basis for generalexpansion or againstequipment purchases only to long-standingclients. Privatefinancial institutions undertake very little project-orientedfinancing. None of them appearto use rate of returncalculations in assessinglending opportunities. Several individualsin the privatefinancial sector acknowledged that competitive pressuresto seek out new lendingopportunities were not sufficiently present. One argued that financialmarket expertisewas limited,and that the existingclub-like arrangement among financialinstitutions provides no incentivefor firms to be aggressivelenders to new businesses. These lendingpolicies and procedurestend to work againstemergent businesses who have no connectionswith the financialcommunity and offer little collateral.

3.25 CommercialBanks providedemand and term depositaccounts to both individualand corporatecustomers. The bulk of commercialbank lendingis short term, primarilyfor working capitaland agriculturalfinance. Most of these loans are lines of credit (overdrafts),usually securedbv real propertyor commercialassets. In some instances,medium-term (three to seven year) lendingcan be arranged,but this type of creditis generally providedby merchantbank or financecompany subsidiaries. The servicesof the four merchantbanks, technicallyknown as acceptinghouses, are geared closelyto corporateneeds and large accountholders--financing of foreign trade throughacceptance credits, processing commercial letters of credit and foreignbills of exchange,short and medium-termfinancing, bridge financing,and foreignexchange transactions and dealings. Togetherwith - 47 -

the commercialbanks, merchant banks are the country'sonly authorized privateforeign currency brokers. Merchantbanks also engagein the flotationof public companiesand are authorizedto underwritenew issues, manage portfolios,raise developmentcapital, and arrangefinancing for takeoversand mergers.

3.26 Insurancecompanies and pensionplans are essentiallylong-term investors. Sixty percentof insuranceand pensionplan assetsmust be, at present,Intvested in CentralGovernment and parastatalsecurities. Apart from statutoryinvestments in publicsector securities,their portfolios consistof property,equity, corporate debentures, and some direct industrialterm loans. There are also severalGovernment-sponsored and jointly owned public/privateinstitutions designed to channelofficial and/orprivate sector capital to specificeconomic activities, and a market for securitieswith 52 publiclytraded companies listed as of 1985.

3.27 Banks and insurancecompanies are prohibitedfrom borrowingand lendingoutside their traditionalareas withoutprior approvalfrom the relevantRegistrar. In addition,private non-financial firms are not allowedto issue bonds to the publicand must borrowfrom financial institutions.The segmentationof the market by type of institutionhas facilitatedcooperative market sharingagreements. A merchantbanker said, "We have a semi-gentleman'sagreement with the commercialbankers. We don't undercuttheir overdraftrates, and they don't come into the banker's acceptancemarket."

Labor Laws

3.28 Minimumwages in manufacturingwere set at a sectorallevel before Independence*Owing to the heterogeneityof labor,this led to con- siderablevariation in the agreedmonthly minima; in 1980 the range went from Z$35 (privatesecurity) to Z$99.88 (Dunlopfactory), with an average of Z$58.56. In July 1980, three monthsafter Independence,the Government introduceda uniformwage coveringall manufacturingindustries, followed by a new minimumwage on January1981 and again on January1982. In addition, in 1982 the Governmentalso passedlegislation controlling wage in- creasesfor differentearning levels, the percentageincreases ranging from 23.5% for employeeswith annual incomesof up to Z$1,200to only 1% for those with incomesup to Z$20,000. As discussedin ChapterII, the Govern- ment adoptedaustere economic policies in 1982; the package includeda general wage freeze. Minimumwages remainedfrozen until new levelswere es- tablishedin July 1985. As a result,real minimumwages in manufacturing were virtuallyunchanged five years after Independence,as Table III.5 shows. Average real earningsin manufacturingfollowed a similarpattern: they increasedby about 20% in 1980-82,fell in 1983-84and ended 1984 below the 1980 level (see Table III.5). This post-Independencerecord is similarto that of the five years precedingIndependence when real average annualearnings declined from the 1975 peak by about 5% in the following five years. The growth patternof real wages has followedmore closelythe ups and downs of economicactivity than the dictumsof legislativedecrees. - 48 -

T1Weml.5 MW E - IML ANI)MI G R4D ( Qzstp,ove the % )

198) 1981 19S 1983 19W# 1985 (3) MN M KIX X KIN MX KIN MX M IX MIN MX

.~~~~~~~~~~~ I Depmdt(1) -5.65 -4.97 -9.95 -0.09 -&58 -2.88 -6.38 -. 45 -3.75 -0.42 -4.16 -2.38 IA (4) -1.53 -4.53 -6.20 -1.40 -457 -4.57 -2.95 -2.95 a47 005 005

Lepout (1) -5.42 -4-74 A686 -0.31 --&29 -3.09 --&99 -1.02 -4642 -0.861 --4 16 -3.14 tedig (5) -2.90 -2.68 -7.64 -2.27 -6.60 -5.84 -4.97 -4.54 -2.19 -1.53 -2.25 -2.16

FR#M HI Depo,it (2) -4.74 -3.59 -9.03 -4.77 -8.58 -7.84 -7.03 -6.27 -3.08 -2.97 -3.49 -0.39 lierdig (6) 0.76 7.67 -3.36 7.33 -0.35 3.87 3.06 6.50 6.70 9.36 6.25 89)

K~FM SOV]NB&AI Depoit (2) -4.28 -4.28 -8.81 -5.32 -&37 -8.37 1 -6.81 -6.81 -3.53 -2.19 -2.61 -2.61 BLIuMCSX'flF DEpadlt(2) -4.05 -4.05 -8.60 -4.23 -7.32 -7.32 -5.74 -5.74 -2.42 -2.42 -2.83 -2.83 Mottp Advl l Reidetial -1.30 -1.3D -5.98 -1,18 -4.36 -4.35 -2.73 -2.73 0.69 0.69 0.27 0.27 Ccmnrcal -0.61 -0.61 -5.32 0.13 -3.51 -3.09 J-1.88 -1.88 1.58 1.58 1.16 1.16

(1) 3 mxth -te (2) 12 mxth ra (3) ¶ixdi Jum, 1985 (4) MoixnmOC dt Row2 (5) MinmumRate an Amea±gemOkedts (6) Hire Rzrde Rate

So : Pezve Badkof ZIntM, Qlaterly E ;caicar Satstical PeAe, missin etlnut. - 49 -

Figure III.1

MANUFACtJRINGAVERAGE EARNINGS PER MON1H AS A RJNCIIONOF GNP PER CAPIrA

South Afriea

Zimbabwe (1982) C/ile

_ ~~~~Ziabbw*b(1983)/

:: Ch^ac Dominican" Republic Costa lies

N F~naC i5 IenTK "

m31zlsvi # India

1 0al T_

o 200 4.00 600 eoo 1000 12oo 1O 1600 1800 2000 2200 1983PER CAPlr GNP(1980 US$)

3.30 The minimumwage in 1985/86was equivalentto about US$90 a month, four times higherthan that of Sudan and Zaire, one and one-half times that of Brazil,and about the same as Mexico,as Table III.8 shows. It is way out of line for a countryof Zimbabwe'sper capitaincome. Aver- age earningsare also out of line. In 1982, they were about the same as Chile and higher than Korea, countrieswith almost three times Zimbabwe's per capitaGNP, but significantlybelow averageearnings in South Africa, the principalcompetitor in the regionalmarket. The devaluationof the Zimbabweandollar at the end of 1982 and the gradualsubsequent depreciation broughtlabor costs closerto those of other developingcountries, althoughthey are still significantlyhigher than what is typicalfor a countryof its per capitaincome (see Figure III.3, Table III.8,and Stat- isticalAppendix Table 34). While labor costs are just one of the components of total costs,the relativelyhigh averageearnings in manufacturing - 50 -

puts Zimbabweat a relativedisadvantage in competitionwith exportsfrom other developingcountries, adding to the country'salready difficult positionowing to high transportcosts. High labor costs,of course,are the other side of the coin of an overvaluedexchange rate. Depreciationof the currencyin real.terms would reducelabor costs relativeto other countriesand strengthenZimbabwe's competitive position.

Table III.6: ZIMBABWE- EVOLUTIONOF MINIMUMWAGES, 1980-85 (Z$ per month)

1.7.80a/ 1.1.81b/ 1.1.82c/ 9.1.83d/ 7.1.84d/ 7.1.85e/

Domestic Employees 30 30 50 55 60 77 Agricultural Employees 30 30 50 55 60 75 Mining 43 58 105 110 115 144 Agro-ind.f/ 70 85 105 110 115 144 Manufacturing and Other 70 85 105 115 125 144 CPI (1980-100)g/ 100 112 123 164 179 200* Real Manufac- turingwages (in 1980 prices)70.0 76.2 85.6 70.0 69.9 71.9

* - Estimate. a/ Establishedby StatutoryInstrument 367 of 1980 and Statutory Instrument441A of 1980. b/ Establishedby StatutoryInstrument 925B of 1981. c/ Establishedby StatutoryInstrument 455A of 1983. d/ Inferredfrom "NationalWage Policy Determination"paper, 1985. e/ Establishedby StatutoryInstrument 186 of 1985. f/ Until 1985 this only appliedto skilledemployees in sawmillingand sugar processing. In 1985, it was expandedto "an undertakingengaged exclusivelyor primarilyin the processingof timberor an agricultural productincluding fruit, meat, sugar, tea, coffee,and other food crops,cash crops or livestockproducts." CPI is averagefor year for 1980, 1981 and 1982, actualone for respectivemonth for years thereafter.

3.31 In December1981 the Governmentintroduced legislation attempting to preventemployers from dismissingor laying-off"any employee...without the prior writtenapproval of the Minister." This act placesa particularly heavy burdenon firms duringrecessions, as it did in 1982-84. Firms reportedthat it took from six months to two years to obtainthe required approval. - 51 -

Table III.7: ZIMBABWE- INDICESOF AVERAGEREAL EARNINGS, 1970-84(1970-100)

Index of Index of Index of Average AverageReal AverageReal Index of Real Annual AnnualEarn- Annual Earnings Manufac- Earningsin ings in in all sectors turing Manufacturingb/ all Sectors but Agriculture Employment

1970 100.0 100.0 100.0 100.0 1971 101.9 101.6 104.5 106.0 1972 108.9 103.5 108,0 113.0 1973 112.2 107.2 111.4 121.5 1974 116.6 111.6 115.2 131.9 1975 120.4 116.4 119.2 136.0 1976 119.2 117.2 119.7 133.9 1977 118.4 117.4 119.6 126.5 1978 118.3 117.3 119.9 121.4 1979 115.1 116.3 117.7 126.2 1980 129.8 134.8 134.8 139.0 1981 141.9 147.6 137.5 151.0 1982 148.4 161.1 146.6 157.4 1983 136.8 144.0 129.5 151.2 1984 a/ 119.5 123.7 111.7 145.2 a/ Based on June data. b/ DeflatingAverage nominal earning by low incomeprice index based on 1980. Source: CentralStatistical Office, Quarterly Digest of Statistics,March 1985.

3.32 Minimumwage and "no firing"legislation are a two-edgedsword. On the one hand they protectthe employee'sincome and job security,but on the other hand, they also reduce firm's flexibilityand probablyhave a ne- gativemedium-term impact on employment. Firms reportedthat as economic activityrecovered, they hired labor on short-termcontracts rather than as regularfull-time employees to avoid the 'no-firing"restriction. To the extentpossible, they prefer to use overtimerather than employment. The law did not preventfiring; it merelymade it difficult,as attestedby the employmentdata from 30 of the 52 publiclytraded companies. These data show that for the five years 1980-84,employment peaked in 1982 but was down 112 by 1984, Aggregatedata for the manufacturingsector show similar trends (TableIII.7). Finally,to the extentthat restrictionsmake labor more of a fixed factor of production,the law will createa bias in favor of more capital-intensivetechnology. This undoubtedlycontributed to the choiceof the highly labor-savingtechnology bought by the textilesector in the post-Independenceyears, as discussedin ChapterII. - 52 -

Table I1I.8: ZIMBABWE- MINIMUMWAGE COMPAREDTO OTHER DEVELOPING COUNTRIES

Absolute Relative level to Zimbabwe (US$ per month) (%)

Brazil 58 64.4 Ethiopia 24 26.7 Korea none -O- Lesotho 62 68.9 Malawi 15 16.7 Mexico 105 116.7 Sudan 24 26.7 Tanzania 46 51.1 Zaire 24 26.7 Zimbabwe 90 100.0

Source: VariousIBRD reports;mission estimates.

Effectsof Control Systesison IndustrialIncentives and Performance

3.33 The combinationof foreignexchange allocation, price controls, and investmentcontrols has producedbetter resultsin Zimbabwethan in many other countries. To the extent that the resultsof the Jansen study still hold, the domesticlevel of industrialex factoryprices differs only moderatelyfrom the one that would prevailunder conditionsof free trade. Nevertheless,the similaritiesin the overalllevel of prices hide substantialdisparities in relativeprices. Moreover,Zimbabwe's incentive systemhas a seriousanti-export bias, favors industryat the cost of other sectors,and exacerbatesbarriers to entry for the emergingbusinessman.

ImplicitTaxes and Subsidies

3.34 Price controlsand foreignexchange rationing entail implicit subsidiesand taxes that sometimesconflict with efficiencyand Government objectives. The differencebetween the price of competingimports and that of domesticgoods may be interpretedas an implicittax (if domesticprices are higher)or as an implicitsubsidy (if domesticprices are lower). For example,ZISCO's consumers are paying prices that are lower than the price of equivalentimported goods (i.e., less than the opportunitycost). Con- trollinginflation is the ostensiblereason for holdingdown the price of ZISCO'sproducts in the domesticmarket. Yet, in part becauseof low prices, ZISCO requiresa fiscal subsidythat contributesto the large public sector deficitand to inflationarypressures. Had ZISCO chargedthe opportunitycost for all of its productsin 1985, it would have reducedits lossesby some US$6 million (or by about 16%), Becausethe fisc subsidizes ZISCO'slosses, these US$6 millioneventually become a transferfrom the taxpayersto ZISCO'sconsumers and to exportingmiddlemen. The latter - 53 -

receivepart of the subsidybecause ZISCO sells to them at a price lower than what ZISCO gets when it exportsdirectly. In the fertilizersector the situationis exactlythe opposite: the pricingsystem is implicitlytaxing farmersto the tune of about US$17 millionper year.3 / Yet, farmingin general,but communalfarming in particular,is a hih Governmentpriority. Part of this tax pays for inefficienciesin production,part represents economicrents. Neitherthe subsidyto ZISCO'sconsumers, nor the tax on agriculturecan be justifiedon eitherefficiency or equity grounds. By shieldingdomestic producers from foreigncompetition, the foreignexchange rationingsystem allows domestic prices to be set as high as price controls permit and createsincentives for directingresources to those activities where pricesare higher and diminishesincentives for those activitieswhere prices are lower. For example,the two firms that produce straight fertilizersascribed their lack of investmentin recentyears to the low rates of returnproduced by the price controlsystem.

3.35 The mission also comparedfood and consumerdurable prices in Ha- rare with pricesin the Washington,D. C. metropolitanarea as of November- December1985. This comparisonshows that food pricesare, on average, about 45% lower in Harare than in Washington,D. C. Appliances,on the other hand, are about 2.5 times more expensivein Harare--someare as much as six times (see StatisticalAppendix Table 7). Other consumergoods are about equal in price and agriculturalimplements are lower in Harare, as shown in Table III.9. A simple averageof these priceswould show that prices in Harare are about 20% higher than in Washington--anot too significant difference. However,the simpleaverage would not reflectdifferences in the generalprice level.

Table III.9: ZIMBABWE - PRICES IN HARARE RELATIVE TO PRICES IN WASHINGTON,D.C. METROPOLITANAREA

Coefficientof AverageDifference Variation Food -45.0% O.ff ManufacturedGoods: Appliances 150.8% 1.20 Other Consumer Goods - 1.9% -44.90 AgriculturalImplements -41.8% 0.30

Source: StatisticalAppendix Table 7; missionestimates.

3/ This subsidyis equal to the differencebetween the price of imports (net of importduties) and the price of domesticproducts multiplied by the volume. - 54 -

3.36 The Jansen reportalso indicatesthat thereare substantialvaria- tions betweendomestic and internationalprices, but that the averagelevel in 1981 was only 9% higher (roughlyequivalent to the averageduty rate) than comparableinternational prices, suggesting that the main distortion effect of the price controlsystem on ex-factoryindustrial prices has been on relativeprices and not on the generallevel. Accordingto the Jansen report,36% of industrialvalue added was being producedat prices that were at or below internationallevels; 38% at prices that were between 10% and 20% above internationallevels, and 26% at prices20% or more above international levels (see Table I11.11). Unlikemission findings, however, the Jansen reportdid not indicatewide differencesbetween domestic and internationalprices in any sector. Its findingsshow that some firm's output priceswere at most 17% below internationalprice or at most 44% above. Becausethe Jansenreport shows only aggregatesubsectoral data, the price variancesare likelyto be smallerthan for individualprices. Missiondata was based on individualproducts and models; the variance, therefore,was likelyto be higher. Neitherthe Jansen reportnor the missionmade allowancesfor qualitydifferences. Scarcityis another importantpoint not reflectedby the data. In many cases goods were in short supplyand waits as long as six monthswere common. Light bulbs, stoves,and some agriculturalimplements, for example,were unavailableat the time that the missionwas in the field. Finally,it must be emphasized that the differencebetween domestic and internationalprices is likelyto fluctuateconsiderably from year to year, as domesticprice revisionsare based on costs of individualfirms and not on internationalprice fluctuations.

Table III.10: ZIMBABWE- SHARE OF VALUE ADDED PRODUCEDAT VARIOUSPRICES RELATIVETO INTERNATIONALPRICES (Percentages)

Cumulative Share Share

Value added share producedat or below internationalprices 36 36 Value added share producedat prices between0 and 10% above international prices 6 42 Value added share producedat prices between10% and 20% above internationalprices 32 74 Value added share producedat prices 20% to 30% above internationalprices 14 88

Value added share producedat prices 30% or more above internationalprices 12 100

Source: StatisticalAppendix Table 8; missionestimates. - 55 -

TransportCosts and Anti-ExportBias

3.37 Zimbabwe'stransportation costs are unusuallyhigh owing to its landlockedposition. This situationmakes exports less profitablethan the domesticmarket and createsa naturalexport disadvantage that increases exponentiallywith transportationcosts. In recentyears, access to Mozam- bique's Beira worridor has been unreliable and Zimbabwean manufacturers have had to resort to the Republic of South Africa's trade routes, further increasing transportation costs. These costs alone provide both a protective barrierand an exportobstacle. Under free-tradeconditions, transport costs of 5% would raise domesticprices 10 above exportprices; transportcosts of 15X would raise them by 35.3%;and transportcosts of 20% by 50%. For ZISC0,transport costs raise prices by a miniaumof 18% (mediummill products)and a maximumof 27% (bloom and billets). Even under free trade conditions,ZISCO could make anywherefrom 452 to 692 more in the domesticmarket than in exports. For low-bulk,high-value products, of course,transportation costs make a much smaller difference.

3.38 In additionto the bias againsttrade due to transportcosts, the incentivesystem introduces a stronganti-export bias into the structureof incentivesin the economy. The completeprotection of domesticproducers from foreigncompetition, supported by cost-basedprice controls,allows domesticprices to be higher than import-equivalentprices and even higher than export prices (TableIII.11). In addition,the overvaluationof the exchangerate makes exportsabsolutely less profitable. Finally,owing to price and investmentcontrols, and the power of domesticfirms, there is likelyto be much less intensecompetition from other domesticproducers than there would be in exportmarkets, and littlefear of new competition. The incentivesystem has particularlyperverse effects on domesticrelative prices,because they allow higher-costactivities to chargeprices even more out of line with externalprices than low-costefficient activities. The corollary of a highly variable degree of protection is a highly variable degree of anti-export bias. Under these circumstances, the behavior of industrial exports in the three years following independence is very understandable. Faced with a growing domestic market that: (i) is capable of maintaining the sector working at near full capacity; (ii) is substan- tiallymore profitablethan the exportmarket; and (iii)is virtually free of competitivepressures, entrepreneurs naturally turned away from exports. It was not until the domesticmarket began to crumblein 1982 that export sales becameattractive and exportsexpanded. At the same time, the Governmentdevalued the Zimbabweandollar, introduced a specialexport subsidy and later lifted the foreign exchange constraint on exports with the establishment of the export revolving fund. These two decisions made exportsmore profitableand, by reducingtransactions costs in the procurement of foreignexchange, cheaper to produce. As a result,exports boomed in 1983-84. Nevertheless,the recentexport bonanza may be said to be a bonanzaby default. There is a very high risk that exportsmay fall again as the domestic market recovers. To ensure that an export drive is sustained for longer periods, more comprehensive measures to reduce the extent of the anti-export bias introduced by the incentive system would be necessary. - 56 -

Table III.11: ZIMBABWE- SELECTEDDOMESTIC PRICES COMPARED TO EXPORT PRICES

Ratio Domestic Export (Dom./Exp.)

Steel Products: (Z$/ton) Billets 290 211 137.4 Medium Mill Sections 418 342 122.2 Light Mill Sections 400 298 134.2 Bar/Rod Sections 398 294 135.4 Textiles: Grey Cloth (Z$/m,Firm A) 1.83 1.47 124.5 Grey Cloth (Z$/m,Firm B) 2.25 1.38 163.0 Dyed Piece Goods (Z$/m) 2.15 1.83 117.5 PrintedSheeting (Z$/m ) 1.57 0.83 189.2 Terry Fabrics(Z$/unit) 1.56 1.15 135.7

Source: Direct firm information;mission estimates.

3.39 The highly concentratedstructure of the sector,together with sanctions,has also bred a managerialclass with a strongorientation towards productionand efficiency,but practicallyno orientationtowards marketing. This is a commonphenomenon in countrieswith a small internalmar- ket shieldedfrom outsidecompetition and a naturalresult of operatingin a non-competitiveand highlyprotected seller's market. The importanceof de- velopinga marketingorientation when attemptingto penetrateexport markets cannot be overemphasized.As stated by D. Morawetzin his study on Colom- bian clothingexports:

"Beingable to supplygoods at a competitiveprice is a necessary conditionfor successfulgarment exporting--but it is by no means sufficient. The potentialexporter must also be able, at a minimum,to locatea potentialbuyer, to producea garmentof acceptablequality, and to guaranteedelivery time." 4/

4/ See D. Morawetz,Why the Emperor'sNew Clothesare not Made in Colombia,Oxford University Press for the World Bank, 1981, - 57 -

The same necessaryconditions apply to practicallyany exportingactivity. Zimbabwean manufacturers have had little pressures to satisfy any of these conditions in the domesticmarket. Prices have been set by a combinationof Government decree and market forces, the domestic market has always provided a potentialbuyer, competitive pressares to producehigh qualitygoods have been mild, and timelydelivery has not been a requirementbecause manufacturershave operatedin a seller'smarket since the time of UDI. To competesuccessfully in the world market,Zimbabwean manufacturers must first cut their teeth in the domesticmarket, as the more visibleexporting countrieshave done. This would requireincreasing domestic competition, which in turn would requirerelaxing the tight controlsover investmentand imports.

UnevenSectoral Protection

3.40 Nominaland effectiveprotection are measuresthat help assess the effectsof policieson the incentivesstructure and perforrmanceof industry. The nominalprotection coefficient (NPC) is the ratio of the domestic price of goods to the equivalentinternational price (net of importduties). An NPC below one implies that, at a given exchange rate, the domestic price of the good is lower than the price of a similarimported good after transportationcosts are taken into account. If a firm with an NPC below one is making profits,its cost structureis such that even without import duties it could competewith importsand still be profitable. Nominalprotection could be low either becau'setariffs are low, or because there is intensivedomestic competition. Given the virtualabsence of domesticcompetition and the ban on competingimports that the foreign exchangeallocation system entails, in Zimbabwe,low nominalprotection impliesthat the price controlsystem is successftulin keepingprices down.

3.41 The effectiveprotection coefficient (EPC) is the ratio of value added generatedby a firm (or subsector)at domesticprices comparedto value added at internationalprices. An EPC greaterthan one impliesthat the firm's value added is higher than could be obtainedif its outputsand inputs were valuedat internationalprices. In such a case,either profits, or wages, or taxesare higherby virtueof the protectivesystem. This means that the firm is eitherperceiving high rents,or incurringhigh costs.

3.42 Based on the Jansen study-which covered 122 firms in 33 subsectors, accountingfor 62% of value added--theamount of nominalprotection affordedto Zimbabwe'sindustrial sector in 1981 was quite low: an overall 9% above equivalent free-trade prices. Only three out of the 33 subsectors (paper, heavy metal equipment, and household electrical equipment) reported average ex factory prices more than 30% above the border price. Because the potential scarcity rents available to producers of goods prohibited from importswere certainlymuch higherthan this, price controlsmust have been reasonablyeffective in preventingfirms from capturingthese rents. The nominalprotection coefficients below one for beer and severalfood processing industries implies that these firms actually received less than the world price for their output and that they could receive adequate profits even under conditions of free trade. However, NPC - s8 -

and EPC calculationsare extremelysensitive to CIF pricee and hence should be used with a good deal of care. Unfortunately,the CIF pricesused in the Jansen study are not available. These conclusions,then, assume that the CIF pricesused are rouglycorrect.

3,43 The Jansenstudy estimatedthe averageEPC for Zimbabwe'smanu- facturingsector to be 1.33 in 1981 (i.e.,332 above value added at world prices). This rate could be consideredmoderate, relative to other African countriesand to the scarcityrents potentiallyavailable. The variationin effectiveprotection, however, is considerablygreater than for nominal protection,with two of the 33 subsectorebelow the lowestnominal coefficient of 0.83 and 18 above 1.33-includingfour subsectore(steel, paper, textilesother than CMB, and householdelectrical equipment) for which domesticvalue added is more than doublewhat they would be at free trade prices.

3.44 Variationsin effectiverates of protectionare more pronounced than for nominalprotection and range from a negative17% (slaughteringand meat processing)to 177% (householdelectrical equipment). The dispersion of the distributionfor all subsectorsmasks some importantdifferences between groups. Effectiveprotection is relativelylow in food, beveragesand tobaccosubsectors, whereas it is quite high in wood and paper industries and in chemicaland metal subsectors. Were it not for the investmentcontrol system,this patternwould tend both to induceresources to flow from the former into the latter,and to permitgreater inefficiencies in the let- ter.

Table III,12: ZIMBABWE- DISTRIBUTIONOF VALUE ADDED IN MANUFACTURING ACCORDINGTO EFFECTIVERATES OF PROTECTIONRECEIVED

Value Cumulative EffectiveRates of Added Value Added Protection (2) (2)

Negative 17 17 0 - 10% 10 27 10% - 20Z 16 23 20% - 30% 10 53 30% - 50% 14 67 Above 50% 33 100

Source: AppendixTable 8; mission estimates.

3.45 Under conditionsof uneven protectionsuch as in Zimbabwe,positive effectiveprotection to one sectorusually entails lower (maybenegative) effectiveprotection to anothersector. Only a system of uniformtariffs coupledwith internationalcompetition can achieveequal protectionfor all sectors. In Zimbabwesome sector (probablyagriculture) is laboringunder - 59 -

lower protection,indeed maybe even negativeprotection. An sasessoentof effectiveprotection afforded the agricultureand servicessectors was outsidethe scope of this report. But the comparisonof consumerprices in Hararewith prices prevalentin the Washington,D.C. metropolitanarea shows that, almost uniformly,food prices are substantiallylower in Zimbabwe, whereasindustrial goods pricesare higher. To the extent that this limited sample reflectsa widely prevalentsituation, the Zimbabweanfarmer is being implicitly taxed to finance the Zimbabwean manufacturer or middleman. - 60 -

Iv. IFICIENCY

4.01 As in Zimbabwe,manufacturing developed in the more industrial- ized countriesunder some form of protection. Protectionencourages growth by providingthe extra time and resourcesneeded to go throughthe process of learningand institutingthe most efficienttechniques, management and organizationfor both the industry'sand the country'sparticular circumstances. But it also discouragesefficiency by providinga shieldfrom competitionand protectingprofits even when costs are not carefullycon- trolled. Protectioninevitably involves some combinationof costs and rents,the formerstemming from inefficientor high-costuse of resources, the latterfrom the inducedscarcity of the protectedgoods. If protection is unevenacross different industries and sectors,it can also induce resourcesto move into the protected,but less productiveactivities.

4.02 The costs of protectioncan be attenuatedif coupledwith competitive pressures. These pressurescan come from actual or potentialcompe- tition from domesticfirms, or from importsthat keep pricesdown. Costs can also be reducedthrough the administrationof resourceallocation and pricingin such a way as to encouragecost reduction. In Zimbabwe,competitive pressuresplayed a negligiblerole, but the price and investmentcontrol systemswere attemptsto attenuatemonopoly rents and preventre- sourcesfrom movinginto the more protectedand profitablesectors. These controlshave "hungtogether" and, imposed,as they were, on a fairlyde- velopedand lightlyprotected industrial sector, they did not give rise to widespreadgross industrialinefficiency, as in many other developingcountries.

4.03 The averagedegree of efficiencyfound in the Zimbabweanmanufac- turingsector is relativelyhigh, despitethe limiteddegree of competition and the cushionprovided by the price controlsystem. However,the average measurehides substantialdisparities in efficiencyamong firms. The main issue that emergesin this respectis that the incentivessystems, while not fosteringoverall inefficiency, allowed efficient and inefficientfirms to survive. The effectsof the incentiveson intersectoralallocation of resources is not an issue that has been addressed in this report. However, there is a presumptionthat the incentivessystem has favoredindustry relativeto agriculture,mining and services.

CapitalOutput Ratios

4.04 The missionused severalmeasures of efficiency. The first one is a rough estimationof capital-outputand labor-outputratios for the major subsectors. While this measure does not tell much about absolute efficiency,it sheds light on relative efficiency among subsectors. An efficientsubsector, compared to an inefficientone, would use fewer inputs - 61 -

FigureIV.1

Z AEABE:CAP ITAL ANDLAB0R NPT PERUNIT OF NET OUTPLT MANLFACTLRNGSECTaRSN 18

,4Non-Ketallic Mineral Products r:Metals and Motel Products

Textiles (inc.ginning) - r Chmicals and Petroleum Products DAverage _ C Foodstuf f

Drinks and .Tobaccop Transport Paper "Equipment i D Printing & Publishing Wood and Furniture S Other Manufacturing 8 Products

_ Clothing and _ V Footwear

o_ § ~ ~I ~ ~I I I I u.75 1.00 1.25 1.50 1.75 2.00 .. 2.5C 2.75 LABORPER UNrT OF NET OLflPU - 62 - to producethe same output. A graph showingthe differentcapital- and labor-outputratio. for the differentsubsectors would indicatewhich sectorsare relativelymore efficient. Oving to differentproduction processes,one sectormy use more labor to produceone unit of outputthan anothersector. If at the same time it also uses less capital,then nothingcan be said about efficiencyof the two sectorswithout additional informationabout relativeprices because additional labor costs may be more than made up in lower capitalcosts. Thus, it is impossibleto tell whether the chemicalsand petroleumsubsector--which is capital intensive--ismore or less efficientthan drinksand tobacco--whichis more labor but less capitalintensive. However,if one sectoruses more labor and more capitalto produceone unit of output than anothersector, then it Ts-less efficient. This is the case with non-metallicmineral products, for example,which is more capitaland labor intensivethan all the sectors that lie below it and to its left (chemicaland petroleumproducts, for example). While absoluteefficiency depends on the relativeprices of labor and capital,it is clear that the subsectorsthat use more of both inputs are less efficient. These subsectorsappear closerto the originin Figure IV.1. By this criterionit appearsthat non-metallicmineral products,metal and metal products,and textiles(including ginning), are clearly less efficientin using capitaland labor to generatevalue added.l/

Table IV.1: ZIMBABWE- MANUFACTURINGSECTOR: CAPITALAND LABOR INPUTS PER UNIT OF NET OUTPUT 1982a/

CapitalInput Labor Input per per Unit of Unit of Net Output Net Output

Foodstuffs 2.89 1.33 Drink and Tobacco 2.50 0.97 Textiles(including ginning) 3.38 1.94 Clothingand Footwear 1.08 1.97 Wood and Furniture 1.70 2.63 Paper Printing& Publishing 2.25 1.12 Chemicaland PetroleumProducts 3.19 0.81 Non-metallicMineral Products 4.28 1.38 Metals and Metal Products 4.19 1.45 TransportEquipment 2.36 1.44 Other ManufacturingProducts 1.63 1.81 Average for all Manufacturing 3.0 1.41 a/ All valuesare denominatedin Zimbabweandollars.

Source: StatisticalAppendix Table 9; missionestimates.

1/ This is not, however,a true measureof technicalefficiency because the structureof protectionand price controlsaffects the rents obtainedby differentsubsectors and thereforethe ratios. Thus, even if two sectorshad the same real technicalefficiency, that which has the highestrents would appearto be more efficient. - 63 -

Protectionand DomesticResource Cost

4.05 The effectiveprotection coefflcient (EPC) Is the ratio of valued added generatedby a firm (or subsector)at domesticprices comparedto value added generatedat internatlonalprices. An effectiveprotection coefficientgreater than one impliesthat the firm'svalue added is higher than could be obtainedif its output and Inputswere valuedat international prices. In such a case, either profits,or wages, or taxes,are higher by virtueof the protectivesystem. This means that either the firm is perceivinghigh rents,or Incurringhigh costs.

4.06 The domesticresource cost coefficient(DRC), closely related to effectiveprotection, measures the ratio of domesticresources used per unit of foreignexchange savings. By this measure,a firm that uses US$2 worth of domesticresources to generateUS$1 of foreignexchange savings has a DRC of 2 and is not an economicallyefficient proposition.

4.07 Accordingto the Jansen study,effective protection is relatively low in food, beveragesand tobaccosubsectors, whereas it is quite high in wood and paper industriesand in chemicaland metal subsectors. Were it not for the investmentcontrol system, this patternwould tend both to induce resourcesto flow from the formerinto the latter,and to permit greater inefficienciesin the latter.

4.08 Variationsin EPCs for five broad manufacturinggroups are shown in Figure IV.2. The solid bars show the percentagedistribution of average EPCs for the subsectorswithin each group across four ranges: low (EPC below 1.0, i.e., negativeeffective protection); marginal (EPC 1.0-1.25,with protectioncompensating for one estimateof the degreeof exchangerate overvaluation);high (EPC 1.25-1.50);and very high (over 1.50). The dis- persionof the distributionfor all subsectorsmasks some importantdifferences betweengroups. The relationshipbetween the patternof protection and efficiencyis illustratedin Figure IV.3. The shadedbars show the distributionof domesticresource coefficients. Differences between groups in the distributionof DRCs reflectdifferences in the distributionof EPCs. DRCs tend to be relativelylow in food, beverageand tobaccosubsectors, and quite high in wood and paper industries. Chemicalsand non- metallicmineral products, however, tend to be much more efficientby the DRC criterionthan would be anticipatedon the basisof the patternof protection. Nevertheless,the correlationbetween DRCs and EPCs is 76%, stronglysuggesting that the more efficientfirms are those being the least protected.

4.09 Althoughthe Jansenstudy does not concludethat Zimbabwe'sex- change rate was clearlyovervalued in 1981, It does estimatethat the average DRC wouid be only 1.02 on the hypothesisthat it was 25% overvalued. This impliesthat the systemof controlsin place duringUDI was on the - 64 -

whole successfulin maintainingthe overallcompetitiveness of manufacturingproduction and in preventingfirms from increasingcosts or profits to capturethe potentiallyvery high protectiverents. 2/

Table IV.2: ZIMBABWE- DISTRIBUTIONOF VALUE ADDED ACCORDINGTO DOMESTICRESOURCE OOST INCURRED

Value Cumulative DomesticResource Added Value Added Cost (X) (%)

Below 1.00 39 39 1.00 - 1.10 15 54 1.10 - 1.20 10 64 1.20 - 1.30 4 68 1.30 - 1.40 18 86 Above 1.40 14 100

Source: StatisticalAppendix Table 8; missionestimates.

4.10 These rangesunderstate the variationthat would be found if the samplehad been largeror if DRCs had been calculated for products rather than firms,but they are illustrative.Of the 24 subsectorsfor which the firm-levelrange is available,11 had estimatesranging from low to high or very high-i.e., both inefficientand efficientfirms coexistingin the same subsector(though not necessarilyproducing the same product). This was the case whether the subsectoraverage was low or high. Further- more, only two of these 24 subsectors(beer, wine and spirits,and fertilizers and insecticides)were entirelyin the "low" range,and only two could be consideredunambiguously inefficient (steel and non-ferrousmetals, and heavy metal equipment). This means both that a substantialnumber of less efficientfirms have been able to surviveunder the prevailingsystem, and that these less efficientfirms cannot be readilyor exclusivelyassociated with particularsubsectors.

2/ Inter-countrycomparisons are difficultbecause of varyingdegrees of exchangerate overvaluation(not taken into accountin the estimates discussedhere), different methodologies and sampling,and differences in economicconditions at the time estimateswere made. Nonetheless, the averageof 1.27 for Zimbabwecompares favorably with estimatesof 1.95 for Ghana and 1.4-3.0for non-foodproduct groups in Zambia,and is similarto the averageof 1.34 found for Ivory Coast,a relatively open economy. (Sources: Ghana - S.R. Pearson,G.C. Nelson,and J.D. Stryker,"Incentives and ComparativeAdvantage in GhanaianIndustry and Agriculture,"World Bank Study, 1976; Zambia- World Bank, "Zambia: IndustrialPolicy and Performance,"Report No. 4436-ZA, 1984; Ivory Coast- D. Stryker,G. Purselland T. Monson, "Incentives and ResourceCosts in the Ivory Coast,"World Bank study,1975.) Figure IV. 3: DISTRIBUTION OF DRCs BY INDUSTRY GROUP (Percentage of observations in group)

| ~~~~AllSect-r lChewlcOl- s lBDn-_tellles 1 litels

' t~~~~~~~~~~~~~~

PP.* Alld 4.P. jChel.~s. EB.6-- t.tl.k1

O 1.00 1.25 l.SO0 O 1.00) 1.25 I.SO >> O l. O s 2IS S >>

O 0 .00 1.2S l.SO O .W 1.25 1.50 >> O 1.00 1.25 1.EO > High O - 1.00 Low 1.25 - 1.50 high 1.00 - 1.25 Marginal > 1.50 Very - 66 -

4.11 It is unusualto find such high degreeof efficiencyin a country that, like Zimbabwe,has been substantiallyisolated from outsidecompetition on for such a long time and that has laboredunder such severe import restriction.The missionundertook some spot checksrecalculating DRCs in two subsectors(fertilizers and steel) and using other measuresof efficiency in the textilesubsector. The missionresults show that, if anything,the Jansenstudy underestimatedthe degree of efficiencybecause it did not use shadowprices. But they also reinforcethe wide variationsin efficiencythat the controlssystem has spawned. In the case of steel (ZISCO),mission results show that this firm, classifiedas inefficientin the Jansenstudy, is efficientif its inputsand outputsare valued at economic (or shadow)prices. In the case of textilessubsector, mission findingsshow that some firms are as efficientas any in developedcountries and that others are very inefficient,even by developingcountry standards.

TechnicalEfficiency in the TextileSubsector

4.12 Technicalefficiency in textilemanufacturing can be measured accordingto two main criteria,machine efficiencies and labor productivity. Machineefficiency is definedas the numberof hours that a machine actuallyworked relativeto the numberof hours that a machinewas available for work. Labor productivityis definedas the total number of labor-hoursper unit of output. The missionvisited seven firms producing about 80% of the total value added in the subsector. Four firms provided sufficientdata for a completeanalysis.

4.13 In spinningoperations, machine efficiency is very close to Euro- pean standards,but in weavingit is generallybelow. In both cases there are wide variationsbetween firms. With the countsof yarn in production and the qualityof cottonused, ring spinningmachine efficiencies would be expectedat about 90%. The averageof the four firms was about 90%, with two below 90% and one substantiallyabove. Machineefficiencies in weaving, on the other hand, are low for the types of fabricsin productionand for the low numbersof looms per weaver,as Table IV.3 shows.

Table No. IV.3: ZIMBABWE- ESTIMATESOF OVERALLSPINNING AND WEAVING EFFICIENCIESa/

Spinning Weaving Ring Rotor Looms _ 2 Firm A 85 - 60 FirmB 94 - 82 Firm C 88 95 73 Firm D 90 95 77 a/ Machineefficiency is definedas the ratio of hours worked to hours availablefor work.

Source: Directfirm information;mission estimate. FiRure lV.4: RANGE OF DRCS BY SUBSECTOR MARG- VERYLOWI LOW IINAL hiia I VERYHIGH 0.4 05 Oh 0J 0.8091.0 L25 L5 2.0 3.0 4.0 5.0 6.0 FOOD, Beer,vine,spirits BEVERAGES Meet products AND Bakery products TOBACCO Misic.food productsL Sugar, confectionery Grain milling, feeds Dairy products Tobacco products Soft dr nks

TEXTILES Footwear AND | Knitwear

APPAREL Textiles & ginning MI ...... I...-L Ai i - l. Clothing 1I

WOOD, Furniture FURNITURE Sawmilling t I I K Printing, stationery PPaper products

CHEIMCALS Glassproducts : | .A_ I I AND |Soaps, detergents

mu- rFertillzer, insecticides METALIC Plastics MINERAL Mi PRODUCTS Potr Cement, bricks Plaints, etc.Ij--IL.'-A Pharmaceuticals [Rubber products

Agricultural implementsI Industrial Elec. Equip. METALS Light metal products Transport Equip. Heavy metal equip. | i - Household elect. equip.; | |Steel,non-ferrous metals_L - rs \ \ \ \q Range of lowest to highest DRC in subsector. u Average (weighted) subsectoral DRC. - 68 -

4.14 Labor productivity is also very variable between firms. One firm attained labor productivity in spinning higher than that of the United Kingdom (third in the sample of countries), whereas another firm was at the bottom of the list and slightly lower than Turkey (see Table IV.4). In weaving, the variance in labor productivity was also high, with one firm being third in the sample and another firm next to last. These findings illustrate the shortcomings of the policy environment: the umbrella of protection is so broad that all firms survive, be it that they are efficient or inefficient. If the more inefficient ones are making profits, the more efficient ones are enjoying high rents.

Economic Efficiency in the Textile Subsector

4.15 Machine and labor productivities are not measures of economic efficiency because they do not take into account relative factor prices. These two factors of production must be combined in appropriate proportions in order to compensate for differences in factor costs. To this end, the mission used another measure of efficiency--relative total factor productivity-in order to assess whether the particular combination of capital and labor used by textile manufacturers was appropriate for Zimbabwe's cost structure. This approach essentially compared individual factor productivity in Zimbabwe with factor productivities in "best practice" plants in developed countries and then used a production function to weight the individual factor productivities. The overall result was then compared to "best practice" for a total relative factor productivity measure. A relative total factor productivity (RTFP) of 1.0 implies .hat Zimbabwe is as efficient as "best practice" plants; whereas an RTFP of 0.50 implies that Zimbabwe is only half as efficient. If the weighted average cost of the factors relative to their cost in the "best practice" plant is only 25%, for example, then Zimbabwe can produce at a lower cost than the beat practice plants, despite its lower efficiency.

4.16 The results show that Zimbabwe's RTFP is 79% in ring spinning, 77% in open-end spinning and 72% in weaving. This is roughly the same performance achieved in Morocco, which has had a long industrial history in textiles; it is superior to that realized in countries such as Kenya and the Philippines, although inferior to those in Europe and the United States. It is important to note that Zimbabwe's lower productivity relative to "best practice" stems from lower labor productivity, capital productivity being as almost as high as in "best practice" plants. A lower capital-labor ratio and hence lower output per worker is to be expected, given lower labor costs in Zimbabwe relative to Europe and the United States. Table IV.5 shows the different input requirements relative to "best practice". For example in spinning, Zimbabwe's textile subsector requires 1.88 units of labor per unit of output compared to 1.00 unit of labor required in "best practice." In weaving, it requires 2.6 units of labor, but exactly the same units of capital as "best practice." Again, the wide variations in productivity are noteworthy. As discussed in Chapter III, given relative factor prices, these differences in productivity mean that for Zimbabwe, textile exports are a possibility, but not a strong one. With a lower exchange rate they would be quite competitive. - 69 -

Table IV.4:- ZIMBABWELABOR PRODUCTIVITYIN THE TEXTILESECTOR RELATIVETO PRODUCTIVITYIN VARIOUSCOUNTRIES a/ (Percentages)

Ring SpinningS/

USA 100.0 100.0 German FederalRep. 79.4 60.0 ZimbabweB 62.7 29.1 UnitedKingdom 42.5 33.3 Zimbabwe C 40.0 4.6 Kenya B 35.4 16.7 Turkey 33.7 18.8 ZimbabweA 30.7 15.2 Kenya A 17.9 7.5 ZimbabweD n.a 14.7

a/ Four sets of values are quotedfox Zimbabweand two for Kenya. The values for Zimbabweare for differentmills. The value for Kenya A is for a typical mill; the value for Kenya B is for a brand new mill with modem ring spinning and preparatory equipment, and modern shuttle weaving.

b/ The figures quoted for ring spinning refer to ring spinning only. Rotor spinning and that part of the preparatory processes that might be attributed to rotor spinning have been removed from the calculation. Activity on combing was also removed to bring all mills on to a common basis for ring span carded yarn with count adjustment to a nominal 30's tex.

Efficiency in Steel and FertilizerManufacturing

4.17 The mission calculated DRCs in the steel and fertilizer sectors using the following set of accounting ratios:

Foreign exchange: 1.40 Skilled labor: 1.80 Unskilled lab3r: 0.42 Electricity: 0.79 Coal: 0.46

4.18 In the steel sector, the results show that ZISCO's operation has a DRC of 0.42 for domestic sales, 0.76 for exports, and 0.58 for overall average, indicating that steel making is an economically justifiable operation. These results are much better than the ones obtained in the Jansen study. There are several reasons for the improvement. Since the Jansen study was published, the exchange rate has been devalued. The exchange rate in 1981 was Z$C.72 per US$, while the one used for the - 70 -

currentcalculation was Z$1.60 per US$. This differencein exchangerates would bring the DRC down by about one-half,from 4.4 as calculatedin the Jansen study,to about 2. Second,the adjustmentsto costs steumingfrom the use of shadow pricesfavor ZISCO in severalways: (i) by loweringthe cost of labor;(II) by loweringthe cost of coal; and (iii) by raisingthe value of ZISCO'sproduct on accountof the exchangerate adjustment. These adjustmentsbring the DRC down to 0.58. The differencebetween these and earlierresults, then, comes from methodologicalprocedures rather than gains in efficiencyin ZISCO'soperations.

Table IV.5: ZIMBABWE- AVERAGESECTOR-WIDE UNIT LABORAND EQUIPMENT REQUIREMENTSAND TOTAL FACTOR PRODUCTIVITY RELATIVETO BEST PRACTICE

SELECTEDCOUNTRIES Zimbabwe Kenya Philippines Morocco

Spinning

Labor 1.88 3.57 2.05 1.88 Equipment 1.03 1.07 1.29 1.00 Total factor productivity .79 .69 .73 .78

Weaving

Labor 2.60 4.62 4.23 1.94 Equipment 1.00 1.05 1.39 1.16 Total factor productivity .72 .68 .55 .73

Source: Direct firm information; mission estimates.

4.19 In the fertilizersector, the DRCs vary considerablyfrom firm to firm. The lowestDRC recordedwas 0.28,, while the highestwas 0.91. A sales-weightedaverage DRC would show a DRC of 0.62, suggestingthat this sector Is also efficient,but once more pointingout that there are wide variationsbetween firms, regardlessof the sector.

Problemswith the PresentSystem

4.20 Althoughdata are lackingon the size of scarcityrents that resulted from import scarcities under UDI, it is clear that opportunities for windfallgains were considerable.In such a situation,controls typically either break down, or, if they are effective,discourage continued productionin controlledactivities and encourageshifting into less con- trolledor illegalactivities. Nevertheless,manufacturing production - 71 -

flourished,at least duringthe first half of UDI, apparentlywithout the severelydistorting impact on efficiencythat is found in many other countrieswith high protectivesystems. What accountsfor the relative successwith which controlsapparently were operatedunder UDI? Why did this systemproduce a relativelyefficient manufacturing sector?

Table IV.6: ZIMBABWE- DOMESTICRESOURCE COST CALCULATIONS FOR STEEL MANUFACTURING

D R C Protection Export Domestic Nominal Effective Sales Sales Overall % %

Jansen Study n.a. n.a. 4.4 20.0 87.0

Mission Estimates

Blooms & Billets 0.71 0.32 0.59 4.4 5.3 Medium Sections 0.72 0.35 0.39 -15.7 -29.8 Light Sections 2.64 0.54 0.55 -11.3 -26.1 Bar/Rods 1.07 0.53 0.75 -11.1 -23.1

Average 0.76 0.42 0.58 -7.6 -16.6

Source: DirectZISCO information;mission estimates.

4.21 Importallocation and pricingdecisions for -.anufacturerswere based largelyon firms'imports and profitrates prior to the impositionof sanctions,limiting the extentto which firms could capturewindfall gains due to the scarcityof competingimports. The monitoringof prices and costs duringUDI appearsto have been reasonablysuccessful in maintaining the degreeof efficiencythat had made Zimbabwe'sindustry competitive on exportmarkets and the remarkableprice stabilitymay have helped keep re- quests for price revisionsdown to a minimum. With the data availableit is not possibleto say whethermonetary and fiscalpolicies kept inflationary prestlaresdown, or whetherinflation rates merely reflectthe effect of price controls. The accelerationof inflationin the secondhalf of UDI and after Independencesuggest that monetaryand fiscalpolicies during the fi.st half of UDI were at least partiallyresponsible for the low inflation rates. Another importantfactor, mentioned in ChapterI, is the fact that Zimbabwe'smanufacturing sector was not born duringUDI. In fact, about one-halfof today'sproductive capacity was alreadybuilt by 1965. This productivecapacity was put in place by the privatesector under conditions of relativelyfree trade and hence could be presumedto be competitive world-wide. The investmentthat took place during UDI built upon this base. Time limitationsprevented the mission from evaluatingwhether the firms establishedduring UDI were more or less efficientthan those that came before,but futureresearch might try to answerthis question. - 72 -

Table IV,7: ZIMBABWE- DOMESTICRESOURCE COST CALCULATIONSFOR FERTILIZERMANUFACTURING

ProJection DRC Nominal Effective

Firm A 0,72 24.8 141.6 Firm B 0.91 28.3 142,9 Firm C 0.28 6.3 10.0

Source: Direct informationfrom firms;mission estimates.

4.22 In sum, the implicitprotection afforded to Zimbabwe'sindustrial sector by the foreignexchange allocation system and investmentcontrol systemshas not distortedthe sector to the same extent as in other countries. Nevertheless,the systemhas entailedsome costs. Both inefficient and efficientfirms coexistpeacefully in the same subsectors,have access to preciousforeign exchange and only mild incentivesto improve(they have the carrotof profitsbut the stick of bankruptcystems only from the reductionof markets,not from competitivepressures). The high degree of efficiencycoupled with the generallymoderate differences between domestic and internationalprices imply that openingthe economyto outsidecompetition would not be highly disruptiveto the sectorduring the t-ansition period. In fact,even with the presentimport duty rates, the firms that might be squeezedproduce only about 11X of value added. But the combination of relativelyhigh efficiencyand high capacityutilization also means that the gains from reallocationof currentresources would be minor. To grow, Zimbabweanindustry needs to modernizeand expand its capitalstock, i.e., invest. Becauseprivate ownership prevails, investment will come about only in responseto perceivedbusiness opportunities in what is now a generallyunfavorable environment owing to the politicaluncertainties of SouthernAfrica. The businessenvironment, then, must be favorableenough to counterbalancethis situation. - 72 -

Table IV,7: ZIMBABWE- DOMESTICRESOURCE COST CALCULATIONSFOR FERTILIZERMANUFACTURING

Projection DRC Nominal Effective

Firm A 0.72 24.8 141.6 Firm B 0.91 28.3 142.9 Firm C 0.28 6.3 10.0

Source: Direct informationfrom firms;mission estimates.

4.22 In sum, the implicitprotection afforded to Zimbabwe'sindustrial sector by the foreignexchange allocation system and investmentcontrol systemshas not distortedthe sector to the same extentas in other countries. Nevertheless,the systemhas entailedsome costs. Both inefficient and efficientfirms coexistpeacefully in the same subsectors,have access to preciousforeign exchange and only mild incentivesto improve(they have the carrotof profitsbut the stick of bankruptcystems only from the reductionof markets,not from competitivepressures). The high degreeof efficiencycoupled with the generallymoderate differences between domestic and internationalprices imply that openingthe economyto outsidecompetition would not be highly disruptiveto the sectorduring the t-ansition period. In fact, even with the presentimport duty rates,the firms that might be squeezedproduce only about 11X of value added. But the combination of relativelyhigh efficiencyand high capacityutilization also means that the gains from reallocationof currentresources would be minor. To grow, Zimbabweanindustry needs to modernizeand expandits capitalstock, i.e., invest. Becauseprivate ownership prevails, investment will come about only in responseto perceivedbusiness opportunities in what is now a generallyunfavorable environment owing to the politicaluncertainties of SouthernAfrica. The businessenvironment, then, must be favorableenough to counterbalancethis situation. - 73 -

V. UtOOHNNDATIONS

5.01 The Government of Zimbabwe's First Five Year National Development Plan 1986-1990 published in April 1986, singles out the manufacturing sector as the "key for changing the structure of the Zimbabwean economy and for achieving rapid growth and...developmtent." Among other things, manufacturing is expected to employ 31,000 new workers, invest Z$1.4 billion (of which Z$1 billion would be private investment) and expand its exports at an annual rate of 8.2% during the Plan period. Compared to past achievements, these are very ambitious targets. The growth rate of manufactured exports is particularly ambitious: the plan projects a ten-fold increase in the growth rate of exports over the growth rate achieved in 1980-84 (see Table V.1). Of the total increase in merchandise exports projected for the Plan period, manufactured exports are expected to account for 36.5%.

Table V.1: ZIMBABWE- 5-YEARPLAN TARGETS COMPARED TO PAST ACHIEVEMENTS IN MANUFACTURING

Actual Plan 19P80-1984 1986-90 Plan/Actual

Growth Rates Value Added a/ 1.8 6.5 3.6 Exports 0.9 8.2 9.5 Employment 1.2 2.0 1.7

Volumes (Million 1980 Z$) Investment 656 659 1.0 a/ Based on 1980-83 data.

Source: First Five Year Development Plan; mission estimates.

5.02 Previous Bank analysis has also made the manufacturing sector the centerpiece of Zimbabwe's economic development. The 1985 Country Economic Memorandum (Report No. 5458-ZIM) concluded that foreign exchange would be Zimbabwe's main constraint to growth and that increasing manufactured exports was the country's most promising avenue to ease this constraint. The Bank's projections showed that a modest rate of economic growth of 4.2% per year in 1986-90 would be possible if exports increased at about 4.9% per year. This would lead to a 7% improvement in per capita income in 1990 compared to 1980. A 1.5% per year export growth rate, on the other hand, would lead to only 3.0% per year GDP growth. In the latter case, ten years after Independence, Zimbabwe's per capita income would be at exactly the same level as in 1980. - 73 -

V. 3EODHBNDATIONS

5.01 The Governmentof Zimbabwe'sFirst Five Year NationalDevelopment Plan 1986-1990published in April 1986, singlesout the manufacturing sectoras the "key for changingthe structureof the Zimbabweaneconomy and for achievingrapid growthand...development." Among other things,manu- facturingis expectedto employ31,000 new workers,invest ZS1.4 billion (of which Z$1 billionwould be privateinvestment) and expand its exports at an annualrate of 8.2X duringthe Plan period. Comparedto past achievements,these are very ambitioustargets. The growthrate of manufactured exports is particularlyambitious: the plan projectsa ten-foldincrease in the growth rate of exports over the growth rate achieved in 1980-84(see Table V.1). Of the total increasein merchandiseexports projected for the Plan period,manufactured exports are expectedto accountfor 36.5%.

Table V.1: ZIMBABWE- 5-YEARPLAN TARGETSCOMPARED TO PAST ACHIEVEMENTS IN MANUFACTURING

Actual Plan 1980-1984 1986-90 Plan/Actual

Growth Rates Value Added a/ 1.8 6.5 3.6 Exports 0.9 8.2 9.5 Employment 1.2 2.0 1.7

Volumes (Million 1980 Z$) Investment 656 659 1.0 a/ Based on 1980-83 data.

Source: First Five Year Development Plan; mission estimates.

5.02 Previous Bank analysis has also made the manufacturing sector the centerpiece of Zimbabwe'seconomic development. The 1985 CountryEconomic Memorandum(Report No. 5458-ZIM)concluded that foreignexchange would be Zimbabwe'smain constraintto growthand that increasingmanufactured exports was the country'smost promisingavenue to ease this constraint. The Bank'sprojections showed that a modest rate of economicgrowth of 4.2% per year in 1986-90would be possibleif exportsincreased at about 4.9% per year. This would lead to a 7% improvementin per capitaincome in 1990 comparedto 1980. A 1.5% per year exportgrowth rate, on the other hand, would lead to only 3.0% per year GDP growth. In the lattercase, ten years after Independence,Zimbabwe's per capitaincome would be at exactlythe same level as in 1980. - 74 -

5.03 It has been one of the themes of this report that Zimbabwe's manufacturing sector has the huan resources required to achieve these targets. However, they will not be achieved with the present environment. In particular, major policy changes are required to bring the growth rate of manufactured exports from 0.91 per year to 8.21 per year. Within manufactured exports, iron and steel account for about one-quarter of all exports. ZISCO is not presently in a position to expand exports noticeably, as discussed in Chapter VIII. Other mnufactures, then, must grow at about 11% per annum if the target is to be achieved. This would require tripling the growth rate attained by these exports during the past five years. Such a turnaround will not happen overnight under present conditions. First, the profitability of exporting needs to improve. Profits in the domestic market are much higher than in the export market;manufacturers do not have the incentives required to expand exports at 11X per annum. Second, the capital stock is old and is already being utilizedat close to full capacity: the private sector needs an environment that will stimulate investment.

5.04 The discussion of the two preceding chapters indicates that Zim- babwe's manufacturing sector has not suffered to the same extent as other countries the usual ills associated with industrial development achieved through import substitution behind high protective barriers. Some 45% of thte sector's value added is produced at domestic resource cost at or below 1.0 and another 211 is produced at domestic resource cost between 1.0 and 1.2. Despite the strict controls on investment and domestic competition, the price control system has succeeded in preventing widespread monopoly rents from accruing to manufacturing firms and becoming an industry-wide problem. Also, the price control system has succeeded in keeping the general price level down. Finally, at least during the first seven years of UDI, the sector's growth rate was high. It could be argued that the stagnation and decline experienced during the second half of UDI could be attributed to political factors and not necessarily to the incentives system. Why change now?

5.05 There are several reasons why the present system needs to be changed. The case for reform of the existing incentive system flows from the assessment of its limitations, as reported in previous chapters. The combination of virtually complete protection from foreign competition and domestic controls leads to a system that protects high and low-cost existing activities alike. Future growth will depend on higher levels of investment that will allow the evolution of a more consistently efficient, and technologically dynamic sector. This is likely to involve an increase in specialization at the firm and subsector level. The limitations inherent in the existing incentive system place a severe brake on investment and growth and tends to support the continued expansion of high-cost activities that use both domestic and foreign resources inefficiently.

5.06 Reform of the environment for the industrial sector appears ur- gent in the mid-1980s owing to the changed macroeconomic conditions (compared with the 1960s or early 1970s when the sector was rapidly expanding.) Owing to terms of trade losses and lower potential volume growth for - 74 -

5.03 It has been one of the themes of this report that Zimbabwe la manufacturing sector has the human resources required to achieve these targets. However,they will not be achieved with the present environment. In particular, major policy changes are requiredto bring the growthrate of manufactured exports from 0.92 per year to 8.21 per year. Within manufactured exports, iron and steel account for about one-quarter of all exports. ZISCO is not presentlyin a positionto expandexports noticeably, as discussedin ChapterVIII. Other manufactures,then, munt grow at about 11% per annumif the target is to be achieved. This would requiretripling the growthrate attainedby these exportsduring the past five years. Such a turnaroundwill not happen overnightunder presentconditions. First, the profitabilityof exportingneeds to improve. Profitsin the domestic market are much higher than in the exportmarket; manufacturers do not have the incentivesrequired to expandexports at 11% per annum. Second,the capitalstock is old and is alreadybeing utilizedat close to full capacity: the privatesector needs an environmentthat will stimulateinvestment.

5.04 The discussionof the two precedingchapters indicates that Zim- babwe'smanufacturing sector has not sufferedto the same extentas other countriesthe usual ills associated with industrial development achieved throughimport substitutionbehind high protectivebarriers. Some 45% of the sector'svalue added is producedat domesticresource cost at or below 1.0 and another 21% is producedat domesticresource cost between1.0 and 1.2. Despitethe strictcontrols on investmentand domesticcompetition, the price controlsystem has succeededin preventingwidespread monopoly rents from accruingto manufacturingfirms and becomingan industry-wide problem. Also, the price controlsystem has succeededin keepingthe generalprice leveldown. Finally,at leastduring the first sevenyears of UDI, the sector'sgrowth rate was high. It could be argued that the stagnationand declineexperienced during the secondhalf of UDI could be attributedto politicalfactors and not necessarilyto the incentivessystem. Why change now?

5.05 There are severalreasons why the presentsystem needs to be changed. The case for reformof the existingincentive system flows from the assessmentof its limitations,as reportedin previouschapters. The combinationof virtuallycomplete protection from foreigncompetition and domesticcontrols leads to a systemthat protectshigh and low-cost existingactivities alike. Futuregrowth will dependon higher levelsof investmentthat will allow the evolutionof a more consistentlyefficient, and technologicallydynamic sector. This is likelyto involvean increase in specializationat the firm and subsectorlevel. The limitations inherentin the existingincentive system place a severebrake on investmentand growth and tends to supportthe continuedexpansion of high-costactivities that use both domesticand foreignresources inefficiently.

5.06 Reformof the environmentfor the industrialsector appearsur- gent in the mid-1980s owing to the changed macroeconomic conditions (compared with the 1960s or early 1970s when the sector was rapidly expanding.) Owing to terms of trade lossesand lower potential volume growth for - 75 -

primary commodities, combined with higher service outflows than in the past, the rest of the economy cannot be expected to provide a continued foreign exchange surplus to finance the further expansion of the industrial sector along its historical path. Moreover, the cost of further increases in the sector's reliance on the domestic market is likely to rise since easy" import substitution options have been effectively exploited in the past. This implies that growth in manufactured exports will play a crucial role both as a source of growth of the industrial sector itself and to support the exparnsion of the whole economy. Both the Government's and the Bank's analysis agree in that Zimbabwe's future growth will hinge on the country's ability to export. Foreign exchange is the most serious macroeconomic constraint to growth. Given the country's indebtedness, it would not be prudent to overcome the constraint solelywith additional external borrowing. This leaves aid, foreign investment, and exports as the main future sources of foreign exchange. Of these, exports is the only one likely to provide the volume of foreign exchange necespary to feed Zimbabwe's growth needs. The present system of incentives, however, is not geared to stimulate industrial exports.

5.07 Indeed, as discussed in Chapter III, one of the consequences of the current incentive system is a pervasive, if highly variable, bias against exports. In 1963 Zimbabwe's exports amounted to about US$350 million--equivalent to about US$1.2 billion at 1980 prices. Twenty-one years la-er, in 1984, exports were lower--about US$1.1 billion at 1980 prices. Industrial exports, in particular, have declined from about US$330 million (1980 prices) in 1966 to US$240 million (1980 prices) in 1984, while mining and agricultural exports rose despite sanctions. This disparate behavior suggests that the policy environment affected performance as much as sanctions, if not more. By comparison with a country whose incentive system has been geared towards exports, in 1962 Korea's exports were one-seventh of Zimbabwe's, by 1968 they were twice as high, by 1970 they were three times as high, and by 1981 they were more than 20 times higher.

5.08 During UDI, growth of the industrial sector was based on expansion of domestic demand and import substitution. Despite the lifting of sanctions after Independence, growth continued to stem from the same two sources, as discussed in Chapter I. Export expansion, if anything, became a less significant source of growth. The main reason for this performance lies in the strong anti-export bias inherent in the present system. Zimbabwe's landlocked position increases its transportation costs. For Zimbabwean exporters to be on an equal footing with exporters elsewhere, the incentives system must overcome their natural disadvantage. Far from doing this, the present system makes exports, net of transport costs, less attractive than domestic sales. Not only are domestic prices higher than export prices, but domestic sales--unencumbered with competitive pressures--are far safer. Under these conditions, it would be surprising to find that manufacturers prefer the riskier and less profitable export market to the safer and more lucrative domestic market.

5.09 The quickness with which capacity could become a bottleneck is illustrated by a simple arithmetic exercise. Using the UNIDOestimate of current capacity utilization (70%), and the share of exports in total - 75 -

primarycommodities, combined with higher serviceoutflows than in the past, the rest of the economycannot be expectedto providea continued foreignexchange surplus to financethe furtherexpansion of the industrial sectoralong its historicalpath. Moreover,the cost of furtherincreases in the sector'sreliance on the domesticmarket is likelyto rise since "easy"import substitution options have been effectivelyexploited in the past. This impliesthat growthin manufacturedexports will play a crucial role both as a source of growth of the industrialsector itself and to supportthe expansionof the whole economy. Both the Government'sand the Bank'sanalysis agree in that Zimbabwe'sfuture growth will hinge on the country'sability to export. Foreignexchange is the most serious macroeconomicconstraint to growth. Given the country'sindebtedness, it would not be prudentto overcomethe constraintsolely with additional externalborrowing. This leavesaid, foreigninvestment, and exportsas the main futuresources of foreignexchange. Of these,exports is the only one likelyto providethe volumeof foreignexchange necespary to feed Zimbabwe'sgrowth needs. The presentsystem of incentives,however, is not geared to stimulateindustrial exports.

5.07 Indeed,as discussedin ChapterIII, one of the consequencesof the currentincentive system is a pervasive,if highlyvariable, bias againstexports. In 1963 Zimbabwe'sexports amounted to about US$350 million--equivalentto about US$1.2 billionat 1980 prices. Twenty-one years laer, in 1984, exportswere lower--aboutUS$1.1 billionat 1980 prices. Industrialexports, in particular,have declinedfrom about US$330 million (1980 prices)in 1966 to US$240million (1980 prices)in 1984, while mining and agriculturalexports rose despitesanctions. This disparatebehavior suggests that the policyenvironment affected performanceas much as sanctions,if not more. By comparisonwith a countrywhose incentivesystem has been geared towardsexports, in 1962 Korea'sexports were one-seventhof Zimbabwe's,by 1968 they were twice as high, by 1970 they were three times as high, and by 1981 they were more than 20 times higher.

5.08 DuringUDI, growth of the industrialsector was based on expansion of domesticdemand and importsubstitution. Despite the liftingof sanctionsafter Independence,growth continuedto stem from the same two sources,as discussedin ChapterI. Exportexpansion, if anything,became a less significantsource of growth. The main reason for this performance lies in the stronganti-export bias inherentin the presentsystem. Zimbabwe'slandlocked position increases its transportationcosts. For Zimbabweanexporters to be on an equal footingwith exporterselsewhere, the incentivessystem must overcometheir naturaldisadvantage. Far from doing this, the presentsystem makes exports,net of transportcosts, less attractivethan domesticsales. Not only are domesticprices higher than exportprices, but domesticsales--unencumbered with competitivepressures--arefar safer. Under these conditions,it would be surprisingto find that manufacturersprefer the riskierand less profitableexport market to the safer and more lucrativedomestic market.

5.09 The quicknesswith which capacitycould becomea bottleneckis illustratedby a simplearithmetic exercise. Using the UNIDO estimateof currentcapacity utilization (70%), and the share of exportsin total - 76 -

production,we have that about 63% of capacityis being used for domestic productionand about 7% for exports. The Five Year Plan is aimingat 6.5% annual rate of growth of the industrialsector and, as statedbefore, an 8.2% rate of growth of industrialexports. These rates of growthimply that in five years capacityutilization would have to increaseby about 38% to 95%. Of course,the actual degreeof slack capacityis much lower becausenot all subsectorshave the same export capabilityand some of the major exportingsectors (e.g., steel and textiles)are alreadyworking at or near full capacity.

5.10 To preventcapital equipment from becominga bindingconstraint, levelsof investmenthigher than achievedin recentyears will be necessary. As riotedin ChapterII, low investmentlevels have been associated with both economicand non-economicreasons. Shortageof foreignexchange and low profit rates are the two economicreasons most frequentlycited by firms for holdinginvestment back. The politicalsituation in the Republic of South Africa and a perceivedlack of clarityin Governmenteconomic policiesare the two most frequentlycited non-economicreasons. Although making more foreignexchange available and increasingprofit ratesmay not be a sufficientcondition to raise investmentlevels, they are clearly necessary. Also, both would go a long way towardsdispelling doubts about the Government's economicpolicies.

AlternativePolicy Modifications

5.11 The presentpolicy environment served Zimbabwereasonably well in the past and, while the countryhas not fully exploitedits growth potential, it is not facingimminent disaster either. With the present policy environment the post-Independence GDP and industrial sector growth rates could be maintained, but the ambitious targets set in the Five-Year Planare not likely to be achieved.

5.12 The Plan'sgoals rest on a significantexport expansionto complement the traditional sources of growth. While in the opinion of the mission these goals are attainable, as long as policies designed to reduce the anti-exportbias are not put into effect,the exportexpansion is likelyto play a negligiblerole, despitethe good performanceof 1983 and 1984. A more plausiblescenario is for industrialexports to continue growingwhile domesticdemand remains depressed, and to stagnate--indeed, even fall--whendomestic demand picks up again and the opportunitycost of exportingbecomes too high. This see-sawpattern is likely to continue indefinitelyand, on average,industrial production is likelyto grow only about 1% per year, as it has in the past five years.

5.13 With productionexpanding at snail'space, investmentis also likelyto continuedepressed and to barely cover depreciation,keeping the capitalstock constant,as has happenedsince 1974. Moreover,non-economic reasonsare keepinginvestment down, and are likelyto continuedampening entrepreneurialenthusiasm in SouthernAfrica for some time to come. Thus, only the prospectof excellentbusiness opportunities could counterbalance them. Finally,without major policy changes,installed capacity--already - 76 -

production,we have that about 63% of capacityis being used for domestic productionand about 7% for exports. The Five Year Plan is aimingat 6.5% annual rate of growth of the industrialsector and, as statedbefore, an 8.2% rate of growth of industrialexports. These rates of growth imply that in five years capacityutilization would have to increaseby about 38% to 95%. Of course,the actualdegree of slack capacityis much lower becausenot all subsectorshave the same exportcapability and some of the major exportingsectors (e.g., steel and textiles)are alreadyworking at or near full capacity.

5.10 To prevent capitalequipment from becominga bindingconstraint, levels of investmenthigher than achievedin recentyears will be necessary. As riotedin ChapterII, low investmentlevels have been associated with both economicand non-economicreasons. Shortageof foreignexchange and low profitrates are the two economicreasons most frequentlycited by firms for holdinginvestment back. The politicalsituation in the Republic of South Africaand a perceivedlack of clarityin Governmenteconomic policiesare the two most frequentlycited non-economicreasons. Although making more foreignexchange available and increasingprofit ratesmay not be a sufficientcondition to raise investmentlevels, they are clearly necessary. Also, both would go a long way towardsdispelling doubts about the Government'seconomic policies.

AlternativePolicy Modifications

5.12 The Plan'sgoals rest on a significantexport expansionto complementthe traditionalsources of growth. While in the opinionof the mission these goals are attainable,as long as policiesdesigned to reduce the anti-exportbias are not put into effect,the exportexpansion is likelyto play a negligiblerole, despitethe good performanceof 1983 and 1984. A more plausiblescenario is for industrialexports to continue growingwhile domesticdemand remains depressed, and to stagnate--indeed, even fall--whendomestic demand picks up again and the opportunitycost of exportingbecomes too high. This see-saw patternis likelyto continue indefinitelyand, on average,industrial production is likelyto grow only about 1% per year, as it has in the past five years.

5.13 With productionexpanding at snail'space, investmentis also likelyto continuedepressed and to barelycover depreciation,keeping the capitalstock constant,as has happenedsince 1974. Moreover,non-economic reasonsare keepinginvestment down, and are likelyto continuedampening entrepreneurialenthusiasm in SouthernAfrica for some time to come. Thus, only the prospectof excellentbusiness opportunities could counterbalance them. Finally,without major policy changes,installed capacity--already - 77 -

highlyutilized--could eventually become a bindingconstraint on exports and production. In short,without modifying present policies, the growth patternof recentyears is likely to continue.

5.14 The analysisof this report indicatesthat raisingthe growth rate will requirea packageof measuresthat reducesthe biasesin the existingsystem and providesthe environmentfor appropriatenew investment. An importantobjective of the policy recommendationsof this report is to diminishthe anti-exportbias by increasingthe profitability of exportsatnd reducing protection to the domesticmarket in order to make exportexpansion a significantsource of growth in the future. Another importantobjective is to increasethe efficiencyof resourceuse and direct investmentto activitieswhere Zimbabwehas a comparative advantage. Attainingthese objectivesrequires first, changesin relative incentivesto increasethe absoluteand relativeprofitability of activitiesthat use resourcesefficiently, most notablyfor export,second the introductionof a greaterdegree of competitionfrom both importsand other domesticfirms in order to encouragecost control,stimulate innovationand developmarketing skills, and third,the developmentof an environmentthat facilitatesthe movementof factorsof productioninto expandingactivities. The followingparagraphs outline the principalareas of policy reformthat are recommended,but it does not go into the question of the phasingor timeframefor policy implementation.

5.15 Modificationof the exchangerate will be a crucialcomponent of an overallpackage of policy adjustment. It would simultaneouslyaddress a numberof problems. First,a morrfcompetitive exchange rate would increase the price of exports,both in absoluteterms and relativeto domesticprices, tacklingone of the main causes s the anti-exportbias. Second,by stimulatingexports and discouragingimports, it would reduceexcess demand for foreignexchange and therebyprovide the environmentfor reformof the foreignexchange allocation system.

5.16 An adjustmentof the exchangerate without trade liberalization would only do part of the job. Trade liberalizationdoes not mean putting Zimbabweon to a free-tradebasis, but the removal (if over a periodof time) of the quotas implicitin the foreignexchange allocation system and the exposureof domesticproduction to foreigncompetition with a moderate level of tariffs. The currenttariff schedule,if not ideal, is already quite moderateby internationalstandards. This liberalizationwill be essentialto effect the changesin relativeprices that will be necessary to supportthe expansionof the sectoron more efficientand specialized lines. Attenuationof the anti-exportbias also requiresopening the domesticmarket to internationalcompetition to expose the industrial sector to the exigenciesof the market place, preferablyat first within a familiarenvironment so that managershone their marketingskills in the market where they have a competitiveedge. Althoughthe first objective could theoreticallybe accomplishedby modifyingthe price controlsystem so that relativedomestic prices are set accordingto relative internationalprices, the second objectivecan only be accomplishedby - 77 -

highly utilized--couldeventually become a bindingconstraint on exports and production. In short,without modifying present policies, the growth patternof recentyears is likely to continue.

5.14 The analysisof this report indicatesthat raisingthe growth rate will requirea packageof measuresthat reducesthe biases in the existingsystem and providesthe environmentfor appropriatenew investment. An importantobjective of the policy recommendationsof this reportis to diminishthe anti-exportbias by increasingthe profitability of exportsantd reducing protection to the domesticmarket in order to make export expansion a significant source of growth in the future. Another important objective is to increasethe efficiencyof resourceuse and direct investmentto activitieswhere Zimbabwehas a comparative advantage. Attainingthese objectivesrequires first, changesin relative incentivesto increasethe absoluteand relativeprofitability of activitiesthat use resourcesefficiently, most notablyfor export,second the introductionof a greaterdegree of competitionfrom both importsand other domesticfirms in order to encouragecost control,stimulate innovationand developmarketing skills, and third,the developmentof an environmentthat facilitatesthe movementof factorsof productioninto expandingactivities. The followingparagraphs outline the principalareas of policy reform that are recommended,but it does not go into the question of the phasingor timeframefor policyimplementation.

5.15 Modificationof the exchangerate will be a crucialcomponent of an overallpackage of policy adjustment. It would simultaneouslyaddress a number of problems. First, a more competitiveexchange rate would increase the price of exports,both in absolu!eterms and relativeto domesticprices, tacklingone of the main causes -s the anti-exportbias. Second,by stimulatingexports and discouragingimports, it would reduceexcess demand for foreignexchange and therebyprovide the environmentfor reformof the foreignexchange allocation system.

5.16 An adjustmentof the exchangerate without trade liberalization would only do part of the job. Trade liberalizationdoes not mean putting Zimbabweon to a free-tradebasis, but the removal (if over a periodof time) of the quotas implicitin the foreignexchange allocation system and the exposureof domesticproduction to foreigncompetition with a moderate level of tariffs. The currenttariff schedule,if not ideal, is already quite moderateby internationalstandards. This liberalizationwill be essentialto effect the changesin relativeprices that will be necessary to supportthe expansionof the sector on more efficientand specialized lines. Attenuationof the anti-exportbias also requiresopening the domesticmarket to internationalcompetition to expose the industrial sector to the exigenciesof the market place, preferablyat first within a familiarenvironment so that managershone their marketingskills in the market where they have a competitiveedge. Althoughthe first objective could theoreticallybe accomplishedby modifyingthe price controlsystem so that relativedomestic prices are set accordingto relative internationalprices, the second objectivecan only be accomplishedby - 78 -

opening the countryto internationaltrade. Importderegulation would not only exert pressureon domesticprices throughcompetition, but would also expose the sectorto the technologyand productsthat are necessaryto fostergrowth.

5.17 There is a close complementaritybetween trade liberalization, exchangerate adjustmentand macroeconomicmanagement. In particular, deregulationattempts in other countrieshave shown that an appropriate exchangerate policy that maintainsa manageableposition in the current account is a necessarycondition for success. Studiescarried out in Ar- gentina,Brazil, Chile, Indonesia,Korea, Pakistan,Peru, the Philippines, Portugaland Spain concludedthat the balanceof paymentsposition is the crucialfactor on which the sustainabilityof a deregulationprogram depends. Balanceof paymentsdeficits and the loss of foreignreserves often lead to interruptedtrade liberalization.Zimbabwe's own experiencein the immediatepost-Independence period illustratesthe risks of liberalizing importswith an inconsistentexchange rate and macroeconomicframework. The increasedallocations of foreignexchange in the expectationof higher externalassistance and exportsin 1980-82,in the contextof both an overvaluedexchange rate and expansionarydomestic demand, led to a quick depletionof internationalreserves and to an eventualreduction in foreign exchangeallocations.

5.18 It is essentialthat any liberalizationof importsbe accompanied by the simultaneous(or prior)movement of the exchangerate to the extent necessaryto maintainexternal balance. Carefulmonitoring of the external accountswould be necessaryto ensure that the managedexchange rate movementsare consistentwith the degreeof deregulationbeing introduced. There are other alternativeforeign exchange rate managementschemes that the authoritiesmay wish to consider. For example,they could adopt a market-determinedexchange rate, either via a float,or one of the many variantsof foreignexchange auctions introduced in other developing countries. In any case, controlson the capitalaccount may still be necessary.

5.19 With competingimports increasingly keeping a lid on domestic prices,the price controlsystem would lose its usefulnessas a way of controllingmonopoly rents and its continuationwould only be justifiedon equity grounds(e.g., to redistributeincome to particulargroups in the society). The perils,however, would remain the same now inherentin the system: implicitsubsidies and taxes that far from accomplishingthe Government'sgoals, actuallyconflict with them e.g., by reducingoutput of basic necessitieswith controlledprices. After the countrybecomes open to outsidecompetition, it would be preferable,both on equityand efficiencygrounds to abolishprice controlsfor industrialgoods altogether.

5.20 The fourthelement in the proposedpolicy approach would be the deregulationof investmentcontrols. Such deregulationis neededto stimulateinvestment and preventan aging capitalstock from stiflinga fledglingexport drive. This step should follow,or be adoptedsimulta- neouslywith, importand price controlderegulation. Otherwise,current price distortionswould give the wrong signalsand investmentwould be channelledto activitieswhere Zimbabwedoes not have a comparative advantage. - 85 -

6.06 Since Independence,Zimbabwean textile manufacturers have been attemptingto penetrateEuropean markets, but only with limitedsuccess. Long lead times requiredby the textilemills have made it impossibleto penetratethose market segmentswhere fashionchanges rapidly (printed sheets,for example).

GarmentExports

6.07 The Republicof South Africa has also been a major exportmarket for Zimbabwe'sgarment industry, typically taking over 90% of the clothing exports. In 1982 therewas a drasticreduction in the value of exports almost entirelydue to the collapseof the Republicof South Africamarket, as shown in Table VI.1. The exportdecline continued into 1983, with a considerableimprovement coming in 1984. No detailsare availablefor countryof destinationafter 1982. While the Republicof South Africa probablyremains the largestsingle importerof Zimbabwegarments, the trade with Europeand the UnitedStates is growingas the garmentproducers develop thosemarkets as alternativesto the Republicof South Africa.

Table VI.1:- ZIMBABWEFOB VALUE OF CLOIHINGEXPORTS (Z$ million)

1979 1980 1981 1982 1983 1984

Republic of South Africa 9.95 11.38 11.32 4.46 n.a. n.a.

Other 1.67 0.82 1.00 2.56 n.a. n.a.

Total 11.62 12.20 12.32 6.96 4.70 10.88

Source: Goverrnmentof Zimbabwe,Central Statistical Office.

Machinery& Equipment

Age of Machinery

6.08 Spinningequipment is, on average,about 20 years old while weavingequipment is about 16 years old. Substantialquantities of ring frames,cards, and five openinglines were manufacturedprior to 1951. In weavingonly a numberof pirn winders date back that far, but significant numbersof looms go back to the 1950s. Mill managementhave plans for renewalof old equipment, and claim that the shortage of foreign exchange preventswhat would be a major re-equipmentphase throughoutthe textile industry. To providea rough idea of the cost of renovatingthe equipment, the taissionestimated what it would cost to renew and renovatethe capital stock,assuming (i) that all equipmentpredating 1961 is replacedand (ii) that equipmentmanufactured from and including1961 and 1970 is renovated - 86 -

at a cost amounting to 33% of their replacement cost. Such an undertaking would cost about US$32million, as shown in Table VI.2. This would be an upper limit,as the equipmentis in fairly good condition.

Table VI.2: ZIMBABWE- ESTIMATEDCOST OF RENOVATINGCAPITAL EQUIPMENTIN TEXTILESUBSECTOR (MillionUS$)

Renewal Renovation Total

Spinning 18.6 3.1 21.7

Weaving 9.1 1.0 10.1

Total 27.7 4.1 31.8

Conditionsof Machinery

6.09 The conditionof the machineryis generallygood for its age despitedifficulties in obtainingimported spare parts owing to foreign exchangeshortages. Some sparesare manufacturedlocally and work reason- ably well.

6.10 In some developingcountries automatic pirn ch.angemechanisms on looms have been dismantled,owing to lack of spare parts and maintenance expertise,thus convertingthe loom from automaticto a non-automatic.No such situationswere found in the Zimbabwetextile industry where all mechanicaland electricalfunctions were fully operationalon the machinery. Some cannibalizationhad taken place in older machinesto obtain spare parts for machinesstill in production,but not on any wide scale. Down-timefor mechanicalrepairs and maintenancewas greaterthan might be expecteddue to the growingshortage of skilledmaintenance workers, mechanicsand electricians.

Qualityof Management

6.11 Chief executivesand seniormanagers in the textilesubsector are of high qualityand long experience. This is perhapsthe subsector'smajor asset. Evidenceof managerialcompetence can be found in the widespread use of managementcontrol systems, in productionplanning, maintenance, qualitycontrol, low breakagerates, and the ratio of actual to potential speed of ring spindles. Zimbabweis extremelyfortunate in this respect becausea strongand qualifiedmanagement '8 a rare commodityin countries at similarstages of development.For many countriesat Zimbabwe'sstage of development,to attainthe same qualityof managementwould be extremely costlyand time consumtng. - 86 -

at a cost amountingto 33% of their replacementcost. Such an undertaking would cost about US$32 million,as shown in Table VI.2. This would be an upper limit,as the equipmentis in fairlygood condition.

Table VI.2: ZIMBABWE- ESTIMATEDCOST OF RENOVATINGCAPITAL EQUIPMENTIN TEXTILE SUBSECTOR (Million US$)

Renewal Renovation Total

Spinning 18.6 3.1 21.7

Weaving 9.1 1.0 10.1

Total 27.7 4.1 31.8

Conditionsof Machinery

6.10 In some developing countries automatic pirn change mechanisms on looms have been dismantled, owing to lack of spare parts and maintenance expertise, thus converting the loom from automatic to a non-automatic. No such situations were found in the Zimbabwe textile industry where all mechanical and electrical functions were fully operational on the machinery. Some cannibalizationhad taken place in older machines to obtain spare parts for machinesstill in production,but not on any wide scale. Down-timefor mechanicalrepairs and maintenancewas greaterthan might be expecteddue to the growingshortage of skilledmaintenance workers, mechanics and electricians.

Quality of Management

becausea strongand qualifiedmanagement 'l a rare commodityin countries at similarstages of development. For many countriesat Zimbabwe'sstage of development,to attain the same quality of management would be extremely costly and time consuming. - 87 -

6.12 Most firms employstandard European and Americanmanagement informationand controlsystems, but perhapsowing to the country'siso- lation from the world economyduring UDI, managementis more concernedwith productionand internalefficiency than with marketing. This orientation must changeif firms are to competesuccessfully outside Zimbabwe. Manage- ment is aware of this challengeand at the time of the mission'svisit the identificationand developmentof new marketsoccupied considerable management time. Unfortunately,valuable management time is also spentin the pursuitof activitiesthat In other countries-countriesthat are now Zimbabwe'scompetitors in the world market-are routineand not worthyof management'sattention, such as the pursuitof foreignexchange for importedinputs. Of the four firms that providedfull information,all but one use productionplanning, production control, inventory control systems, budgetarycontrol, cost control,standard costing systems, wage incentives and work study routines.

6.13 At the lower levelsof management,e.g. sectionsupervisors and skilledforemen, however, there was a shortageof individualswith the desireddegree of experience. The increasein textiledemand of the last two yearshas broughtthis problemto the fore, particularlywhere mills have moved from three to four 42-hourshift operation.

Efficiency

6.14 Nowhereis the qualityof managementmore evidentthan in the efficiencyattained by Zimbabwe'stextile subsector. The missionused r;everalmeasures of efficiencyand all showed the same results: with properexchange policies, the textilesubsector would be able to compete successfullyin world markets. This is not to say that the mills are as efficientas in Europe,East Asia, or the UnitedStates, but that they are efficientenough to produceat lower cost with an appropriateexchange rate if they have access to inputsat internationalprices.

6.15 The firstmeasure of efficiencywas a comparisonof machineand labor and energyefficiencies with thoseattained in other countries. The secondmeasure consisted of domesticresource cost, and the final measure took into accountrelative total factor productivity.

MachineEfficiencies

6.16 The most importantdeterminants of machineefficiency, defined as the numberof hours that a machineactually worked relativeto the number of hours it was availablefor work, are: (i) the natureand qualityof the materialpassing through the machine;(ii) the age and conditionof the machine;(iii) the skilland attentionof the machineattendant; (iv) the standardof maintenanceprovided; and (v) the complexityof the product mix. In Zimbabweman-made fibers are importedand the natureand quality of cotton is up to internationalstandards. In fact, Zimbabweancotton is of such high qualitythat it commandspremium in world markets. The standards of maintenanceare also high. But the machinesare too old and the productmix is too diverseto achievebest practiceefficiency. - 87 -

6.12 Most firmsemploy standardEuropean and Americanmanagement informationand controlsystems, but perhapsowing to the country'siso- lationfrom the world economyduring UDI, managementis more concernedwith productionand internalefficiency than with marketing. This orientation must changeif firms are to competesuccessfully outside Zimbabwe. Manage- ment is aware of this challengeand at the time of the mission'svisit the identificationand developmentof new marketsoccupied considerable management time. Unfortunately,valuable management time is also spent in the pursuitof activitiesthat in other countries-countriesthat are now Zimbabwe'scompetitors in the world market-are routineand not worthy of management'sattention, such as the pursuitof foreignexchange for importedinputs. Of the four firms that providedfull information,all but one use productionplanning, production control, inventory control systems, budgetarycontrol, cost control,standard costing systems, wage incentives and work study routines.

6.13 At the lower levelsof management,e.g. sectionsupervisors and skilledforemen, however, there was a shortageof individualswith the desireddegree of experience.The increasein textiledemand of the last two years has broughtthis problemto the fore, particularlywhere mills have moved from three to four 42-hourshift operation.

Efficiency

6.14 Nowhereis the qualityof managementmore evidentthan in the efficiencyattained by Zimbabwe'stextile subsector. The missionused severalmeasures of efficiencyand all showedthe same results: with properexchange policies, the textilesubsector would be able to compete successfullyin world markets. This is not to say that the mills are as efficientas in Europe,East Asia, or the United States,but that they are efficientenough to produceat lower cost with an appropriateexchange rate if they have access twoinputs at internationalprices.

6.15 The firstmeasure of efficiencywas a comparisonof machineand labor and energyefficiencies with those attainedin other countries. The secondmeasure consisted of domesticresource cost, and the final measure took into accountrelative total factorproductivity.

MachineEfficiencies

6.16 The most importantdeterminants of machineefficiency, defined as the numberof hours that a machineactually worked relativeto the number of hours it was availablefor work, are: (i) the natureand qualityof the materialpassing through the machine;(ii) the age and conditionof the machine;(iii) the skill and attentionof the machineattendant; (iv) the standardof maintenanceprovided; and (v) the complexityof the product mix. In Zimbabweman-made fibers are importedand the natureand quality of cottonis up to internationalstandards. In fact, Zimbabweancotton is of such high qualitythat it commandspremium in world markets. The standards of maintenanceare also high. But the machinesare too old and the productmix is too diverseto achievebest practiceefficiency. - 88 -

Table No. VI.3 : ZIMBABWE- ESTIMATESOF OVERALLSPINNING AND WEAVING EFFICIENCIESa/

Spinning Weaving Ring Rotor Looms

Firm A 85 - 60

Firm B 94 - 82

Firm C 88 95 73

Firm D 90 95 77

a/ Machineefficiency is definedas the ratio of hours workedto hours availablefor work.

6.17 With the countsof yarn in productionand the qualityof cotton used, ring spinningefficiencies are expectedat the 90% minimum level. Althoughthe averageof the four firms is at about 90%, two of the companies fell below while one was significantlyabove, at 94%. This is another illustrationof efficientfirms coexistingalong with inefficientones. Weavingefficiencies on the otherhand are low for the types of fabricsin productionand for the low numbersof looms per weaver. The variousfac- tors that affect spinningefficiency also affectweaving, but the age of machineryis paramount--thenegative correlation between age of machinery and loom efficiencyis about 90%.

Labor Productivity

6.18 As might be expectedfrom prevailinglabor laws,almost all,mills are overmannedwhen judgedagainst European standards (some mills operate with twiceas many peopleas used in Europe)and output-laborratios are about one-halfof Europeanstandards. Labor laws contributeto delaying acquisitionof newer,more efficientmachines because labor savingtechnology is of littleuse if surpluslabor cannotbe laid off. Of course, given the differencesin relativefactor prices, more labor-intensive productionvis-a-vis European production is to be expected. Low productivity, however,also stems from inadequatetraiiiing and supervision.

6.19 Estimatesof spinningand weaving labor productivityare given below. In ring spinning,labor productivityin Zimbabwediffered widely among firms,the highestbeing higher than averagelabor productivity in the UnitedKingdom and the lowestbeing slightlylower than Turkey's. In weaving,the story was about the same, except that one firm had extremely low productivityowing to seriousovermanning (see Table VI.4). - 88 -

TableNo. VI.3 : ZIMBABWE- ESTIMATESOF OVERALLSPINNING AND WEAVING EFFICIENCIESa/

Spinning Weaving Ring Rotor Looms

Firm A 85 - 60

Firm B 94 - 82

Firm C 88 95 73

Firm D 90 95 77

a/ Machineefficiency is definedas the ratio of hoursworked to hours availablefor work.

6.17 With the countsof yarn in productionand the qualityof cotton used, ring spinningefficiencies are expectedat the 90% minimumlevel. Althoughthe averageof the four firms is at about 90%, two of the companies fell below while one was significantlyabove, at 94%. This is another illustrationof efficientfirms coexistingalong with inefficientones. Weavingefficiencies on the other hand are low for the types of fabricsin productionand for the low numbersof looms per weaver. The variousfac- tors that affectspinning efficiency also affectweaving, but the age of machineryis paramount--thenegative correlation between age of machinery and loom efficiencyis about 90%.

Labor Productivity

6.18 As might be expectedfrom prevailinglabor laws, almost all mills are overmannedwhen judgedagainst European standards (some mills operate with twice as many peopleas used in Europe)and output-laborratios are about one-halfof Europeanstandards. Labor laws contributeto delaying acquisitionof newer,more efficientmachines because labor savingtechnology is of littleuse if surpluslabor cannotbe laid off. Of course, given the differencesin relativefactor prices, more labor-intensive productionvis-a-vis European production is to be expected. Low productivity, however,also stems from inadequatetraining and supervision.

6.19 Estimatesof spinningand weaving labor productivityare given below. In ring spinning,labor productivityin Zimbabwediffered widely among firms, the highestbeing higher than averagelabor productivityin the UnitedKingdom and the lowestbeing slightlylower than Turkey's. In weaving,the story was about the same, except that one firm had extremely low productivityowing to seriousovermanning (see Table VI.4). -89 -

Table VI.4: - ZIMBABWELABOR PRODUCTIVITY IN THE TEXTILE SECTOR RELATIVE TO PRODUCTIVITYIN VARIOUS COUNTRIESa/ (Percentages)

Ring Spinnng Weaving %

USA 100.0 100.0 German Federal Rep. 79.4 60.0 Zimbabwe B 62.7 29.1 United Kingdom 42.5 33.3 Zimbabwe C 40.0 4.6 Kenya B 35.4 16.7 Turkey 33.7 18.8 Zimbabwe A 30.7 15.2 Kenya A 17.9 7.5 Zimbabwe D n.a 14.7

a/ Four sets of values are quoted for Zimbabwe and two for Kenya. The values for Zimbabwe are for different mills. The value for Kenya A is for a typical mill; the value for Kenya B is for a brand new mill with modem ring spinning and preparatory equipment, and modern shuttle weaving.

b/ The figures quoted for ring spinning refer to ring spinning only. Rotor spinning and that part of the preparatory processess that might be attributed to rotor spinning have been removed from the calculation. Activity on combing was also removed to bring all mills on to a common basis for ring spun carded yarn with count adjustment to a nominal 30's tex.

Energy Utilization

6.20 The two major areas of energy consumption in the textile industry are the electric motors for driving machines, and heat for heating process water and fabric drying. In spinning and weaving most of the energy used is electrical motive power for the machinery. Heat is used in the sizing process in weaving but this forms a small proportion of the total energy used in weaving.

6.21 In order to assess the relative efficiency of the Zimbabwe textile industry as an energy user, the actual energy consumption was compared with energy consumption in the UK for the same product mix. From energy audits conducted in 180 British textile plants, both the range and the mean energy consumption per ton of production is known for the British industry. These means were applied to the Zimbabwe production figures. Total estimates of consumptionwere:

Zimbabwe actual: 1,929.9 terajoules Estimated on UK means: 2,052.1 terajoules -89 -

Table VI.4:- ZIMBABWELABOR PRODUCTIVITYIN THE TEXTILESECTOR RELATIVETO PRODUCTIVITYIN VARIOUSCOUNTRIES a/ (Percentages)

Ring SpInningb/ Weaving

USA 100.0 100.0 German FederalRep. 79.4 60.0 ZimbabweB 62.7 29.1 UnitedKingdom 42.5 33.3 Zimbabwe C 40.0 4.6 Kenya B 35.4 16.7 Turkey 33.7 18.8 ZimbabweA 30.7 15.2 Kenya A 17.9 7.5 ZimbabweD n.a 14.7

a/ Four sets of values are quoted for ZimbabwecAnd two for Kenya. The values for Zimbabweare for differentmills. The value for Kenya A is for a typicalmill; the value for Kenya B is for a brand new mill with modern ring spinningand preparatoryequip- ment, and modernshuttle weaving.

b/ The figuresquoted for ring spinningrefer to ring spinningonly. Rotor spinningand that part of the preparatoryprocessess that might be attributedto rotor spinninghave been removedfrom the calculation. Activityon combingwas also removedto bring all mills on to a common basis for ring spun carded yarn with count adjustment to a nominal 30's tex.

Energy Utilization

6.20 The two major areas of energyconsumption in the textileindustry are the electricmotors for drivingmachines, and heat for heatingprocess water and fabric drying. In spinningand weavingmost of the energyused is electricalmotive power for the machinery. Heat is used in the sizing processin weaving but this forms a small proportionof the total energy used in weaving.

6.21 In order to assess the relative efficiency of the Zimbabwe textile industry as an energy user, the actualenergy consumptionwas compared with energy consumption in the UK for the same product mix. From energy audits conducted in 180 British textile plants, both the range and the mean energy consumption per ton of production is known for the British industry. These means were applied to the Zimbabwe production figures. Total estimates of consumption were:

Zimbabwe actual: 1,929.9 terajoules Estimated on UK means: 2,052.1 terajoules - 90 -

Zimbabwe'sactual consumption is thus 94% of the estimatebased on the figuresfor the UK industry. However,no accounthas been takenof differencesin productspecification, i.e., yarn count,cloth weight, etc. Yarn countsand clothweights tend to be respectivelycoarser and heavier in Zimbabwe,requiring lower process energy per ton than finer countsand lighterfabrics. After allowingfor thesedifferences, the subsector's energy efficiencywould still be reasonable.

Domestic Resource Cost

6.22 The secondmeasure of productivityis based on domesticresource cost calculations.The Jansenstudy 3/ showedthat the textilesubsector (includingcotton ginning) had a DRC of 1.28. Spot checksby the mission showed that the DRC for a sampleof one firm was on the orderof 1.14. These calculations-shownin Table VI.5 are in line with the previous conclusionthat the textileindustry is fairlyefficient.

Table VI.5: ZIMBABWE- DOMESTICRESOURCE COST IN TEXTILEMANUFACTURING

Protection DRC Nominal Effective (.X) (X)

Firm A a/ 1.14 60.5 168.5 Firm A b/ 0.89 45.9 107.4 a/ DRC, nominalprotection, and effectiveprotection calculated on basis of exportsales. Nominaland effectiveprotection, therefore, are biasedupwards.

b/ Assumes that transportcosts would add 10% to price of improvedgoods.

RelativeTotal FactorProductivity

6.23 Machineproductivities and labor productivitiesare only partial ways of lookingat the questionof competitiveness.Capital and labor must be combinedin appropriateproportions and used efficientlyif a firm, sector, or countryis to competein the world market,i.e., total factorpro- ductivitymust be high enough to compensatefor differencesin factor costs. In order to obtainan idea of Zimbabwe'sability to competein world marketsthe missionalso used a comprehensivemeasure based on total factorproductivity. The conclusionof this approachwas consistentwith the conclusionsderived from the other two measuresof productivity:

3/ Doris Jansen, Op. Cit. - 90 -

Zimbabwe'sactual consumption is thus 94% of the estimatebased on the figuresfor the UK industry. However,no accounthas been taken of differencesin productspecification, i.e., yarn count,cloth weight,etc. Yarn countsand cloth weightstend to be respectivelycoarser and heavier in Zimbabwe,requiring lower processenergy per ton chan finer countsand lighterfabrics. After allowingfor these differences,the subsector's energy efficiencywould still be reasonable.

DomesticResource Cost

6.22 The secondmeasure of productivityis based on domesticresource cost calculations.The Jansenstudy 3/ showed that the textilesubsector (includingcotton ginning) had a DRC of 1.28. Spot checksby the mission showed that the DRC for a sample of one firm was on the order of 1.14. These calculations-shownin Table VI.5 are in line with the previous conclusionthat the textileindustry is fairlyefficient.

Table VI.5: ZIMBABWE- DOMESTICRESOURCE COST IN TEXTILEMANUFACTURING

Protection DRC Nominal Effective g%) (X)

Firm A a/ 1.14 60.5 168.5 Firm A b/ 0.89 45.9 107.4

a! DRC, nominalprotection, and effectiveprotection calculated on basis of export sales. Nominaland effectiveprotection, therefore, are biasedupwards.

b/ Assumes that transportcosts would add 10% to price of improvedgoods.

RelativeTotal FactorProductivity

3/ Doris Jansen, Op. Cit. - 96 -

VII. FETILIZERS

Introduction

7.01 The fertilizerindustry in Zimbabwedates back to 1924 when a small single superphosphateplant was startedin the outskirtsof Harare. Some expansiontook place immediatelyafter World War II with the establishmentof a 1.000 tons per year bulk-blendingplant, but the major expansion took place in the late 19609 and early 1970s with the establishmentof an ammoniaplant based on a sophisticatedelectrolysis process, and a second compoundfertilizer plant. At present there are four fertilizer plants--allprivately owned--producing some 210 thousandtons per year of ammoniumnitrate and some 40 thousandtons per year of P20 / in equivalent phosphatefertilizers. Two upstreamplants--SABLE and ZIMPHOS-- manufactureammonium nitrate and phosphatefertilizers, respectively, mainly from domesticraw materials. These two plants sell their entire productionto two downstreamplants, ZFC and Windmill,that manufacturea broad range of NPK granularcompounds. Fertilizersare marketedexclu- sively by ZFC and Windmill(Figure VII.1 shows the presentstructure of the industry). Althoughthe subsectoris of no importancein terms of exports, and, with only 2,400 employees,of minor importancein terms of employment, the Governmentconsiders it of strategicimportance for the developmentof the agriculturalsector. Becausethere is an activeworld trade in fertilizersthe key issue regardingthe subsectoris the efficiencywith which it substitutespotential imports.

Markets

7.02 Virtuallyall of the fertilizerproduction is sold in the domestic market. Multinutrientfertilizers are marketedin the form of NPK com- poundswith formulationstailored for specificcrops. At present,a total of iD NPK compoundsare produced,as shown in StatisticalAppendix Table 26. All compoundshave a sulphurcontent ranging from 3% to 10% becauseof the widespreadsulphur deficiency of Zimbabweansoils. Straight fertilizersare suppliedmainly in the form of locallyproduced ammonium nitrate(AN) and urea--thelatter imported in recentyears in significant quantitiesto fill the nitrogengap left by domesticproduction.

7.03 Overallfertilizer consumption grew at about 4% per year in the past decade,peaking at 506,000tons in crop year 1981/82(Table VII.1). Fluctuationsin demandhave been mainly the resultof droughts,but changes in Governmentpolicies (e.g., elimination of fertilizersubsidies) have also had a bearing. Since Independence,moreover, there has been a relatively highergrowth in the demandfor fertilizersstemming from the commu- nal farmer. In 1976/77crop year, 93.5% of the total fertilizerconsumption in the countrywas in the commercialfarming sector. Sales in the communalfarming sector were about 20,000tons. By 1980/81consumption by communalfarmers had jumpedto 90,000tons. For crop year 1985/86consump- tion in the communalsector is forecastat about 120,000tons, or one- quarterof total fertilizerconsumption.

1/ The phosphorousnutrient content of phosphatefertilizers is expressed as phosphorouspentoxide (P 205). - 97 -

Fig VII.1I

ZIB3 - S1WI. OFE rniL SYSTM

DSm | E. E. POWE

LI4UIDAL0A AN

SAM_I_ S=

I~ ~~ ~ ~ ~ ~~N CDSSP

I~~~~~~z sPtSP I ~P. UWA~~~~~~R(

JaiIr1986

IndtiustryDepatmn Jawry 1986 - 92 -

Table VI.7: ZIMBABWE- AVERAGE SECTOR-WIDEUNIT LABOR AND EQUIPMENT REQUIREMENTSAND TOTAL FACTORPRODUCTIVITY RELATIVETO BEST PRACTICEIN SELECTED COUNTRIES

Zimbabwe Kenya Philippines Morocco

Spinning

Labor 1.88 3.57 2.05 1.88 Equipment 1.03 1.07 1.29 1.00 Total factor productivity .79 .69 .73 .78

Weaving

Labor 2.60 4.62 4.23 1.94 Equipment 1.00 1.05 1.39 1.16 Total factor productivity .72 .68 .55 .73

6.25 In weaving,the maximum achievableRTFP given the large range of productswoven, is about 85%. Hence,either managerial deficiencies or low task level productivityamong productionworkers reduceproductivity by another 10 to 12 percentagepoints. Given that managerialcompetence is quite high, as demonstratedby attentionto productionplanning, maintenance, low breakagerates, and the ratio of actual to potentialspeed of ring spindles,it is reasonableto infer that much of the shortfallfrom best practiceproductivity reflects low labor productivity,including the impact of a reportedshortage of skilledoperatives.

6.26 More than half the deviationof productivityin weavingfrom best practicereflects the diversityof productmix in weavingsheds. Most mills reportthat despitethe relativelylarge numberof products,four accountfor 90% or more of their sales. Given the size of the domestic market,'At is unlikelythat greaterspecialization can be achievedwithout significantlygreater exports. In view of the high transportationcosts and their effecton the price of imports,the existingproduct diversity is probablyclose to the socialoptimum.

6.27 Low task level productivitypartly reflectsinadequate training. In the four largestmills, there are only four full-timeand two part-time instructors. The surprisinglyhigh level of task productivityprobably reflectshigher earlier levels of training. Althoughgeographic dispersion of the firms militatesagainst centralized training facilities, either residentsor expatriateson medium-termcontracts could conductin-house training. With probablyminor increasesin trainingexpenses, firms could achievelower unit labor costs. - 99 -

Table VII.2- ZIMBABWE: SABLE- HISTORICALPRODUCTION (Tons)

1981 1982 1983 1984 1985*

AmmoniaProduced 72,000 74,000 72,000 70,000 n.a. AmmoniaImported 31,274 39,696 25,687 24,800 n.a. AmmoniumNitrate a/ 225,000 243,000 198,000 206,000 206,000 a/ Includesabout 15,000tpy for explosivegrade ammoniumnitrate. * Estimate.

ZimbabwePhosphate Industries Ltd. (ZIMPHOS)

7.06 ZIMPHOS'present fertilizer facilities comprise: (i) one 50,000 tpy pyrite-basedsulfuric acid plant; (ii) one 75,000tpy sulphur-based sulfuricacid plant; (iii) one 21,000 tpy P2O5 phosphoricacid plant; (iv) one single superphosphate/triplesuperphosphate (SSP/TSP) plant to produce up to 360,000tpy of SSP and 70,000tpy ot TSP with a maximumcombined outputof 75,000tpy in the form of P205.

7.07 Approximately90% of the sulfuricacid producedis used for SSP and phosphoricacid manufacture;the balanceis used mainly for production of monocalciumphosphate (2,500 tpy), aluminiumsulphate (4,000 tpy), and oleum (2,400tpy). In addition,about 6,000 tpy of sulfuricacid are sold for industrialuses. 2/ Of the total sulphuricacid production,about 60% is based on importedsulphur and the rest on local pyrite. AchievableP205 productionis currentlylimited to about 45,000 tpy. Historicalproduction levels appearin Table VII.3.

Table No. VII.3: ZIMBABWE- ZIMPHOSHISTORICAL PRODUCTION (Tons)

1982 1983 1984 1985*

SulfuricAcid 46,975 48,214 45,889 37,144 (pyriteburning) SulfuricAcid 60,352 64,379 61,542 40,499 (sulphurburning) PhosphoricAcid 10,084 15,078 16,080 8,823 SingleSuperphosphate 162,166 156,927 120,243 104,114 TripleSuperphosphate 17,065 35,158 39,437 23,114 Mono-calciumPhosphate 7,392 4,481 2,552 1,160 Total P205 Production 40,810 46,500 40,730 29,950

* PeriodJanuary-September 1985.

Source: ZIMPHOS,direct information.

2/ ZIMPHOSalso manufacturesa broad varietyof industrialproducts, such as sodiumsilicate solution (for adhesivesand flocculants),diluted ammoniasolution, gold extractionagents, insecticides, etc. - 100 -

ZFC and Windmill

7.08 The two d)wnstreamcompanies, ZFC and Windmill,produce compound fertilizersand startedproduction in 1947,with a small bulk-blending plant. Productionof granularfertilizers atarted in 1960with a 200,000 tpy plant of NPK corpounds. Capacitywas doubledin 1971 with the instal- lationof anotherplant whose actualcapacity now amountsto 210,000tpy of NPK compounds. Since then, productioncapacity has not expanded,but bulk- storage facilitieshave been recentlyinstalled. Total installedcapacity still exceedsdemand by about 30%. Althoughold, these plantscan meet demand up to 410,000tpy, a level that is not expectedto be reachedwithin the next 15 years.

Management

7.09 Managementin all four companiesis up to averageEuropean standards and the technologicalcomplexities of the productionprocesses have not createdany particulardifficulties. Good managementpractices are evidentin plant maintenance. SABLE'anitric acid and ammoniumnitrate plants,for example,are old, but their productivecapacity is still close to their designcapacity owing to good maintenancepractices. At ZIMPHOS, the plantsare still capableof producingat a 75% of design capacity, despitetheir age. The granulationunits at ZFC and Windmillare still in good condition--goodenough to secturepoduction of NPK compoundsfor the next 15 to 20 years.

7.10 Domesticfertilizer prices vary considerablyfrom international prices. While the price of ammoniumnitrate--a main ingredientin all compound fertilizersis only slightlyabove internationalprices, triple superphosphate(TSP) ts 20,17 above and single superphosphate(SSP) is 4.4% below. All of these are ex-factoryprices effective for the downstream firms. Compoundfertilizera, on the other hand, are on average44.1% above comparableinternational prices. Becauseammonium nitrate, TSP, and SSP are main ingredientsin the manufactureof compoundfertilizers, the level of both nominaland effectiveprotection varies widely betweenstraight and compoundfertilizers, as show' in Table VII.4.

Table VII.4: ZIMBABWE- CUiliARISONBETWEEN DOMESTIC AND WORLD PRICES OF FRTILIZERS

LandedCost NominalProtection (as % of domesticprice)

AmmoniumNitrate 94.1% 6.3% Single Super Phosphate 104.3% - 4.4% Triple Super Phosphate 83.3% 20.1% CompoundFertilizers 69.4% 44.1%

Source: StatisticalAppendix Table 30; direct informationfrom fertilizer plants;mission estimates. - 101 -

EconomicEfficiency

7.11 Despitethe effectiveprotection levels granted to some fertilizer firms,efficiency--as measured by domesticresource costs-is high. Three of the four firms providedeufficient information to calculateDRCs. The resultsshow that all three firms have DRCs below one. One firm, in particular,has a DRC of 0.23. These resultsaxe in line with the estimates of the Jansenstudy. As in the case of ZISCO, the calculationswere done at shadowprices. Shadow pricing,as opposedto market pricing, accountsfor the lower DRCs obtainedwhen comparedto the Jansenstudy.

Table No. VII.5: ZIMBABWE- INDICATORSOF ECONOMICEFRICIENCY IN THE FERTILIZERSUBSECTOR

Nominal Effective Protection Protection Source DRC (%) (%)

Jansen Study 0.83 - 1.0 17.0

Mission a/ Plant A 0.72 24.8 141.6 Plant B 0.91 28.3 142.9 Plant C 0.28 6.3 10.0

a/ DRC calculatedusing shadow prices. The Jansen study used market prices.

Constraints

7.12 Zimbabwe'sfertilizer firms can meet most of the country's presentfertilizer needs, but a substantialgap could developif demand grows even modestly,as SABLE and ZIMPHOSare alreadyworking at full capacity. Particularlyworrisome is the low investmentlevels in the four firms. Not one reportedinvestments with a view to expandingcapacity. All four reportedcapital expenditures for maintenanceand upkeep of presentcapacity. The allegedreasons for these low investmentlevels are the low returnsimplicit in the presentpricing structure. In the medium term, the depletionof sulfursources might also be a constraint.

Pyrites

7.13 The only known sourceof sulfurin the countryis the Iron Duke pyritemine. Currentlevel of productionis 72,000tpy of pyriteswith 35% sulphurcontent. At presentproduction levels, pyrites reserves are estimated to last for about 20 years. Any expansionof productionwould bring the technicallife of the mine below acceptablelevels. Although there might be additionalreserves in the proximityof the existingmine, - 102 -

only an extensiveexploration program would confirmtheir existence. Total productioncost (excludingdepreciation) of TSP from local pyritesis Z$320 per ton, comparedto a landedcost of importedTSP of Z$360 per ton. Pro- ductioncosts would increaseto Z$412 per ton if based on importedsulphur. The availabilityof pyritesis a major,although not pressing, issue. Phosphaterock reservesare plentifuland will not be a constraint at currentand foreseeableconsumption levels.

PricingStructure

7.14 Prices are set accordingto severalformulae. Some are cost- plus, othersare based on rates of return to a specifiedasset. At SABLE prices are set so as to provideshareholders with a fixed pre-taxreturn on the issued share capitalof the companyof 22.5% per annum,equivalent to a profitbefore taxes of Z$1.3 millionper year. These arrangementsarise from a 1976 agreementbetween SABLE and the previousGovernment. ZIMPHOS is alloweda 17.5% return on fixed and working capitalemployed. ZFC and Windmillare alloweda mark-upon the productioncosts of compoundsof Z$27 per ton, equivalentto an after tax returnon fixed assetsof 6%. For sales of productsfor straightapplication the two companiesare alloweda fixed mark-upwhich currentlyamounts to Z$22 per ton for ammoniumsul- phate, sodiumchloride, and potassiumsulfate; Z$18 per ton for urea and Z$13 per ton for ammoniumnitrate. In addition,a 4.5% sales allowancesis added.

7.15 The currentpricing structure allows producers to cover all costs,but it entailsa tax on agriculture,discussed in ChapterIII and has two additionalnegative effects. First, it does not provideincentives for expansionand second,it does not stimulateproducers to reducecosts. The two upstreamfirms generatea fixed returnon the nominalvalue of the equity shares,but not enough to financemajor investments. In fact, both companiesreported no new investmentsin the past four years.

Conclusions

7.16 In conclusion,fertilizer production in Zimbabweis an economically efficientactivity. Ammoniumnitrate is producedfrom electricity and phosphatefertilizers from locallyavailable pyrites and phosphate sources. The four firms involvedin the manufactureof fertilizerssatisfy about three quartersof domesticdemand, a proportionthat is likelyto declinein the futurebecause of seriousconstraints to expansionof supply.

7.17 There are both economicand physicalconstraints to expansion. The former arise from price controls,the latterfrom diminishingresources of non-renewableraw materials. Price controlaare set so as to provide shareholderswith fixed returnson equity--returnsthat are not high enough to stimulateinvestment. As a result,there was virtuallyno net investment in the subsectorin 1981-1985. Yet investmentsare needed to expand productionof ammoniumnitrate and phosphate-basedfertilizers. Physical constraintsto productionresult from depletionof known pyritessources. At currentlevels of productionknown pyritesreserves would last - 103 -

about 20 years. At levelsof productionrequired to meet projecteddemand, known resourceswould last only 8-10 years. An activeexploration program is requiredto establishthe probableand proven levelsof reservesand on that basis formulateplans to meet futuredemand.

7.18 Even if the policyrecommendations outlined in ChapterIII are not followed,it would be advisableto revise price-settingmechanisms so as to bring relativedomestic prices closer to internationalprices. For example,the Governmentcould opt for establishingdomestic prices at internationallevels plus a fixed percentagemargin. This would avoid relativeprice distortionsand yet providea margin of protection. - 104 -

VIII. STEIL (ZISOD)

Historical Background

8.01 Steel production in Zimbabwe dates back to 1938 when a group of businessmen established a small company in Bulawayo using a small electric arc furnace to melt scrap. The steel produced was used primarily in a foundry for castings. The balance was rolled into light sections in a small mill. In 1942 the Government formed the Rhodesian Iron and Steel Commission (RISCO), a statutory body which took over the Bulawayo works and adjacent limestone deposits. In 1946 work started on a small integrated steel plant with an 8-foot diameter blast furnace and a 25 ton open-hearth furnace and small rod mills. The first iron was produced in 1948. In 1954-55 the plant was extended with the addition of a 9-foot diameter blast furnace. RISCO steel took over the company on January 1, 1957 and immedia- tely began a large expansion program. A third blast furnace, the smaller one of the two now operating, was commissioned in 1961. The fourth, and largest, was commissioned in 1975 as part of a large expansion plan that included the installation of modern basic oxygen convertors for steelmaking as well as the introduction of continuous casting. The liquid steelmaking capacity of the plant, one million tons a year, makes it the largest steel plant in Black Africa. GeneralDescription

8.02 At Independence, RISCO became the Zimbabwe Iron and Steel Company (ZISCO). Although ZISCO has some private shareholders, it is almost 100% state-owned. The installed capacity of the plant is one million tons of liquidsteel per year, with a saleable steel output of semi-finished and finished products of approximately 800,000 tons. It has about 5,500 employees; it is the largest foreign exchange earner in the manufacturing sector and the largest single recipient of Government subsidy-a subsidy that in 1984 was equivalent to almost 2% of GDP. In recent years, ZISCO's exports have declined in relative and absolute terms and its dependence on the fisc has increased alarmingly, as shown in Table VIII.1. There are clear indications that the plant is currently overmanned and that its efficiency could be increased considerably with better training and management. Economic analyses, nevertheless, indicate that the plant is more economically viable than suggested by its financial situation. - 105 -

Table No. VIII.1: ZIMBABWE- KEY FINANCIALAND ECONOMICINDICATORS OF ZISCO, 1980-1984

1980 1982 1984

Exportsas % of Total Exports 7.8 4.3 3.4 Subsidyas % of PublicSector Deficit 1.7 1.7 13.3 Subsidyas % of ZISCO'sSales 4.7 13.2 93.2

Source: IMF, Zimbabwe-- RecentEconomic Developments, mimeo, August 1985, pp. 20, 67,73.

8.03 ZISCO'sbasic raw materials,iron ore, limestone,and coal, are all availabledomestically. These materialsare processedthrough conventional coke ovens,blast furnaces,and basic oxygen furnacesto produceli- quid steel. Liquidsteel is processedinto ingotsand rolledinto blooms, and billetson the continuousbillet mill. Semi-finishedbillets are furtherprocessed and preparedfor shipmentor are sent on to the finishing mills for furtherprocessing. The finishingmills consistof the medium and light sectionmills and the bar/rodmill, the most modern facilityin the rollingmill complex. The section-millsproduce a varietyof small structuralsections including angles, flats,channels, I-beams, rounds, rails, plowshares,grader blades, and fencing. The bar/rodmill producesa varietyof round and square coils and bars. Other major installations comprisea sinteringplant to produceblast furnacecharge materials, a lime burningplant consistingof two identicalkilns, and a foundrywhich producesiron and steel castingsfor internalplant use. It is estimated that in 1985 the plant operatedat approximately70% of its capacity. Plant capacityconstraints were reportedto have been causedby lingering technicalproblems after a major relineof the largerblast furnacein 1984.

Markets

8.04 ZISCO supplies approximately 50% of all the steel consumedin the country. The balance is imported in the form of large, heavy sections or flat products which the ZISCO mills cannot produce. ZISCO's home market accountsfor a relativelysmall percentageof its total sales,rather unusual for an integratedsteel producer. As Table VIII.2shows, domestic sales have accountedfor slightlyless than 30% of total shipmentsduring the past five years. Of the 30% sold domestically,a good proportion--15% in 1985--isalso exportedby middlemenaid other intermediaries. Whenever domesticsales resultin exports,ZISCO gives a rebateto the exporter(see paragraph8.06). - 106 -

Table VIII.2: ZIMBABWE - SALES OF ZISCO (Thousand Tons)

1981 1982 1983 1984a/ 1985b/

Local Sales of ZISCO Products

Semi-finished 65.6 47.0 44.1 54.0 59.3 Medium Sections 49.4 28.3 16.6 17.3 31.9 Light Sections 33.2 33.4 21.8 25.9 36.1 Bars & Rods 36.2 25.7 29.5 36.0 37.7 Subtotal 184.4 i34.4 TT2T. 13. 163.0 Subtotal (Million Z$) n.a. n.a. 33.2 39.4 58.2

Direct Export Sales of ZISCO Products

Semi-finished 224.5 293.2 295.2 241.2 296.7 Medium Sections 5.7 11.8 16.3 19.7 7.4 Light Sections 1.1 .5 7.8 4.3 .8 Bars & Rods 87.4 67.2 64.0 52.9 51.2 Subtotal 318.7 372.6 33.3 318.1 356.1 Subtotal (Million Z$) n.a. n.a. 66.5 66.0 105.0

Total Sales 503.1 507.0 495.3 451.3 519.1

Sales (Million Z$) n.a. n.a. 99.7 105.4 163.2

a/ Reduced production due to blast furnace reline. b/ Total production constrained due to continuing blast furnace problems.

Source: ZISCO, direct information. b.05 With domestic demand at approximately 160,000 product-tons, there is a balance of 640,000 tons available for export. Current exports are re- sulting in net losses to ZISCO due to depressed world prices and high transportation costs--the latter being as much as 271 of the FOB price (see Table VIII.3)--becauseZISCO must ship through South African ports and then to world markets. Exporting through Mozambican ports is now a risky pro- pt.aitionowing to security considerations. If conditions in that country inprove, ZISCO's transport costs would decline. - 107 -

Table No. VIII.3: ZIMBABWE - EXPORT PRICES (US$/Ton)

FOB (S. African Transport Net Exporta/ Item Ports) Cost Price

Billets and Blooms 180 48 132 Medium Mill Sections 262 48 214 Light Mill Sections 234 48 186 bar/Rod Sections 232 48 184

8.06 Zimbabwe's landlocked position, while a clear disadvantage for exports, provides natural protection to the industrial sector in general and to ZISCO in particular. ZISCO's pricing structure is such that in fact it charges less than the cost of equivalent imports (i.e., ZISCO received negative nominal protection) in 3 out of 4 of its main products. This pricing structure means that part of the subsidy that ZISCO receives from the state is being passed on to the consumer via low product prices. The mission estimates that in 1985, the implicit subsidy passed on to the consumer was on the order of US$2.8 million. This is without taking into account the rebate given to re-exporters. That rebate (which is between 26% and 40% of the domestic list price) lowers the net price received on a domestic sale to a level below the net revenue ZISCO would get from exporting the product (see Table VIII.5). ZISCO, in effect, over-rebates domestic sales that are re-exported. Based on 1985 data the over-rebate was in the order of US$600,000.1/ IThetotal implicit subsidy, including the export rebates was in the order of US$5.7 million.2 /

1/ The calculation is made by multiplying the difference between the domestic list price after rebates and the net export price by the tons of domestic sales that receive the export rebate. In the absence of a detailed breakdown of the re-exports by type of steel, it has been assumed that the 15% figure for re-exports of domestic sales applies proportionally to all product groups.

2/ This is the sum of the implicit subsidy on sales to the local market of US$2.8 million, plus ai:estimated US$2.9 million rebate on the 15% of local sales that are re-exported. The latter figure was calculated by multiplying the difference between the domestic list price after rebates and the equivalent landed price by the tons re-exported. - 108 -

Table No. VIII.4: ZIMBABWE- NOMINALPROTECTION FOR STEEL PRODUCTS,1984 (US$ per ton)

Nominal FOB Pricea/ Transport Landed Domestic ProtectionC/ (S.A. Port) Cost Price Priceb/ (X)

Blooms 175 48 223 238 6.7 Billets 180 48 228 238 4.4 Medium Mill 262 48 310 261 -15.7 Light Mill 234 48 282 250 -11.3 Rod Mill 252 48 280 249 -11.1 a/ These FOB prices are equal to or slightlybelow the Rotterdamspot pricesfor the products. They are taken as indicativeof the opportunity cost of steel importsfrom South Africa,which would be the most likelysupplier. If they were actuallyto come from Rotterdam,an ad- ditionalUS$20 to US$25 per ton would have to be added to cover over- seab shippingand insurance. In that case all four of the firm'sproduct would be receivingnegative nominal protection. b/ These base priceshave been in effect since February1985. The prices actuallyrealized by the companyon domesticsales for 1985 are lower (especiallyfor blooms and billets)due to a lag in the Februaryprice struzturetaking effect, sales of billetsat discountedprices to Lancashiresteel (a Governmentowned re-rollingoperation), and the rebatesgiven on domesticsales that are re-exported. cf (Domesticprice minus equivalentlanded price) divided by equivalent landedprice.

Source: ZISCO,direct information,mission estimates. - 109 -

Table No. VIII.5: ZIMBABWE - DOMESTIC LIST AND NET EXPORT REBATE PRICES (US$ per ton)

DcoesticList PriceAfter EVxrt Rebateas DomesticList Exprt Rebates DomesticList % of Donsetic PriceAfter as % of Net Price ListPrice ExportRebates EqxwrtPrice

Billetsaid Blooms 238 52 114 86

MediumMill Sectimns 261 37 164 76

LightMill Sectiis 250 26 184 98

Bar/RodSections 249 4 150 81

8.07 The disparity in the nominal rates of protection among ZISCO's product is indicative of another problem with its price structure. While the difference in production costs between the least and most expensive product is more than US$117, that between the highest and the lowest list price is only US$23. Furthermore, at the current list prices, only blooms and billets are sold for more than what they cost to produce; the three other products are all sold at a loss, ranging from 1% of their production cost for medium sections, to 17% for light sections. This distortion has probably resulted from the price control system since steel prices are subject to absolute price controls.

8.08 Growth in Zimbabwe's GNP and population during the next ten years will increase domestic steel demand, but even at an annual growth rate of 5%, the domestic requirement for ZISCO products in 1995 would be approximately only 270,000 tons/year, still leaving a large quantity for export. The Preferred Trading Area (PTA), a group of eastern and southern Africa countries that have entered into trade agreement promoting inter-regional trade, is the most logical export market for ZISCO products, owing to the geographical and political links with Zimbabwe. However, in part due to their depressed economies, shipments to these countries presently amount to only 5% of total exports. ZISCO, then, must be efficient enough to compete worldwide if it is to export with net economic benefit to Zimbabwe. - 110 -

Table VIII.6: ZIMBABWE - COMPARISON OF DOMESTIC LIST PRICES WITH ESTIMATE PRODUCTION COSTS

Domestic List Production Domestic List Prices Medium Sections Prices Costsa/ Over Product Costs

Blooms & Billets 238 184 1.29

Medium Sections 261 265 .98

Light Sections 250 302 .83

Bar/Rods 249 257 .97

a/ Mission estimates.

Efficiency

Technical Efficiency

8.09 Labor productivity and coke rate are two key indicators of technical efficiency in steel production. The former is usually measured in either shipped tons per employee, or labor costs per shipped ton. The latter is the ratio of the tons of coke required to manufacture a ton of iron. On both counts, as Table VIII.7 shows, ZISCO fares relatively well compared to Latin America but not well at all compared to the most efficient producers in the world, namely Japan and Korea.

Table No. VIII.7: ZIMBABWE- KEY EFFICIENCYINDICATORS IN STEEL MILLS

Annual Shipments Labor Costs Wage Bill Coke Rate Gross per Per Shipped Ton Per Employee (Kgs/Ton Yield Country Employee US$ USS of Iron) x

Korea 584 15.0 8,910 480 89.1

Japan 368 57.8 21,270 480 94.7

UnitedStates 145 186.8 27,076 500 78.4

Latin Americaa/ 74 72.1 5,335 550 78.1

ZiSCO 88 77.1 6,785 775 72.2 a/ Firms in Argentina,Brazil and Mexico.

Source: For countriesother than Zimbabwe, Peter F. Mareusand KarlisM. Kirsis, World SteelDynamics, March 1986;various IBRD reports;ZISCO, direct information;mission estimates. - ill -

8.10 Although,it may seem irrelevantto compareZISCO to the most efficientsteel producers,the hard and inevitablefact is that ZISCO is competing and will continueto competewith these countries in world markets. This means that it must bring its technicalefficiency closer to their standardsif it is to competewith them on a more equal footing.

8.11 In any case, the comparisonsreadily suggest areas for possible improvements.Coke rates,for example,are the highestin the sample--61% higher than in Korea and Japan,and 41% higher than in Latin America. High coke rates suggestlow skills levels. Indeed,supervisory skills and technicalexpertise among the supervisoryforce at ZISCO are in rather short supply. Europeansand Zimbabweansof Europeanorigin who have had plant experience,are becominga smallerpercentage of the supervisory force. Well-educatedAfricans are assumingmanagement positions, but un- fortunatelythey have less experiencein steel operations.

8.12 Labor productivityis anotherarea where ZISCO comparesunfavora- bly, even more unfavorablythan in coke rate. AlthoughZISCO's labor productivityis higherthan that of the Latin Americancountries it is only 15% as high as in Korea,and 24% as high as in Japan. ZISCO'saverage wage bill per employeeis higherthan Latin America's. This is a surprising finding especially because the "Latin America" category consists of three of the most developedLatin Americancountries, Mexico, Brazil and Argenti- na. These three countries have higher per capita income than Zimbabwe, yet the average salary paid to employees in steel mills is 12% lower than ZISCO's. As a result, although ZISCO's labor force has a higher productivity than these three countries,its labor costs per ton are 7% higher. The comparisonwith Korea is even more astounding. Korea'saverage remune- rationper worker is 31% higher than ZISCO's,yet its labor force has a productivitywhich is nearly 7 timeshigher. As a result,ZISCO's labor costs per shippedton are 5 times higher (see Table VIII.7).

8.13 ZISCO'shigher labor costs are partiallythe resultof overman- ning. With the emigrationof highly skilledpersonnel after Independence, ZISCO'smanagement decided to double-mansome positionsin order to train its unskilledpersonnel along side experiencedexpatriates. To this extent, technicalassistance and time may help reduceZISCO's costs in the future. But high labor costs are also an industry-widephenomenon, as discussedin ChapterII.

8.14 ZISCO can ill affordto labor under any type of disadvantage, whether it stems from an overvaluedexchange rate or technicalinefficiency specificto the plant. DespiteZISCO's ready access to cheap raw materials,its transportcosts are a seriousdisadvantage. Table VIII.8compa- res operatingcosts at ZISCO with those of liquidsteel and ingot cast slabs in Brazil. Althoughsome libertywas taken in this comparisonbecau- se the Brazilianplant producesslabs insteadof billets,the comparison still illustratesthe disadvantagethat ZISCO must overcome. The rail and - 112 -

port chargesof approximatelyUS$48/ton added to ZISCO'scost comparewith an estimatedcharge of less than US$8/tonfor Brazil. This US$40/ton differentialmust be absorbedby ZISCO in order for it to compete. It does not seem likelythat effortsto reduce costs throughmodernization or other means can overcomethis differentialon semi-finishedproducts.

Table No. VIII.8: ZIMBABWE- OPERATINGCOSTS AT ZISCO COMPARED WITH THOSE IN BRAZIL (US$ per ton)

ZISCO BRAZIL

Liquid Steel 94 97 Ingots 103 107 SemifinishedProduct 139 149

EconomicEfficiency

8.15 If high transport costs make export sales particularly costly, by the same token they provideZISCO with a naturalumbrella of protection. Coupledwith domesticallyavailable cheap raw materials,these two factors suggestthat ZISCO shouldbe an economicallyjustifiable operation as far as domesticsales are concerned,although noc readilycompetitive in world markets.

8.16 The Jansen study3 / suggestedthat ZISCO was not an efficient operation,with a DRC of 474. The Jansen study,however, did not indicate whetherthere was any varianceamong products,whether all of ZISCO's productlines were all equallyunattractive, or whetherdomestic sales were economicallyjustified. To answerthese questions,the missionundertook a detailedexamination of ZISCO'seconomic efficiency on the basis of 1985 data. A summaryof the results (see Table VIII.9and StatisticalAppendix Tables 41-45),show more detailedbreakdowns of the DRC calculations, includingDRC for each of the four productsfor domesticand exportsales, as well as additionalsensitivity calculations, including no shadowpricing for energy inputs.

8.17 To make a rough comparisonwith the Jansen calculation,a base case with no shadowpricing for inputsexcept the removalof taxes and duties was made (CaseA in Table VIII.9). The DRC for domesticsales was .85 but the DRC for exportsales was 3.17 largelybecause of high transport costs. The reasonwhy the DRC calculatedby thc missionis considerably better than that obtainedin the Jansen study is probablythe significant devaluationthat has taken place in the interim,rather than any real improvementin the efficiencyof the plant. The exchangerate in 1981 used in the Jansen study was Z$0.72 per US$, while the one used for the current calculationwas Z$1.60per US$.

3/ Jansen,Zimbabwe. M. cit. - 113 -

8.18 Once adjustmentsare made for shadowwage rates and for shadow energy prices(Case C), the very low DRCs on domesticsales more than com- pensatethe DRC on export saleswhich is still over one. The weightedaverage for the plant is then slightlybelow one, implyingthat the plant makes economicsense to operate. The main reasonswhy ZISCO makes economic sense, even thoughit has to export 70% of its outputat a tremendous transportcost disadvantage,is that all of its raw materialsare essentiallynon-tradeables and are producedvery cheaplylocally. 4 / 8.19 BecauseZISCO uses virtuallyno importedinputs except equipment spares,its DRCs improvefurther if shadow pricingis extendedto reflect foreignexchange premia. With a foreignexchange premia of 20% (Case D), the weightedDRC for the plant falls to .67 and export sales are economically viable,with a DRC of .94. With a foreignexchange premia of 40% (Case E) the weightedDRC falls to .58 and even exportsales make clear economic sense.

8.20 Both the technicaland economicefficiency of ZISCO could be improved considerably.A detailedreport outlining some of the action that ZISCO can take has been preparedfor deliveryto the authoritiesby the Bank mission.5 / As an illustrationof the impact that one of these impro- vementscould make for the DRC calculations,the last three cases in Table VIII.9 show the DRCs that would be achievedif ZISCO were able to sell its productsat the FOB list pricesrather than at discountsbecause of quality problemsas it currentlydoes. Such qualityimprovement could be achieved as part of a technicalassistance project costing only US$4 million,which would also reducecosts and improveoperating efficiency.6/

4/ The two main raw materials,iron and coal are non-tradeablebecause of the prohibitivelyhigh costs of transportingsuch high bulk of value mineralsto the ports. In the economicanalysis, iron ore was priced at its financialcost in the absenceof any better data on the economiccost of producingit, while electricityand coal were priced at their long run marginalcost of productionfrom pricesobtained from the Bank'sEnergy Department based on an extensiveenergy pricing study done by Coopersand Lybrand for Zimbabwe.

5/ See World Bank, "AssessmentReport: Zimbabwe--ZimbabweIron and Steel Company",July 1986.

6/ For more detailson this technicalassistance program and the more in depth assessmentof ZISCO please refer to the reportalready cited above. - 114 - Table VIII.9: ZIMBABWE- ESTIMATEDDOMESTIC RESOURCE COSTS FOR ZISCO

Av. for For Domestic For Case Plant Sales Exports

A. Base Case: no adjustmentexcept 1.55 .85 3.17 removalof taxes B. Case A: adjustedfor shadow 1.19 .65 2.43 wage rate C. Case B: adjustedfor shadow .96 .58 1.59 energy prices D. Case C: adjustedfor 20% shadow .67 .46 .94 ExchangePremium E. Case C: adjustedfor 40% shadow .58 .42 .76 ExchangePremium

F. Case C: adjustedfor Impact of .81 .53 1.21 TechnicalAssistance G. Case D: adjustedfor Impactof .58 .42 .78 TechnicalAssistance H. Case E: adjustedfor Impactof .51 .39 .65 TechnicalAssistance

The generalformula used for the DRC calculationswas wl + rk where 1 and k wete labor and capitalinputs per ton of steel;w and r were price of labor and capital;and VA was value added at internationalprices per ton of steel.

CASE A: w and 1 used were financialprices actuallypaid by the firm; VA for exportswas based on actual FOB pricesreceived by ZISCO at S.A. ports minus the US$48 transportcost of gettingthe steel there,minus the cost of raw materialsand services;VA for domesticsales was based on actual FOB prices receivedby ZISCO at S.A. ports plus the US$48 transportcharge minus the cost of raw materials and services note that this means that the equivalent landedprice used for importshas been adjustedto reflectthe same qualitydiscounts ZISCO is forcedto give on exports). CASE B: same as Case A except that a shadowlabor adjustmentfactor of .30 was used for unskilledlabor, 1.0 for skilledlabor. CASE C: same as Case B except that shadow pricesof .45 and .26 were used for coal and electricityinputs respectively. CASE D: same as Case C except that a foreignexchange premium of 20% was assumed. This was also assumedto includethe followingincreases in other shadow price adjustmentfactors: unskilledlabor to .36; skilledlabor to 1.1; coal to .48; and electricityto .27. CASE E: same as Case D except that a foreignexchange premium of 40% was assumed. This was also assumedto includethe followingincreases in other shadowprice adjustmentfactors: unskilledlabor to .42; skilledlabor to 1.2; coal to .50;and electricityto .28. CASE F: same as Case C except that list FOB prices ratherthan actualFOB priceswere used in the calculations,sn the assumptionthat these could be reachedafter a US$4 milliontechnIcal assistance project. The difference betweenthe actualFOB pricesand the list FOB pricesreflects discounts ZISCO has to give becauseof the poorerquality of some of its shipment. CASE G: same adjustmentas in F but to Case D. CASE H: same adjustmentas in F but to Case E. - 115 -

Constraints

8.21 Investmentsnecessary to maintainefficient operations are not being made. Consequently,the plant is runningdown and, if the processis allowedto continue,ZISCO would requireeven greatersubsidies in the future. In addition,it is allegedthat the plant'scurrent high qualityore supplywill run out in eight to ten years and that alternativelocal ore suppliescannot be used withoutinstalling a new sinter plant. There is thus the possibilitythat the plant will be forcedto stop unless the new sinterplant is installed. At least two foreignconsultant studies have been done on a proposedrennovation of the plant. One preparedby Voest- Alpine in 1983 recommendeda rennovationprogram with an estimatedcapital cost of Z$185 million (US$116million) for four major components,including a new sinterplant. That rennovationprogram was reviewedby British Steel Consultantsin December1984. Their final report,issued in March 1985, essentiallyagreed with the basic strategyoutlined by Voest-Alpine, althoughit took issuewith some of the specificproject components and suggestedmodifications. Based on these studies,ZISCO, in turn, has put togetherits own rehabilitationproposal which includessome additional components. The estimatedcapital cost of that proposalis Z$312 million (US$195million), 71% of which are expectedto be foreignexchange. Neitheralternative contemplates increasing capacity.

8.22 These are very large investmentsand it is not clear that even after they are made ZISCO will be able to operateprofitably or that they make economicsense becausethe studiesrecommending these investmentsdid not includefinancial projections for the plant as a whole or economiceva- luationsof the investments.Before undertaking these investments,it would be advisableto conducta market study and investigatealternatives, includingscaling down the plant to operateprimarily for the domesticmarket with the small blast furnace. A comprehensivemarket study is needed as a first step in developingan action plan leadingto ZISCO'slong-term viability. Such a study shouldaddress both the domesticmarket for all steel productsand the niches,in the exportmarkets, that ZISCO could oc- cupy effectively.A financialstudy of alternativesis also essentialto providea clear pictureof the financialburden that the State will have to carry if ZISCO is to continueoperating and, especially,to select the less onerouschoice. Scalingdown the plant, for example,would have the advantage of extendingthe life of the high qualityore depositsand avoiding the need to installthe expensivenew sinterplant. On the other hand, the DRC calculationssuggest that it makes sense for the plant to continueto export: a reductionin the size of the plant may increaseunit costs so much as to make more attractivethe alternativeof continuingat the present scale but restructuringthe firm to increaseits overallefficiency. An adequateexamination of these difficulttrade-offs will requirefurther analyticalwork with a considerabletechnical input.

AlternativePossibilities for ZISCO

8.23 There are severalalternatives available to the company,each of which will requirefurther analysis of tne companyas well as the investment requiredand the returns. - 116 -

(a) Continueoperations as they exist with continuingeffort to reduceproduction costs. This alternativehas the implica- tion of shuttingthe plant down completelywhen the present iron ore mines are depleted.

(b) Scale productiondown to a level closer to nationalneeds with exports reducedsubstantially. Scaling down may reduce financiallosses but would also substantiallyreduce the inflow of foreigncurrency. This alternativewould involve operatingonly one of two blast furnacesat 40-60%of present capacitybut would extend the life of existingreserves. This alternativewould have to be coupledwith technicalas- sistanceto help lower productioncosts.

(c) Undertakethe modernizationplan recommendedby Voest-Alpine as modifiedby BritishSteel and ZISCO. This alternativere- quires an investmentof Z$312 million. The study,although technicallycomplete, is overambitiousand the financialim- plicationshinge on futureworld marketsand prices. Further analysisshould be done on the market-worthinessof the study'sassumption, based on (a) the market study,(b) up-to- date sellingprices, and (c) the financialimpact of loan re- paymenton the company. An economicevaluation of this al- ternativeshould also be undertaken.

8.24 In conclusion,as an importsubstituting activity, ZISCO is an efficientoperation even at marketprices. Exportsales are a financial drain on the company,but bring a net economicbenefit to the country. The firm has both managerialand technicaldeficiencies that, if addressed, could improveboth financialhealth and economicbenefits. In particular, there is overmanningand poor qualitycontiol and top managementis just beginningto acquirefamiliarity with steel making. The plant is increasing lossespartly becauseof its pricingstructure. At present,it is chargingtoo littlein the domesticmarket for some of its productsand over-rebatingon some of its export products. There is no economicration- ale for this pricingstructure, especially considering that the fisc must subsidizeZISCO's operations in order for the firm to subsidizeconsumers and exportingmiddlemen.

8.25 The availabilityof ore is a medium-termproblem that must be tackledimmediately. Ore may run out in 8 to 10 years unl^ss a sinter plant is put into operationsoon. ZISCO could also benefitfrom a modernization of its presentfacilities, but an economicand financialanalysis of a modernizationplan has to be predicatedon a marketingstudy that should be undertakenas a first step.

8.26 It would be advisableto undertakethese reformseven in the absenceof the more ambitioussteps outlinedin ChapterV. The latter reforms,however, would be of considerablebenefit to ZISCO. A more competitiveexchange rate would make its exportssubstantially more profitablethereby improving its financialperformance and reducingits - 117 -

relianceon the fisc. Importliberalization together with price control liberalizationwould also help ZISCO,although it would be under pressure to improveits quantity. Finally,ZISCO's future investments would look more financiallyattractive, as a resultof increasedprofitability. - 118 -

STATISTICALAPPENDIX TA I

ZlUU - S1UWCM (F S 1WACM, UJL BY MMClIR1967 ad 1970-82 (Z7$ Itlin)

1967 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 I960 1981 1982 Fodtffs (iwutl stodcfeed) 99.5 138.0 153.6 174.6 214.1 231.9 260.0 295.8 327.4 351.3 415.7 505.3 Drik and Tdbux 37.9 614.7 809.2 49.3 55.3 63.6 69.7 80.3 92.1 103.1 104.6 121.2 132.5 160.8 leutlle (1nchwtlrg 195.5 20.5 GImd1Z) 37.0 57.4 71.6 88.0 103.0 138.9 136.6 151.2 1156.5 165.8 197.8 254.2 313.8 3D4.5 Clodhtig & FoPr 3$.31/ 46.2 53.4 60.6 69.7 84.1 89.0 85.2 79.9 80.0 10W.2 143.3 23.4 215.3 Wood& P brnitur 15.0 22.3 25.3 28.2 32.2 38.6 36.3 37.4 33.6 37.2 55.0 82.2 109.6 Paper, PrintIrg & 102.4 PdIi.dilxg 23.4 -%.1 37.7 43.1 51.5 65.5 74.9 65.5 65.9 71.9 84.0 Chmdal & Perol 114.3 148.5 169.7 Produts 53.8 82.9 98.9 113.2 120.6 166.0 184.1 170.5 192.0 205.7 235.7 lorTChoc Minral 335.3 439.4 477.5 P nduca 12.6 24.0 28.3 33.9 39.2 45.1 48.4 45.1 41.5 38.3 46.6 62.0 88.0 95.9 etals & ea1 Prodcs 58.4 113.5 140.0 157.3 188.2 249.3 291.7 290.6 267.0 295.7 3E0.1 491.3 574.3 9B5.2 Tranlpwt FAdtt 11.4 2D.5 28.1 33.5 29.8 44.0 51.9 45.1 46.7 42.8 47.9 5E.2 79.2 99.7 Electrlal taddier 16.5 7D.8 22.8 24.2 28.8 41.1 39.0 35.7 39.6 40.0 47.2 63.9 82.5 96.8 Other tfg. (kms 4.1 6.7 7.8 9.3 10.9 13.7 13.7 13.8 14.8 17.1 21.6 30.5 41.6 38.4 All Mrifacbwig (kup 403.2 615.7 722.7 829.5 957.6 1,198.5 1,317.7 1,339.0 1,369.5 1,470.1 1,771.3 2,301.3 2,A0.5 3,235.3 a/ ids figure 1 fo*bnr. '5xmw: (ktral StMals d OffT , Sqtnw 1985. - 120 -

Table 2

ZMA - DMincOt 'Mo 07 0X MW Cfl3DC0 =CM

~w u~ O"ca Mm- )htaa OdwOth O Fodsdf Wft UalwM:t x "IRWO WA PbwLUJ and Tuat Ec w 'atilw g 1|t 9|g 1J; Pm9mwtotE Pto&xtw Itmductm

593 . 6. 65.2 6. U6 37 35 tl9.U 6 t32j I. 9, 20 .65J§, 1°4

1975 U zoJ 67.4 61.1 n 6 1 5.4 6S4. 91.5 123A 3.06 115.3 67.1 91.6 5.6 F 116a 2 W9 Ila t~~~~~~~~~~.Y:3 71.4 1101fl 11 IJ

1121 01.5 10735 1.3 16 19 94 l0.4 12.079 9.1 1M5 109 713. 1(15' 94.8 1 .6 1932 Jmay ~~~112.572.3 63. W 64A6 ":73 *1"IA4 4 bbuwy 12311 70.2 135.9 us7 917 P13 in*' 136.7 67.2 116.1 9.7 13D.9 119.0 9:1 ilA 113.7 105 100.6 109.7 17.7 1502.9 U.1 111.1 130.31i3.1 82.777.1 1.29.513D.0 135.IQ..1 9790. 11.10S.4 113.12.

ij1~~~~~ 123.6 93.3 127.1 12.1 89.3 115.1 126. 112.6 99.3 3D1.8 65.6 113.2 ffli ioDlbu 1 :7 2.4 ~ 19.1 126. 113.2 964 173i 62.0 1107.1 = W1101 I 5 19 2 .7 118.0 .8 121.1 IM~~~90. 19. 937 11 1927 1015 119.7 11.7 77.4 119.9 123.0 116.0 97.2 198.4 61.2 113.4 129.4 119.7 111.6 137A. 92.8 119.9 122.4 114.1 10.2 3 D1.6 1 117.6 1t26.1 113. 79.6 101U3 NJ 96.6 93.4 B3DI7 1 9 12 .0 47.1 96.6 19U3 .mfhy 125 2.4 63.3 61.0 (AA6 102.4 10318 97. 87.6 143.9 39.4 94.3 131 91.1 952 119. 90. 109.4 12210 100.3 14000 164. 64. 1.6 I~~~di~~13D.6 71.7 110.9 11.2 913 13. 121 103 940 1.6 77 1(5 69.20. 1(8.9~~~~~~~~~~~~~~~~~~~~~~25. 123.4 86.6 123.6 126.61823 92.3 1(5.915. 116.716.7 1(3.910.9 91.291. 153.77 125.7 78.5 l04.5 115. 63. 109.3 130.7 107.6 92.1 13.6 72.9 1(.0 137.2 61.5 107.5 1(3.4 61.1 103.3 13.6 99. 94.6 139.0 72.4 103.7 1im.9 98.1 113.1 1(8.2 79.2 101.7 1.33.6 109.6 112.0 146.3 76.6 111.3 idy 93g114 41 8.6 133 i341. 115.0 99.1 143.3 676 1(3.1 Sqi~~~~~ 125. ~ 97. 1(3.4 111.3 77.2 10.1 123 111.3 go. 1.2 7.1 10B.L 120.7 94.7 113.0 113.9 8. 1. 117.4 128.3 114.4 92.0 146.0 901 107.4 124.3 10.N1J 2. 1 104.4 123.4 115.6 92.7 141.1 103.7 9.0 12D.4 93.2 110.6 1(.6 7.7 90.8 1(5.1 66.6 63.1 106 9. 1966.4 r 117.1 39.0 S6. 44.2 67.0 82.3 75.3 77.5 70.6 09.2 32.7 73.2 JMMY ~124.7 63. 99.3 9~S 64 101.3 113.6 90J 1.6 1.53.2 34.7 96.3 111r~~ 153.3 61.3 116.1 9. uA 10D.1 19 .8 9. 192.3 115.2 3.S 104.2 1:30.1 61.6 129.7 91.1 73.9 98.4 104.1 92.7 97.9 190.2 35.0 103.3 114.8 120.2 104 77.2 94.7 112.5 93.4 a8.3 114.4 43.0q 97.3 117.8 .3 109.2 100.5 74.9 85.4 116.3 102.9 88.1 117.5 447 97 .6 lily 91.83 114.7 104.7 81.9 104.1 123.4 91.2 87. la6.3 46.7 10D.6 4asa ~~~~11418119.1 91 135.5 114. 91.1 IL?. 11.i9 979o2. 46.9 103.3 1MA. = W ~~111.2 1(3.6 147. 1163 63.0 1.5 116.3 110 82.3 103.0 91 109.2 113.6 13. 5 117.4 95.0 107.0 125.3 112.9 92.3 126.3 (AA L01.5 N-mai 119.5 126.3 17918 '25.5 102.4 115.6 127.9 121.3 92.9 113.7 621 116.3 ~~1963 ~~~~127.4 89.4 103.6 10.4 821 107. 1.22.7 107.1 931 149.6 75.0 101.3 1984 1201 86.0 12.5 10.6 82.3 1L02 114.3 100.3 69.3 120.6 323 101. - 121 -

bbl 3 ZCw. - .IO A0 Nu aC1J1Ew ?NUFNRDC INLSS (2$ lilUm)

_M. oitpAt TctOWPdu ad rl in Stoks Not Outpt

kLaSol Iudirg salm

F.rlnd C t ftoim NotltlWu PAthdW t: Friie nt ttduud m ft Ft _m m f Pdtma fo b-S.al fo b-SaJa m the Pdam m eh n_ta

1964 36S.5 33t.1 231.3 201.9 137.2 129.2

19$5 34 370.7 251A 221.2 151.6 146.5 1986 34.3 351.6 739 14.7 144.5 136.9 1967 '03.3 372A 245.9 222.4 15.4 130.3 19 MA6.3 414.6 270.3 215.3 175.9 169.3 191i9 523.4 40.1 318.3 208 25.1 197.3

1970 615A6 375.7 367.5 33.9 24o.1 239.7 1971 722.7 008.4 429.1 38L6 293.6 80r.8 1972 69.5 708.9 496.3 449.9 333.2 319.0 1973 967.7 90D.2 56.0- 59.7 3S7.6 370.5 1974 1.19166 1,121.0 721.6 660.3 476.9 460.7

1975 1,318.S 1,234.4 70.3 727.5 53D.5 506.9 1976 1,350.8 1,269.5 S.5 750.9 5U2.2 518.5 1977 1,369A 1,30.4 836.2 774.6 533.4 515.8 1978 1,470.0 1,359.5 867.9 80.1 602.2 564.4 1979 1,771.3 1,6A2A 1,046.7 976.3 721.6 704.3

1980 2,301.3 2,180.9 1,39.J 1,20.3 951.4 923.7 1981 2,190.5 2,721.5 169.1 1,5S7.8 1,1ff.5 .,163.7

abl 4

ZrnM - MN WIIT CFT tMIW=MG IIIIS K AMA (Zs ElAal)

Qs Q btf1.d* mumc 3AI7OW K las ad ?I* Aft qp Kadve Odr Ares !Tbtai

1964 186.4 1IX.1 17.3 16.2 18.8 3.9 8.7 17.1 368.5

1965 D19.7 103.3 30.7 18.4 18.9 3.9 10.7 18.8 403,4 19f6 195.5 102.7 17.5 18.5 15.6 5.5 9.5 19.5 384.3 1967 202.6 110.2 14.3 19.2 19.7 5.5 10.9 70.9 403.3 196S 221.1 122.5 15.6 21.1 18.4 6.5 11.2 29.8 446.3 1969 260.2 134.0 21.0 2.5 27.4 7.4 15.1 34.0 523.4

1970 1)6.0 156.0 21.3 30.6 39.6 8.2 17.0 34.8 6U.6 1971 359.0 179.8 26.5 32.6 47.7 9.2 Z4.2 43.6 722.7 1972 406.5 206.7 32.9 36.2 56.1 10.3 28.6 52.2 829.5 1973 400.2 235.2 36.9 41.0 65.5 14.0 39.7 67.3 967.7 1974 578.5 3DI.1 39.6 61.0 84.4 11.8 40.4 81.7 1,198.6

1975 633.0 311.2 46.2 67.5 116.5 13.2 37.3 93.8 1,318.8 1976 637.4 297.J 43.9 70.6 t22.7 17.0 43.3 117.9 1,350.8 1977 655.2 299.2 43.5 60.4 129.2 18.4 45.8 177.8 1,369.5 1978 702.1 329.3 43.4 63.8 154.2 15.5 39.5 122.3 1,470.0 1979 83D.6 3I6.5 S6.0 96.4 179.7 19.4 44.9 145.5 1,771.3

190 1,1.22.5 3M.5 77.0 117.6 22.3 20.0 56.8 177.6 2,301.3 19U 1,439.2 679.7 96.6 136.9 2Z3.2 22.3 62.1 2a.5 2,90.5

* V fTh j= to te flinoiay n A ¶w f lad tfx 19791s io dstadlimtm fr4i 7 uWi bsio 3DhdJA=, 1979 7d 9thJum, 1980. - 122 -

TAble5: Zim :s 1oufubWkrta, 1966,1975-6 - 1Oilmz) ltm 1966 1975 1976 1977 1978 1979 1960 1961 192 1 1964

Vttle &-set 902 1,14 1,672 1,955 1,533 1,776 1,867 2,992 3,136 2,200 3,639 So 267 x1 666 54 55 424 1, 3,118 3,441 3,002 6,228 Cnio C1 173 252 168 11 199 422 600 632 664 68 484 otw 4,426 2,902 2,947 2,09 2,06 2,661 3,997 4,955 4,935 5,663 13,601 Utotal 5,766 4,559 5,653 4,295 4,623 5,43 7,747 11,69712,196 11,553 23,952 N=Afaw= by)hArUIa Umtbe mitbm pie 72 113 330 446 60 1,376 1,856 1,780 1,391 271 479 Tys A tube 945 1,113 201 375 678 1,05 750 1,161 1,371 1,762 2,54 Pqr etc 2,711 2,599 997 941 1,2 1,423 1,39 1,120 2,063 4,606 8,148 Yam O1 1,60 2,855 3,099 3,010 5,06 5,620 3,948 2,616 2,839 14,218 F*rice 1,197 1,S4 3,000 2,860 4,806 4,139 4,862 2,612 1,563 5,255 8,613 COWL 315 812 616 651 892 1,05 1,906 1,S29 1,717 4,436 7,581 Ot. 7,204 6,691 6,448 5,799 5,509 7,641 9,860 11,166 9,597 17,241 36,699 ACCal 13,330 14,767 14,247 14,173 16,934 21,7M7 26,268 23,518 20,386 36,410 78,286 Iz atl Ptoduct Pi&lIon 3,159 1,940 3,538 0 0 547 3,725 816 432 22 36 LtU &billet 1,399 8,0S2 11,193 19,777 22,767 25,968 34,224 24,185 28,228 40.666 31,027 I= & itel 1,333 3,410 5,862 8,726 16,178 31,931 33,014 17,637 12,969 16,443 18,313 ALiwyCoat. interiuls 80 514 249 90 172 316 643 203 1,217 273 477 otht- 959 7,996 15,m 4,690 1,778 1,307 1,761 1,966 1,650 5,547 17,461 Ot*r 5,651 7,232 6,543 8,0C0 8,638 9,953 14,147 16,497 10,917 10,291 12,832 Utotal 12,581 29,134 42,608 41,303 49,533 70,022 87,511 61,324 55,413 73,242 80,146 '_himzy, m9o?t & ther Nle1ect. mchiny 2,348 5,893 5,252 5,032 5,401 4,301 6,967 7,238 6,214 4,965 8,369 lIul. el4. cble &vir6 2,474 145 138 541 1,916 1,591 2,350 1,666 95 708 1,54 Radios,T.Vc 6 pau 3,975 6,145 4,039 2,264 3,129 4,854 4,341 3,462 1,940 2,IX 2,562 PAil. VehiclS & SPi. 359 1,221 1,526 2,803 1,839 1,797 1,146 5,293 1,185 1,161 1,443 ott. 3,940 2,256 2,032 1,240 1,744 756 416 1,585 2,322 2,940 8,438 S9)total 13,096 15,660 12,987 11,880 14,059 13,299 15,220 19,244 12,656 11,910 22,396 Misc. Jwjf. & Camdities 1xnitg & Fiztwe 1,307 4,433 4,158 2,626 2,492 3,303 4,744 5,273 3,590 3,531 4,835 Suits, jackits, tc rna 1,812 4,716 4,967 3,279 3,441 3,246 3,372 2,766 1,415 967 3,138 Drees, blowe, skirts 1,227 3,367 3,906 2,896 3,446 4,007 3,755 4,222 2,762 1,978 4,784 Otts clothig 3,831 5,695 6,130 5,377 4,991 4,429 5,185 5,320 2,778 1,760 3,691 *ootwe 3,195 5,144 5,734 3,906 4,145 4,594 5,066 6,074 3,819 4,171 5,890 Tral god 402 324 446 556 710 826 1,226 1,120 1,229 2,039 3,374 Otber 2,752 3,0% 2,892 3,220 4,105 5,802 5,715 6,248 5,081 8,871 11,899 btoata 14,526 26.735 A,233 21,860 23,330 26,207 29,083 31,023 20,674 23,317 37,611 Aufactuw izcl.im 6 steel59,301 90,855 103,728 93,501 106,479 136,796 165,832 146,806 121,329 156,432 242,391 Mtfctum mcl. irc6 & steel 52,371 68,953 67,663 60,218 67,584 76,729 92,465 101,979 76,833 93,481 175,077 rroa ad steel 6,930 21,902 36,065 33,283 40,895 60,069 73,367 44,827 44,496 62,951 67,314

Sarce: COmtralScactitical Office, Sttmint of Ektemal Trade, varias isas - 123 -

Table5A - Zimbebm-41snufavturadxports, 1966, 1975-84 OIillwi198D0 $) 1966 1975 1976 1977 1978 1979 1980 19U1 1982 1983 1984

(lkal: Ibttle mtrmt 4,235 3,196 4,740 4,433 2,495 2,775 2,917 2,817 2,247 1,131 1,565 kwq. 69 217 1,188 33 122 609 2,005 5,113 3,755 4,762 7,642 Cr* ClyeTine 926 523 459 467 495 842 938 1,196 1,110 824 292 0tk 20,779 8,107 7,462 4,751 5,181 4,613 6,245 7,145 6,552 5,810 11,570 Juttot-l 26,009 12,043 13,849 9,684 8,283 8,839 12,105 16,272 13,665 12,528 21,070 1daswm by Ibtwial ImtberIn tb piece 338 316 329 1,016 548 1,455 2,900 3,790 1,949 282 108 Tyres &tubs 2,761 3,104 445 727 1,521 2,133 1,172 2,245 2,331 2,103 2,279 pow etc 12,728 7,261 2,524 2,134 2,674 4,802 2,178 1,198 2,806 6,637 12,006 sarni 4,160 4,484 7,229 7,027 5,421 9,053 8,781 5,719 4,186 2,852 19,851 Fabrics 5,620 5,123 7,596 6,485 0 7,108 7,597 4,070 2,045 7,081 13,448 Clmwt 1,479 2,268 1,560 1,476 1,730 1,976 2,978 2,213 2,336 4,606 7,811 Other 33,822 18,692 16,327 13,150 10,210 12,321 15,438 16,105 12,742 17,689 31,219 &bhtota 60,907 41,248 36,010 32,015 22,104 38,848 41,044 35,340 28,396 41,250 86,722 Iron & steel Pig Iron 31,491 6,944 13,091 0 0 1,226 5,82D 1,646 BOB 23 40 Tgotes &billets 50,579 25,727 42,004 70,531 56,786 41,635 53,475 36,373 44,196 50,100 32,226 Irom & steel berm etc 3,511 11,824 23,099 33,371 56,075 53,841 51,584 28,283 20,732 31,389 18,519 Railw y Cost.materials 107 1,866 710 418 565 608 1,005 507 942 522 1,396 Other 4,502 22,338 38,545 10,635 3,248 2,108 2,752 2,864 2,191 5,691 14,854 Subeotal . 90,19168,699 117,439 114,955 116,675 99,418 114,636 69,674 68,868 87,726 67,085 Otber Metal& )htal Produrts 26,531 20,203 16,567 18,186 15,780 16,049 22,105 23,790 14,495 10,559 10,916 M-hinry,tromport & other Nt I telt.mchinmy 11,023 16,463 13,296 11,410 9,867 6,935 10,886 10,438 8,251 5,094 7,119 Insul.elec. cableluire 11,615 405 349 1,227 3,555 2,565 3,672 2,402 1,321 726 1,347 Padios,T.V.s & pert. 18,66217,167 10,227 5,134 5,716 7,827 6,783 4,"2 2,576 2,192 2,179 Rail.Vehicles& equip. 1,685 3,411 3,864 6,356 3,360 2,898 1,791 7,633 1,573 1,191 1,228 Other 18,498 6,302 5,145 2,812 3,186 1,219 650 2,286 3,083 3,016 7,178 Subtotal 61,484 43,748 32,883 26,939 25,683 21,444 23,781 27,751 16,804 12,220 19,052 Miscellaneos mofactures Fumniture&Fixtures 6,136 12,38410,528 5,955 4,552 5,326 7,413 7,604 4,767 3,623 4,113 Suits,jackets,tnouers 8,507 13,17512,577 7,435 6,286 5,234 5,269 3,989 1,879 992 2,669 Dresses,blouses,skirts5,761 9,406 9,890 6,567 6,295 6,461 5,867 6,088 3,667 2,029 4,070 Otherclothiag 17,986 15,910 15,521 12,193 9,118 7,142 8,102 7,672 3,688 1,806 3,140 Footwre 15,000 14,370 14,519 8,857 7,572 7,408 7,947 8,759 5,071 4,279 5,011 Traw.goods 1,887 905 1,129 1,261 1,297 1,332 1,916 1,615 1,632 2,092 2,870 Other 12,920 8,537 7,323 7,302 7,499 9,356 8,930 9,010 6,746 9,102 10,122 iutota1 68,197 74,687 71,487 49,569 42,620 42,258 45,442 44,73727,450 23,923 31,99S Total su£factures 333,318 260,629 288,235 251,348 231,145 226,857 259,113 217,564 169,678 188,205 236,790 Mioufacturesecl. iron & steel 243,127 191,930 170,796 136,393 114,470 127,439 144,477 147,890 100,810 100,480 169,755 Indexof Total Minufactures 100.0 78.2 86.5 75.4 69.3 68.1 77.7 65.3 50.9 56.5 71.0 Tndm of Mnwuf.encl. Iron 6 Ste 100.0 78.9 70.2 56.1 47.1 52.4 59.4 60.8 41.5 41.3 69.8 Source:Ceatral Statistical Office, Statemnt of EtterualTrade, varicus issues;missiam estiamtes - 124 -

Table 6 mu .mm wIakl.o st NI S "- 35 _a _S

Fdd usG 1 , 1, 1111 1,1811, 1,13I ,O 1,3 11,195 0 &"Otiidiitlim AN111 ^W OnM WTO IK 4111,11 UR we lok K M U67lown ^^^n",0 bmi. am ,10? 1,1, 111 11,4 1,6 ,44 U,.,111S t,"

l9*dwt 619,121 1 4131,411194,10431 O,3,4 1914 %vat W3, IrM l 1^21,111131211 33 1,1414,1 @9,44,11 volt W,l9 3,46N W4,0 S,3A2 lid IlilIltO.l volt , ,u 81,9 87,39 Noll" itfr t 13,91 8496 04,15 115,11 3111 15.11 31owvlicdoh o Faillts ,09 330 4,1 ,2 1793 , 194grill 149,99 1,3 1917 7,18 9,3 93, _ullt 1*,93 11,219 149,11 114,711UI,U *,u fwuiadhoAsi cad lOw 3.497 5.8343 6,1V7 3103 09,31 42,4jv flat ast &mm 11,014 0,3 3,61 ?,4 .0s6 40 Iw.. Is ion two.6 3,17111 12,41W91,9 00,114 01,4194 4,01 liwrees e catal 41117 1i.2 1,170 35,411111 1,474 . 1 *AV Mt 9176 11,411 3,I10 13,33 Ii,11 22,3 tuft 1U214,37 343,317339,3111 ,11 1194731 3,297 50164 P.*li mu a*lt80 101,1 17,3s 872,219n159,11 142,431 72j0 bstle INJOIN ta Mt 3,69 1,32,1 17,440 3,973 29,119 48,3 hitt 70,116 3,i,0 ",m 3,32 1,0 532 Tactils 4,9 51,17I ,019 42,604 0,974 319P1 ItAf 11,219 U.132 27,210 23,931 9,62 1,291 131021 32,m 141,942 l,lp Mm 210,11 197,6

at tenol. billtI 41,61 1,365 IS,A 11,136) 29,913 9,977

' 1.iut 0H,t , 91,3 12,01 ",7,1 17,5 Total _ iue 0nU) 03 7nD 7U 3 pi 409 bli t1ilt.lnt III,.1448 094 1is? 31 24 275 34

hFilltattr 1m/le.8 kel 9.401 9.2 C.M 31.711 3.711 0.831 fetal att tnIbt wth 15.99 15.45 111.1,2 0.5 1 0.0 1 20.11 CwrUItoot,PCwvrrt LU9itiUn 1.45 8. 1.37 I.0 1.44 1.3 Imm ttuawrfli.l suto 0.15 1.90 0.90 O.97 1.42 1.13 0r,, pnfitoikel leas 20.0n 13.1 0.301 *.9 0.042 7.5 Priat ofter IN/_ea)l tI-nr 81.1n 89.61 5.801 3.021 3.191 5.431 IceIis iamier 1.10 09.19 00.88 9.09 14.419 10.31 l bvid r.t71li,l4 3.31 14.41 84.911 13.721 19.321 livieod pat patio, o."4 42.80N 3.0U2 14.51 47. 111137.911 b magt vain pr " i 081.24 21.218 0.126 08.39 01.41 08.92 IM tiu as* oIrn Proeflit 3X.1Z1 V.431 3.241 37.411 3.7 27.15 Slt mkestrto it.I 137M.2 123.6l11 113.451 112.202 19.251 Oilt FiedsatsAiSt bi.t I U."1 19.11 5.971 19.531 3.011 58.1.

I n laatvlsl

tI .. --let. Lls./q,itl 0.9 9.78 0.1 .70. 0. 0.05 Lag"Two LO,r.-tt. Ostliltt 0.17 0.19 0.25 0.20 4.29 0.20

I/l be Alloys, I90: a9 tuati, dataa grawibI therfoire teail wr nm_r to If fare. 0ft4r tea profits c.twrf en tbr telredr na OSctili df Ors profits loe tlatih, thereof i rom,eq offer tax proflts by 2,049t_miM.

2n nill. Aloys. 89H I I 2: iOMa074 nuOthmwe t.i. ar rtb, Cttiley far 'O *'II 41e*ntI.i8 a 1&04tII late] netstd tiltl li,ilitie, * gt wtet c0f tlst"t,

3/ Profits to Ic state t ad $eMCIeee ,ttwabtoe snt tce,,ittet is 191 44674tIe di ff o0a*gs})lmg 8933 808,90) dafferese bu ce wcen#mesdata is, lialf Ofo iaca, 88 Clit) toa193.

4/ 1..tiga isea.. I tateoeetpi swff/p"n *tetfmot re Netcm,lsteet a, 1980130 tIn ned diftfrfc* *E 9I"10535' 4l,U rae e 6kete WEeunen data is 1cI010 bfr rt0aIr ii 1912ad Olsle is 1"3.

SI 10 totlse re daeptlvelvml) bS " a sIpI ", t eue,of fifes old of r*ert 19tat1r t9t 9w. - 125 -

Table 7

lisbabwt- hDmstic Prices Relative toInternational Prices ...... Unit Price

It" Units ZimbaweUnited States RelativePrice ...... , Pargarine Kg 1.13 1.72 -34.02 Elio Dozen 0.9 1.09 -18.12 hiteFlour Kg 0.65 0.44 42.11 IhiteSugar Kg 0.31 1.05 -70.1? Salt Kg 0.25 0.49 -48.41 Nilk Kg 0.33 0.53 -37.6? T-bmneSteak Kg 2.43 11.42 -78.71 Broundweat Kg 2.21 5.24 -57.91 PorterhouseSteak Kg 2.21 9.13 -75.81 RumpSteak Kg 3.06 5.70 -46.2l RoastRib Kg 1.81 6.15 -70.61 WholeChickten Kg. 1.71 2.04 -15.9X Toothpaste(Colgate, fai.) One 1.14 1.96 -38.52 One-footcandles One 0.09 0.99 -90.41 B-sizebattery One 0.58 0.37 56.1I ToiletPaper 1000 sheet roll One 0.63 0.55 14.71 Soap One 1.44 1.46 -0.9? Detergent One 1.85 1.07 71.89 12.5cu.ft. refrigerator One 939.53 467.99 100.89 7.5 cu.ft.freezer One 729.44 374.39 94.6? 6 cu.ft.Refrigerator One 593.91 343.19 73.1Z Onedoor 12.5 cu.ft Refrig. One 666.90 467.99 42.5S 4-platestove with oven One 735.83 311.99 135.92 2-plateelectric stove One 299.15 41.59 616.91 3-plitestove with oven One 709.00 324.47 119.5? 700h Iron One 29.04 29.11 -0.2X Toaster One 29.56 10.39 174.9? Juniorbed with bedsprings One 162.19 187.18 -13.3? 27'Hen's bicycle One 141.92 155.99 -9.0Z 27'lomen's bicycle One 144.01 155.99 -7.7? 3'x26xSOemesh 200sq ft 9.16 14.59 -37.2X HandShovel IOx6 One 7.72 10.39 -25.7X Handaxe 3xf6 One 4.29 9.88 -56.5? Handhoe One 2.95 6.03 -51.1? Cenent One 5.66 15.99 -64.6? Pitchfork One 15.90 21.83 -27.6? Shovel(2-mos. wait) One 9.51 16.63 -42.89 Pick One 4.41 9.32 -47.0X Child'stricycle One 33.39 31.19 7.1?

Source:Direct information gathered bysission from visits toshops in Harare. _ 126 -

Table 6

z2 Lam- DOICATOM0f lCrIaI NQAM CIWC't IN S NAwACUIMN SIECT1R

CepacAty 0.atpjt/ Avg. VA Utilisatiao F1o,ee lIp re NmC IPC DlC () (2$ 000) (2$)

1. Pooetuffs 21 0.96 0.66 0.68 a8 86 2471 1. Slsit, Procei of Plus -T 7.93 0.73 0.79 i 2. Oral, Aahm1 Fede 6 0.96 1.02 1.03 100 31 3. I3 uProductlY I 1.00 1.04 0.70 61 20 4. Deity fto*t8 3 1.00 1.04 1.11 92 17 5. hagar Ref., C4=fGctLOWry 2 0.83 0.44 0.83 a6 26 6. Othr Food uroats 2 0.95 0.83 0.74 100 44

tI. Tombommad 10 1.00 1.04 0. 79 20 3495 1. NW, mma sUt- = I! 2. Soft ODei I 1.11 1.48 1.32 75 13 3. Tobo PtoActa 3 1.09 1.19 1.13 76 A.

III. h4tl o lalcdi >tto mm"_1j .18 1.74 1.23 $I 23 2074 (ioclhdiq W)aj 9 1.17 1.79 1.30 62 28 1s. Cottem 0imai. Taile (xcludiq c)!/ 4 1.39 2.54 1.72 79 18 2. kitted rodecte 2 1.24 1.50 1.20 76 11

tV. soi t 1.19 2. 1.05 66 12 1954 1. QLOedrg '- -M -70 E 2. hootmr 5 1.14 1.21 0.92 87 13

V. lieodl hsrnizt e 3 1.21 1.38 1.33 65 5 1. 5_11tN WOO Prds -T M. 7T1.3 - 2. Nimiture 1 1.23 1.45 1.32 69 a

VI. Do. prnttt 1 _t hXM 3 1.32 1.90 1.87 87 20 4391 1. Pow roducts -7 1. 3 2.4 -m -9 2. Priotig & Stotloeary 2 1.30 1.52 1.36 79 17

VU'. Q_tcal Prouts 20 1.08 1.29 0.94 a8 38 4195 1. Portili±er, lct. y 5W T7 0.99 08 2. Soo", Dot., TollAt Pr". 5 1.05 1.10 0.81 100 50 3. Fthemcaticals 1 1.13 1.36 1.19 93 42 4. Pointt. tzvh. Qticals 2 1.24 1.57 1.17 75 24 5. bbber Producta 2 1.23 1.56 1.21 70 35 6. Plstic Products 2 1.25 1.54 0.95 78 21

VIII. Niftf-11c tlSrol froducte 5 1.12 1.25 0.96 85 12 2196 1. -T M. 11 1.07 - _ 2. Cle 4 GlueC Prodcts I 1.nI 1.20 0.68 94 17 3. Ceme& rticks 3 1.15 1.29 1.08 84 13

I lMetal& Petal Products 1.28 1.78 2.36 77 23 IA. Steel & tx-Prro (includti ZI50M) 9 1.18 2.03 3.62 86 30 15. Steel & Navo errm (ecludi ZISX) 4 1.15 2.23 2.69 90 53 2. PSsy PeAl 94uqptP : 2 1.33 1.71 1.41 68 13 3. Uiht Metal ProductO 4 1.17 1-35 1.12 65 16 4. Agric. Igl1mgU 1 1.16 1.22 0.91 78 14 5. I uOlid EliC. !quap. I 1.44 2.77 2.29 48 10 6. Indut. &lC. I14 2 1.18 1.38 1.09 87 26

L TEO bp= 1 1-23 1.49 1.27 70 14 2924 TOia nfecturiq 100 1.09 1.33 1.27 83 21

! Cottoe P4e* tiq loa Mte, The off c4acy indicators used in ti stUdy include I teaisa proattm Cneffciaot (ISC), effective PToteCtIbO Oeffici.t (DC), MAdOetc reseec Oete mefficiott (OC). NDCSm t railo o theift's tevel- to Privet. (_keit) prima to Its revw in sot1 (border) Prim. -- ia ttF atio of vsle added in prtvate pria1 to value added in soial priss. P iy, vDI.cr prwfted by a ratio of doestid factor cats 1r socl Priem to V" aie in socl Priem. VAMMI - V" ae In s411 pricm for the PrOuPdivided by rl edded La oea-1 pri. fo, total mafectudit. T1* 9

ZDAUE - APr. MME ESrnMM K NSE9IFC1UR1Q C IN 1982 AT 1962 P

by 9iinntc±o LmxI& Z Of Plant& %of Z Of btml Z of I"& N2mnt &aflMr" Total * Equp. Total Vddcles Total Cvital Stodk total B1i4p. Equip. Vddcl &ubsecter (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

Foodstuffs 254,026 21.8 251,785 10.9 67,33D 23.3 573,141 15.2 44.3 43.9 11.8

Dikxk and Tdccz 136,893 11.7 163,558 7.1 40,753 14.1 3u1,2D 9.1 40.1 47.9 11.9

1MMiJ1 (mIn. glzxixg) 106,483 9.1 247,462 10.8 8,962 3. 362,907 9.7 29.3 68.2 2.5

CLothizg & Foobinr 41,158 3.5 68,753 3.0 9,967 3.4 119,878 3.2 34.3 57.4 8.3

WVM& Fumiturue 24,913 2.1 43,026 1.9 15,6WD 5.4 83,599 2.2 29.8 51.5 18.7 paw.: Printfrg & PRtlishIx 47,514 4.1 127,884 5.5 13,937 4.8 10,335 5.0 25.1 67.5 7.4

(2oical & Petrolm Prodctxs 133,560 11.k 337,085 14.6 36,781 12.7 207,446 13.5 26.3 66.4 7.3

N&m taflic Mkreral PnxhLict 81,066 7.0 138,347 6.0 23,743 8.2 243,176 6.5 33.3 56.9 9.8

Meta3z aid Metal Produacts 292,787 25.1 866,150 37.6 59,936 20.7 1,218,873 32.4 24.0 71.1 4.9

Ttisprct Eqtiipint 40,767 3.5 36,792 1.6 8,475 2.9 86,034 2.3 47.4 42.8 9.5

OtherI M fa±cured Pro&Lx±B 7,27 0.6 2),111 0.9 3,428 1.2 30,762 0.9 23.5 65.4 11.1

ium I ~~~~~166,43)100.0 2,300,953 100.) 288,972 100.0 3,756,355 100.0 31.0 61.3 7.7 bcurc~e: UNr1".)0,1exat Tab-le. (anwr- of Pri:ducUma 19W283, Ipble 7, (wmai of Patimi977/78, Tale 7, Ome of P &duciwmM92, 1U1 8., Deflato for amh ymr 1962-1962 provided by the C-SD: separate defl*ato, for land & &lifld2H Plant & Equigmin w'4 pzovided f or 1969-1982, C-P defi~Atc lmbd for each year. Table 10 ZIMBABWE- BASIC DATAON MAWNFACTURINGSECTOR BY SUBSECTCRFOR 1982 (value figures in thousands of Z$)

Capital Employment Gross Output Net Output KE Stock (K) (E) (G) (NQ) RN Subsector 1 2 3 4 5 6

Foodstuffs 573,141 26,334 788,273 198,320 21,746 2.89

Drirk and Tobacco 341,204 13,206 229,831 136,367 25,837 2.50

Textiles (inel.ginning) 362,907 20,787 302,415 107,31 17,458 3.38

Clothing & Footwear 119,878 21,879 211,259 111,256 5,479 1.08

Wood & Furniture 83,599 12,914 93,964 49,098 6,474 i.70

Paper, Printing and Publishing 189,335 9,445 163,489 84,131 22,420 2.25 1

Chemical & Petroleum Products 507,446 12,945 395,246 159,131 39,200 3.19 co

Non-metallicMineral Products 243,176 7,818 94,361 56,749 31,105 4.28

Metals and Metal Products 1,218,873 42,237 639,137 290,963 28,191 4.19

Transport Equipment 86,034 5,245 93,836 36,486 16,403 2.36

Other ManufacturedProducts 30,762 3,411 37,195 18,880 9,018 1.63

TOTAL 3,756,300 176,223 3,049,006 1,248,692 21,316 3.01

Source: Various tables in UNIDO Report. - 129 -

Table 11

ZIMBABWE- ESTIMATEOF INVESTMENTAND FOREIGN EXCHANGE REQUIREMENTSIN THE MANUFACTURINGSECTOR 1983-1985 a/ (Million 1982 Z$)

Total 1983 1984 1985 1983-85

GROSSFIXED CAPITALFORMATION

Land and Building 20.5 23.6 17.3 61.4

Plant,Machinery & Equipment 135.4 249.4 309.3 694.1

Vehicles& AssociatedImplements 29.3 29.9 26.6 85.8

OfficeFurniture & Equipment 6.8 8.8 5.8 21.4

TOTAL GFCF 192.0 311.7 359.0 862.7

% Replacement 59X 37% 24% 37% 7 New Capital 41% 63% 76% 63%

FOREIGNEXCHANGE REQUIREMENTS

Plant,Machinery & Equipment 92 170 210 472

Vehicles& AssociatedImplements 20 20 18 58

Office Furniture& Equipment 3 4 3 10

TOTAL FOREIGNEXCHANGE 115 194 231 540

As X of Total GFCF 60% 62% 64% 63%

a/ SectoralEstimates obtained by enlargingresults of samplesurvey to sector on the assumptionthat investmentrequirements of sectorwere in proportionto sample'sshare of total manufacturingturnover. Sample firms accountedfor 50% of total manufacturingturnover.

Source: R.C. Ridelland D. Nsiyaladzu. "Investmentin the Manufacturing Sector: Proiectionsto 1985 and ForeignExchange Requirements: Resultsof a CZI Surveyand InitialComments" Confederation of ZimbabweanIndustries: Harare,August 1983 mimeo. Table 12

ZIMBABWE- SUBSECTORALSURVEY ESTIMATES OF GROSS FIXED CAPITALFORMATION FOR THE MANUFACTURINGSECTOR 1983 - 1985 (Millinl 1982 Z$)

Replace- ment New Gross Subsector Capital % Capital % Total Z

Foodstuffs 86.2 15.8 61.5 19.6 148.1 17.2

Drink and Tobacco 18.7 3.4 35.3 11.2 54.0 6.3

Textilesand Ginning 7.7 1.4 13.0 4.1 20.7 2.4

Clothing & Footwear 3.5 0.6 5.7 1.8 9.2 1.0

Wood & Furniture 4.0 0.7 23.9 7.6 27.9 3.2

Paper, Printingand Publishing 36.8 6.8 33.1 10.5 69.9 8.1

Chemical & Petroleum Products 42.3 7.7 61.6 19.5 103.9 12.0

Ncxtl-tallic Mineral Products 19.1 3.5 22.7 7.2 41.8 4.9

Metals and Metal Products 316.9 58.2 54.2 17.2 371.1 43.1

Transport Equiplnt 9.4 1.7 4.0 1.3 13.4 1.6

Other Manufactured Products 0.2 - 0.4 0.1 0.6 0.1

TOTAL 544.8 315.8 860.6

Source: Confederation of Zimbabwean Industry Survey, 1983 Thble 13 ZI1MSgd - ESTIMArESOF ANNUALCAPITAL 1EPLACIEfEN lEQUI fl'ES IN MANIJFACnIRIN SECTORBASED ON 1982 CAPITALSTOCK (Z$ million)

Estimated Total Require- Land and Plant & Equipment *ents with Plant & Equt. Buildings Vehicles 3% 5% Replaoemmut Rates at Subsector (1) (2) (3) (4) 3Z 5Z

Foodstuffs 3.8 5.3 7.6 12.6 16.9 21.7

Drink and Thbacco 2.1 2.9 4.9 8.2 9.9 13.2

Textilesand Ginning 1.6 0.6 7.4 12.4 9.6 14.6

Clothing& Footwear 0.6 0.6 2.1 3.4 3.3 4.6

Wood & Furniture 0.4 1.3 1.3 2.2 3.0 3.9

Paper, Printingand Publishirg 0.7 1.0 3.8 6.4 5.5 8.1

Chemical& PetroleumProducts 2.0 2.7 10.1 16.9 14.8 21.6

Non-wtallic Mieral Products 1.2 1.7 4.1 6.9 7.0 9.8

Metals and MPtal Products 4.4 5.0 26.0 43.3 35.4 52.7

TransportEquipment 0.6 0.6 1.1 1.8 2.3 3.0

Other ManufacturedProducts 0.1 0.2 0.6 1.0 0.9 1.3

TOTAL 17.5 21.9 69.0 115.1 108.4 154.5

1. Assuminga depreciationrate of 1.5% 2. Using capitalstock values for previous twelveyears and a 10 year straightline depreciationrate. 3. Assuminga depreciationrate of 3.0%. 4. Assuminga depreciationrate of 5.0%.

Source: UNIDO REPORT.Table 12.4, p. 315. Table 14

ZIMBABWE- COMPARISONOF ACTUALMANUFACTURING INVES1WTM VERSUS 1982 CZI SAMPLE INIS AND UNIDO ErSTIMAES (all figures in millions of Z$)

UNIDOReport Estimates Estimate of Annual New Invest- Actual Net Investment Requirement Replacement Requirements ment Requirement to Sustain Investment * According to 1982 CZI Estimate Based on 1982 3% and 5% Annual Output Inr- Sample Survey Capital Stock creases to 1995 3Z 5% (1) (2) (3) (4)

1981 231.7 Replacement New Total

1982 168.5 - - 178.6

1983 131.5 112.2 78.7 190.9 108-154 70 173.3

1984 n.a. 115.7 194.3 310.0 w

1985 n.a. 88.1 271.1 359.2

1. From census of production adjusted to constant 1982 Z$ in UNIDOReport.

2. From R.C. Riddel and D.F. Nsiyaludzu "Investment in the Marnfacturing Sector: Projections to 1985 and ForeignExchange Requirements," CZI: Harare, August 1983 mimeo.

3. Table 5.

4. Based on 1984 productionlevels, 3% and 5% growth targets, sectoral capital stocks from Table 1, average capital output ratios for each sector over 1973-1982, and adjusting for previous record levels. From UNIDO Report, Table 12.6, p. 319.

* Net lnvestment is "total expenditure during the year less trade-in values, proceeds of sales and recoveries from insurance clai m. 7Mbe 15

ZMAB - iiinM OFii MMINDIR S M w PRLVAnMUD H C INuW=G

Ithlncpxpramed 2 of Private X of QGbermmt z of diaItl 1 X of local X cf lbtal SOCtOr enterprlw total coatppdaelueaUal tt DCow trc led tota wafaturlg taa aidwrmts total tunw er

obdItuJff 4.6 1 457.0 74 - - 153.7 25 - - 615.3

Ddrkt & hetC 1.6 1 154.8 92 - - 12.4 7 168.8

It11e (lri. gmIxbgE 0.2 - 217.9 62 - - 130.5 38 - - 348.6

Clnotig modu obw m 2.2 1 192.6 98 1.8 1 - - - - 196.6

Wxd aid Rwrdnre 1.9 1 108.6 99 - - - - - 110.5

Pqwr, PrintUg, ad Pb1iddg 1.1 1 151.3 97 2.6 2 - - - - 155.0

c md Patrolu FWdxts 11.4 3 366.7 97 ------378.1

Mm rical ICLirml Pwdwt 0.3 1 87.8 99 - - - - 88.1

Mas 1mMelPntaa1 4.7 1 516.6 82 l1I.1 17 - - - - 629.1 t lnqortBsll t 1.3 1 120.7 97 1.5 2 - - - - 92.9

Other NPuzfad PDuLts 0.6 1 40.4 99 - - - - - 41.

Total 29.9 1 2,383.8 84.5 114.0 4 294.2 10 12.4 0.5 2,824.3

Read on iqmdilshId inforlit frvLmCRD, UNIDDquetirde rmlts ant kvtrial Oielropt Oxpimi of b*im Itd., Amul Pept and Aclxuts for the yer ed 3Ddt Jbe 1984.

_ahdklda Nie:

Tbe bgdc data, IE1nc1xtg tqCt timwver f w are for 1981. H*bwer the dlstribtutlm of Unwertam bm v4deen to the (3Eeriip patern pe1ta1rdvg in 1985. 1u2xamr under the Dlium h g -Oent.mi bOmerrom andMD0controlled- 1nichethe foIof g: ZI90, 1maidre Suei, DelJmm, WLulownae, F. lawla aA Owiit 1Kpdqtiig and Staticlmy. 1Hmr, it dos mt I-lalm ral Film i1-ties gad1Ptliml Fmdtuze .ruhtrIas for idcd 1961 tuzer figar mm na wt lible.

Smwroe: Um1An lSpwbMe 2.11, p. 45. Tabie 16

ZIMBA5 - FD1EIcWDCWSrICOINRSP PATM OFE HMIMFACIURlIIRSCIR UNIDOAND JMN DAE. CAPA

1i11 Su4y Reslts know aShdwy eslt Foreign ooMltld EZ tlOedgrI3

Subsectr (!rship dwe total tumaver CMershp du8 total tumover

Foodbtuffs 39.4 65.6 8 70

Drik &Tbbacm 60.9 23.6 61 67

TPxt1ilm (inc1. gimldg) 24.4 47.0 30 70

Clot1lzg and Footwr 17.3 16.1 62 44

Iood ard F,rnriture 37.0 22.4 85 46

Paper, Prfntxrg, and Nbliddig 61.3 68.1 49 61

Chedcal and Pebro1au Products 62.7 70.1 74 77

Non-Metallic Mineral Products 54.1 72.2 65 77

Metals and Neta Prodxicts 52.2 54.8 53 63

Tranwpowt EFulpmnt 47.8 96.6 84 45 other wnifactuzedProducts 74.3 75.6 n.a. 0

Total 48.1 56.6 50 65

Source: UNDMO,Study of the Mr i -a±rIxgSector in Zitubae, 1985, Tale 2.13, p. 49. _ 135 -

Table 17

ZIMBABWE- NET CAPITAL INVESTMENTIN THE MANUFACTURING SECTOR1970-1983

Total Net Investment Volume Index (in thousand of Index of of dollars in constant, Investment Production 1982 prices) (1983-100) 1983-100

1970 129,465 98 63 1971 154,549 117 69 1972 171,022 130 77 1973 285,709 217 83 1974 308,084 234 89 1975 340,469 259 86 1976 190,042 144 81 1977 122,452 93 77 1978 85,465 65 75 1979 72,870 55 82 1980 170,217 129 106 1981 231,665 176 103 1982 168,517 128 103 1983 131,589 100 100 1984

Averages

1980-83 175,497 133 103 1976-79 117,707 89 99 1972-75 276,321 210 84

Source: UNIDO ReportTable 12.2 p. 308. - 136 -

Table 18

ZIMBABWE- INVESTMENTPLANS FOR NEXT SIX MONTHSBY FIRMS SURVEYED:CURRENT AND CONSTANT ZIMBABWE DOLLARS IN MILLIONS

Number X with Current Constant 1980 of Investment Zimbabwe Zimbabwe Survey Date Respondents Plans Dollars Dollars

April 1981 94. 74.5 97 90

December 1981 96 57.3 53 47

June 1982 111 39.6 33 27

December 1982 112 40.2 n.a. na.

June 1983 104 41.3 37 26

December 1983 106 33.0 21 14

June 1984 105 35.2 36 22

December 1984 n.a. 31.8 30 17

June 1985 105 36.2 34 17

Source: University of Zimbabwe Business OpinionSurvey, various issues. - 137 -

Table 19

ZIMBABWE - IMMIGRATIONAND EMIGRATIONTHROUGH OFFICIAL PORTS 1970-1985

Year Immigrationa/ Emigrationb/ Net Immigrationc/

1970 12,345 5,238 7,107 1971 14,881 4,713 10,168 1972 14,085 4,562 9,523 1973 9,511 6,846 2,665 1974 9,764 7,982 1,782 1975 12,552 9,242 3,310 1976 7,941 13,013 -5,072 1977 5,914 14,556 -8,642 1978 4,650 16,467 -11,817 1979 3,647 12,951 -9,304 1980 6,407 17,240 -10,833 1981 7,794 20,534 -12,740 1982 7,715 17,942 -10,227 1983 6,944 19,067 -12,123 1984 5,567 16,979 -11,412 1985 (Jan-July) 3,392 4,846 -1,454

January 448 1,098 -650 February 521 700 -179 March 575 728 -153 April 381 730 -349 May 528 640 -112 June 448 628 -180 July 491 322 169

a/ This is known to be an incompleterecord of all migrationbecause (a) it omits cross bordermovements other than throughofficial ports, (b) some residentswho declarethey are leavingfor less than 12 months (and are thereforenot countedas emigrants)stay away permanentlyor for more than a year. b/ Recordsof Africanemigration through official ports only started April, 1978. c/ Recordsof African immigrationthrough official ports only started January,1980.

Source: 1970-1984from CentralStatistical Office, Quarterly Digest of Statistics,March 1985. 1985 from CentralStatistical Office, Monthly Migration and TouristStatistics, July 1985, p. 3. Table20

ZIIS&M - UNIVIRSIITYOF ZD IA' S ESINESS OPINI(3 SXDF: 19811985

Dec. 85 June 85 Dec. 84 June 84 Dec. 83 Jut. 83 Dec. 82 Jum 82 Dec. 81 4mdl 81

Total mber of suryn emt 150 n.a 150 152 147 172 165 Nuber of RDeponAent 184 230 105 n.a 105 106 104 112 111 96 S Participation 94 70.0 70.0 69.8 70.7 65.1 60.0 49.2 40.9 1. GUtAL SUSUESS SnIUATIW Ar you uore or left optimistlc about your firm prospects den you a 6 inthe qo? More OptImidtlc 63.8 40.9 16.2 9.4 7.7 4.5 No Differemce 8.1 14.6 3S.3 22.9 37.3 36.2 28.3 26.9 17.9 23.4 Less Optistic 28.1 37.2 13.3 21.8 47.6 62.3 64.4 76.8 67.6 No respoqe 57.3 23.4 0 0 0 0 1.0 0.8 0.9 0 9 1.1 2. PRDUCTIN/SAIES Do you expect proaduction sales turnover in the It six mthe to: Rise more than 2CR 7.6 4.5 '.0 3.8 1.9 0.8 Rise 20Z 3.6 6.3 18.1 101 to 27.6 13.6 11.4 4.7 7.7 Rise 52 to 1Ct 6.3 9.0 16.7 24.5 34.3 25.5 2D.0 17.0 7.7 6.3 11.7 18.8 Rein the 33.0 s 22.9 30.9 32.4 22.6 23.1 19.6 Fall less than 1CS 32.4 26.0 15.1 2.9 11.8 14.3 18.9 29.6 2.1 18.9 Fall wre than 101 14.6 3.2 4.7 12.7 19.0 31.1 27.9 42.9 24.4 16.7 2.1 No comnt 0 0.9 1.9 1.9 1.9 - - 0.9 1.0

3. STOCKS 1a)Will rw _terials d ompoents stocksover the I six mosthe: Increae 22.9 20.0 14.3 16.1 6.7 8.0 lmn the em 8.1 12.5 21.3 34.2 35.5 38.0 30.2 31.7 17.0 3D.6 Decrease 31.3 30.9 41.0 40.9 45.7 50.9 60.6 71.4 No iwver 59.5 54.2 44.7 1.9 0.9 1.9 1.9 1.0 3.6 1.8 2.0 3.1 (b) Will stocks of finished goods over the tet six nmtbe:

Increse 11.4 10.9 14.3 18.9 19.2 14.2 Ren the 13.5 15.8 16.0 se 51.4 48.2 45.7 34.0 27.9 30.4 Decrease 40.5 40.9 50.0 30.5 36.4 35.2 39.6 42.3 37.5 No anser 36.9 41.0 26.6 6.7 4.5 4.8 7.5 10.6 17.8 9.1 2.3 7.4 Tbe 21

UMSIVM OrFZIUA5' USJSS OFININ SJWE: 1981-1985

Dec. 85 Jute 85 Dec. 84 Junm 84 Dec. 83 Jun 83 Dec. 82 Juma 82 Dec. 81 pril 81

4. CAPAITM (a)rI ar firm mctir:

Abwo taret capacity 11.4 7.3 1.9 3.8 3.8 2.7 9.0 10.6 19.2 At pl_d output levels 32.4 27.3 17.1 17.9 17.3 23.2 27.0 46.3 52.1 Wow tarset cqclty 54.3 64.5 80.0 75.3 73.1 71.4 59.5 41.1 23.4 No - 1.9 0.9 1.3 3.0 5.8 2.7 4.5 2.0 5.3

(b) In the p_t ds tthia b_ there bee:

An inrem in capalty 25.7 27.3 13.3 17.0 15.4 14.3 11.7 40.9 n.e No duin 55.2 51.8 59.0 55.6 53.8 51.8 47.8 36.6 n.S caacity deres 12.4 17.3 23.8 23.8 25.0 25.0 31.5 16.1 n. MD an_mr 6.7 3.6 3.9 5.6 5.8 8.9 9.0 6.4 n.-

5. COSTS

Do ya expect costs over tbe next s*x mtlh to: (a) I materlals M cammt costs

Iae more than 2(K 9.4 8.2 6.7 13.2 10.6 7.1 10.8 14.7 18.1 ise 103 to 2(3 61.0 57.3 61.0 62.3 58.7 61.6 62.2 65.3 61.7 Rls Iao then 10( 24.8 25.5 26.7 17.0 19.2 21.4 17.1 15.8 14.9 1IAD the m 2.9 4.5 5.6 3.8 3.8 7.1 4.5 4.2 4.3 No a r 1.9 4.5 0 3.7 7.7 2.8 5.4 0 0

(b) Wige CDsts

Rise nore than 2(3 1.9 2.7 1.0 0.9 1.9 7.1 6.3 34.0 2D.3 RIe 10( to 2(K 60.9 38.2 38.1 49.1 51.0 67.0 35.1 54.3 57.5 Rie las then 103 3D.5 35.5 40.0 31.1 29.8 18.8 15.3 8.5 16.0 Reiln the e 4.8 18.1 19.0 13.2 13.5 3.6 36.0 3.2 6.3 No nmr 1.9 5.4 1.9 5.7 3.8 2.8 7.3 0 0 (c) Japort Costs

Rse ore than 20Z 11.4 16.4 17.1 15.1 22.1 14.3 9.0 16.7 14.9 Rse 10 to 20K 54.3 46.4 47.6 54.7 39.4 43.8 50.5 57.1 43.6 Ris lse than 1(3 25.7 23.6 23.7 16.0 22.1 25.0 2D.7 19.0 21.3 _sin the 1.9 5.5 5.7 3.8 5.8 5.4 6.3 3.6 0 Decreae 0 0.9 1.0 1.9 1.0 4.4 0 0 0 No amer 6.7 7.3 2.9 8.5 9.6 7.1 11.7 0 2D.2 Tole 22

ZOUAME - UNIVK9ITY OF ZDUMAB'S UJSIDiS OPINIE smnnc: 1961-1985

Dec. 85 June 85 DeC. 84 June 84 Dec. 83 AJn 83 Dec. 82 June 82 Dec. 81 April 81

(d) Unit Cb te

Increase Ims than 52 12.4 11.8 9.5 8.5 6.7 7.1 9.0 4.4 8.5 Rise 5X to 101 48.6 41.5 46.7 34.9 34.6 3D.4 35.1 36.3 36.2 Rise 101 to 152 27.6 26.4 28.6 36.8 33.7 39.3 30.6 35.2 34.0 Else mone than 15X 10.5 15.5 11.4 14.2 16.3 18.8 15.3 23.1 13.8 3mminthe * 0 2.7 1.0 1.9 1.9 0.8 5.4 1.0 3.2 NO Fuu"^Ar 0.9 1.8 2.8 3.7 6.8 3.6 4.6 0 0 a

6. PIRO MANGI0S Do you expect profit auagizn over tihe mxt six umtim to:

Increase 34.3 21.8 13.3 8.5 7.7 3.6 3.6 2.0 9.6 Vi"na the am 40.0 30.0 27.6 22.6 2D.2 19.6 22.5 37.5 59.5 Dereaae 23.8 47.3 56.2 67.9 69.2 72.3 72.1 56.3 30.9 No aommer 1.9 0.9 2.9 1.0 2.9 4.5 1.8 4.2 0

7. 1A0 !JUUMM!MS Do you expect yetw labor force over the neaft *li artio to: g

Increase 13.3 7.3 6.7 5.7 3.8 3.6 3.6 18.8 33.0 tAnnin the am 74.3 72.7 56.2 64.2 61.5 56.9 73.0 62.5 63.9 Dmcreaae 12.4 17.3 34.3 28.3 31.7 35.7 22.5 17.7 2.1 No answer 0 2.7 2.8 1.8 2.9 1.8 0.9 1.0 1.0

8. SKI1S Is productim beig ilhibited by a *bortage of lled permml?

Serlously 9.5 7.3 12.4 11.3 14.4 19.6 28.8 26.0 31.9 Slightly 44.8 41.8 46.7 45.3 47.1 49.1 49.5 41.7 52.1 not at a11 44.8 49.1 39.0 37.7 3D.8 27.7 17.2 22.9 13.8 No aer 0.9 1.8 1.9 5.7 7.7 3.6 4.5 9.4 2.2

9. INESIT (a) ibuld it im practicable to imereae prodiction without extra inveatrnt in buildirg, pliot, and equient? Yes 64.8 71.8 77.1 71.7 64.4 55.4 45.1 33.3 48.9 Nb 28.6 20.9 19.0 21.7 26.9 36.6 45.9 59.4 48.9 NO a*r 6.6 7.3 3.9 6.6 8.7 8.0 9.0 7.3 2.2

(b) Do you have plam to invest in capital, buIlld etc., over the t six mthm? Yes 36.2 31.8 35.2 33.0 41.3 4D.2 39.6 57.3 74.5 No - 61.0 58.2 61.0 59.4 47.1 52.7 52.3 34.4 22.3 No a 2.8 10.0 3.8 7.6 11.6 7.1 8.1 8.3 3.2 M1e 23

UNIVIRSITY OF Z 'IAME'S WSINESS OPION SJRW: 1981-1985

Dec. 85 June 85 Dec. 84 June 84 Dec. 83 Jui 83 Dec. 82 June 82 Dec. 81 April 81

10. OR0 BOCS (a) Did yur delivery periods for orders receive ower the past six sDnthl? Iagthen 32.4 25.5 12.4 11.3 15.4 21.4 24.3 38.9 47.9 imi unchanged 45.7 43.6 45.7 46.2 38.5 34.8 34.2 38.9 40.4 Shorten 14.3 22.7 32.4 32.1 35.6 37.5 33.3 16.8 3.2 No anwer 7.6 8.2 0.5 10.4 10.5 6.3 8.2 5.4 8.5

(b) Is your order be-* today, comared with six mthw ago? HIgher 42.9 30.0 8.6 17.9 12.5 11.6 17.1 27.1 53.2 About the 37.1 36.4 43.8 25.5 26.0 36.6 31.5 40.6 36.2 LAuer 9.5 27.3 41.9 50.0 53.8 43.8 42.3 24.0 2.1 No anrer 10.5 6.4 5.7 6.6 7.7 8.0 9.1 8.3 8.5

I1. EXPOTS (a) 0ver the past ix wDotha exports have: Increased 28.6 39.1 28.6 34.0 24.0 10.7 9.9 11.6 22.3 mined the ae 31.4 20.9 28.6 17.9 27.0 19.6 25.2 29.5 33.0 FalIe 15.2 13.6 13.3 13.2 17.3 32.1 27.9 23.2 22.3 No anwwer 24.8 26.3 29.5 34.9 31.7 37.6 37.0 35.7 22.4

(b) Over the next saix oths do you expect exports to: Increase 31.4 24.5 34.3 27.4 27.9 23.2 15.3 12.9 29.8 BP-in the sae 37.1 38.2 33.3 28.2 29.8 2D.5 30.6 25.8 30.9 Fall 10.5 11.8 5.7 10.4 13.5 18.8 21.6 26.9 19.2 No an_wer 21.0 25.5 26.7 34.0 28.8 37.5 32.5 34.4 20.1

12. FA70BS AYFWECt PEDJXTION ADVERSELY (a) What factors are currently attracting production adversely? Domtic dmand 35 60 77 78 67 52 46 43 61 Import quotas 63 57 52 64 66 72 62 38 67 Ro mterials 49 44 39 40 49 41 48 19 53 Export defm- 12 18 21 20 31 30 23 12 29 orkimg capital 8 13 16 11 12 7 10 8 2 Skilled factory staff 18 IS 19 24 29 33 41 46 52 Fmeative staff 6 0 5 6 7 9 12 4 3 Plant capacity 7 7 1 5 10 11 17 42 31 Industrlal disputes am 1eI 2 I 7 5 1 13 Mmual labor no 5 10 4 9 19 17 5

Source: University of Zibabwe: Department of buiness Studies Dusinems opinion 9urver, Nbe. 1-9. - 142 -

Table 24

ZIMBABWE-RATIO OF ?2 T GDP IN SLZCC DEVELOPINGCOUNRIE 1979- 1984

Average 1979 1980 1981 1982 1983 1984 1979-1984

Algeria 62.0 57.4 56,.9 66.1 71.6 n.a. 62.8 Argentina 30.5 29.3 32.0 30.9 31.3 n.a. 30.8 Brazil 14.5 11.2 11.2 10.4 10.4 11.6 11.6 Chile 19.0 21.5 24.4 31.7 26.4 n.a. 24.6 Colombia 18.6 20.3 21.9 21.0 21.7 22.0 20.9 Ecuador 22.3 22.6 21.7 22.5 21.2 21.6 22.0 Egypt n.a. 67.0 78.2 87.7 88.6 94.0 83.1 Ghana 21.1 19.4 15.7 17.3 11.4 n.a. 17.0 India 40.6 39.6 40.4 42.7 41.7 n.a. 41.0 Indonesia 16.5 17.8 18.8 20.5 20.1 22.4 19.4 IvoryCoast 29.1 26.0 27.6 26.6 27.7 n.a. 27.4 Jamaica 33.3 36.0 41.7 47j.5 51.1 44.8 42.4 Kenya 35.2 30.6 30,2 31.6 28.9 29.5 31.0 Korea 31.6 33.1 33,.5 37.6 38.5 36.8 35.2 Malawi 20.4 20.4 23.0 23.4 21.3 22.4 21.8 Malaysia 48.2 55.9 57.7 61.5 60.6 59.9 58.8 Mexico 31.0 30.3 33.0 35.2 31.5 30.6 31.9 Mbrocco 43.6 42.7 45.5 39.7 44.3 n.a. 43.2 Nigeria 24.7 30.6 32.4 33.8 40.7 43.8 34.3 Pakistan 42.6 41.0 38.3 41.0 43.7 40.0 41.1 Peru 22.0 25.2 25.0 25.0 28.0 n.a. 25.0 Philippines 20.9 20.9 21.5 23.1 24.9 20.0 21.9 Portugal 91.3 91.5 94.7 92.5 86.6 n.a. 91.3 Senegal 27.7 28.3 32.4 31.1 27.9 n.a. 29.5 Sri Lanka 31.6 32.0 30.0 32.3 31.8 29.4 31.2 Tanzania 37.9 40.6 40.7 40.9 n.a. n.a. 40.0 Thailand 37.0 36.8 37.2 42.9 48.4 54.8 42.9 Tunisia 41.5 41.2 42.6 44.2 44.8 44.3 43.1 Turkey 24.8 20.9 26.6 29.9 28.8 n.a. 26.2 Uruguay 35.7 38.6 43.5 73,.4 47.0 n.a. 47.6 Venezuela 36.2 34.9 36.2 39.8 49.1 47.5 40.6 Yugoslavia 76.8 79.3 73.4 73.5 73.2 n.a. 75.2 Zaire 18.4 19.5 21.2 27.0 25.9 19.3 21.9 Zambia 31.3 29.6 28.1 36.4 34.8 36.0 32.7

Average1979-1984 33.1 35.0 36.4 39.4 38.9 36.5 38.3

Source: International MonetarvFund, "IFS Data Tape," mission estimates. - 143 -

Table 25 ZIMBABWE- FERTILIZER SALES BY PRODUCT (tonnes)

Year (1/3-28/2) 1980/81 1981/82 1982/83 1983/84 1984/85

PRODUCT

A 4,655 5,211 3,899 3,170 3,003 B 4,142 3,858 3,593 5,267 4,035 C 18,066 25,070 26,529 36,729 28,558 V 8,769 8,595 7,936 8,088 6,430 D 85,559 109,425 100,082 102,835 95,049 J 6,395 5,731 5,068 7,535 5,593 L 39,731 28,421 28,081 38,209 33,898 ; 17,831 31,789 28,540 20,792 16,305 P 31,835 10,972 7,334 3,718 5,363 s 25,000 22,876 14,916 18,003 11,076 T 1,174 800 1,676 4,138 1,628 X 6,865 4,378 3,227 1,931 2,405 Z 20,542 23,467 16,992 15,810 13,646

Subtotal 270,564 280,593 247,900 266,225 226,989

AS 229 432 306 371 315 AN 129,044 119,667 168,476 145,415 147,951 Sod. N. 1,031 1,279 1,052 1,489 1,642 Urea 43,408 78,588 22,690 22,850 7,118 SSP 20,395 13,517 10,313 12,594 7,404 D Super 5,999 5,995 5,852 6,191 5,532 KCl 5,228 5,463 5,858 6,746 4,460 K2SO4 514 482 526 720 918 .m.m .. _m.m. . *--mi m...... TOTAL 476,412 506,016 462,973 462,601 402,329 - 144 - Table 26

A. 6, . Citric MLao Soluble Man1e Nutrient d trae Phow=bate Ptotah S1lulur r mtmt Uc

0.1X tobacco A 2 17 15 10.OS boron (sul)

3 4 17 15 9.0S 0.12 tobacco (sul) boron

C 6 17 15 7.51 0.11 tobacco (11 sul, 4 chlor) 6.51 boron

D 8 14 7 ±ts/gSevral (chlor) 6.51 -

J 15 5 2D 3.41 0.12 fruit troes (chlor) borom

L 5 18 10 8.01 0.252 cotton (Chlor) boron

N 10 10 10 6.52 _ aise/gpraral (odor)

p 10 18 0 6.52 - sunlowers

3 7 21 7 9.01 0.041 idsse/geraral (zul) boron

*T 25 5 5 5.02 t" (sul)

Y 4 17 LS 8.0S 0.1S tobacco (11 sul, 4 chlor) borom

X 20 10 5 3.01 - (chlor) gardening

Z a 14 7 6.5S 0.81 fhise/gorral (chlor) zinc

* IMfzactuted only against firt order. Sul - azuifactured with potaaius *ulphate. Oaor. u m_uDacturd with potassium chloride.

5- -N1Xl

U ccinNitrate 34,5N Um 46> Sodlin Nitrut 161N

Dcble94usrPh0*at (CniIW) 372 P205 (Citric Sol)52 9AuIphrMRn.

Stiula 9RerIOVur1ae (Poder) 18.52 P0 5(Citric SDl) L SUIhUrMtn.

Pot±miu Chaorie(Mijra of Potah) 6C0K 2 0

PFoCsim &j4Aute (Suphate of Potsh) 501 K20 16% SuIphurMln.

CalkiumSu1phsce (CGn) 17.5%S - 145 -

Table 27

ZIMBABWE- FERTILIZERAPPLICATION RATES LARGE-SCALECOMMERCIAL SECTOR

Crop Basic Dressing Top Dressing Kg Compounds/ha (Nitrogenas AN kg/ha)

Tobacco- Virginia 700 75 - Burley 800 300 Maize (incl.seed) 360 380 Cotton 325 150 Sorghum 125 75 Groundnuts 300 - Wheat 650 450 Barley 700 200 Edible Beans 200 - Soyabeans 250 - Sunflowers 300 100 Potatoes 1.800 150 Coffee 1,100 300 Fruit 400 150 Sugar Cane 300 475 Tea 600 220 Vegetables 1,200 1,000

Source: AgriculturalInputs Priority Committee. - 146 -

Table 28

ZIMBABWE- RELATIVEFERTILIZER CONSUMPTION OF THE PRINCIPALCROPS

X Maize 61 Winter Cereals 8 Tobacco 8 Cotton 6 Coffeeand Tea 4 Sugarcane 4 Potatoesand Vegetables 3 Soyabeans 2 Others 4 i00

Source: FertilizerTrade ForecastGovernment Subcommission. Table 29 z- - s am (tin)

197(171 197M/n I97/73 1971974 M9775 M976 n777 1978 197W/79 197W 196W8I 11/82 1SM3 118184 11884

Noise 117,198 143,270 147,776 1526 13,043 12,A1 144,702 15,108 1M, 12817 233,758 23UM 2),1 238,833 1bcro 18333 52,900 52,M3 54.68 57,996 65.68 52,93 52,218 51,67B 56,748 56,711 35,632 42,731 41,957 53,4 42,2 Tam - 872 1,709 1,58 1,037 1,197 811 1,444 2,663 2,366 1,174 8W 1,676 4,13 1,63 Thtal COmpund 170,098 196,150 114,173 211,950 24,525B 182,373 197,772 210,230 216,968 21,34 270,514 2D,593 217,673 266,225 22b,93

Fa Sxab9ulpb te 432.9 3Db 371 315 Jo ELzMU-rte 119,864 157,769 151,672 147,501 166,035 121,88 136,715 135,9(2 13AS32 133,187 139,04 119,667 18,476 145,415 147,951 Ubk 43,N X66,8 22,680 22,60 7,118 Sbdi Mtrnn"L 2,461 2rMD 1,901 3,433 2,1(3 1,2I3 852 I'm I,V 1,3W 1,3 I'M j02 1,4 IJ642 S1zv1 2 13,707 15,611 15,44 14,85 19,394 15,07 14,291 13,694 17,706 20,36 2D,395 13,517 10,313 12,59 7,40M DM1" &W 4,R 5,f95 4,496 7,121 6.396 6,370 9,331 5,36 5,m 5,13 5.,9 5.995 5,352 6,191 5,532 ~hn Fd 719 765 576 1,144 1,5 692 559 g9 865 663 514 42 5Z6 720 918 m adlru 2,911 3,5D 3.11D 4,17 5,m 5,541 6,30 3,562 4.177 4,S5 5,2S 5,463 5,8S 6,74 4,460 - maree 92 125 144 74 49 17 20 9 19 - - DolSem 252 - 193 72 - - - _

9Sole 314,304 382,770 381,593 390,63 445,42 336,961 365,9Z 3D,2M8 31,963 377,172 476,412 301,016 462,973 42,601 82,329

Note: PRo 197C171tD 1979/80 *str it ndt!qpn fertiltaw *walom,we e *m1 amiu ndtrte epzdvalt *d m 1clbde ll Ltd uash of mos aid a mdfi Table 30

ZIMBABWE - O(XP3ARISON BETWEEN LOCALLY PRODUCKDFERTILIZER OUTPUTS AND IMPORTED K&TERIALS

Landed Cost of Urea Landed Coat of AN Selllg Price Production Coat Economic Fnnancial f/ Economdc Financial r/ (ZS/ton N) (Z$7ton N) (Z$/ton N) (Z$/ton N) (Zt$/ton N) (Z$/ton N)

SABLE

Ainonium Nitrate 933 8/ 823 b/ 707 c/ 807 878 d/ 998

Z310S

(Z$/too P2 05 ) (Z$/ton P2 0 5 ) Landed Cost of TSP Economic Flnancial (Z$/ton P2 05 ) (Z$/ton P2 0 5 ) TSP e/ From Pyrites 940 727 b/ 4, TSP e/ From Sulfur _ 936 1!/ 783 890 OD

a/ Selling prlce to Windmill and ZFC, ex factory producer b/ Exclude depreciation. c/ Based on assumed USS120/ton FOB urea bagged. d/ Based on assumed US$106/ton FOR AN bagged. e/ ZIMPHOS TSP is at 44Z P2 0 5 . Imported TSP Is at 462 P2 0 5 . fi Includes 201 surtax on CIF African port value of imported materials. Table 31

ZINDA - I3E LK3 PU CM (Zl/tam w-NRavte)

W NIIIUVSS7OUE 1971172 1972173 1973/14 1974/75 1975/76 1976/77 1977/78 1976/79 1979/60 910/81 191182 1982/83 19"3/64 19a4/35 1965/86

A 61.00 61.00 61.0D 73.40 100.20 110.80 114.60 123.20 146.00 175.00 201.60 230.60 230.60 327.80 443.20 * 64.20 64.20 64.20 77.20 107.00 117.20 122.40 131.60 155.00 165.80 211.40 241.20 241.20 364.00 465.00 C 56.80 S6.80 56.60 64.40 94.00 105.00 126.40 136.00 3S5.60 190.40 214.40 Z..i.e0 243.40 347.60 467.80 V 62.60 62.60 62.60 75.40 103.40 113.40 118.60 127.60 149.60 179.60 204.60 233.00 233.00 331.00 445.0 D ss.40 5S.40 55.40 66.60 91.40 "9.40 106.00 114.20 128.20 IS4.00 166.00 10 .40 189.40 265.20 355.60 J - - - - 112.00 107.60 111.00 119.60 131.80 159.60 195.60 211.20 211.20 29.60 410.60 L 57.00 57.00 57.00 46.40 94.40 102.20 92.20 96.80 112.20 135.00 18B.00 214.20 214.20 304.60 404.00 N 56.40 56.40 56.40 66.60 ".20 95.20 99.00 10.40 117.80 141.20 166.20 184.60 184.60 256.60 350.60 p 56.60 56.60 56.60 66.60 9.60 9.6O 110.O0 119.00 130.40 IS4.00 178.60 204.80 206.60 290.40 384.60 s 55.80 55.O0 55.60 67.20 88.60 100.40 106.60 114.60 130.00 154.00 160.00 206.60 206.60 337.60 448.00 T ------212.40 232.20 232.20 336.00 60.40 x 63.80 63.80 63.60 75.60 114.20 119.60 130.40 140.60 153.40 160.00 201.00 223.00 223.00 322.20 434.40 Z 61.00 61.00 61.00 76.60 109.20 116.40 123.00 126.60 140.20 165.40 181.60 203.00 203.00 230.60 371.20 WITRWOGNPEEHLIZZSU:

A_o1ul Nitrate (prilled) 63.20 63.20 63.20 74.20 127.40 116.40 129.40 138.90 141.60 164.20 137.20 206.60 206.60 306.40 *06.00 Urea ------249.60 27S.60 275.60 405.60 541.40 ' Sodlum Nltrate (cz7tal) 77.80 64.20 84.20 96.00 156.20 153.00 170.20 163.40 214.00 220.00 2S7.60 302.20 302.20 S16.60 609.80 0 P90SA flEtTLIU.1:

Slrgie Superpboepbate (pder) 32.20 32.20 32.20 37.60 43.80 57.40 63.00 67.60 76.20 90.40 117.00 143.60 143.60 196.40 256.00 Double Superphepbste (granalar) 70.20 70.20 70.20 31.20 92.80 117.60 138.00 149.60 173.00 Z04.40 230.40 267.40 267.40 376.00 479.60 POTASH FBEIILIZE6S: murlate of ?otaeh 58.20 58.20 58.20 71.40 118.40 "9.20 89.80 91.60 121.60 155.20 183.00 193.60 L93.80 252.20 351.80 Sulphat- of Poteash 70.60 10.60 70.60 85.60 143.40 130.60 119.60 125.40 366.20 201.60 238.60 267.40 267.40 373.80 536.40 0T1ER PODUMcS: cype _ - 15.40 37.60 21.60 23.40 25.20 26.20 29.00 34.20 33.00 44.20 44.20 52.40 55.40 note: A11 fortilisera ae *old la 50 kg beg (witb the _ptlo. at compund a). Table 32

ZIMAIWE - FKRT[ILIZY DEUMADFORECASTS

1984/85 1989/90 1"4/95 Product ---- ' 000 tons- Product -' 000 tom.- Product --- '000 toes----- A. COIPOUNDS Compositlon (tons) N P2 05 K20 (tons) N P2 05 120 (tons) N P2 05 120 N P205 K20

Compound A 2 17 15 3.003 0.06 0.51 0.45 B 4 17 15 4,035 0.16 0.68 0.60 C 6 17 15 28,558 1.71 4.85 4.28 V 4 17 15 6,430 0.26 1.09 0.96

Total Tobacco Mixes 42,026 2.19 7.13 6.2, 45,000 2.19 7.13 6.29 45.000 2.19 7.13 6.29

D 8 14 7 95,049 7.60 13.30 6.65 J 15 5 20 5,593 0.84 0.28 1.12 L 5 18 10 33,898 1.70 6.10 3.39 K 10 10 10 16,305 1.63 1.63 1.63 P 10 18 0 5,363 0.53 0.96 - S 7 21 7 11,076 0.77 2.32 0.77 T 25 5 5 1,628 0.41 0.08 0.08 x 4 17 15 2.405 0.09 0.40 0.36 Z 8 14 7 13.646 1.09 1.91 0.95

Total Maize and Other Mixes a/ 184.963 14.66 26.98 14.95 247,489 19.62 36.10 20.00 300,936 23.77 43.87 24.07 o

Total Coepound- 226,989 16.85 34.11 21.24 292,480 21.81 43.23 26.29 345.936 25.96 51.00 30.60

B. STRAIGHT FERTILIZERS

Amnius Sulphate 21 0 0 315 0.07 - - 315 0.07 - - 315 0.07 - - Amonium Nitrate 34 5 0 147,951 51.00 - - 184,346 63.60 - - 224,164 77.33 - Sodium Nitrate 16 0 0 1,642 0.26 - - 1,642 0.26 - 1642 0.26 - Urea 46 0 0 7,118 3.27 - - 8,000 3.68 - - 9,000 4.14 - SSP 0.19.0 7,404 - 1.40 - 9,000 - 1.71 - 10,000 - 1.90 - D Super 0.38.0 5,532 - 2.10 - 7,000 - 2.66 - 7,600 - 2.85 - KC1 0.0.60 4,460 - - 2.67 5,000 - - 3.00 5.500 - - 3.30 K2504 0.0.50 918 - - 0.46 1,000 - - 0.50 1.200 - - 0.60

Total Straight 175,340 54.60 3.50 3. 3 216,303 67.61 4.37 3.50 259,421 S1.80 4.75 3.90

Total 402,329 71.45 37.61 24.37 508,783 89.42 47.60 29.79 605,357 107.76 55.75 34.28

Dsand/Supply (1.45) 7.39 n.a. (19.42) (2.60) n.a. (37.76) (10.75) n.e. in nutrient term a/ Include mixes for the (T compound) cotton (L compound) sunflover (P compound) and fruit trees (J compound), oalch carrently total 252 of Maize mdxes. bI Local supply availability is estimated at 70,000 tpy N (as aonium nitrate fertilizer grade from SAWLE) and 45,OOOtpy P2 05 (as SSP/TSP from ZINPE)S). -151 -

Table 33

cuimoo lsi(.ip Per 66wCute of "u14 LSIofe CEtgjita aING

heat', WxICpt. is to6 31 191 19Th 19" 1916q 1919331639111 3W 3963 IIII III 97.66 ta.i.p 3.1. U.11 39.61 43.3 47.4 11. Wif 66.A ", LeCuAIM 6.643 6.12 6,313 6.96291 6.1131 0.6149 6.1121 9.16631 1.M6 3.37I9 1.41a on6(jul.. 44.4118 44.9136 MPH91 47,9566 91.7610 62.3103 74.745 71."I2 44.9174 9.1666 6.6916 391166 71.1433 61.716 63.0116 41.3184 16.1371 7.61 74.7445 d6. 797 6.296 6.166 ,61

taaaua 246 1961.51 (vti.p 643.4 1434. 633.6 4119. 675.0 764,6 all. Laci./336 7,331 7.367 6.117 8.26 7.7:I 8.237 16:97 8.26 C.2M 11.141 MM29 54 (ai v. 64.7131 81,31444 71.7326 C2.32 973'259 92.976 6344.386 S.""6 f.446 4.166 6.16" 39W11of 343,7946 327,613 332.4432332.9276 336.1325 345.531134 4364.365 4.466 6.1666 M.w4 06.64

tads, 764 233.96 fIus,4e M6.9 2W.: 427.3 472.3 5W..6 132. 523,? 611.3 MOM13S$ 4.362 6.376 6.946 6.729 6,343 6.116 7,66 6,639 9.43 36.649 3.6 54 (qesW. 32.2439 13,7437 47.6674 54.6413 63.7332 63.0111667.7477 79,26 4.0114 6.166 I.,1614 316614 331.494 47.916 be,1632 73.4366 7.1.3 71.1311 67.1477 64.3I62II 6116111 6.662 6.16

1146 3i6 2156.43 (t3q,el 1133.4 132.4 223, 38.1 31.7 . W&,N3l* .4 6.669 CIIII96 6,119 6.116% 4.3616 6.3616 63416 4.3636 6.33 .61 166jul. 6 382.111644* 101.4, 7 94.2611140263.66261 M =.32 I 6 I 6 3916654 6.16 317,6733 17.3116122631.9616 3126.43211 346.1116 6.1w1 6.61 4,161 6.w6 6L166 lowy. 34 6.2 uelep 7MA, 0. 111114. 91.3 3627.7 3684.7I 15223 131939 3545,7 3673.6 LU,3Io 7.t34 7.341 6.367 .2771 7,72 7,1471 7.426 9.64 MM92 13.312 4. VP (Siiv. 363.93661 333.346 345.&5= 13.196 3II.9667 345.334 JAM6.77143.63 343.6237 321.71162 6.16 396654 376,4314 71.2634 312.P96 366.3936 63167.113364.1336 366.712 132.3434 124.04 366.1643 6.016

lagi, 39 ~~~~~~~~~~~479,74(.i.p 66.4 96. 34340 371,4 311. . 36.6 541Lwa13.3 3.354 3.53 I.1166 3136 3.21 3.26 3.25 1.1331 I.6M 6.669 6.4 54 (julY. 33.246 ISM29 371.66 367,332 196.3P 4 224,31 6 6 3911540 231.266 .211.239 621.365 22.135 IPA71= 6.1666 214.3466 6.164 $.461 $10.466 6.6611

hOd.. 716 632.016 lEmal" M9. 132.6 332.1 434.6 366.6 376,1 26.6 266.6 396.6 337.1 334.7 5411101ac6 13.6 3.766 I.51 3.16 1.4711 3.473 3.39 3,462 3.321 6.9911 6.11111 du4(4., 369.626 226 233.6671773.6762 36.16 239.92117 126.15 .37.2 396.3 13.94M1 216.6264 3966166N 342.4156 334166 34.6310 314,M4 2M.659 295,63411336156 343.953 3R4211 276.2374 239.3573 Ceetshue 3826 6413.6 lvulap 644.4 3324.6 3243.4 3446,6 3643.6 3167.6 213.4 22426 4411.4 6637.6 LMa3/U3 7.959 6.1 IV1179 656 M.".1 6.516 6174 21.70 37,436 43.166 44.101 5414.v. 336.§P§16963333.9121M 1316.6431363161.7263123 393.135261 22I.A649 266.793463126.266 336.9112310161361,3.62641 I 3966VW 3911,7633 246,166 2361653412291.2192 242.66461 249.92163 246.193 336.223 363.137 333.3463 6.OW6

lusetta 6ebolac 331 1333.37 (usia,, 15,2 324.25 316.2 332.93 134.71 31.41 316.73 LU&A31 3.46 3.6 .41113.166.6 1. 166I. 3.00 3.M6 I.446 3.16 3.66 66sSq.,v. 15.7 326.25 314.211 332.93 345.71 316.4 316.73 4 6 I 396 54 342646 364.1333 31.72134366.&m: 364.47 366.2637 336.7316 4.146 4.41666 6.41666 O.""6

mile IM7 3546.7 [Weis"i . 4761.6 71363.6 341666 3472764 Jam32 33132,6 tualAw . siltu~365 37M4 19.M6 39.69 v.969 76.642 91.6311 54(4,t . II-111131.6 9966534.71647379.21476 12371.6624322.17266 49 162.21111163 6 39W54 4.6164 6.64l6 6.666 4.11 396694 236.4*43 219211 342.6429 21.6379 132.7924 6.16646

ropla 2~~7941 366.31 (ale,, 1#739.4 3116.9 336111.469366.0 171967.6339133.4 344684, 376116.0 MIRA7. ra" Luah/WI #44.41 464.016 464.54 164,666 414.166 54.1 607.414 66341603,4 7 71.6l16MA611.3166 650(wi.. K4AM7M13 '9.293363316,76295213 34.4966 9.9667 246.1921936241. q2967 216.696512977.461116 292.3134971 I 396 M4 121.932,4294 154.3'41 394.376424!.5260 269.296 24i.443 2314.1233 2.16.93 243.795V.1O

1411cs rq~23c 36217 vi.p 21614.4 3432.6 3124.7 4'12.4 7716.64 961,14 '4977. 42611, 3471.8 26121164.6 Laial'66 12.504 123.516 3.1436 22.371 22.767 22.69 22.9 2113 a4553. 62 I2649 ld7.n1 A4 (qas,. 224.1 21.96 M3.621216129704Mum1M3.418663 396.OM9419 6712716:29 9.6243932 331.6PIM19 22.12135746 6 Io* V" M11.373 4361692 3661.264264M.432 47.42 440.3162 471,7796 313.3416 26.2665 364.694 S.01611 Iaea. 342 361 te,soi 346494.4 3613729.6 J6IM3.6 76614.6 33457.6 721r1,9 244513.9 2591.6 769563.4 739366.6 I*aI'154 297.W 294.796 M961 268.536 236.44 2391.341 226,746 MM6O4 749.94611 2.11.13 27,6 is, (991.. Sol.fii&5'@ 533I6436326616,9148177647,6536 63,496 393.3634 361.6h71 77.69143 61.731.12M,175.13,375116 3Ji6at 91 So"s 144.8369 O-69374 3633.643'1 9.34 33'9.14M6137.47 34671SO 2.63717,0210 973.9162 Cow

£ IEvlea ~~~~~~2496 "95.3 (u.s.,. 173 31.0 266.6 237.6 26.6 333.6 119.4 '13.0 S49.6 639.6

66 ("IV.. 71,~99 76i.631 3,9 77n.55 321.4 w7,74 47.45 5341.39 167195 154539" 396616 4446354 492.7162 342.016 11.3362 O34,9217 413.5353 473.43a 469.11132 432.4314 466n.311 64 - 152 -

Table 34

ZIMBABWE- HOURLYCOMPENSATION & GNP PER CAPITA IN SELECTED COUNTRIES (1983)

Hourly Compensation GNP per Capita Country Value (1983) Rank Value (1983) Rank

Switzerland 10.47 4 16,290 1 United States 12,04 1 14,110 2 Norway 10.48 3 14,020 3 Sweden 8.89 9 12,470 4 Canada 10.92 2 12,310 5 Denmark 8.72 10 11,570 6 Australia 9.19 8 11,490 7 Germany 10.33 5 11,430 8 Finland 7.40 13 10,740 9 France 7.92 11 10,500 10 Japan 6.13 16 10,120 11 Netherlands 9.62 6 9,890 12 Austria 6.92 14 9,250 13 United Kingdom 6.26 15 9,200 14 Belgium 9.34 7 9,150 15 New Zealand 5.17 18 7,730 16 Singapore 2.19 22 6,620 17 Italy 7.73 12 6,400 18 Hong Kong 1.52 25 6,000 19 Israel 4.88 19 5,370 20 Ireland 5.60 17 5,000 21 Spain 4.64 20 4,780 22 Greece 3.66 21 3,920 23 Mexico 1.42 27 2,240 24 Portugal 1.61 24 2,230 25 Korea 1.30 28 2,010 26 Brazil 1.46 26 1,880 27 Zimbabwe 1.76 23 740 28 Sri Lanka 0.25 29 330 29

Regression Results:

Hourly Comp.- .30937 + .000741245* GNP per capita (.5571) (.000062)

R2- .8408

Kendall's Rank Correlation:

Kendall's Tau: 0.9532 Chi Squared: 53.3793

Significant at 99.5% - 153 -

Table 35 ZIMBABWE- SPIMDLESIN TE ODTTONINDUSTRIES OF SELECTEDCOUNtIXES

Numberof Installed MachinesInstalled Ring 1974r79(million) Spindles Ring Open-end Countries 1978 Spindlesa/ Rotorsb

(1) (2) (3) EC 12.027 1.614 0.213 of which Italy 3.338 0.911 0.73 West Germany 2.971 0.374 0.48 France 2.495 0.095 0.49 UK 2.250 0.171 0.20

Greece 1.349 0.416 0.9 USA 12.5 0.449 0.139 USSR 16.0 ? 1.161

Asia 68.0 8.327 0.278 World 151.4 15.448 2.230 a/ No detailsare available for supplies from Western Europe, USA, Asia and Czechoslovakia trading countries for their own account is hence not included. In reality the rumber of ring spin b/ Rotor-3 rings.

Source: Ingo Walter, editor, The Global Textile Industry, London, George Allen & Unwin,1984. - 154 -

Table 36

ZIMBABWE- LOOMSIN THE OOTTONINDUSTRIES OF SELECTEDCOUNTRIES

Shuttle Looms installed loom 1974-79 1978 Shuttle Shuttleless Country '000 '000 '000

(1) (2) (3)

EC 156.7 13.0 32.2 of which Belgium 15.9 0.5 1.6 France 36.5 2.2 6.1 West Germany 36.1 3.3 6.8 Italy 42.7 3.9 12.3 UK 20.6 2.5 3.8

USSR8/ 270

USA 246 9.4 21.7 China 290 Japan 180 28.0 8.6 World 2,000 a/ Only the numberof advancedtechnology machines supplied by Western Europeor Czechoslovakiato Comeconis known (open-endspinning; looms/shuttlelessweaving loom).

Source: Ingo Walter,editor, The Global TextileIndustry, London, George Allen& Urwin, 1984. Table 37 ZiNE - AMNLM OF ME Z1SA5 1rnE uUiS

STIt Vol. 1978 1981 1982 1983 1984 Niuder Prodk,ct TLype UWdt volum Valu Volt Valu Vobiz Value Vol_ Vae Value

65129 ridttng Yanm ig 10,590 51 9,659 74 54 65161 MMCPyan yartm Ig 42 852,000 1,075 812,000 923 77,172 265 6 65192/5 10(1 Gotton Yarn ud Threa kg 532,000 825 191,726 373 34,877 88 100,071 257 558 65185 tirais Flaent Yn kg 1,941 62S,845 1,741 3,2B0 65196/7 Yarns of Staple Fibre 148,466 501 10,315 6521V/4 IO(1Ottxn Bleadied/UThld.d 2 00 73 14,200 18 496 2 5M8,7 962 1,256 65233 1(XX(bttat DysI 3) 24 5,497 55 12,337 13 213,645 442 4,258 65212 10(1 Got(tn Printed 2 158 151 58,114 102 26,909 48 977,122 1,879 2,457 65261 Cia/Thrpaxlin 1 349 574 212,276 555 21,491 121 67,888 216 1,347 65399 9yntItic Fire Piece td j 0 ^2 1,163 2,122 739 1,435 766,260 1,556 3S8 u 65633 Blar*ets t 81 50 143 9 28 11,904 62 71 1 65593 bwels ad Naidio t 139 541 225 1,141 85 400 15D 659 2,497 65695 Sheets 103m2 2,972 1,345 2,991 2,335 2,3B6 1,853 4,685,617 3,941 5,882 65699 Other Hme Llren ig 112 368 5 21 3D5 970 84249/79 Claottdirg Knitted no 4,543,000 3,298 2,322,744 2,745 1,32Z,672 1,363 976,647 1,070 1,908 65781 Carpetirg kg 63 63,C46 3$1 12,355 65 41,458 3)1 164 65614 BW anI Sada n 173,502 52 147,574 69 38,981 43 68 6556X Rope, 6die lg 744,000 193 93D,OOD 237 80,000 170 62,801 169 190

lrAL 9,492 11,333 6,673 14,269 35,579

Sawce: 1978-1983 - StateItB af ELernal Trade, C9D. 1984- - 156 -

Table 38

ZIMBABWE- MAJOR TRXTILE D(PORTS

1984/1983 Abbreviated Description 1981 1982 1983 1984 Percentage

FIBM (266)

Filament for Marufacture of Fibres (23) - - 123 13 (10)

ViscoseRayon Staple (91) 638 483 50 111 (220)

AcetateRayon Staple(92) 213 402 7 - -

Polamide(93) - - 165 39 (23)

Acrylic(94) 700 875 649 1,459 (224)

Polythene(95) - - 957 2,241 (234)

Polyester(96) 1,274 2,283 1,313 829 (63)

Artifical/syntheticNes (99) 2,188 1,070 47 - -

TOTAL 5,016 5,133 3,311 4,692 (142)

YAMS(651)

Knitting(29) 166 79 166 15 (9)

Yarnsand Threadsof 2 or More Mbnofil(84/5) 10,412 6,373 7,736 8,764 (113)

CottonThread/Yarn (92/6) 3,190 1,231 651 347 (53)

JuteYarn (91) 33 7 45 104 (231)

Yarns/Threads-StapleFibres (97) 2,337 1,462 - - -

Yars/ThreadsNes (99) 171 337 20 23 (115)

IOTAL 16,276 9,489 8,618 9,253 (104)

Source:CATMA. - 157 -

Table 39 ZIMBABWE- MAJOR TEXTILE IMPORTS

AnnualTotals ($'000)

1984/1983 AbbreviatedDescription 1981 1982 1983 1984 Percentage

0OTTONFABRICS (652)

100% CottonBleached or not (11-13) 2,809 1,372 195 1,100 (564)

100% CottonCorduron (22) 251 240 204 111 (50)

Other Corduroy(24) 295 297 165 101 (50)

100% CottonDyed (31-33) 2,231 524 98 264 (269)

100% CottonPrinted (41/2) 2,323 1,144 1,467 10,726 (732)

100% Cottonof Coloured Yarns (51/2) 792 481 - 2 -

Canvas,over 340 g (75) 568 39 11 123 (1,118)

TOTAL 9,269 4,098 2,140 12,427 (580)

NISCELLANKOUSFABRICS (653)

Hessian(42) 1,244 644 419 973 (232)

Rayon, Dyed/Printed (62/3)More 1,569 1,141 - - -

Rayon of Colored Yarn (82) 295 298 22 - -

Other Piece Goods (70) - Knitted (22,127 (22,378 12,070 9,435 (78) Syntheticfibre (99) - Woven ( ( 12,434 11,297 (91) TOTAL 25,216 24,461 24,949 22,335 (90)

Source: CATMA. - 158 -

Table 40 ZIMBABWE- MAJORTEXTILE IMPORTS

Annual Totals($'000)

1984/1983 AbbreviatedDescription 1981 1982 1983 1984 Percentage

NADI-UP ARTICLIS(65)

Twine,Rope and Cord (561/4) 1,279 955 1,022 931 (91)

Bags/Sacks,Hessian/Jute (611/19) 12,990 4,886 5,473 1,688 (31)

Blankets(33) 370 290 423 330 (77)

Other TextileGoods (695/99) 589 510 199 382 (192)

Carpets(7909) 223 132 26 27 (100)

TOTAL 15,449 6,773 7,143 3,358 (47)

CLOTHING(842)

Stockingand Hose 2 7 20 169 (845)

Cardigans/Jerseys/Vests (72/9) 44 181 123 111 (90)

Handkerchiefs(81) 101 119 46 72 (156)

Haberdasheryand Other (84) 1,163 863 268 660 (246)

TOTAL 1,310 1,170 457 1,012 (221)

Dyes (5321) TOTAL 5,607 4,099 3,090 4,692 (152)

Source: CATMA. - 159 -

Table 41 ZI1'AWE- MAJORTEXTILE IMPORTS

AnnualTotals ($'000)

1984/1983 AbbreviatedDescription 1981 1982 1983 1984 Percentage

IMPORTSFROM BOTSWANA

Yarns and Threadsof 2 or more Monofil (651850) Nil Nil 1,510 1,841 (122)

Fabricsof SyntheticFibres and piece goods not cotton rayon- knitted) ^ - 10,794 8,098 (75) ) 7!,475 12,538 - - - - woven ) - - 5,122 2,155 (42)

Printer100% CottonFabric (65242) - - 740 10,739 (1,451)

Carpetsand Other Textile 295 119 - 52 -

Stockingsand Vests,etc. 12 168 127 277 (218)

Handkerchiefsand Haberdashery 61 304 218 666 (305)

TOTAL 7,843 13,129 18,511 23,828 (129)

Source: CATMA. - 160 -

Table 42

I SEtTlF 1011 IILLCJS10If l ll E6113 i LMI NCCO.UlEAIS ------uiustore sm U miE OSestic iles worI CapiWtalg fro rir Step 6.413IO.3 133.63103.A0 WIS Lus:Ajudvsbt fur S _aghuge te 15.45 25.1 32.12 23.1122.1

lustedLar I Capitalt0.9mp 11..61IO.S 79.n 7S.47

REhetic Sema 0.4 0.51 1.17 1.91 3.S ExportSalen LabrI CapitalCIiv fromPrior Step 15.12110.30 133.63 103.0 71.72 Lss:Ijustimt for ShmdUi m ate 15.11 25.69 32.12 23.11 16.62

f lustedLabor I Capital C p 19.5 14.11 101.1 n79.Sl 5.10

PUtExport Sales 2.18 I.S 0.00 4.69 2.43 TotalSales borI CapitalDwgp from Prior Step 65.34110.30 133.63 103.40 10.12 Lesn:Adjuwtsat for Sgo bgelVte 15.22 25.69 32.12 23.1111.62

AdustedLalr I CapitlClwig. S0.1114.11 101.51 79.19 61.S0

o,etTtl sales 1.37 0.59 0.89 1.70 1.18 - 161 -

Table 43 - urS tunsis 99 alPKwz" t~~~~~~~~~~LI U61n LINt UIULf mainri No runmmIm EC1A "MM)II betl; its blw Aw fru Prig Slap 115.741.11.6 11?.67 67.9 116. %jsot LaWhtaia Casi 11.2119.24 3.59 1.0o 16.12 Ialpertgtsrsal tws 6.0 6. IA 1.1 L6 laul IOWA"tI" .1 16 1.7 670 las Pd (6.S12(6.5) (6.9) (.7) (.73 LU rlrtelitChwpso bSles (2.61)(2.61) (2.61)(2.61) (2.11) WulsIwm 6.6 6.10 I.E 6.06 L.0

AdjustewhWiAdIU I6.22115. I U 11.06112.11 Lar I Cltal Chrpfro Prir Step SO. 6I.11.1S1.111 9.." 75.N Ltu: Ajuwtt Lar Cuts 9.19 1129 15.1213.93 ILlU Cit awc. l.SO 6.12 o.n .U0 .73 Addhei: Ierst Shb ihp ate 3.31 S.51 N.1 5.62 1.93

AdjustedLker I CoitalOpr. 14.1074.10 1.43 70.2015.18

C 6m'tic Selles 0.3 I.41 .1.s56.17 6.10 Exet hits blut Addfro PrierStep 22.925.02 (1I.07)17.07 22. ldjustwntLaul lhterAal cuts 1.20 11.2i 20.6119.06 IIS. lapertedIbterialcets 0.tO 0.00 6.60 0.00 6.10 lJterulIral rt l.41 0.61 6.17 1.74 6.13 aneshid (0.SZ)(0.56) (1.91)(M.71) (1.16) Lowrrto1dt pgeson Sles 2.61 2.01 2.01 2.01 2.11 Sellsblue 0.60 6.60 6.00 0.00 0.60 _. , ...... _...... _.... Adjustedblue Addd 40.0976.25 I.55 38.1540,49 LaberI apitalCOrp fro PrierStep 49.1561.61 101.51 71." S5.10 Lns: justat LaerCats 9.0315.25 19.12 13.93 9.19 CaitAl hcrc 0.1590.62 0.61 0.68 6.SS Addbak: Inr1m sdWOW ble 3.25 1.51 6A. 1.0? 3.56

AdjustedLer I CaitalOwrpe 13.1871.60 66.4370.20 li.22

NCExport Saln 1.09 0.17 13.51 1.61 1.19 low Salts blweAded from Prier Step 36.50144.36 111.28 17.03 S2.60 AdjuiWtLocal Ibteril Casts 15.2119.24 20.6119.06 16.5? ,rtdlIbterial Casts 0.00 1.00 1.00 0.60 0.00 lIterul rawprt 6.4 1.64 0.1676.7 1.51 oes Paod (0.2) (IN) (6.9) (0.71)(0.11) LKalrrehttCharges in 5lts 1.31 (1.25) (1.92)0.31 1.75 SalesWlue L.0 1.00 1.0 L.N 6.60

Adjusttdble dd 3.6U162.33 132.7 66.4165.26 Lk I taital Clnrpfrrm Prior Step S0.11I1. 111.511.9 11.10 Lns: AdjuvsntLabr tCts 1.06 IS.2 19.1213.93 11.01 Coital urge 0.19 0.6?126.14 1. 0.51 A dlck: lacrm Shdw 1gap 3.26 5.11 1.6A 1.0 3."

AdjustedLaer I il Catre 43.1371.60 06.4370.20 13.60

Nllft 61 es 6.13 1.4 1.1671.16 0.71 - 162 -

Table 44 ~~~ irnsa mi fl I 1111 109 RS Ku uo OK 0 LO t xtlul (__ ~~~~~~~~~~~~~...... ~...._. Wm1Fe m nS IS WE(M Il PUl)

i d frWmPrkm St 15.74 165.11 7.M 17.79116.5 U4jtmt LaucAiWtea CahIL R." J2L%. 21.2 3. LWrbd ter el Cuts 1** g** LO g* L N letresiI" i 15 1.4 I 1.26 IL. lh ed (L.O) 41.47) .62) (1.26)(1.25) ulerolot tbrn a Sale (110 L1 (3 U.)(3.0 (3.1) Sln 161 L.11 1.U LN1 1.11 1.11

inted i. Used 129.3194.52 14.97 117.5 13.62 Lar I Cpia Chvp fro Priv Stop S. 0411 111.5179." 7S.47 Ie: 1i4t LaerCuts I71 26.U 32.77 213. 23.46 CteitlCh.r r L .11 I1.M 1.51 1.25 Mshi: lwe db w e lVte .2? 15.2 19.7 14.n1 13.79 ... . __...... * isted Lbs a citul tbr 41.63 72.40 A.57 66.4 .56

Ciotleic hlss 1.34 03?7 .so 0.59S .is

biloidd fro Pior Step 22.92 5.U2 (16.17)17.07 .66 1djustneetLes btsriel Costs 26.56 32.n 3S.4 32.n2 27.13 Iepertedlhteril Costs I.10 1.10 1.0 1.00 I.1 I!term Ir ert L.13 1.4 1.9 1.26 3.3 TosPid (.19) (1.47) (1.62) (1.21)(.6) LaUefri ht Chlap Shl" 3.1" 3.41 3.1 3.41 3.N Waleshi. 1.K 0.3 I. 0.. OM

Adjustedbew 5d . 52.5i 91.V 22.70 53.21 53.22 U_wI C1pita Cw romtrt9S P Step 1N.61101.51 79.99 55.10 Ls: djusbtt Uil Cuts IS." 26.22 32.77 23.N 16.9 coital ChWg 0.13 1.41 1.44 1.51 0.9 As c: lar Sdoem p bte 91.11IS.2 11.27 14.0M41.17

Adu itedtmbw I Coital Drp 42.73u1.57 72.40 61.64 47.17

KCExprt Sales 1.12 1.79 3.11 1.9 0.0 low Selah blw IW fromPrar Step 36.O 141.36114.21 47.03 S2.00 Adut,t LOcWltrieal Csts 26.07 32. 35.46 32.72 21.10 Lwrtd terlulCuts 1.U I.K L.O 0.0 .0N Iltrel Trepert 113 1.44 1.49 1.26 1.00 TamPad (1.09)(1.47) (1.62)(1.21) (1.05) Lua TruiOt0mw., en Selts 2.32 (2.15) (3.29) 0.52 1.21 Sels1d La L O1 0 1.1 a.W0. 1 .0

Aited bl kw 64.03175.16 14.33 5.26 01.62 liar I CeitalChar fro Prr Stop S1.1104.1 11.S 999 61.50 Lns: Jutebt Latr Csts 1S.5326.22 32.77 23.1 19.0 Capitel0 . L4 1.41 1.4 1.51 1.M s cit:lucruse .d. lhplete 9.13 15.42 19.27 1M. 11.M7

IdjtudLar a C4tal 0 . LU 724L l.57 6U.6452.64

dt letw hi L.66 1.11 L1. 1.51 1.64 - 163 -

Table 45

ShLIfSVim tiJBlVilACS LIt P11CENI51C0ISI W~J amIClEY (Otilto tAUIIiIINI) stalt hiss (torrent(shog hi)e Valdeded fro PrimSttp 16.71 NS.A 117.17 7.7 116.1s AidSck: jitml CaslPrice 111 10.to 11.11 9.95 1.52 her rin 2.11 3. 4.77 6.67 4.03 a.. __. _.. -.--* Adjstidblw Ad 111.0776.66 I3i.16163.11 129.5S

OKhwstic hIss (CvrrentE xaNlte) 6.46 3L47 1.77 0.7 o.S Sestic hScn(it 0 ("ke btfePrwiuu) bl ddfrom Prior Sttp 119. .22 I35.U( 104.06 132.13 Addack: Adjuastnt Coal Frie 7.13 9.1S 1.10 9.05 6.65 PahrPrice 2.41 3.21 .35 5.1I 3.67

Adjustedalu Addd 110.26j9S 111.13111h. 144.15

NCtOmstic sales(20? Exchane late Premium) 0.34 1.30 0.51 0.59 0.46 bnesticShles (It 401Exchan bte Premium) VivlueWd fromPrior Step 1 319 12 .52 1".97 117.06143.62 Addlack: Adjustent Coal Price S-17 16 6.12 6.78 6.19 PoIerPrice 2.41 3.1 1.23 5.03 3.5?

AdjustedValue Added I1.61 2M1.5?160.03 121.17 153.60

RCh0estic Soles (101 Exchnge bte Premium) 0.32 0.35 I.S4 6.53 0.42 ExportStles (Current Excange lte) ValueAdded from Prior Step 22.s2SS.t2 -16.0? 17.07 22.46 Addlack: AdjustWent CoalPriee 1.76 10.16 10.01 9.X5 1.98 PowerPrice 2.68 3.0 4.77 5.67 3.13

Adjustedalut Added 34.3 6.68 1.29 32.69 31.1'

IC Exporthles (CurrentEchange bte) 1.45 1.23 .IM 2.45 1.S9 EporthSles (20M Exchange late Prsqi-) aluetAdded from Prir Step I.i 76.25 6.55 31.15 10.49 Addlae: Adjustnenttoal Price 7.9 1.15 9.10 9.05 1.16 Par Price 2.44 3.21 4.35 5.16 2.65

AdjustedValue Addt 50.5111.1 20K. 52.36 S1.50

PC ExportSales (201 Exchang lbt Premuiu) 1.06 6.U3 4.42 1.34 0D." ExportShts (10 Exchgebte Prauiw) ValueAdded Irom Pnor Step Y2.3I 91.41 2.JC 53.1 Q3.U2 A Back:ldjustnent CaH Price 51.7 6. 6.6 . 6.41 PwrPricte 1.15 2.45 3.25 3.L 2.74

AdjustedValve Added 6e.17131.72 32.71 3.IS62.5

tCEwport Sales (402 Exchange lte Pruiw") 3.71 un6. .M I.6r I.76 - 164 -

TABLE46

'U'S 11f5IEI U0 fuILLEs3101W LJI1111 iff I Umit00.t PISI IR CU.CLRf II (._... .. fetalSul" (Cwnrt E ane bRte) hlie ed fro PrierStep 36.50119.36 11I.21 97.13 52.0 1 Sack:Adustmnt tol Price 1.7S11.06 10.01 1.95 1.1s PokwPrice 2.66 3.60 9.77 5.6? 3.t1 ...... Adusted hele Added V7.99151.02 129.06 6U.6S 6t.56 Ot fetalSiles (CwrentExcange Rte) I.Os 0.5S 0.7 1.26 0.95 fetalSeln (20? Exng latePrgsu1) ilueAdded tromPrior Step 53.03162.33 132.97 66,t1 69.21 AddlcKi: AdjgstAent CoaPriCe 7.95 9.15 9.10 1.05 1.31 PutrPrict 2.f5 3.28 1.3S S.16 3.11 ..._...... ~ AdJustwdhble Added U.U 174.751t6.t2 10.6310.70 MRC1etal Sles (20S EchangeRtePrfnizw) 0.69 0.12 0.60 0.67 0.67 rti Sales(90 Echge atePreqiaw) thlu Added freoPrier Step 69.63175.16 1t6.33 80.26 81.62 AddlKi: Adjut,,entCoal PriCe 5.3 6.96 6.92 6.78 6.t9 PsierPrice 1.14 3.05 9.21 9.35 3.00 _...... _...... AdjustedUalueAdded 72.6t1S.07 IS7.36 91.40 91.11 Oftfatal Salel (901 Exchnop l atere,ztw) 0.59 0.39 0.SS 0.75 O.S6