Download The Economy of Zambia

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 exports
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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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