Download What Are the Constraints to Inclusive Growth in Zambia?

What Are the Constraints to
Inclusive Growth in Zambia?
Elena Ianchovichina and Susanna Lundström
Employment and Shared Growth Workshop, Oxford
March 16, 2008
Business Environment
Analysis
Returns to economic
activity
Social Returns
Private
Appropriability
Government failures
Macro risks
Cost of finance
International sources
of finance
Market failures
Micro risks
Local sources
of finance
Domestic savings
Financial sector
intermediation
Economic
Growth
Income increases through
productive employment
Self-employed
Poverty Reduction
Wage-employed
Business Environment
Analysis
Viewed from the perspective of the poor as productive actors…
Employability
Analysis
Three Main Parts

The overall dynamics and what it tells us about
the potential in different sectors



Growth-Poverty Pattern, Sector Dynamics and
Productivity Dynamics
Identifying the productive activities and resources
of the poor
Going through the extended tree with the
objective of increasing in a sustainable way the
income of the poor

Given the characteristics and future opportunities of
the poor identified in step one and two.
Increased and less volatile growth rates
20
500
450
15
350
5
300
%
10
250
0
200
-5
150
LCU thousands
400
100
-10
50
GDP per capita growth (annual %)
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
0
1962
-15
GDP growth (annual %)
GDP per capita (constant LCU)
Introduction
5
7000
140
1.20
700.0
6000
120
1.00
600.0
5000
500.0
4000
400.0
3000
300.0
2000
200.0
1000
100.0
Number of exports
800.0
100
0.80
80
0.60
60
0.40
40
20
0.20
0
0.00
1980
0.0
Production (mt'000) LHS
International price (constant 1990 USD mt) RHS
2005
2000
1995
1990
1985
1980
1975
1970
1965
0
1985
1990
1995
2000
2004
No. of products exported (> 10,000 US$)
Herfindahl Index
Five largest (share of merchandise exports)
Index/shares
Development driven by discrete events
or potentially sustainable growth?
Loans to the private sector
1,600,000
Agriculture, forestry,Fishing
and hunting
Mining and quarying
1,400,000
Manufacturing
1,200,000
1,000,000
Electricity, gas, water and
energy
Construction
800,000
Wholesale and retail trade
Restaurants and hotels
600,000
Transport, storage and
communications
Financial services
400,000
Community, social and
personal services
Real estate
200,000
Jun-07
Dec-06
Jun-06
Dec-05
Jun-05
Dec-04
Jun-04
Dec-03
Jun-03
Dec-02
Jun-02
Dec-01
Jun-01
Dec-00
Jun-00
Dec-99
Jun-99
Dec-98
0
Other sectors
100
310
90
290
80
270
70
250
60
230
50
210
40
190
30
170
20
150
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
National Headcount (LHS)
National Rural (LHS)
National Urban (LHS)
Poverty headcount at 1US$ a day
GDP Per Capita (RHS)
GDP Per capita (1994 Kwacha)
Poverty Head Count (%)
Rural poverty reduction not responsive
to growth
Inverse relation between productivity
levels/growth and employment levels
Paths out of poverty has mainly been through new employment opportunities in
low-cost urban areas, or higher returns in other urban areas
Productivity growth has been on the rise except in agriculture where also
employment opportunities has stagnated


Value added per worker in Zambia
3000
LCU in thousands
2500
23%
2000
Agriculture
1500
Industry
1000
Services
7%
500
70%
0
2000
2001
2002
Total
2003
Agriculture
Industry
2004
2005
2006
Services
Source: Authors’ estimates based on data from Government of Zambia and World Bank.
What are the sources of income for the
rural poor in Zambia?
Most rural poor are smallholder subsistence farmers
Table 1: Mean Shares of Household Income by Source, by Income Quintile, Rural Areas
All
Food crop sales
Nonfood crop sales
Non-farm business
Livestock and other ag. Income
Salary
Remittances
Pension
Nonagricultural rent
Other income
Consumption of own production
6
2
10
2
6
6
0
0
11
55
Quintile of National Distribution
Poorest
2
3
4
Richest
20%
20%
7
6
6
6
5
1
2
3
2
2
11
10
10
13
11
2
2
3
2
3
3
5
6
7
11
7
6
6
7
5
0
0
0
0
0
0
0
0
0
0
13
12
12
11
9
57
55
54
55
52
Source: World Bank (2007a)
What are the sources of income for the
urban poor in Zambia?
Most urban poor are employed in informal businesses
and rely on multiple activities as a source of income
Table 3. Mean Shares of Household Income by Source, by Quintile, Urban Areas
All
Non-farm business
Salary
Remittances
Other income
Consumption of own production
Source: 2002-03 LCMS
24
50
6
15
5
100
Quintile of National Distribution
Poorest 20%
2
3
4
Richest 20%
25
38
8
20
9
100
27
40
6
19
7
100
27
46
5
16
7
100
26
50
6
14
4
100
19
60
5
13
3
100
Any reasons to focus on agriculture?


Evidence that there is potential for productivity improvement in
agriculture
Even a sizable increase in employment in urban industries will result in
relatively few urban jobs
Figure 1: Distribution of employed by industrial sector in the rural and urban areas (2004)
2500000
2000000
1500000
Rural
Urban
1000000
500000
0
Agric.
Mining
Manuf.
Elect.
Constr.
Trade
Hotels
Source: CSO (forthcoming)
Transp. Finance Commun.
Implication of the booming mining sector


The capital intensive nature implies that few
new jobs are created
Adverse REER effects on the competitiveness
and job opportunities of the tradable sectors
Look for constraint to inclusive growth
through:



Self as well as wage employment
Agriculture as well as non-agriculture
activities
Up-coming data on employment and
additional analysis may help to narrow down
further
Economic
Growth
Income increases through
productive employment
Self-employed
Poverty Reduction
Wage-employed
Business Environment
Analysis
Employability
Analysis:
Education, Health
Viewed from the perspective of the poor as productive actors…
Is education a major constraint for the poor
as individuals?

Major difference in
mean years of
education between
the rich and poor
households in urban
areas, and limited
access to higher
education in rural
areas
Percentage of households with access to education
facilities within five kilometers
100
90
80
70
60
50
40
30
20
10
0
Rural
Urban
Middle Basic School
(1-7)
Secondary School
Table 1: Mean years of schooling of household head in 2002/03
Rural
Urban
All
5.3
9.3
Poorest 20%
4.4
6.6
Source: World Bank (2007a)
Richest 20%
6.2
11.1
Is health a major constraint for the poor?

HIV/AIDS costs almost 1 percent in GDP
growth per year


Prevalence rates are high: 17% of working age
population in 2005 compared to the SSA average
of 6%.
High prevalence rates combined with poor health
care provision and other diseases undermine



Labor stock and ability to provide labor;
Productivity of the work force;
Incentives for investment;
Economic
Growth
Income increases through
productive employment
Self-employed
Poverty Reduction
Wage-employed
Business Environment
Analysis
Employability
Analysis:
Education, Health
Viewed from the perspective of the poor as productive actors…
Business Environment
Analysis
Returns to economic
activity
Social Returns
Private
Appropriability
Government failures
Macro risks
Cost of finance
International sources
of finance
Market failures
Micro risks
Local sources
of finance
Domestic savings
Financial sector
intermediation
Is the cost of capital a binding constraint to
firms’ investment and growth?
Figure 1: Real cost of capital (average)
100.0
90.0
80.0
Percent
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
1995
1996
1997
1998
Zambia
1999
2000
Mongolia
Source: Authors’ own calculations using World Bank data.
2001
2002
South Africa
2003
Uganda
2004
2005
But, cost and access of capital
differentials are sizable

Access and cost of capital varies with the size
of the firm




In 2003, nearly 50 percent of larger firms had a
loan, while only 19 percent of small firms had a
loan
The cost of capital differential between large and
small firms was more than 10 percentage points
Similar differentials existed between the cost of
capital of exporters and non-exporters, domestic
and foreign companies
Micro firms face even steeper constraints
What are the reasons for the poor access to and
high cost of finance for small and micro firms?

Poor financial intermediation rather than low
domestic savings or bad international finance



Domestic savings as a share of GDP climbed up from 6%
in 1990s to 18.1% in 2006, a share higher than the SSA
average
FDI and aid have been higher than the average for SSA
and LICs both in 1990s and 2000s
However, there are signs of improvements: the
percentage of people identifying the cost of finance
as the main reason for their poverty status halved in
the period 2002-06
Business Environment
Analysis
Returns to economic
activity
Social Returns
Private
Appropriability
Government failures
Macro risks
Cost of finance
International sources
of finance
Market failures
Micro risks
Local sources
of finance
Domestic savings
Financial sector
intermediation
Do low social returns constrain income
growth?


Zambia is well endowed with natural resources
Landlocked geographic position:


Pros: Serves as an import tax protecting domestic importcompeting 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
Access to air transport is low for
Zambia’s level of per capita income
Zambia
GDP per capita (logs)
Fitted values
95% CI
Are infrastructure and basic services a
binding constraint to income growth?

High domestic transport costs due to poor domestic
road condition and high fuel:



affect the ability of rural residents to access markets;
The reasons for poor access is not always because of
limited supply (e.g. electricity), but because of
industry structures and interests
Poor quality and expensive basic services undermine
the competitiveness of firms and slow down job
creation
Cost-structure: firm-level averages
Source: Eifert, Gelb, and Ramachandran (2005)
Connectivity services
Mobile rates per minute
$0.04
Mauritius
$0.10
Zimbabwe
$0.14
Mozambique
$0.21
Namibia
Swaziland
$0.25
Tanzania
$0.25
$0.27
South Africa
$0.29
Malawi
$0.32
Botswana
$0.44
Zambia
$0.00
$0.05
$0.10
$0.15
$0.20
Source: Mattoo and Payton (2007)
$0.25
$0.30
$0.35
$0.40
$0.45
Business Environment
Analysis
Returns to economic
activity
Social Returns
Infrastructure services
Binding constraint to
growth
Private
Appropriability
Government failures
Macro risks
Cost of finance
International sources
of finance
Market failures
Micro risks
Local sources
of finance
Domestic savings
Financial sector
intermediation
Is the macroeconomic environment a binding constraint
to shared growth?
150
REER index (1997=100)
140
5,000
130
120
4,000
110
100
3,000
90
2,000
80
70
1,000
60
50
1997
1998
1999
2000
2001
2002
2003
2004
2005
0
2006
Nominal Kwacha per dollar
.
6,000
.
Exchange rate developments
Business Environment
Analysis
Returns to economic
activity
Social Returns
Infrastructure services
Binding constraint to
growth
Private
Appropriability
Government failures
Macro risks
REER appreciation
Binding constraint to
growth
Cost of finance
International sources
of finance
Market failures
Micro risks
Local sources
of finance
Domestic savings
Financial sector
intermediation
Are property rights over land a major
constraint to income growth?


Customary land arrangements with limited transfer possibilities
are dominant, with only 6-15% of land under statutory tenure
The land system is not perceived as a binding constraint to shared
growth





Land is abundant – only 40% of arable land is used
Most smallholders who demand more land get land from their chiefs (only
4% of respondents mentioned lack of land as a reason for poverty)
Despite small plot sizes, a typical household does not have capability to
cultivate more land
The system creates risks to future returns on investments
Lack of serviced land with access to infrastructure is a perceived binding
constraint to operations implying not land, but rural infrastructure is a
bottleneck
Is regulatory uncertainty and government
interventions an obstacle to shared growth?

Regulatory uncertainty is the fourth most binding
constraint to firms’ operations


Most of firm owners (70 percent) think that officials’
interpretation of regulations is inconsistent and
unpredictable
Problem is especially acute in agriculture

Fertilizer subsidy program



Last minute contracts push up the cost of the input
Program not well targeted opens opportunities for rent seeking
Program is expensive (accounts for 50% of the budget earmarked
for agriculture, compared to only 3% for irrigation and other rural
infrastructure)
Is governance a constraint?
Business Environment
Analysis
Returns to economic
activity
Social Returns
Infrastructure services
Binding constraint to
growth
Cost of finance
Private
Appropriability
Government failures
International sources
of finance
Market failures
Micro risks
Macro risks
Regulatory uncertainty
REER appreciation
Government effectiveness
Binding constraint to
Binding constraint to
growth
growth
Local sources
of finance
Domestic savings
Financial sector
intermediation
Are market failures binding constraints
for income growth?

Firms need services requiring simultaneous, large
scale investments in:



basic infrastructure and connectivity services which
ensure access to inputs and foreign markets;
marketing, state-of-the-art technology, and product quality
information services
Might be a development trap:


No incentives for private investor before a certain level of
economic activity
Especially severe in sparsely populated countries
Rural-urban differentials in
connectivity service provision


Poor access and high cost of basic services are major constraints to growth
Rural areas are at a disadvantage relative to urban areas
Number of households with access to facilities within 5 km
120
100
80
Rural
60
Urban
40
20
0
Food
Market
Input
Market
Post Office
Public
Transport
Public
Phone
Internet
Cafe
Source: CSO (forthcoming)
Farm level productivity is negatively correlated with weak service performance
 Examples where there were positive coordination externalities (e.g. outgrower schemes)

Business Environment
Analysis
Returns to economic
activity
Social Returns
Infrastructure services
Binding constraint to
growth
Cost of finance
Private
Appropriability
Government failures
International sources
of finance
Market failures
Coordination failures
Binding constraint to
growth
Micro risks
Macro risks
Regulatory uncertainty
REER appreciation
Government effectiveness
Binding constraint to
Binding constraint to
growth
growth
Local sources
of finance
Domestic savings
Financial sector
intermediation
Bindings constraints to shared growth
in Zambia





Lack of positive coordination externalities (ruralurban connectivity)
Poor government effectiveness
Regulatory uncertainty and government
interventions (stop doing harm before doing good,
especially severe in agriculture)
Real exchange rate appreciation (international
connectivity)
Access to post-primary education and health for the
poor
end
Appendix:
Incidence of poverty by stratum (%)
100
90
80
70
1996
60
1998
50
2004
40
2006
30
20
10
0
Rural Agr
Small
Rural Agr
M edium
Rural Agr
Large
Rural Non- Urban Low
Agr
Cost
Urban
M edium
Cost
Urban High
Cost
Appendix:
Number of people employed by stratum
2500000
2000000
1996
1500000
1998
2004
1000000
2006
500000
0
Rural
Agr
Small
Rural
Rural
Agr
Agr
Medium Large
Rural
NonAgr
Urban Urban Urban
Low
Medium High
Cost
Cost
Cost