Import substitution makes a comeback

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Every time a foreign dignitary visits Cipla Quality Chemical Industries Limited (CiplaQCIL), they plant a tree.

Visiting presidents show up so frequently that the grassy verge outside its factory in Kampala will soon become a forest. The pharmaceuticals manufacturer is a feather in the cap of the Ugandan government: a sign that Africa need not rely on foreign imports to meet basic needs.

The COVID-19 pandemic has reinforced the notion that African countries should produce locally, rather than importing from abroad. Announcing a lockdown in March, Uganda’s President Yoweri Museveni expressed his hope that the crisis would help to build manufacturing capacity, rather than “turning our market into a dumping point for foreign goods”.

“Everything you have been importing, except for petroleum products, now make it here,” he exhorted. 

Cipla, an Indian pharmaceutical company which holds a 51 percent stake in CiplaQCIL, used to import the drugs it sold in Uganda. In 2005 it entered into a partnership with Quality Chemicals Industries, its Ugandan distributor, and moved parts of the manufacturing process to Kampala. The active ingredients still come from India and China but the tablets are made and quality tested in Uganda, explains Nevin Bradford, CiplaQCIL’s chief executive.

It sells drugs for HIV, malaria and hepatitis B to the Ugandan government, donor agencies and 19 African countries.

This kind of import substitution creates jobs, transfers skills and saves foreign exchange, as well as stirring patriotic pride. Bradford notes another advantage as covid disrupts transport: security of supply.

“If anything, what covid has done from our perspective is crystallise the minds of healthcare providers about security of supply,” says Bradford. “It’s only when they face the disruptions of logistics, of imports, of air freight, sea freight and all of that, that they really appreciate the benefit of having security of supply from an African-based manufacturer.”

That helps Uganda and Africa more widely, he says: “At the start of the covid pandemic Botswana was facing a stockout of ARVs because it couldn’t source them from its usual sources of supply in India. So we were able to step in and secure a contract worth over US$6,5m to deliver 1m treatments of ARVs. And from a standing start we were able to do that in 10 weeks.”

 

Return to the Past?

In the 18th century, US founding father Alexander Hamilton urged governments to erect tariff barriers to protect infant industries. In the 1950s, Latin American economists argued that import substitution would help developing countries break the grip of economic dependency.

Many African countries adopted this approach after independence, with some initial success. Between 1965 and 1970 manufacturing output grew annually by eight percent in Ghana, and 10 percent in Tanzania, rates which have rarely been matched since.

But the boom didn’t last.

African countries became more dependent on imports, in part because they still needed to buy intermediate and capital goods. Industrial enterprises were inefficient and badly run after being shielded from international competition. In the 1980s, as Africa lurched into a debt crisis, the IMF and World Bank pushed governments towards exports, privatisation and FDI.

In recent years import substitution has made a quiet comeback. Chinese growth and Trumpian protectionism are eroding the free-trade principles of the “Washington Consensus”, and slow industrialisation in Africa is reviving interest in alternative policies. 

A degree of import substitution is happening anyway, stimulated by population growth and rising demand.

Surveys of African industrial firms by the International Growth Centre, a research network at the London School of Economics, find that many started out as import-export businesses before venturing into domestic manufacturing. Half of the 50 leading industrial firms in Ethiopia in 2010 began as traders.

A similar pattern holds for foreign companies in Africa. Chinese manufacturers in Africa make 93 percent of their revenues from local or regional sales, according to a 2017 McKinsey survey.

 

Uneven Potential

Import substitution is usually practised on a national scale, but the growth of regional markets is creating a pan-African equivalent. Regional economic communities are deepening, and a continental free trade area is on the horizon.

In Africa’s Business Revolution, a 2018 book, McKinsey consultants forecast that “three-quarters of the growth opportunity in manufacturing lies in meeting intra-African demand and substituting imports”.

Carlos Lopes of the University of Cape Town says the potential is uneven.

“I think the strategy for Africa’s industrialisation will be centred on import substitution mostly on the agro-processing area, but not for other areas. Sectors such as light manufacturing may be more oriented towards world exports.”

In some countries import substitution never really went away. In Nigeria, a large domestic market creates economies of scale for local industry. Its “backward integration policy” helped Aliko Dangote build a domestic cement business – a trick he is hoping to repeat in sectors from fertilisers to oil refining. At the same time, clumsy import restrictions have pushed up prices for consumers and encouraged smuggling.

Ugandan policy has taken a more circuitous route.

A “Ten Point Programme” developed by Museveni’s 1980s rebel army argued that import substitution would stop the “endless haemorrhage” of national resources. But after winning power in 1986, he shifted to free trade and reduced state intervention.

“At that time the IMF, the World Bank and the US Treasury were promoting the Washington Consensus and this was a new government, it was broke,” says Ramathan Ggoobi, an economist at Makerere University Business School. “So they right away abandoned the Ten Point Programme. But over the years they have been gradually trying to get back to where their initial plan was.”

In 2014 Uganda introduced a “Buy Uganda, Build Uganda” policy, which seeks to promote consumption of Ugandan products through branding, public procurement preference schemes and supporting small businesses to meet supply-chain requirements. Museveni has commissioned new factories and industrial parks, which typically receive tax holidays. In 2018, he opened a factory run by Goodwill, a Chinese-owned ceramics manufacturer, which today claims to meet 70 percent of Ugandan demand for ceramic tiles.

 

Border Closures

The COVID-19 pandemic has focused minds.

“Suddenly every country closes its border and you are in your own house,” says Emmanuel Mutahunga, Uganda’s commissioner for external trade. “You either provide for yourself or die.” The government has increased import duties on agricultural products and on some locally manufactured goods.

“The import substitution of now is to develop the capacity to compete… We are not talking of banning imports, but rather we are looking at how we use that import substitution drive to make our own products more competitive domestically, and then in the regional market and in international markets.”

That is an acknowledgment that import substitution and export promotion are not mutually exclusive. It also reflects the ambivalence in Uganda’s approach. Museveni is yet to sign the National Local Content Bill, passed by parliament in May to promote the role of local companies in supplying the oil industry. He reportedly considered parts of the bill unworkable.  

“They seem to be overstretching the existing capabilities in the country, wanting to do everything from assembling buses to building all sorts of industries,” says Ggoobi. 

Risks range from the careless use of tariffs, which could push up the cost of industrial inputs, to the danger that government insiders use subsidies to support their private businesses, he says. 

The usual challenges of doing business remain.

Three years ago CiplaQCIL agreed to supply pharmaceuticals to the Zambian government. But the cash-strapped Zambians stopped paying, sending the company into the red and its share price plummeting.

If more businesses are to make things in Africa then it is consistent policy, not patriotic rhetoric, that they need. - African Business

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