A well-oiled economic system is one whose different parts, like the systems of a locomotive engine, work together as a whole to produce forward motion. An economic system should be self-complementing to ensure faster and broader economic growth, which is economy-wide and not confined to sectors or geographic areas.
An ideal economic system is one that has strong synergies across economic sectors interwoven in such a manner that ensures a balance between dependency and synergy to the effect that under-performance in one sector will not result in proportionate under-performance in other industries, both downstream and upstream.
Downstream industries depend on primary/upstream industries for input supplies and in turn the upstream industries depend on secondary/downstream industries for markets. Zimbabwe’s agriculture sector is the major input industry into the food and beverages manufacturing sector while the steel and fabrication manufacturing industry is a major supplier to the construction and mining sectors.
A thorough industry supply chain analysis is critical to establish the possible links, which can be exploited across industries and sectors. Through exploiting links across all sectors of the economy, it is possible to create a self-sustaining system, which moves with one accord.
An understanding of economic linkages across sectors is crucial to clearly identify and understand the impact of economic policy initiatives, it is the iceberg phenomenon, what is visible above the water surface is often a tip of what is submerged in under the water, in the same light the indirect impact of policy initiatives is often of much higher scale than the direct impact.
The indirect effect of certain industries and companies, which ceased operations in some cases, has led to towns and cities being abandoned and left economically lifeless. The closure of Shabanie Mine in Zvishavane and Gaths’ Mine in Mashava had dire consequences to the established towns of Zvishavane and Mashava, which depended on the mines for much of their economic livelihoods.
At peak output of 140 000 tonnes per annum the mines employed around 5 000 workers and supported an estimated 250 up and down stream industries directly and indirectly.
Turnall Fibre Cement is one example of a business, which was adversely affected by the closure of the mines as it now has to import asbestos fibre cement from countries like Australia and Brazil, which further strains the country’s balance of payment and worsens the prevailing foreign currency shortages. Other industries in Bulawayo also got a lot of inputs from Shabanie and Mashava Mines.
The closure of ZISCO steel is another candid example of the impact of economic synergies on wider economic growth and development, at peak the company employed over 5000 people and gave birth to the satellite town of Redcliff.
The impact of closure of certain firms to downstream and upstream industries can only be described as devastating and very much evident countrywide today.
According to the Engineering, Iron and Steel Association of Zimbabwe, close to 5 000 companies linked to the steel industry closed down, resulting in around 55 000 employees losing their jobs between 2011 and 2014.
The mining sector in Zimbabwe creates a $550 million input market annually and only 11 percent of this market is serviced by the local industries, meaning the other $490 million is serviced by foreign suppliers.
Growing capacity in those industries, which have ready markets in the mining sector, has immense growth and development impact on the whole economy as the growth in one sector creates opportunities across other related sectors.
Decreased capacity in the agriculture sector has driven the food and beverages manufacturing sector to depend on imported inputs, which again has strained the country’s external position. A simple observation of economic relationships highlights that industries or economic sectors do not exist in isolation of other existing industries, such that understanding the direct and indirect relationships across companies, sectors and industries is crucial in policy formulation and implementation.
If these relationships are not clearly understood, it can lead to under utilisation of potential synergies across industries or cannibalizing policy, which has more indirect harmful consequences to related industries than direct benefits to a single industry. Policy should be harmonized to reflect the interests of all economic participants and stakeholders in allocating financial or other resources. Capital providers must understand the economic magnitude of investment decisions through having a clear understanding of economic relationships in an economy.
The economic growth and strength of countries like the United States of America was a derivation of investment made in the oil and steel industries and through synergies other industries like infrastructure and technological development grew from the industrial synergies that existed across industry.
Capital is a scarce resource, whose allocation should be determined by a meticulous and calculated cost benefit analysis, which informs the maximum return on investment and sustainable growth and development.
The study of economic systems to identify the roles and relationships across industry is a crucial aspect of public finance management and in general investment management. It is crucial, in any economic system to identify what are called market industries, as these form a market for goods and services from other industries (supply industries). The scale of either of these industries should be considered in determining allocation of scarce capital resources informed by the size of the market or supply created.
In another school of thought, the impact of an investment decision such as the revival of a company like ZISCO is informed by the direct economic impact as well as consideration of the entire market size created for related industries.
If this approach is implemented across the entire economy there will be efficient allocation of capital resources across the whole economy, which allows for growth from economic synergies which is a catalyst for the spread of economic revival.
Albert Norumedzo is an Equity and Alternative Investment Analyst who writes in his own capacity.