Lesotho CEM : Pro-Poor Growth and Employment Strategy

1. Lesotho CEM : Pro-Poor Growth and Employment Strategy Vandana Chandra, PRMEP Brown Bag Seminar Series September 11, 2003

2. Outline of presentation • Background – CEM, PRSP • Geography and history • Why a growth – labor markets focus ? • Poverty and employment profile • Econometric analysis of the labor market • Analysis of real sectors – methodology for growth analysis – SAM-based model • Two types of output: (1) identifying a growth and job creation strategy to reduce poverty in Lesotho • (2) Growth projections as input for RMSM type macroeconomic framework

3. Background – CEM, PRSP and what else is available on Lesotho • Last CEM -17 years ago; no other AAA or informal ESW • Govt. request for a Bank input for the PRSP • Available reports and data: old PA based on 1986/87 data; 1994/95 HH survey; Labor Force 2000; usual national accounts; agricultural census 2001; garment industry census. • HIV/AIDS study; CAE

4. Geography and history matters in Lesotho • Small country. 2.1 mln. location within South Africa (RSA) – porous borders • Poverty of natural resources – LHWP • History: the role of RSA gold mines –remittance as safety nets - historical ties with RSA • SADC and SACU membership - implications • Basotho share the vision of an independent Lesotho, free of dependence on RSA –merger with RSA is not an option, although extreme import dependence – goods and services remains

5. Why a growth – labor markets focus ? • Per capita income: $456 in the 1980s; rose to $600 in the 1990s; fallen to $453 today • SACU: all macro polices except fiscal are set by RSA which has maintained a prudent and conducive macro climate and stability since 1994 • Structural problems remain and constrain growth • Underemployment rampant in rural areas; official unemployment rates of over 25-35 percent • 60% Basotho below poverty line; 35% ultra poor; bulk in rural areas although not an agricultural country; high inequality

6. Growth trends (real, per annum)

7. 3 main structural changes • Late 1980s: start of the Lesotho Highlands Water Project – RSA-owned, capital import intensive, enclave-activity; peak in mid-1990s; investment: 22% of GNP; today less than 5% • Arrival of the FDI-driven, export-oriented garment industry; 1980s:exports/GNP was 5%; today the share is 40% • Decline in miners remittances: over 45% of GNP in 1980s; today less than 18% - loss of livelihoods, rise in domestic unemployment

8. Structural change: before and after

9. Nexus between employment and growth to evaluate effect on poverty • Analyzed 2000 Labor Force Survey: • 14% employed in RSA; external source • remaining 590,000 employed in Lesotho of which 69% are in subsistence activity. Focus on domestic sources of employment in CEM • Used national accounts, BOP, trade, labor force, HH survey data etc. to analyze sources of growth, linkages etc.. • Joint recommendations

12. Estimated probability Location Gender Age Education Technical training 74 percent Urban Male 20-25 8 Yes 64 percent Urban Female 20-25 9 Yes 55 percent Urban Male 20-25 8 No 44 percent Urban Female 20-25 9 No 54 percent Rural Male 20-25 5 Yes 41 percent Rural Female 20-25 7 Yes 34 percent Rural Male 20-25 5 No 24 percent Rural Female 20-25 7 No Estimated probability of employment of young men and women

13. Returns to post-primary education in Lesotho, 2000 Median income by education 1600 1400 1200 1000 800 600 400 200 0 18 0 12 16 2 4 6 8 10 14 No of years of education

14. Methodology used to analyze sources of growth and employment and options for GoL • Foreign investment climate assessment from Garments Study • Activity analyses to learn about best practice and linkages in sub-sectors – meat, poultry, dairy, fruits, vegetables, sandstone, hair salons, restaurants, trading, construction, IT and business services • Social Accounting Matrix (SAM) integrating national accounts, labor force data and HH survey at a very disaggregated level as there is no sub-sector of critical mass in Lesotho • Model has 50 activities/commodities/services; 8 labor skills categories; 4 geographic regions where high and low income households reside • Multiplier model with fixed coefficients and prices – suitable for economy with plenty of slack and where prices are set by RSA • Useful for inter-sectoral linkages between goods/services markets and labor/capital markets

15. Applications of the model • Growth accounting: can the model explain how the structural shocks – decline in miners remittances, increase in LHWP investment and rise in garments exports affected GDP growth, employment and poverty? • Policy simulations to examine impact of piecemeal reform –on growth, employment and household incomes as well as human and physical pre-requisites • Design of elements of a broad based pro-poor growth strategy for Lesotho – financial costs, physical and human capital pre-requisites • Growth and public investment estimates served as input into medium term projections • LIMITATIONS: fixed prices; supply response only if plenty of slack;

16. Growth Accounting using the SAM model – high LHWP

17. Growth Accounting using the SAM model – Post LHWP

18. SAM Model Simulations: trade-off between growth, job creation and poverty reduction in Lesotho – few options

19. SAM Model Simulations:Pre-requisites for policy options

20. SAM Model Simulations:Pre-requisites for policy options

21. Recommendations for a broad-based pro-poor growth strategy • Land reform, private property rights legislation • Infrastructure investment • Training, human capital development-higher education • Capacity building in government & governance • Basotho-private sector development –level playing field – facilitate access to credit etc. • Safety nets for unemployable/HIV/AIDS