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

2. 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

3. 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

4. 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

5. 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)

6. 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

7. 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

8. 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

9. 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

10. 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:

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

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

13. Infrastructure Connectivity services

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

15. 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?”