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 2

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 3

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 4

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 Averaged 4% Country qualified for HIPC debt relief External debt stock which reached 415% GDP in 1986 and averaged 215% GDP Fell to 24% in

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 6

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 7

Patterns of Growth 8

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% 9

Poverty 10

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 11

IMF Assessment IV Economic structure has changed but still strong dependence on mining During 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 12

Growth Pattens 13

IMF Assessment V Sources of growth During 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 Declined recently 14

Growth Decomposition 15

IMF Assessment VI Other patterns of interest Mining sector showed some positive productivity growth but it was reversed in 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. 16

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 17

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 18

Doing Business 19

Education and Health 20

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 21

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 22