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Foreign trade, competitiveness and the balance of payments
Tony Hawkins and Daniel Ndlela, United Nations Development Program (UNDP)
July 24, 2009

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This paper is part of the Comprehensive Economic Recovery in Zimbabwe Working Paper Series

Executive Summary

For the foreseeable future Zimbabwe's economic development will be constrained by low levels of domestic savings as well as by an inadequate supply of foreign exchange from exports and capital inflows. Furthermore because during the crisis phase since 2000 the domestic market contracted by two thirds (in US dollar terms) economic recovery will have to be export-driven since domestic expenditure will remain well below the levels of the 1990s. The impact of this market contraction will be magnified by a very large trade deficit, Since imports (2009-2013) are projected to average 65 percent of GDP, while the export share will be close to 40 percent, a very substantial trade deficit of nearly a quarter of GDP will be a major drag on the speed of economic recovery. As a result, the multiplier effects of domestic expenditure will be much diluted by the visible trade deficit.

This paper explores the implications of this scenario for economic policy and future development concluding that going forward Zimbabwe has no choice other than to seek growth through enhanced integration with the regional and global economies via strong export growth and an investment-friendly business climate to attract foreign capital, especially foreign direct investment (FDI). From a policy viewpoint, fixation with trade liberalization, trade preferences and access to industrialized country markets should be replaced by a much tighter focus on domestic - behind-the-border - obstacles to export growth in the form of malfunctioning domestic institutions and markets, especially labour markets, weak infrastructure and low levels of productivity and competitiveness. Government needs to adopt and implement strategies designed to boost productivity and competitiveness by lowering transaction costs and reducing, if not eliminating, obstacles to foreign investment.

The success of any development strategy depends ultimately on the response of private sector players - entrepreneurs, investors, lenders and corporate strategists. If they are unconvinced, the strategy will not work. Because they are a heterogeneous group, it is simply impossible for the state to devise a 'one-size fits- all' strategy. Some investors may be attracted by outsourcing opportunities while others will see clusters or participation in Global Value Chains (GVC) as profitable. The optimal way out of such a policy dilemma is a level playing field approach, leaving entrepreneurs and investors to 'discover' what they can and cannot do.

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