Returns to Investments as Potential Constraints Applied Inclusive Growth Analytics Course March 23, 2009 Susanna Lundstrom, PRMED

International sources Business Environment Analysis Returns to economic activity Social Returns Private Appropriability Government failures Macro risks Micro risks Market failures Cost of finance International sources of finance Local sources Domestic savings Financial sector intermediation

Social Returns to Investments “The underlying potential returns to investments, given a non-distorted economy” Geography minerals, land-locked, energy, tourism potential, agriculture potential, etc Infrastructure roads, electricity, mobile phones, water, rail roads, air transport, etc Human Capital Jesus Crespo Cuaresma’s presentation

Natural Resources and Geography Zambia is well endowed with natural resources (water, forest, arable land, minerals) Simple international benchmarking Endowment per capita Cross-country regression evidence: tourist flows are much lower than expected, given Zambia’s natural endowments estimates suggest that if the road infrastructure and the business climate were as in South Africa, Zambia’s tourist flows would be 51 percent higher than existing levels

Natural Resources and Geography - Agriculture Both extensive and intensive expansion possible in Zambia Only 40% of arable land used Productivity studies show both substantial employment and income potential from irrigation Evidence of government distortions in agriculture High indirect costs to agriculture, (direct taxes and indirect costs through macroeconomic and other distortions)

Natural Resources and Geography Mountains? (ex Tajikistan) Potential neighboring effects? Landlocked geographic position? (ex Zambia) Pros: Serves as an import tax protecting domestic import-competing industries; borders 8 countries and plays an active role in regional trade Cons: reaching global markets and realizing economies of scale is a problem Affects ability to export bulky low–value products (e.g. farm products) Requires well-developed air transport and an emphasis on high value, low weight and volume goods

Natural Resources and Geography Access to air transport is low for Zambia’s level of per capita income But primary roads are fairly OK Important to look at roads in a disaggregated way Primary-Secondary Rural-Urban

Infrastructure - Firm-level cost structure benchmarking gives a hint Zambian firms have the second-highest share of “indirect” costs: energy, transport, telecom, water, insurance, marketing, travel, independent professionals and accounting

Infrastructure - Roads in Zambia High domestic transport costs due to poor domestic road condition and high fuel cost for one ton per one kilometer was US$0.07 in Zambia, which was higher than in countries like South Africa (US$0.02), Malawi (US$0.07), etc Affect the ability of rural residents to access markets 50% of the rural households were more than 9 (25) kilometers from the nearest food (fertilizers and seeds) market Binding constraint? Net returns 10 percent lower for remote households Look at examples where they have overcome road constraints ex cotton growers in Zambia

Infrastructure - Roads, continued Road congestion: A sign of high demand and limited supply Dynamics (and benchmarking) of public investment in infrastructure Direct measure of quality:

Infrastructure - ICA or BEEPs indicate constraints for firms Survey data shows that 56% of firms experienced power outages in Tajikistan Source: Tajikistan BEEPS, 2008

Infrastructure Connectivity services Market monopolies or state-owned enterprises common Mobile rate per minute – international benchmarking:

Infrastructure Connectivity services

Infrastructure - Differences rural-urban The number of households with access to facilities within five kilometers

Infrastructure Note… The reasons for poor access is not always because of limited supply but because of industry structures and interests Zambia: electricity costs are not high compared to countries within and outside the region, but prices are held too low for expansion outside mining It is not only about the average availability or cost – it is also about the reliability Number of power outages, harassment/road blocks during transport, etc… Always ask “But is it binding?”