NS4301 Summer Term 2015

Zambia

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

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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 exports3

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

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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

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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

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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

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Patterns of Growth

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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%

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Poverty

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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

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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

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Growth Pattens

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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

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Growth Decomposition

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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.

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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

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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

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Doing Business

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Education and Health

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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

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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

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