BEYOND ECONOMIC STABILIZATION IN ZAMBIA UNDER THE NEW DEAL ADMINISTRATION

BEYOND STABILIZATION: THE CHALLENGE OF SUSTAINED MANAGEMENT OF GROWTH AND POVERTY REDUCTION FOR ZAMBIA UNDER THE NEW DEAL MMD ADMINISTRATION.

Dr Katele Kalumba, MP

Chairman, Finance and Economic Affairs Sub-Committee of NEC, MMD.

Monday, January 03, 2005

Introduction

This paper addresses itself to specific economic policy issues in Zambia’s macroeconomic performance relevant to current efforts to review government economic policy. It is written in the context of the preliminary review of the Medium Term Expenditure Framework (MTEF) Paper and budget 2005 presented to sector Ministries. The review was necessitated by the concerns of the Parliamentary Liaison Committee which mandated the Finance and Economic Affairs Sub-Committee (FEA) of NEC to examine both the MTEF and Budget 2005.

In the limited exercise mandated by the Parliamentary Liaison Committee, FEA incorporated some of the work of the sister sub-committee of Commerce and Industry as presented by its Chairman, Mr. Sebastian Kopulande. Consultations were held by FEA members together with Chairman for Commerce and Industry (CI) with Ministry of Finance officials. These included the Minister and his senior staff from ZRA, Budget Office and Secretary to the Treasury. A more technical discussion was further held with the Secretary to the Treasury. And later, a meeting with the Minister of Works and Supply with some of his officers resulted in some major amendments and prioritization to capital projects proposals were undertaken for re-submission to the Treasury at the behest of the Minister of Finance and National Planning. Another policy meeting was held with the Minister of Finance and together with his Secretary to the Treasury.

A preliminary report was submitted to His Excellency President Levy Patrick Mwanawasa, SC during the process of initial consultation. During further consultation by the Chairman of Finance and Economic Affairs with the Minister of Finance and National Planning on the outcomes of the initial work, the Minister suggested the need to continue the consultations by the FEA with other sector Ministries. He stressed in particular the need to clarify policy priorities. This request was passed on to the National Secretary to help seek further amplification of mandate from the Party and Republican President. Given the busy schedules of government Ministers, time constraints in terms of the budget process, the practicalities of a broad-based consultation appeared remote for now.

Nevertheless, limited consultations and study was undertaken by the Chairman of FEA. He undertook discussions with technical staff of CSO led by the Director. Further, he reviewed Ministerial responses to oral questions in the Parliamentary Hansards as well as various policy documents including the Letters of Intent to the IMF and Letters of Development Credit to the World Bank. And, voluntary submissions from the special interest groups including the Zambia Association of Manufacturers and Small Scale Industries Association of Zambia were received and studied by the Chairman. Moreover, as participant, he studied the documentations prepared in support of the Ministry of Commerce and Industry Workshop on the Blair Commission for Africa and by the small technical group designated to finalize that Report. The Living Conditions Monitoring Survey of CSO and the National Governance Baseline Survey Report were also critically studied in addition to DevInfo database of CSO. Therefore, while incorporating the policy observations in the initial work of the joint efforts of the FEA and the Commerce and Industry Sub-Committees, the following report represents an expanded working policy issues paper by the Chairman of FEA for further use by the Sub-Committee and other organs of our Party. It deals with the policy concerns and areas of possible redirection of our thinking about the economy. It does not resubmit the programmatic issues that were presented to the Ministers concerned with Finance and Works and Supply.

THE STRUCTURE OF THE REPORT

1          MMD macroeconomic policy performance: Why Leadership Matters

            2.         Economic Policy Advocacy: Where are we today?

            3          Stabilization without Prosperity?

            4.         The Crisis of Job Creation: A Dearth of Ideas

            5          Questions about Public Sector Investment

            6.         Incentives and Private Sector Investments

            7.         The Poverty of The Minimum Wage

            8          Where do we stand on the MTEF: The FEA and CI Position

1. MMD MACROECONOMIC POLICY PERFORMANCE: LEADERSHIP MATTERS!

MMD macroeconomic policies have been in place since 1993. Budget 1991 was not prepared nor implemented by MMD. And budget 1992 while implemented by MMD was not an MMD budget. It was ready after the November 1991 elections. Therefore in practical terms, the first real MMD budget was 1993. The policies underlying that budget reflected the MMD manifesto and the challenges of reform that it had committed itself to. Those policies were fine-tuned in 1996. And now the New Deal MMD Administration has begun the necessary process of review of policies in the context of a new Manifesto.

How effective have MMD macroeconomic policies of structural adjustment been in stabilizing the disequilibrium in the economy and creating opportunities for growth? In this paper, we argue that taken as a whole, these policies have begun to bear fruit. Macroeconomic stabilization has become a reality even if sometimes challenged objective.  Further, we posit the argument that much of the stabilization can be explained by one major factor. Even under great external and internal shocks, effective political management of economic policy, both fiscal and monetary coupled with practical support to the real economy, has resulted in increased growth in real Gross Domestic Product. When policy leadership has faltered, remarkable declines have been noticeable.

Leadership at Finance matters. The bold policy decisions that Policy makers at Finance begun to take resulting in the highest growth rate in GDP achieved in 1996 were marred by the weak macroeconomic management that was evidenced in the later part of 1997 and 1998 when the economy nearly collapsed again after a spurt of recovery. This evidence is further supported by the performance of budget year 2002 that witnessed a decline even after three consistent years of upward growth in the economy since 1999. Fortunately the forces for growth have become adequately entrenched since budget 2001 such that the slippage of 2002 was quickly corrected by effective management in 2003 and 2004. The challenge now remains whether, policy makers at Finance, can be bold enough not only to sustain the growth but to drastically take structural decisions that are needed to increase the rate of economic growth required to mitigate in favour of achieving the Millenium Development Goals (MDGs)?

It must be admitted then, that the great impetus given by the New Deal MMD Administration to the effective management since budget 2003 through adherence to the principles of good economic policy governance especially by highlighting the need to reduce rent-seeking in government operations has further consolidated the momentum of recovery in the economy. When coupled with good rains and high export metal prices, the situation continues to be promising for 2005. And yet, the worrisome question is: Why do popular perceptions of increased poverty continue?

2.         ECONOMIC POLICY ADVOCACY: WHERE ARE WE TODAY COMPARED TO YESTERDAY:

MMD legacy at explaining its economic policy performance has been less than impressive. This is a problem not only of our form of political practice but also our discomfort with statistics. Politics is statistics made visible. And when we are asked where are we today, and numbers are churned out in criticism of our performance: we mumble and lose a sense of context. Because we lose a sense of the time dimension: today in relation to yesterday, our arguments are weak. This is a failure of political practice as it is of technical capability.

First, let us attend to some critical methodological issues. Today is as difficult to define as yesterday in the context of a political calendar. Politics defines time. As MMD, a party, we have a 13 year legacy to account for just as we have 26 years of UNIP performance to unravel. If we accept the simple division between the period before MMD came into power and the thirteen year period of UNIP rule preceding the political transformation of the 1990s, we have generally two acceptable comparative periods which can stand objective scientific and political scrutiny by any political analyst. Annual trends of a short term nature have the difficulty of accounting for lag effects whether positive or negative. This is where we are facing difficulties today in advocacy for reasons of internal political problems.

While worthy of political examination, we should be weary of the inherent limits of inadequate analysis of periodicity. Macro-economic policies are non-linear in their performance and are subject to bifurcation effects. At times, a situation may look chaotic but within it new forces of either progressive evolution or growth on one hand or total collapse on the other, may be brewing. Therefore, as in the case of health and disease, only long term time series studies form an adequate framework for rational economic conclusions. And yet, we know that political calendars do not always fit into the imperatives of economic periodicity and therefore we must be willing to make cautious pronouncements on the merits or demerits of short-term, and sometimes, annual performances.

Another point of methodological caution relates to the substantive meaning of figures we look at and their interpretation. Facts and figures do not always speak for themselves. We must strive to satisfy ourselves as to when they were collected, how, and for what purpose. Equally, the so-called indicators for much of development monitoring do not always measure what their users claim they measure. Apart from issues of the reliability: that is dependability, consistency, stability, accuracy or predictability of a method of measurement, there are questions of the validity of measures. Reliability is the accuracy or precision of a measurement instrument. The Bureau of Standards often goes around business houses checking weight scales for example in order to check their reliability. After so many times of use, the weight scales’ springs may weaken and give wrong measures. Sometimes owners may tamper with the scale at the disadvantage of the customer. This is called “doctoring” the measure. Validity issues answer a different question beyond accuracy: Are we measuring what we think we are measuring? Is our survey questionnaire, for example really measuring poverty? What does real GDP really measure?  In fact educationists would ask, what does a standard IQ test measure?  To these questions there are no definite answers except conceptual analyses of what different models propose.

a)      The Case of Measuring HIV Prevalence: Is it up or down or just slippery?

The critical aspect of validity issues relate to content validity, that is, the representative-ness or sampling adequacy of the content-- the substance, the matter, the issue, of a measuring instrument. Let us illustrate this problem from a practical policy stand point with implications for broader economic policy implications. This is the case of HIV prevalence rates. Until 2002, Zambia relied on sentinel surveillance (blood samples randomly taken for testing) from expectant mothers who present themselves at health centres to determine the national prevalence rate of HIV infection. The assumption being that expectant mothers represent a general norm of people having normal sexual activity in the quest of natural population reproduction and therefore, they may give us a generally adequate picture of sexuality and HIV infection.

 But while plausible, if the dependent variable which must or must not be found is HIV, and HIV is definitely known to be sexually transmitted, those who become pregnant are by their definition a population unlikely to practice safe sex such as use of condoms! There are in many ways a self-selecting group with the likelihood of engaging in sexual acts and neither abstaining nor using condoms. For purposes of statistical probability, we are likely to find more infections in this “normal population” than may be the case in a general sample. Further, we need to answer the question: how representative is the population of expectant mothers who attend antenatal services to the general population of the universe of all expectant mothers in the country? We know from other surveys like the Demographic and Health Survey that a large percentage of expectant mothers do not attend ante-natal care and this may in part explain the high maternal mortality rates in the country among other reasons. The point is, it is questionable to use mothers who voluntarily present themselves at Clinics to represent all expectant mothers. They may come from a population sample with very unique characteristics.

[For purposes of a technical simplification of this argument, the issue is that of finding the Mean Square Error of a Sample Survey like the Living Conditions Survey of the CSO, the equation is a amplified Kish Model]

Only a systematically stratified sample may correct this methodological problem by considering for example, expectant mothers as a sub-set of all sexually active women. If we did that the interesting question may then be whether expectant mothers who by definition do not use physical prophylactic devices like condoms (they may however practice, as a couple the intervention of sticking to one partner) are more likely to be exposed to HIV infection than other sexually active women who do not fall pregnant? However, even this interesting question does not give us currency to extrapolate rates of infection from sexually active women to the national population because we have no idea of the incidence and types of sexual conduct in the general population. Homosexually transmitted infections would be completely missed if the infection status of women alone was studied.

A cross-sectional study therefore, is necessary to give us indications of national prevalence. And as the 2002-2003 CSO study shows, when this was done, the relatively high prevalence rates reported among pregnant women ranging between 20-26% did not reflect the general population. The national prevalence rate of 16% which some research minded policy scientists had always suspected was vindicated. This may need further replication to become a solid basis for policy action.

Next question: What does this mean? Have HIV rates been reduced between 2002-2003?  From these findings by CSO, the answer is definitely a big NO! The methodology has changed and the two figures are not comparable. There are studies among adolescents that were conducted in 1996-1997 (Flykeness and Msiska) that suggested real trends towards reduction among adolescents in the 16-19 age group. Yet it was not clear whether this was as a result of increased condom use, abstinence or limited opportunities for casual sex. It was equally difficult to conclude whether health promotion messages, religious fundamentalism, or family/cultural changes were influencing observed trends. Facts and figures do not speak for themselves.  Poor methodology and in particular, over reliance on official statistics that are routinely reported by public service agencies can dramatically distort national statistics like the 99.99 per cent election results of the communist days! What is the political language that would communicate these facts: yes, we are making some progress among adolescents, but are also improving the way we monitor HIV in the general population more accurately than we did before ( without saying our past figures were wrong and we have now corrected them?)

b)      How Poor are the Poor: The CSO-Sachika Apples and Oranges Issue.

Another example we want to high-light is that of poverty statistics. First, let us say this. Poverty chains the human spirit and subjects its victims to a struggle against their entrapment in a survival below basic want.  For large number of our people who live on less than one dollar a day, it encircles them into a frustrating culture of either rage, numbness or simply contingent frustrations whereby real understanding of their predicament becomes the purview of the privileged or enlightened few, whether in or outside government. The poverty of not knowing the full story of ones suffering is more painful perhaps than even the physical expression of economic poverty. Explaining the genesis and persistence of Zambian poverty is/must be part of our economic and political agenda in order to inspire our people into new thinking and not simply who to blame.

In the 1990s and at the dawn of the new millennium of 2000, a whole industry of poverty experts has emerged. With the governing elite as consumers, the poverty industry has grown alongside the trans-national corporations, whose own form of existence give meaning to the very face of poverty today.  Within the ideological perimeters of the debates on poverty, it is often lost that poverty is a phenomenon that evolves overtime, responding to largely non-linear effects of public policy. It is therefore, structural in its causality and manifestation. Unless this simple fact is appreciated, poverty debates cannot fully capture the meaning of suffering for the many who have known nothing else but a life of progressive emasculation, children who live in the deserts of despair.

The need to inform the public accurately is a political rather than a strictly economic issue. Furthermore, the situation has not been helped by problems of the quality of data collected and disseminated by various stakeholders in their particular definition of public interest issues such as campaigns for debt cancellation or increased wage demands. Inconsistencies, including politically motivated ones, in government use of data for public policy statements has added to the problems as much as the difficulties in resolving methodological problems in the systematic collection of official statistics by the Central Statistics Office and the Bank of Zambia. Multi-lateral organizations with different mandates have also added to the apparent problem of monitoring the actual effects of macroeconomic stabilization on the general population.  

The FDD senior leader Sketchley Sacika was reported by the Post newspaper as having attacked the Central Statistical Office for what he considers their “doctoring” poverty statistics in their 2002-2003 Living Conditions Monitoring Survey Report. That is a very serious credibility question for our national data centre. Let us look at what is behind the criticism. Sacika understandably doubts whether it is possible to reduce poverty by 6% percentage points within five years from 73% officially reported in the Living Conditions and Monitoring Survey of 1998 to 67% reported in the 2002-2003 Survey. The answer is “Yes” and “No”, which means we can only speculate. If at all it were possible to report increases in poverty of similar margins as were reported in surveys conducted before 2002-2003, then it may well be possible to reduce it by the same margin or even more if those variables or things that were causing poverty to increase were fully addressed! This is just a logical and not an empirical answer. This logical answer sounds matter of fact but it has not been tested and therefore is not useable for purposes of objective analysis.

The CSO-Sacika debate is derived from a misreading of the data. What where poverty figures collected during surveys before 2002-2003 measuring, and is this the same poverty measured in 2002-2003? Well, in politics, poverty is poverty, period! But then that is not the same with apparently scientific surveys which measure poverty. The CSO will definitely explain or may have already done so that there is a significant difference between the methods used to study “poverty” in previous surveys as compared with the 2002-2003 survey. Previous surveys, studied the poverty of the “lean” quarter of the year which is always the last quarter of the year when crops are in the ground, fish bans have been slapped on fishing areas, companies have down-sized their labour force, particularly casual labour as they go on industrial breaks etc. The last survey, the 2002-2003 studied the whole year. This means when all the lean and high quarters are combined to find the mean, it is possible as it was revealed  in the latest survey that national poverty levels may not be as high as previously reported.

The Sacika attack on CSO is often referred to as the apples and oranges debate. We cannot compare the results of “lean” quarter surveys to the aggregated mean of the annual survey! If the FDD leader wants to take on CSO, he must look closely at the report and isolate the result of the last quarter which shows poverty at 71% in the 2002-2003, that is 2 percentage points below what was reported in 1998! Yes, it appears there has been a reduction. On closer examination, is that really correct? May be, but a student of research would discover that the methodological differences between 2002-2003 and previous studies were not just in terms of periods covered but further, in the contents of the questions asked and therefore the data captured. The reliability and validity of instruments problem comes into play here. Of significance to the “lean” period studies we can observe the fact that while previous studies focused on expenditure patterns of households in studying economic activity and incomes poverty, the 2002-2003 sought to quantify the value of own production and not just the workings of markets. This is likely to account for a significant change in the poverty values reported within the “lean” quarters across the studies. If we  are asking a man in Chienge how much money he spent on buying goods and services in order to determine his incomes status without establishing how self-sufficient in terms of own production he is in the first place, you may get very different pictures of poverty. Facts and figures do not speak for themselves! The point we want to end with here is that methodological issues matter much in the politics of the mathematics of poverty. This says nothing about individual subjective perception of poverty. The point we referred to in our opening remarks on this debate on poverty.

3.         STABILIZATION WITHOUT PROSPERITY? THE BIGGER ISSUES IN ZAMBIA’S ECONOMIC STORY

“We now occupy the position of a colony with Japan: we send them raw materials and they send us finished products…. That’s a very clever way of increasing Japanese prosperity at the expense of the United States” (US Congressman Gingell as quoted by Henderson, 1986:p21)

The growth rate of an entire economy is not an easy thing to monkey around with. Too many undigested ideas result into a massive structural constipation for the many small men and women who irk out a living out of honest labour. We need to exercise ourselves seriously to the question: why our country’s economy has for 40 years been static, nay regressive notwithstanding periodic internal and external shocks and opportunities? Why so many tantalizing hopes of economic growth and dramatic long periods of bust and despair? The historical explanations are many but the solutions identified to address “causes” never appear to deliver. And here we are today. There are troubling anxieties and prudence is called for again and requires a closer look at what lies behind the aggregates of optimistic growth figures coming out of the Treasury.

Key questions in this respect are: What is the conceptual basis of the growth strategy today? What is the actual magnitude of growth that must be aimed at and to what extent is the data, upon which growth claims and strategies are based, consistent and reliable? What are the sources of growth? How broad-based and sustainable is the growth process? And what has been the impact of the growth process on employment, income distribution and poverty? What accounts for the generally less that impressive or rather statistically insignificant change in new job creation for the entire period of post-independence? How can the situation be changed?

Economic policy making over the last thirteen years has been mired in controversy. MMD Policymakers at the Ministries of Finance and at Commerce and Industry have claimed that achieving macroeconomic stability is the essential pre-requisite for sustained growth and poverty reduction. Critics, largely Civil Society organizations like the Jesuit Centre for Theological Reflection and the labor movement, have disagreed. The disagreement has not been over the necessity of stability, but over the sequencing of stabilization and growth paths particularly over structural measures of privatization, the cost at which stabilization objectives are achieved, and the distribution of the costs of reform and adjustment. This criticism is valid and must create opportunities for alliances with Civil Society in dealing with multilateral issues such as debt.

As MMD, our economic stance has been that it is prudent to rapidly move towards growth objectives, so that an increase in employment and reduction in poverty can be achieved. The exact linkages in the mechanism that facilitate both high economic growth rates and poverty reduction have not been clearly articulated either by the Party or our MMD government administrations. We have simply taken this relationship for granted.

Since 1993, State Budgets as well as statements by leading policymakers have tended to convey the impression that the harsh stabilization policies have been successful in creating conditions for growth and that the economy is now poised for "take-off". The process from hereon is incremental. Budget 2004 has been a classic example of this argument. Significant improvements are cited in GDP growth rate, per capita income, remittances, and the prospects of achieving HIPC completion point (which has raised optimism over the current account balance). Increased incentives to the manufacturing sector, the high yield of non-traditional exports and improved copper and cobalt prices on the international market, and above estimate revenue generation largely from non-tax revenue sources in addition to aggregate macroeconomic indicators, have all tended to support the official optimism. And indeed, this looks very possible when you consider the 2004 real GDP growth target of 3.5 % even when the indications in budget 2003 performance of 5.1 % suggested a need to play to win.

TRENDS IN MACROECONMIC INDICATORS IN ZAMBIA 1965-2004 (Index to 1977 prices)

YEAR		Real GDP		Inflation		Lending		Employment
						Rates
1965	*	2.3		8.1		6.5		296200
1966		-4.1		10.2		6.5		324200
1967		5		5		6.98		338730
1968		2.6		10.8		7		354730
1969		3.2		2.4		7		357150
1970		7.5		2.7		7		372130
1971		0.9		6		7		358360
1972		9.8		5.1		7.25		364740
1973		-1		6.5		7.5		377640
1974		6.7		8.1		7.5		368150
1975		-2.4		10.1		7.5		398810
1976		4.3		18.8		8.13		379400
1977	*Index	0		19.8		8.25		372630
1978		0.6		16.3		8.25		369310
1979		-3		9.7		9.08		371670
1980	*WEO	0.7		11.6		9.5		408821
1981		6.2		13		9.5		451076
1982		-2.8		13.6		9.5		497699
1983		-2		19.6		13		508047
1984		-0.4		20		14.54		516631
1985		1.6		37.3		18.6		521900
1986		0.7		54		27.4		556500
1987		2.7		45.6		21.2		530300
1988		6.3		54.7		21		533400
1989		-1		128.7		33		540500
1990		-0.5		111		40		543300
1991		-1.3		92.6		46		544200
1992	*    WEO	-2.8		197		60		546000
1993		6.2		189		119		520000
1994	*WEO	-8.6		52.3		45.8		496000
1995		-2.8		34.6		66.7		484967
1996		6.9		35.2		64.8		479400
1997		3.3		18.6		58.5		473161
1998		-1.9		30.6		40.3		466925
1999		2.2		20.6		48.4		477503
2000		3.6		30.1		47.9		476347
2001		4.9		18.7		54.3		475316
2002		3.3		26.7		53.1		429406
2003		5.1		17.2		48.7		416804
2004	** proj.	4.6		20		47.5		405700
2005

Sources: MFNP, CSO, BOZ, World Economic Outlook, IMF

A study of economic trends reveals a GDP growth rate of 3.6 per cent which is just slightly higher than the population growth rate of 3.2 per cent between 1996-2004 ranging from the low of -1.9 per cent in 1998 to a high of 6.9 per cent in 1996. In trend terms, it is significant to observe that above all, a positive growth rate has been recorded since 1999. Admittedly therefore, there are some successes in MMD economic policies. In aggregate terms however, the record is less than impressive if we consider the whole span of MMD rule from budget 1992-2004 ( MMD was responsible for managing the UNIP budget proposed for 2002 and is therefore used as a base year) which translates into a real GDP growth rate of only 1.8 per cent. If we were to compare pygmies with pygmies, the MMD performance in 13 years compares favorably with UNIP 0.6 per cent performance in the thirteen year period 1978-1991 before MMD came to power!

Of course UNIP’s best years were from 1965-1977 during which period it managed a real GDP growth rate of 2.5 percent. When we consider the entire period ranging from 1965 to 1991, i.e. 26 years of full UNIP economic policy management, Real GDP falls to 1.6 per cent that is slightly below that which MMD has achieved in 13 years! Can MMD achieve higher rates of economic growth in 26 years above that which UNIP achieved? So far prospects exist but the opportunities can be lost by poor political management of economic policy. We need to understand: what are the major sources of fluctuations so evident in Zambia’s economic activity as evidenced in the trends in real GDP? (see Chart 1  below).

And, what are the key mechanisms by which these shocks are propagated across sectors of the economy, and over time? In exploring these questions, government economic policy makers need to focus on three related activities: empirically identifying the effects of exogenous shocks on the economy; constructing empirical general equilibrium models of economic fluctuations; and exploring the efficacy of alternative policy responses to different shocks.  This approach can give us alternative scenarios of the MTEF. We believe it would less than bold leadership to set a growth target of less than 6.5 per cent in budget 2005 and 7 per cent in 2006!

CHART 1

4        AND WHAT ABOUT JOB CREATION ?

Evident too in Zambia’s economic history is the incapacity of the economy to create new jobs. On average, since independence, Zambia has maintained a rather slow and generally static job creation scenario. Only 200,000 jobs were added to the number of jobs at independence for the entire period of 40 years! Above all, most of these jobs were in political administrative and military structures that were created during the period of the 1980s. In earnest therefore no real economically productive public or private sector jobs were created. At any rate the real economy had started to contract following the shocks of the mid 1970s.

The Zambianization policy that was in place since the Mulungushi Economic reforms only put black faces into formally white jobs. Most of these black faces were straight out of school with limited skills training but many with confusing political, ideological doctrines consistent with the politics of the day. The collapse of education in the last two decades and brain drain has not reversed this pathetic picture of diminishing social capability.

CHART 2

If we discount for the political jobs created by UNIP between 1972 and carried over to 1993 when restructuring of parastatals and government started, and further discount for a blotted Civil Service (which is really a carry over from UNIP) an average annual formal sector employment of 350,000 would be our estimate between 1965-2004 that is barely 100,000 jobs above the independence level.  In other words no new real jobs have been created by the Zambian economy in 40 years! Why?  To these questions, the government needs to provide the Party with clear answers to form a viable armamentarium of informed policy debates.

Statements have been made to the extent that growth, and particularly through incentives to investors will create employment opportunities. This appears to be a throw back to the discredited and discarded 'trickle-down' theory. The fact is that growth need not automatically create more jobs as the period before 1976 shows. If growth is achieved on account of enhanced efficiency obtained through increased capital, employment is likely to actually decrease; at least in the short run. And if labor has been displaced by imported capital, then the employment multiplier will operate in the capital-exporting country rather than locally.

5        REAL QUESTIONS ABOUT THE QUALITY OF PUBLIC INVESTMENTS?

While the issue of stabilization versus growth has been a subject of dispute for a long time now, new issues can be raised that are equally contentious.  One point that we can raise is the fact that while the public sector investment has been allowed to be reduced to provide space for the private sector, clearly, policy makers have ignored empirical evidence for developing economies that establishes the paramount role of public investment in ‘crowding-in’ private investment.  Investment is not merely a function of a corruption free environment, but is a function of a number of economic factors.  One important factor is the cost of investment, which is shown to be rising owing to both policy factors and market play especially the cost of financing.  Another equally important factor is market demand, which can be strengthened by public investment.  Low level house-hold incomes and even low level savings means low market demand for new goods and services.

Two points needs amplification here for policy purposes. The first relates to models of economic growth that are critical of government spending. The criticism is often general but we can highlight three components of public expenditure: consumption, investment and transfers. These types of expenditures often lead to three basic concerns: the direct impact of government spending on real resources, the possible disincentive effects on growth caused by the required tax burden and the consequences of financing government expenditure other than by taxation.

The public sector is often categorized as “unproductive” and resources meant for it are better applied if used by the private sector which is considered productive. This argument would hold in an economy which has some “internal integrity”, by this I mean, it is not so highly indebted and its tax base so constrained. There is no evidence in Zambia to suggest that reductions in government spending have resulted into increased private sector production. In year 2001, for instance private sector production improved in tandem with increased public sector spending, and so was the case in 1996, 2003 and 2004.

In theory, it is plausible to argue that if the size of the public sector is primarily determined by the ability to raise revenue from taxation, high levels of taxation imposed on the private sector  and those employed in the public sector), might inhibit effort, enterprise and saving to the detriment of the growth rate. Again, in the case of Zambia, no one has analyzed evidence to support this theoretical position especially one that discounts for the effect of inherited debt and donor inflows in terms of grants to government spending programmes.

In considering the effects of taxation, it is important to distinguish between the forms in which taxation is raised, the total burden of taxation and the relationship between the average and the marginal tax rates. For many years now, Zambia has raised a larger proportion of its taxation in the form of income taxation and it is arguable that greater incentives would result from a shift from direct to indirect taxation. The VAT is an expenditure tax that was considered an ideal innovation in Zambia’s indirect taxation laws in the 1990s and remains pegged at 17.5 per cent!

Calls for reduction in income taxation have often been parried with arguments that there is no evidence of short run changes in behavior as a result of tax cuts. People at the top who are often taxed more neither work harder nor do their work better as a consequence of reduction in their tax burden. And so ZRA supported by the IMF in this case, never give in on their high taxation for high income earners. This is the logic of PAYE. However, this argument ignores the point that the structure of taxation has in principle important long term effects on the allocation of resources between different kinds of occupation and attitudes towards risk taking. Above the possible questions of lost output, the real test becomes that when a tax system begins to make rogues out of honest men, the specifics of the tax system must become suspect. And because any political Minister of Finance is afraid to raise taxation beyond a certain point, there is a danger of resorting to more dubious ways to finance the political parties promises such as the creation of money and excessive borrowing. This has been Zambia’s Achilles heel for the four decades of post-independence economic management,  typified by generally stubborn inflation rates particularly since the late 1970s. Here the point I want to leave for further thought on government spending is this: Is it not perhaps more important to consider as a policy challenge, how government spending is to be financed that to focus on the particular significance of the level of government spending as such?

6        PRIVATE SECTOR INVESTMENT AND THE INCENTIVES QUESTION

There is no question that to achieve economic growth requires investment in physical and intangible assets including human capital in such proportion as may be appropriate to the development of technology and ideas at the time. But it is also true that in the short run, as perhaps the period since 2001 may testify, improvements in productivity and so an increase in the observed rate of economic growth may come about simply as a consequence of re-organization of the way in which existing resources are used. In social policy terms, this case was made in the World Development Report of 1993 (p53-54) with respect to Zambia’s investment in health care, a point which we believe is still valid today. That Report made strong, the case for health reforms when it observed that for over a decade Zambia was getting poor health outcomes because of a lower than predicated level of spending. Zambia’s life expectancy was about five years lower than expected given its level of income and education. In other words, within its level of national income, Zambia could have spent more on health and within its level of expenditure, it could have achieved much better health. Changes in the targeting of expenditure has shown health improvements in infant mortality rates in the period since 1990 including some observable improvements in nutritional indicators for children in some provinces. (CSO, 2002-2003).

In economic terms, it is reasonable to accept the view that sustainable economic growth will require capital accumulation, although the nature of that accumulation must be carefully considered. When this point is ignored, we may end up with what is sometimes referred to as the “MIDAS CURSE” phenomenon: Rapid growth in financial assets yet slow growth in real GDP. This means that potential claims on economic output growing faster than the rate of growth of the output itself.  This is a structural defect in the financial framework of a country’s development strategy. The Graph 1 below depicts this paradox in Zambia’s economic policy management.

Chart 3.

While real GDP for the entire 40 years of economic policy management has been a paltry 1.6 percent, the net interest margins ratio of fee income to average assets has been one of the highest. The normal bank hedging for inflation that was observed between the period 1965-1985 has been drastically distorted. Literally, the banks have been raping Zambia dead! The margins between inflation rates and lending rates since 1993 have been nothing less than criminal. It is even dramatically less defensible since 1996 when stabilization in the economic growth rate appear to have started and inflation rates have been generally low and steadily declining in real trend terms.

When you are faced with such examples of investor behavior, the character of the investment not simply its volume becomes important. There are other issues here in respect of the question of investment. The first is simply that while capital accumulation is almost certainly a necessary condition for sustained economic growth, it is equally certainly not sufficient. Incentives for business to invest at a higher rate offer no guarantee that such investment will be made in productive and profitable activities, rather than leading to the subsidization of low quality products and inefficient processes. This may be the case of entrepreneurial failure and managerial inefficiencies which do not often get factored in budget speeches. Zambia’s incentives to manufacturers have never been reciprocated with improved manufactured products with high value addition. When manufacturers have to import raw materials in order to take advantage of budget incentives for local production, we are not going anywhere. Does it not make sense first to give incentives for higher levels of raw material production in order to create demand for local level manufacturing once a certain level of raw material export saturation has been reached for a variety of external market reasons? I believe the number of Cotton Ginneries investments in Eastern province have been “too quick” for the level of raw material production reached. More efforts and incentives are needed to encourage cotton growing to sustain a viable cotton-based industry in Zambia. And perhaps, the real manufacturing investment issue is not that of ginneries but that of the textile manufacturing like Mulungushi in Kabwe.

The other issue is productivity of investment as contrasted to its volume. The volume of investment required to sustain a given rate of economic growth clearly depends on its quality, or productivity. Inefficiencies in capital productivity owing to many structural constraints including contradictory or inconsistent government policy statements, the excessive role of labour activism, the ambivalence in respect to the “personality” of foreign investment, can all conspire to create inefficiencies in the productivity of capital.

Finally, in so far as, investment is simply the medium through which ideas about new goods and economic processes are translated into physical fact, the ultimate driver of the growth process lies elsewhere in the generation of such ideas. There is our problem. It is a social capability problem that goes beyond our education system and right into our cultural ethos regarding economic activities and wealth accumulation. We like our economy to grow but we hate or suspect people who become rich, even worse, those who profess new ideas!

7        THE POVERTY OF THE MINIMUM WAGE

The problem of the Minimum Wage remains a policy gridlock.  It will visit us in 2005 and beyond whether we address it in MTEF or not. It is our view that it is possible to conceive of a situation where the setting up of a minimum wage at a particular level not only does no harm, but actually encourages employment. The idea requires special assumptions that may need serious thinking.  Clearly, what effects a minimum wage has depends on where it is set relative to the going market rate. If the workers being paid higher rates in money terms are also to benefit in real terms, which must be the object of the exercise, this can only be the case if the affected industries are able to raise their product prices so lowering real wages elsewhere. If this is not possible the result will be to lower employment. This latter position appears to have prevailed in Zambia when Union demands have not been reconciled with a commodity economy whose prices are not set by the local industry and particularly in absence of increased labor productivity. The emotional case for setting minimum wages must turn on the belief that market wage rates are concomitant with what may be described as “poverty” (more accurately incomes poverty). It is not clear in our view that minimum wage rates would succeed in raising real living standards for the lowest paid workers in any case. A minimum wage tends to be badly focused or targeted. If MMD has to protect the poor, it is far better to concentrate on providing a minimum income rather than a minimum wage and thus separating the issue of welfare from the functioning of the labor market. This whole issue of “workfare” and human capital including what forms of education and skills are needed both in the short and long term in our economy needs clear thinking. We may be educating for unemployment instead of the “future”.

8        AND WHAT ABOUT THE MTEF: SHYING THE FUTURE?

Against the background discussed above, it is now possible to put the observations of the Finance and Economic Affairs submissions of the Medium Term Expenditure Framework paper and Budget 2005 in perspective. The FEA Committee’s appraisal of the  macroeconomic objectives spelt out in the Green Paper was that they were too cautious and in some respects based on less than robust analysis of economic trends and factor performance. It was the view of the Committee that a fixed flat economic growth rate of 5 per cent for the next three years has four basic features:

a)         It assures the Economic Policy makers the appearance of successful policy implementation

b)         Yet, it is lower than what is needed to significantly begin to reduce poverty within the context of the 2015 MDGs

c)         It understates the dynamic growth pushes within the economy that can be clearly discerned from the value of strong MMD policy management since 1996 and particularly dramatized since 2001 and perhaps ignores the contribution of the informal sector completely.

d)         It sends weak signals to local and foreign investors about government confidence in the prospects for sustained economic growth in the medium term. Budget 2005 must not aim at less than 6.5 per cent.

Further the Committee observed the following points on the MTEF:

a)      Clearly the projected capital expenditure outlays for the MTEF are too low to “crowd in” private sector investments both local and foreign.  While it is assumed that agriculture will drive growth, the multiplier effect of this sectoral growth will be undermined by limited investments in secondary industries related to the sector unless some infrastructural constraints, particularly both major and feeder roads in rural areas are dramatically dismantled. This is a political decision. The basis for real growth in local manufacturing, particularly agro-processing have not been clearly spelt out to suggest value added in agriculture.

b)      It is debatable whether the increase in agricultural production (the bumper crop effect) is evidence of increased “productivity” in agriculture given the low level of return on factors in maize production across various districts in the country.  The further away you are from Lusaka the greater your investments of factors and the lower the level of your return (according to figures from the Ministry of Agriculture).  This is a case of “Simple Reproductive Squeeze” involving vertical concentration of rural household labor.

c)      The core strategy in agriculture of Farm Block development does not appear to be backed by budget outlays within the three year circle of the MTEF.  How many new Farm Blocks are envisaged, where and at what cost? The economies of specificity are needed here to evaluate this policy strategy accurately.

d)     The Strategy for cattle restocking and fighting cattle diseases and other such measures do suggest increased budget commitments but does not guarantee higher economic growth returns within the medium term.  Their effects are likely to be felt beyond 2007 if successful.

e)      There are economic growth impacts and revenue effects anticipated from increased investments in mining in North-Western Province but these will soon taper off as stabilization is reached in production under a scenario where copper prices are unlikely to stay high. The rate of investment in mining has specific effects on the behavior of capacity and output, but is clearly also affected by the rate of growth of the economy itself in general. Clearly, there is no evidence of matched human capital growth within the new mining investment scenario to compare with the old Anglo, RST and part ZCCM investments in the 60s and 70s.  In the era of HIV/AIDS, productivity improving investment may not be undertaken by management within the mining sector and firms outside in the absence of a clear indication of how to arrest the disease-specific high attrition factor within the workforce.  We may, therefore, witness again more production (assuming high mineral prices) but low factor productivity in mining.

f)       The potentially high yielding gemstone mining sector has been gravely under-strategized in terms of new and different approaches likely to change the status quo and particularly seal off the big holes in illegal mining.

g)      The strategies on manufacturing are wholesomely vague to be believable and the current strategies to Finance Tourism development is too bureaucratic and poorly targeted to promise either value investments and/or sustainable local empowerment. This is not simply a problem of incentives. It is also a choice of the manufacturing industry we need to provide incentives to.

h)      Inflation and Interest rate reduction objectives are too lukewarm and premised on a weak assumption of drastic change in the performance culture of the public service.  Frontloading the dismantling of the huge domestic debt and the “debt discount” strategy appear problematic in terms of the analysis upon which they are based and the fiscal stance of the budget 2005. Equally the institutional sluggishness appears to continue to prevent nominal interest rates adapting quickly enough to stabilize real interest.

i)        Government position on Sectoral Reforms is perhaps strategically vague, but it requires a clear internal definition of Plan B.  Machismo stances against the IMF have always cost us more than we have gained.  In real economic terms, what other options do we have to withstand the pressures for privatization of our “strategic” enterprises?  What do we really mean by commercialization, both in economic and political terms?

j)        It is the general trend in assumptions about donor in-flows that when modalities for funding change from project to sector-wide “basket funding” for budget support or WHIP, the quantum of grants generally drop and the releases are tied to even broader or more vague, less time-bound conditionalities . As we approach election 2006, donor inflow assumptions ought to be necessarily cautious. Among other reasons, including prudence, this speaks for the need to have three MTEF scenarios: the base, the low and the optimistic.

Monday, January 03, 2005