NS4301 Summer Term 2015 Zambia

1. NS4301 Summer Term 2015Zambia

2. Overview • Zambia’s per capita income at independence in 1964 was three times higher than South Korea • By 2008 South Korea’s per capita income was seventeen times higher • Between 1945 and 1974 Zambia was one of the most successful global growth stories • Between 1875 and 1991 it was one of the worst • Erosion of wealth attributed to failed social experiment of the ruling United National Independence Party (UNIP). • Beginning with nationalization drive in 1968 followed by a single party declaration of 1972 Zambia witnessed a steady decline of productive assets and institutions

3. History I • By 1975 just about everything had been taken over by the Party • Copper mines were nationalized and went into decay • Production fell from a peek of 720,000 metric tons in 1973 to a low of 226,000 by 2000 • Over the next two decades it is estimated that over US$ 12 billion in capital. left the country – major contraction in the economy • By 1991 when multiparty elections were restored and UNIP ousted, Zambia's economy was at lowest point • External debt was • in excess of 200% of the country’s GDP • Over three times its annual exports

4. History II • Real per-capita incomes in 1991 were • About a third of 1975 levels and • Over 60% of the population lived below the poverty line • New government (1991) implemented painful, but far reaching structural reforms to eliminate economic distortions that included • Elimination of maize subsidies • Establishment of a revenue authority • Downsizing of the pubic service and • Liberalization of trade and exchange rate restrictions • In 1996 the government began the process of privatizing copper mines • By 2001 clear signs of a copper revival

5. History III • Along with the copper revival there was also an effort to improve economic governance including: • Measures to strengthen public financial management • Conduct of monetary policy • Tax reforms started in the 1990s began to boost revenues • Annual inflation which had reached 188% in 1993 was brought down to19% by 2001 • Real economic growth also improved • Had increased at an average annual rate of 0.72% in 1975-90 • Averaged 4% 1991-2010 • Country qualified for HIPC debt relief • External debt stock which reached 415% GDP in 1986 and averaged 215% GDP 1990-2000 • Fell to 24% in 2006

6. Assessment • With economic stability restored country has attempted to diversify economy away from copper dependence • Close to half the land is arable but only 15% under cultivation • Much smaller amount irrigated • Studies show country could be a major agricultural exporter • Country has plan, Vision 2030 to be a middle income country by 2030 • Private sector which has been neglected must play a larger role

7. IMF Assessment I • IMF, “Toward More Inclusive Growth in Zambia,” June 2015 • In last decade Zambia sustained high growth in line with fast-growing countries in sub-Saharan Africa • Supported by • market liberalizing reforms in the 1990s and • strong copper prices since 2004 • GDP growth has averaged abut 7 percent since 2003 – above average of about 5.5% for SSA • Strong growth lead to sustained increases in GDP per capita • More than tripled between 2000 and 2013 • But still below the peak level of $2,000 reached in the 1970s

8. Patterns of Growth

9. IMF Assessment II • Problem – Strong growth has not been sufficiently inclusive to benefit most Zambians • Overall growth effect in reducing poverty in Zambia, similar to that found in other developing countries • For each percentage point increase of growth • Zambia’s extreme poverty rate declined by 1.1% and • Overall poverty rate declined by about 0.7% • Inline with the SSA average • However Urban-Rural divide is significant • While the urban poverty rate has fallen to about 30% in 2010 • Rural areas where 2/3 population live – remains above 70% • Much higher than SSA average of 48%

10. Poverty

11. IMF Assessment III • Also a sharp urban rural gap in consumption • In urban areas consumption growth has been positive for all households and even higher among poor ones. • Impact has been regressive in rural areas where consumption of poorer households has declined • Urban rural disparity exists in a variety of social indicators. • What explains lack of Inclusive growth in Zambia? • IMF looks at • Growth and productivity patterns and • Growth constraints in infrastructure and business environment

12. IMF Assessment IV • Economic structure has changed but still strong dependence on mining • During 2000-13 economic structure showed increasing diversity • Share of primary sector declined from 30% to 20% • Decline was driven by agriculture • Share of mining rose from about 4 percent to 20% GDP • Tertiary sector significant increase • 50% in 2000 to 60% in 2013 • Growth continues to show high correlation with copper indicating strong linkages between mining and other sectors

13. Growth Pattens

14. IMF Assessment V Sources of growth • During 2000-10 capital and labor accounted for 27% and 24% of growth – in line with low income countries • However human capital contribution of 7% lower than LIC average of 42% • Overall productivity growth strong and accounted for 42% of growth • Recent productivity data by sector show low growth, particularly in sectors important for jobs and structural transformation • Agriculture employs 60-70% of labor force • While productivity growth largely positive 2009-12 • Declined recently

15. Growth Decomposition

16. IMF Assessment VI • Other patterns of interest • Mining sector showed some positive productivity growth but it was reversed in 2011-12 • In secondary sector productivity growth an upward trend in recent years although rate still negative • Job rich tertiary sector has had a small but continued decline in productivity.

17. IMF Assessment VII Constraints on More Inclusive Growth • IMF World Bank assessments find Zambia has growth bottlenecks from • Poor Infrastructure services, • Low Quality of human capital and • Weak business environment • In addition, • Fast growth sectors (mining and construction) have not created sufficient jobs • More labor intensive and agriculture and service sector require strong increases in productivity

18. IMF Assessment VIII • Among business environment indicators, one bottleneck stands out – access to finance. • About 70% Zambians have no access to formal or informal credit • Best perfuming peers range is 20-50% • Cost of finance also a problem • Firms adversely affected by the high yield offered by government securities • Government put lending cap on rates, but only caused credit rationing • Human capital • Although spending on education and health has increased significantly from 2001 Zambia still lags behind peer countries in years completed • Also poor availability of some specific skills needed by business

19. Doing Business

20. Education and Health

21. IMF Assessment IX • Problems with minimum wage • Zambia’s average minimum wage private sector about 110% per capita GDP and • For the public sector it is about 350% • The minimum wage in neighboring countries ranges form 20 to 220% • The government’s attempt to push private firms to apply the public sector minimum wage could be very detrimental to job creation • Promoting labor intensive employment through better quality education and a better business environment more effective in raising employment levels and wealth creation

22. IMF Assessment X • Country has made significant progress but Infrastructure bottlenecks remain a constraint • Main problem electricity supply and transport • Electrification is abut 23% nationally, but only 3% in rural areas • Road and rail infrastructure deficiencies have been limiting Zambia’s trade with neighboring countries • Domestic transport costs found higher than some regional peers – South Africa, Malawi and Ethiopia • Government needs to free up money for transport by adopting better prioritization and higher efficiency