Problems of industrial development and market integration in Namibia

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Problems of industrialdevelopment and marketintegration in NamibiaSteve Curry a & Colin Stoneman ba Development and Project Planning Centre ,University of Bradfordb Centre for Southern African Studies, University ofYorkPublished online: 23 Feb 2007.

To cite this article: Steve Curry & Colin Stoneman (1993) Problems of industrialdevelopment and market integration in Namibia, Journal of Southern AfricanStudies, 19:1, 40-59, DOI: 10.1080/03057079308708346

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Journal of Southern African Studies, Vol. 19, No. 1, March 1993

Problems of Industrial Development andMarket Integration in Namibia

STEVE CURRY AND COLIN STONEMAN*(Development and Project Planning Centre, University of Bradfordand Centre for Southern African Studies, University of York)

This paper reports on a recent survey of manufacturing industry in Namibia, anduses this and other data to attempt an analysis of the possibility and desirability ofindustrialisation in a very small economy. The analysis is located in the context ofNamibia's long-standing integration with the economy of South Africa, its presentmembership of the Southern African Customs Union, and its membership ofdeveloping regional organisations. The constraints on industrialisation areidentified, and the paper concludes with an elaboration of the role that industryshould play in employment creation and general economic development.

Introduction

Namibia comprises a tiny economy in an isolated corner of a region that isbecoming ever more marginal to the world economy. Whatever general theories of

economic development and industrialisation may tell us about the optimal strategyfor other countries will have to be radically modified to take account of thismarginality. Because of the tiny size of the internal market, the possibility of arigorously protectionist, inward-looking policy being viable may be immediatelydiscounted. But on the other hand, would Namibia sink or swim if thrownunprotected into the world market? Some evidence on the likely consequences ofsuch a policy may be deduced from Namibia's own history in relation to SouthAfrica, and there may well be some lessons from this experience for South Africaitself in relation to the world market.

The purpose of this paper is to analyse the possibilities for industrialdevelopment in Namibia. After a general discussion of the consequences ofNamibia's economic integration with South Africa, the second part of the paper

* Colin Stoneman headed a team which prepared an indicative industrial plan for Namibia in 1991-2,and with Jan Isaksen of Unido helped the Ministry of Trade and Industry prepare an industrial policystatement which was accepted as government policy in July 1992. Steve Curry was a member of theteam, which also included Paul Goodison, B.P. Misra, Richard Moorsom and Chris Smith. Theopinions expressed in this paper are the authors', and do not necessarily reflect those of the governmentof Namibia nor of the sponsoring organisations.

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Problems of Industrial Development and Market Integration 41

provides an account of the resulting structure and characteristics of the tinymanufacturing industry sector. The third section analyses the constraints onindustrial development, including the regional trade regime, and the final sectionelaborates some objectives for industrial development in Namibia and the means ofachieving them.

Namibia has a choice in the 1990s: it can establish institutions to enable it toadopt a fully outward-oriented policy for manufacturing, or it can try to adapt sucha policy to encourage a domestic market-based development of manufacturing andthe small-scale sector. This choice will be little influenced by general prescriptionsrelating to outward- or inward-looking strategies, and much more by the specificlegacy the country has inherited.

The Economy Under South Africa

The first, and key observation, is that since 1920 Namibia has been in a freemarket with South Africa. It may therefore be considered as a case study throwingsome light on the effectiveness of such policies. The economic size of Namibia isso small in relation to South Africa that it is comparable to that of many othercountries in relation to the world economy. In fact its situation was much like thatof most erstwhile colonies in relation to their imperial masters. In both cases, itmay be objected, the 'free market' was distorted, by South African or imperialinterests. This is certainly true, but it is equally true of today's world market,which second and third world countries are being urged to enter, strippingthemselves bare of the protection still regarded as essential for parts of their ownmuch stronger economies by the first world.1 Most ex-colonies on independenceseized the chance of attempting to undo their colonial economic structures, whichalthough rarely created by free trade, had long been consolidated by it. Thus, withvarying degrees of commitment, they began attempts to industrialise, using thesame tools of state intervention, infant industry protection, and some stateinvestment, which had proved so successful in late developers in the first world,including France, Germany, Japan, and more recently the so-called newlyindustrialised countries (NICs). By no means all the post-colonial experimentswere such total failures as is often represented2, and for the South as a whole, theperiod 1950-1980 showed what was probably the most dramatic spurt in economicgrowth ever.3

1 We refer here to distortions in the very world prices which poor countries have to adopt internallyas part of the instruction to 'get the prices right'. These distortions are caused by the EC's CommonAgricultural Policy, agricultural support in the USA, and subsidised exports by both, the Multi-FibresAgreement (MFA), by tariff escalation with degree of processing, which prevents poor countriesdeveloping new comparative advantages, and finally by the cartelised nature of world trade in manycommodities, of which the CSO in diamonds and OPEC in oil are only the most familiar.

2 In Africa we can point to Botswana, Gabon and Mauritius, although they enjoyed specialadvantages not easily generalisable, but also to Congo, Cameroon, Senegal and Zimbabwe.

3 See Surendra J. Patel, 'In tribute to the Golden Age of the South's development', WorldDevelopment, 20, 5, pp. 767-777, 1992.

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42 Journal of Southern African Studies

What concerns us here, however, is that Namibia came to independence at a timewhen such experiments were effectively ruled out by the new world order.Although it had already experienced a thoroughgoing free market experience fromits integration with South Africa, and had inherited a price structure completelyunrelated to its own development needs, it has nevertheless joined most othercountries in committing itself to adopting a world market price structure(admittedly modified at present by membership of the Southern African CustomsUnion) that may be equally inappropriate for the needs of internal development.

The observed outcome in Namibia of integration through a free market with amore advanced economy, is a structure of extreme distortions that Zambia,Zimbabwe and other African countries presently attempting to integrate themselvesinto the world market, could well ponder. The relatively balanced structure of theZimbabwean economy might well be 'Namibianised' in a 'free' world market.

Despite a per caput income of over US$1,000, derived largely from near enclaveproduction of diamonds and uranium, Namibia has as severe poverty for themajority of its people as anywhere in Africa, and few means of bettering their lot.More specifically, manufacturing industry generates only about 5 per cent of GDP,one of the lowest anywhere — even agricultural Malawi with about a quarter ofNamibia's per caput GDP has 12 per cent originating in industry — and this is adirect consequence of the history of integration with South Africa. Market forcesprevented the growth of industry in so small a market (thereby ensuring that itstayed small) as a result of the competition imposed by larger, developed industriesin South Africa. The latter, having progressed through their 'learning curves', hadalready gained relative efficiency and economies of scale. In addition to this 'fair'competition, South African companies exerted monopoly control over theNamibian market, through dumping, over-pricing of intermediate inputs, andrestrictive purchasing policies. These latter abuses of monopoly power aretheoretically susceptible to correction, but infant-industry protection or similarinterventions would be needed to counteract the underlying pattern established bymarket forces.

The Structure of the Industrial Sector

The economy of Namibia is based on its natural resources, mineral, agriculturaland marine. What little activity there is in manufacturing industry has grown in anad hoc fashion, mainly in downstream resource-based activities, partly in responseto natural protection as, for example, in baking, but it remains disjointed andrandom, with earlier production in parts of food processing, clothing and metalworking having been destroyed by South African competition. Furthermore there isvery little informal sector activity, consequent on the suppression and over-regulation of this sector under former regimes.4

4 See David Simon, 'Urban poverty, informal sector activity and inter-sectoral linkages: evidencefrom Windhoek, Namibia', Development and Change, 15, 4 (1984) pp. 551-576.

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A picture of the industrial sector shortly after independence can be constructedfrom interviews conducted in 1991 in both the formal and informal sectors,supplemented by secondary data from earlier official surveys, mainly carried out in1989.

Out of 259 formal companies in nine manufacturing subsectors, the largestnumber are in food and drink processing and wood products and furniture (see Table1). However several companies are engaged in engineering and repair activities, andproducing associated metal products. The average number of employees percompany was 35, but this derived from companies of widely different scale, withonly 21 employing over 100 persons and a hundred companies employing less than10 persons.

Manufacturing production and employment is concentrated geographically inWindhoek and a few small towns, all of them far from the major populationconcentrations in the north of the country. Some industries such as slaughtering,bakery products, and furniture are distributed more widely, but only 23 companieswith 298 employees are in the communal areas (see Table 2), while half thecompanies and 60 per cent of employment is in the Windhoek area alone.

Table 1: Distribution of Enterprises by Subsector and Number of Employees

Subsector

Food, Drink, TobaccoTextiles, Clothing,

LeatherWood Products/ FurniturePaper/ printing,

publishingChemical ProductsNon- Metallic Mineral

ProductsMetal ProductsOther ProductsRepair ServicesTotal

Number ofenterprises

75

2142

1311

19332025

259

Number of enterpriseswith:

over 100employees

11

01

20

3400

21

10-100employees

46

1312

88

14205

12138

under 10employees

18

829

33

29

1513

100

Source: Department of Economic Affairs, Manufacturing Industry Survey, 1989.

Three subsectors account for three quarters of manufacturing employment, fooddrink and tobacco, non-metallic minerals and metal products. A moredetailed description of these subsectors illustrates the disjointed nature of the man-ufacturing sector. The first involves a variety of product and market circumstances.First there are subsectors such as grain milling and baking where local

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products satisfy a high proportion of local demand. Second, there are subsectorsconditioned by trade relations with South Africa, for example dairy productswhere cheese and butter production was undermined by dumping, fruit canningand bottling (now negligible), beer, wine and spirits in which expandinglager exports to South Africa were halted by a ban on supermarket sales. Third,there are products which are exported to South Africa and have some potential forexport elsewhere, for example chilled beef, which is benefiting from a Lome quotaof about 12,000 tons5. Finally, there are a large number of subsectors whoseproducts are dominated by imports, such as refined sugar for bagging, edible oilsfor margarine, cooking oils, and soft drinks made from concentrates. In some ofthese cases limited local inputs have been used, for example sunflower oil, andLonrho is engaged in trials for a sugar estate in eastern Caprivi.

Non-metallic mineral products such as bricks and concrete blocks aremade in several locations, some onsite. In 1991 a cement plant opened outsideOtjiwarongo with sufficient capacity to satisfy most of local demand and prospectsof producing a small surplus for export; however it is already in trouble from acombination of cut-throat competition by South African suppliers and an attack onits levels of pollution. The viability of much local production is dependent on thehigh bulk and low unit value of the output (there is for example local productionof paint). However there is no glass production, either of bottles or forconstruction. This is a subsector whose absence, like that of fruit canning, isunexpected, and probably derives from monopolistic practices by South Africanfirms. Production in such areas could often be profitably established givenappropriate policies.

The metal and metal products sector, comprising 33 companies with 1,130employees, produces a diverse range of products to suit particular local needs.Imported sheets and sections are used to make windows and doors, reinforcing rods,safes, tanks, specialised vehicle bodies and other simple products through cutting,welding and drilling processes. Some of these products satisfy up to 96 per cent oflocal demand and their production has survived against competition from SouthAfrica. Further products such as troughs and fencing are produced for the agriculturesector whilst half of the cans required in fish processing are produced in WalvisBay. There are small factories assembling a limited range of electrical equipmentsuch as switchgears, uninterruptible power supplies, and electronic timers, butthere is no manufacture of mechanical equipment, merely reconditioning and repair.In general the range of engineering skills is limited to a relatively simple level andis mostly workshop based; larger processes in the metal sectors such as rolling andmilling, large-scale foundries, and precision machining are absent. Nevertheless,several companies operate in a local market niche and provide valuable products andservices to manufacturing and other industrial branches against import competition.

5 The beef quota is in fact 10,500, 10,500, 13,000, 13,000, 13,000 tpa over Lom6 IV (1991-95).However, only 2 out of 22 abattoirs are at EC standards and further exports would require an up-gradingof processing facilities.

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Table 2: Distribution of Enterprises and Employees by Subsector and Area

Subsector

Food, beverages andtobaccoTextiles, clothingand leatherWood/woodproducts/furniturePaper/printing/publishingChemical productsNon-metal mineralproductsMetal productsOther manu-facturing industriesRepair ServicesTotal

Number of EnterprisesWind-hoek+

18

13

16

10

1011

2217

13130

Swakopmund

4

2

7

1

01

03

422

Oka-handja

3

0

2

0

12

40

012

Communal

areas*13

3

4

2

00

10

023

Others

37

3

13

0

05

60

872

Total

75

21

42

13

1119

3320

25259

Number of EmployeesWind-hoek*

2,271

208

471

392

275658

826104

1965,401

Swakopmund

225

84

69

11

044

027

38498

Oka-handja

354

0

17

0

54219

2120

0856

Communal

areas*224

24

21

15

00

140

0298

Others

1,613

73

91

36

0173

780

592,123

Total

4,687

389

669

454

3291,094

1,130131

2939,176

5"I-

3

fIITO

+ Windhoek and area, including Brakwater.* Industries recorded in Katima Mulilo, Khorixas, Okakarara, Opuwo, Rundu, Oshakati and Rehoboth.

Source: Department of Economic Affairs, Manufacturing Industry Survey, 1989.Dow

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In the absence of a complete industrial census or trade statistics it is impossibleto analyse the sources of supply and demand for industrial products fully. Howevera study of cross-border flows for 1988, together with a rudimentary input-outputtable, confirms the disjointed nature of the manufacturing sector in Namibia and itsdependence on imports.6 The main importation of industrial products by value wasin the vehicles, chemicals, clothing, food and beverage subsectors (Table3). Evidently some of these imports, especially of clothing, food and beverages,were competing with (actual or potential) local production. However, the localproducers are concentrated geographically, and do not enjoy the same supplynetwork throughout Namibia as do longer-established suppliers from South Africa.

Moreover, local producers are themselves import dependent. Only four out of 24identified subsectors spent more than 40 per cent of their revenues purchasingmaterial inputs produced domestically. These included the food, footwear, and woodproducts industries, all using local raw materials. All other subsectors spent muchless of their revenue on domestic supplies and were more reliant on importedsupplies. In consequence the food, footwear and wood products subsectorsgave rise to much higher output multiplier values than other sectors, that is, theirproduction gave rise to a much higher level of demand for inputs from withinNamibia itself.

The very poor integration between manufacturing sectors is confirmed byinspection of the interindustry purchases of manufacturing enterprises (that ispurchases of intermediate goods rather than raw materials). Out of 800 entries inthe input-output coefficient table for manufacturing subsectors only four wereabove 10 per cent, that is on only four occasions did purchases from othermanufacturers reach 10 per cent of revenues. Together with the evidence on importvalues and the lack of control over imports, this suggests an industrial sector ofisolated producers, most competing with imports, but themselves dependent onimports also.

Resource-based Activities

This outline of industry in Namibia would be incomplete without specific referenceto some resource-based and small-scale activities. Resource-based activities dependprincipally on livestock, fish and minerals. In livestock, beef is now chilled beforeexport to Europe as well as to South Africa, and speciality meats are produced forthe local, and increasingly the export, market. A minority of karakul pelts areprocessed to garments for export whilst woven karakul wools with a high designstandard are sold in the tourist market, and carpets are exported. However, each ofthese constitutes a high quality product for a limited market. Similarly, shoes andbags are produced from game skins although there is not much processing of gamemeats. Perhaps most importantly, the major tannery faces supply problems and hasto import whilst raw hides are also being exported. Altogether the livestock

6 Department of Economic Affairs, Report on Cross-Border Flows and the Introduction of BorderControl, May 1989.

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processing subsector is small in relation to raw material exports, and produces onlyfor specific, small markets.

Table 3: Estimated Volume and Value of Imports into Namibia in 1988, andDerivation of Gross Output and Output Multipliers

Commodity

FoodFood for animalsBeveragesTobacco/productsTextilesClothingFootwear/leatherWood/productsFurniturePaper/productsInd. chemicalsNon-ind.chemicalsRubber products/tyresPlastic productsGlass productsNon-metallicproductsBasic metalsMetal productsMachineryElectrical equip.Motor vehicles/sparesOther transportOther man.Other7

Imports:Volume000 tons127.8

44.149.2

1.53.43.2

22.49.4

12.431.862.5

6.1

5.814.5

341.0

32.420.815.59.3

20.1

10.5_

510.4

Imports:ValueR mn190.117.5

117.57.1

17.5191.363.327.127.916.1

131.9258.8

25.1

5.434.872.0

64.931.981.927.3

321.1

50.9

430.9

Localinputs

as%603025

.

15106040202015

-

20

15-

25

15205

15

1565

-

Importedinputs

of total253040

.

50402035253060

-

45

45

20

45605040

5015

Valueadded

%

154035-

35502025555025-

35

40-

55

.

40204545

3520-

OutputMulti-pliers

1.941.431.321.001.171.122.201.541.251.291.18-

1.25

1.161.001.30

1.001.191.221.081.20

1.161.80

Source: Derived from Report on Cross-Border Flows and the Introduction of Border Control,tables 3.3, 3.17, 8.1, 8.3.

7 No further breakdown due to legal restrictions; in 1988 this item would include army supplies.

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The species composition of fish in Namibia's exclusive zone has changed withoverfishing in the last forty years and a stock recovery programme is beingimplemented. Much of the fish processing takes place on board freezer ships or inthe countries of origin of the international fishing vessels. There is substantial on-shore fish processing capacity at Walvis Bay, but although all fish has now to belanded, only about a fifth is processed in Namibia. This capacity at presentsupplies mainly the South African market, but could be expanded for exportelsewhere as in the past.

The main mineral exports are of uranium oxide and diamonds. Apart from somesorting (but not cutting) of the latter, further processing is impractical. Otherwisethere has been little investment in mining for the last decade;8 the Tsumeb coppermine is about to be exhausted and a tin mine has closed. There are some possibleoptions for mineral based production; lead might find a local or regional market forlead-acid batteries, and possible local use for some zincs and copper are worthexploring. Salt is produced from sea-water on a large scale at Walvis Bay andSwakopmund, supplying much of the South African market. However, the mineralsector overall is particularly sensitive to changes in demand and enjoys fewpossibilities in the current world recession.

The Small-scale and Informal Sectors

Small-scale industries, whether formal or informal, are very underdeveloped inNamibia. Although a range of products and services are produced, the geographicspread is very uneven, and small-scale enterprises are concentrated in retailing, withlittle manufacturing or repair activity. Within the Namibian context it isappropriate to define small-scale production units as having less than 10 workers,an annual turnover of less than R50,000 (1991 prices), and a capital investment ofless than R 100,000; most units are owned and operated by one person alone.

They face a number of obstacles. First, historically, regulations were enactedwhich effectively reserved some types of production for the formal, white-ownedsector. Second, informal enterprises have to compete not just with suppliers fromSouth Africa but with the domestic formal sector too. Third, because the formalsector is geographically concentrated it fails to provide a market for small-scalesector suppliers in remote regions. But finally, and in addition to these limitations,small-scale production operates in a large, sparsely-populated country withunintegrated markets and costly transport, and these features probably represent themain obstacle to development of the small-scale sector.

There are possibly a total of 1000 production units in the industrial sector, ofwhich three-quarters are small scale, mostly artisan shops and handicraft producers.They are involved in a wide range of activities; food processing, butchery, baking,tailoring, carpet weaving, shoe making, metal working, repair, and so on. Anexploratory survey of 50 such enterprises was carried out in 1991, together with

8 A small gold mine opened in 1991 and there has been some extension of the diamond-mining area,but large areas of the country remain inadequately prospected.

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visits to farms, schools, medical and training centres, and an agriculturalcooperative, to assess possible linkages with small-scale production. This briefsurvey confirmed some of the known characteristics of small-scale production.Such units are individually owned; there is little linkage to the formal sector; thereis a dependence on very small local markets. In addition, the units are reliant onself-finance with little access to external funding. Within the present recessionaryclimate with declining rather than growing markets, lack of access to sources ofinvestment or working capital is a major limitation on small-scale activities.

Altogether the industrial sector in Namibia operates on a small scale, withoutprotection against imports, and grew up in the context of a regional economydominated by South African suppliers. It is no surprise that it is small andunintegrated, and that it should face many constraints on its expansion.

Constraints on Industrial Development in Namibia

The constraints on industrial development in Namibia range from the fragmentednature of industry through limitations of marketing, finance and management.Many constraints result from regional economic relations, particularly those withSouth Africa.

Fragmentation is itself a major constraint on industrial development; growth inone subsector does not stimulate significant growth in others, but merely raisesimport demand. Namibia is a large country with dispersed centres of economicactivity and a concentrated income distribution; any major industrial expansionwould be difficult and would not initially affect the fragmentation. The formalsectors which exist have their main links to South Africa, for supplies anddistribution arrangements. The main exception to the general lack of linkages isthe existence of some small engineering and metal products enterprises (referred toabove) linked to the food-processing and mining sectors. However even theseoperate on a limited scale and provide only a limited range of engineering skills.

In the context of large distances it might be expected that small enterprises —whether formal or informal — would grow up to meet local needs through localproduction. However, the relatively good infrastructure of distribution networksensures that cheap imports continue to dominate even remote markets. There islittle sub-contracting by the relatively large-scale formal sector to small-scaleenterprises that could help to sustain the latter. Moreover, all enterprises, large orsmall, are subject to the same competitive pressures in an unprotected economy.South African suppliers can raise prices to exploit their monopoly position, orsqueeze producers out of business to take over profitable opportunities.

Fragmented relations extend to the agro-processing sectors. Here marketingarrangements play the most significant role. Raw materials such as rough-hewnwood and raw hides often by-pass local processing and go directly for export onlong-term contracts that ensure that most value-added and profits accrue in SouthAfrica. There is always a potential conflict of interest between farmers andprocessors and here the balance favours the former, making local processing asecondary and uncertain activity.

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Marketing arrangements are a constraint on most industrial sectors, not just theprocessing sectors. In the absence of protective barriers, supplies of industrialproducts are monopolised by South African companies. South African companieshave hardly any producing subsidiaries operating in Namibia itself, preferring tosupply from South African factories. Entering and staying in the local market isdifficult for local companies shut out of the resulting wholesale and retailstructures. Only where freshness is essential, as in baking and butchery, or wherevolumes are large, as with soft drinks and beer, can local companies compete fairlysecurely.9

The export of industrial products has also been oriented to South Africa,particularly in the case of processed products such as meat. Because the SouthAfrican market is itself protected, Namibian producers are not used to competingon the wider world market, or have been until recently shut out of it. Moreover,marketing overseas is limited by the small scale of production and lack ofknowledge of opportunities. Uncertainties about the volume and quality ofproducts, as well as the difficulty of monitoring changes in demands overseas,makes it difficult to develop long term marketing development and productionprogrammes. Even in fish-processing where the scale is larger, the South Africanorientation has contributed to a very conservative mentality on the part ofentrepreneurs, who continue to expect to sell pilchards in round cans into marketsthat now expect higher quality fish in flat cans or plastic packs.

Namibia is still part of the 'Common [Rand] Monetary Area' and the SouthAfrican financial system. Financial policies are dictated by the needs of the SouthAfrican economy. As a consequence, there are difficulties of access to loans, whichfurthermore bear high rates of interest. Independent sources of investment funds inNamibia are only now becoming available through Lome and other cooperationprogrammes. Larger firms can finance their working capital requirements andcontinuing investments from retained earnings; however it is difficult andexpensive to finance major expansions.

The financial constraint is more severe for small and medium-sized companies.For many, raw material costs comprise up to two-thirds of operating costs; makingthe cost of working capital prohibitive even for well-established firms. At the sametime, lack of collateral and the high interest and administration costs of small loansprevents borrowing. Even where skills and materials are in adequate supply, theavailability and cost of finance are perhaps the main obstacle to the expansion ofsmall enterprises in the local market.

There are several functions to perform in running an industrial enterprise. Evenwhere production skills and knowledge are present, difficulties may arise fromlimited attention to other aspects. Most industrial enterprises in Namibia havegrowth up from small family based units. Many retain this form rather thanbecoming limited liability companies. In these circumstances there is littledivision of labour between management functions and little formal management

9 The qualification is necessary because South African Breweries have recently begun to make inroadsinto the market for beer.

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training. An expansion of the enterprise entails the need for non-family membersand thus dilution of control. There is considerable reluctance to take the risks ofdoing so. This often means that where attention must be focussed on theproduction process there is little time devoted to purchasing and marketing.

The risks of expansion are also financial. Business loans are often personalloans, secured against personal property, which magnifies the risks of expansionand constrains the size of firms. However, whereas management skills can beabsorbed and practised as the general level of education rises, the disincentives torisk-taking remain. A lack of confidence amongst small-scale entrepreneurs stifleschallenge to market structures.

Namibia's Regional Advantages and Disadvantages

Several references have been made above to the limitations imposed on industrialdevelopment in Namibia by regional economic structures. The operation of theSouthern African Customs Union (Sacu) has a major impact on the marketconditions under which Namibian firms produce for the domestic market; in somerespects the impact has been a negative one. Because of the dominance of SouthAfrica, Sacu trade policies are to all intents and purposes South African policies,determined in its interests alone. Thus the common external tariff raises the priceof imports into Sacu, partly to raise revenue which Namibia shares in, but partlyso as to protect firms in the region which make the same products. In fact thesefirms are overwhelmingly South African; Namibian firms in all sectors thereforesuffer from a double disadvantage in that they get no protection from South Africanfirms, but have to pay high tariffs on their extra-regional inputs (or above worldprices for South African inputs) so as to protect South African firms.10 The overalleffect has been of natural resource-based sectors exporting at world market prices,but buying inputs at considerably above world market price levels. The onlycompensating advantage is in the formula through which Namibia derives revenuefrom the Sacu pool, but with political change in South Africa it can be expectedthat the agreement will be renegotiated.

Beginning in 1982, South Africa has subsidised firms in nine economic regionsas part of the Regional Industrial Development Programme.11 The subsidiescovered labour, capital and rental costs, transport, electricity, relocation andworkers' housing. As the recent World Bank report12 showed, Namibian firmstherefore suffered not only from being further from markets in South Africa but hadto compete with these heavily subsidised firms in both the South African andNamibian markets. For a short period before independence, a small programmeoperated in Namibia, subsidising the labour and transport costs of some firms, forexample the Salt Company at Swakopmund, which was at an unfair disadvantagecompared with the neighbouring salt works in Walvis Bay. The main purpose of

10 In certain circumstances, Namibian firms can in theory be protected against South African ones,but these articles of the Sacu agreement have rarely been invoked.

11 Current proposals would replace incentives to the regions with disincentives to core areas.12 World Bank, Namibia: Towards Sustainable Growth with Equity, March 1991.

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the programme was to cancel or reduce the effects of the South African measures,and there are strong arguments in favour of reintroducing such a programme.

In April 1990 South Africa introduced a General Export Incentives Scheme forSouth African companies only. Although this was officially only for extra-Sacutrade it has in practice frequently been paid for exports into Sacu countries as well,so disadvantaging further those firms attempting to produce for the local market.Furthermore, in the case of a customs union such as Sacu claims to be, fairnessdictates that benefits should be extended to exporters in all the member countries;in principle the Namibian Government could subsidise exports and domesticproduction in the same way so as to 'level the playing field', but this would bevery expensive; the alternative of imposing duties on imports from South Africa torestore their prices to the market level, would clearly be contrary to the Sacuagreement.

As the World Bank report concludes, these three disadvantages have relegatedNamibian industry to its present minor role in the economy: 'Under theseconditions, the intriguing question is not why is the Namibian manufacturingsector so small, but why does it exist at all'. However, since independence andaccession to the Lome Convention, Namibia has gained one major set ofadvantages relative to South Africa in its special relationship with the EuropeanCommunity. This goes beyond the aid provided through the National IndicativeProgramme to concrete trade advantages, which include a lucrative quota for beefexports and non-reciprocal duty-free access of manufactured goods into theCommunity. Although post-apartheid South Africa might obtain similarconcessions, Namibia at present is the only coastal country in Southern Africa thathas a combination of duty-free regional and European Community access. It istherefore potentially a very attractive site for investment; in particular its Lomeaccess has already brought inquiries from Asian-based companies suffering fromrestricted access to Europe.

Objectives and Strategy for Industrial Development

A developed economy has a complex web of internal trade relationships — betweenregions, companies and individuals. Namibia, on the other hand, as has often beensaid, produces what it does not consume, and consumes what it does not produce.Most of its trade relationships are across its borders. Thus the largest and mostprofitable companies (like CDM, mining diamonds, and Rossing, mininguranium) produce almost exclusively for export, themselves consuming little ofNamibian origin except labour, water and electricity. Some of the most notablerecent investment prospects — including vehicle assembly plants and the Usakosoil refinery — would have been little better if they had gone ahead. Major parts ofthe economy thus create few jobs and hardly any wealth for most Namibians.Meanwhile the Namibian people themselves import most of the food they eat andmost of the clothes that they wear, thus creating jobs only for non-Namibians. Inshort, the economy exhibits few vertical linkages.

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The lack of integration applies not only vertically but also horizontally, asdifferent parts of the economy have more to do with the outside world than witheach other. The diamond mines are effectively not in the same economy asOvamboland, let alone Caprivi, and not just because of geographical distance, forthere are negligible resource or factor flows between them, much less than for theformer with Angola and the latter with South Africa. Similarly Rbssing's uraniumis effectively in a different economy from the fishing industry — although here forthe first time a small qualification may be in order, as some engineering firms inWalvis Bay do contract work at Rossing. But even the engineering industry inWindhoek has much less to do with the transport or mining industries than it couldhave.

The small size and low density of the population of course make all theseproblems worse. But if market size is seen as an absolute constraint on thedevelopment of many industries or linkages, a solution may never be found. Alow-wage economy has a smaller market than a high wage one, and if Namibialacks the market size of India, China or Nigeria, it also lacks their enormousproblems. Many small countries have become rich through exploiting the resourceof a highly educated population as well as natural resources; Norway does not havemany more people than Namibia, but has a gross domestic product comparablewith that of South Africa, and a per caput income about ten times as great.

To conclude the paper, we now discuss briefly some components of a viableindustrial strategy for Namibia, starting with some general observations, and thenlooking in turn at removing distortions, raising investment, improving marketingand finally 'moving north', that is beginning a process of shifting the economiccentre of gravity away from the area established as most convenient for colonialadministration to areas of greater economic potential.

General Principles

There are no easy solutions in addressing the very difficult problems of industrialdevelopment, especially in so sparsely populated a country as Namibia, and someapparently obvious solutions would probably not work. But the following generalpropositions seem to be appropriate:

1 the viability of profitable subsectors should not be threatened by 'milking'them for the benefit of other subsectors; the solution for rural poverty is notdiversion of profits from fishing or diamonds, but investment for thedevelopment of internal dynamism;

1 even less should external interests be allowed to continue 'milking' fishing ordiamonds, as in the past;

1 nor again should sectional internal interests monopolise the benefits fromnational assets;

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1 forced linkages with South Africa do not reflect 'natural' market forces andshould be dismantled;

1 the Windhoek area is over-developed in relation to its resources and location;for mainly strategic reasons artificial, uneconomic linkages have been created, tothe cost of the country as a whole;

1 conversely, the north is where the main concentrations of people anddevelopmentally relevant resources (energy, water, arable land, wood, minerals)exist. Development of the communal areas and in particular those in the north isthus not just a desirable regional social policy, but a policy that is in thenational interest: even Windhoek would eventually benefit from switching thebalance of investment to the north for a sustained period.

One of the aims of any investment plan should be to produce a more integratedeconomy so that the overall return from investments is raised by the increasingnumber of linkages generated. In particular, an important strategy would promotesub-contracting from larger, formal companies to smaller and informal sectorcompanies.

This is not to say that all projects must show that they will have significantlinkages. It would be absurd to fail to develop a diamond deposit solely because oflack of integration, if the financial return were high. Similarly, we may consideralso possible foreign investment like the Citroen assembly plant proposal atGobabis which would have been almost completely irrelevant so far as Namibia'sfuture industrialisation was concerned, because very few local inputs, and hardlyany local market would have been involved. The proposal arose because Citroensaw the possibility of exporting into South Africa (facilitated by Namibia's Sacumembership) whilst hoping that location in Namibia might bring exemption fromSouth Africa's stringent local content rules. But there would have been somebenefits to Namibia if only through the employment generated. So the promotionof integration is necessary if Namibia is to develop a balanced and useful industrialstructure, but it is not the only criterion to be used in assessing the desirability ofa new investment.

Removing Distortions

There are a number of areas which require action by government in a broadframework of interventions to remove market distortions. These include protection,legislation against unfair business practices, and the promotion of local value-added.

Protection would of course involve introducing a different market distortion, butonly for a previously delimited period, after which the new industries would haveto stand on their own, but on a 'more level playing field'. Infant industryprotection may be necessary to help establish industries that are lacking, partly

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because of past market distortions, sometimes because other industries are missing.The arguments for infant-industry protection are three-fold:

1 Theoretical: the 'infant-industry' exception to the general principle of thedesirability of free-trade (during a learning period) has been generally acceptedeven by the most orthodox trade economists;13

1 Empirical: the historical evidence shows that nearly all successfulindustrialisation experiences began with a period of protection, including suchrecent success stories as South Korea and Taiwan (which even now retainsignificant protection).14

1 Pragmatic: Namibia's low level of both industrial production and foreigninvestment are connected with the fact that South African companies couldsupply the Namibian market from home factories, unlike the situation they facedin the protected Zimbabwean market, where they had to set up factories insidethe trade barriers; protection thus attracts foreign investment.

The level of protection allowed by Sacu could be exploited where it is desired toestablish certain strategic industries. However, protection measures must be usedwith great caution because of the very small size of the local market. Examplesmight be in clothing (for basic needs and job creation), engineering (as being of alinkage creating subsector stimulating the development of other industries) andcement and other building materials. Any protection given should not be allowedto become institutionalised: a clear published timetable for its phasing out shouldbe notified to the firm or subsector at the start, with exceptions allowed only inexceptional circumstances.

Protection in itself need not lead to inefficient industries if it can be combinedwith other policies. A recent study of industrial protection in Zimbabwe afterindependence found that high levels of protection were consistent with trade-efficient production in most sectors, when combined with domestic price controlsthat forced industrial producers to raise their productivity.15 The main questions arewhether the same combination of policies would work in the context of a smallermarket, and whether the Namibian government could develop the expertise in theseareas of policy.

Legislation against unfair business practices is not only needed against foreignmonopolies, where it could help to create space for local enterprise, but alsoagainst the practices of some formal sector enterprises which seek to exploit their

13 See for example Meier, G.M. and Steel, W.F. (eds) Industrial Adjustment in Sub-Saharan Africa(Oxford University Press for the World Bank, 1989), pp. 16 and 252-7.

14 Westphal, Larry E., 1981, EmpiricalJustification for Infant Industry Protection, World Bank StaffWorking Paper, No. 445.

15 L. Ndlovu, The System of Protection and Industrial Development in Zimbabwe, Ph. D. thesis,Development and Project Planning Centre, University of Bradford, 1992; see also Colin Stoneman,'The World Bank and the IMF in Zimbabwe', in Bonnie Campbell and John Loxley, StructuralAdjustment in Africa (Macmillan, 1989), pp. 37-66.

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monopoly position vis-a-vis smaller local formal or informal sector enterprises.The aim should be to put an end to unfair business practices and level the fieldboth between national and South African companies and informal and formal sectorenterprises within Namibia.

Many local resources are exported unprocessed or with minimal processing; thusthe industries concerned earn less for Namibia than they might, and interact hardlyat all with the rest of the economy. Many examples have been given, butdiamonds, fish, hides and wood, would seem to be particularly glaring cases. Thebanning of the export of these materials in unprocessed form could be consideredon a case-by-case basis.

A quite different example of poor local resource use is to be found in the quiteadvanced equipment, for example CNC lathes and a fluting machine, that areoperated by a few engineering firms. These are often underutilised, and the ownerscould put out more work locally if incentives were given. A well-publiciseddatabase of local services could be established so that other firms do notautomatically go to South Africa for services and inputs that could be locallyprovided.

Raising Investment

Given the reluctance of existing entrepreneurs to risk expansion, additionalincentives are needed to raise investment. Although import-duty rebates arepossibly inconsistent with Sacu, this could be tested. Firms requiring to importmachinery may pay duties as high as 30 per cent. The purpose of these tariffs is toprotect and nurture South African firms, in other words the main competition forNamibian industry; it is not clear why Namibian companies should fund theircompetitors in this way. Such tariffs are serious disincentives to investment andmay be significant barriers to entry.

Namibian firms suffer competitively from the incentives paid to all SouthAfrican exporters, and the subsidies paid to some (bantustan, growth point)industries. Anti-dumping duties are commonly applied in such cases in Europe andNorth America, and equivalent payments to Namibian firms actually or potentiallysuffering could be made, although they would probably be of very low magnitude.They could be made as direct payments pro rata, or they could be in the form ofemployment or transport subsidies as in a former scheme. All these options couldbe explored within a policy framework which sought to push Sacu provisions tothe limit, and in a context in which the provisions of the agreement are likely tocome up for review in any case.

The Namibian government intends to set up an Industrial DevelopmentCorporation, but this may only be functioning effectively some time in the future.In the medium-run it is vital that some progress be made and that policy directionsare not neglected pending complex grand solutions. The market will produce onlypatchy results, whereas selective encouragement could produce more balanceddevelopment.

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State investment and the underwriting or joint financing of some key facilitieshas played a key role in the early stages of development in most countries thathave developed industry. Thus in both Zimbabwe and South Africa the statefinanced initial facilities in both the steel and cotton industries as well as ininfrastructure. This level of involvement is inappropriate in Namibia's muchsmaller market, but the principle might be applied to, for instance the introductionof a small foundry (or the expansion and redirection of the one at Tsumeb) helpingengineering companies and village blacksmiths, and a gin to help an emergingcotton industry. Moreover there are possibilities for regional joint ventures:engineering firms in Botswana, Zambia and Zimbabwe could be interested in jointventures with some larger local engineering firms. Such initiatives could be linkedto the need to provide greater local content. Some Zimbabwean agriculturalimplement firms already have joint ventures in other SADC16 countries in whichlater stages such as sharpening and painting are carried out in the partner country.

Use could be made of the experience of those local companies with importantskills by a scheme involving placements of trainee future managers of new firmsin them, or alternatively, use of their managers as consultants to help establishnew companies. This does not necessarily mean helping rivals, but could oftenmean helping to develop complementary companies, through increasingspecialisation to mutual benefit.

More generally, the development of a more closely articulated economy could bestimulated by making a range of government support measures dependent on thefostering of backward or forward linkages within the Namibian economy. Thiscould provide a transparent system for the application of various support measures,which would clearly be seen to be linked to wider government policy objectives. Inthis context, as others, a company database would be a vital resource. It couldcontain information on: the technology and skills deployed; the inputs needed; theoutput produced; and the local market share.

Improving Marketing

Government has at its disposal the means to kick-start industry into developmentat almost zero cost through its purchasing leverage. For instance, requirementscould be imposed on foreign suppliers — such as wholesalers, retailers or otherimporters — to raise the proportion of local goods (as opposed to solely SouthAfrican which is often the case at present) that they sell to the public, or else facethe loss of government contracts. This requirement could be phased in over a five-or ten-year period. A company with zero local content to its sales might be requiredto move one percentage point a year to 5 or 10 per cent; even this could produce amajor stimulus to local suppliers and sub-contractors.

Requirements could also be imposed on some suppliers to raise the local contentof goods that they sell to Government. Thus furniture supplies to Government

16 The Southern African Development Community, which before 1992 was known as the SouthernAfrican Development Coordination Conference (SADCC), was founded in 1980.

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might be required to involve a specified proportion of Namibian wood, rising overtime. Local content in other cases might be Namibian labour through last stage orassembly operations.

More directly, government contracts could operate as a matter of course under alocal preference scheme. The purpose of having such local preferences is tostimulate local manufacturing production of goods that are consumed locally.Whilst such a scheme has in fact existed for some time, some firms believe that ithas become effectively inoperative. There is therefore a need to systematise thelocal preference scheme and to apply it in a more transparent fashion. In somecases the level of preferences might be raised for an 'infant-industry' period.

Moving North

The development of the resources of the north of the country probably holds thekey to future national prosperity in the long run. This is notwithstanding the vitalimportance of the development of the fishing industry, or of adding value in meat,karakul and game exports; nor is it intended to suggest neglect of the south. In thefirst place, development of the north means getting policies with respect to smalland informal sector industries right (which is of great relevance to the south also),and ensuring their linkages with more developed parts of the economy.

Some of the possible measures suggested above for the formal sector might beadapted to help to expand informal sector industries also. Thus governmentcontracts with local furniture firms for the provision of school desks might requiresome local (communal area) value added by way of assembly or final working. Asmall proportion of such markets might also be reserved for small-scale (or CA)producers, possibly through a preference system, with tenders designed deliberatelyto favour small-scale local firms. An industrial version of agricultural supportservices might also be considered, as might labour subsidies.

The eventual development of sub-contracting links with the formal sectorhowever, will crucially depend on the success of integrated support programmes forthe informal sector, meeting training, capital, and management-skill needs, as andwhen they arise. Selective encouragement of investment in new industries andpromotion of joint ventures could similarly be focussed on the communal areas.

Conclusion

Namibia is not the poorest of developing countries. However, at independence itinherited a very small industrial sector, constrained by integration into the SouthAfrican economy. Moreover, it missed out on the sanctions-avoidingmanufacturing investments of the 1980s that took place in other southern Africancountries. Whereas both Botswana and Swaziland benefited from 'runaway' SouthAfrican assembly and last-stage manufacturing investments, and Zimbabweattracted investments by Heinz and several Japanese companies aimed at regionaland European exports, Namibia received almost no investment at all, even in

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mining. Continuing integration into regional (primarily South African) economicstructures does not favour the expansion of industry in Namibia.

Nevertheless, an expanded industrial sector has been a component of developmentin virtually every high income economy. Formal manufacturing industry may notitself provide a large number of jobs, and may not become the main means forincome earning for all the population, but it can play an important part inallowing other sectors to develop internally, without neglecting the opportunitiesfor export.

Discussion of industrial policy often begins from the perspective thatgovernment interventions to protect local industry generally lead to distortedmarkets, that in turn stunt the growth of industry. There is much less focus onwhat is more relevant in the Namibian case: that markets can also operate to stuntlocal industry without government intervention, and indeed without a government.The larger and more relevant focus is on the monopoly power of external firmsover production and sales. There is a persistent truth relating to industrialdevelopment, which is that integration of different economies in the same marketarrangements can operate entirely in favour of the stronger economy through itsability to raise supplies and suppress competition. Government action is thereforeneeded to modify the operation of the market.

One response to the issue of developing the industrial sector in Namibia could bethat you 'should not start from here'. This paper has provided a brief outline of theindustrial sector at independence and of the major constraints under which the sectoroperates. A few specific proposals have also been put forward on ways in whichindustry could be encouraged to play a more integrating role in an outward-lookingeconomy. They are based on two general perceptions: that a fully outward-lookingstrategy can seriously undermine industrial development; and that more than mostgovernments, the Namibian government has to take several coordinated actions toestablish both the framework for an industrial policy and the means to encourage amore integrated set of industrial investments.

Finally, it should be pointed out that even after majority rule in South Africa,Namibia's constrained opportunities for industrial development would persist. Anew government in South Africa will have to look mainly to the manufacturingsector to reduce unemployment among the black population, and it might thereforewant to renegotiate regional trade arrangements in a context in which theconsequences of South African policies would be harder for Namibia to contest.This prospect makes the need to establish a framework for industrial developmentin Namibia even more urgent.

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Documents

Problems of industrial development and market integration in Namibia