The production of the constraints analyses posted on this website was led by the partner governments, and was used in the development of a Millennium Challenge Compact or threshold program. Although the preparation of the constraints analysis is a collaborative process, posting of the constraints analyses on this website does not constitute an endorsement by MCC of the content presented therein.

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Map No. 3731 Rev. 4 UNITED NATIONS Department of Peacekeeping Operations January 2004 Cartographic Section 4 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA ISBN number 978-9982-22-435-2 © Copyright 2011 www.mcaz.gov.zm Millennium Challenge Account-Zambia by: Published Printech, Lusaka Printed and by: Bound Masuzyo Mtawali andDesign Layout by: PostlewhiteKerry and Masuka Mutenda by: Proofread Pamela Bwalya Kasese Edited by: Pamela Bwalya, Kasese Chiwele, Dennis Susan Siyunyi, Cheelo, Caesar Claire Harris, White Eric by: Authored Lusaka, Zambia, 28 Lusaka, MCC, most notably Mr. Steve Anderson, for comments and guidance during preparation the of report. the heavily on its report ‘What are constraints the to inclusive growth Finally, inZambia?’ we wish to staff thank the the of available of part to teambe the that draftedthe CA. thankthe also We WorldBank forgiving permission us to draw would like to United thank the Kingdom Department for International Development for making Ms.Clare Harris We acknowledge also comments and information provided by cooperating analysis. the enriched which partners We to Treasury, the by Secretary the Mr. Likolo Ndalamei, helped report, guidethe as well as commenting on draft. the of Nationalthe Assembly and representatives of Housethe of The Chiefs. MCA-Zambia CommitteeSteering chaired Constraintsthe Analysis Advisory (CA)with Sector Groups, as well as with chairpersons the committees of selected We acknowledge further valuablethe comments of more than three hundred participants in consultative meetings on gratefully received. report.this The peer-reviewed was report by Professor Oliver Saasa and Dr. Fredrick Mutesa, commentswhose were Hausmann-Rodrik-Velascothe Growth Diagnostic Framework, forms which in used underlying the methodology Cheelo, Dr. Chiwele, Dennis Ms.Clare Harris and Ms.Susan Siyunyi. Mr. White Eric assisted team the inapplying guidanceder the of Mr. Liebenthal, National Robert Coordinator MCA-Zambia. The team comprised Mr.Caesar Mrs. Pamela Bwalya, Kasese Deputy National Coordinator, MCA-Zambia team the led preparing report, the un- preparation. bia eligible became on 12 was prepared a torequirement fulfil Corporationof ChallengeMillennium Compact (MCC)funding Zamfor- which of FinanceMinistry and National Planning to develop Millenniumthe Challenge Account Compact for Zambia. It This was report prepared the by ChallengeMillennium Account–Zambia (MCA-Zambia), aunitset theup under th February, 2010 th December 2008and December as an input for SixthNational the Development Plan, currently under ACKNOWLEDGEMENTS Millennium Challenge Account-zambia |i

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA ii | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 5. CHAPTER 5...... 4. CHAPTER 4...... 3. CHAPTER 3...... 2. METHODOLOGY...... CHAPTER 2...... 1. INTRODUCTION...... CHAPTER 1...... SUMMARYEXECUTIVE ...... GLOSSARY...... ACRONYMS...... LIST OF BOXES...... LIST OF FIGURES...... LIST OF TABLES...... ACKNOWLEDGEMENTS...... 5.2 Demand for Financial Services ...... 5.1 Access to Financial Services Markets4.3 Labour ...... 4.2 Health...... 4.1 Education...... Developments3.3 Social ...... 3.2 Poverty Trends...... 3.1 Economic Developments ...... 2.2 Inclusive Growth Diagnostics...... 2.1 IG Framework...... BUSINESS ENVIRONMENT ANALYSIS: OF COST FINANCE...... EMPLOYABILITY ANALYSIS...... ZAMBIA’S GROWTH STORY...... TABLE OFCONTENTS Millennium Challenge Account-zambia |iii xiii viii xii 25 17 25 17 29 25 21 19 17 14 10 ix vi 7 7 3 3 1 1 7 4 3 v i

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA iv | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 6. CHAPTER 6...... CHAPTER 7...... 7.

table ofcontents 7.2 Market Failures...... 7.1 Government Failures...... 6.2 Natural Capital...... 6.1 Infrastructure...... Returns RETURNS TO ECONOMIC ACTIVITY: SOCIAL RETURNS...... 7.2.2 Coordination and Information Failures...... 7.2.1 Innovation 7.1.4 Investment and Business Climate...... 7.1.3 Is Exchange Rate volatility Appreciation and Real Binding on Growth?...... Perceptions7.1.2 Firm on Macroeconomic the Environment...... 7.1.1 Macroeconomic Risks...... 6.2.9 Climate Conditions and Internal Water Resources...... 6.2.8 Hydropower Endowment...... 6.2.7 Mineral Resources Endowment...... 6.2.6 Fisheries...... 6.2.5 Wildlife and Tourism...... 6.2.4 Forest and Woodlands...... 6.2.3 Terrain Endowment 6.2.2 Natural Resource Endowment...... 6.2.1 Size and Location...... 6.1.8 Water Supply and Sanitation...... 6.1.7 Air Transport...... 6.1.6 Railway Infrastructure ...... Transport6.1.5 Land Infrastructure...... Infrastructure6.1.4 Energy ...... 6.1.3 Information Communications Technology Infrastructure (ICT) ...... 6.1.2 Cross-cutting Issues inInfrastructure...... 6.1.1 Infrastructure and Growth inZambia...... to Economic ...... A ctivity : P rivate Appropriability Analysis ...... 55 35 49 35 35 55 69 66 66 61 59 58 55 55 53 52 52 52 51 50 49 49 49 46 45 44 40 37 37 36 35 Table 4.1:Increment in Table 3.5:Industries’ Table 3.4:Shares inTotal Value Added inZambia (%)...... Table 3.3:Mean shares of Table 3.2:Mean Table 3.1:Trends inInequality, 1996-2006...... LIST OF TABLES ANNEXES REFERENCES...... CHAPTER 8...... Table 6.11:Access to Air Transport...... Table 6.10:Access to Transport By Country, 2000-2004 ...... Table 6.9:Total Trade Volumes...... Table 6.8:Estimated Volume of Traffic/ Transit Time on Main Transport Routes...... Table 6.7:Indicative Transport Tariffs ...... Table 6.5:Zambia’s Table 6.4: Table generation 6.3:Electricity and consumption inZambia (GWh)...... Table 6.2:Access by to Households/Cross Electricity Comparison Country ...... Table 6.1:Average one-way travel for time different Table and 5.3:Banked Table and 5.2:Bank Non-Bank Financial Institutions Sheet Balance ...... Table 5.1:Investment and Saving Indicators Table 4.4:Population Table 4.3:Range of Estimates Cost of Health...... MDGs Table 4.2:Mean years of 8. f ormal ormal

8.3 From Constraints to Causes Root ...... Cause8.2 Root Analysis...... 8.1 Decision Tree For Zambia: Attaining Accelerated and Inclusive Growth...... Characterising e ducation and no on-the-job Electricity IntensityElectricity of Production and Share Export of Sub-Saharan...... Africa ...... s hares of household g round c a u ontribution to to ontribution verage e nbanked s arnings to h chooling of C ousehold income by t onstraints ransport a nnual b usinesses inZambia ...... h i t uman r h ncome by g i raining (%)...... eal eal nfrastructure nfrastructure ousehold ousehold rowth (2001-07)...... g ...... c rowth inZambia (%)...... to apital apital s s Inclusive h ource, ource, ead in2002/03...... ead s r ocial and ocial g elative to lobal lobal i i ncome ncome r anking e e Growth conomic q q arnings of uintile, uintile, ...... a r u ctivities in selected African countries African .... inselected ctivities . w ...... ural ural rban orkers with no Millennium Challenge Account-zambia |v a a reas reas ...... table ofcontents 73 85 79 73 13 12 13 12 10 77 73 73 41 45 43 42 42 42 40 40 38 36 33 29 26 21 20 18 17

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA vi | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA Figure 5.2:Number of Commercial Banks’ Branches...... Figure 5.1:Financial Access Strand Countries...... inselected Figure Value 4.3:Sector Added Shares (%of Total Value Added)...... ValueFigure 4.2:Real Added Worker per inZambia...... Figure 4.1:Distribution of by Labour (%of Sector total labour force) ...... Figure 3.8:Trends inInfant, and Child Under-five Mortality...... Figure 3.7:Number of People Employed by Rural inthe Sector and Urban Areas, 2004...... Figure 3.6:Total poverty -provincial trends, 1996-2006...... Figure 3.5:Poverty Rates inRural and Urban Areas, 1991-2006...... Figure 3.4:Changes Growth inReal Rates (%)...... Figure 3.3:Growth Accounting Decomposition for Zambia...... Figure Price 3.2:Copper Movements and Production, 1965-2008...... Figure 3.1:GDPCapita, per 1960-2008...... Figure 2.2:Business Environment Analysis...... Figure 2.1:Inclusive Growth Analytics...... LIST OF FIGURES Table 8.1:From Constraints to Syndromes...... ts...... Table 7.7:Spearman rank correlation performance inZambian hectare farm yields and per between distric services Table 7.6:Agricultural production and yields ...... Table...... 7.5:Redundancy Costs Table of Doing 7.4:Ease Business...... Rank Table 7.3:2010Doing Business Index inZambia...... Table 7.2:Foreign Direct Investment, US$m(2002-2007 Table 7.1:Inflation 2008(Annual average, % change)...... Table 6.18:Renewable Water 2001and Resources 2002...... inSouthern Africa, Table 6.17:Forest and Woodlands Cover in2000...... Table Comparison 6.16:Country of Some Natural Resource Endowments...... Table 6.15:Access to Sanitation by Households/Cross Comparison Country ...... Table 6.14:Access to Irrigated Countries...... Agricultural inSelected Land Table 6.13:Access to Water by Households/Cross Comparison Country ...... Table 6.12:Zambia’s Competitiveness Global (out Ranking of 124countries)...... table ofcontents c umulative) ...... 59 27 27 22 22 21 15 14 11 11 77 71 70 65 63 61 56 54 51 51 48 48 47 45 9 8 8 7 4 3 Figure 7.5:Exchange Figure 7.4:Government and Private Debt Sector as %of GDP...... Figure 7.3:Domestic and Foreign Interest as %of GDP...... Figure 7.2:Inflation,Consumer (av.Prices Annual % change)...... (%GDP) Balance ...... Fiscal Figure 7.1:Overall Figure Hydropower 6.9:African Potential...... Figure 6.8:Fish Production (kg/capita), and Countries...... Southern African Africa by Women inKafue Flats...... Figure 6.7:Monthly Food Availability, Demand Labour Burden and Disease as Perceived Figure 6.6:Water SSACountries...... Figure 6.5:DelayinSelected Connection inObtaining an Electrical Figure 6.4:Q Figure Use 6.3:Energy and Consumption inZambia in2006...... Figure 6.2:Mobile Minute Rates per Countries...... African inSelected Figure 6.1:Q Figure 5.10:Reasons for not Having Account aBank for Business: Unbanked MSMEs...... Figure 5.9.Banking Figure 5.8:Financial Figure 5.7:Characteristics of Adults Accounts with Bank inZambia...... Figure 5.6:Micro-finance Institutions Branch Distribution by Province as 2008...... December at 31st Figure 5.4:Decomposition of Interest Rate Spread inZambia (2004-2008)...... Figure Composition 5.3:Loan of...... Sector Banking the Figure 7.6: Real Figure 7.6:Real Figure 7.9:Gross Figure 7.8:Private Figure 7.7:Selected Figure 7.14:GDP Per Capita and EXPY...... Figure 7.13:Composition of inZambia...... Exports Figure 7.12:Non-oil Herfindahl Index for countries inSSA,2004...... Figure of 7.11Degree Figure 7.10:Foreign Direct and Portfolio Investment (US$millions)...... uality of Electricity in Selected SSACountries...... inSelected uality of Electricity uality Countries of...... African Infrastructure inSelected e i ffective s nvestment (%GDP)...... i upply nvestment: w p p r enetration by e orld roduct ate (ZMK/$)and xport xport c e xchange xchange overage SSAcountries inselected (%),2006...... a gricultural gricultural d u f sage: iversification,Zambia oreign and s r ector e ate (2000=100)...... nterprises inZambia...... p c rices (2004-2009)...... rices ...... opper opper d omestic (%GDP)...... p rice ($/mt)...... rice ...... 62 ...... 61 ...... 59 ...... 60 Millennium Challenge Account-zambia |vii ...... 59 ...... 46 57 57 56 55 53 52 50 39 38 38 37 36 34 33 32 31 30 28 28 66 68 67 67 62

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA viii | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA Box 4.1:Q Box 3.1:Zambia’sBox Poor: Facts Some Stylised ...... 2.1:A Box LIST OF BOXES Figure 8.3:Unsupportive Business Environment Problem Tree ...... Figure 8.2:Low Employability Problem Tree...... Figure 8.1:Why Zambia’s Growth is Not Inclusive...... Figure 7.16:Constraints to Figure 7.15:The number of table ofcontents uality of Education Indicators ...... c onstraint is b inding if...... t h ourism ouseholds with access to facilities within fivekilometres ...... g rowth as i dentified the by h ospitality ospitality s ector inZambia...... 72 18 12 76 74 73 69 3 ACRONYMS COMESA MOFNP MCA-Z MSME OECD AFDB FNDP IRWR LCMS IFPRI MOH MDG AIDS GWh MCC MOE HRV GDP DRC BOZ GRZ GTZ NER LICs ART GER NTE EAC FAO HIV MW MFI IMF ICA ICT FDI LFS IFC IAS CA IG Ministry of EducationMinistry Micro-Finance Institution Millennium Development Goal Millennium Challenge Corporation Millennium Challenge Account–Zambia International Food Policy Research Institute Ministry of HealthMinistry of FinanceMinistry and National Planning Low Income Countries ForceLabour Survey Living Conditions Monitoring Survey Internal Renewable Water Resources International Monetary Fund Inclusive Growth International Finance Corporation Information and Communication Technology Investment Climate Assessment Institute for Studies African Hausmann-Rodrick-Velasco Human Immunodeficiency Virus TechnicalGerman Cooperation Government of Republic the of Zambia Gigawatt hour Gross Enrolment Ratio Gross Domestic Product Fifth NationalDevelopment Plan Foreign Direct Investment Food and Agriculture Organisation Community African East Democratic Republic of Congo Common Market for and Eastern Southern Africa Constraints Analysis Zambia of Bank Antiretroviral Therapy Acquired Immunodeficiency Syndrome DevelopmentAfrican Bank Organisation for Economic Cooperation and Development Non-Traditional Exports Net Enrolment Ratio Mega Watts Micro, and Small Medium Enterprise Millennium Challenge Account-zambia |ix

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA x | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA GLOSSARY Business environment analysis table ofcontents UNCTAD ZANACO T ZAMTEL azara SHEMP PACRO ZESCO UNZA SADC ZNFU SNDP PRGF SAPP WTO VOC VoIP WDI Co-ordination failures ZDA ZRA SAG VAT ZRL RSZ ZBS SSA Constraints Analysis Information failures United Nations Centre for Trade and Development Zambia Electricity SupplyZambia Electricity Corporation Zambia Development Agency Zambia Business Survey Zambia National Commercial Bank Zambia Telecommunications Limited World Trade Organisation World Development Indicators Voice Internet Over Protocol Vehicle Operating Cost Value Added Tax University of Zambia Tanzania-Zambia Railway System Sub-Saharan Africa Sixth National Development Plan Smallholder Enterprise Marketing Programme PowerSouthern African Pool Group Advisory Sector DevelopmentSouthern Africa Community Railway Systems of Zambia Poverty Reduction and Growth Facility Patents and Company Registration Office Zambia Railways Limited Authority Revenue Zambia Zambia National Farmers Union Syndromes Compact PRODY EXPY Root causes.Root Income content number assigned to eachproduct exports acountry research and product quality information. investor information. gathers necessary the Examples include marketing, benefit many investors, but is costly to gather. As a result,potential no single information when Arise about economic opportunities has potential the to andcessfully make aprofit. by needed enterprises goods mentary to innovate, market products their suc- failsExists acountry when to provide sufficient non-traded inputs of comple- exports. Measures country’s the sophistication export or value-addition the of country’s Identifying potential obstacles to economic growth justly, investing inpeople and economic freedom. Eligibility criteria are on 17indicators based categories: inthree policy ruling five-yearLarge-scale grants for countriesthat pass eligibilityMCC criteria. ronment for profitable private business operations exists. private investments; and private appropriability envi- necessary the -whether endowments returns has acountry necessary the social -whether to support Analysis of returns to economic activity broken down into two components: performance of agriculture the employs which sector dwellers. most rural have completely population. bypassed rural the The main reason forthislack of inclusivegrowth the lies inunder- poverty rose fromrural 78%to 80%.This would suggestthat benefitsthe the lastdecade of economic of progress at of heart the problem. the Whilst povertycount the head inurban areas dropped from 53%in2004to 34%in 2006, Millennium Development on poverty despite (MDG) Goal recent strong economic performance. Rural poverty lies Poverty levels on whole the have slowly fallen from 73%in1998 to 64% in2006,with Zambia far from attaining the make asufficient dent on poverty. Fifth NationalDevelopment Plan (FNDP) (2006–2010) projectedthat growth a rate inexcess to of 7%was necessary level in2008. Zambians were therefore, on average, years inthe poorer had been in2008thanprior they to 1985.The Zambia’s independence. It declinedcontinually until it 2000when again, to started rise but only recovered to its 1985 However, despite strong this performance, GDPcapita per remains below historical the highs of early the years of GDP.benefits The almost of twentyyears policies beginning ofstructural are to pay off. gross investment as apercentage of GDP. Gross investment steadily has over risen last the ten years to over 20%of improvements and amore diversifiedbase.been asignificant There export also has increase in FDI flows wellas as ward and negative trends ingrowth. Growth accompanied been has past also inthe decade by total factor productivity prices and output increased significantly,there are indicationsthat economythe is breaking awayfrom pastthe down- over past Although the decade. mining the has boom helped to propel growth, this afterwhen copper especially 2004 After alongof declineperiod and stagnation,Zambia’s economy growing been has strongly at aboutper 5%annum Past Growth and Poverty Reduction Trends World Bank’s IG Study. ment and Employability Analysis using more recent data.therefore This CA updatesthe materials containedthe in question inZambianthe situation. The IG study further behad augmentedto with a more detailed Business Environ- strong growth inZambia over had past this not the decade, translated into significantpoverty reduction. This isakey The IG study approachthe advantagehad overtraditionalthe CA approachthat it attempted to uncoverwhy, despite Zambia was fortunate to already have Bank’s the IG available at of time the her qualification Compact-funding.for concern for many Zambians. issues These weretherefore not analysed. analyzing non-economic factors -implementation capacity issues for example are -which important very and amajor mately, reduced levels of poverty. One of shortcomings the of methodology, this however, is difficulty the involved in factors preventing growth growth whether ascertain translates to also into increased household incomes and, ulti- attributes of individuals either as wage earners or as self-employed workers. The frameworkIG thus beyond the goes HRVin the framework) and an Employability Analysis. The Employability Analysis is adiagnosis the of productivity analysis of individuals rather thanalone firms thereforeand consists boththe of Business Environment Analysis (as The Inclusive Growth (IG)framework adoptsthe HRV framework somewith important additions. It includes an growth or to accelerate growth at where is arate this occurring lower deemed than perceived potential. environment analysis, to constraints the identify is used preventingfrom firms investingeconomythe in to generate its 2008study –What are the Constraints to Inclusive Growth in Zambia? The HRVframework, through the business framework the utilises provided by Hausmann, and Velasco Rodrik (HRV) (2005)as modified the by WorldBank in Thetherefore CA is growth a that diagnostic identifies thekey binding constraints economic to growth. This CA produce significantpositive economic growth impactthe constraints if were relaxed. country’s context. specific This is to ensure that investments supported the by MCC are directed at thatareas would for funding by that undertaken to MCC, the aCAneeds identifies be the core obstacles economicto growth within a Funding for which Zambia eligible became on 12 ConstraintsThis a Analysisfulfils requirement (CA) the of Millennium Challenge Corporation (MCC) Compact-for EXECUTIVE SUMMARY th December 2008. Before December prepares a country investment proposals Millennium Challenge Account-zambia |xi

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA xii | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA Access to water supply and sanitation is abinding constraint for and areas. peri-urban rural A2006appraisal report longer shipping times. volume due is partly to perception the that rail transport is unreliable due to derailments, low wagon availability, and to 4.5 million in 1988, to less than 1.5 million in 1998 and to in 2008. Thearound decline in railtraffic 1.3 million The total amount traffic of carried by Zambia’s railways fallen has from million more than 6 tonnes of freight in1975, transport-relatedA further constraint, for particularly country’s the is state the exports, of Zambia’s rail infrastructure. and tourism. havecountry roads of fairly quality good and impacts this negatively on commercial agriculture, gemstone mining domesticthe road network are constraints to growth the economic of whole rural inthe Only activities. afew districts paved roads inZambia isthan higher average the for SSA.However, road poor quality and uneven the distribution of deteriorating.has been The Zambia’squality of internationaltransit routes has improved.percentagethe Overall of activities is declining, largely as a result of resurgence in mining activity. At samethe infrastructure time, electricity Despite elsewhere inSouthern Africa. than acapacity experienced of 1,680MW, access for to electricity non-mining inZambia declinedfrom haselectricity infact 1990sto 23%inthe 2000s,adecline 13%inthe of magnitude ahigher key needs(a driver ofergy deforestation). Fossil fuels, most notably petroleum, are presently imported. all Access to Low levels of access are to electricity abinding constraint to growth. Wood provides about 70%of nation’s the en- and water and sanitation has declinedover past the one and decades. half and Mauritius,Africa and 8.49%for Asian the Tigers. As aresult, access such infrastructure to critical as electricity 2001-2005comparedfor period the to 1.01%for countries, other SADC 99%for as awhole, 3.59%for Africa South ita GDP contribution attributable to increases stock inthe and quality of infrastructure, estimated at ameagre 0.6% ‘indirect’ costs at 22%of gross share the value twice added- of labour costs. Zambia has alower-than-average cap per - country’s competitiveness export and constraining growth both and jobcreation. Zambian levelsbear high firms of required to promote accelerated economic and inclusive growth inZambia. Poor is infrastructure undermining the -DespitePoor far below fall progress level still the these Infrastructure Services inextending services, infrastructure estimated to work inagriculture) low participating has been levels with inasector very of labour productivity. is much thanand higher inagriculture. services This meansthat the thelabourbulk of forceZambians (70% of are limitedthe because number of wage-paying jobs in economythe are hard to access. productivity Labour in industry The incomesZambians poor of are lowbecause of low returnsself-employment, to in particularly agriculture, and HIVandhealth. AIDScosts alone are range inthe of 1%to 1.8%of GDP. than rest inthe of SSA.It is estimated that Zambia forfeits 2.9%to 3.5%of GDP growth year per as aresult of poor tancy, maternal mortality and prevalence the of HIVand AIDSshow that Zambia’s status health is worse on average combine to impose binding growth constraints on economy. the Health indicators such as child mortality,- life expec poor Thestate of population,health the of cost the high and of disease productivity losses associatedwithill-health attainment and, to extent, alesser on-the-job training. shortages Skills at levels limit all economic growth. levelshigher of education. Studies show that wage earnings are positively and significantly influenced by educational education. and As tertiary secondary aresult, are they unable tofrom benefit the wages higher that arethe outcome of one of main the explanations for lack the of inclusive growth last inthe ten years. seen poor Thehave limited access to of Quality HumanLow Capital -This is the at root the lowof levels of employabilityZambian the of population and is importance of different the constraints. to to abinding use identify constraint. This CA relied mainly the on use of shadow pricing theto determine relative FNDP. Four of reasons these are adjudged binding to be constraints. The HRVframework lists a number of criteria This CA found many reasonswhy growth has inclusiveneitherbeen nor occurred hasthe rateat anticipatedthe in Binding Constraints to Accelerated and Inclusive Growth in Zambia 2. 1. This CAtherefore on questions:two key focused What is constraining more inclusive growth and significantpoverty reduction? independence? and Why has Zambia’s GDPcapita per not accelerated and attained levels the first achieved inthe ten years of more inclusive. raise substantially quantity the both and quality of inorder complementary to accelerate services growth and make it above)seen and an under-innovating state (hence low sophistication). export What means this all is that Zambia must are syndromes: two further Zambia is an under-educated state (resulting human poor inthe capital characteristics constraining amuch more significantthe in rise returns economicto from activity private investments. thisLinked to ment constraints identified above. There are low sectors investments associal that asininfrastructure well the in are is notcountry providing complementary the investments required to relax employability the and business environ- Growththis Diagnostic concludes that Zambia characterised as can an be under-investing state. This meansthat the constitutewhich syndromes HRV inthe Framework. Using amatrix that at looks hierarchy the of problem situations, mutually reinforcing. Together with many other constraints, are they symptoms of some underlying characteristics It important is also to note that binding the constraints donot operate described inisolation but are and linked Investment Climate Surveys. show how maize and cotton productivity are negatively correlatedperformance measured by withservice weak the of to provide lack the of necessary infrastructure quality assurance facilities. Farm-level productivity data inZambia ity. Added failures to these are encountered difficulties the in breaking developedinto countries’agriculture asa result multiplebetween smallholder farmers and processing food firms. processingFood firms end up working below - capac inputsservice-related that result in low and declining crop yields,market poor linkages, channels few intermediary Agriculture is most the obvious example of coordination failures; indirect costs high attributable to infrastructure; andfrastructure uncompetitive flight costs as contributors the inabilityto the of tourismsector to attain potential.its road infrastructure, consumers’ lack of awareness of Zambia as atourist destination, quality poor the of in- airport Thereevidence also of coordination is failurethe in wheretourismsector operators citepoor conditionthe of rail and well-educated workforce available to investors. of economy. the Obvious examples and would infrastructure, education, ensuring be ahealthy services health and producer-consumer the link services supply chain and require simultaneous large-scale investments invarious sectors to enable enterprises to innovate, market products their successfully, and generate profit.Complementary and goods therefore Theis country tries. failing to provide sufficient non-traded inputs or services goodscomplementary and not match that of other countries capita with asimilar per income and is worse than anumber of other SSAcoun- – an indicator of coordination failure. This suggeststhat the value-added the country’sof basket does of export goods Coordination Failures -Despite diversification, export Zambia suffers still from levelslow sophistication ofexport sure on water points leading to longer waiting times. to recommended the national target of 500metres and is said to have increased inrecent years due to increased pres- of water is estimated one between to be and three kilometres – a30 minute time. walking This compares unfavourably impoverished communities, but Onaverage, on also public services. health distance the on foot from home to asource outbreaks of waterborne during rainy the diseases This season. not only economic a places heavy burden alreadyon environment.a clean, disease-free Poor water supply areas and inperi-urban sanitation have caused services annual was about 20litres day per (approximately 5litres day), person per well per below average the amount required for by UNCTAD found that average the consumption of water for and drinking householdother domestic rural per use Millennium Challenge Account-zambia |xiii

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA xiv | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA activity; and chapteractivity; root eightthe discusses causes of constraints the outlined inprevious chapters. and sixcontinue with analyses the of binding constraints concentrating on cost the of finance and returns economicto chapter four with discussion the begins of binding constraints by focusing on employability the analysis; chapters five This is report organised as follows: chapter chaptertwo Zambia’sthree outlines thetells methodology; growth story; country,in the areas. inrural This is aconcern especially of manyZambians. ing constraints to accelerated growth and why, despite ten years of uninterrupted growth, poverty remains widespread HRV framework recommended by MCC. the This was found more suited Zambiafor because thebothtracks it bind- Constraintsthe to Inclusive Growth as key reference the inZambia?” document it because arefined uses version the of is no re-invention of In wheels. regard, this MCA-Zambia the CAteam adopted World the study Bank on “What are In conducting MCC aCA,the encourages and accepts of use the existing studies and national initiatives that so there were as an used input also into SNDP the by helping shape strategic over focus plan the period. relevant stakeholders including chiefs and chairpersons Parliamentary of selected Committees. The results the CA of as basis for the apublicCA served consultation on Advisory Compact the with 16Sector Groups (SAGs) and other Against background, this CAreport this was prepared by MCA-Z the this torequirement. fulfil The results the of suggested that on CAreport the three focuses the to sixmost important binding constraints. income growth inmany sectors. While number the of core impediments by to growth country, vary will it has been opment projects, but rather to point to key binding constraints that are national and inscope impede investment and that reduce poverty through economic growth. The CA is not intended economicto dictate sectorsspecific devel or - poverty reduction is– this referred to as a Constraints Analysis (CA) – and ensures that funds are devoted to projects is for countries assessment acritical to undertake of conditions the domestic inthe economy that limit growth and submittedbe to MCC the by end January 2010for consideration. The first thestep in development proposal process Following Zambia’s qualification Compactfor Funding, she must now developpackage a of investment proposals to ity is competitive. countries must median group, the exceed of peer their low- whether or lower middle-income countries. Thus eligibil- and economic freedom. It makes its assessment on 17indicators based developed by “third agencies. party” Eligible ity eligibility criteria. country on MCC assesses progress based inthree broad areas: justly, ruling investing inpeople Zambia eligible became for Compact Funding from MCC the on 12 INTRODUCTION CHAPTER 1 th December 2008after December the meeting eligibilMCC - Millennium Challenge Account-zambia |1 INTRODUCTION

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 2 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA INTRODUCTION 3. 2. 1. HRV framework, growth constrained can be by: areto they which privately appropriated less cost the of financingthis accumulation (Figure 2.2). According the to economic growth is of afunction returns the to assetaccumulation, extent the laxation have of will which largest the impact on growth. In framework, this binding to growth, that is, ones the with highest the (shadow) prices, re the - growth. In particular, approach the aims constraints to those identify most The HRVframework attemptsthe to identify principal obstacles economicto HRV approach to shed light on bottlenecks the business inthe environment. ity attributes she brings to a job. On demand-side,the analysisthe the uses individual, for example, her education, her and health any other productiv- Thelabour-supply (employability) analysisthe on focuses resources the of for productive employment on labour the demand side(Figure 2.1). pacity on labour the supply sideas well as ways of opening up opportunities atlooks ways of strengthening individual’s the productive resources and- ca as main the instrument for sustainable and inclusive growth.framework The HRVthe framework, advances which for case the productive employment Zambia. It adopts an Inclusive Growth Diagnostics framework, avariant of This chapter outlinesappliedthe methodology inconductingthe CA for IG Framework High cost of capital through domestic financial markets or external ones. conflicts, incomplete information and other market failures; and Poor appropriability through taxation, high inadequate property rights, contract weak enforcement, labour tor productivity or by unfavourable externalities; returnsLow social caused by alack of complementary factors such as infrastructure, human capital, total fac- Figure 2.1:InclusiveGrowthAnalytics Source: AdaptedfromHausmann,RodrikandVelasco (2005) Economic Growth Business Environment Self-employmnet Analysis METHODOLOGY Income increasesthrough productive employment CHAPTER 2 Employability Analysis Wage employed Millennium Challenge Account-zambia |3 4. 3. 2. 1. Box 2.1:Aconstraintisbindingif: 2008, pp.32) vice-versa” (Hausmannetal, andthrive likely tosurvive binding constraintaremore Agents lessintensiveina bypass theconstraint attempting toovercome or Agents intheeconomyare function movements intheobjective produce significant Movements intheconstraint The (shadow)priceishigh Poverty reduction METHODOLOGY

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 4 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 2.2 Source: AdaptedfromHausmann,RodrikandVelasco (2005) The following steps are involved inconductingthe Inclusive Growth diagnostic. Figure 2.2:BusinessEnvironmentAnalysis METHODOLOGY

6. 5. 4. 3. 2. 1. Inclusive Iteration of stages four and five untilthere is convergence the on causes.root Searching that for signals would further substantiate root the causes of constraints the identified. ing constraints. Characterising constraints to –Identifying growth possible the root causes (syndromes) for bind the - sation of constraints, avalue-addition methodology. of particular this straint is binding ifit criteria the meets highlighted inText 2.1.This Box process assiststhe in prioriti- 2.1 and 2.2to binding identify constraints from of perspective the differenteconomic actors. Acon- Finding thebinding constraints to on inclusive framework the -Based growth presented inFigures long This is covered run. growththe in story. have potential the for growth and migration whether to other sectors is possible short –inthe and the possible to get apicturegroups of specific activities the are engagedwhat in; to extent activities these (formal or informal), and other relevant characteristics. With findings the from two these stages it is tor, sizeof firm, geographical urban),area (rural, sub-national unit (provincial, state and others),type a description of income-earning the of activities or self- wage-employed people, distinguished by- sec Putting together theprofileeconomic actorsof -Paying attention to excluded groups and including and opportunities, and possibilities for economic transformation and diversification. reduction trends and trend-breaks, overall productivity and employment dynamics, major challenges sis, including an understanding of major the factors explaining country’s the past growth and poverty andDescribing postulating story thegrowth question thegrowth - This involvesbackground a analy- Growth D iagnostics with shortcomings the that were identified. The value-addition theto WorldBank IG study the by MCA-Zambia was to updatethedata where possible and deal economies developing inthe world. chosen, inmanyfully instances comparing Zambia to countries and/or inSouthern Africa landlocked, resource-rich sons to benchmark Zambia’s performance were relied also upon extensively.set The of comparator countries wascare - Macro-data, as welland asdata, industry firm-level firm and werehouseholdused. surveys Cross-country compari- Growth This bothstudy inZambia?” direct bottlenecksandevidence indirect used to identify to inclusivegrowth. As indicated inChapter team 1,the draws heavily on World the study, Bank “What are Constraints the to Inclusive have therefore not analysed. been as well as potentially being important ingeneral, may have also significance for varying differentsectors. factors These analysisthe is difficult to undertake for non-economic factorslike implementation difficultiescorruption, and which not does allow for methodology the sector-specific becauseanalysis it is undertaken at an aggregate level. In addition, straints as not binding. As aresult, binding the constraints identifiedthe in havereport notbeen prioritized. Further, ofin practicebecause impossibility the of estimating shadow prices and by challenge the some rejecting posed con - providesAlthough methodology the criteria for binding selecting constraints, applying is difficult methodology the Millennium Challenge Account-zambia |5 METHODOLOGY

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 6 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA METHODOLOGY of past the was which largely linked to developments mining inthe sector. total factor productivity improvements (Figure 3.3).This presents adistinct withthebreakcapita decliningper GDP and 2008(see decline (see late inthe Beginning 1990s,Zambia’s economy to started grow and capita per incomes after to started rise decades of from more being inclusive and making aseriousdent on poverty? tained levels the first achieved inthe ten years of independence?secondly, And what is constrainingcurrent growth Against backdrop this two questions: CAtackles the firstly,why Zambia’s has capita GDPper not accelerated and at- neighbouring countries. declined only slightly and poverty remains widespread. Inequality remains inZambia also relative high to some of its growth and some improvements indicators insocial (education and aggregate health), poverty rates in Zambia have process findsthatZambia’s sophistication export remains low for her level of development.Despite strong and robust gan capitalising tofruit, bear on country’s the advantage inland-intensive However, goods. primary IG the diagnostic spurred private investment, sector mining inthe sector. especially At same the time, Zambia’s diversification drivebe- Current growth underpinned by has been an improved macroeconomic environment and reforms structural that years of independence (1964-1974). targetsthe Fifth inthe set NationalDevelopment Plan (FNDP)capita per theand GDP levels attainedthe first in ten age rate of 5% with positive capita per growth recorded. It should noted be though, that rates short these fall of still some of time. this In last the ten years, however, uninterrupted Zambia has experienced real GDP growth at an aver of copper and its impact on mining the sector. Prior to 2000,growth declinedsteadily and evenfell below zero for Since independence, real GDP growth inZambia has largely driven by been developments international inthe price factors country’s the behind past growth, employment, development poverty and social trends. clusive diagnostic analysis for Zambia that follows insubsequent chapters. It analysis is acountry-specific the of major This chapterZambia’s describes economic developments social and since independencethe sets stageand forthe in- 3.1

Figure 3.1:GDPpercapita,1960-2008 Economic Source: Author’sconstruction 100 200 300 400 500 600 700 Figure price 3.1).Copper movements generally explain real GDP growth inZambia 1965 over period the YR 1960 0 Figures 3.1and 3.2),however, recent positive and stable growth accompanied has, since 2002, been by Independence 1964 YR 1965 D evelopments ZAMBIA’S GROWTH STORY YR 1970 Copper PriceCollapse YR 1975 1975 GDP pc(Constant2000USD) CHAPTER 3 YR 1980 YR 1985 YR 1990 Millennium Challenge Account-zambia |7 YR 1995 growth (recovery) begins growth (recovery) Period ofSustained ZAMBIA’S GROWTHSTORY 1999 YR 2000 YR 2005 -

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 8 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA % Source: WorldBank, 2008(a) ZAMBIA’S GROWTHSTORY Source: World Bank,2008(a) Figure 3.3:GrowthAccountingDecompositionforZambia Figure 3.2:GDPpercapita,1960-2008 -0.12 -0.10 -0.08 -0.06 -0.04 -0.02 0.02 0.04 0.06 0.08 100 200 300 400 500 600 700 800 0 0 YR 1965

1980

1981 YR 1970

1982

1983 YR 1975 1984

1985

1986 YR 1980

1987

1988 YR 1985 1989

1990

1991 YR 1990 1992

1993

1994 YR 1995 Output 1995

1996 YR 2000 TFP

1997 International price(constant1990USDmt)RHS Production (mt’000)LHS

1998

1999 Factor growth YR 2005 2000

2001

2002 Linear (TFP)

2003 0 100 200 300 400 500 600 700

2004

2005 International price(constant1990USDmt)RHS Production (mt’000)LHS growing GDP components at 6.4% and 3.3%,respectively. with about athird of GDP spent on investments together which, with government consumption, were fastest- the economic Hugepolicies. earnings from copper were exports to increase used country’sthe capital stock significantly counted for almost of half formal GDP. sector growth This was complemented by relatively favourablepolitical and at an average rate of 4%aided by international high prices (World 2004(a)).Value-added Bank, from mining ac- At independence, Zambia was one of most the prosperous 1965 and countries 1972,real GDP inSSA.Between grew economies inSSA. numberthe of products and exported halved her Herfindahl index, breaking awayfrom groupthe of least-diversified Zambia has managed to broaden somewhat. nearly base her1980-2004, country the export In doubled period the communication, and finance and insurance,which tend to reflect economicbroader dynamism. sectors These are and wholesale more retail services. often an “employer of last resort”unlike transporttourism, and was mainly driven bywithin services growth real estate incommunity and and business services, and services social 1.4%fromfrom construction, mining, 1.1%fromand only services, 0.5%from manufacturing (Figure 3.4).Growth degreea lesser inmanufacturing: average growth rates increased by 1991and 4.4%between 2008,made up of 1.8% In addition to mining, growth drivers last inthe ten years have inconstruction, an and expansion been to inservices, lastthe five years. gross investment as apercentage of GDP increased steadily over and last the over decade has been 20%of GDP for rect investment (FDI) flows and favourable coppergrowth boosted since 2004,theprices miningsector. in Similarly, reaching tonnes 615,000metric in2009from alow of tonnes 257,000metric in2000.Robust increases inforeign di- tural reforms and copperthe According boom. to preliminary data, copper production steadily has increasing, been positive These growth rates arelargely due to remarkable improvementsthe in macroeconomic environment,- struc statuscountry by 2030. ing to 7% the levels required to achieve Vision 2030, (GRZ, FNDP), Government’sthe plan to achieve middle-income 6% to 5%.Whilst growth this pattern sustainable, seems questions remain as to why Zambia’s growth is not accelerat- years, is noteworthy. Zambia weathered economic global the crisiswith only shock amild to growth fell which from Zambia’s growth rates have not remarkable, been consistency the of growth the rate, over particularly last the five than higher spectable, Ghana andfor South Africa example, countries generally considered performers. good Whilst medium-term. Compared to benchmark countries, Zambia’s average growth rate over last the ten years re has- been num. Today, Zambia on to seems be asustained growth path with growth the rate projected to stay above 5%for the There was strongeconomic growth 1999 withto 2008 GDP period growththe real during averagingper 5%an- Source: World Bank,2008(a) Figure 3.4:ChangesinRealGrowthRates(%) Mining and quarrying Net indirecttaxes Manufacturing Construction ervices, etc Services, GDP Growth Agriculture -0.5 -1.4 -0.4 -1.5 0.1 0.1 0.1 0.5 0.4 0.5 0.4 0.3 0.3 1.1 1.5 Millennium Challenge Account-zambia |9 2.2 2.5 ZAMBIA’S GROWTHSTORY 3.5 1991-98 1998-06 4.45 4.5

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 10 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA tend to rely more on wage employment and less on subsistence farming households than poorer rural (Table 3.2). householdsFew rural have sufficient resourcespoorer to hire neighbours or provideloans. Richerrural households only 10%of farmers’ income comes from The majority farm sales. of farm output foris used subsistence (Table 3.2). bility to poverty. atA look closer sourcesthe of income of mostly rural, self-employed, household heads, suggests that death or divorce. This intermittent loss labourof capacity and incomeeventually increasesthe household’s suscepti- female-headed households are vulnerable to often poverty and insecurity food as a result the lossof their via of spouse At 64%,poverty infemale-headedhouseholds households isthan higher inmale-headed at 58.1%.The majority of T toseems suggest that inequality when to is with, start high it to acts reduce impact the of growth on poverty reduction. line. The Gini coefficientboth in between 2004 also declined and2006(Figure provinces 3.6 and Table 3.1). This belt and Lusaka, where economic activity has increased, incidencethe of poverty was below 2006 the national poverty Gini coefficientactually increased from 40.8in1996 to43.5in2006. the For two most urbanized provinces, Copper from 68%in2004and areas 73%in1998,poverty levels inrural remained at high 77%in2006(Figure 3.5)and the (LCMS) that revealed 64%of population the was living below national the poverty line. Although an improvement and urban rural areasin both during years the 1996toConditionsLiving 2006.The 2006 and Monitoring Survey Recent growth has not translated into asignificantrural areas. in poverty decline in especially Inequality increased ments was to keep real GDP growth depressed. resorted to domestic money creation, createdwhich inflationary pressures. The combined developeffect these of - was unwilling to Kwacha the devalue inresponse to negative term-of-trade shocks and as foreign financing dried up, andtries relied heavily on price controls, subsidies, tariffs high andlarge a protectedparastatal sector. Government resorted to heavy borrowing to finance consumption and investmentcapital-intensive, in import substitution indus- 2004b). This decline largelyis explained the country’sby poor response thelarge to Zambiaterms-of-trade shock. age real GDP growth fell to 1.5%ayear to 1970s,then inthe 1980sand 1.4%inthe 1990s(World 0.3%inthe Bank economyThe contracting started following oil increasesprice in1973 theand drop incopper in1975. prices Aver 3.2 able 3.1:T ZAMBIA’S GROWTHSTORY

Poverty rends inInequality, 1996-2006 Source: CSOforthcoming.Note:Giniinequalityisbasedonexpenditureperadultequivalent North-Western Copperbelt Northern Southern Western Trends Luapula Zambia Eastern Central Lusaka Urban Rural 1996 42.8 38.9 43.9 39.3 38.9 41.2 40.9 42.2 40.8 47.4 44.4 42.5 1998 39.9 39.3 47.1 41.7 40.2 44.8 49.6 44.5 41.4 48.8 44.4 46.0 2004 47.5 47.8 48.4 41.7 46.9 48.8 47.3 46.6 45.7 52.7 46.5 51.6 2006 43.0 47.4 47.7 43.6 44.4 48.4 46.5 46.8 43.5 52.6 47.5 49.3 - - Source: World Bank,2008(a) Figure 3.5:PovertyRatesinRuralandUrbanAreas,1991-2006 Source: CSOforthcoming Figure 3.6:T Poverty Rate in Percent 100 20 40 60 80 0 Poverty Head count (%) otal Poverty–ProvinceT 100 20 30 40 50 60 70 80 90 Zambia 91

Central 92 93 94 rends, 1996-2006 Copperbelt 1996 95 96 Eastern 97 1998 98

Luapula 99 00 GDP PerCapita(RHS) Poverty headcountat1US$aday National Urban(LHS) National Rural(LHS) National Headcount(LHS) 01 Lusaka 2004 02 03 Millennium Challenge Account-zambia |11

Northern 04 2006 05 06 North-Western ZAMBIA’S GROWTHSTORY 150 170 190 21 230 250 270 290 310

Southern GDP Per Capita (1994 Kwacha)

Western

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 12 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA Survey 2002-03. Survey 1 increased and productivity economy. than higher rural in the has been pathway out of migration poverty has been to urban low-cost and medium-cost areas where number the of jobshas 3.5), accounting for 86%of GDP in2006and located mostly inurban centres. most past the the decade, effective Over of expansion have which activities drivers insome industrial andbeen of service growth inZambia (Tables 3.4and In last the few years, urban poverty whilst poverty has has increased declined, slightly. rural trends These are a result Source World Bank,2008(a). T areurban poor typically self-employed. are home to an estimated 50-80% of urbanthe population. The In urban areas, reside poor the ininformal settlements which Source: World Bank,2008(a). T urban land. far fewer years of schooling. Incomes and intake food are supplemented by cultivating undeveloped urban or peri- relyurban richthey much less on income from wages and have wages (Table poor than rural the 3.3). In comparison to the urbanderive poor a much larger share of incometheir from trading commodities, petty farming, and letting real estate, the rangingties from producing and building selling materials, to 2002- 2003.Employed inavarietyof informal economic- activi which 56% of Zambia’s urban workers livingtheir earned in urban centres are of part large, the urban, informal in sector able 3.3:MeanSharesofHouseholdIncomebySource,Quintile,UrbanAreas able 3.2:MeanSharesofHouseholdIncomebySource,Quintile,RuralAreas Consumption of own production Other incomeOther Non-agricultural rent Pension Remittances Salary Livestock and other farm income Non-farm business Consumption of own production Other incomeOther Remittances Salary Non-farm business Non-food crop sales Food crop sales ZAMBIA’S GROWTHSTORY Among individuals aged 20and over, 18%of bottom inthe those quintile were unemployed according to Living the Conditions and Monitoring 100 All All 15 50 24 55 11 10 5 6 0 0 6 6 2 2 6 1 The self-employedThe in Poorest 20% Poorest 20% 100 20 38 25 57 13 11 9 8 0 0 7 3 2 1 7 Quintile ofQuintile National Distribution Quintile ofQuintile National Distribution Box 3.1:Zambia’sPoor:SomeStylizedFacts 100 19 40 27 55 12 10 7 6 2 2 0 0 6 5 2 2 6 3. 2. 1. HIV&AIDS, Malaria and healthriskssuchasdroughts,floods, The poorarehighlyvulnerabletoshocks resources The poorhaveinadequatehuman The poorhavelowreturnstotheirlabour 100 54 12 10 16 46 27 3 0 0 6 6 3 3 6 7 5 3 100 55 11 13 14 50 26 4 0 0 7 7 2 2 6 4 6 4 Richest 20% Richest Richest 20% 100 52 11 11 13 60 19 9 0 0 5 3 2 5 3 5 number of created jobsbeing sufficient not to be does seem significant tolifta shareof people outof poverty. number of urban near jobsinthe term.Furthermore, despite increases ininvestment flows the miningsector,to the even asizeable percentage increase inemployment in urban industriesnot will result inasignificant increasethe in Despite level higher of the productivity, distribution the of employment by (Figure to industry 3.7)seems imply that sive growth as well as pointing inefficient to avery utilisation of labour. productivity in farm and non-farm (mostly urban) employment (see ofLevels labour productivity in agriculture, in sector which mostthe people are employed, are low. The gapbetween T T Trade Transport Public administration estateReal services Other Utilities Banking Services Manufacturing Mining Construction Industry Agriculture Trade Transport Public administration estateReal services Other Utilities Banking Services Manufacturing Mining Construction Industry Agriculture Total Source: World Bank,2008(a). Total Sector Source: World Bank,2008(a) Sector able 3.5:Industries’ContributiontoRealGrowthinZambia(%) able 3.4:SharesinT otal Value AddedinZambia(%) 100.0 2000 19.4 10.1 58.4 11.2 23.3 18.3 6.7 8.2 2.1 3.1 8.7 6.8 5.3 100.0 2001 2001 19.6 10.0 58.7 11.1 24.2 17.1 -0.5 4.5 1.0 0.2 0.5 0.4 0.5 0.4 0.0 3.0 0.5 1.0 0.6 2.0 6.6 8.3 2.4 3.3 8.4 7.5 5.6 2002 100.0 -0.2 -0.3 2002 4.5 1.0 0.1 0.1 0.4 0.1 0.3 1.9 0.6 1.2 1.0 2.8 19.7 10.0 58.0 11.3 25.9 16.1 6.4 8.1 2.5 3.0 8.3 8.3 6.3 2003 100.0 2003 5.8 1.2 0.3 0.1 0.4 0.2 0.0 0.3 2.5 0.9 0.3 1.4 2.5 0.8 19.8 57.2 11.5 26.8 15.9 6.4 7.8 2.5 2.9 8.1 8.1 7.3 9.9 Section 4.3) has negative Section implications for inclu - 100.0 2004 2004 19.6 56.1 11.3 28.3 15.7 Millennium Challenge Account-zambia |13 6.1 1.0 0.4 0.0 0.4 0.2 0.0 0.3 2.2 0.5 1.1 1.5 3.2 0.7 6.4 7.4 2.5 2.7 7.9 8.7 8.2 9.7 100.0 2005 2005 19.6 55.9 11.1 28.9 15.2 5.8 1.2 0.5 0.3 0.4 0.3 0.1 0.3 3.1 0.4 0.2 1.6 2.3 0.4 6.6 7.2 2.6 2.7 7.7 8.5 9.3 9.5 ZAMBIA’S GROWTHSTORY 100.0 2006 2006 10.0 18.7 55.9 11.0 29.5 14.6 6.7 0.4 1.4 0.6 0.3 0.4 0.3 0.3 3.8 0.6 0.6 1.3 2.6 0.3 7.5 7.4 2.9 2.8 7.5 8.5 9.2 Average Average 100.0 19.5 57.2 11.2 26.7 16.1 5.6 7.4 6.7 7.8 2.5 2.9 8.1 8.1 9.8 1.0 0.5 0.3 0.4 0.3 0.1 0.2 2.8 0.6 0.7 1.2 2.6 0.3

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 14 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA the workforce. the futurethe quality of human capital. Therepositive is a relationshipeducationalbetween attainment theand quality of pupils to one teacher. For ratio 1-4,the grades is 71.8pupils to one teacher. This negative development puts riskat qualitythe of education. The pupil teacher ratio education forbasic primary continues be high to averaging 46.4 tion schooling of in2002.Favourable primary free developments notwithstanding, there are major concerns about completionthe rate increased from 63.6%in2000to improvements 94.7%in2008.These the partly reflect introduc- 1-9 rose from net 75.1% in 2000toenrolment 104.6% in 2005,while ratios (NER)rose from 68.1% to 97.3%. Similarly, Education indicators have improving been over recent years. For instance, gross enrolment ratios (GER) for grades duced number the of hours of contact students had with instructors. their class sizesand double, triple and quadruple shifts. Not this only did put undue stress on physical facilities, also it re- of education primary deteriorated significantly. Much the increaseof inenrolmentthe been resulthad of increased enrolments increased more than twelve-fold at 10.5% annually (World 1994). After Bank, 1985, however,the quality 1964 and 1985,enrolments schools increased four-fold, inprimary growing at 5.5%ayear school and secondary independence in1964were reversed during 1970sand the due 1980s,inpart to adecline inpublic revenues. Between enrolments, maternal mortality and infant, child and under-five mortality. indicators Gainssocial in achieved after In last the Zambia decade, to has recover begun much of progress the made early inthe 1960sand 1970sinschool 3.3 1000000 1500000 2000000 2500000 Source: World Bank,2008(a) Figure 3.7:NumberofPeopleEmployedbySectorintheRuralandUrbanAreas,2004 ZAMBIA’S GROWTHSTORY 500000

Social 0 Agric. D evelopments Mining Manuf. Elect. Constr. T rade Hotels T rans. Finance Comm. Urban Rural in Chapter 2. economy that have contributed to status the quo/ equilibrium position using IG the diagnostic framework described The remainder of his therefore report attempts to answer these questions theby identifying principal factorsthe in and making aseriousdent on poverty? firstachieved inthe ten years of independence? (2) What is constrainingcurrent growth from being more inclusive arising from growth this are story (1)why has Zambia’s GDPcapita per growth not accelerated and attained levels andpendence is insufficientmake serious to a dent the in country’s levels. high poverty Hence the twokey questions ever, short that falls of still targets the FNDP, inthe set has not reached ten inthe levels the years set following inde- This chapterZambia’s tells growth story. It is a story of sustained GDPgrowth real thelast in ten years,growth, how- 2006, GRZ2009). children immunised fully in2007was 49.1compared to 66.6,78.3and 70in1992,1996and 2001respectively (GRZ Immunisation rates, incomparison although good with rest the appear of Africa, declining.percentage to The be of cholera. In 1978there were fewer than of 2000reported cases cholera; figure this risen to had roughly 12,000 by 1991. holds to 18%.This thehas increased number peopleof vulnerable to water-borne and such infectious other as diseases early 1990sto around early 34%inthe 2000s.Similarly, access to improved sanitation dropped from 27%of house- 1990ssawthe adeterioration insome indicators. Access to improved water dropped from 49%of households inthe and centre health doubled beds and 75%%of population the lived within 12kilometres of facility. a health However, 97 in improved.1990). At also delivery samethe time,1964 and health service 1981, numberthe Between of hospital deathand in infant rates, incrude afall a fall inlife expectancy mortality arise rates 1000births in1950to (259per In years the following independence, performance across anumber of indicators health improved substantially with and AIDSprevalence rate for adult the population aged 15-49to 14.3%in2007from 16%in2002. Infant, child and maternal mortality indicators have improved substantially. There a slightbeen has dropthe HIV in Zambia’s overall indicators health have improved considerably last inthe since twenty independence, especially years. Source: GRZ,2009(a) Figure 3.8:T

Deaths per 1,000 live births rends inInfant,ChildandUnder-FiveMortality 100 150 200 250 50 0 1992 1996 2002 2007 Millennium Challenge Account-zambia |15 Under-five Mortality Child Mortality Infant MortalityRate ZAMBIA’S GROWTHSTORY

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 16 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA ZAMBIA’S GROWTHSTORY Job T T and LICs. inthe school(Annex 1),although Zambia’ssecondary performance regard inthis is better on average than its inSSA peers schoolaccess, difference the to secondary is clear. There are more thanboys girls in education and at bothprimary There is no major difference rural between and urban inareas terms of accessschools to primary but with respect In 2004,only 24%of Zambians attended school and only secondary 18%completed 12years full of the schooling. lower than average the for SSAand much lower than average the for LICs. (LICs) over 2000-2007 (Annex I). However, period the school enrolment gross secondary rates for 2002-2004 were ratios for education and primary secondary combined were above average the for SSAand Low Income Countries levelshigh of educational attainment at lower levels of schoolcompletion schooling. Primary rates and girl-to-boy long the Over quality term,the of human capital is apositive of function educational attainment. Zambia has relatively straints that have limited extent the of country’s the growth. in professionsskills such as banking and construction for example. These shortages have far imposed reaching con- impose binding growth constraints on economy. the economy The facesconsiderablealso shortages labour of certain costs associated high the with contending and productivity withthe disease arising losses from combine health ill to wages higher the associated witheducational higher attainment.poor Thestate of health thepopulation, of general have schoollevels, poor the andondary limited tertiary access to education, restricting chances their of gaining from ticularly on inclusive growth. ofLevels educational attainment are only not binding at school level. primary At- sec The study concludesthat broadly,the state of humancapital Zambia in is a binding constraint growthon parand out turns and on prospects for employment future. inthe term. The chapter exploresalso thewhether quality of humancapital is aconstraint currenton labour employment cation and determine health, prospects the of opportunities to poor seize the business inthe environment long inthe In chapter, this factors the determining qualitative the supply of labour are examined. factors, These edu particularly - 4.1 able 4.1:IncrementinEarningstoHumanCapitalRelativeofWorkers withnoFormalEducationandOn-The- Education raining (%) EMPLOYABILITY ANALYSIS Source: World Bank,2004b University completers completersSecondary completersPrimary Education Variable Age square Age University completers square Age Age completersSecondary Age square Age completersPrimary Age CHAPTER 4 209 90 43 Coefficient -0.003 0.23 -0.001 0.14 -0.0008 0.07 Millennium Challenge Account-zambia |17 EMPLOYABILITY ANALYSIS -

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 18 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA the Governmentthe invested heavily inhuman resource development, under-funding, inadequate on focus - sci policy developmentskills for advancement high-level necessary of and science technology. Although after independence inherited an industrial apprenticeshiptry on system hands-on focused development skills instead of on analytical the Zambia has made little progress in technical and vocational training since independence. At independence, counthe - hire Zambian- trained professionals. education among parents, firms and communities. explains This partly the reluctance of firmssome and industries to As aconsequence, quality the of education has remained relatively low, resulting inloss of confidencethe value in of education, compared to Zambia’s 20%(GRZ,2007). Malawi at 5.3% of GDP. comparator These countries devote at least 25% their domesticof discretionary budgets to funding level that much is still lower than average the government expenditure on education in Kenya, Uganda, and spends an average of about 3.2%of GDP on education and training (including and technical vocational training), a 4.1). The Box main (see equality educationchallengethe is limited financing services availablesector. the to Zambia Various indicators suggest that Zambia is not doing well inproviding tion therefore akey constraint pose for inclusive growth. education is of afunction household income. Disparities ineduca- public sector, reaches just alittle over 2%of population. the Tertiary Tertiary education, essential for most jobsinlarge companies and the The pyramid narrowseducation. evenfurther the level at of tertiary andseven there is ashortage of and places inmiddle schools. high ofneeds country. the Fees are charged still for education aftergrade human resources) ineducation. Capacity not does currently the meet cerns about qualitythe of education and about inputs (particularly Despite improvements inschoolinfrastructure, there are major con- Source: World Bank,2008(a) T As aproxy of returns to education, World the (2004a) Bank 2 young ages. poorest inthe in schoolthan those quintile. typically schoollater, start poor the Because greatest the difference is at poorestthe (Table urban deciles 4.2).At ages, all children from households top inthe quintiles are more likely to be household-heads richest inthe had nearly urban deciles mean the years twice of schooling than household-heads in poorer household-heads areas Table inrural (see difference 4.2),this is more marked inurban centres. In 2002-2003, forsector in Zambia. poor the Although there is no major difference in mean years educationof richerbetween and Education level beyondis amajor primary constraint to self-employment successful and employment formal inthe thatsertion there are important returns to developing human capital through levels higher of education and training. education attainment are relatively more substantial of than those on-the-job training. findings These support the as- cantly influenced botheducationalby increases in attainment and training; on-the-job secondly,and the effects of The analysis two reveals mainpoints. Firstly, as farback labouras 1995, (wage)earnings werepositively - and signifi received any form of education. ment ineducation and on-the-job training is estimated (Table 4.1)against sub-group the having industry inthe never differenteducational segments the of workforce. The relationship between an increment in earnings and an incre- byexperienced differentsegments the of manufacturinglabour force; theand average ages earningand levels the of that industry has completeda particular eacheducational level; measures of average the years of on-the-job training manufacturing, wasusing this calculated aMincerian wage equation data uses which on share the of workforce the in cational attainment and level of on-the-job training inZambia’s manufacturing in1993-1995(Table sector 4.1).For Urban Rural able 4.2:MeanYears ofSchoolingHouseholdeadin2002/03 EMPLOYABILITY ANALYSIS Both references Both are somewhat out of date, but are available best the works inZambia on subject this matter. 9.3 5.3 All 2 presents estimates of relative the by earnings scales edu- 6.6 4.4 Poorest 20% Source: MOE(2008) • • • • • • • Box 4.1:QualityofEducationIndicators 39.86 Pupil ClassRatio(PCR,Grade10-12): Pupil ClassRatio(PCR,Grade1-9):43.43 Pupil ClassRatio(PCR,Grade1-7):37.60 Pupil T Pupil T Exam PassRate(P,Grade12):61.0% Exam PassRate(P,Grade9):48.6% eacher Ratio(PTR,Grade8-9):32.35 eacher Ratio(PTR,Grade1-7):51.62 11.1 6.2 20% Richest and and poor limited (GRZ, 2009(b)). infrastructure healthcareweak systems with constraints on human resources, supply weak chains and managementlogistics systems, costs of about 0.5%of GDP is implied FNDP inthe financing. financing These gaps, among things, other result in mitments from Government and donors care in2006.Ahealth financing gap relative the to upper estimate of health The FNDP estimatesthat health-related costs amounting to 3% of GDP annuallycanbe covered by indicative com- growth rate of real GDP on average by 0.3%since 1992. AIDS particularly, estimating held else constant, that everything HIVand the AIDSepidemic has lowered annual the interventions,health HIVand AIDS.The especially WorldBank (2004(a)) growththe stresses constraints of HIV and rangein the of 1%to 1.8%of GDP. The variations arelargely due to differences timethe extent in over scale of the of costs related to inZambia health are range inthe of 2.9%to 3.5%of GDPyear per (Table 4.3).HIVand AIDScosts are The majorcauses of mortality and morbidityZambia in are HIV and AIDS, malaria and Estimates tuberculosis. the of regionSSA, the that itself has highest the incidence. ity and morbidity remain major concerns country. inthe The prevalence of HIV and AIDS is amongthe highest in improving has been (Annex I).Life expectancy slowly but among is still lowest the inSSAand LICs. Maternal- mortal for many poor.the people, especially Compared to rates SSA andin both LICs, childin Zambiamortalityhigher is still Despite improvements, these status the of and is poor country inthe health is aconstraint to productive employment AIDS treatment compared to 2002. 2009) shows notable improvements inmaternal and childmortality health outcomes and inenrolment for HIVand Zambia over 2000-2007. The Demographic and malaria period the other services and for Health 2007 (GRZ, Survey (GRZ forthcoming). inareas Some progress delivery such Antiretroviral was made in service Therapy (ART), and (96.2% of urban households and households), 94.4% of rural and therefore had relatively access easy to services health by public the sector. About 95%of households were, as of 2006,located within 5kilometres of apublic facility. health Health is another important dimension of employability. inZambia, are over Overall provided 80%of services health Cabinetthe (GRZ,2009). soon it has not implemented. been After along delay,fresh a pay was drafted policy in2009 and is be due to submitted to Even and salaries withbasic fewer higher pay though anew allowances policy was approved by Cabinet the in2003, by up to 200%(encouraging many public to on focus servants chasing allowances) (World 2003;GTZ,2009). Bank, and managerial staff; and fixing a distorted payment system which in anarray allowances salary of boost basic can important issues, improving namely: levels that are salary low too to attract and retain essential technical, professional teachers inpublicthe are sector generally not properly remunerated. Pay reform in Zambia two to istackle needed significant amount of under-utilisation and under-rewarding of humancapital the country. in Jobs for doctors and ployed and under-employed engineers, doctors and teachers for example. This would suggestthat there maybe a Moreover, there are anecdotal indications opinions and expert currently that point to significant numbers of unem- Zambianin the market. largely by overhead high costs, inturn, which, are driven by scarcity the financialsector of skilled professionals certain of report this with cost dealing the of finance documentsthat thespreads high bankingsectorthe in are determined is perhaps more nuanced and to different specific economicsectors than the study shows. For instance,section the Workers’ are skills not perceived amajor to be obstacle to private growth sector inZambia but picture the inreality indicators(GRZ, 2006a).These suggestthat science andis technology relativelyZambia. underdeveloped in ment (approximately 1scientist/engineer 1,000Zambians, per an insignificant ratio), andZambian just 28 patents ment (R&D),had only about 1,000scientists and million engineers population per engaged inresearch and develop - total manufacturing In exports. 2006,Zambia spent an insignificant proportion of its GDP on research and develop - million population,neers per number of patent applications, percentage content,and of technology with high exports indicators, including research and development expenditures as apercentage of GNP, number of scientists and engi- Zambia’s failure to make progress and and technical vocational intertiary training informative is evident inseveral solidated (GRZ2006). investment by private the ininnovative sector since has ideas then meant th 4.2 Health Millennium Challenge Account-zambia |19 EMPLOYABILITY ANALYSIS

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 20 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA households and disproportionately more on poor. the The costs thealleviating constraints of in health are substantial. Health constraints inZambia appear binding to be on inclusive growth as burden the of payments health on falls availability of careetal, health 2009;GRZ,2009b). (Cheelo se per (transportinfrastructure networks anddivide) are rural-urban the more significant determinants than theof health socio-economic factors (income, nutrition, water and sanitation, housing, education, culture and employment), and in future consumption (physical as well as human capital investments) are undermined. Recent work shows also that come growth negatively stockthe because of available labour and labour productivity, and incentives for investments The high prevalence coupledof disease, with systems health weak socio-economicpoorand conditions, in- affects The system, health thoughlargely (over 80%) public,transfers significant cost burdens to households. household out-of-pocket expenditures are to pay used for medicines, consultations and other facility health costs. other financiers (12%)(GRZ2009b).This shows that thebrunt health of paymentsfalls on households. Thebulk of out-of-pocket payments by households (32%),Government taxes and other revenues (29%),donors (26%)and Zambia’s services. health total expenditure on from health 1995to from 2006was funded following the sources: As well as resource gaps, that there fact the ishouseholds also spendconsiderable amounts of incomes their on Source: Cheeloetal(2009;forthcoming) T m) Total on Health Core based Costs Costs Total Health est. inFNDP: Cost l) Total +NAC): BHCP (CBoH Costs (b)+(g) k) Total Health (Mphuka): Cost (a)+(d)+(e)+(f) j) Total Health+Kombe (CBoH &Smith:) (b)+(h) Total Health ests., recalc’d Cost (adjusted to FNDP): h) Alt. HIVcosts 2(Kombe &Smith)**** g) Alt. HIVcosts 1(NAC)*** f) HIV&AIDScosts (Mphuka)* f) e) Malaria only (Mphuka)* d) Maternal Mortality (Mphuka)* c) Child Mortalityc) Child (minimum costs) (Mphuka)* Components of Health est. b) Alternative Health cost (CBOH)** Maternal Mort.) (Mphuka)* a) Health (incl. Mortality Child exc. Malaria, HIV&AIDS& Total Health est.: (I) projection and to health GDP ratio calculation are authors’ estimates on that based study. ****Kombe, G.,and O.Costs of Anti-Retroviral Smith (2003)“The TreatmentZambia”, in PHRplus were and Total extracted used. (2005-2015) cost projection and health-to-GDP ratios were separately calculated (not of part exercise). original the *** NACZambia HIV and (2006)“The AIDS Strategic Framework 2006-2010”, Lusaka: February. Only costs treatment,of assuming up scaled as programme, 2015) cost projection and health-to-GDP ratio calculation are innovations study. not CBoH inthe and UNZA IHE(2004)“Costs**CBoH, of Health aBasic Care Package for 1st, 2nd and 3rd of Levels inZambia”, Referral Lusaka: November. The total (2005- but areMDGs, only MDGs health the reflected here. *MphukaCostZambia”. of in the (2005)“The MDGs Meeting Research commissioned by CSPR, JCTR CCJDP;and October. Lusaka: The studythe all costs Notes: Goal/Target Definition able 4.3:RangeofCostEstimatesHealthMDGs EMPLOYABILITY ANALYSIS 4,578.8 5,369.1 4,403.6 4,444.9 1,760 2,684 1,092.6 630.7 167.4 127.7 2,684.5 2,512.9 (II) 2015) ($million) Total cost (2005- 416.2 488 400.3 404 160 244 99.4 57.3 15.2 11.6 244 228.4 (III) million) annual cost ($ Average. , Abt Associates, October. The total (2005-2015)cost 32.0 37.5 30.8 31.1 15 18.5 7.4 4.8 1.3 n.a. 22.7 16.6 (IV) ($) annual cost Per capita 3.0 3.5 2.9 2.9 1.2 1.8 0.7 0.4 0.1 0.1 1.8 1.7 (V) projections) GDP (FNDP Annual % of Avgas produce for commercial both and subsistence purposes. andskills productivity levels typical of SSA. There are also hybrids, medium-sized and emergent farm operationsthat of developed countries and on other the hand, alarge number subsistence of small-scale, farms with relatively low hand, there are number asmall of export-oriented commercial farmers productivity boast who levels similar to those future?in the Can agriculture provide apotential path out ofsector poverty? This has a structure: dual the on one ployed in,and derive income their from, farming. But is there potential for sector inthis productivity improvements Agriculture interest is of asector special inZambia. The majorityZambia,poor, peoplethe of in especially are em- labour employment, and bulk of the labour the force participating has been with inasector low labour productivity. respectivelyfor over In and industry essence, services, same the growth the period). sectors have not created much during agriculture 2001-2006,the sector’s real input rather has been low (compared to contributions of 2.6%and 2.8% declining over (Figure time 4.3)and unsurprisingly, with an annual average contribution of 0.3%of total real growth compared Moreover, and to industry services. sharethe of agriculture’s value in total added value has added been is much than higher inagricultureservices (Figureper 4.2).The valueworker added real in agriculture is marginal In stark contrast to labour the force profile proportions (70%in agriculture),labour productivity and inindustry Source: Authors’construction T and 2005LFS.The 2005LFS results showthat 16% peoplethelabourof in force were unemployed. force grewfrom 2.4million in1986to 4.9million in2005.Employment levels remained above 1986 the 80%inboth of SSAand other LICs (Table 4.4).The resultsLabour the 2005 of Force (LFS) show that Survey the size thelabour of average 2001-2007,the period the Over growth of Zambia’s both population and its labour force was lower than that sector (7%). sector is illustrated inFigure 4.1.The thelabourbulk of force (70%) is in agriculture grouptheand smallest services the in active sub-populations disadvantaged interms of employment. The distribution labourof forceparticipation sector by areas. At national the level there were obvious gender and location divides, with females economically and rural the participation rate was about 65%of total the economically active population; 59%inurban areas and 69%inrural According to preliminarythe results of 2006 the Living Conditions Monitoring (LCMS), labourthe Survey force 4.3 Labour forceLabour growth (%) Population growth (%) able 4.4:PopulationA Source: Authorsconstruction

Figure 4.1:DistributionofLabourbySector(%totallabourforce) L abour

Markets verage AnnualGrowth(2001-07) Agriculture 70% 1.8 1.9 Zambia Industry 27% 2.6 2.5 Sub-Saharan Africa Services 7% Millennium Challenge Account-zambia |21 EMPLOYABILITY ANALYSIS 2.7 2.2 LICs

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 22 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA to other countries African and have of even increased since beginning the 1980s. the in most countries, but not inZambia. costs, These created economicthe by Zambia, structure in are compared high costs to agriculture, including direct taxes and macroeconomic and other distortions, have diminished substantially ment interventions markets inagricultural to misallocation led of the resources and to indirect higher costs. Indirect benefited, manyto accesswhile markets, farmers struggled inputs small-scale and information.Continued govern- reduction of producer subsidies. The nature these of reforms meantthat large-scale firmsfirms and with market access 1990s,major the During reforms were out carried and within sector the including market-determined prices and a Low productivity areas inrural stems from partly many the years indeveloping of neglect agriculture the sector. wage employment. what So are main the factors limiting returns to labour and jobcreation inZambia? inZambiapoor are low returns to self-employment, inagriculture, particularly and limited growth of and/or access to subsidies. This wage differential reflectsproductivity differentials. The main reasonsfor the low incomegrowth of the maize farmer without subsidies, and fertiliser commercial $1.30for maize a small-scale farmer with 50% fertiliser $4.50 aday, much than higher average the daily return of cotton $1.20for asmall-scale farmer, $0.30for asmall-scale der crops, horticulture two inlocal and as many as 25infloriculture. wage between$3.60 be The expected and would to generate,tial for example, hectare in coffee jobs per time two full- production,wheat/soya,job ain half one in- fod sons for ingeneral. sector the It is estimated that expanding irrigated commercial agriculture would create poten the - The employment and income implications pastof commercial agriculture expansionZambia in reflect important les- EMPLOYABILITY ANALYSIS Source: World Bank,DDP(modified) Source: EstimatesbasedondatafromGRZandWorld Bank. Figure 4.2:RealValue AddedperWorker inZambia Figure 4.3:SectorValue AddedShares(%ofT LCU in thousands 1000 1500 2000 2500 3000 500 0 10 20 30 40 50 60 70 2000 0 2000 2001 2001 2002 T 2003 otal otal Value Added) 2004 Agriculture 2002 2005 2006 Industry 2003 Services Linear Services Linear Industry Linear Agriculture Services Industry Agriculture 2004 2005 2006 skill constraintsskill future, inthe asrelates this particularly to more skills. specialised quality or of focus education and supply actual the of strategies skills, are to address needed ways of meeting potential ness Environment Analysis shows, result overhead inhigh costs. Moreover, given lag time for the changes level, inthe and other trained professionals. highly imbalances These exist,sectorthe financial in for example, and, the as Busi- However, not does this mean that there are not imbalancessuch skills in specific as managers, engineers,technical At aggregate the level, there are few signs of major demand imbalances the between and supply labour. of skilled to other education. countries of and pool people with small atertiary the low compared to other developing countries. At level, rate the tertiary increases the to 10%but low is also compared and Asia. 0.5%inSouth-Central For education, with secondary those migration the rate very is is 0.3%which also migrated from Zambia in2000compared to regional averages 2.8%inNorthern of 0.3%inSouthern Africa, Africa world,the and Zambia’s rates are low evenby standards. African schooleducation Only 0.1%of with primary those ited education and infrastructure resources. migration Overall rates are generally lower relative inAfrica to rest the of brain-drainso-called The can have a huge negative effect on growth limited ina with country human capital and lim- Another way to analyse excess demand for or excess supply of labour is to at look international migration patterns. of different types ofefficientlabour unlikely is to constrain jobformal creation. mismatch demanded skills the by between an average firm theand workers skills provide. the theIn near supplyterm, tenth inalist of 17obstacles to business operations inZambia (World suggests 2004b)which Bank, that there is no labour demand. It argued can be that labour is not aconstraint to business growth. Workers’ and skills education rank Another important thing to consider labour in the market is extent the of mismatches labour supply between and ever, to increase output at both intensive the and extensive margins. already comparable indeveloped countries. to those There are opportunities for farms,medium howand small-scale - Any expansion incommercial agriculture place take mainly inZambia will along extensive the margins as yields are Millennium Challenge Account-zambia |23 EMPLOYABILITY ANALYSIS

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 24 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA EMPLOYABILITY ANALYSIS Zambia (see TableZambia (see 5.1). ofpart 2000s,showing the that at macro the level at least,relative the availability of alternative financing options in direct investmenteign (FDI) and aid were than higher averages the for SSAand LICs 1990sand inthe both first the 2000s.Inin the 2006,Zambia’s domestic saving as ashare of corresponding the GDP surpassed average for SSA.For havein both noted: been for instance, domestic saving as a share of GDP climbed from just 6% in 1990s the to 16.5% financialpoor intermediation ratherthan low levels of domesticsavings poor internationalor finance. Improvements The main supply-side reason forpoor access to costtheand high of finance for small and micro-firmsappears be to bankingthe environment. overhead costs (due mainlyof bankingthe toscale system), small the human high capital costs, and deficiencies in pediment to creditgrowth), (and otherand financialservices is in largereflected interest rate spreads,driven byhigh constraintsthese are binding on inclusive growth widely is debated. still cost The high of finance the is main im- major constraints to growth (World 2007b;World Bank, OfZambia, 2004b;Bank 2009).The Bank, extentwhich to InZambia, financialsector the costthe inboth high of finance and limited access to finance beenidentified as have but are not binding constraints on growth. ultimately section The finds that access to finance the and cost of financing are importantchallenges thefor country, question, Chapter 5considers supply the and demand sidesofZambia. banking,credit in and other financialservices growthThe whether askssection supplythis diagnosis in capitalof is a binding constraint growth.to this tackle To Chapter 5addresses issues related to cost the of finance Chaptersand 6 and 7consider returns economicto activity. analysis of factors the determining returns to economic activity. business environment analysis, inturn, has two components: an analysis of access to and demand for finance; and, an clusive Growth at looks which model supporting economic progress; first the being employability leg (Chapter 4). The This chapterthrough thegoes diagnostic decision treethe HRV developed in second model. Thisthe is leg the of In- 5.1

A ccess to BUSINESS ENVIRONMENTANALYSIS: Financial COST OFFINANCE S ervices CHAPTER 5 Millennium Challenge Account-zambia |25 BUSINESS ENVIRONMENTANALYSIS: COST OFFINANCE -

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 26 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA banked) is considered below. further 4 of factors the inhibiting effective the usage 2009). of credit (BOZ, referenceservices ofLack sufficient historical usage high data, fees,faced and difficulties by banks ingetting consent forms from existing customers due to laws privacy are some 3 inadequate supporting financial (for infrastructure example a young and challenged credit reference bureau). Financial intermediation is limited by both size(and small the coverage) of banking the sector, its volatility, and an Source: World BankDDPdata. *Latest yearshowninparenthesis T ther formalther nor informal financial institutions and only 5% of adults and 8% of business micro-financeowners used 2009).This meansdata, that,two thethirds (BOZ, 2005FinScope in Zambiansseen as of service by nei- wereserved access to other formal 66% while andof adultZambians informal financialservices have no access to any financial adult population of has access whom to formal 61% are banking services, and male 39% are female. About 19% have countries, suggesting that depth the of Zambia’s low financialsector (Figure is very 5.1). Moreover, only 14.6% the of than 5%of population, the percentage the of people with account abank is much lower than that inother African (FinTrust, 2006). Zambia Gross Capital Formation (%of GDP) Low income countries Sub-Saharan Africa Zambia Gross Domestic Savings (%of GDP) Low income countries Sub-Saharan Africa Zambia FDI, Net Inflows (% of GDP) Low income countries Sub-Saharan Africa Zambia FDI, Net Inflows (% of GrossCapital Formation) Low income countries Sub-Saharan Africa Zambia Aid (%of Gross Capital Formation) Low income countries Sub-Saharan Africa Zambia Gross Capital Formation (Annual %Growth) Low income countries Sub-Saharan Africa able 5.1:InvestmentandSavingndicators COST OFFINANCE BUSINESS ENVIRONMENTANALYSIS: The demand for banking (for and example, financialservices other reasons for such small proportions the of adult population Zambia in being non- Zambian The credit reference bureau,which commenced full operations in February, 2008, has date,to achieved insufficient market penetration. 1991-1999 13.7 18.6 16.2 6.0 1.1 1.5 4.0 5.0 8.4 27.6 16.2 30.0 193.4 5.6 3.1 11.1 21.4 17.8 2000-2005 23.8 22.5 18.0 16.5 1.4 3.0 3.3 5.8 16.1 14.3 10.5 25.6 72.8 8.4 7.1 7.9 25.0 18.9 Latest year* 25.8 (2006) 25.1 (2005) 16.2 (2006) 18.1 (2006) 1.5 (2005) 2.7 (2005) 3.6 (2005) 5.1 (2005) 13.9 (2005) 13.8 (2005) 9.9 (2005) 26.7 (2005) 50.3 (2005) 15.9 (2005) 13.0 (2006) 13.1 (2006) 28.8 (2005) 19.2 (2006) 3 At less 4

2005 (Figure 5.4) 5.3) and interestthe rate spread (dominated by overhead costs)relatively though still declining has since high, been end of 2007 (Kalyalya, 2008). loansBanking sector to individuals and corporate institutions have expanded (Figure 2008. The ratio of domestic credit the to privatesector to GDPfrom increased 18.7% the endat of 2005 to 43% the at 2009 respectively. The number of Automatic Telling Machines (ATMs)from increased 54 2004- to 295 period overthe (Figure 5.2).This represents annualgrowth ratesthe in number of branches of 12%,23% and 14%in2007,2008 and branches grewrapidly 2006-2009,reaching 264branches period inthe representing as 17banks of September 2009 Some positive trends infinancial intermediation in recent havetimes. Thebeen observed number of commercial bank Source: IMFandWorld Bank,2008 Figure 5.1:FinancialAccessStrandinSelectedCountries Figure 5.2:NumberofCommercialBanks’ranches Updated usingwww.boz.zm South Africa(2006) Botswana (2004) T Namibia (2004) anzania (2007) Zambia (2005) Kenya (2006) 100 150 200 250 300 50 0 2001 154 0% 9 15 2002 163 19 2 Banked 20% 2003 8 158 43 8 51 Other formal 54 11 35 2004 159 40% 2005 154 35 Informal only 11 3 2006 162 1 5 7 60% Millennium Challenge Account-zambia |27 2007 181 9 66 BUSINESS ENVIRONMENTANALYSIS: Unserved 54 2008* 223 45 80% 41 38 30 2009* 254 COST OFFINANCE 100% Series 1

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 28 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA but of part and bank the asmall non-bank balancesheet (Table 5.2). of enterprises; these up banking taking about 80%of financial the system’s assets and formal micro-financing being enterprise (MSME) finance continues countries,peer behind lagto drivenpartly the by predominantly informal status micro-lenders, transaction products accounts and are deposit services, scarce and costly. Micro, and small medium While outreach workers to salaried has increased substantially, inlarge due part to recent the of commercial entry escalation of couldtowhich operating lead afurther the cost problem. increase number inthe of branches bank brings possibility the of greater competition for scarce among skills banks restructuringbank forgains efficiency localised further and costhighly (BOZ, 2009). The naturereduction the of procedures and limited training programmes for banking professionals –have cited as been afactor also impeding Zambian inthe withals key skills market. labour inthe Rigidities market –restrictive labour legislation, immigration large share of overhead these costs for inZambia,of banks because inpart scarcity the of financialsector profession- part bypart overhead high costs. 5 and areas. peri-urban rural Thebankingsector currently is also subject to high overhead costs Despite improvements, these financial intermediation a major is still concern severeand particularly constraintis a in COST OFFINANCE BUSINESS ENVIRONMENTANALYSIS: Figure 5.3:LoanCompositionoftheBankingSector Figure 5.4:DecompositionofInterestRateSpreadinZambia(2004-2008) Source: constructedfromBOZ(2009)and(www.boz.zm) Source: constructedfromBOZ(2009)and(www.boz.zm) Diagnostic work context inthe of 2008FSAP update the has shown that spreads high the banking inZambia inthe sector are inalarge determined (%)

% 100 120 20 40 60 80 10 15 20 0 0 5 2005 2004 20.5 71.5 8 2006 2005 74.5 9.5 16 2007 2006 70.8 18.2 11 2008 2007 62 35 3 2008 Loans tocorporateinstitutions Loans toindividuals&households Loans topublicsector, NFI,Others Overhead Costs Requirement Reserve Tax Profit Margin 5 . Staff costs make up a of financial the market. inurban areas, targetinglocalised for workers most the salaried part and other elements at medium the end to high two provinces alone jointly account for 63.5%of MFIbranches all banking,micro-financing Like countrywide. is limited presence of MFIs inprovinces aside from Copperbelt the (34.9%of MFIbranches) and Lusaka (28.6%);these ZambiaThe (ZBS)(MelzerBusiness al,Survey et 2009)cites a recentZambiaBank of presentation,illustrating the urban areas, targeting medium the end to of high market. the mercial hubs and border areas. The recent proliferation thereforeseems banks of largelybe to to commercialrestricted 20%areLusaka, afurther inmining while towns Copperbelt inthe province. The rest arescattered around comother - problem might low be demand. Most commercial branches bank (40%)are situated inand around capital the city, tribution of commercial branches bank and micro-finance institutions (MFIs) provides an indicationthat the main inclusive growth, it is important to ask why people (households) and firms are The dis- not using financial services. Before drawing conclusions final aboutthe extent whichthe cost to of or access capitalto is a binding constraint on of business owners remain unaware of micro-credit opportunities (32%). owners with no access to micro credit cannot afford it (63%) or arepoor (23%). too However, asignificant proportion only 17%say dohave they access to credit but donot have it need they because own funds. The majority of business FinTrust (2006)datademonstrates also that only 1%of business owners have micro-credit loans. other Ofthe 99%, Source: Fundanga(2007);Kalyalya,2008(www.boz.zm) T 5.2 illion, unless otherwise stated able 5.2:BankandNon-FinancialInstitutionsalanceSheet,inK’illion,unlessotherwise Banks Commercial panies Finance- Com and Leasing eties - Building Soci Credit banks Credit Savings and tutions Finance Insti- Development Institutions Microfinance Total

D emand billion) Assets (K 11,066.9 260.1 167.5 109.1 170.1 180.2 11,953.8 for total % of 92.6 2.2 1.4 0.9 1.4 1.5 100.0 Financial Loans Loans 4,065.7 178.3 42.6 57.3 59.6 166.9 4,570.5 2007 total % of 89.0 3.9 0.9 1.3 1.3 3.7 100.0 S ervices Deposits Deposits 4,065.7 37.1 105.3 98.0 0.0 17.8 4,323.9 total % of 94.0 0.9 2.4 2.3 0.0 0.4 100.0 Assets 14,465.0 195.4 256.6 168.4 165.0 351.7 15,602.2 total % of 92.7 1.3 1.6 1.1 1.1 2.3 100.0 Millennium Challenge Account-zambia |29 BUSINESS ENVIRONMENTANALYSIS: Loans Loans 5,973.8 156.8 122.6 79.2 90.0 308.8 6,731.3 2008 total % of 88.7 2.3 1.8 1.2 1.3 4.6 100.0 COST OFFINANCE Deposits Deposits 9,970.3 28.0 120.2 127.2 N/a 27.5 10,273.2 total % of 97.1 0.3 1.2 1.2 N/a 0.3 100.0

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 30 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA emerges one when at looks reasons the why enterprises are not of making use micro-credit. access to savings institutions, constraints to income growth are for crucial shared growth at present. Asimilar picture outweighs questions of physical access or fixed costs high thereforeand indicatesthat above beyondand the issue of topthe reasons people give for not having account abank is that incomes their are low too and irregular. This reason The characteristicsZambia’s of adultpopulationbanking are inFiguresummarised 5.7. As elaboratedbelow, one of ries. opportunities.points This that the fact to supply of and access to finance may bea not major constraint all for catego - end of market the -initself an indication and infrastructure thatare financialservices respondingeconomic to new Although commercial both and banks MFIs have expanding been coverage, their is this targeted mainly at high the Source: Melzeretal(2009) Blue (2) Bayport (1) Northern Microfin (1) Blue (1) Bayport (1) Western Nedfin (1) Microfin (1) Blue (1) Bayport (1) North Western Y Royal MFI(1),Pulse(1) Microbankers (1) Mtawila (1), Finca (1),Letshego(1) Unity Finance(2) Meanwood (3),Elpe(1) Cetzam (3),Butala(1) Microfin (2),Nedfin(5) Bayport (5),lue(2) Lusaka Figure 5.6:MicrofinanceInstitutionsBranchDistributionbyProvinceasat31stDecember2008 akabutal (1)Pelton COST OFFINANCE BUSINESS ENVIRONMENTANALYSIS: Microfin (1) Blue (1) Bayport (1) Luapula Microfin (1) Bayport (1) Eastern Unity Finance(1) Blue (1) Central Elpe Finance(1) Cetzam (1) Blue (2) Bayport (2) Southern Unity Finance(2) Meanwood (3) Cetzam (3) Microfin (2),Nedfin(5) Bayport (5),lue(2) Copperbelt Mongu Mongu WESTERN 3 4 WESTERN NORTH- SOUTHERN Livingstone 6 Solwezi COPPERBELT

C 22 Kabwe

E

Lusaka

Mansa N Mansa 2

L

U

18 A

Ndola P

U

L T A 3 LUS

R AKA

A NOR

L 3 T H Kasama E E R Chipata

A N S T E 2 R N although bycategory the only least-used 11.2%ofof firms the surveyed; products is insurance. isvices examined. Figure 5.8shows that financial the products mostwidely used by MSMEs aretransaction products and cost) factors. Before considering important these MSME characteristics, of use their and access to financialser demonstrate will port that has this more to dowith characteristics the of MSMEs the than with supply-side the (access Among MSMEs on other the hand, access to finance theand cost of finance seriousare constraints, thisalthough re- group of enterprises. Indeed, (100%)of all large the have enterprises surveyed at least one formal banking relationship. access andwould makesuggest ofthat use obstacle financialservices, particular is this not a binding constraint forthis ranked as thirdthe largest obstacle by large businesses. Thehowever, fact, that the majority largeof firms are able to supply,electricity macroeconomic instability, costthe of finance taxthen rates.and The cost of finance therefore is (FinTrust,bia. In survey FinScope the 2006) mainthe obstacles identified largeby businesses are, in order severity,of Credit products are by least-used large those firms, underpinned that the fact by the cost Zam - of credit in high is still (2009). take-up of financial products so high amongis large firms, they are excluded from detailed analysis by al Melzer et counts and other savings products), and credit and insurance products (including assetand life insurance). As the - transaction products (including bank accounts and savings money productstransfer (including services), ac- bank glaringly different finance profiles the for two groups in Figure practice. 5.8take-up summarises of fourtypes product businesses, Melzer the (2009)study etal offers insights useful into how divergentthese characteristics manifest in andals households. that inmind also there Bearing ischaracteristics the a distinction between of MSMEs and large Of course most the important constraints facing businesses or firms are rather different from facing those individu- credit and other financialservices. areas and 19% in urban areas. Theretherefore is an important intricatethe demandbetween link and supply side of capital or credit to extend or abusiness start was perceived as main the reason for poverty by 14%of people inrural cost of capital, were cited by majority the of people as poor reasons for and urban rural povertyareas. inboth of Lack Another important is respect that in this observation in2006,access to inputs agricultural and low wages, not high the Source: Eighty20Analysis0fFinscope2005 Figure 5.7:CharacteristicsofAdultswithBankccountsinZambia Unbanked 86% Currently Banked 14% 16 to20 21 to30 31 to40 41 to50 51 to65 Female Urban Rural Male 65 1% 4% 10% Millennium Challenge Account-zambia |31 Percentage ofbanked 21% BUSINESS ENVIRONMENTANALYSIS: 29% 34% 39% 41% COST OFFINANCE 59% 61% -

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 32 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA large and firms (Table small 5.3). varies accordingalso to gender, paid employment status and some other factors although apply these to both likewise either account abank or some use other formal financial product compared to rural areas.Bankingonly 10%in status There are clear discrepanciesbetween urban MSMEs. rural and Approximately 28% of MSMEs inurban areas have cess, no more than 10%of 3.88million the MSMEs inZambia have accounts. bank for proxy MSMEs. is Banking auseful for access to finance.Overall, usingthe definition most liberal of ac- banking Melzer (2009)highlight access etal to finance,transportationthen thenlandand the as most significant constraints Source: Melzeretal(2009) Figure 5.8:FinancialProductUsage:EnterprisesinZambia COST OFFINANCE BUSINESS ENVIRONMENTANALYSIS: Insurance 96.7% 0.9% ag uiess MSMEs Large Businesses Transactions 45.3% 96.9% Credit 2.3% 7.7% 7.7% 84.5% Savings Source: Melzeretal(2009) Figure 5.9BankingPenetrationbySector tion and sizewould appear therefore important to be co-factors inlimiting banking access. even for 407,000MSMEs the that grow value high crops such as cotton, sunflowers, tobacco, sugar and coffee.- Loca noticeably within agriculture the depending activity sector agricultural of on MSME, primary the the it is low (4.5%) yet banking penetration sector, inthis at 7%,is extremely low (Figure 5.9)and although banking penetration differs across economic services sectors. Accordingcial to ZBS,70%of the MSMEs are involved production inagricultural thanOther business size and location, there are noticeable differencespenetrationthe in bankingof and finanother - Source: Melzeretal(2009) T able 5.3:BankedandUnbankedusinessesinZambia Multiple person Multiple Single person Paid Employees Single size(n)/Weighted population No formal registration Fromal registration (PACRO/Other) Registration Female Male Gender No phone Cell access phoneCell access phone Cell Don’t know/refuse K1 Million and above (K300,000, K1,000,000) Lessthan K300,000 Monthly sale: Rural Urban Location Other Trade Agriculture Sector Thousand Businesses 1000 1500 2000 2500 3000 500 0 Agriculture 2722 7% 832 14% Trade 100% 0% Large Banked 1% 19% 17% 12% 76% 9% 161 99% 81% 83% 0% 0% 88% 14% 178 Others 23% Manufacturing 108 15% leasing, business Real Estate services Banked MSMEBanked 654 (378,893) 86% 21% 25% 75% 14% 21% 37% 23% 19% 49% 51% 22% 30% 48% 52% 48% 79% 27 55% Transportation, Storage 12 77% Millennium Challenge Account-zambia |33 ICT 2 96% BUSINESS ENVIRONMENTANALYSIS: Unbanked MSME 4,147 (3,501,753) 2% 34% 66% 60% 40% 21% 9% 18% 52% 85% 15% 7% 20% 73% 17% 83% 98% 0% 20% 40% 60% 80% 100% COST OFFINANCE Percentage of Businesses

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 34 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA beyond simply improving access to finance or loweringthe cost of finance. nancial input); improvements in valuethe chains, and improvements in market organisation. go These aspects well to enable tothem access finance. interventionsOther could include: improvements in inputsourcing (including fi- ing to Melzer (2009),individuals etal group inthis typically require non-market interventions such as subsidies, about 3.3million establishments, liesbeyond reach the of market the mechanism are they because poor. too Accord- Ultimately, scenario, case even in best the 85% of MSMEs cannot access banking products. The majority group,this of Figure 5.10:ReasonsBusinessesdonothaveaankAccount:UnbankedMSMEs enterprises as opposedto self-standing entities” (ZBS,2009p.9). members. The MSMEgroup comprises establishments small of very that as are:household-based “better described Just 7%of MSME 15%operate owners from say pay home they themselves and asalary; 56%say employ they family cannotthey affordeventhe cheapest (ZANACO monthlybankingservices offers anaccount costing K7,700a month). MSMEs have monthly turnovers sales of less than K100,000(approximately US$20)and as aresult,73% indicate that Access to finance,plays alesser rolethe decision in aboutwhether or not to havebank account. a The majority of Sixty-two percent of unbanked MSMEs cite limited income as areason for not having account abank (Figure 5.10). selves? are inaccessible costly services and orthese isvery it of because some underlying characteristics of MSMEsthe - them It is important to understand why MSMEs are not using business andIs financialservices. it predominantlybecause Source: ZBS,2008 COST OFFINANCE BUSINESS ENVIRONMENTANALYSIS: Business doesn’tgenerateenoughincometoputintobank Process ofopeningbusinessaccounttoocomplicated Don’t wanttax-mantoknowaboutbusiness’smoney Business doesn’thavenecessarydocumentaion Business doesn’tqualifytoopenaccount Don’t needbankaccountforbusiness Bank charges/servicefeestoohigh Banks discriminateagainstwomen Prefer dealingincashforbusiness Bank closedmybusinessaccount Banks don’tunderstandbusiness Bank toofarawayfrombusiness Minimum balancetoohigh Do nottrustbanks Other 0% 2% 0% 0% 0% 4% 5% 5% 7% 7% 10% 9% 10% 17% 20% 22% 30% Percentage ofbusinesses 34% 40% 50% 60 62% 70% 80% ture development; any that isattributed can be to improvements inquality rather than to increases instock The WorldBank (2008c) foundthat little the country’sof very growth sincecanbe accounted 2001 for- by infrastruc in infrastructure. achieved by public the alone. sector Accordingly, FNDPto the encourage seeks Private Public Partnership investments overinfrastructure mixed.Government has The past been the decade that recognizes growth infrastructure cannot be nium Development is not Goals possible without efficient the infrastructure,and effective of delivery the growth of Despite economic progress and Government awareness that sustaining growth high to the attain needed - Millen the 6.1.1 of power, roads, and water supply. are key to inclusive services infrastructure all while growth, most the binding constraints for Zambia areas lieinthe resources required by ailing the sub-sectors through aPublic Private Partnerships strategy. concludessection This that and water supply and sanitation (World poor has been to is 2008d).Central this Zambia’s Bank failure to attract the international transit routes. inother areas, Delivery however, such as electricity, roads, feeder rail and air transport, Zambia has made substantial progress telecommunications especially in extending some infrastructure services, and is constrained. Chapter returns private with social while 6deals appropriability is analysed inChapter 7. – without which there nocan adequate be returns to private investmentssector and without which economic growth business operations exists).Two important returns of social are aspects considered and –infrastructure natural capital support private investments) and private appropriability environment necessary the (whether for profitable private made upis also of two components: returns endowments social analysis has acountry necessary the (whether to secondThe element this of business environment analysis is an analysis of returns economicto which activityin turn transport services mattertransport agreat services to Zambia. deal Thelack transportof connections outsidethe international transit its main economic centres lying at from least 1,400km nearest the efficiency and cost the seaport, of cross-border Poor are links transport a binding constraint to integration business a landlocked with and country rural : Being practice ofthe keeping tariffs at such low levelsbenefited has only the echelonsupper society. of housing and urban development programmes for have poor non-existent the virtually been over last the two decades, are kept at much lower levels compared countries, to peer making itnew difficult to undertake investments.Because One possible explanation for country’s the performance poor is that inZambia, tariffs forboth water and electricity clearly skewed infavour of Zambia‘s urban areas and people with relatively incomes. high to improved water and sanitation -access too declinedover by 15%and same the period 9%respectively. Access is 30%. Recent estimates suggest that situation the inZambia had improved to 20%by 2007.This holdsfortrue access late20% inthe 1980s.This compares unfavourably the to rest whereof SSA access was oversamewell theperiod over positive the exemption.been In early the at 2000s,access stood to electricity only 13%nationwide, down from over has deteriorated over services infrastructure electricity last the 15years. Access to mobile phone communications has AccordingAccess to has declined: infrastructure to World the (2008e), access Bank to water and sanitation and rica’s top-ranked) and 8.49%for Asian the Tigers. were estimated at 1.01%for countries other SADC and 0.99%for 3.59%for and Africa, SouthMauritius Africa (Af- capitaper GDP growth was estimated at just 2001-2005.Similar 0.6%for calculations over period the same the period growth rates for piped water, flush toilets and electricity. The contributiondevelopment ofinfrastructure Zambia’s to averages. and Africa SADC the According to World the (2008e),Zambia Bank is an extreme reporting case, negative contribution to revival the of growth through improvements stocks inboth and quality of is infrastructure lower than tor followed contribution the by road the sector; was ofsector on electricity whole, the the negative. In addition, the (2007) shows that most of improvements the ingrowth performance come from mobile the telecommunications- sec 6.1 RETURNS TO ECONOMICACTIVITY: SOCIALRETURNS Infrastructure Infrastructure and inZambia growth CHAPTER 6 Millennium Challenge Account-zambia |35 RETURNS TOECONOMICACTIVITY: SOCIAL RETURNS . Calderon

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 36 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA T on foot. Rural households are engaged inanumber economic of actives social that involve considerable travel time, mostly holds contributes significantly the to problems of deforestation andland degradation. source of for energy and poor the 70%of meet national the Thelack needs. sources energy of energy other for house- Inequitable has major access to ramifications services infrastructure forthe environment. fuels aretheWood main 6.1.2 bilitation and expansion. Most of utilities the are unable to generate sufficientrevenues to cover theiroperating costsalone let invest in reha- wells on premises their to avoid water shortages. a poses revenue-generation This challenge the to companies.utility to substitutes poor such as generators or charcoal and an increasing number of households have boreholes drilled and shows that general the quality of inZambia infrastructure is below that of its Firms and peers. households often resort With exception the quality the of of has infrastructure road declinedover transport services, years. the Figure 6.1 Source: CompiledbyAuthorfromGlobalompetitivenessIndexandWDI Figure 6.1:QualityofinfrastructureinSelectedAfricanCountries marketsexport slowing down jobcreation. costs attributable is likely to price have to of high the services competitiveness the undermined of Zambian firms in ages 22% of gross value sharethe added, twice of labour costs. The Eifert study foundthat levelthe high of indirect insurance, marketing, travel, independent professionals and accounting). In Zambia, share the of indirect costs aver arewhich attributable inputs to service-related the inproduction used (energy, transport, telecommunications, water, that incomparison with similar countries, Zambian firms havesecond-highestthe share “indirect”of costs, most of majorto be constraints by business owners. Astudy on by Investment (2005)based etal Eifert Climate found Surveys; Various show business surveys that inadequate and infrastructure quality, poor are perceived expensive services basic economies.global tourism and mining resulted has also non-integration inthe communities of rural into national, the regional and routes and provincial the centres has expansion impededthe of production potential inagriculture, manufacturing, Location Survey Average one-way travelcountries time forAfrican selected differenteconomic in activities and social Source: DoranIntermediate T able 6.1FindingsfromStudiesCarriedoutinGhana,T Tanzania Zambia Ghana SOCIAL RETURNS RETURNS TOECONOMICACTIVITY: Cross-cutting Issues inInfrastructure Water 23 min 5 min 25 min echnology Publications inassociationwithUNIFEM,1996.Energyand Environment T Firewood 98 min 92 min 43 min Land Cultivated 65 min 1h 7min 48 min anzania, andZambia(BambergerMaramba,2001). Zambia Dispensary 96 min 5h 20min 1h 40min echnology Source Books: Rural T Hospital 5h 40min 5h 20min 2h 38min Mill Grinding 1h 42min 50 min 28 min ransport, p.10 Market 3h 18min 5h 20min 2h 8min - electric resourceselectric and historically has met most of from its needs electricity its own hydroelectric stations operated by providesfuel some 70%of nation’s the Although needs. Zambia energy imports petroleum, it has abundant hydro - consumption, and industry transport (Figure 6.3).Woodland and forests cover about 66%of total land area and wood Zambia is yet to make transition the to low-carbon, and efficient sources inkey of energy areas such as household 6.1.4 regional averages. competitiveness by removing sector,notably inthe to barriers entry by reducing international gateway license fees to to make significant contributions economicto growth and is now taking steps to promoteZambia’s international highest rates (FigureGovernment in 6.2). Africa The thathas Zambiatherecognized sectorICT in potential thehas Acomparisonpetitive prices for of key services. mobile phone rates that in2007revealed Zambia has one of the ards interms of providing access to telecommunications to its citizens and services businesses and interms of com- Since 2002,despite competition inmobile Zambia and has continued internet services, regional behind to fall stand- Figure 6.2:MobileRatesperMinuteinSelectedAfricanCountries adverse.been routed through less-than-efficientthe ZAMTEL international gateway. segments The all effects on sectorof the have of doing business inZambia. This situation is compounded the by requirementthat internationalall calls be must most expensive region, inthe despite quality. poor the Investors frequently cite as this contributing cost to high the Zambia are kept low artificially by cross-subsidiesfrom international calls. Thus internationalcalls are amongst the incumbentthe are According high. to World the prices fixed-line the of Bank, telecommunication local in services and voice over services call-back internet protocol (VoIP) are and illegal, access charges for termination call through state-owned operator is only the ZAMTEL provider ofZambia. fixed lines in In addition,sector,the fixed-line in (ICTs):technologies Though private and foreign ownership arepermitted, due to prohibitivelythe license high fees, State ininformation monopolistic to costs and tendencies quality low high lead ofand communication service has materialised (OECD and AfDB, 2009). clearalso that in fixedthe segment, line little or no investment takenhas place and consequently, no increase in access as awhole. InAfrica 2006,14out of 100inhabitants had amobile phone subscription; up from only 9in2000.It is cant progress madesegment inthis haslast inthe few been years, average the well isbelow still 57%recorded the for voice segment of market the with 46%of population the within range of amobile in2006.Even signal - though signifi It is however clear that Zambia has made great inwidening access strides to telecommunication mobile inthe services holds (where 65%of population the resides) owns atelephone, (WTO, 2006:219). located inLusaka and Copperbelt the (where 30%of population the resides) only while 0.3%of Zambia’s house- rural 76,000 lines in1995to 91,000in2007for apopulation of more than 11million people. Nearly 80%of fixed lines are fixed-line teledensity remains the at half regional average inSSA. The linefixed network has grown only slowly, from Access to telecommunications may abinding not be constraint: With only 100people, three lines per Zambia’s 6.1.3 Source: MattooandPayton(2007) Energy Infrastructure Energy Information Communications Technology Infrastructure Mozambique South Africa Zimbabwe Swaziland Botswana Tanzania Mauritius Namibia Zambia Malawi 0 5 10 15 20 25 30 35 40 Millennium Challenge Account-zambia |37 45 RETURNS TOECONOMICACTIVITY: 50 SOCIAL RETURNS

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 38 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA Figure 6.4:QualityofElectricityinSelectedSSACountries firms in towns while electricity like Ndola and Kabwe for example suffer frequent power outages. supply indifferent parts the country.of someIn areas in North-Western province for examplethere is no supply of lays inobtaining connection an electricity (Figure 6.5).There are big variations in quality of and access to electricity countries at same the level of development (Figure 6.4).However, Zambiansome firms experience the longestof de- The isa quality bindingof constraint:electricity The Zambia’squality of consumption is of electricity average for T Figure 6.3:EnergyUseandConsumptioninZambia2006 at amuch slower rate than Zambia. has declinedfrom as awhole has 1990sto 23%inthe witnessedsome 2000s.Southern Africa 13%inthe decline but state-ownedthe Supply Zambia Electricity Corporation Table (ZESCO). 6.2shows that access inZambia to electricity Source: World Bank,2008d ouseholds/Cross Country Comparison able 6.2:AccesstoElectricitybyHouseholds/CrossCountry SOCIAL RETURNS RETURNS TOECONOMICACTIVITY: Electricity 10% Zambia As percentage of households MIC High Urbanisation Southern Africa Africa Overall Africa 9% 2% Energy Use Use Energy 79%

Global Competitveness Index 0 1 2 3 4 5 6 Coal Petroleum Electricity Woodfuels 23 1990s Early 59 37 36 23 Source: Compiledbyauthorfrom GlobalCompetitivenessReportandW DI 2009

20 1990s Late 55 47 37 28 10% 27% 6% 13 2000s Early 52 51 33 29 Petroluem Consump.on 4% Zambia 3 Rural 15 30 13 12 57% Government Households Industry Mining Transport 45 Urban 72 82 69 71 Income distribution 0 Q1 2 9 3 4 4%

19% 0 Q2 16 33 14 14 7% 68% Electricity Consump1on Consump1on Electricity 2% 57% 0 Q3 34 38 28 20 15 Q4 68 76 45 38 Agriculture Government Households Mining Transport Industry 84 Q5 91 92 79 72

that increasingly Zambia will have to on depend imports from its DRC. neighbours,the especially ing (Reuters, diesel 2008).)It is anticipated that shortages intensify electricity will over coming years mean will which from mining. In 2008,Zambia’s consumption fuel rose sharply as copper the mines with coped apower deficit by buy- an average of 900m sumption of petroleum products noted has been recent in the past; for instance, consumption the of grewfrom diesel The situation is likely to get worse ifcopper production potentialmeets its grow.to Significant growth the in con- one of highestregion. the in power productionelectric is geared towards copper mining Zambia’s needs. serving connection delay of 93days is of 1,680MWtotal. the Peak demand at was time the 1,607MWand shortages resulted. Much of existing the hydro- mon feature country. inthe In rehabilitation 2007,the programme temporarily cut capacity by about 400-500MW Total capacity installed inZambia is 1,680MW, dominated by hydro generations, yet power shortages remain acom- North, and Lower Kafue Gorge. mand growth and reduce power outages. Hydro projects under consideration inZambia include Itezhi Tezhi, Kariba cant investments inorder to develop 31.3GWof capacity new and refurbish existingto the de- meet 28GWneeded studyBank estimates that Power Southern African the Pool (SAPP), of Zambia which is amember, requires- signifi Currently, Zambia has few options got very interms of importing from electricity its neighbours. Arecent World rehabilitation works have completed, since been Master (Energy minimal impact their has been Plan). import of from and electricity Democratic Souththe Republic Africa of Congo (DRC) 2008).Even (WTO: though the rehabilitation work on ageing the hydroelectric power stations.power This rehabilitation programme necessitatedthe exporter,electricity but was forced in2005,ZESCO to suspend as generation exports capacity fell owing to of start the isa binding shortage of electricity constraintLooming to inclusive alarge to Zambia growth: be used regional Figure 6.5:DelayinObtaininganElectricalConnectionSelectedSSACountries 3 per day per in2006to 1,500m Source: CompiledbyauthorfromGlobalompetitivenessReportandWDI2009 3 in 2007. This growth in2007.This been has attributed mainly to increased demand Zambia Millennium Challenge Account-zambia |39 RETURNS TOECONOMICACTIVITY: SOCIAL RETURNS

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 40 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA tiveness Index, Zambia’s domestic transport is ranked bottom of list the of 124countries (Table 6.5). Zambia’s land transport is infrastructure ranked as one of poorest the world. inthe According to Competi Global - the 6.1.5 T itelectricity is impossible to realize most of growth the potential (Table 6.4). Zambia has comparative advantage are to medium high intensity electricity products so, of because access to poor to it which downstream undertakes processing of commodities basic the produced. Most of products the inwhich bined with other conditions, infrastructure poor Zambia thebothtype affectsof exports the this and extentgoods High-cost increase production the and low-quality costs of services some electricity products more than others.- Com T Source: AdaptedfromUSITC2009 Note: **ProducedinZambia*Potentialexportsfrom Low Medium High exports global SSA share of Source: ofEnergyandWater Ministry DevelopmentandJapanInternationalCorporation Agency. Forthcoming Total generated electricity able 6.4:ElectricityIntensityofProductionandxportShareSub-SaharanAfrica able 6.3:ElectricityGenerationandConsumptioninZambiaWh Major hydros Mini hydros Diesel Bulk purchasesBulk 2/(CEC) Domestic consumption Retail domesticRetail consumed electricity Industrial Agriculture Construction Manufacturing Mining and quarrying Other Implied electricity exported Transmission losses SOCIAL RETURNS RETURNS TOECONOMICACTIVITY: Land TransportLand Infrastructure • • • • • • • • • • • • • IntensityHigh Electricity of Production Textiles* Paper and pulp rubber,Chemicals, plastics products Manufactured mineral Wheat Petroleum and products coal Sugar cane* and beet Plant-based fibres* Coal Miscellaneous minerals** Ferrous metals* Nonferrous metals** 2002 9,168 9,117 34 17 3,519 6,096 2,578 97 73 3 21 22 2,460 2,778 293 2003 8,289 8,230 42 17 3,707 6,617 2,909 137 83 5 23 26 2,772 1,383 290 2004 8,448 8,383 50 15 3,870 7,039 3,168 137 119 3 25 24 2,998 1,148 262 • • • • • • • • • • • of Production IntensityMedium Electricity Milk* Processed rice Fabricated metals* Natural gas Vegetable oils and fats* Meat products* products* Miscellaneous food Miscellaneous crops* Wool Fruits and vegetables* Sugar**, manufactured 2005 8,255 8,192 48 15 3,932 7,452 3,520 139 107 2 30 23 3,358 539 264 2006 8,906 8,855 39 12 3,809 7,198 3,389 790 158 21 611 186 2,414 1,386 322 • • • • • • • • • Production Intensity Electricity ofLow 2007* N/A N/A N/A N/A 4,002 2,018 1,470 N/A N/A N/A 561 N/A N/A N/A Other transportOther equipment Industrial machinery Electronics Motor vehicles Apparel* andBeverages tobacco** Fisheries products Forestry products petroleum Crude 2008* N/A N/A N/A N/A 4,024 2,144 1,656 N/A N/A N/A 1300 N/A N/A N/A 2009* 11,022 N/A N/A 9,184 N/A 3,206 2,256 1,759 N/A N/A N/A 2,121 N/A N/A 331 T route for Zambia and through Bridge, passes Beit Chirundu, and Kasumbulesa to DRC. the (GiersingZambia-South 2008).The etal corridorroad through ZimbabweAfrica the is most importanttransport times (up to ten days by road and 25 days by rail; Table 6.8) and are relatively expensive, averaging US$50-160/tonne providingBeira level of acertain transport flexibility. However,the all routes are longwithkm), lengthy (3,000 transit Although it is neither cheapest the nor closest the (Table preferred 6.7),the is with Durban Dar port esSalaam and on routes these over years. the North-South and Tazara Corridors to regional (Table ports 6.6).However role the of rail transport declining has been structure. There alternativeare several road and rail connectionsfromZambia’s maineconomic centresalong the interms ofing international landlocked countries Zambia well is particularly serviced inAfrica, road and- rail infra illustrating impact the of regional liberalisationtrucking on efficiencyof the companies. Compared todevelop most - locked countries itfrom nevertheless benefits competitive on its internationaltransport services road transit routes Access to international transit routes isnot abinding constraint: While Zambia is among most the distant land- utes to Zambia’s transport high costs. adequate domestic is amajor road and rail transport source services of complaint bythis firms contrib exporting as - value mining and (cobalt goods and agricultural fresh/frozen products) are generally transported by air. Thelack of products agricultural acid, coal); (sugar, tobacco, and cotton); and fuels (diesel petrol) and (bulk grain). High food main products transported by road within Zambia are mining products (ores, concentrates, sulphur, metals, sulphuric terms; by 24%is carried rail and most of remainder the consists of oil imports by pipeline from Dar esSalaam. The transportRoad is dominant the transport inZambia mode with ashare of about 71%of Zambia’s involume trade T able 6.6:Value ofExportsbyMajorPortsxit*(K’Millions) able 6.5:Zambia’sGroundtransportinfrastructurelobalRanking Source: GRZ,November2007 figures Note: *Preliminary Port Office Kitwe Port Office Chingola Kapiri Mposhi Livingstone Port Office Ndola Port Office Chirundu Kasumbalesa Lusaka International Airport Lusaka Port Office Nakonde Kazungula Other port offices port Other TOTAL Sources World Bank,World Development IndicatorsOnlineatabase(ecember2006) infrastructure Railroad infrastructure Road Port infrastructure Domestic transport network Type of Infrastructure 1,457,071 677,117 268,464 125,397 109,609 92,046 81,658 45,580 17,302 16,497 10,426 12,973 Value Exports 93 107 110 124 Countries Rank/124 % Share % 100.0 46.5 18.4 8.6 7.5 6.3 5.6 3.1 1.2 1.1 0.7 0.9 Millennium Challenge Account-zambia |41 1,536,650 276,662 726,152 143,612 33,400 14,995 22,272 19,499 99,839 63,672 72,288 64,260 RETURNS TOECONOMICACTIVITY: Value Imports % Share % 100.0 SOCIAL RETURNS 18.0 47.3 2.2 1.0 1.4 1.3 6.5 4.1 9.3 4.7 4.2

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 42 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA T T is indicatedmode inTable 6.9. competition operators between of) and transport (Giersing modes 2008).The etal resultingtrade flow transport by deregulatedall with road and railwaylargely tariffs similar, and influenced the demand by the existenceand lack(or contributesCompetition services intrucking to lower transport tariffs and increasestransport quality. The tariffs are cess for carriage the of international road freight and harmonizing to ensure rules interoperability inmember states. COMESA regional the and groupings SADC, of Zambia which is amember, have on market liberalizing focused ac- T Beira Beira Dar esSalaam Gauteng /Durban International via Transit DRC (est) Namibia DRC DRC Tanzania Zimbabwe South Africa Origin /DestinationOrigin Salaam ­ Oil Durban Zimbabwe /Gauteng / Gauteng /Durban Harare Dar esSalaam Dar esSalaam Dar esSalaam To /From Ndola Source: Giersingetal2008 Source: Giersingetal2008 Source: Giersingetal2008 Corridor Walvis Bay Beira Walvis Bay Beira Durban Salaam Ndola, Zambia Dar es able 6.8:EstimatedVolume of T able 6.9:T able 6.7:IndicativeT SOCIAL RETURNS RETURNS TOECONOMICACTIVITY: POL by pipeline ­ otal T rade Volumes 0.20mtpa Dar es ransport T Mode Distance (km) (km) Distance Road/rail multimodalRoad/rail ariffs raffic/T 2300 1400 3000 1970 Road Road Road Road Road ransit T Rail Rail Rail 0 0.04 0.15 0.11 0 0.015 0.025 0.13 0.320 Rail 0.60 Rail Imports 2.3mtpa rih Fo Ipr/xot % Import/Export Flow Freight ime onMainT Import 80 80 50 65 in both directions) in both Estimated tonnes volume (inmillion year, per 0.028 0.236 0.151 0.275 Nom 0.120 0.090 0.060 1.065 Road 1.70 (74%) Road ransport Routes Export Included in0.21above 20 20 50 35 0.48 (including DRC) 0.21 (including DRC) Not significant Not significant 1.58 0.82 0.3 0 0.17 0.18 0.05 0 0.020 0.010 Nom. Nom Rail 0.53 Rail Exports 1.6mtpa Exports Import 160 100 120 Tariff US$/t 80 Export 160 100 120 0.019 0.148 0.143 0.075 Nom 0.20 0.01 0.245 0.455 Road 1.07 (67%) Road 50 (days) Estimated transit time Import 2,700 1,700 2,040 1,800 Tariff US$/TEU11 1.1% 19.4% 15.2 % 0% 8.6% 3.3% 7.5% 44.9% 2 –3 7 -9 4 -5 8.5 18 19 21 4 Export 2,700 1,700 2,040 1,400 One of mainthe quantifiablebenefits ofroad the is projects saving made inOperation Vehicle Costs These (VOCs). shorter distances,with neighbouring countries especially such as DRC. the nated by road transport (ATTIC 2009). Greater consideration therefore given to needs be to facilitating across trade become progressively more transport if difficultbecome toexport costs too prohibitive, in particularly regions domi- anetbeing oil importer, Zambia’s less valuable such exports as beverages, tobacco, and animal and vegetable oils will air pollution. In addition, though Zambia’s value-copper, high exports cobalt and -provide coal some buffer against roads on is also increase the and is quite noticeable on some of parts North-South the corridor, causing noise and as awhole,with increases above Central,Copperbelt 30%inthe and North Western Provinces. Congestion on urban safety concerns. Statistics show that road traffic accidents increased between2006 by14% and 2007 the for country such as copper, sugar and cement. In addition, over-reliance on busy the road routes is raising anumber of road a reduction from about 50km/hour at end the of 1980s.This the creates problems for the export of bulky products are and poor thereforeservices not limit inZambia. widely The used is speed just 20km/ hour to avoid derailments; fewer from losses shipping at less than 1%of below regression sales, the line for region. the However, rail transport helps to keep competition thereby high, maintaining Consequently, quality of service. Zambian firms experience and travel transport costs areLand binding constraints: transport and Zambiasector has liberalised this ahighly roughly 10%lower for remote households. lower returns household per member and lower returns to land. Alwang and Siegel (2003) show that net returns are market access has anegative effect on returns to farming. More remote households have lessland cultivation, under nearest market, food and over 25kilometres from nearest the input agricultural markets for Poor and fertilizers seeds. The WorldBank (2007a)that reports households in2002-2003rural half of were morethan ninekilometres from the of roads areas. to rural Despite Zambia’s privileged access to regional markets therefore, constrained is still country the by quality poor the andor road poor earth the system contributes considerably to reducing Zambia’s attractiveness as alocation for FDI. usageRoad is one of lowest the region inthe for people both and vehicles. Almost 80%of roads are made of gravel quality”good (Table 6.10). than average the for SSA. However, only wholein the have country a few districts roads classifiedbeing as of “fairly of domestic roads on transit routes has improved inrecent years.percentage The pavedof Zambia in roads is higher riculture, mining new and activities, tourism.Zambia is an Because important transit route for region, the quality the distributed domestic road network is aconstraint to growth the economic of rural including activities, commercial ag- vast and country requires an extensive road network tokey areas keep all connected. quality Apoor and unevenly of6,600km which are tarred. The networkroad is characterised Governmenttheby as “generallybad”. Zambia is a Access network road to the feeder isabinding constraint: Zambia has an estimated of 40,000km roads; about T able 6.10:AccesstoT ransport ByCountry, 2000-2004 South Africa Mozambique Malawi Madagascar (DRC) Congo Botswana Zimbabwe Zambia Tunisia Tanzania Country Source :AfDB,OECDUNECA2009 Total Net Work 364,131 153,497 15,451 24,455 97,267 91,440 19,232 (Km) 8,891 … … Road Paved (%of Total) Millennium Challenge Account-zambia |43 661 … 19 45 36 17 19 22 2 9 RETURNS TOECONOMICACTIVITY: SOCIAL RETURNS

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 44 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA It is mainthe route for transportthe of Zambia’s copper cathode to Europe, andChina United the States port the via mine traffic remains below well the volume time the the at concession was awarded. a railway regulator made possible. this Limited inter-mine have now resumed services been but volumethe of inter- of concession. the The absence of a clear contractsetting outthe obligation to continuethelackand of services these RSZ 5. 4. 3. 2. 1. A joint COMESA-EAC-SADC study, made following the comments on performance the of RSZ: network and rolling stock. RSZis paying aUS$1.5million concession year. fee per US$40 million isinvested to be first inthe fiveyears. spent be will The mainlymoney on rehabilitating the existing of improvement. RSZhas committed itself to invest US$60million during duration the of concession, the of which companies,African has below performed expectations, with regular complaints and regarding raised lack service poor RSZ has a rail network of of 1,100km track. The RSZ management concession, owned by aconsortium Southtwoof sustainable long inthe run. onfocus high-value, low-weight and low-volume products. Improved access to air transport is, however, probably not countries. Indeed, more and more of Zambia’s products agricultural are now by exported airthat –ashift requires a usingcases imperfect substitutes, roads and air, has compensated to be for by producing more effectivelythan coastal ample) is affectedperformance poor the by of her railways. cost The extra of getting such in mostproducts to ports, Zambia is landlocked,Because her ability bulky to low-value export products (some products agricultural for ex- road tariffs. for low volumes as railway the tariffs required to achieve financiallyviable operations than are higher the equivalent unreliable of because derailments, low wagon availability, and longer shipping transport is less Rail times. competitive in 1998and to aroundtraffic inrail 2008.This fall is partly the due to perception 1.3 million by thatrail transport is fromhas fallen more than 6million tonnes of freight year per in1975,to 4.5million in1988,to under 1.5million Access to rail is infrastructure abinding constraint for The exports. total amount traffic of carried by Zambia’s railways bia’s of extending policy private-sector involvement to rail the network is already far advanced and to is continue. set agreement with Railway Systems of Zambia (RSZ)in2003,and Tanzania-Zambia the Railway System (Tazara).- Zam ZambianThe railway network consists twoof systems:ZambiaRailways Limited whichaconcession signed (ZRL), 6.1.6 providers despite employing of same using the tactic second-hand vehicles. ever, are inZambia. higher By contrast, providers domestic transport service are less competitive than South African second hand vehicles, lower incurring financing, depreciation and insurance costs. Maintenance fueland costs, how- providers are more competitive than providers South African circumvent they because cost the constraints by using where and contribute inexcess of 50%to costs the of transportation. Zambian Overall, cross-border transport service andindustry trade. In Zambia, VOCs are and fuel because high maintenance costs are more expensive than- else initially to owners the accrue of vehicle, the but generally more lead broadly to lower transport costs for agriculture, T azara SOCIAL RETURNS RETURNS TOECONOMICACTIVITY: de facto abandoned inter-mine facto the de goal aprimary that short supported haul copper the services, services industry Disagreements continue over contract language and there is no effective regulator. of freed operating the been cost of passenger the service. arePassenger operating, services albeit not at level the desired by government. The government though,has, at 20km/hour. improvements and ininfrastructure railway rolling stock, although average the rather is still slow too speed Freight over long-haul the service corridor has improved significantly theand concessionaire is investing in some level of public investment required. is still ments continue over level the of investment made by concessionaire. the The WorldthatBank (2008d)advises The governmentfreed thebeen of investment meeting has capital theneeds railway,of although disagree- bia’s railway and infrastructure equipment. Concessioning of Zambia Railways Limited (ZRL)to RSZhas successfully halted deterioration the of- Zam InfrastructureRailway is jointly owned by governments the of Zambia and Tanzania, and was initially financed China in 1975.by 6.1.7 accepted two to one advantage efficiency fuel trucking per kilometre.over tonne level expected given her GDPcapita.level expected per Therethatevidence is some as firms have suspended exports horticultural to countries some African other is selected shown inTable 6.11.Zambia’s access to air transport well is below still the adeclinenessed as aconsequence of cost of high the aviation fuel. Zambia’s level of access to air transport compared ofexports perishable products (cut flowers and vegetables) mostly destined for Europe.Lately this market haswit - Zambian grewby 2007 airports and 12%between 2008. The cargoair market plays asignificant role the for country’s Passenger movements at four these amounted airports to 1.2million in2008,78%was international arrivals. Traffic at T copper mining. and have Mfuwe 3%.Flight increased inrecent services years, through particularly Ndola,the reflecting in revival Livingstone and Mfuwe. Lusaka accounts for about 60%of passenger all movements, Livingstone 23%,Ndola 11%, strips in Zambia. The state-owned CorporationNational Airports managesthe four major airports: Lusaka, Ndola, Zambia’s aviation market is one of region. inSouthern smallest the the African Currently, there are 144 airports/air T countries landlockedthose ones (especially alternative development infrastructure. Arecent analysis by AITIC (2009)argues that of inview rising prices, fuel offersRail the most sustainablesolution current the to inadequacy landof transport and providesframework a for ture, tourism, mining, forestry and fishing production. across some of land most the insouthern fertile Tanzania and Zambia, northern and has potential to propel- agricul distance by rail from resource-rich the Copperbelt and DRC the Promisingly, to aport. corridor the extends also private to improve partner Tazara’s performance 2008,p. (WTO 147).The corridorcurrently providesthe shortest havewhich delivery. resulted service inpoor Currently, Government the is exploring identification the of a strategic Salaam has put pressure on of Dar esSalaam, but has recently losing market been share andthrough The Durban. to declinetrade Beira inDar es 6 Zimbabwe Zambia Tanzania South Africa Mozambique Malawi Madagascar Source :OECDandAfDB,2009 (DRC) Congo Botswana Country able 6.12:Zambia’sGlobalCompetitivenessRankingoutof124Countries able 6.11:AccesstoirT Ability to rail utilise transport explains why Mongolia’s copper is more competitive than Zambia’s. Air Transport Sources World Bank,World DevelopmentIndicatorsOnline Database (ecember2006) International air transport network Q Number of operating airlines Departures 1,000population per Available seat kilometres Air infrastructure transport uality of air transport infrastructure ransport T . T azara Freight tons (Million /km) 1,196 azara 923 444 … … 22 15 5 1 6 ) that are investingfrom benefit inrail infrastructure, will rail’s generally is aclassic parastatal, alot experiencing of operational inefficiencies Passengers (000) carried 11,845 2,263 243 347 132 575 230 54 7 Millennium Challenge Account-zambia |45 56 58 91 91 105 Registered worldwide departures carrier RETURNS TOECONOMICACTIVITY: 148,146 17,911 9,768 5,446 5,965 5,200 8,181 4410 659 SOCIAL RETURNS

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 46 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA a strain on public services. health rainythe This season. not only putseconomic a heavy burden alreadyon impoverished communities, but also places water supply and urban areas inpoor sanitation have services caused annual outbreaks of waterborne during diseases mainly on women and children whereas by collection animal or vehicle is more performed often by men. Inadequate amount of spent time going water. to collect The burdentransporting, of collecting, and storing water on foot falls walking-distance of 500 metres. Increased pressure on water points has to led longer waiting times, increasing the of water is estimated one between to be and three kilometres, more than national the recommended target maximum- amount required for environment. achieving aclean, disease-free In Zambia, average the distance walking to asource household rural per is use abouttic 20litres aday (approximately five litresday),personper per below well the average According to an UNCTAD Appraisal average (2006),the Report consumption of water for and drinking other domes- Figure 6.6:Water SupplyCoverageinSelectedSSACountries(%)2006 terms divide of and rural-urban the distribution by income. than most. Zambia’s provision of water less isequitable also than inmany other countries measured when in both access to piped both and improved water (Table since 1990sinAfrica the 6.13).Zambia’s more decline has been rapid Access to water supply and sanitation isabinding constraint areas for: There been an rural has declineoverall in development. regressionthe line for region, the suggesting that water supply levels are inadequate to country’s the meet level of fighting avoidable waterborne such as diseases cholera and malaria. At 58%water supply coverage,Zambia below is access to safe water drinking (World 2008e).This Bank, meansthat valuable resources continuewill be devoted to to Millennium the meet Developmentwill that aims Goal to reduce by proportion the half of people without sustainable Without a substantial increase in amountthe of resources dedicated to water and sanitation, it is unlikely that Zambia 6.1.8 problems cannot attributed be to state the of infrastructure. of airlines operating country. inthe Therefore,although the state of travelair Zambia in leaves alotbe desired, theto Thisillustrated is by poor rankingits in terms of availableseats, departuresper 1,000 population of theand number out 58th Ranked of 124countries, Zambia’s air transport competitive is infrastructure globally but under-utilized. to Europe, of frequency the flightsthereby has decreased raising air-freight costs for those remainingthe in market. SOCIAL RETURNS RETURNS TOECONOMICACTIVITY: Water Supply and Sanitation Source: CompiledbyauthorfromGlobalompetivenessIndexandWDI2009 and Zambia’s share of irrigated land as apercentage of land agricultural is below SSAaverage the (Table 6.15). security, famine protection, and land-use intensification. however, Africa, behindlags most theof developing world resources to achieve such broad objectives as economic growth, and development, agricultural rural national food of water resources over lastthe five to decades improve outcomes.social Huge investments have madebeen in water Water is resource avital for production agricultural and many developing countries have promoted development the annual supplies utilised and providing livelihoods for most of world’s the poor. improvements Agriculture is now inexisting services. world’s the largest consumer of water, swallowing 80–90%of ply problems for generally call an water/irrigation agricultural the expansion of problem services, requires drastic Water for irrigated agricultureisabinding constraint: While solutions to sanitation, hygiene, and potable sup- 2000d). Lusaka inparticular, asecond needs pipeline from Kafue the River, as well as atreatment plant. ages as a binding constraint. plans Detailed to improve situation the in urban areas are not yet available (World Bank, serious water shortages and atZambia, least 14%of firms the in particularly medium-sized firms, rate water short- among other things, water and supply electricity were provided. Most towns, including Lusaka, currently experience Zones and industrial parks. The 2009GRZ thatbudgetdevelopers specified willonly incentivesthese for qualify if, tives under Zambia the Development Agency (ZDA) Act to developers of and investors in,Multi-Facility Economic anding base enhance national competitiveness, Government the established industrial parks and incen extended- tax of or piped improvedLack water isabinding In constraint order for to expand industry: country’s the manufactur T Source: World 2008 Bank Water able 6.13:AccessT

Improved water Piped water Africa Overall Africa Overall Africa Southern Africa Southern Africa High Urbanisation High Urbanisation MIC MIC Zambia Zambia 1990s Early As percentage of households o WaterComparison ByHouseholds/CrossCountry 32 18 53 34 41 7 74 50 49 31 1990s Late 32 17 53 34 40 8 67 45 37 21 2000s Early 32 17 46 29 38 22 63 42 34 18 Rural 14 4 22 38 19 7 41 17 7 3 Urban 63 38 87 65 58 39 90 69 83 46 Q1 Millennium Challenge Account-zambia |47 Income Distribution 6 0 13 1 11 1 24 2 0 0 Q2 RETURNS TOECONOMICACTIVITY: 13 3 30 10 25 6 53 16 3 0 Q3 21 7 39 26 33 17 72 47 14 0 Q4 SOCIAL RETURNS 38 18 62 42 49 32 87 69 60 15 Q5 69 46 89 67 62 49 95 86 94 77 -

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 48 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA with lack of access to clean water and sanitation, cholera for example, continue to rise. Health statistics indicate that infant mortality rates are on decline the (Annex associated I)whereas, some diseases There correlationis a close the infantbetween mortality rate poor accessand safe to water sanitationand Zambia. in T (76.8%)and urbanfacility rural areas inboth (59.8%). toilet shows facility inZambia.that The survey ten households every aboutseven in use pitlatrines their as main toilet pears not abinding to be constraint to growth. According to 2006LCMS, the pit latrines are most the widely-used and for schools and hospitals that play an intensive role inhuman development. However, access to flush toilets ap- 2000s(Table20% inthe 6.16).This maybe a binding constraint forthe development of cities, forthe environment, Sanitation isa binding constraint: Access to improved sanitation has declinedinZambia from 1990sto 29%inthe Source: World Bank2008e T Africa SSA Average Zambia Zimbabwe Uganda Tanzania South Africa Senegal Mozambique Malawi Kenya Ghana Country Source: World Bank2008e ouseholds/Cross Country Comparison able 6.15:AccesstoSanitationbyHouseholds/CrossCountry able 6.14:AccesstoIrrigatedgriculturalLandinSelectedCountries

Sanitation SOCIAL RETURNS RETURNS TOECONOMICACTIVITY:

Flush toilet Improved sanitation Zambia Zambia 1990s Early As percentage of households MIC MIC High Urbanisation High Urbanisation Southern Africa Southern Africa Africa Overall Africa Overall Africa 10,989 212 30 109 9 144 1,200 94 105 20 54 30 Irrigated /Total Land (1000ha) 1990 13,150 251 140 174 9 160 1,498 104 115 55 85 31 2000 27 29 1990s Late 38 40 17 21 27 34 9 16 13,358 263 156 174 9 184 1,498 120 118 56 103 31 2003 21 21 2000s Early 33 41 18 27 27 32 9 17 197,781 3,928 5,268 3,010 6,850 4,400 14,300 2,350 3,680 1,930 4,700 4,200 1990 Agricultural Land Total Land Agricultural (1000ha) 18 20 Rural 31 39 19 26 22 33 10 20 217,115 4,1878 5,287 3,350 7,160 5,000 15,712 2,400 4,135 2,240 5,060 6,100 2000 2 3 Urban 4 9 5 9 2 15 2 8 225,361 4,350 5,289 3,350 7,350 5,100 15,712 2,507 4,580 2,590 5,212 6,385 2003 47 49 Q1 58 71 38 50 57 66 25 40 Income Distribution 0 0 Q2 0 0 0 1 0 1 0 0 5.6 4.1 0.6 3.6 0.1 3.3 8.4 4.0 2.9 1.0 1.1 0.7 1990 Land Irrigated %of Agricultural Land 0 0 Q3 2 3 1 5 3 8 1 3 6.1 4.4 2.6 5.2 0.1 3.2 9.5 4.3 2.8 2.5 1.7 0.5 2000 1 2 Q4 22 30 9 15 13 30 4 10 14 18 Q5 61 79 25 38 39 56 12 23 5.9 4.3 2.9 5.2 0.1 3.6 9.5 4.8 2.6 2.2 2 0.5 2003 76 78 78 93 61 74 59 75 34 53 Of Zambia’s total area of 75million hectares (752,000km 6.2.3 some challenges inusing resources these sustainably. supported by Zambia’s rich natural resource significantly base, contributing growth.to though,does, face The country nomic such activities as agriculture, fisheries, forestry, wildlife and tourism, hydro-energy and miningcanbe well Zambia is richly endowed innatural resources relative to other countries (Table inSouthern Africa 6.17).Many- eco 6.2.2 a binding constraint to growth. Although some problems may caused by be Zambia’s low population density and her landlocked status, are these not countries in terms of it time the to takes import (World and goods export 2008c). Bank, notwithstanding, Zambian exporters continue to facesignificantly higher obstaclesthan trade to exporters in other COMESA countries and away from European the Union and United the States (World 2007b).Transit Bank, routes transport costs on main the transit corridors have facilitated regionalZambia’s and trade shifted and to SADC exports costsinfrastructure are relatively low inZambia. five All transit routes have unitbelow costs the regional average.Low destination or transit for country five the 18 of majortransit corridorsRegional inSSA. and internationaltransit- bia’s landlocked position has proved anto be advantage. Zambia borders eight other countries and is beginning, the On otherthe hand, being landlockedto mayprotect serve domestic importers. When it comes to regional- trade, Zam Her status makes it harder for Zambia to reach markets, export economies realise of and scale, access cheap imports. populated that are they unlikely to attract viable and economically feasible investments. outside line the of rail is concentrated inprovincial centres. There arelarge thatparts the country of areso sparsely a narrow strip of land that from runs Copperbelt the northto inthe Livingstone inSouthern Province. Population simultaneously. but quickly after very that has to start plantinglabour-intensive and all very – weeding tasksthat have take to place only for ahoe cultivation, Zambian the farmer has to wait for first the rainsbefore s/hecan to start preparetheland thirdThe factor relates thelabour to constraintswith season. Armed thetimes in agricultural peak experienced at cultivation inareas have which historically most been the productive. oftimes growing the Compounding season. problem the of climatic shock is decline the due fertility insoil to constant irrigationmentary to mitigate needed lack of nor rainfall practice moist dothey conservation techniques at critical significantlyfrom one year to another on account of changes in weather. Farmers do not have access theto supple- secondThe factor is climateboth – climatic variability and adaptation to climate change. Cropyields have varied approach to farming required for success increasingly inthe environment liberal (SHEMP, 2008). market information compounded farmers’ the problems. Unfortunately most farmers to failed master commercial the farmers were unable to advantage take of better the prices available later marketing inthe Limited season. access to meant that farming bulk commodities such as maize sub-economical. became Inadequate on-farm storage meant that before liberalisation contributed(Chiwele, to difficulties their et al, 1996;UNZA/IAS, 1996). transaction costs High failure of privatethe the vacuum tosector left fill the by marketing finance rural and institutionsservedfarmers that sector, inadapting faced ushered sector agricultural reforms toinby liberalised the policy the of early the 1990s.The numerousthe studies out carried on topic. this The first factors these small of farmers,the difficulty the is bulkof the agriculture smallholder in the is sector low. There are a number of reasons forthis. At least four factors emergefrom However, despite that fact the access to land and quality the of land are not constraints to growth, land productivity livestock rearing. Terrain endowment is therefore not aconstraint to growth inZambia. rainfall, is fertility soil onhigh enough whole the to good grow range awide of crops. Most land is able to support are degrading soilscountry’s the inthe midlands and soils the of tend parts acidicon northern the to be account of productionagricultural yet only about 14%of that land is currently under cultivation. While farming poor practices Zambia is a landlocked country in Southern Africa, 752,000km Zambia is alandlocked inSouthern Africa, country 6.2.1 ducted in2000,population density was 13.1km 6.2

N Terrain Endowment Natural Resource Endowment Size andSize Location atural capital 2 . Some 40%of population the is concentrated along line the of rail, 2 ), 58%is classified as having potentialmedium to high for 2 insize. When last the population census was con- Millennium Challenge Account-zambia |49 RETURNS TOECONOMICACTIVITY: SOCIAL RETURNS

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 50 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA Southern African andSouthern African eighth the highest rate of forest depletion whole inthe of Africa. growth (Table 6.18). In 2000, Zambia’s forests were being depleted at a rate of 2.4%, highest,the alongside Malawi, in proportion of farm households early in the that 1990s fertiliser used rose to 29.4%in2008with introduction the of Support GRZFertiliser the Programme but lower was still than the number1990s, the of farm households declinedfrom using 31.4%in1990-91to fertiliser 17.8%in1997-98.The figure The factorfourth identified the is challenge thatfarmers small-scale have getting hold modern farm of inputs. the In Source: ScottWilsonPielsold,2003 Figure 6.7:MonthlyFoodA repeat itself year after year. to produce enough to lastfood for comingthe year.cycle This of hunger,thus is insecurity and disease likelyfood to cropstheir This decreases. meansthat the farmers are unable to increaselabour andland productivity eventuallyand at Hunger its peak. and vulnerability increase; abilitythe of farmers to cultivate sufficient amounts of land and manage preparing to cultivate fields. their The highestthe in also rainy is season prevalencewhen of disease labour demand is availability are mutually reinforcing. In communities, most rural out runs food by September just as households are and stocks are food low. when very variations Seasonal incidence inthe of indemand disease, for labour, and infood shows, labourconstrained is also by that fact the at demand same the peaks as time incidence the is peaking of disease areain the of land cultivated and yields falling as quality the of farm management diminishes further. As Figure 6.7 HIV and AIDS-affected households,labour constraints,already a problem, have deteriorated leading to a reduction This situation been worsenedhas theby devastating impact the of HIV and AIDS epidemic (McEwan, May 2003). In andinadequate droughts. access services to veterinary was aggravated by of occurrence high animal the (UNZA/IAS, losses 1996) that resulted from animal poor husbandry, Low levels of mechanisation are aconstraining factor on increasedproductivity. agricultural In problem 1990s,the the 7 to forest plantations, ranking 7 butin Southern Africa is home to 17.1% of region’sthe forest cover area. Zambia not does do as well it when comes area, third only to Angola and Zimbabwe (Tables 6.17 and 6.18).Zambia accounts for only 6.7%of total the land area Zambia is one of forested best the countries with forest inSouthern Africa cover in2000at 42%of her total land 6.2.4 levels of production as well as and to security participate food meaningfully inmarkets. a greater of sense insecurity. discrimination Gender means that women find it much more difficult to improve their traditionalthe land tenure system, only the land at of disposal most the farmers, small is not thereby titled inducing not provide to encourage enough security permanent improvements aggravates situation. the under accessed Land Net Associates Limited, 2002).Inadequate investment infarm improvements caused by aland tenure system that does dropped from 43.6% in 1990-91 to 17.4% in 1997-98 before rising again to 37.1% in 2000 (Kane Consult and Rural SOCIAL RETURNS RETURNS TOECONOMICACTIVITY: Unpublished data supplied Research by Project Food Security the Forest and Woodlands 10.0 20.0 30.0 40.0 50.0 60.0 0.0

Jan Average Score Feb vailability, LabourDemandandDiseaseBurdenasPerceivedbyWomen inKafueFlats

th in Southern Africa. The high rate The high inSouthern Africa. of depletion of forest resourcesrisk is a futureto Mar Food Availability Apr May Demands Labour Jun h Mont Jul 7 . The share of farmers using improved also seeds Aug Prevalence Disease Sep

Oct Nov Dec

over 80,000. in tourism. At one million tourist year, arrivals per number the to Zambiasee of could expect jobsintourism to rise Zambia’s 2007tourist figures, arrival this should mean as manypermanent as 67,088 and non-permanent employees ers (GRZ, 2008,Table sector inthe 9.2).It 12tourist is said that arrivals create every one job. Extrapolating from toplaced create jobs for relatively workers. unskilled In 2007, there were 22,776 relatively permanent unskilled work- Wildlife and tourism can help to accelerate growth and jobcreation. They arelabour-intensive uniquely activities, Zambia is on course to reach its planned target of one million tourist arrivals by 2011. ism, Environment and Natural Resources show that tourist arrivals reached 805,059in2007(GRZ,2008,Table 9.1). 457,411 in2000to 668,886in2005(United Nations World Tourism Organisation). Data of from Tour Ministry the areas covering 16.6million hectares. The number of touristsZambia arriving in been the increase,hason risingfrom country’s land area, 30% is designated to 19national parks covering 6.6million hectares and 34game management Wildlife and tourism resources have as long having recognised been great potential to contribute to growth. Ofthe 6.2.5 Source: TheEncyclopaediaofthearth(www.eoearth.org) basedonFAO Data T Source: AfricanDevelopmentIndicators(2000) T Tanzania Namibia South Africa Mozambique Malawi Zimbabwe Zambia Lesotho Lesotho Botswana Angola Southern Africa Southern Africa Zimbabwe Zambia Swaziland South Africa Namibia Mozambique Malawi able 6.17:ForestandWoodlands Coverin2000 ComparisonofSomeNaturalResourceEndowments able 6.17:Country Wildlife and Tourism ha) Total Area (‘000 1,102,954 Annual Water Renewable 566,673 124,670 122,704 38,667 74,339 82,329 79,409 Resources(km 3,035 1,720 9,408 (‘000 ha) Forest in2000 Cover 100 80 45 18 14 80 6 3 ), 2000 183,125 12,427 69,756 19,040 31,246 30,601 8,040 8,917 2,562 522 14 Forest (1,000ha)1995 Coverage (%) area Land 283.2 21.9 56.0 49.2 42.0 30.3 39.0 27.2 0.5 9.8 7.3 12,374 16,834 31,355 1,224 7,204 3,213 8,626 (‘000 ha) Total forest plantation Millennium Challenge Account-zambia |51 RETURNS TOECONOMICACTIVITY: 2,249 1,554 Nationally Protected Areas 141 141 161 112 14 75 50 1 (1,000 ha)1999 of Change(%) Forest Annual Rate SOCIAL RETURNS 13,817 10,616 6,619 4,779 1,059 3,071 6,366 -0.9 -0.2 -0.9 -1.5 -2.4 -1.2 -0.2 -0.1 -2.4 n.s. -

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 52 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA Thelast natural resource highlighted herethe country’sis potential to produce hydropowerZambia (Figure 6.9). 6.2.8 tonnes within next the few years on investments new the based that are coming on stream. in copper production tonnes to 523,435metric in2007.It that production is expected reach will one million metric copperwhich was exploited. being Afterthe privatisation thethelate minesof in there 1990s, rise was a once more ofbecause low international prices, rising production costs and alack of reinvestment, reducing with efficiency the productionCopper mid-1970sat inthe tonnes peaked 700,000metric year per but slumped to 222,767in1999 nounced for various minerals in different parts the country.of mining. In recent years, alot of exploration licenseshave issued and been commercially viable deposits are an being - world.in the Rich deposits of uranium have confirmed been at Lumwana but no decision hasmade been to yet start commercially can this which be exploited is yet determined. to Zambia be is aleading producer of copper and cobalt there have indications been that there may inNorth-Western petroleum oil be inZambezi Province but extent the to (copper,metals manganese, nickel, and cobalt), industrial minerals (gemstones) and Recently fuels mineral (coal). Zambia’s growth is not constrained by alack of resources. mineral The country’srich mineral resources comprise base Resources6.2.7 Mineral Endowment tonnes (ACF/FSRP, April 2009),doubling sub-sector’s the contribution to GDP, remaining everything constant. are higher. estimates Conservative suggest that Zambia should able be to raise her fish production to about 120,000 is much among higher fishersthan farmers. Wherepossible, fishing is preferred rural in areas to farming as earnings more significantgiven there as are only about 25,000 fishersartisanal compared to over 800,000 farmers. Productivity compares to agriculture (crops and livestock) contributed which 6.1%and forestry atbecome figures 5.1%.These even Inproduction 2007,fishery contributed 2.3% to GDP,equivalentthe of K79.9 billion, about US$20.8million. This Figure 6.8:FishProduction(kg/capita),AfricaandSouthernfricanCountries production of fish, levels compare favourablyZambiawith as countriesother especially has no coastline. in Africa, production 1970sand inthe 80srose from 4,240tonnes to 5,125tonnes. Despite decline the inZambia’s capita per in shared of water bodies requiring cross-border coordination and cooperation, not insome Aquaculture easy cases. partment makes it difficult to thestem problem of over-exploitation. Inaddition, some the of main fisheries are found production was estimated to have as 12kilograms as (UNDP, high been 2000).Under-funding of- Fisheries the De production fell from 6.1kilograms in2000to 5.3kilograms in2006(Figure 6.8).In 1970sand the capita 80s,per fish Aquaculture Statistics). The was decrease attributable to over-exploitation bad andfishing methods. Per capita fish tonnes of fish were produced in2006, slightly downfrom 66,671 tonnes in2000(2006 FAO and Fishery Yearbook country, she has richfisheries in her 11.5million hectares of water,open swamps andareas. flooded About 65,000 Fisheries are another natural resource with great potential to help stimulate growth. Although Zambia is alandlocked 6.2.6 Fisheries SOCIAL RETURNS RETURNS TOECONOMICACTIVITY: Hydropower Endowment Source: 2006FAO Y ishery andAquacultureStatistics earbook, Fishery due to breakdowns at power installations. Zambia able countriesto has other been electricity to export SADC but intermittent experience does power shortages generation capacity of only 1,680MW. Demand for is estimated electricity at 1,300MW. In years, good therefore, Regulation, Board IRWR capita per of 13,203m m water aquifers Internal high yielding very Renewable Water Resources (IRWR). In 2001IRWR were estimated at 7,377 countries (Table 6.19). There is afairlyriver dense network,dams, lakes,dambos (shallow wetlands) and underground Zambia generally facesnone of seriouswater the constraints that are to beginning confront other Southern African country’sthe total land area, is largest the of three the regions. constitutes 42% of total land. Region III receives 1,000mm and between 1,500mm of rainfall annually and, at 46% of zones accounting for only 12%of total the land area. Zone IIreceives 800to 1000mmof between annually rainfall and found inzone Iwhere averages rainfall less than 800mm.Zone 1is fortunately of smallest the Zambia’s agro-ecological zonesecological or regions. and quality soil zones.these Rainfall differbetween The harshest climatic conditions are average of northto 1,000mminthe an average of south. 600mm inthe The intois divided country three major agro- Zambia’s climate is conducive for many economic includingactivities agriculture. Annual from decreases rainfall an 6.2.9 Source: FAO, 2008. Figure 6.9:AfricanHydropowerPotential is among top the ten countries with great inAfrica potential for hydropower production. zambique and Namibia but low. are very still At 2%,withdrawals as ashare of total renewable water resources are for higher Zambia than Angola, Botswana, Mo- 3 per capita, per more than SSA’s average of 5,705.In Zambia was second Southern only Africa, to Angola had which Climate Conditions and Internal Water Resources Zambia has potential the to produce up to 6,000MWof hydropower but currently has an installed 3 . Adding flowsfrom countries,other total renewable water resourcescame to 9,676m Millennium Challenge Account-zambia |53 RETURNS TOECONOMICACTIVITY:

According to Energy the SOCIAL RETURNS 3 .

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 54 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA to introduce sustainable natural resource exploitation inZambia. endowment is not a binding constraint at moment,the it is likely in tofuture be steps are necessary unless the taken sanitation and degraded lands desertification, depletedfisheries wildlife and resources, deterioration of national heritage, polluted water and inadequate in 2005found asystemic failure of environmental and natural resource management manifested in”…widespread exploitation of natural capital give does grounds for concern. A situational analysis of environment the conducted whole,On the Zambia’s natural capital endowment is not currently aconstraint to growth. However, unsustainable the materialise. to mitigate and adapt not only to climate variability, but to climate change effects werepossiblethe worstscenarios to agriculture production. Zambia inaposition, could be however, to its use considerable availability of water resources However, climatic conditions, andclimate specifically variability, are a binding constraint growth,on on especially It is therefore concluded that availability the of water for production is not abinding constraint for growth inZambia. incidence inthe ofrise cholera with an increase and inrainfall temperatures (The Medical 23 News, April, 2009). sitive to climatic variability may to Astudy start rise. out carried inLusaka 2003and between 2006associated the rence dysentery, diarrhoea, like ofmalaria, diseases cholera, eyeinfections and respiratory are which - diseases sen and and wildlife are interfering with power generation. The humancapital implications are also obvious. Occur sures, livelihoods the of many and droughts Floods people inperil. could be are already devastating crops, livestock remain there uncertain, are already indications that unless Zambiamitigation critical takes and adaptation- mea 1.5, pushing 30,000more people into poverty over a10-year period”(Thurlowal,Although et 2008). future projects levelsrainfall by to fall 15%, climate change would enhance “the negative effects of climate variability by a factor of There is considerable uncertainty about anythe effect climate change may have on future rainfall. However, were conditionsrainfall were to reoccur. mate variability is forecast to keep 300,000people inpoverty by 2016,anumber that would severely rise if1985-1995 1985 and suffered between country the 1995 when experienced likescenarios those recurrent droughts.Overall, cli- nerable, losing on average 1%inGDP growth due to climate variability. This loss climbs theto 2%under worst rainfall impactthe of climate variability on crop yields over pastAgriculturethe three decades. is found- vul particularly to be Compatible on Equilibrium General historical based model (CGE) climate data and ahydro-crop to model estimate high as US$7.1 billion under Zambia’s worst rainfall scenario”. The authors arrive this conclusionat by developing a rate by 0.4percentage points per year, which costs the country US$4.3billion over a10-year period. These losses reach as reduce poverty. According to a study by IFPRI (Thurlowal, et 2008), climate variability “reduces Zambia’s GDP growth Climate variability, however, found has been amajor to be constraint on country’s the economic growth and ability to Source: http://earthtrends.wri.org T Zimbabwe Zambia Swaziland South Africa Namibia Mozambique Malawi Lesotho Botswana Angola able 6.18:RenewableWater ResourcesinSouthernAfrica,2001and2002 SOCIAL RETURNS RETURNS TOECONOMICACTIVITY: Internal Water Renewable Resources capita per (m ” (Robert Douthwaite” (Robert etal, May 2005,p.viii). This meansthat even if naturalcapital 13,203 1,078 7,377 2,785 1,014 3,387 5,214 1,365 2,519 1,855 2001 3 ) capita (m Natural Water Renewable Resources per 3 ) –includingfrom flows other countries, 2002 11,382 13,203 1,530 9,676 2,785 1,131 9,865 1,461 1,456 9,209 Withdrawals asshare of actual renewable water resources (%) 42.0 32.3 8.6 2.0 1.8 0.4 6.5 2.2 0.9 0.4 -

Figure 7.1:OverallFiscalBalance(%GDP) recently augmented. tionship with International the Monetary Fund better (IMF)has and never been its existing PRGF programme was management was fundamental inZambia reaching HIPCdebt the relief completion point in2006.Zambia’s rela- budget deficits of over 5%. then,Sincemanagement fiscal has improved dramatically (Figure economicSound 7.1). and measures bytaken Governmentthe to achieve macroeconomic stability. Prior to 2003, Governmentthe sustained management:Fiscal Zambia’s recent growth explained can be by positive the both environment external for copper sustainability. last few years, inflation crept up again almostto 13%in2009. More long-termrisks exist in relation to public finance copper prospects, causes seriousproblems for businesses. Inflation becomemay also an issue.Remaining low forthe volatile world. inthe This excessive volatility,along periods of significantwith and rapidreal appreciation linked to Government to fix. The exchange rate is one such issue. Zambia’s market-based exchange rate is one the of most ing macroeconomic stability as a top priority. However, key challenges exist still that are less within controlthe of Zambia’s macroeconomic environment has improved dramatically in recent years with currentthe Government plac- 7.1.1 Macroeconomic Risks information and coordination externalities constraining private investments and adoption the of technologies. new and micro and risks (policies regulations determining business climate). Market failures, on other the hand, refer to poverty reduction. Government failures relates and to macro institutional both poor policy risks (bad environment) ronment is unattractive to foreign both private and local investments and is thus aseriousconstraint to growth and returnssocial from being translated into private returns. In situations where appropriability is low, businessthe envi- This analysis of private appropriability attemptswhether governmentto diagnose or market failures are constraining 7.1

Government Returns to EconomicA Appropriability nalysis F ailures CHAPTER 7 Source:IMF ctivity Millennium Challenge Account-zambia |55 Private Appropriabilitynalysis Returns toEconomicActivity: : Private

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 56 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA a surplus of 3%GDP in2006.Zambia’s position, external to linked mining the particularly sector, has weathered the over last the As decade. aconsequence, Zambia’s balancewas transformed trade with current the account recording gains. In addition copper to high prices, Zambia has therefore at seen least adoubling of copper production volumes with privatisation the of copper the mines has which driven massive investments inmining operations and efficiency termsthe of (largely trade of because world high the copper price). Fortunately increased copper the price coincided position:External report– this concludes that inflation is not asignificant constraint on growth and certainly not a binding constraint. potential inflationaryrisks existfuturethe in – suchpoor maizeas a harvest theand size the of publicsector wage bill in late have 2008/early also 2009will put pressure on inflation becameas imported more goods expensive. Whilst appreciation of Kwacha). the Therefore,the massive exchange rate depreciationeconomic global the linked to crisis drop. Inflation the linked exchangealso to is rate dramatic (the ininflation fall in2005 was clearly linkedthe to real domestica poor Despite harvest. a strong for harvest 2009 and lower prices, domestic global prices arefood yet to Headline inflationZambia in largelyis driven which early by surged in prices globally food 2008 samethe at time as Figure 7.2:Inflation,ConsumerPrices(A volatility than inflation (which would likelyfirmsall insimilar affect ways). macroeconomic instability as aconstraint suggests in2008which that concerns are related more to exchange rate rate volatility rather than inflation. The data shows that firmsimporting and exporting were more likely toreport seems The ZBS to suggestthat increased concern overthe macro-economy amongst firms is related to exchange healthystill compared to Zambia’s past and inline with regional the average for low-income countries (Table 7.1). with current the projection for 2009at 12%(Figure 7.2).Despite since current 2006,the rise the inflation rate is Inflation: After dropping dramatically in2005,inflationreached single-digits in2006, but slightly has since risen T able 7.1:Inflation,2008(Annual Private Appropriabilitynalysis Returns toEconomicActivity: Zambia’s position trade strengthened has also over due last the decade to amarked improvement in Source: AfricanEconomicOutlook,2009 SSA LIC Average Ethiopia Zambia Uganda Tanzania Ghana Malawi Mozambique verage, %change) verage Annual%change) Source:IMF 13.1 25.30 12.4 7.3 10.3 16.5 8.7 10.3 over last the five years and be compensatedonly started to for by domestically-capital funded expenditure in2006. capitalfunded expenditure was worth 8.9% of GDP, comprising bulk of the public investment but has declined rapidly wages. The majority of public investmentZambia in over donorthelastbeen two has decades funded. In 2003donor- Prior to 2005, Governmentthe had limited domestic revenues left over for public investment after paying interest and explained by changes patterns inthe of aid and shift the awayfrom projects support.to budgetary 20% of GDP in 2007. Peaking at 11.9% of GDP in 2001, public investment dropped-off significantly. Much this of was dramaticallyrisen since late the 1990sand now significantly exceeds public investments. Private investment peaked at of GDP increased significantly, indicating domestic private activity (Figure 7.4). Private investmentparticular, in has In 2005, FDI inflows increased by 166%,compared to only 2%in2004.Credit the to privatesectorpercentage as a Figure 7.4:GovernmentandPrivateSectorDebtas%ofDP Figure 7.3:DomesticandForeignInterestas%ofGDP revenuetax from mining of around $1billion eachyear. Prior economic to global the downturn, positive these trends were projected to continue with onset the of additional substantially reduced Government’s the interest bill and increased credit to private the (Figures sector 7.3 and 7.4). enabled Zambia to bring domestic the debt-to-GDP ratio down toalong 13%.This, with HIPC and MDRI debt relief, Public finances domesticand debt: priority innational development planning. significant prospect forjob creation. Diversification ofexports economy theand real remain a economictop policy economy.the With technologies becoming new less is sector also the and less labour intensive and therefore is not a as ever to future shocks. The miningsector global thought is to havebackward weak and forward linkagesthrough However, continued reliance on astrong mining is sector clearly not desirable andleave will Zambia as vulnerable ofcovery copper the price, outlook the for Zambia’s current account is favourable. financial crisis global well futureand projections are once again strong. With mining volume increasing theand re- A combination of reduced deficits since fiscal 2004 economic and growth has Source: (2002-2008) AWhitworth,ZambiaFiscalPerformance Source: (2002-2008) AWhitworth,ZambiaFiscalPerformance Millennium Challenge Account-zambia |57 Private Appropriabilitynalysis Returns toEconomicActivity:

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 58 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA an appreciation of around 100%injust afew months. exchange rate rapid has experienced bursts of real appreciation, most notably in2005-2006(Figures 7.5and 7.6)with copper price fluctuations remain acontinuedcause of volatilitythe in nominal and exchangereal rates.Zambia’s real Whilst asnap-shot of Zambia’s position external healthy, looks heavy on dependence means asingle export that global rate is abinding constraint on growth. ity remains a major analysis issue. is Deeper required to level the determine and whether volatility of exchange the Despite overall the dramatic improvements macroeconomic inthe environment inrecent years, exchange rate volatil- 7.1.3 largely due to factors outside Zambia’s control. major improvements in macroeconomicthe environment over slippingcould this lastthe be decade back, although 2008 and early 2009and economy. general global inthe uncertainly This would suggestthat therewhilst have been business in2008.This is most likelybe to due the extremeto exchange rate volatilitythelatter in experienced half of 2008 ZBSwas that firms were far more likely sayto that macroeconomic instability was a major constraint to doing of business opinion 2007and between 2008.One of most the significant differences the 2007 in and Enterprise Survey tion of exchange the rate at end the of 2008.The impact this of on seen clearlybusinessescanbe in results of surveys economic global The downturn has impactedZambia’s on macro-economy, most notablythrough a sharp deprecia- and dependent on imports/exports. ic instability was aseriousconstraint, possibly due that to fact the urban businesses are more likely monetised to be serious obstacle – only second to electricity. firms in urban Also areas were 14% more likely sayto that macroeconom- mostthe seriousobstacle. Managers of large enterprises were more likely to say that macroeconomic instability was a ness operations with around 25%of firms reporting seriousit as a obstacle and only about 4% of firms reporting it as the listthe of constraints in2003,compared to 7 ICA shows also improvements relative to other business constraints –with macroeconomic stability ranked second in stability as amajor or severe obstacle to business operations inZambia from 74%in2003to around 25%in2008.The sessment (World 2008c)shows Bank, asignificant percentagereductionthe in of firms macroeconomic reporting in- The improved macroeconomic environmentevident is in recent The businesslatest surveys. Investment Climate As- 7.1.2 recurrent budget may crowding-out be much domestic needed investment iffinanced by domesticborrowing. of GDP compared to other countries region. inthe Although is this not abinding constraint at moment, the high the Another key concern to sustainability the of public financethe is publicsector wage which is bill relatively high at 8% credit conditions following financial crisis. global the duecould be to crowding-out from additional public borrowing sector but likely is also due to be to atightening of off in2009– growbutto expected it is still by 16%in2009 and as a share of GDP. This slowing-down of credit growth orsector on interest rates? The rapidgrowth increditseen the to private between 2005-2008looks sectorto have tailed increased domestic borrowing due to crisisis the not amajor risk. Is it impacting on credit available to private the to continuejected over to fall next the few years to 10.4%of from GDP in2011.So amacroeconomic the perspective According to IMF, the despite increased domestic borrowing compared to 2008plans, stock the of public debt is pro - ditional IMFsupport and by expanding net domestic financing to 1.2% of GDP in2008 and 1.9% of GDP in2009. deficitexpanded fiscal the to around 3% of GDP to ensure thefully budgetexecuted. be This wascould financed byad- introduced tax mining windfall in2008before recession. global the In response to revenue the Government shortfall, the fromticular lower import VAT receipts depreciation. to linked currency the Government The scrap to decided the also economic global The downturnZambia’s has impacted position fiscal and projections throughreduced revenue, in par The ZBS showsthat enterprise managers rank macroeconomic instabilitythe 7 as Private Appropriabilitynalysis Returns toEconomicActivity: Is exchange rate volatility andappreciation real binding on growth? Firm perceptions of environment themacroeconomic th in2008. th largest impediment to busi their - - constraint to investment and to growth the of non-traditional exporters. The appreciation the of exchangereal rate appreciationReal hurts exchange exporters. also Real inparticular rate appreciation, it when happens, is aparticular severely about macro fluctuations,so something it is that shouldbe investigated. This thanmay expected. the lead to conclusion that it is not a constraint. However, a number of firms complained exchange rate volatility inlate seen 2008/early downturn to 2009linked global the –with growth doing much better growththe and appreciation the were result the of copper high the price. Growth to have seem also held up well to the around 5%.From 2005to economic 2006,the growth appreciated, rose as currency the but it likely seems that both straining growth? whole, On the growth not to have does seem responded to changes exchange inthe rate –staying at economic instability as aconstraint to business are future than in2007(ZBS).So fluctuations expected currency con- depreciatedcurrency sharply due downturn, to global the Zambian firms were much more likely to macroreport - ity to price external movements. The impact the exchangeof rate volatility on firms issignificant. the when In2008, Exchange rate volatility is aresult of Zambia’s economic on dependence copper and exports `associated vulnerabil- T Figure 7.6:RealEffectivexchangeRate(2000=100) Figure 7.5:ExchangeRate(ZMK/$)andCopperPrice($/mt) Total Domestic Staples CropsExport Source: ZambiaNationalFarmers’Union,2006 able 7.2:ProjectedImpactofaKwachaAppreciationFromK4,500toK3,500perUSDonZambiangriculture ($ millions) Production 557 281 277 Current Scale Current Employment (thousands) Source: IMF Source: IMF 975 511 463 ($ millions) Net exports Millennium Challenge Account-zambia |59 181 106 Private Appropriabilitynalysis 75 Returns toEconomicActivity: Anticipated Reduction Anticipated Employment (thousands) 220 190 30

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 60 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA by of School the Oriental and Studies African (SOAS) questions, however, for case the is this infact Zambia whether Arguments against managing value actual the of Kwacha the include risk of the increased inflation.Research in2008 lisation of foreign exchange earnings to avoid appreciation. effects. The ZNFU studyrecommended active management the of exchange rate to avoid excessive volatility and - steri stance is not sufficient the and Government be should targeting an undervalued Kwacha to counter Dutch-disease dramatic impact on diversification agricultural Zambia’s (the heart of poverty currentreductionthe strategy) policy to smoothen excess volatility but not intervene to manage real the value of Kwacha. the Many argue that given the Is helping exchange rate to address volatility policy and appreciation?: Existing exchange rate has been policy Figure 7.7:SelectedWorld AgriculturalPrices(2004-2009) during times 2004levelsthe same several the period. tween wheat, maize and sugar roughly which doubled 2005and inprice between 2007and cotton fell which to below returnsexpected could –which relate price. Figure to expected the 7.7shows contrast the inprice developments- be resistance to planting non-food crops major the to seems be lasting effect the of appreciation, alogical reaction tolow prices were rising quite dramatically. In contrast, prices for non-food crops reducing had been or remaining flat. The ing non-food crops as aresult. This may be linked to developments marketsglobal the in as, time,theglobal at food quickly afterthe depreciation, but non-food products did not – thereseems it maybe more reluctance now to plant- Agricultural fell exports during 2005-2006appreciation the and not have all recovered. Most recovered exports food as projected by ZNFUstudy. the The main impactseemsbe in toterms theof composition basket thewhichof export shifted away fromagriculture, faceofthe appreciation. the driver, total non-copper Surprisingly, exports? total non-copper either exports grewor remained roughly same the in definitelybe a binding constraintgrowth the to of non-traditional exports. How doexchange rates relategrowth the to is exchange the So rate abinding constraint to growth? The ZNFU study suggests exchange rate appreciation would current rate of US$277mto US$171mand 190,000jobswould lost. be a dollar rate of K4,500to K,3500)would reduce production the of crops export by almost 40%invalue terms from the 1995and between 2005priorcally to appreciation. the The study projectedthat an appreciation of around 25%(from (cotton, tobacco, sugar and floriculture) and associated employment.growing been had exports Agricultural dramati- In potential ZNFUanalysed the 2006the impacts of appreciation on production of domestic staples and crops export from 2005.There areknock-on in effects terms ofareduction thatjobs inagricultural also have an impact on poverty. 2005andbetween 2008had asevere impact onshowed which exports agricultural some sectors, especially a decline Private Appropriabilitynalysis Returns toEconomicActivity: 100 150 200 250 300 350 400 450 500 50 0 Cotton (cents/kg) Cotton Jan-04 May-04 Sep-04

Jan-05 (2004-2009) Prices Agricultural World Selected

Source: ZambiaNationalFarmersUnion May-05

Wheat ($/mt) Wheat Sep-05 Jan-06 May-06 Sep-06 Jan-07 Maize ($/mt) Maize May-07 Sep-07 Jan-08 May-08

Sugar (cents/kg) Sugar Sep-08 Jan-09 May-09 Sep-09

ing at over $1 billion in2007(Figure 7.10). (TableAfrica 7.3).FDI increased significantly overthethelast (since decade privatisation- thepeak miningsector),of countries, interms both of total inflows and in terms capitaper of dollar Zambiawhere is roughly Southparon a with 7.8). Private investment at peaked 20%of GDP in2007(Figure 7.9).FDI into Zambia relative is high to comparator significantly exceeds public investment. Just under half of private investmentZambia in is foreign investment (Figure 20% of GDP for lastthe five years. Private investment, dramatically risen has particular in the sincelate 1990s and now Investment Trends: Zambia’s total investment rate increasing has been steadily over and last the over decade has been T do business and invest in;ranked 6 economy ago. almost twodecades Compared to other countries in region,the Zambia is a relatively to country easy ZambianThe climate for investment and doing business has improved dramaticallythe since move to a market-based Figure 7.8:PrivateInvestment:ForeignandDomestic(%GDP) 7.1.4 if not managed well. aid flows theandlarge drawing rightsspecial (SDR)allocationfrom thecause IMF couldalso appreciation pressure would have significant effects on non-traditional export competitiveness and on import-competingfirms. Increased an obvious risk of areturn sudden real appreciations to further as copper the price and economy global recover. This Although downturn the has reversed some of real the appreciation (and most of nominal the appreciation), there is inducing inflationary pressures. as Zambia), exchange rate management an could be effective tool forsafeguarding competitiveness export without ing asignificant impact on inflation. Thisresearch the supports general proposition that in developing countries (such and suggests that managing exchange the rate in2005-2006could have forestalled real the appreciation without hav- businesses. areascal and time where cost import Zambiato export, performs across badly: borders and costs of high the licensing Zambia’s improved position indices. However in global there remains significant room for improvementsome in criti- Government is continuing to implement reforms to improve business the environment and progress is evident from able 7.3:ForeignDirectInvestment,US$m(2002-2007Cumulative) Investment and Business Climate Malawi Uganda Ghana Tanzania Zambia South Africa Source: AfricanEconomicOutlook2009 10% 20% 30% 0% th inSSAon World the Bank’s of Doing 2010Ease Business Index.Zambian The

2005 and Foreign Domestic Investment: Private Domestic Domestic Private

$301 $1,830 $1,940 $2,716 $2,971 $14,914 Total 2006 (% GDP) (% Source: IMF FDI

2007 $0.02 $0.06 $0.08 $0.06 $0.24 $0.30 $pc Millennium Challenge Account-zambia |61 Private Appropriabilitynalysis Returns toEconomicActivity: 2008

AN SourceANAL IMF YSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 62 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA indicators, Credit performing well particularly on Getting and overtaking Kenya both and Ghana (Table 7.5). Zambia is now above medianthe on most of Doing the Business Doing Business indicators. workingtechnical groups have established been to specifically look at Zambiahow can improvethe worst-performing ranking of next 50inthe five years.Led Government’sthe by PrivateSectorDevelopment Reform Programme Unit, Encouraged by Zambia’s recent progress up rankings, the Government the atarget has set of reaching an overall Tradingand across Borders. consistently top inthe ten for region the over last the five years improving, been and also has moving up to 6 Index (Table 7.4).Zambia’s overall ranking has global improved by 26places last inthe two years. Zambia has been environment. As of 2010 the report, Zambia is ranked (out 90th of 183) overall on Worldthe Bank’s Doing Business Conditions for doing Zambia business: performs Overall, relatively rankings well for inglobal very business the levels have invested been by foreign financialsector. inthe banks nications,eachwith four and financialservices projects oversametheperiod. In terms the valueof of FDI, significant 2003and between sector 2009.Themetals next most importantsectors by number of projects were energy, commu- FDI into Zambia is mining-related. According to arecent report for ZDA, the 27FDI projects were inthe undertaken vatisation, copper high prices and favourable the incentives tax given to investors. It is estimated that around 75%of FDI is predominantly directed towards mining the and sector to linked massive the investment following needs pri- Figure 7.10:ForeignDirectandPortfolioInvestment(US$Millions) Figure 7.9:GrossInvestment(%DP) Private Appropriabilitynalysis Returns toEconomicActivity: 10% 20% 30% 0%

1990

1991

1992

Source: IMF 1000 1200

-400 -200 1993 200 400 600 800 0 1994 Public 1990

1991 1995 1992 Private 1993 1996 1994 1995 1997

1996 Source: IMF 1998 Paying Taxes Paying and 1997 1998 1999 1999 2000 2000 2001 2001 2002 Dealing with Licences with , but poorly on Dealing very 2003 2002 2004 2005 2003 2006 2007 2004 2008 2005

2006

th 2007 for 2010

2008

due to modernisation the and computerisation of PACRO. the In Lusaka, to taken time the register with PACRO has cost has stayed same. the Zambia made significant improvementsthe a in starting business indicatorpartly in2007 ness inZambia are not excessively Since high. to taken time 2004 the open abusiness has more than halved the whilst Starting and licensing abusiness: At 18days and 28%of capita per income and time the cost required to abusi start - PACRO. of information on registering were to barriers formalisation. only Of4,801firms 234 surveyed, were registeredwith asked why were they not registered, answers the given suggested that cost of high the registering abusiness and alack Company Registration Office (PACRO), ZambianRevenue Authoritylocal (ZRA) or government agencies. When that only 10% of MSMEs operate from formal premises and only 5% reported being registered with Patentsthe and that also The ZBS reveals formalisation the of privatesector is a issuekey for domestic MSMEs. foundThe survey access to land (34%). businesses. For MSMEs, most the seriousobstacles reported were access to financetransportation (55%), (39%) and macroeconomic instability (34%),and cost the of finance (34%) tax ratesand serious (23%) as constraints to doing quite different from large experienced by those Largebusinesses. businesses were more likely (38%), to rank electricity enterprises, was conducted in2008.The ZBS showsthat the constraints most important to smaller businesses are source: IFC,2010 anationally surveyed A ZBSwhich representative sample of 4,800MSMEs (fewer than 50employees) and 160large source: IFC, 2010 T T able 7.5:EaseofDoingBusinessRank able 7.4:2010DoingBusinessIndexinZambia 10. Uganda (118) 9. Zambia (116) 8. Ethiopia (102) (90) 7. Seychelles 6. Ghana (87) 5. Kenya (72) 4. Botswana (51) 3. Namibia (43) (35) 2. South Africa 1. Mauritius (27) 2007 Top-10 inbrackets) ranking (global inSub-Saharan Africa Overall Ease of Doing Ease BusinessOverall Closing aBusiness Enforcing Contracts Trading Across Borders Paying Taxes Investors Protecting Getting Credit Registering Property Employing Workers with Licenses Dealing Starting aBusiness 10. Ethiopia (111) 9. Uganda (106) (105) 8. Seychelles 7. Zambia (99) 6. Ghana (87) 5. Kenya (84) 4. Namibia (54) 3. Botswana (39) (32) 2. South Africa 1. Mauritius (24) 2009 Global Ranking Global 83 87 157 36 73 30 94 116 151 94 90 10. Seychelles (111) 10. Seychelles 9. Ethiopia (107) 8. Kenya (95) 7. Ghana (92) 6. Zambia (90) 5. Rwanda (67) 4. Namibia (66) 3. Botswana (45) (34) 2. South Africa 1. Mauritius (17) 2010 Regional Ranking Regional 12 16 30 6 12 4 12 19 30 10 6 Millennium Challenge Account-zambia |63 Private Appropriabilitynalysis Returns toEconomicActivity:

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 64 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA Paying Taxes Index for Paying that “taxes, although on side, are high the not excessively nor high out of line compared to other countries”. The DB Tax and administration isnot abinding policy constraint: The WorldBank’s Inclusive Growth Study concluded through scrapping the of 170licences and streamlining of others. programme was which approved by Cabinet in2009with intention the of reducing compliance costs by 30%in2009 lem by hiring firms to licenses(largehandleall hotels for example). GRZ has put in a place BusinessLicensing Reform constraint than starting abusiness. The heavy burden of licensingevident is largeas firms pay tocircumvent the prob - Obtaining business associated licenses,and high compliance particularly the costs, are thought amore to be serious considerably (dropping 22places). not afford whilst to stand countriesother still are continuing to improveZambia –in2010 slipped downthe rankings now reduced been to three to fivedays from days 35 in2006. However,the 2010 DB showsreport thatZambia can - to more populous neighbours such as DRC and Zimbabwe. countries? When Zambia’s domestic market there small is areso significant opportunities forgrowth from exporting reported exporters. to Why be are Zambian firms not looking outward the to regional marketsthe eight in bordering few Zambian the ZBS2009, firms in very export overseas:this, onlyproducts 15 of 4,801firmsservices surveyed or cording to IMF’s the Trade Restrictiveness Index and average tariffs are lowerthan SSAcountries.other Despite Trading across borders isnot abinding constraint: Zambia has one of most the ac- regimes open trade inAfrica preventing investment. are finding ways to circumventthe problem of corruption,so, whilst it maybe acost their to business, it may notbe tors are low. The ZBS would suggestthat corruption is notthe most binding constraint; however it maythatbe firms was inconclusive on governance weak whether was abinding constraint, given that most of governance the indica- indicators show that Government effectiveness improvingbeen has which is a sign of effective reforms. The IG study comparison, given its GDP level, Zambia scores than higher estimated on most governance indicators. Trends in control of corruption and government effectiveness. The World Bank’s IG Study also found that ina cross-country According to World the Governance Bank Indicators, Zambia scores relatively well on stability political but low on sayingfirms corruption was a major severeor obstacle. Large firms were less likelythan MSMEs to corruptionreport serious as aconstraintwith – thanfewer 20% largeof tion was amajor or severe obstacle to doingsaid few firms businesses;corruption very the was serious most obstacle. slightly above averagethe for OECD countries. Around one quarter of firms questioned forsaidthethat ZBS corrup- investors protecting Governance and corruption: Zambia ranks around average and globally regionally on DB the indicators relating to subsequently reversed later year. inthe by changes ad-hoc to tourist fees were which visa more than doubled for British and American tourists in2008and made significant changes to miningtax regime overthelast 18 months.been Theaffected also has tourism industry and uncertainty tax is an issue that is rising up agenda the mining inthe –particularly sector.Government The has Firms report anumber of problems around of frequency high unexplained the or unjustified changes policy tax in enterprises. providers negotiate – distorting deals competition special and in industry the disadvantaging tourism local small seldom of part incentive tax schemes provided to other non-traditional Some large exports. (foreign-owned) tourism tions sector. inthe There a3% also is turnovertax agricultural on small producers. Similarly,the tourismsector is level sales The for VAT registrationso is $40,000 largeonly farmerscan take advantage the significantof VAT exemp- system could evenfavour large businesses, inagriculture particularly where system tax the could disfavour MSMEs. tered firms were askedwhy they were not registered, mentionedfew thetax Someas very reason. elements tax the of It is not evident from ZBSthat the rates tax or burdens create disincentives to enter formal the sector. When unregis- of large firms tax rates reported serious as a obstacle to business operations, compared thanto less 10% of MSMEs. narrow, particularly being with large firmstax rates facing higher than MSMEs.evident This is wherethe ZBS, in 23% that The fact tax rates and administrationbe a do majornotseem to constraintZambia’s may be linked to base tax pay taxes at 132hours year per compared to 306hours is considerably better than regional the average. Whilst at number 37the of payments required is this inline iswith regional high, the average and to taken time the of 16.1%of profits, significantly lower than theboth regional averagenearly of 70% theand OECD average of45%. Private Appropriabilitynalysis Returns toEconomicActivity: enforcing contracts enforcing and puts Zambia at 36 . The time takentime. The to enforce acontractZambia in daysis 471 which is just th globally and globally 6 th in the region. inthe The DB calculates ataxratereport total to land as 4 the land cannot as collateral used be for loans. However, more inthe recent ZBS,Zambian businesses overall rated access oftion. Lack available land is not mentioned as aconstraint farmersdonot also who complain scale to small- that is not perceived as a binding constraint largely land because is abundant with only 40% of arable land under cultiva - and 15%of total land allows for ownership rights, despite dominance the of customary land holding, land the system Bank’s IG study concluded that access to land is not abinding constraint on inclusive growth. Whilst only 6 between . In Zambia,erty it on takes average 39days to register about property; of half 80day the regional average. The World are rights not abindingLand constraint: Zambia performs relatively well on DB the indicator prop for registering workers for example. labour regulation and that large formal firms have found ways of getting roundthe problem, usingcasual or contract than MSMEs to complain about labour laws. This maybe that due theto fact informal firms would not encounter few firms labour reported very regulationserious as a obstacle to doing business andlarge firms were even lesslikely Excessive labour regulation clearly discourages permanent employment and formality. However, ZBSreveals the that anecdotally by firms as a major issue resulting ininflexibility the in labour market and worker productivity. 178 weeks of wages, around threeSSA regional the times average (Table 7.6).The excessively costs high are reported Where Zambia comparison performs poorly inglobal particularly is on redundancy costs serious obstacle. title on land. their full Rural MSMEs were slightly more likely than urban businesses to say that access to land was a firms are much less likely sayto that access landto serious is aconstraintpossibly becausethey are more likely to have low. Zambia ranks 116 regulation isexcessively costs Labour areLabour high: considered inZambia high and to be labour productivity T andglobally within region. the trade indicator The Zambiawhere is performs worst the on DB index –ranking at 157 number of documents and required time the to import to and and goods export from Zambia are excessively high ofOne part answer the is likely burdensome to be and costly border procedures. The DB indicators showthat the documentation and have significant waitingtimes. has not improved situation the for many the business small that are required still to clearing use agents to help prepare in 2008and has had asignificant impact border-crossingthe on times for companies.these Howeverthis programme toms officerscalculate to search dutiestrucks or the at border. The programme wasrolled out to16 large businesses where number asmall of large exporters and importers accredited can be tonot self-value goods, their requiring- cus just 20% in 2008 (GRZ 2008, PAF Performance introduced has ZRA also Report). a Client Accredited Programme customs facilities, computerisation and mobile scanners cut which truck down on physical inspections from 80%to years to with become Chirundu set aOne-Stop Border Post in2010.Investments have involved immigration new and Improvements at Zambia’s main border (Zambia-Zimbabwe-Chirundu border) have for underway last been the three for improvement, is this one area where aDB Technical Working Group has recently established. been tor is which not related to landlocked being and well within Zambia’s control to improve. Given significant the room indicator shows also that bulkthe of totalthe time is uptaken actually preparing requiredthe documentation – a fac- tors reveal that major the problem and to istaken time the export import at 53and 64days respectively. However, the of 183countries, bottom inthe so 15%globally.Zambia Thispartly linked is tobeinglandlocked theand sub-indica - able 7.5:RedundancyCosts th most seriousobstacle to businesses their and 14%ofsay firms theit seriousis most Largeobstacle. SSA Average Rwanda Uganda Ghana Mozambique Malawi Tanzania Zambia th employing workers on DBthe employing Source: IFCDoingBusiness2010 (Weeks ofSalary) indicator and performs averagely on most of sub-indicators.the 67.6 26 13 178 134 84 18 178 Millennium Challenge Account-zambia |65 Private Appropriabilitynalysis Returns toEconomicActivity: which are which unusually at high th -

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 66 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA effect effect the incomeon poor. rural the of sharesmall of Since exports. main the are NTEs farm products, activities is bound scaling-up to these have apositive rising again to 95in2005. Non-traditional have (NTEs) exports increased, continue although they to make up only a countries buying Zambian products expanded from 68in1997to 105in1999,before down falling to 82in2003,and 96% of yet exports by made up 2004,they about 80%. groupthe of least diversifiedeconomies inSSA(Figure 7.12). the In 1980, five largest Zambian accounted exports for 10 9 8 Source: World Bank,Exportdiversificationdata,PRMED Figure 7.11DegreeofExportDiversification,Zambia nearly doubled numberthe of products (Figure exported 7.11)and halved its Herfindahl index Zambia past the few decades, hasOver managed to broaden country 1980-2004the In base. her export period the tion and coordination externalities? low for her level of development. Is low this level of sophistication export due to market failures –negative informa- Using various measures, it concluded can be that Zambia has diversified her exports sophisticationbut export remains rangethe of countries to it which are ways exports is innovating. country useful the to whether learn tions. Checking extent the of acountry’s diversification, export sophisticationthe the of productsthat it exports and producing at them lower cost, developing and varieties, new increasing number the of and destina exports - export the innovation is more diversification successful the economythe of by, for example, imitating existing products and technological frontiers leading to invention the of products. new In developing countries such as Zambia, however, But how can it that determined be is innovating? acountry In developed countries innovation is often about pushing not is to check innovation whether place. is taking haveneurs will no incentive to innovate. One way has of acountry aproblem whether seeing of low appropriability or to appropriate gains the from invention their competitors their because imitate at them low or no cost at entrepre all, - inventionstheir offor time in order a period to recoup investmenttheir costs and make profit. Where they are unable For entrepreneurs to devote and time their money to innovation, some need kindof they monopolistic advantage over 7.2.1 Innovation tions. There backlog a landof also is registrationswhich indicates inefficiencies theadministrative in system. and accessibleis land lack the of means which serviced thatis infrastructure abinding rural constraint to farm opera- ofLack land rights may a constraint be from a long-run as it perspective creates risk for future returns. constraint Real 2005. 7.2 Private Appropriabilitynalysis Returns toEconomicActivity:

10 Alarge share 74%and –between again 80%–was of exports exported following the these year. The number of Market Source: World (2007b). Bank Although economy the has grown rapidly and has trade expanded inabsolute terms, it is declining inrelative terms. The measuresindex Herfindahl the degree ofexport diversification. thehigher The the index, Herfindahl the lower degree of diversification.

Number of exports 100 120 140 20 40 60 80 0 F ailures 1980 Five largest (share of merchandise exports) of merchandise (share Five largest IndexHerfindahl US$) 10,000 (> exported of products No. 1985 1990 1995 9 The fromnumber increased of exports 501in1998 to 704in 2000 2004 0.00 0.20 0.40 0.60 0.80 1.00 1.20

Index/shares 8 breaking away from export-led growth.export-led Cassava, sweet potato, cotton and groundnut production have increased. 11 five accounted exports, they and forthan less 2% of total exports. movedBy 2002 metals base other second the to spot from copper into and metals other precious base stones. In were metals 1995other base fifth the on listZambia’s of top The the declineshare export in of mining hidesimportanttrends the miningsector in which hasitself diversified away Source: WorldBank, Exportdiversificationdata Figure 7.13:CompositionofExportsinZambia playingstarted amuch more prominent role. on of exports ores and last inthe 17years metals, including exports, agricultural non-traditional have farm exports, dominate still ucts merchandise butZambia after exports, three inthe decades independence while exclusivelyrelied Zambia has diversified capitalisingby on her advantageland-intensive in (Figure 7.12). goods Mining primary prod- Source: World Bank,Exportdiversificationdata,PRMED. Figure 7.12:Non-oilHerfindahlIndexforCountriesinSSA,2004 out of fivegrew cotton, and 45%derived incomefrom animal products fromand 17% horticulture. fromcreased 1980s 4%in the to 20%inearlythe 2000s. Even farmers have small-scale diversified – by 2002-2003, one The grosstotal value of agricultural output rose by theCotton mid-1990s between overand 50% 2001-2004. and tobacco have contributed to 0.00 0.20 0.40 0.60 0.80 1.00 1.20

Non ores (shares) the in Zambia 0.000 0.050 0.100 0.150 0.200 0.250 1980 Primary Goods (non ores and mineral) as a share of exports ashare as andmineral) (non ores Goods Primary of exports ashare as andMetals Ores of Manufactig ashare as Textiles of exports ashare as Manufacturing goods of primary ashare as Raw Materials goods of primary ashare as Food 1960s 1970s 11 Zambia’s share of and food other farm products in- intotal exports 1980s 1990s 2000s Millennium Challenge Account-zambia |67 Private Appropriabilitynalysis Returns toEconomicActivity: 0.000 0.200 0.400 0.600 0.800 1.000 1.200

Ores and metals (shares)

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 68 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA and Malawi Uganda, while Togo, Gambia hadEXPY. and ahigher Senegal its basket. export Among SSAcountries with asimilar GDPcapita, per Zambia fared better than only Tanzania, Benin 13 tion itself. 12 oping amore sophisticated basket. export with capabilities the industry that accompany as abasis for awell viewed could developed mining be industry devel- Russia and Canada)have amuch GDP capita higher per than Zambia’s. other Onthe hand, presence the of acopper fromboost PRODY the of copper other -the main producers of USA,Peru, (Chile, which Australia, China, Indonesia, low for her level of development. Onone hand, Zambia’s EXPYmay considered be overstated it because gets abig So, although Zambia may diversifying basket be her export and destinations, export sophistication her export remains Source: CenterforInternationalDevelopment;Note:ataare2005. Harvard Figure 7.14:GDPPerCapitaandEXPY tion of PRODY assigns which an income content number to eachproduct by exported acountry. to capturetries extent the of value addition of acountry’s EXPYis derived exports. intwo stages. First, is computa the - countries relative to GDPcapita. their per EXPYis ameasure of country’s the sophistication. export Put simply, it on FigureBased conclusion 7.13,the regarding sophistication export is less ambigous. It graphs EXPYof the different US $16million, US$11million of to them DRC. the included spare for parts mining equipment. In 2008,Zambia imported US$99million worth of and parts, exported to DRCexported the imported had that been same year. Parts are not broken but down further it is likely that these in 2008. Of sulphuricthe in exports 99.6% went acid exports, to DRC. the It is noted that 100% of sulphuricthe acid acids growth is entirely attributable to sulphuric input acid, a primary incopper refinement,with over US $20 million butexports examination adetailed of what is happening shows that some of are these mere re-exports. Inorganic mon for to a country innovate and diversify by utilising capabilities the it has acquired production in the of its main overstated. There aregrowing a number that of exports requiresamethe capabilities as copper processing. It is com- It should noted be that, acknowledging obvious while the diversificationZambia’s in this maysomewhat exports, be represented nearly 4%of total exports. and represented 15%of Zambia’s merchandise Precious exports. stones, were which not on top the five list in 1998, from its level of income to what extent basket export the of does show a country value the addition matching levelthe that expected could be derived by aggregating PRODY the by for exported goods acountry. all EXPYtherefore to answer tries question, the Private Appropriabilitynalysis Returns toEconomicActivity: Within Growth the Diagnostic HRV literature, is this what is referred to sophistication. as export The income contentbeing a proxy for R&D. Accurately,therefore, this isa measuresophistication export of revealed rathersophisticathan export - 13

8 8.5 9 9.5 10 ? In Figure 7.14,Zambia’s presence below best-fit the line indicatesthe low sophistication of BDI 6 NER MWI TGO UGA 7 TZA GDP per capita and EXPY and capita GDP per GMB ZMB ZMB BEN lexpyppp Log capita per GDP at PPP SEN SDN KGZ MDA NIC IND CPV MNG 8 GUY PHL HND IDN GEO MAR BOL MDV GTM CHN ARM JOR AZE ALB UKR OL C BLZ Fitted values VCT TUN PER ECU DMA HA TH 9 MKD ZAF LCA BLR BRA KAZ CRI URY PAN OM R IRN BGR VEN MUS TUR ARG MEX MYS RUS KNA CHL LVA HRV POL LTU SVK EST HUN TTO 10 PRT ZE C OMN MLT SAU KOR ISR SVN NZL CYP ESP ITA GRC JPN DEU FRA FIN GBR BEL AUS SWE DNK AUT NLD CAN CHE ISL HKG IRL USA SGP NOR 11 LUX QAT 12 Second, EXPYis achieved when supported by crucial services and thus supported secondachieved when the principle satisfy services by of crucial differential diagnosis: “If acon- There are cases of coordination failurespockets where cases ofindustry andprivate specific sector growth been have Source: CSO(forthcoming) Figure 7.15:NumberofHouseholdswithAccesstoFacilitieswithinFiveKilometres Arnold by market the had economic activity reached level. acertain investments,wide and may to need make investment initial that private incertain would have services provided been and implies that government the topublic their needs focus investments on of pockets growth rather than country- potential This diverse ofproblem set services. common is especially in sparselypopulated countriesZambia, such as information failures as failure the should described of be market the to respond to potential investors’ demands for a of case in the and private due to non-exclusiveness services, Hence of case inthe public coordination services. and The incentive is limited to establish kinds for these services of an individual entrepreneur due marketto small size include marketing, research and product quality information. investors, but is costly to gather. As aresult, no single potential investor information. gathers necessary the Examples ures on other the hand may information when arise about economic opportunities has potential the to benefit many productionthe chain, access to such markets, as irrigation, and electricity and water. services basic Information fail- economy include 2004).They the (Rodrik, provision of infrastructure and institutionsthe different linking steps in chain producers between and consumers, and require simultaneous, large-scale investments invarious sectors of the byneeded enterprises to innovate, market products their successfully, and make the aprofit. link supply services These Coordination failures exist fails acountry when to provide sufficient non-traded inputs or complementary goods Zambia’s growth and market failures ingeneral are abinding constraint to growth. in agriculture, manufacturing and tourism show that coordination and information externalities are ahuge drag on Coordination and information externalities are contributing in various ways to low sophistication. export Examples tute market failures. Market failures exist market the when malfunctions and fails to bring about economic efficiency. Zambia’s low level of sophistication export is symptomatic of coordination the and information failures that consti- 7.2.2 urban areas itfor when facilities basic needed comes afunctioning market to very the (Figure 7.14). levelthis of access, impact the on country’s the GDP growth would significant. be Rural areas are at adisadvantage to firms, South African and 6% more productive thecase in of access bankingservices. to ZambianWere firms to have predicts that Zambian firms be 13% wouldmore productive enjoyedthey if samethe access to telecommunications as countries. After controlling for systematic differences the at country, firm level, and industry the study for example of firms indownstream industries, using InvestmentClimate withpanel data from Surveys 1,185firms in tenSSA 100 120 et al et Coordination and Information Failures 20 40 60 80 0 . (2006)analyse relationship the providers performance the between service and of productivity local the Food Market Market Food Input Market Market Input Post Office Post Post Office Transport T Public ransport Public Public Phone Phone Public Millennium Challenge Account-zambia |69 Private Appropriabilitynalysis Returns toEconomicActivity: Internet Cafe Internet Cafe Urban Rural

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 70 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA proved farm inputs, explains much inyields of fall this 15 14 and costof transportfinance services could notbe statistically confirmed. rank of Zambian is 77% correlated districts to rankthe of availability of phone correlationthe lines, while to reliability and 87% ofcorrelated transport services, to rank the of cost the of finance. the In maizesector, the firm productivity 90% correlated to rank the of availability of phone 90%correlated lines same inthe district, to rank the of reliability Investmentthe Climate (Table Surveys 7.10).In cotton the sector, firm-productivity the Zambian rank of is districts to show how maize and cotton productivity are negatively correlated performance as measured by withservice weak Bramilla and Porto farm level productivity (2006)collected data inZambia, from making districts it several possible are absent or inadequate, limiting ability the of firmsto developedmarkets. country to expand especially exports, processing,food packaging and labelling facilities. Modern research, food testing and product development facilities pansion of agro-processing the industry. The processingfood in lacks access industry turn to information on modern at low rates of capacity utilisation, making economies difficult of to achieve scale acting as and an obstacle the ex- to channels multiple between smallholder farmers and processing food firms. As a result, agro-processing firmsoperate Farmers’ market access problems caused by road poor networks are augmented by that fact the there are few very Source: World Resource Institute(http://earthtrends.wri.org) T yields were inZambia early inthe 1980s than yields the inSSA,average cereal yields inZambia are much lower rest inthe than those of world the and than information things properly,yields to these need use they hectare and per productivity remain low. Although higher farmerssmallholder donot have access to fertiliser, and chemicals, right the irrigation seeds, and donot have the increaseseven in small productivity would have big impact ona very country’s the growth. But Zambia’s because might holding be back innovation. It majority the inwhich is sector the of Zambians living, their earn meaning that Agriculture example is agood for learning about existence the of coordination the and information externalities that straint binding, is then movement in the constraint should produce significant movement in the objectivefunction ” not only nearly ten less times ofrest than inthe use the fertilisers of world, the but was below inSSA. use the than 1%,compared to nearly 4%inSSAand rest 18%inthe of world. the In average 1999,the was annual use fertiliser irrigation and inZambia.percentage The fertilisers of irrigated croplandZambia 1999-2001was less period in the in tion is much than higher average the for SSAand world. the These outcomes are not surprising considering the use of Average crop hectare) yield (kgper 1999-2001 Cereal, Percentage change since 1979-81 able 7.6:AgriculturalProductionandYields Hectares of cropland 1,000population, per 1999 Agricultural land Per cent of cropland that is irrigated Average ha) annual use, 1999(kgper fertiliser Agricultural inputs Volatility indomestic cereal production, 1992-2001 Food security Net cereal imports and aid cent food as aper of total (average cent per variation from mean) Consumption, 1998-2000 Private Appropriabilitynalysis Returns toEconomicActivity: Agriculture market liberalisation initiated by government new the to led in1992, which asignificant decline farmers’ insmallholder access to im- (Hausmann, Klinger and Wagner, September 2008,Table 5,p.32). . 15 . Food security remains. Food security an issue as volatility the indomestic cereal produc - Zambia 24.6% 17.7% -14% 0.9% 1437 518 10 13.5% 3.8% 6.5% 1221 SSA 274 9% 12 World 18.3% 3.5% 3096 41% 251 n.a. 94 14 be bindingbe constraints (Figure 7.16). were sector the asked arange whether of potential problems were constraints on business and of which might them tion failure problems within tourism the are sector through confirmed perception also data: business peoplesurvey in consolidationthe of transport, hotels and tour operators makes it hard for operators small to compete. The coordina- distribution channels are dominated by internationalthat firms have access systems.global to reservation In addition, Examples of coordination externalities are abundant inmanufacturing In tourism, and supply services. chains and ing inrecent years, production and its credit has mid-1990speak, surpassed recovery has improved substantially. and level the of loan recovery achieved. Although system the inits is still infancy, yields have gradually increas been - support to producers. The ‘distributors’ arepaid the cottonby companies basis cottonthe on seed of volume-delivered system whereby extension agents are transformed into self-employed contractors, on-lend who and provide extension twothe major cotton operations inZambia, responded to challenge this by implementing ‘distributor’ so-called the encouraged increased side-selling by producers. The world’slargest cottontrader, Dunavant, which operated one of rapidly in mid-1990s the but growth was interrupted by problems with credit recovery as entrants new into sector the Zambia’s cotton is sector another success story, documentedand inEllis Freeman (2005).Cotton production grew whom 85%are engaged incotton production. rently about one-third of Zambia’s smallholders participate in some form of out-grower scheme arrangement, of from 65%to more than 90%with introduction the of arefined out-grower arrangement (WorldBank, 2008a). Cur sector. agricultural the National production of cotton 2000and tripled between 2003,and credit repayment improved schemes These successful haveand indicate been very that overcoming coordination failures may ignitegrowth in level of market outlet. trepreneur provides assistance technical necessary to the reach agreed the production levels and guarantees acertain neur contracts to asmallholder produce acommercial crop is which later then marketed by entrepreneur. the The en- example assistance technical combined with credits under out-grower schemes. Under schemes, an these entrepre- The deterioration has encouraged inextensionsome services alternative methods of informationtransmission, for fixedthe cost of finding the knowledge oraccessing alternative information channels. onesthe most affected thelarge-scale as the farmers declineby inextension wereservices able to absorb moreeasily had levels higher of productivityservices without than those (Balat and Porto, 2005).Poor farmers were small-scale costs, and reducing livestock In diseases. astudy of Zambia it was found that households with access to extension these Theof reforms purpose was to help farmers inidentifying markets, adopting techniques,new reducing fertiliser extent. However, provided extension by services governmentthe were more common before 1991 the reforms began. providedextension by services government, the NGOs, donor-funded projects or churches maythat some fill to need Thelack of middlemen and informationsevere in sparselyis especially populated, remote rural areas. Agricultural Note Source: MattooandPayton(2007);BramillaPorto(2006);World Bank(2002) T (perceivedfirms) difficultylocal of cost of financeLocal availabilityLocal of (no reliable of days year transport per with transport services failures) (no of days to get landline anew connection) availabilityLocal of phone line able 7.7:SpearmanRankCorrelationbetweenFarmYields PerformanceinZambianDistricts perHectareandServices : The hypothesis thetwo between rankof independence orderings canbe therejected 90%(*) at or 95%(**)confidencelevels. Millennium Challenge Account-zambia |71 Private Appropriabilitynalysis Returns toEconomicActivity: -0.77** Maize -0.15 -0.4 Cotton -0.90** -0.99** -0.87* -

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 72 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA year round. firms Other work only a half year. road, from 51km and electricity up to from 55km water. 891enterprises Ofthe with licenses,only one company mines structure as main the constraint to investment sector. inthe The most important mines fromare 70km all- weatheran access to usually remote mining areas. According to aWorld survey, Bank large the gemstone firms citelack - of infra by inadequateprovision. and infrastructure service basic Aprecondition for investment gemstone inthe is sector The gemstone miningsector is anotherwith untapped industry potential that offers an example the of posed obstacles Figure 7.16:ConstraintstoT Private Appropriabilitynalysis Returns toEconomicActivity: P P L C A P P N ourism GrowthasidentifiedbytheHospitalitySectorinZambia Source: GovernmentoftheRepublicZambia(2006a) and hunger when is stocks at are food because its at peak lowest. their Unless complexity the and dynamics of this areas, burden the mounts of disease during rainy the labour when season demand for agriculture high isactivities also such asdiseases HIV and AIDS is a major cause of low productivity for example. Chapter 4 demonstrates how in rural another order high cause, although in reality constraints these are mutually reinforcing. Poor health due to chronic Figure 8.2outlines constraints the related to low employability inaneat hierarchy, showing how one cause to leads and and AIDS,malaria tuberculosis. despitetime improvements inenrolment. Poor is health asymptom of prevalence high the such of as HIV diseases education. The situation is not helped the lowby quality educationof deteriorating levelswhichbeen all hasat over cost schooleducation, of post-primary schoolplaces and limited insufficient secondary opportunities for tertiary poverty. Low productivity is inturn due to Zambia’s low education status for which, poor, the is aresult of high the concentrated, notably agriculture the sector, result the is economy’s the restricted capacity to create jobsand reduce ity low and health. Because productivitypoor manifests more plainly in sectors where majoritythe of are poor the hierarchythe of key constraints to employability. Low employability results from two main causes -low productiv- Figure 8.1is unsurprising and unpacked to needs be what to see liesbelow of conditions. both these Figure 8.2shows Figure 8.1:InadequatenclusiveGrowth address general the employability of population, the growth not inclusive will be and pro-poor. to improve supportiveness the of business the environment may promote growth but without simultaneous actionto growththis not inclusive will be constraints ifthe on left the arm are not also resolved. In other words, action taking tion of inclusive growth. It is possible to accelerate growth by resolving constraints the on right the arm of tree the but of human capital and business the environment. arms of Both problem the tree must addressedques the to be - tackle is that Zambia is failing to achieve accelerated and inclusive growth of because two main problems: employability the summarises contents the of report. this Figure 8.1provides overall the picture of constraints the to growth. Its message The inclusivegrowth decisiontree is an expanded version treethe of theproposed HRV in Growth Diagnostics and leveraging key points of growth the problem tree, areas producing greatest the impact at cost. minimal identified been be understood.mustResources to resolvethe problems arescarce and shouldtherefore targetedbe at onethis uncovers. For and policies interventions their effective, tothe be causesroot the symptomsof that have to any identify emerging patterns. It by overwhelmed isto easy be long the list of constraints that an analysis like other. To move from here to an analysis implications, of policy however, requires bringing constraints the together The inclusivegrowth diagnostic Zambiafor thushas far looked the variousat constraints in isolationfrom each 8.2 R 8.1 D Growth oot ecision Characterising Constraintsto Inclusive Cause Tree Analysis for Low Employability Z ambia: A CHAPTER 8 Inadequate Inclusive Growth ttaining Growth A Unsupportive Business ccelerated Characterising onstraintstoInclusive Environment Millennium Challenge Account-zambia |73 and Inclusive Growth

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 74 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA Growth Characterising onstraintstoInclusive

Figure 8.2: Low Employability Problem Tree standing relative to countries on same the level of development and SSA.Upgrading inSouthern Africa infrastructure that The fact infrastructure is a binding constraintZambia’s to inclusive developmentZambia’s evidenced is by poor people live of inpoverty because climate variability. to US$7.1 billionrise were harsher conditions such as droughtsthe of 1985 and 1995 to reoccur. As many as 300,000 reducing Zambia’s growth by annum 0.4%per translates which into US$4.3billion over could which aten-year period agriculture, is abinding constraint to accelerated and inclusive growth. Estimates suggest that climate variability is and poverty reduction efforts. Nevertheless, it is foundthat climate variability,given particularly its negative effect on unsustainablethe utilisation of resources. these If continues, this environment the may to constrain begin growth In returns, terms of social Zambia’s natural resource is not base binding to growth although there are concerns about low-income country. demandnalities will adelicate cluster strategy given limited the public resources sparsely-populated, inthis large, sources for inputs, marketing, information The creation and of other types services. positiveof coordination exter nation failures are severe for especially cannot who poor the affordthe fixed cost associated findingwith alternative more competitive in world markets, limit jobcreation and therefore as amajor serve constraint to growth. Coordi- water, but insurance, also marketing and professional –undermine Zambia’s services ability to innovate and become – most of are which attributable inputs to service-related infrastructure into production including power, transport, and international markets, inputs, and information. extension services High indirect costs arising from failures these Low sophistication export is characteristic of coordination and information failures such access as to poor domestic on growth the of exports. redundancyhigh costs. costs The high particularly associatedwithtrading for goods, SMEs, are a binding constraint and time cost and to export performs import badly: across borders, costs of high licensing businesses and unusually indexes.in global However, there remains significant room for improvementsome in critical areasZambiawhere to implement reforms to improve business the environment and progress is evident from Zambia’s improved position ranked at 6 growth. Compared to other countries region inthe Zambia is arelatively to country dobusiness easy and invest in, in Zambia has improved dramatically over last the five years and is clearly not wholethe on a binding constraint on not constrained by an unsupportive investment and business climate. Thankfully,the investment and business climate key governmentDiagnostics of expected the actions include targeted those at ensuring that private are activities sector Underlying low appropriability are government failures and Zambia’s low sophistication. export The Inclusive Growth low returns to economic activity, low private appropriability and returns low social are main the underlying factors. in providing to complementary private necessary the services investment sector such as infrastructure. In of case the and insufficiently the developed taxadministration apparatus. This results in considerablechallenges for Government ability as aresult of narrow the explained base largely tax by significant the tax exemptions enjoyed someby investors country’s diversification export progress hard, particularly secondagriculture The exports. is public finance sustain- to swings in copper prices and actionsthe of portfolio investors. The Kwacha appreciation of 2005 and 2006 hitthe growth. Nevertheless two main risks remain The that first tackled. to the need be is exchange rate volatility connected Inclusive Growth Diagnostics found Zambia’s macro environment after 2002improved and overall notrisk a to of low incomes. for financial poor intermediationZambia, rural areas, in in particularly is low demand asa resultfor financialservices indicating and that infrastructure are financialservices respondingeconomic to new opportunities. A main reason capital financialsector. inthe Signs of improvementcan howeverbe foundboth empirical in perceptionand data, spreads result which from overhead high costs driven by ascarcity cost of high fuelling the of skills, human critical has great potential economic to boost growth and reduce poverty. The main reasons forthis arelarge interest rates and costs associated high the with arethem major still constraints in Zambia for SMEs, a segment of economy the that Access to finance is generally not a problem forlarge enterprises,although access to credit and financialservices other economic activity. Separating constraints these hierarchy inthe is simply amatter of of ease presentation. forcing nature of constraints the identified – low levels of access to finance for is SMEs a major cause of low returns to to summarise what is two leading to problem these situations, it is worth once again emphasising mutually the rein- for and small the medium enterprises and low returns to economic activity (Figure 8.3).Before using problem the tree The problem poor the of business environmentfrom also arises two binding constraints: low levels of access to finance problem are appreciated, initiatives to relax constraint the of low employability may not amount to much. th in SSA on Worldthe Bank’s of Doing 2010 Ease Business Index.Zambian The Government is continuing Characterising onstraintstoInclusive Millennium Challenge Account-zambia |75 Growth -

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 76 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA Growth Characterising onstraintstoInclusive

Figure 8.3: Unsupportive Business Environment Problem Tree T The binding constraints to accelerated and inclusivegrowth canbe as summarised follows: as possible.tries Therefore, improvementsbethe made in to need regulatory environment to attract foreign investors. managedto be carefully and positioned strategically to foster positive externalities for as many households and indus- norsector private the able be alone sector to finance will the required investments. However, investmentsthese need transport requires attention rather sooner than later. Studies make it neither clear cases, thatpublic the these inall position and status as an of exporter bulky mining products and of vast the potential for agriculture growth, railway term are supply, electricity water supply and sanitation and roads. feeder However of inview Zambia’s landlocked complementessary other to investments all and reforms to foster shared growth inZambia. Most short inthe critical An extension road of network rural the and other public and utilities urban inrural informal settlement areas is- anec workedbe out. have tapped to be from private the sector. than area Other in the of ICTs, viable Public Private Partnerships are yet to frastructure. In of view Zambia’s constraint fiscal even after factoring miningincreased revenues, additional resources ments inexcess of 10%of GDP annually areover necessary next the three to five years to increasethe provision of in- can help maintain ifnot accelerate Zambia’s economic growth. According to World the (2008d),large Bank invest - the syndromethe and constraint the shows is low XX astrong while link. Note: an under-educated state. What are implications the of three related these syndromes? syndrome, otherthe two key syndromes are under-education and under-innovation. Zambia is an under-invested and CA.The inthe corediscussed syndrome is under-investment.Zambia is an under-investing state. theLinked coreto Zambia is mostly characterised by three syndromes lieat which core the of binding the and non-binding constraints just symptoms. The key question to addresswhy is symptomsthese indifferentrecur places. According to Table 8.1, However, not the does underlying yetcrystallize summary sufficiently this picture. These constraints are actually 8.3 able 8.1:FromConstraintstoSyndromes The Under-educated state The Under-protecting state The Under-investing state Over-borrowingThe state The Under-protecting state The Under-innovating state Syndrome

The number of crosses showsthe strengththe constraintbetween the link of theand syndrome. Therefore:means X that between the link From 3. 2. 1. goods and services to help pri andvategoods services investors to beprofitable and competitive. Coor ply and sanitation and areas; peri-urban inrural and, electricity, especially Poor services, infrastructure road connectivity, rail and infrastructure water sup- Low levels human of skilled capital are at root the of low the employability of Zambian the population; C onstraints dination failures, fails as country the to provide sufficient non-traded inputs or complementary XX XX XX productivity Low labour Employability Binding Failure to Achieve Accelerated and Inclusive Growth Scarcity of skills in some sectors to X XX

Poor health status R oot SMEs Finance for Low access to Binding Finance X XX Binding Business Environment Large interest

rates spreads Causes

Returns Low Social Low Returns to Economic Activity XX Poor Infrastructure Characterising onstraintstoInclusive Low Private Appropriability Private Low X XX Macro Risks Government Failures XX XX Millennium Challenge Account-zambia |77 X XX X Micro Risks X XX XX Failures Coordination Growth

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 78 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA complementary inputs that causes low innovation. Nevertheless should link acknowledged. the be and under-innovation direction the because of causality is other the way round; inother words, it is absence the of generatedof locally patents registered with PACRO. Table not 8.1does show infrastructure poor between link the Enterprises are not making up for deficit, this source a of microrisks, suchthatZambia small has number only a very portion of GDP. Zambia has an insignificant Zambians),number scientistsof per 1,000 (1 for example. development. It is to linked Zambia’s inability to createbecause little and technology is diffuse spent on R&D as a pro - Zambia is an under-innovating state because, most directly, it has alow level of sophistication export for its level of through public aweak sector. stitutions inturn which underlie macro and micro risks and coordination failures (and back to education and health) rates spreads. and Small medium enterprises are hit most. Low education status agreat is also contributor to in- weak as which, sector aresult, cost. The high at can only secured results a very be are high overhead costs andlarge interest sufficiently to increase their productivity. Low educationstatus scarcity also a causes the in financial skills critical of in agriculture not does produce desired the results farmers because are unable to process information the receive they productivityhigher donot achieve intention their of because For this. example, investing inresearch and extension low education status reason is primary the for low productivity and income. Public investments aimed at supporting of nature the of constraints the it imposes on growth. Inclusive Growth Diagnostics has identifiedthat the country’s an under-educatedBeing state aproduct is inpart of under-investment but should examined separately be because inordercomplementary to accelerate services growth and make it more inclusive. economic growth identified. canpoint be crucial The however, that is Zambia must theraise quantity andquality of of investingwary in,for example, research and development to increase competitiveness. Many loops constraining economythe extremely sensitive to movements price inthe of copper. It indirectly makes also private entrepreneurs lines macro-risks because, among other things, it constrains diversification export sophisticationand which makes to help returns boost to economic activity from private investments. Indirectly, statethe of under-investing under manifests directly inlow investment sectors to create social inthe amore employable population and infrastructure ments required to relax employability the and business environment constraints identified above. Thissyndrome Zambia is an under-investing state means- this mean that Government is not providing complementarythe invest- Growth Characterising onstraintstoInclusive - REFERENCES DC. DC. Evidence from the Investment Climate Data. Working Paper no 56,Center for Development, Global Washington, B.,Eifert, A.Gelband V. 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AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 84 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA references Annex I:HumanCapital,ndicatorsofDevelopment ANNEXES Immunization, measles (%of children ages 12-23months) mortality rate,Child under-5 1,000) (per Births attended bystaff health (% skilled of total) Contraceptive prevalence (%of women ages 15-49) Adolescent fertility rate 1,000women per (births ages15-19) Fertility rate, total woman) (births per at total birth, (years)Life expectancy Population, total (millions) Sub-Saharan (SSA) Africa Zambia Low Income Countries (LICs) Sub-Saharan (SSA) Africa Zambia Low Income Countries (LICs) Sub-Saharan (SSA) Africa Zambia Low Income Countries (LICs) Sub-Saharan (SSA) Africa Zambia Low Income Countries (LICs) Sub-Saharan (SSA) Africa Zambia Low Income Countries (LICs) Sub-Saharan (SSA) Africa Zambia Low Income Countries (LICs) Sub-Saharan (SSA) Africa Zambia Low Income Countries (LICs) Sub-Saharan (SSA) Africa Zambia 55.0 85.0 137.0 164.0 178.0 ...... 103.0 130.0 153.0 4.40 5.60 6.10 56.0 50.0 42.0 819.89 670.82 10.47 2000 Millennium Challenge Account-zambia |85 69.0 85.0 124.0 151.0 174.0 ...... 94.0 122.0 149.0 4.10 5.20 6.0 58.0 51.0 44.0 913.30 760.30 11.74 2005 73.0 85.0 120.0 146.0 170.0 43.0 45.0 47.0 37.0 22.0 41.0 90.0 118.0 142.0 4.0 5.10 5.90 59.0 52.0 45.0 952.65 798.17 12.31 2007 Annexes

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 86 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA Source: World DevelopmentIndicatorsdatabase,April2009(www.worldbank.org) Prevalence of HIV, total (%of population ages 15-49) ofRatio education girls to and boys inprimary secondary (%) Primary completionPrimary rate, total (%of relevant age group) annexes Low Income Countries (LICs) Sub-Saharan (SSA) Africa Zambia Low Income Countries (LICs) Sub-Saharan (SSA) Africa Zambia Low Income Countries (LICs) Sub-Saharan (SSA) Africa Zambia Low Income Countries (LICs) 3.4 5.5 15.5 88.0 84.0 91.0 56.0 50.0 60.0 66.0 2.4 5.1 15.0 90.0 86.0 93.0 62.0 59.0 83.0 75.0 2.3 5.0 15.2 91.0 88.0 96.0 65.0 63.0 88.0 78.0 Millennium Challenge Account-zambia |87 Annexes

AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA 88 | Millennium ChallengeAccount-za mbia AN ANALYSIS OF CONSTRAINTS TO INCLUSIVE GROWTH IN ZAMBIA annexes 2nd Floor,MpileOffice Park 74 IndependenceAvenue Lusaka, Zambia P.O. Box50062