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Beggar-thy-neighbour protectionist policy is decadent

03 Mar 2019 at 11:06hrs | Views
Reports that the Zimbabwean government wants to liberalize fuel imports is a very significant development that will go a long way towards solving the country's artificial fuel shortages once and for all. To put it bluntly, the day the government frees the fuel sector, that's the day all fuel related misery will end in Zimbabwe. Zimbabwe will be awash with fuel and new jobs will be created. Consumers will benefit from lower prices as competition invariably leads to lower prices for consumers.

The present monopolistic behaviour in the fuel sector where one Queen B is alleged to be controlling a lion's share of the fuel cake is unuacceptable and is causing artificial shortages of fuel.

Hoarding of fuel creates artificial shortages as a ploy to push prices up.

The problem with protectionism is that always and everywhere, it has had adverse consequences. Hoarding, collusion, artificial shortages and blatant corruption are some of the key features of a protectionist policy like the restriction on imports which is currently a sector reserved for one or two organidations. The monopolist knows that if he creates shortages, consumers can not import fuel as the law currently prohibits and criminalises them from doing so. The end result of protectionism is shortages of fuel followed by a corollary price increase in the convenient name of scarcity.

The ugly face of protectionism is that it causes inflation through higher prices. The unintended consequences or the so-called negative feedback loop, also tends to be a resultant effect of protectionism through its destruction of jobs rather than creating them. The policy of protecting inefficient firms proves to be worse than useless as such protected firms seldom get better. Sunset industries end up attracting new capital that might have been better spent elsewhere. Think about the policy of protecting a company that makes black and white television sets. There is no rationale for protecting such a company because it becomes innovative, it should need no protection.

Since protectionism tends to shield the inefficient industries, it then causes the death of those that can compete as they are left to the vagaries of the market while weak ones are protected. What is worse with protectionist policies is that the first wave of protectionism is usually followed by more in other sectors. Protectionism has the overall effect of Zimbabwe becoming a closed economy similar to North Korea.

 Protectionists like to argue that they want to make local industries to be competitive. The tragedy is that the root cause of lack of competitiveness is not addressed as protectionism hinders efforts to become quality oriented, by taking the heat off the worst offenders. Since innovation generally comes from the free exchange of information across borders, protectionist attitudes slow the exchange of innovative ideas.

Just in case some people wonder what the benefits of competition are. Consider the following: gone are the days of tea leaves that were not inside tea-bags. Gone are the days of the need for a deposit when you buy a Coca-Cola, now they are canned. Gone are the days of buying unsliced and unwrapped bread. Now the bread is sliced and put into sealed plastic bags. The days of nearly losing a tooth when opening a beer like Zambezi Lager are now history as currently they supply one which you simply twist open with your hand. Look at how efficient the transport system now is in Zimbabwe. Almost every family, including children, has a car and that pushes the standard of living for the people up. Had the government continued with the ill-conceived policy of protecting Zupco or the inefficient Willowvale Motors, then the country would still be tottering in the doldrums. Gone are the days of the long transport queues at Bulawayo's Egodini or Harare's Mbare. All these consumer gains were courtesy of the government's relaxation of protectionist policies.

Against the backdrop of the foregoing, for Zimbabwe at this day and age to wrap itself into the toxic mantle of protectionism is similar to printing money as a remedy to increasing local demand. A tragic mistake which can only breed hyperinflation. Former US Federal Reserve Chairman Ben Bernanke has argued that a retreat into protectionism and isolationism would be self-defeating and, in the long run, probably not even feasible. In the case of Zimbabwe, what has led to the dramatic improvement in the transport system has not been protectionism but rather the embracement of the many opportunities provided by liberalisation of imports. Notwithstanding the fact that trade liberalisation makes the Zim economy stronger, the broad benefits of trade may come at a cost to some local industries. While trying to ameliorate such pain, there is no need to stand in the way of economic growth and an improving standard of living.

In general, a drift towards protectionism is the option with the worst economic return. The Zimbabwean educated former US treasury secretary (under Obama) Tim Geithner has also added his voice against protectionism arguing that the typical political impulse is to try to address directly the source of the competitive pressure and to relieve it, but these measures cannot offer lasting relief. The economic price of protection, in terms of distorted incentives, reduced flexibility and broader costs on the economy as a whole, seem both more substantial and more enduring than any temporary political benefit.

Indeed economic openness tends to affect some industries and some workers within an economy. But the adverse impact suffered by those so affected are a drop in the ocean relative to the broader and bigger benefits enjoyed by the economy as a whole in line with the economic dictum that what is true of one is not necessarily true of the whole. The pains of one worker who loses his job due to imports are outweighed by the gains of millions others whose standards of living go up due to imports. Admittedly, the natural reaction of those so affected is to resist change, for example, by seeking the passage of protectionist measures. Policy makers would rather help these displaced workers by retraining them to fit into the new ensuing economy rather than to stifle innovation. In general, economic theory and economic history have provided ample reasons showing that changes in legislation and regulation that tilt toward economic isolation and protectionism are unwise and unhelpful. Others have argued that protectionism is nothing but a tax on the consumer and the businesses that use foreign inputs.

Flexibility is critical in an environment of maximum competition. Flexible labour markets provide a key element of this environment. People tend to equate labor market flexibility with job insecurity. Despite that perception, flexible labor policies appear to promote job creation. Another former US Federal Reserve Chairman, the legendary Allan Greenspan once asserted that an increased capacity of management to discharge workers without excessive cost apparently increases companies' willingness to hire without fear of unremediable mistakes. He further argued that protectionism in all its guises, both domestic and international, "does not contribute to the welfare of workers. At best, it is a short-term fix for a few workers at a cost of lower standards of living for a nation as a whole. Training for those displaced by the Schumpeterian process of "creative destruction" is the answer, not a stifling of competition"... through protectionism. Right now, Zimbabwe receives huge foreign exchange currencies from remittances. What if other countries could retaliate against Zimbabwe by criminalizing anyone who sends money to Zimbabwe citing a need to preserve liquidity within their own markets. Zimbabwe would lose billions in forex.

In conclusion, protectionism is counterproductive and should the neighbours retaliate by restricting imports into their own markets, overall standards of living suffer and the consumers are the ones who are dealt a severe blow as they would begin to experience rising prices and goods of inferior quality.

The government must therefore be commended for moving away from the dangerous beggar-thy-neighbour protectionist policy. Let the government liberalize fuel imports so that Zimbabwean can be treated to affordable fuel prices and of course this will create thousands of new jobs as opposed to the present situation where only individual is benefiting.

Ndlovu is an award winning economist and central banker.

Source - Colls Ndlovu
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