Infant industry protection: A policy tool to enhance Namibia’s industrialisation

During November 2011 the Ministry of Trade and Industry presented Namibia’s first draft Industrial Policy. It builds on the country’s industrial ambitions as contained in Vision 2030 and it will eventually also guide the Fourth National Development Plan (NDP IV). According to the draft, industrialisation will be rolled out across all the regions in the country with the aim to link urban and rural development.

This draft Industrial Policy should also be seen in a regional context. Namibia is a member of the Southern African Customs Union (Sacu), together with Botswana, Lesotho, South Africa and Swaziland. Given that South Africa is the dominant economy in the region, the Sacu 2002 Agreement contains a provision (Article 26) to protect infant industries in the smaller economies.Article 26.2 defines an infant industry as an industry which has been established in the area of a member state for not more than eight years. According to Article 26.3 the protection afforded to an infant industry shall be for a period of eight years. Hence, this policy tool is a temporary measure to allow an infant industry time to establish itself in the market and become viable without protection. In addition, this is also a valuable policy tool to assist with Namibia’s industrial ambitions as set out in the draft Industrial Policy.Although the infant industry protection (IIP) argument was originally designed for the industrialisation processes in the now developed countries, it has particular relevance today for newly established industries in developing countries like Namibia. The establishment of a new industry requires a substantial capital investment with subsequent market risks against foreign competition, especially during the initial years of production.By utilising IIP, such investments could be secured together with its derived benefits for the economy as a whole. These include inter alia direct and indirect employment, the transfer of knowledge and a fiscal injection through new direct and indirect taxes.The rational of the IIP argument is that while protection is afforded to a newly established industry during the start-up years, the costs will decrease over a period of time to a level where efficient production will be achieved. This lowering of costs can be attributed to two factors. The first factor is economies of scale. Taking into account the high fixed costs, the newly established industry need to reach a certain level of production and sales to enable a reduction in total unit costs to the level of foreign competition. This is particularly true for a small economy like Namibia.The second factor is the learning curve. It may be true that early production could be costly given the initial level of experience of employees. However, as the employees gain more experience over time, the production, as well as the efficiency of production, will increase, while the unit costs of production will decrease. This will ensure that the cumulative net benefits provided by the IIP will eventually exceed the cumulative costs of protection.The IIP argument could also be related to the theory of comparative advantage. In this regard policy tools like IIP are justified until such time that a potential comparative advantage industry has become an actual comparative advantage industry. Hence, the utilisation of IIP would ensure that the newly established industry will eventually be able to compete on its own.Secondly, the ultimate gains of IIP for the population in general would be large enough to compensate for the costs incurred during the period of effective protection.Given the above, the NMA supports the Government’s draft Industrial Policy. In this regard the NMA also supports the utilisation of the available policy tools such as IIP to ensure the realisation and implementation of Namibia’s industrialisation process.* Wallie Roux is a member of the NMA’s management committee charged with international affairs.Read the second part of his column next Friday in Bottomline.