Report No. 28069-ZA Report No. 28069-ZA Zambia Country Economic Memorandum
Authorized Authorized Disclosure Disclosure Public Public Policies for Growth and Diversification (In Two Volumes) Volume II: Annexes October 20, 2004
Poverty Reduction and Economic Management I Southern Africa Africa Region
aba Country Economic Memor Zambia Public Disclosure Authorized Authorized Disclosure Disclosure Public Public
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Document of the World Bank Public Disclosure Authorized Authorized Disclosure Disclosure Public Public
Table of Contents Annex A .Economic Reforms. 1991-2002 ...... 3 1. Political Economy of Reforms in Zambia ...... 3 2 . Chronology of Economic Reforms in the 1990s...... 7 Annex B. Growth Analysis for Zambia ...... 14 1. Growth Accounting, 1960-2002 ...... 14 2 . Effect of HIV/AIDS on Human Capital and Economic Growth ...... 21 3 . Supply and Demand-Side Decomposition of Growth, 1965-2002 ...... 25 4 . Quality of Zambia’s National Accounts Statistics: A Note ...... 30 Annex C .Zambia’s Trade Agreements ...... 31 Annex D. Prospects for Growth and Poverty Reduction through 2015...... 35 1. Model Description ...... 35 2. Detailed Description of the Simulation Scenarios ...... 39 3 . Detailed Simulation Results...... 46 Annex E. Statistical Tables ...... 56 Bibliography ...... 72
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ANNEX A. ECONOMIC REFORMS, 1991-2002
1. Political Economy of Reforms in Zambia
1. Despite the extensive economic reforms pursued in the 199Os, Zambia’s economy continued to decline, and poverty levels continued to escalate. After more than ten years of stabilization and structural adjustment policies, the gains in terms of both economic stability and growth remain mixed, On the one hand, inflation has declined from three digits to around 25 per cent per annum; budget deficits have been controlled; non-traditional exports have grown. On the other hand, full macroeconomic stability and sustained growth have remained elusive, and social and poverty conditions have worsened. Several political economy factors undermined the successes of the economic reforms both from the long-term perspective as well as in the 1990s.
2. First, the political leadership seems to lack foresightedness and the willingness to take bold decisions in the midst of economic decay and stagnation. Political developments in Zambia have been prompted by changing economic misfortunes. Lack of prompt and efficient economic management by the previous government, including that of Kaunda was partly responsible for the failure of economic policies. Seshamani notes that one of the manifestations of the Zambia’s economic malaise is the failure by political leaders to act promptly to arrest economic decline (Sheshamani, undated). This was the case with the UNIP government, as manifested in its failure to contain the dual shocks of 1973-74 involving the collapse of copper prices and increase in oil prices. The government of the day squandered an opportunity to diversify the economy from copper to agriculture to the detriment of the long term sustainability of the economy. Predictably, the dual shock was to precipitate an economic decline which the country was not able to recover from.
3. Under Chiluba administration, there were some limited achievements in diversifying exports and reducing dependence on copper for foreign exchange. Non-traditional agricultural exports increased in the second half of the 1990s due to a more favorable environment in agriculture. Despite this limited success, there has not been a well coordinated vision and strategy to reduce Zambia’s dependence on copper. Indeed, it was not until the announcement of the withdrawal of the Anglo American from the Zambia Copper Mines in January 2001 that the diversification of the economy was put back on the Government’s agenda. The reluctance by the successive Zambian leaders to diversify the economy from copper has had severe effects on the country’s economic growth prospects. With changes in technology and lack of demand for copper on the world market, its prices have declined. This has in turn drastically reduced
This is a summary of a longer paper prepared for the World Bank by Neo Simutanyi, Institute of Economic and Social Research, University ofZambia. After initial background research, the author carried out interviews in Lusaka and the Copperbelt from February 25” to March 15th, 2003. He consulted as widely as possible with people from the media, large and medium-scale private entrepreneurs, the academic community, civil society, politicians, Members of Parliament, senior civil servants and the unions. The list of people interviewed is given at the end of this report. -4 - government revenue, and made it difficult for the government to meet its social obligations. The political leadership needs to forge a long-term vision on how to reverse the long-term decline in Zambia, associated with the (mis) fortunes of copper.
4. Second, unlike other countries, economic policy options in Zambia are a preserve of the Government. Many in Zambia feel that the implementation of important economic policy measures should have been preceded by public consultations so that their appropriateness could be debated. In practice, there has been little real debate prior to the adoption ofeconomic reform measures in Zambia. The MMD government did not seriously tackle this question, and the public consultations on reforms were generally inadequate. Where there were seminars organized around questions of structural adjustment, these were designed largely to discuss modalities of implementation and not economic alternatives. Further, all the stakeholders were expected to accept the adoption of the economic reform policies, and only operate within that given framework. As one prominent politician puts it, “anyone who opposes them [economic reforms] is considered either reactionary or unpatriotic. It is expected that there should be unanimity, without debate. And dissenting voices are simply dismissed as living in the past.”
5. Further, the failure by the opposition political parties and the elite to articulate viable economic alternatives and policy options left the country with little opportunity to examine the appropriateness of the economic reforms proposed by IFIs. At the political level, the responsiveness of any government in power to the people’s needs and demands depends to a large degree on a strong opposition. When the party in power commands an overwhelming majority in Parliament-such as MMD did in Zambia in the 1990s- it can do anything it wants.* The opposition in Zambia was weak, fragmented, and lacked policy focus. The de facto one-party state therefore partly contributed to a situation where basic accountability, checks and balances, and responsiveness to the people’s needs were missing. Furthermore, when public debates took place either on radio or television, like-minded persons were often given the forum to participate in such debates. Opposition politicians rarely obtained access to national media, and critical voices were often branded names and ridiculed in the public media.3 From the limited interviews done for this study, it cannot be said that Zambia’s economic reform programs are well understood and supported by a cross-section of Zambia people.
6. Third, with hindsight, there were problems with regard to the speed of liberalization and their timing in the 1990s. When the MMD government came to power in 1991, it accelerated the pace of economic reforms. This was done uncritically, and without studying the implications of the reforms and or making adequate preparations for them. The introduction of a whole package of reforms without adequate preparations may have been responsible for policy failures in some instances. For example, the hasty and complete liberalization of the economy has put Zambia at a disadvantage relative to her neighbours. The general feeling of the populace is that, because of import liberalization, Zambia has become a dumping ground for goods from countries such as South Africa and Zimbabwe, which has been responsible for the destruction of
While the current make-up of Parliament has six opposition parties and almost an equal number of MPs as the ruling party, the opposition lacks cohesion and has so far failed to contribute to a sustained policy dialogue. Some recent development in Zambia suggest the possibility of a change in the relationship between the state and society. At least for the first time since the Kaunda days, the government allowed the expression of dissent through the sanctioning of public demonstrations and encouragement of a public debate on the privatization of the ZANACO, ZESCO and ZAMTEL. -5-
Zambian manufacturing industry, especially textiles. Small and medium scale businesses have suffered at the hands of foreign companies who prefer to import goods from the other countries. In one foreign textile company on the Copperbelt, a firm imports 90 percent of its raw materials; in another instance, a mining company grants contracts to South African firms to supply goods that are produced by Zambian manufactuvevs. The quick and hasty openness of the economy against the back-drop of state ownership of key producing units, created an “unequal” competition for domestic businesses, which saw many businesses exit the market.
7. The privatization exercise is another case in point. While many people believe that privatization is necessary in improving efficiency and profitability, most people interviewed were doubtful about the manner in which it was done in Zambia. To be sure, there is a genuine difference of opinion from across the Zambian population on privatization. On the one hand, many nostalgic of the era of parastatals would want a return to the dominance of the state, where employment was guaranteed as long as one was loyal to the party and its Government. On the other hand, there are those who think that most parastatals were subsidized by the state, and given lack of funds, such subsidies could not be sustained. Be that as it may, most people in Zambia complain that the pace at which privatization was done was rather too fast, without a thorough study of the capacity of new owners to manage the privatized companies, and the implications of hiving off some social obligation^.^
8. With regard to capacity, there were companies bought by Zambians, where they either lacked sufficient capital or capacity to manage, which have had to be repossessed by the State through the Zambia Privatisation Agency. Among these were: Elephant’s Head Hotel, New Savoy Hotel and Kabwe Pharmaceuticals. Of those sold to foreigners, the case of Roan Mining Corporation of Zambia (RAMCOZ) is an indictment of the pitfalls of rushing into privatization before taking time to make necessary arrangements.
9. With regard to the social consequences, many people allege that many companies were closed down without considering the plight of the workers. The suffering which the BINANI Group of Companies inflicted on the people of Luanshya with the closure of the mines have been phenomenal. In some instances, there were long delays in disbursing retrenchment benefits, that by the time they were due most beneficiaries would have died of starvation. In many other cases, workers dues were simply never paid. These adverse consequences have created a general sentiment against privatization.
10. Fourth, the sequencing of reforms was not well thought out in many cases. The implementation of various programmes all at once had a shock effect, which hindered growth. Indeed, to create a market economy, the country needed entrepreneurs in the private sector. In a situation in which the private sector was not only very small, but was dependent on the large parastatal sector, the dismantling of the parastatal sector did not increase the size of the private sector, Consequently, many private sector companies went out ofbusiness as they were not given sufficient room to adjust to the new economic environment. The creation of a Stock Exchange, Zambian Privatization Agency, Competition Commission and liberalization of maize marketing were all done simultaneously. The effect was that the objectives of private sector development were by and large not achieved. As one informant noted, a child has to learn to walk before they can run. A more gradual approach to reform, where the reform measures are well sequenced and
Others contend this view: A recent World Bank study on Zambia’s privatization experience concludes that “There is no obvious right timing or sequencing in privatization. These depend on individual country experiences” (World Bank, 2002). -6- where time is allowed for experience and growth by domestic businesses could have yielded better results. It was no surprise that new entrants to the market received a rude shock of the effects ofcompetition, which in many cases drove them out ofthe market.
11. Fifth, there are sudden shifts in economic policy, and a poor record of implementation of reforms. During 199 1-2001, the implementation of policy reforms was boggled down by internal debates of appropriateness and timing. For example, the MMD government was not unanimous on the approach for privatizing the copper mines, whether to sell them as a single unit, or to unbundle them into smaller units. The differences were so intense that some leaders even lost their positions. For example, a deputy minister was dismissed for openly favouring the selling of the mines as a single entity, and not as individual units. In early 2003, Members of Parliament resolved that Government should not proceed with privatizing the three state companies as they were strategic to the Zambian economy. There were differences between President Mwanawasa and his Finance Minister, Emmanuel Kasonde on privatization. While the President supported those who are opposed to privatization arguing that the programme “had brought untold suffering to the workers and increased poverty in the country,” his Finance Minister maintained that it was inevitable to privatize the companies to make them more competitive and to redress the situation where they continue to depend on the state for subventions, Following these differences over privatization, Emmanuel Kasonde was soon relieved of his ministerial position by the Mwanawasa Government.
12. Further, implementation was poor in other areas as a number of important reform measures were either not implemented, or produced negative results. Notably, the public sector reform programme, which aimed at increasing the capacity and performance of the civil service, and balancing of the national budget proceeded very slowly. The privatization programme led to large job losses; retrenched workers waited too long to receive their severance pay; and some privatized firms went out of business, either because the buyers were favored by the political elite when they did not possess requisite skills and expertise to manage the entities, or due to unfavourable economic climate, including intense competition from regional markets.
13. Finally, donors play an important in the political economy of economic policy failure in Zambia. As in many African countries, donors play a significant role, and have a significant leverage-money-- to force the Government to adopt political and economic reforms. Since the early 199Os, donors have implemented a dual conditionality on lending, namely the adoption of economic reforms and political liberalisation. For example, donors played an important role in the campaign against the adoption of a constitution that barred Kenneth Kaunda from contesting the presidency in 1996 by threatening to withdraw support. But because they were not united in their action, the Chiluba administration was able to sustain itself and even conduct elections that many independent observers considered was not free and fair. In 2001, donors’ intervention and leverage played a critical role in defeating Chiluba’s third-term bid.
14. Despite donors’ rhetoric about governance, Zambian political leaders quickly learned that lack of adherence to principles of democracy and governance will not be seriously challenged by donors as long as the country follows the economic prescriptions of donors and meets the “performance benchmarks”. Hence, the political leaders often flouted good governance5
’ Good governance in Zambia constitutes the following: observance of transparency and public accountability; respect for the rule of law; a culture of constitutionalism; separation of powers; respect for human rights and hndamental freedoms; tolerance of opposing or minority views; guarantee of a free and independent judiciary; existence of a free, independent and responsible press and gender equity. -7- principles as long as it did not sever donor relationships. There is growing evidence, for example, that most parastatals were either used for patronage, or were sources of funds for the ruling party. In the presidential petition, it was revealed that ZANACO and ZESCO provided campaign funds to their MMD presidential candidates. There were also cases of politicians obtaining unsecured loans and leaving huge debts which were often written off at the instigation of government. These were of course governance issues beyond donors’ radar screen or “benchmarks”.
15. Yet, while the MMD government may be adamant on the criteria for assessing performance in the governance area, and may even tell donors not to interfere in matters of sovereignty, this is not the case with economic policy reforms. Indeed, it is the opposite when it comes to economic policy reforms: because not following the line entails loss of revenue, Government and political leaders often have flip-flopped and reversed their decisions at the whim of donors. A recent case in point is the privatization of ZANACO, ZAMTEL, ZESCO and other parastatals, where the Government has reversed its earlier policy decisions not to privatize ZANACO. Such is a clear illustration of donor leverage, with no strong social ownership of the proposed reforms, leading to the failure of economic reforms.
16. More generally, there is a perception among Zambians that donors do not listen enough to the needs and concerns of the Zambian people. There is a tendency within the donor community of picking and choosing concerns which please the particular donor’s priorities.6 This state of affairs has made the Government and the Zambian people to be dishonest and to play by the rules of the political game as dictated by the donors. The result is that donor conditionalities do not seem to have contributed to changed political attitudes.
2. Chronology of Economic Reforms in the 1990s
17. Zambia pursued extensive policy reforms throughout the 1990s. Going hand in hand with economic reforms were political developments throughout the 1990s that marked Zambia’s transition from one party state to a multiparty democracy. The following table summarizes, in chronological order, the key economic reforms undertaken as well as the political developments that occurred during 1991-2002.
Table Al.1. Chronology of Main Economic Reforms, Political Developments, 1991-2002
Year I Main economic reform Main political development
Comprehensive set ofZambia’s external 0 MMD wins the presidential and debt data produced Parliamentary elections by a clear majority. The inauguration ofthe December Third Republic under the Presidency of Priority program to rehabilitate Frederick T. Chiluba. infrastructure commenced MMD announces the responsibility for the privatization process is handed over to the Ministry of Commerce and Trade and Industry from ZIMCO
We are aware of efforts by donors to pool resources through “basket funding” arrangements, where they support similar programmes. This is being done in funding programmes to education and health and now even in the area of governance. The Parliamentary Reform Programme is a case in point. -8-
Year Main economic reform Mainpolitical development Substantiai reductions ofmaize meal and fertilizer subsidies announced 1992 January January Non-traditional exporters allowed 100 Chiluba declares Zambia a Christian percent foreign exchange retention nation Official exchange rate devalued by 30 May percent (155 percent through 1992) A pressure group, Caucasus for Subsidies on maize meal removed. National Unity, is created within Program to reduce military expenditure in MMD. All members asked to leave real terms over the period 1992-1994 the Party. announced July Commitment to limiting net borrowing United Democratic Party formed by Govt from the banking system to zero Kaunda announces that he will be announced resigning fiom politics Subsidies, loans and loan guarantees August eliminated for all parastatals, except 500 striking bank workers dismissed. Zambian Airways and ZCCM ZCTU criticized for being too close to Import preferences (except for PTA) MMD. h4MD ministers Balwin revoked Nkumbula and Aka Lewanika resigns Debt Management Task Force created fiom the Cabinet citing growing within Ministry of Finance to coordinate corruption within the government as all issues related to external debt reason for their departure. Zambia’s arrears to the World Bank November cleared. UDP is dissolved and its leader, Enoch February Davindele, rejoins MMD and is An agreement reached between the immediately appointed to the MMD Zambian government, the IMF and the Party finance committee. World Bank on a Policy Framework Paper 1992-1994, focusing on subsidy removals, privatization ofthe parastatal enterprises and liberalization ofmarkets March First evidence of major failure ofcrop due to drought. Efforts to mobilize increased donor support started. Controls on exports of petroleum eliminated
Subsidies on maize meal (roller meal) removed Controls on all prices eased, most eliminated Fertilizer market opened up for fill competition Pan-territorial pricing for maize eliminated, pricing to reflect differential transport costs
Privatization Bill passed in parliament. Zambia Privatization Agency (ZPA) established. Legislation enacted to increase autonomy of Local Councils. -9-
Main economic reform Main political development Investment Act amended to make incentives automatic and transparent The IMF approves ofa restructured Rights Accumulation Program (RAP) enabling a clearance ofZambia’s arrears to the IMF 4ugust Agreement with Paris Club on rescheduling ofbilateral debt on enhanced Toronto terms. Rescheduling and debt cancellation reduces Zambia’s external debt burden by USD1.5 billion
September First phase ofgovernment redundancy program. 12000 contract daily employees within civil service are made redundant October Bureaux de change system for foreign exchange introduced Open General License System changed from a positive to a negative list Report ofTax Policy Task Force recommending sweeping changes in the tax system December Joint MOFi BoZ Data Monitoring Committee established Exchange rates unified (with ZCCM selling at the market exchange rate) First tranche of 19 state companies
offered for sale ~ 1993 January February Cash budget introduced The ‘Zero Option Plan’ to overthrow Weekly Treasury bill tender commenced the MMD government discovered. 26 Announcement that Exchange Control Act opposition members with a basis in will be repealed UNIP are detained, among them the General reduction in tariffs and excises, shift son ofKenneth Kaunda. to Harmoized Code for trade March classification President Chiluba announces the Reduction in Corporate Tax Rate, reintroduction ofstate emergency laws modification ofpersonal income tax rates Lifted after 82 days (May 1993). and bands April Budget Heads established for defence and Major ministerial reshuffles. ‘Key security forces reform ministers,’ Emmanuel Kasonde Elimination ofimport and export licenses (finance), Guy Scott (agriculture), announced, import license levy abolished Arthur Wina (education) and Company tax reduced from 40 to 3 5 percent Humphrey Mulemba (mines) are Special fund set up to accelerate road dismissed from Cabinet. No official rehabilitation explanation offered. March June .All bilateral (Paris Club) agreements Roger Chongwe removed from the -10-
Year Main economic reform Main political development finalized. Negotiations on interest rate Ministry oflegal affairs, anticipated to reductions and additional debt write-off be connected to his criticism ofthe produce savings of $100 million. introduction ofstate ofemergency June laws. Import and export licenses eliminated August Establishment of Zambia Revenue Pastoral letter “Hear the cry of the Authority (ZRA) poor” issued by the Catholic Churches July criticizing the social consequences of Formal establishment of the Lusaka the government’s economic policies, Stock Exchange (LUSE) The National Party registered. Markets for maize and fertilizer opened November to full competition 0 8 by-elections in which the National Party captures 4 seats. November Mwankatwe constitutional commission Commencement of Public Sector Reform established. Programme (PSRP) December Bilateral donors threaten to withhold balance-of-payments support unless something is done to drug trafficking. 1994 January January Exchange controls removed e A number ofMinisters attending the Manufacturing-in-bond permitted December 1993 Consultative Group Duty drawback extended to include third Meeting, including the minister of party exporters Health (Kavimbe) and Deputy Minister Property transfer tax reduced from 7.5 ofFinance (Mung’omba) are dismissed per cent to 2.5 percent from Cabinet, Provision for countervailing duties if e Foreign Affairs Minister (Vernon unfair trade practices can be proved Mwaanga), Community Development April and Social Welfare Minister (Nakatindi Zambia Revenue Authority commenced Wina) and deputy Speaker of operations Parliament (Sikota Wina) resign their Privatization Fund account established position due to repeated allegations of June drug trafficking by the named Retirement package for civil servants ministers. determined April August e The managing director (Fred Mineral Tax Act Revoked and replaced M’membe) and a reporter ofthe Post by Mineral Royalty Tax Act (bringing newspaper are arrested charged with Zambia into line with international defaming the President. The legal norms) action do not result in a conviction. September July Commercial debt buy-back operation e Chiluba publicly criticizes MMD’s (ongoing since 1992) completed. economic policies, arguing that unless Approximately USD652 million in debt the problems within the agricultural eradicated sector are solved, MMD will not be October able to win the upcoming elections. Proposed Land Act converting customary 0 ‘The Young Turks’, a group ofyoung tenure to leasehold is deferred by dissenters within MMD present their Parliament pending further consultations vision statement in which the December governance record as well as the economic policies ofthe MMD Zambian Airways and United Bus government are criticized. Company (UBZ) put into receivership August The Government announces that ZIMCO 0 .z2;11 hn A;mnnl.,o,4 h., 3Jnmh 3 1 1 nnc Amendment ofthe Land Bill, intended -1 1-
Year Main economic reform Main political development will be dissolved by March 31, 1995. to transform land from customary to tenure, is rejected by the National Assembly. September 0 Kenneth Kaunda announces his return to national politics, citing opposition to the economic policies ofMMD as the main reason for ending his retirement. October ZCTU’s Quadrennial congress in Livingstone. Five unions leave the labour congress after losing the contested elections for leadership positions. December The ZCTU leadership claims that MMD has failed workers more than Kenneth Kaunda and UNIP ever did. 1995 January January Conversion ofmost commercial banks’ 0 The Post newspaper claims President statutory reserve deposits to medium term Chiluba is not a true Zambian. government debt as a mean ofreducing the interest rate spread February Adjustment ofpersonal income tax limits 0 Kenneth Kaunda replaces Kebby to overcome “bracket creep” Musoktwane as President ofUNIP. Fuel levy increased to finance Road March Funds (further increased in 1996 Budget) 0 Fractions between the ‘Young Turks’ February lead by Derrick Chitala and ‘the old Meridian Bank supported by the BoZ and guard’ lead by Michael Sata, are the govemineiit after a major run on its brought to the front. deposits June March Mwanakatwe Constitutional Review e ZIMCO put into voluntary liquidation Commission releases its report. May Derrick Chitala, and Dean Mung’omba e Sale by public floatation of shares of associated to the ‘Young Turks’ Chilanga Cement to the general public dissenters are expelled from MMD. e Meridian Bank and African Commercial August Bank put into receivership Baldwin Nkumbula, the President of e Mid-termreview of ESAF delayed to National Party and former Minister of December Sports in MMD government, is killed July in a car accident implicating President e Value-added tax (VAT) introduced, sales Chiluba’s son Castro Chiluba. The tax repealed independent press link Chiluba to e Sale of Zambia Sugar Company Ltd. Nkumbula’s death. e Revised Land Act passed by parliament, September enabling unused land to be purchased by 0 Zambia Democratic Congress (ZDC) new investors (Land Act 1995) formed by Derrick Chitala and Dean August Mung’omba. Temporary revenue measures introduced 0 Government issues a White Paper on to close budget deficit created in first half the procedure for adopting the new of budget year: Excise duty on petroleum draft constitution, rejecting from 30 to 45 percent, increased rate on recommendations ofthe Constitutional withholding tax from 10 to 25 percent, Review Commission that the draft be excise tax on electricity from 3 to 10 adopted through a constitutional -12-
Main economic reform Mainpolitical development percent, and excise sugar tax from 10 to assembly and national referendum. 20 percent. October September 0 In 8 by-elections conducted, UNIP, Cash budget moved from daily reinvigorated by Kaunda’s return, wins observance to monthly observance 3 seats. The National Party fails to Road license taxes increased win any seat. December 0 Incidents ofharassment of non- The IMF recognizes Zambia’s successful governmental organizations and their completion ofthe Rights Accumulation leaders increase. 17 catholic priests Programme (RAP) and approves of a are arrested together with and three three year Enhanced Structural other civil society leaders for Adjustment Facility (ESAF) campaigning against the constitutional amendment process.
November 0 An Israeli firm, Nikuv computers, is offered the contract for the Voter registration process. ~~ ~ January February Customs duty exemptions, including 0 The first bilateral donors announce government purchases, eliminated. partial withdrawal ofaid citing the Customs duty tariffs reduced on most governance situation as their main goods by 15 per cent reason. February 0 Three journalists from the Post are IMF finds a number of year-end arrested and jailed on charges of liberal benchmarks (6 out of 10) to have been and contempt for the parliament by the missed by the Zambian government. As Speaker ofthe House. Release the March ESAF targets will not be met, without charges after three weeks by a a delay ofESAF is proposed High Court rule. A tentative agreement reached with the March Paris Club on Naples terms being applied 0 The Minister ofFinance, Ronald to Zambia’s external debt obligations. Penza, announces that MMD is The agreement implies a 67 percent debt suspending the implementation ofthe cancellation, pending the IMF’s mid term public sector reform programme review evaluation (PSRP). April May Bank ofZambia allows ZCCM to retain The Government White paper on the 100 percent of its foreign exchange new Constitution is ratified by the receipts to supply the market directly National Assembly and signed into May Law by President Chiluba on May 28. 0 Cabinet endorses plan and timetable for June ZCCM’s privatization and announces the 8 opposition party leaders, including proceeds of sales to commence on UNIP’s vice-residential candidate, are February 28, 1997. arrested charged with treason after a June spate ofbombings in Lusaka and the ZCCM Board approves of the ZCCM Cooper belt. privatization plan. October Increase parliamentary gratuities passed The government announces the Second in Parliament (Withdrawn by President in National and presidential elections in July) the Third Republic to take place on July November 18. Zambia passes IMF’s mid-termreview of UNIP.and6 smaller opposition parties ESAF’s first year announce that they will boycott the October mesidential and Darliamentarv -13-
Year Main economic reform Main political development World Bank releases first tranche ofUS$ elections due to the constitution and the 90 million structural adjustment facility. voter registration process. November MMD wins 60 percent ofthe vote in the Presidential elections. Some local and international election monitoring groups characterize the elections as flawed due to the voter registration and constitutional amendment barring Kaunda from contesting. Others, focusing on the actual voting process, endorse the elections as free and fair.
1997 February August 0 Closing date for tender for the Police shoot and wound former privatization of ZCCM in unbundled President Kenneth Kaunda units Bilateral donors do not disburse, citing 0 Zambia passes IMF's mid-term review of ' poor performance on governance ESAF. The 1996 Paris Club agreement issues. on debt rescheduling on Naples terms formalized October July Failed coup by junior officers. 0 Consultative Group Meeting. Donors Kaunda is detained and a state of promised USS 150 millions in Balance of emergency declared. Payments (BOP) support as well as US $ 285 for general financing. However, bilateral donors make it clear that disbursement are conditional on governance reform. The Zambian government announces resumption ofthe Public Sector Reform Programme. November The Kafue Consortium presents a bid for major ZCCM units. The bid is turned down by the government.
1998 March February A new and lower bid is presented by the Finance Minister Ronald Penza is Kafue Consortium. The bid is again replaced by Edith Nawakwi. rejected by the government Purportedly fired on grounds of May corruption Consultative Group Meeting. Donors Charges against Kenneth Kaunda pledge USD530 million for balance of dropped. payments support, but make November disbursement contingent on the sale of e Ex-Finance Minister Ronald Penza ZCCM and governance issues assassinated in his Lusaka home. Most bilateral balance-of-payment support held back. -14-
ANNEX B. GROWTH ANALYSIS FOR ZAMBIA 1. Growth Accounting, 1960-2002 Frame,work
1. The starting point of growth analysis is the circular income-expenditure flow diagram of economic activity and the system of social accounts associated with it (Jorgenson and Griliches, 1967; Hulten, 2000). Hulten (2000) describes succinctly the thrust of the circular income- expenditure flow model:
“In that model, the product market determines the price, p,, and quantity, Qt, ofgoods and services sold to consumers. The total value ofthese goods is ptQt dollars, which is equally the expenditure of consumers and the revenue of producers. The factor markets determine the volume of the inputs (labor, L,, and capital, KJ, as well as the corresponding prices, wt and rt. The payment to these inputs, w,L,+r,K,, is a cost to the producer and the gross income of consumers. The two markets are connected by the equality of revenue and cost, on the producer side, and gross income and expenditure on the consumer side, leading to the fundamental GDP accounting identity: ptQt= wtLt+rtKt. This is, in effect, the budget constraint imposed on an economy with limited resources ofcapital, labor, and technology.” Hulten (2000).
2. Because the observed value of GDP is the result of the interplay of demand and supply in the product and factor markets, a comprehensive analysis of constant-price’ GDP growth must examine its components on both the production and the consumption sides of social accounts. On the production side, one approach, known as growth accounting, uses the fundamental identity between revenue and cost to break down observed economic growth into contributions by factors accumulation and a residual, which using the analytical apparatus of aggregate production function research, can be interpreted as reflecting technological progress (Hulten, 2000; Barro, 1998). Alternatively, observed economic growth can be decomposed into contributions by different production sectors (e.g., agriculture, industry, etc.). On the demand side, growth analysis focuses exclusively on the contributions of different components of aggregate demand (Le., domestic private sector and government final consumption and investment, and external demand).
3. We assume that GDP can be expressed as a function of physical capital and human capital as follows: ’
Y = AF(K,H)
’ Within the system of social accouiit~, economic welfare over the course of a given fixed-length accounting period is measured by the quantity (not value) of goods and services consumed in that period. Therefore, a comparison of economic well-being across different accounting periods requires the use of a constant-price measure of economic activity (i.e., the prices of a chosen base year are used to value economic output in all periods). This framework is based on Swati R. Ghosh and Aart Kraay, 2000, “Measuring growth in total factor productivity: Worksheet to estimate total factor productivity” PREMNote 42. -15-
In the above equation, Y is gross domestic product (GDP) in constant 1994 Kwacha; A measures total factor productivity; K is gross domestic capital stock in constant 1994 Kwacha; Hishuman- capital-adjusted labor input, defined as:
4. In equation (2), L is population; D is share of population aged 15-64; P is labor force participation rate; S is number of years of education per worker; and, pis a parameter that measures the returns to education, We assume that the aggregate production function is Cobb- Douglas type with constant returns to scale, in which the parameter a is a between 0 and 1 and measures the relative importance of capital (for developing countries, reasonable values of alpha range from 0.3 to 0.5):
Data and Measurement
5. Several methods are available to estimate the initial capital-output ratio (ky,). One possibility is to use the capital-output ratio reported in Summers and Heston Penn World Tables for the period 1960-2000.9 For most developing countries, reasonable values range between 1 and 2. For Zambia, we use a capital-output ratio of 1.02, which is obtained from Summers and Heston." Reasonable values for the depreciation rate (6)range from 0.04 to 0.08. For Zambia, we assume a depreciation rate of 0.04." The capital stock in 1960 is ky, multiplied by real GDP (Y) in 1960. For subsequent years the capital stock is obtained using the perpetual inventory method, using real gross fixed capital formation in constant 1994 Kwacha to approximate I,:
K, = (1 - S)K,-, +I,
6. To arrive at a plausible value for a, we use the well-known fact that under the assumption of perfect competition in the product and factor markets, the factors ofproduction are paid their marginal products:
-=rdY and-=wdY dK dH
These data are available at www.nber.org. The variable used is RGDPCH multiplied by POP.
loThis is also very close to the capital-output ratio in Easterly, W. and Ross Levine, "It's not factor accumulation: stylized facts and growth models" , Mimeo, World Bank and U. of Minnesota, September 1999. '' Adam and Bevan (1997) estimate that depreciation was about 4% of GDP in 1995 for Zambia. -16-
7. In equation (6), Y and w are respectively the real return on capital and the real wage. If the aggregate production function is Cobb-Douglas, a and 1- a equal the shares of capital and labor in output respectively:
8. The share of labor in output, (1- a ), is estimated for Zambia for the period 1965-80, using equation (8) and information on wages, employment and value added by sector. This share is calculated by multiplying average wages for a sector by employment in that sector and dividing the result by value added in that sector. Summation over sectors yields the total share of labor in output (value-added). Accordingly, the average share of labor in output in Zambia over 1965-80 was estimated to be 0.604, and this is the value we use in the estimation.
9. To estimate the human capital stock, we need data on the share of the population aged 15-64 (D), the labor force participation rate (P), and data on the stock of years of education (S). Data on labor force and participation rates are obtained from the World Bank's WDI and SIMA databases. Data on the stock of years of education are available from two sources: Barro and Lee (1996), and Nehru, Swanson, and Dubey (1993). '* l3 For Zambia, data on average years of schooling of population is obtained from the Barro and Lee dataset (www.worldbank.or~/researcli/~ro~~~i/~dbarle2.htm),because of its better coverage of the period. The parameter 9,which measures the returns to education (the percentage increase in worker productivity due to an additional year of education) is assumed to be 0.1 or 10 per~ent.'~
10. With data on Y, K, L, D, P, and S, and an estimation and/or assumption of reasonable values for the parameters of the growth accounting equations, a,y,p,S, it is straightforward to estimate A, the Total Factor Productivity (TFP). The full dataset used in the estimation of A for Zambia is provided in Table A1 below.
11. Using the fact that in continuous time, the instantaneous rate of growth of output equals the ratio of its derivative with respect to time and the value at which the derivative is evaluated, we differentiate both sides of (3) with respect of time, divide by Y, and rearrange:
Y ;4 (~YK~K(~YH)H -=-+ -- -+ -- - andfrom(7) Y A dKYK dHY H
Barro and Lee, 1996, "International Measures of Schooling Years and Schooling Quality," American Economic Review 86 (2): 218-23.
l3Nehru, Vikram, and Ashok Dhareshwar. 1993. "A New Database on Physical Capital Stock: Sources, Methodology, and Results.'' Revista de Analisis Economic0 8 (1): 37-59.
l4World Bank, PREM Note 44. -17-
YA K H _-_- +a-+(l-a)- (9) YA K H
12. In our analysis, we use the discrete time approximation of (8) (see Hulten, 2000; Dolinskaya, 2001):
AY 1- AA1 -AK - +ad+1-a - (10) T-1 4-1 Kt-1 ( -12, In the above equation, = a is the average income share of capital in the two periods. Using equation (lo), we estimate the growth rate of TFP as the difference between the growth rate of ' output and the weighted growth rates of factor inputs, the weights being their respective aggregate income shares. We then calculate the contributions of factors accumulation and TFP growth to observed growth of aggregate output as follows:
100=100- AAt /AK-+lOOa--- - Ml pY,-+loo (1-a -)::/;: - - (1 1) 4-1 ?-I Kl-I Y,-1
13. The specificities of Zambia's data require a number of departures from the standard estimation techniques of equations (10) and (1 l),which are appropriate when working with data from advanced countries. First, in estimating the annual TFP growth rates, we follow Dolinskaya (2001) and use actual growth rates rather than their approximation as first-differences in log levels of variables. We work with actual growth rates, because in Zambia, their year-to-year values for Y, K, and H are often quite large, in which case the log first-difference approximation substantially underestimates large positive growth rates and overestimates negative ones. Second, the estimates of the contributions of factors accumulation and TFP growth to observed growth obtained from equation (11) are implausibly large for a number of years (approx. 9-10 out of 43), in which Zambia's real GDP growth AY, I?-, was close to zero. To overcome this problem, we use the properties of the Cobb-Douglas production function to transform (11) in per effective labor unit form:
l5We choose this method instead of the standard practice ofreplacing outliers with the average contributions of variables over a pre-specified period, because the latter method is generally appropriate only when the number of outliers is small. Furthermore, applying it would effectively remove from the dataset observations that are typical, rather than out of the ordinary, for Zambia's growth performance. -18-
Table A2.1. Zambia: Data Used in Growth Accounting Exercise
Real Investment Share of Average years Real Physical GDP (gross fixed capital Population Population, Labor.Fo!ce of schooling of Human Capital (lo00 Participation Year cOOO lgg4formation, thousand 31 ages 15-64 population 15- Capital 1994 kwacha) Rate 4/ kwacha) 1994 kwacha) 21 31 64 51 61 1960 1280881066 470752039 3141000 52.42 46.89 2.52 993248 1306498687 1961 1298318754 463452419 3219760 52.5 1 46.74 2.56 1020745 1717691159 1962 1265979621 399688788 3308330 52.48 46.59 2.60 1049117 2048672300 1963 1307407548 33697 1744 3404680 52.36 46.43 2.64 1078210 2303697152 1964 1467094925 364777603 3507040 52.20 46.28 2.69 1108203 2576326868 1965 1711328854 6 176 11354 3614000 52.01 46.13 2.73 1139351 3090885147 1966 1616002548 77 1804120 3724420 51.84 45.98 2.75 1168571 3739053862 1967 1743985050 904989698 3837480 51.67 45.82 2.77 1198496 449448 1406 1968 17657557 16 928097606 3952680 51.52 45.67 2.79 1229245 5242799755 1969 1758040949 906250 129 4069820 51.40 45.52 2.81 1260893 5939337895 1970 1842376081 1257769665 4 189000 51.28 45.36 2.83 1293223 6959534043 1971 1840790897 1199701098 43 02 85 0 51.16 45.02 2.88 1321171 7880853780 1972 2010306839 1315838099 4423360 50.99 44.67 2.92 1349743 8881457728 1973 1990966772 1223043580 4552410 50.77 44.33 2.97 1378993 9749242999 1974 2118949143 1211228357 4691360 50.48 43.98 3.02 1408698 10570501636 1975 2070863282 1329382556 484 1000 50.13 43.64 3.07 1439453 11477064126 1976 2199691198 800713212 5002480 50.13 43.29 3.22 1498115 11818694773 1977 2099292144 695959224 5 177360 50.05 42.94 3.38 1560036 12041906206 1978 21 10917313 554029548 5361950 49.95 42.60 3.54 1625921 12114259506 1979 2047084593 449 13 1348 5550120 49.86 42.25 3.72 1695797 12078820473 1980 2 109226353 497257742 5738000 49.84 41.91 3.90 1770074 12092925397 1981 2239322391 507776205 5926790 49.84 41.81 3.93 1829383 12116984586 1982 2176335217 445961208 61 17120 49.87 4 1.73 3.96 1891242 12078266410 1983 2133533524 356769104 6309060 49.94 41.63 3.99 1954705 11951904857 1984 2126346977 305328652 6503080 50.04 41.55 4.02 2020891 11779157315 1985 2160694133 28645271 1 6700000 50.17 41.45 4.05 2088792 11594443734 1986 2176335217 242937266 690 1040 50.40 41.36 4.08 2162217 11373603251 1987 2234566574 228960453 7 107800 50.64 41.27 4.10 2238798 11147619574 1988 2374914015 256625902 7322250 50.87 41.18 4.13 2317538 10958340692 1989 2350606975 177520001 7546740 51.08 41.09 4.15 2399673 10697527066 1990 2339298869 249133187 7784000 51.25 4 1.OO 4.18 2484126 10518759170 1991 2338453 193 2 1599227 1 8022380 51.15 41.10 4.40 2619147 10314001074 1992 2297554010 238038188 8261540 51.09 41.20 4.64 2764799 10139479219 1993 2454176399 334723187 8501110 51.07 41.30 4.89 2922219 10068623237 1994 2240699957 253643506 8740720 5 1.09 41.40 5.15 309262 1 99195218 13 1995 2184799977 285599990 8980000 51.15 41.50 5.42 3277525 9808340930 1996 2328800002 287400002 9214400 50.90 41.71 5.43 3366399 9703407295 1997 2405600068 326599999 9443210 50.71 4 1.93 5.44 3457575 9641871002 1998 2360799920 351642911 9665710 50.58 42.13 5.44 3550312 9607839073 1999 2413300023 372900594 9881210 50.52 42.35 5.45 3646378 9596426104 2000 2499599925 433229201 10089000 50.52 42.56 5.46 3744907 9645798261 2001 2622532958 480765711 10283000 51.14 42.76 5.47 3884609 9740732041 2002 2701208947 440262553 10488660 51.14 42.97 5.48 3985128 9791365313 Source: WDI, CSO, SIMA, Barro and Lee dataset on international measures of schooling (www.worldbank.ordrcscarchlerowth/ddbarlc2.htm).
1/ GDP data in constant 1994 kwacha for the period 1960-2000 is obtained from the World Development Indicators (WDI) database published by the World Bank. Missing value for 2001 is taken from data provided by the Central Statistical Office of Zambia. Missing value for 2002 is obtained from the real GDP data for 200 1 and the official figure for real GDP growth in 2002 (3 percent).
2/ The World Development Indicators (WDI) database published by the World Bank contains data on gross fixed capital formation (GFCF) in constant 1994 kwacha for the period 1970-2000. Missing values for the period 1965-1969 are estimated from data provided by the Central Statistical Ofice of Zambia (CSO). Over the years, CSO has produced four different series of GFCF data in constant kwacha with different base years (1965, 1970, 1977, and 1994) that cover time periods that overlap by at least one year. This data allows the construction of a spliced implicit GFCF price deflator index with 1994 as base year, which is then used to rebase the CSO data on gross fixed capital formation for the period 1965-1969. Missing values for the period 1960-1964 are estimated from data on gross fixed capital formation in current kwacha taken from the International Financial Statistics database published by the IMF. Data on the implicit GFCF price deflator index -19- needed for the estimation is extrapolated under the assumption that in each year of the period 1960-1964 the index grew at a constant rate equal to the geometric mean of its annual growth in the period 1965-1970.
31 Population data for the period 1960-2000 is obtained from the World Development Indicators (WDI) database published by the World Bank. Total population figure refers to mid-year population. Missing value for total population in 2002 is extrapolated under the assumption of 2 percent rate of growth in 2002. Missing value for the share of population aged 15-64 in 2002 is extrapolated under the assumption that it grew at a rate equal to the geometric mean of its annual rates of growth in the period 1995-2001.
41 Data on the rate of labor force participation among people aged 15-64 for the period 1960-2001 is obtained from unpublished World Bank sources. Missing value in 2002 extrapolated under the assumption that it grew at a rate equal to the geometric mean of its annual rates of growth in theperiod 1995-2001.
51 Quinquennial data on average years of schooling for the population aged 15 and over for the period 1960-2000 taken from Barro and Lee dataset on intemational measures of schooling (www.worldbank.org/rescarch/arowth/ddbarle2.hbn).Missing values for the periods between the quinquennial observations are extrapolated under the assumption of constant annual compounded growth rate of the variable between the year prior to the start of the respective period with missing values and the year following its end. Missing values for 2001-02 are extrapolated under the assumption of constant annual compounded growth rate equal to that in the period 1995-2000.
61 The capital stock series is generated using a perpetual inventory method for initial capital-output ratio of 1.02 for 1960, obtained from Heston and Summers Penii World Tables, and a constant annual depreciation rate of4 percent, obtained from Adam and Bevan (1997).
14. We then use (12) to estimate the contributions of physical capital per effective labor unit (Le., per unit of human capital) and of TFP to observed growth of real output per effective labor unit. This approach produces only three outliers, all of which are at the start of the period (1961, 1963, and 1968), when the estimated levels of physical capital are unreliable, because of the ad hoc method of the estimation of its initial value (see above). Thus, in this case it is appropriate to replace these outliers with sub-period averages.
15. Finally, in calculating period averages of growth rates and contributions to real output growth, we use arithmetic averages of annual values rather than geometric means (i.e., constant annual compounded growth rates between the start and end-values of variables). We consider arithmetic means more appropriate in the case of Zambia, because real GDP fluctuates substantially from year to year, which makes the estimates from the latter approach too sensitive to the choice of start and end dates of the period.
Results
16. A remarkable feature of the Zambian economy is the steady build-up of human capital throughout the whole period 1960-2002 (Figure 2.1). It was driven by high and persistent population growth, and the substantial gains in the average years of schooling achieved through the mid-1990s (Table A2.1). At the same time, real physical capital increased exponentially prior to the collapse of international copper prices in mid-l970s.I6 The industrialization policies during Zambia’s foray into state ownership and control over the economy (1973-84) managed to keep the aggregate capital stock increasing, though at a slower rate, in part by resorting to external loans. Since then, its stock has been chipped away by depreciation without replacement until 2001, when the trend reversed. The average annual TFP growth rate was negative throughout most ofthe period 196C-2002, with the notable exception of the last three years, in which it grew at a rate of 1.4 percent (Table A2.2).
l6 Copper accounted for more than 90 percent of all Zambian exports, and most of the capital equipment and intermediary inputs ofproduction were imported. -20-
Figure A2.1. Zambia: Factors of Production, 1960-2002
11"" " I" 111 I" 14000 I I.-- 4200 1 +
12000 ...... 3600 +++
L %; .. . . . +t .. . 2 10000 . 3000 p + b! 2 I * ...... t L 2 8000 4 2400 1 b 8 6000 1800 m 1 0' 4000 1200
vE' 2000 600
0 0 ONU ...... 222zz222z22 Source: WDI, SIMA, Barro and Lee dataset on international measures of schooling (www.worldbank.ore/research/crov th/ddbarle2.htm), and Bank staff estimates.
Table A2.2. Zambia: Growth Accounting Results, 1960-2002 (percent) -Sub-oeriod .~-..._ - 199 1-2002 1960-2002 1960-72 1973-84 1985-90 All 1991-98 1999-02 Colonial1 Administration All Kaunda Kaunda Chiluba Kaunda Free State Economic policy regime All Transition Stabilization/ SAP market control Average annual growth rates 11 Real output per effective labor unit -1.4 1.4 -2.8 -1.8 -2.6 -4.1 0.5 Physical capital per effective labor0.7 5.8 -0.4 -2.1 -1.8 -2.2 -1.0 unit 21 Total factor productivity -2.1 -4.4 -2.4 0.3 -0.8 -1.9 1.4 Share in the growth of output per effective labor unit 11 31 Physical capital per effective labor3.0 -1.5 12.5 79.0 -39.9 -39.9 -39.7 unit Total factor productivity 97.0 101.5 87.5 21.0 139.9 139.9 139.7 Memo items (average annual growth vates I/) Output (Real GDP) 1.9 4.0 0.5 1.6 1.3 0.2 3.4 Physical capital (unweighted) 5.2 17.4 2.5 -1.9 -0.6 -1.1 0.5 Human capital (unweighted) 3.4 2.6 3.4 3.5 4.0 4.6 2.9 Source: WDI, CSO, SIMA, Barro and Lee dataset on international measures of schooling (www.worldbank.org/research/~rowth/ddbarle2.htm),and Bank staff estimates. Note: See Annex 1 for estimation details. I/ Arithmetic averages of annual va1~es.l~ 2/ Weighted by the income share ofcapital. 31 Adjusted for 3 outliers (1961, 1963, and 1968). Outliers replaced by average shares for the respective sub-period.
l7In calculating period averages of growth rates and contributions to real output growth, we use arithmetic averages of annual values rather than geometric means (Le., constant annual compounded growth rates between the start and end-values of variables). We consider arithmetic means more appropriate in the case of Zambia, because real GDP fluctuates substantially from year to year, which makes the estimates from the latter approach too sensitive to the choice ofstart and end dates ofthe period. -21-
17. TFP contributions were positive under all policy regimes and quantitatively much larger than those of the relative factor endowment (i.e., the ratio of physical to human capital)I8 in all sub-periods, except in the transitional years 1985-90. Over the whole period 1960-2002, changes in the ratio of physical to human capital on average account for only 3 percent of the growth of output per effective labor unit, whereas the remainder is attributable to changes in TFP. Furthermore, the average contributions of the relative factor endowment to the annual growth of output per effective labor unit were negative in both episodes of free-market policies (1960-72 and 1991-02), quantitatively much larger in the latter period. The large negative value of the average contribution ofthe relative factor endowment to the annual growth of output per effective labor unit in 1991-02 can be an artifact of the way we measure human capital. As we show in Annex 2, the method that we use overestimates the stock of human capital from the mid-1980s onwards, as it does not take into account the dramatic effect that HIV/AIDS has had on the quality of the labor force.Ig
2. Effect of HIV/AIDS on Human Capital and Economic Growth
18. The method we employ to construct the human capital series in the growth accounting exercise for Zambia does not take into account the dramatic effect HIV/AIDS has had on the quality ofthe labor force. The empirical measurement of the HIV/AIDS impact on human capital is largely unchartered territory of economic research. In this section, we pool together information from various sources and propose an alternative method of constructing human capital series, based on a model used by Chow and Lin (2002), that can give us a rough idea of the magnitude and timing of the HIV/AIDS impact on the quality of the labor force. Chow and Lin (2002) construct human capital series for Taiwan and Mainland China by multiplying the number of hours worked by the quality of human capital, which is estimated as follows:
“. . . our measure of the quality of human capital S is given by the sum ofthe percentage ofthejth schooling in the civilian population of age 15 or over multiplied by the relative earnings scale of thejth schooling prevailed in 1991 with the average earnings ofprimary and below taken as 100, which equals 722.4 per month in U.S. dollars .... The relative scale of earnings is 102.38 for junior high, 105.17 for vocational, 114.00 for high school, 139.77 for junior college, and 176.94 for college and above. These relative scales are fixed throughout our sample period 1951 to 1999 while the distribution of schooling varies through time.” (Chow and Lin, 2002, pp. 508-9)
19. Chow and Lin (2002) do not specify the source of data on earnings by level of educational attainment. It is a standard practice in labor-economics literature to obtain these estimates from Mincerian wage equation estimated with survey data on workers. Mincer (1974) showed that in a semi-logarithmic regression of wages on some measure of educational
’’ As noted in the Annex to this chapter, we refrain from measuring the contributions of factors accumulation separately, as the growth rate of real GDP in Zambia is close to zero in a number of years, which results in implausibly large estimates of their contributions to economic growth (see equation 11 in Annex). To overcome this problem, we re-write the Cobb-Douglas aggregate production function in per effective labor unit form and analyze the contributions of physical capital per effective labor unit and of TFP to observed growth ofreal output per effective labor unit. l9Despite its apparent shortcomings, we use this method of measuring human capital, which is standard in the literature (see Chow and Lin, 2002), because of the lack of detailed data on the effect ofHIV/AIDS on Zambia’s labor force. In Annex 2, we use available data to get a rough idea ofthe magnitude and timing of this effect. -22- attainment (years of schooling or dummy variables for highest completed level of education), the OLS coefficient in front of the measure of educational attainment could be interpreted as the return to investment in schooling (per year of schooling or per completed educational level respectively). Mincer (1974) augmented the model by adding a quadratic term in work experience, often proxied by worker’s age, to capture returns to on-the-job training. The resulting regression is known as Mincerian wage equation (Krueger and Linddah, 2000, p. 5).
20. The spread of HIV/AIDS affects the stock of human capital in a number of ways (Isaksen, Songstad, and Spisslay, 2002), the most important of which are: the increase in the mortality rate among workers; the decrease in the total hours worked in the economy, caused by heavier use of medical leave by infected individuals, and the scaling-down of their relatives’ participation in the labor-force, because of the increased need for care giving. We do not have sufficient annual data to measure the changes in hours worked in the Zambian economy. However, existing data allow us to get a rough estimate ofthe effect of HIV/AIDS on the average number of years of on-the-job training among workers. Therefore, to capture the impact of HIV/AIDS on human capital, we extend the Chow and Lin (2002) model by adding the relative return to on-the-job training in the construction of the quality of human capital index. Such an extension follows naturally from the Mincerian wage equation described above. In our model, HIV/AIDS decreases the average number of years of on-the-job training among workers, which has a negative effect on the stock of human capital.
21. To construct human capital series based on the full Mincerian wage equation, we need data on the shares of working-age population that have completed each educational level; a measure of the average years of on-the-job training in the labor force; and estimates of the relative earnings scales by educational attainment and level of on-the-job training. We use the Barro and Lee dataset on intemational measures of schooling to generate annual values for the shares of workmg-age population that have completed each educational level (Table A2.3).” Estimates on the relative earnings scales by educational attainment and level of on-the-job training (Table A2.4) are taken from Bigsten et. al. (2000) study of the rate of retum to human capital in Zambia’s manufacturing sector in 1993-95.
22. We approximate the average years of on-the-job training of primary school completers, secondary school conipleters, and university graduates by the average of the minimum age of entry in the labor force for each group and the life expectancy. This is an appropriate measure of the average age of workers by highest completed level of education, if the age distribution of workers in each group is uniform, and the life expectancy is the same across groups and equals the life expectancy for the whole population. Because the population age structure in most developing countries, including Zambia, is a pyramid,“ with the size of age cohorts decreasing with age” (Isaksen, Songstad, and Spisslay, 2002), the uniform age-structure assumption, adopted due to data limitations, provides an upper-bound estimate of the average age of workers by highest completed level of education. Following Bigsten et. al. (2000), we assume that children enter the school system at the age of 6, and that the length of study is: primary level - 7 years; secondary level - 6 years, university level - 3 years. Thus the minimum age of entry in the labor
2o The Barro and Lee dataset (www.worldbank.or~lresearchl~rowth/ddbarle2.htm)contains quinquennial data over the period 1960-2000. Missing values for the periods between the quinquennial observations are extrapolated under the assumption of constant annual compounded growth rate of the variables between the year prior to the start of the respective period with missing values and the year following its end. Missing values for 2001-02 extrapolated under the assumption of constant annual compounded growth rates equal to those in the period 1995-2000. -23- force is respectively 15,21 19, and 22 years. Annual data on life expectancy for the period 1960-2000 is obtained from the World Bank World Development Indicators (WDI) database.22
Table A2.3. Zambia: Educational Attainment of the Population Aged 15 and Over
No schoolingCoinpleted primarycompleted secondary Completed Year and some firstaiid some secondand some post- post-secondary level level secondary level
1960 88.0 9.5 2.0 0.5 1965 82.8 14.9 2.0 0.4 1970 81.3 16.2 2.2 0.3 1975 82.8 14.7 2.2 0.3 1980 74.3 21.8 3.9 0.0 1985 73.5 23.2 3.1 0.2 1990 72.6 24.3 2.7 0.3 1995 62.2 24.1 13.1 0.6 2000 61.5 24.5 13.3 0.7
Source: Barro and Lee dataset on international measures of schooling (www.worldbank.orn/research/prowtNddbarle2.htm).
Table A2.4. Increment in Earnings to Human Capital Relative to Earnings of Workers with no Formal Education and no On-the-Job Training (percent) Zambia Education Primary Completers 43 Secondary Completers 90 University Completers 209 Age Primary Completers Age 0.07 Age squared -0.0008
Secondary Completers Age 0.14 Age squared -0.001
University Completers Age 0.23 Age squared -0.003
Source: Bigsten et. al. (2000), Table 5.
'' The minimum age of entry in the labor force of primary school graduates, according to the above method, is 13. However, because we estimate the size of the labor force using data on the number of people aged 15 to 64 years (see Annex), we use 15 instead.
22 Missing values for 2001-2002 are extrapolated under the assumption that the life expectancy grew at a constant compounded rate equal to the rate of growth in 2000. -24-
23. We construct our measure of human capital, based on the full Mincerian wage equation, that accounts for the impact of HIV/AIDS as follows: (1) for each education level (primary, secondary, and university), we multiply the share of population aged 15 to 64, for which it is the highest level attained (values from Table A2.3 divided by loo), by one plus the respective increment in earnings (relative to earnings of workers with no formal education and no on-the-job training) from attaining that level of education (values from the top panel of Table A2.3 divided by loo), plus the increment in earnings related to the average level of on-the-job training among workers in this groupz3(values from the bottom panel of Table A2.4 divided by 100); (2) we sum the results from step (1) for all education level, add the share of population aged 15 to 64 that has not completed any of these levels, and multiply the result by the total size ofpopulation aged 15 to 64 times the labor force participation rate. In addition, we estimate the stock ofhuman capital, based on the full Mincerian wage equation, that would have existed in the absence of HIV/AIDS. We follow the same estimation procedure, but we replace the actual values of life expectancy for the period 1982-2002 with its value in 1982 (HIV/AIDS was first diagnosed in 1981).
24. Comparison of the actual and potential values of the stock of human capital, based on the full Mincerian wage equation, shows that the HIV/AIDS have started to exert a noticeable impact on the stock ofhuman capital since 1992 (Figure A2.2). The annual growth rate of human capital between 1992 and 2002 was on average 0.5 percentage points lower than its potential value, because of the spread of HIV/AIDS. Therefore, everything else held constant, the HIV/AIDS epidemic has lowered the annual growth rate of real GDP on average by 0.3 percentage points since 1992 (see equation 10 in Annex),
Figure A2.2. Impact of HIV/AIDS on Human Capital in Zambia, 1960-2002 55 4800000 50 Q* 4300000 '2 3800000 45 2 3300000 40 x- f 2800000 5 35 - "0 2300000 e3 30 l 1800000 - 1300000 25 800000 i , , , , I c 20
+Human capital (based on Mincerian wage equation no Hnl'/AIDS impact) $r Human capital (based on Mincerian wage equation incl HIV/AIDS impact) +Life expectancy at birth (right axis) Source: WDI, SIMA, Barro and Lee dataset on international measures of schooling (www.worldbank.org;/iesearchl~rowthlddbarle2.htm), Bigsten et. al. (2000), and Bank staff estimates
23 In this term, the average age of workers enters directly and squared, multiplied respectively by the returns to its level and squared value. -25-
3. Supply and Demand-Side Decomposition of Growth, 1965-2002
25. In this section, we examine the composition of supply and demand in the productkervices markets over the period 1965-2002 with an emphasis on recent developments. Details on the supply and demand-side decomposition of growth in each of the four sub-periods, differentiated by economic policy regimes (the last period is further subdivided into two periods, 1991-98 and 1999-02, mainly because of different growth patterns) can be found in Annex 3. We represent the growth rate of GDP at constant factor cost 24 as a weighted average of the growth rates of its components on both the production and the consumption sides of social accounts, the weights being the shares of these coniponents in total economic output in a base year.25This allows us to track structural changes in the economy over time, and identify demand and supply components with highest contribution to the observed growth of GDP.
Long-term Growth, 1965-2002
26. Supply-side analysis. Over the period 1965-2002, on average 76 percent oftotal supply ofresources came from domestic sources, the rest being imported from abroad. Imports fell at an average annual rate of 1.7 percent per year, due mainly to the declining purchasing power of Zambia’s exports (Table A2.5).
27. The main engines of growth of the Zambian economy over the period 1965-2002 were the services sector, followed by the manufacturing, and the public utilities sectors, with weighted sectoral contributions to real GDP growth of 89, 38, and 12 percent respectively (Table 2.5, column D). The positive contributions of these sectors to economic growth were, however, partly offset by the declines in the mining and construction sectors, the relative sizes of which in Zambia’s economy have shrunk at average annual rates of 3.2 and 1 percent respectively. Gas, electricity and water was the fastest growing sector with an average annual rate of growth of 9 percent, though starting from a very low level (it accounted on average for only 3 percent of GDP). Agriculture on average generates 16 percent of GDP, growing at an average annual rate of 1.9 percent.
28. Between 1991 and 2002, the average real growth of GDP at factor cost was 1.1 percent per year, of which the service sector accounted for 157 percent, manufacturing for 13 percent, and utilities for 7 percent. Partly offsetting these gains were the negative contributions ofmining and agriculture (-68 and -13 percent respectively). Average annual growth was moderate in the advancing sectors of the economy, ranging between 3 percent in services and 1 percent in agriculture. Mining and construction continued loosing ground with average annual declines of 5 and 0.7 percent respectively. The decline in the mining and quarrying sector was reversed following the privatization of the Zambia Consolidated Copper Mines (ZCCM), a large integrated
24 GDP measured at market prices equals GDP at factor costs plus indirect taxes minus subsidies. Because disaggregated data on indirect taxes and subsidies for each production sector is not available, sectoral analysis must be conducted at factor cost.
25 For example, for any two year period, if sectoral growth rates are weighted by sectoral GDP shares from year one, then the sum of these weighted growth rates will equal the growth rate for total GDP at factor cost. These weighted growth rates can also be averaged over many years to obtain period averages. Note that the use of weighted growth rates means a fast growing sector may not contribute much to total growth if that sector has a small GDP share. Likewise, a very large sector may contribute more to growth simply because if its size, even with a relatively low growth rate. -26- copper mining and processing parastatal, in March 2000. Copper output growth in 2001-02 averaged 15 percent per annum.
Table A2.5. Demand and Supply Composition of Long-Run Growth, 1965-2002 Period Weighted Average Average Average Sources of GDP Growth Growth Growth# Shares ' Rates b/ Rates g/ A B C D
Supply-side decomposition Resource Supply 100 0.6 0.6 100.0 A. Domestic Supply (GDP at Market Prices) 76 1.3 0.9 140.4 B. External Supply (Imports G&NFS) 24 -1.7 -0.2 -40.4
GDP at Factor Cost e/ 100 1.4 1.4 100.0 A. Agriculture, forestry, fishing 16 1.9 0.2 11.3 B. Mining and quarrying 17 -3.2 -0.7 -48.9 C. Industry 24 3.3 0.7 48.4 1. Manufacturing 16 4.0 0.5 38.3 2. Gas, electricity, water 9.1 3 0.2 12.1 3. Construction 5 -1.0 0.0 -2.1 D. Services 43 3.0 1.2 89.2
Demand-side decomposition Resource Demand 100 0.6 0.6 100.0 A. Domestic Demand (Absorption) 73 0.8 0.5 86.3 1. Government Consumption 14 3.3 0.1 11.5 2. Private Consumption 44 0.7 0.2 30.3 3. Investment, incl. Change in Stocks 15 6.4 0.3 44.6 B. External Demand (Exports G&NFS) 27 0.2 0.1 13.7
-a/ Calculated from the average of constant price data from four base years, 1965, 1970, 1977 and 1994. Total may not sum perfectly due to rounding up. -B/ Average of annual growth rates estimated as first-defferences in the natural logs of the intertemporal values ofthe variables. -c/ Average of annual growth rates (estimated as first-differences in the natural logs of the intertemporal values ofthe variables).weighted by annual shares. -d/ Weighted average growth rates of GDP components on the productiodconsumption side (column C) as percent ofthe average GDP growth rate. -e/ GDP at factor costs equals GDP measured at market prices minus indirect taxes plus subsidies. Excludes bank service charges. -27-
Figure A2.3. GDP by Sector of Origin in Constant 1965 Prices, 1965-2002 700.000.000
600,000,000 - -Serv.
500,000,000 C
-Industry 8 400,000,000 Pe Y) E 300,000,000 Q -Ag Tic. 6 " 200,000,000
100,000,000 -M8Q
0
Source: CSO and Bank staff estimates.
29. A further breakdown of the growth rate of the services sector into contributions of its various sub-sectors shows that it comes mostly from the government services (community and social), real estate, and wholesale and retail trade sub-sectors (Table A2.6). The fastest growing parts of the services industry were the real estate and hospitality sub-sectors, though the small relative size of the latter in Zambia's economy means that its contribution to GDP growth remains modest. The government services sector has both a high share in real GDP and a high average rate of growth. Wholesale and retail trade was also a strong contributor because of its large GDP share, though its growth rate was generally low.
Table A2.6. Sources of Long-run Services Growth, 1965-2002
Period Weighted Average Sources Average Average GDP of Growth Growth Growthdl Shares a/ Rates bl Rates GI A B C D
Services 44 3 .O 1.2 89.2 1. Wholesale and Retail Trade 11 0.9 0.2 12.2 2. Hotels and Restaurants 2 7.1 0.1 7.5 3. Transport & Communications 5 1.4 0.1 4.1 4. Finance and Insurance 5 1.6 0.0 3.2 5. Real Estate & Business 7 7.5 0.4 30.8 6. Community & Social Services 14 3.9 0.4 31.4 -a/ Calculated from the average of constant price data from four base years, 1965, 1970, 1977 and 1994. Total may not sum perfectly due to rounding up. bl Calculated as the average of annual growth rates. -cl Calculated from the average of annual growth rates weighted by annual shares. -d Shares are calculated from figures in column C. -28-
30. Demand-side analysis.26 Over the period 1965-2002, on average 73 percent of the total demand came from domestic sources, while 27 percent came from abroad, almost exclusively in the form of demand for Zambian copper (Table 2.5, column A). The main contributors to the growth rate of domestic absorption were investment and change in inventories, and private consumption, with weighted sectoral contributions to real GDP growth of 45 and 30 percent respectively (Table 2.5, column D). Investment demand and government consumption were the two fastest growing demand components with average annual rates of increase of 6.4 and 3.3 percent respectively.
Growth by policy Regime
31. Between 1991 and 2002, government consumption declined at an annual rate of 0.6 percent. Private consumption also declined by 0.5 percent, whereas investment and exports rose on average by 14 and 3 percent per year respectively (Annex 3). In terms of contribution to growth, investment contributed 18 1 percent and exports 139 percent, whereas the contributions of private and government consumption were large and negative (-83 and -138 percent respectively). The increased production of copper and the recapitalization of the mines, following the privatization of the ZCCM, have infused new vigor in the export and investment demand since 2000.
Table A2.7. Sectoral Sources of Growth by Policy Regime, Supply-side Decomposition (percent) Whole Sub-periods for Sub-periods Period period 91-02 65-02 65-72 73-84 85-90 91-02 91-98 99-02 Administration All Kaunda Chiluba Free State Stabilization Economic policy regime Transition SAP market Control I SAP
Average Growth Rates (%) Resource Supply 0.6 4.2 -1.8 1.7 0.5 -0.8 2.9 A. GDP at Market Prices 1.3 3 .O 0.4 1.6 0.9 -0.4 3.6 B. Imports of Goods and Services -1.7 7.6 -8.6 2.4 -2.1 -4.3 2.3
GDP at Factor Cost g/ 1.4 3.0 0.5 1.6 1.1 -0.2 3.8 A. Agriculture, forestry, fishing 1.9 2.9 1.5 3.0 1.3 1.2 1.3 B. Mining and quarrying -3.2 -4.0 -1.0 -3.1 -5.1 -8.7 2.1 C. Industry 3.3 9.5 0.8 4.5 1.8 0.0 5.2 1. Manufacturing 4.0 11.9 -0.1 7.2 2.0 0.9 4.1 2. Gas, electricity, water 9.1 30.0 9.4 -2.4 2.5 1.o 5.4 3. Construction -1.0 2.8 -1.2 -5.4 -0.7 -4.8 7.5 D. Services 3.0 8.1 1.o 0.5 3.3 2.7 4.6
Sources of Growth (99 of GDP growth) Resource Supply 100.0 100.0 100.0 100.0 100.0 100.0 100.0
26 By national accounting identity, the sum of resources generated within Zambia, defined as GDP at market prices, plus the sum of imported resources must equal demand from within Zambia (government and private sector consumption, investment) and demand from trading partners (ie., exports). -29-
Whole Sub-periods for Sub-periods Period period 91-02 65-02 65-72 73-84 85-90 91-02 91-98 99-02 Administration All Kaunda Chiluba Free Stabilization Economic policy regime State Transition SAP market Control / SAP A. GDP at Market Prices 140.4 47.6 -15.0 78.3 124.0 57.2 88.8 B. Imports ofGoods and Services -40.4 52.4 115.0 21.7 -24.0 42.8 11.2
GDP at Factor Cost a/ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 A. Agriculture, forestry, fishing 11.3 12.9 30.1 28.3 -13.1 132.4 6.0 B. Mining and quarrying -48.9 -56.8 -32.0 -18.5 -67.5 445.4 0.0 C. Industry 48.4 55.4 32.1 77.3 23.5 51.9 27.3 1. Manufacturing 38.3 36.7 8.4 95.8 12.9 7.4 12.2 2. Gas, electricity, water 12.1 13.2 46.8 -5.8 6.6 -8.5 4.6 3. Construction -2.1 5.6 -23.1 -12.6 4.1 52.9 10.5 D. Services 89.2 88.5 69.8 12.9 157.0 -529.7 66.7
-al The sum ofthe weighted sectoral averages within a period equals the GDP growth rate for the period. Source: Central Statistical Office and Bank staff calculations.
Table A2.8. Sectoral Sources of Growth by Policy Regime, Demand-Side Decomposition (percent) Whole Sub-periods for Sub-periods Period period 91-02 65-02 65-72 73-84 85-90 91-02 91-98 99-02 Administration All Kaunda Chiluba Free State Transition Stabilization/ Economic policy regime SAP market Control SAP
Average Growth Rates (%) Resource Demand 0.6 4.2 -1.8 1.7 0.5 -0.8 2.9 A. Domestic Demand (Absorption) 0.8 5.6 -2.1 3.0 -0.2 -0.9 1.3 1. Govemment Consumption 3.3 16.4 0.3 1.6 -0.6 -1.5 1.4 2. Private Consumption 0.7 -0.1 0.8 3.7 -0.5 0.4 -2.4 3. Investment, incl. Change in Stocks 6.4 10.9 -7.5 13.6 14.1 13.4 15.4 B. External Demand (Exports of G&NFS) 0.2 2.6 -1.8 -3.4 2.5 -0.2 7.9
Sources of Growth (% of GDP growth) Resource Demand 100.0 100.0 100.0 100.0 100.0 100.0 100.0 A. Domestic Demand (Absorption) 86.3 85.2 76.7 138.2 -39.2 97.2 32.5 1. Government Consumption 11.5 37.9 2.9 -0.7 -137.9 114.5 -5.2 2. Private Consumption 30.3 -0.9 -14.9 84.3 -82.7 1.1 -38.6 3. Investment, incl. Change in Stocks 44.6 48.2 88.7 54.5 181.4 -18.4 76.3 B. External Demand (Exports ofG&NFS) 13.7 14.8 23.3 -38.2 139.2 2.8 67.5 Source: Central Statistical Office and Bank staff calculations. -30-
4. Quality of Zambia’s National Accounts Statistics: A Note
32. The national accounting in Zambia faces serious difficulties, which place the quality of the SNA estimates as well as the quality of assessments of the country’s economic performance (such as the growth analysis in this chapter) in serious jeopardy. The two most recent missions that reviewed the situation on the ground were: the IMF/ DFID mission (June-July 2002), and the World Bank mission (October 2002). The key findings were the following.
o CSO compiles a minimum set of national accounts (value added by sectors & expenditure categories in current and constant prices) annually. It does not yet compile national accounts data for shorter time periods (e.g,, quarterly data). Available data series are not continuous (e.g., earlier series are not linked to the latest series for 1994 and onward.) The time lag involved, however, is reasonable (one quarter for preliminary data, and 3 quarters for final data.) o The basic source data for the National Accounts estimates had been rapidly eroding in the recent past, leading to imprecise estimates. Most of the source statistics required for estimating national accounts data are unavailable, untimely or of poor quality (e.g., industrial production indices, labor force statistics). o CSO uses various short-cut methods including the extrapolation of outdated benchmarks via insufficient proxy indicators at a fairly aggregated level. o Government funding for CSO staffs regular data collection fiom the field (for transportation, food and/or bed for enumerators), except for consumer prices, is said to have been irregular or sometimes halted for an extended time period. o Further, as large public enterprises are privatized and often broken into more numerous individual firms, data collection from the newly formed private firms has become a new challenge to relevant CSO and other agency staff. o CSO uses a simple PC-based system to compile the national accounts data and to produce a few standard tables. The system, however, does not ensure the internal consistency of the overall national accounts data, since a major component (household consumption) is derived residually. It is also too simple to compile more comprehensive estimates (e.g., intermediate inputs for production; institutional accounts) or to employ more elaborate methodology (e.g., double deflation for value added in constant prices). Further, poor or often non-performing equipment renders more efficient electronic data transmission between CSO headquarters and Provincial Offices impractical. 33. To meet needs for policy formulation and monitoring and related research more effectively, CSO will need to compile much more comprehensive accounts timely. It will need to conduct appropriate surveys regularly in order to sustain the improved national accounts data. Without such surveys, the revised national accounts data would very likely be just one-time upward adjustments in the level of estimates. To continue necessary regular surveys, CSO’s capacity for data collection and compilation will need to be increased significantly. It will need to upgrade its computer hardware and software, and seek technical assistance on developing a large-scale database management system and train its staff. These improvements can only be achieved in the medium term. -3 1-
ANNEX C. ZAMBIA’S TRADE AGREEMENTS
1. Zambia participates in a number of trading arrangements. It is a member of WTO, Common Market for Eastern and Southern Africa (COMESA), and Southern African Development Community (SADC); a signatory to the Cotonou Agreement; and eligible for African Growth and Opportunity Act (AGOA) of USA. It is also negotiating bilateral agreements with Botswana, DRC, Mozambique, Namibia, Tanzania, and Zimbabwe. Zambia benefits from non-reciprocal preferential treatment from many industrialized countries under the GSP including EU’s Everthing But Arms (EBA) initiative and US AGOA. The key features of the main agreements are summarized.
2. Common Market for Eastern and Southern Africa (COMESA). COMESA was created in November 1993 with a Treaty superseding the Preferential Trading Agreement that existed since 1982. The Treaty was ratified in 1994. Presently, it comprises 20 members2’. Its main objective, defined in its Treaty and Protocols, is to achieve deep and broad integration among its members through establishment ofharmonized costumes procedures, adoption ofcommon sets of standards and free movement of capital and persons, and harmonization of internal taxation and investment policies, with an ultimate objective of a monetary union.
3. COMESA Free Trade Area (FTA) was launched in November 2000. Zambia and eight other members joined the FTA immediatelq* - They have been trading duty free since then subject to rules of origin. Under the COMESA Treaty, which provides a multi-speed integration program, six members2’ offer preferential access at 60-80 percent tariff reduction rates into their markets from the member states; Ethiopia offers a 10 percent tariff reduction while the remaining four countries3’ offer only MNF rates. COMESA provides four alternative rules of origin to claim eligibility for tariff preferences, including 35 percent of ex-factory value-added. Several institutions have been established to assist COMESA members in development including a development bank, insurance company, clearing house, and court ofjustice. The Protocol on the free movement of persons is to be implemented gradually starting with removing visa requirements which was adopted in 2000. Several members including Zambia have removed the visa requirements.
4. COMESA intends to establish a customs union by November 2004 with a common external tariff (CET) comprising four tariff bands: 0 percent, 5 percent, 15 percent, and 30 percent on capital goods, intermediate goods, raw materials, and final goods, respectively. The Monetary Union is planned to be established by 2005 fully harmonizing economic, fiscal, and monetary
*’Angola, Burundi, Comoros, DRC, Djubouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia, and Zimbabwe.
28 Djibouti, Egypt, Kenya, Madagascar, Malawi, Mauritius, Sudan, Zambia, and Zimbabwe.
29 Burundi, Comoros, DRC, Eritrea, Rwanda, and Uganda.
30 Angola, Namibia, Seychelles, and Swaziland. -32- policies. Given the slow progress so far, it is unlikely that the planned customs union will be established by November 2004.
5. South African Development Community (SADC). SADC was created in 1992 to replace the former Southern African Development Coordination Conference (SADCC). It currently has 14 member states3'. The key objectives of SADC includes cooperation among members in 20 sectors through legally binding protocols and establishment of a FTA. The SADC Trade Protocol was signed in 1996 by 11 of 14 member countries which came into force in September 20003*. The agreement aims a gradual trade liberalization leading to a FTA for 85 percent of intra-block trade in eight years. Free trade will be achieved for the remaining 15 (sensitive products) in 12 years33. The tariff phase-down offers are country-specific -- the member states will move towards free trade at different speed. South Africa (and indirectly its SACU partners) will reduce their tariffs fastest, followed by Zimbabwe, Mauritius, and Seychelles. Other members will open their markets at a slower rate. Products are classified into category A (immediate opening up), category B (duty-free in three years), and category C (sensitive products, duty-free from 2008). Zambia has classified as sensitive certain copper products, cement, and motor vehicle parts. This asymmetric implementation is seen as a means on enhancing equity in the region. By August 2001, all 11 signatories have deposited their instruments of implementation. Implementation of the protocol is based on the principle of reciprocity; that is, tariff preferences will be extended only to members that have submitted their instruments of implementation.
6. The rules of origin, which are being negotiated in many cases on a product-by-product basis, are very complex and apply various origin criteria across products. Negotiations for certain products including wheat flour, cereals, plastics, electrical products, vehicles, optical/photographic/measuring/surgical instruments have proved to be particularly difficult.
7. Since March 2001, SADC has been undergoing significant institutional changes. It is moving from a country- and sector-based decentralized system to an issue-based centralized structure. Member states also agreed to establish an Organ for Politics, Defense and Security, SADC National Committees as well as four Directorates, the latter within the SADC Secretariat and under which all the existing sectors will be clustered. These Directorates are: Trade, Industry, Finance and Investment; Infrastructure and Services; Food, Agriculture and Natural Resources; and Social and Human Development and Special Programs. SADC is presently preparing a Regional Indicative Strategy and Development Plan (RISDP) to provide strategic direction to all components of its integration agenda.
8. Implementation of the Trade Protocol has been very slow. While progress has been made in harmonizing trade and customs documentation, the phase-down offers are largely back-loaded.
9. The Cotonou Agreement. Zambia is a signatory of the Cotonou Agreement between the EU and 77 countries in Africa, the Caribbean, and the Pacific (ACP) which was signed in June
31 Angola, Botswana, DRC, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia, and Zimbabwe.
32 Angola, DRC, and Seychelles are yet to sign the Protocol.
33 These so called sensitive products are dairy products, wheat, sugar, cotton, fabrics, leather footwear, and vehicles. -33-
2000 when Lome Convention IV expired34. This agreement provides the general framework for a new relationship between the EU and the ACP countries. After a two-year period of preparation and strengthening of regional integration among ACP countries, the EU will negotiate during 2002-07 economic partnership agreements (EPA) with the ACP countries either as regional groupings (the option favored by the EU) or individually. EPAs will be based on reciprocal liberalization thereby requiring ACP countries to extend preferential access progressively to EU exporters (the non-reciprocal Lome preferences will continue until 2008). Implementation of the EPAs will take a transition period of 12 years starting from January 2008.
10. The Cotonou agreement adopted an integrated approach emphasizing cooperation in three areas: politics, economics and trade, and finance. It also encourages regional and sub-regional integration. The EU will provide to all ACP countries financial assistance under the European Development Fund (EDF) and the National Indicative Program (NIP).
11. Under the Cotonou Agreements, the EU grants non-reciprocal trade preferences to most imports originating from ACP countries subject to a safeguard close and rules of origin. The rules of origin requires that qualifying products be “either wholly obtained or significantly worked or processed” in one or more ACP states. Non-originating material would not exceed 15 percent of the value of exported product. For certain products (sugar, beef and veal, bananas), the EU provides special market access under commodity protocols.
12. Negotiations for EPAs started in September 2002. Presently, broader All-ACP level issues are being negotiated. Negotiations of the Regional level issues are expected by the end of 2003. Determining country configurations for EPAs and regional negotiating strategy are the key issues confronting Zambia and the other members of COMESA and SADC.
13. Everything But Arms (EBA) Initiative. One of the key principles of the Cotonou Agreement is differentiation. Differentiation means that the ACP countries that belong to the group of 49 least developed countries (LDC) can maintain their preferential cess to the EU without having to provide preferential access to their own markets in return35. In his context, the EU introduced EBA offer in March 2001. Under this Offer, the EU extends duty- and quota-free access to imports of all products from the LDCs, except for arms. Implementation is immediate except for transition periods sugar, rice, and fresh bananas where tariffs are to be phased out over eight years.
14. Africa Growth Opportunity Act (AGOA). AGOA was signed into law in May 2000 as Title 1 of the Trade and Development Act of 2000. It expands the list ofproducts which eligible SSA countries may export to the US subject to zero import duty under the Generalized System of Preferences (GSP) from 4,600 items to more than 6,400 items (including footwear, luggage, handbags, watches, and flatware. AGOA was amended in August 2002 to expand preferential access, It will be effect until September 200836.
34 South Africa was excluded from the Lome Conventions and the Cotonou Agreement. In October 1999, South Africa signed a Trade Development and Cooperation Agreement with the EU, which provides for asymmetrical trade liberalization between the two parties to form a FTA by 2012.
35 Zambia is one of the 33 LDC in Africa.
36 The Act envisages the possible conversion of AGOA, which is non-reciprocal preferential arrangement, into reciprocal FTA where feasible with interested African countries. Such a FTA is being negotiated with SACU. -34-
15. To be eligible, African countries must make progress in establishing a market-based economy , developing political pluralism and the rule of law, eliminating discriminatory barriers to US trade and investment, protecting intellectual property, combating corruption, protecting human and worker rights, and removing certain practices of child labor. 36 of the 48 SSA countries are eligible. Zambia was declared AGOA eligible in October 2000.
16. AGOA has special apparel provisions. It provides for duty free and quota-free access to the US market for apparel made in eligible SSA countries fkom US fabric, yarn, and tread. If the apparel made with fabric and yarn produced in beneficiary countries in SSA, imports are subject to a cap of 3 percent of overall US apparel imports, growing to 7 percent of overall imports over an 8 year period. LDCs in the region are exempt from this rules of origin requirement until the end of2004.
17. Under AGOA, a US-SSA Trade and Economic Forum is organized as a vehicle for regular dialogue between the US and African countries on issues of economics, trade, and investment. -35-
ANNEX D. PROSPECTS FOR GROWTH AND POVERTY REDUCTION THROUGH 2015
1. Model Description
1.1 A CGE model is used to simulate the impact of policies and economic shocks on growth and poverty. Its structure permits us to analyze trade-offs and synergies between different policies, the consequences of alternative financing mechanisms (including reliance on foreign borrowing), and the extent to which foreign debt forgiveness can facilitate the task of reducing poverty.
Overview
1.2 The dynamic model is an extension of the static, standard CGE model in Lofgren et a1 (2002). It is formulated as a simultaneous equation system, including both linear and non-linear equations. The equations define the behavior of the agents, including the government, as well as the environment under which these agents operate. This environment is described by market equilibrium conditions, macro balances, and dynamic updating equations.
1.3 Apart from being dynamic, it extends the earlier model by endogenizing the process of technical change, drawing on the endogenous growth literature. More specifically, it incorporates links between factor productivity and government capital stocks in different functional areas andor openness to foreign trade. Other model features, which also appear in the static model version and which are of particular importance in a Sub-Saharan African setting, include household consumption of non-marketed (or “home”) commodities, and an explicit treatment of transactions costs for marketed commodities.
1.4 The model belongs to the recursive strand of the dynamic CGE literature, which is used more extensively in policy analysis than alternative intertemporal optimization models. A recursive model may be solved one period at a time. The equations may be divided into a within- period module, which covers the decisions in each time period, and a between-period module, which provides a link between different periods, updating selected parameters (typically factor supplies, population, and factor productivity) on the basis of exogenous trends and simulated results from previous periods. All agents (private and public) are myopic, making their decisions on the basis ofpast and current conditions with no explicit role for the future. Our preference for assuming myopic agent behavior stems from the fact that we find little empirical support for the notion that, as a general rule, agents systematically act on the basis of perfect foresight about the near and/or distant future. We do not explicitly specify the factors that prevent agents from letting their behavior be influenced by future events (including the realization of intertemporally optimal savings and investment behavior, as an extreme case). However, these factors may include credit constraints and/or the belief that any knowledge about the future is too uncertain to act on.
1.5 Unlike other recursive-dynamic CGE models, the Zambia model is solved for all time periods in a single pass. This is computationally more efficient (reducing the time needed to -36- carry out simulations) and permits extensions where the decision rules of agents are reformulated to selectively draw on knowledge about future periods.
Within-period Specijkation
1.6 The within-period component describes a one-period static CGE model. Following the disaggregation of the SAM to which the model is calibrated, the model identifies 30 productive sectors or activities that combine primary factors with intermediate commodities to produce output. The eight factors of production identified in the model include: (i)four types of labor distinguished according to maximum education attained (uneducated, primary, secondary, and post-secondary); (ii)three types of capital (agricultural, mining, and non-agricultural); and (iii) agricultural land. Producers make decisions in order to maximize profits with the choice between factors being governed by a constant elasticity of substitution (CES) production function. This specification allows producers to respond to changes in relative factor returns by smoothly substituting between available factors so as to derive a final value-added composite. Profit- maximization implies that the factors receive income where marginal revenue equals marginal cost based on endogenous relative prices. Once determined, these factors are combined with fixed-share intermediates using a Leontief specification. The use of fixed-shares reflects the belief that the required combination of intermediates per unit of output, and the ratio of intermediates to value-added, is determined by technology rather than by the decision-making of producers. The final price of an activity’s output is derived from the price of value-added and intermediates, together with any producer taxes or subsidies that may be imposed by the government per unit of output.
1.7 In addition to its multi-sector specification, the model also distinguishes between activities and the commodities that these activities produce. This distinction allows individual activities to produce more than a single commodity and conversely, for a single commodity to be produced by more than one activity. Fixed-shares govern the disaggregation of activity output into commodities since it is assumed that technology largely determines the production of secondary products. These commodities are supplied to the market.
1.8 Substitution possibilities exist between production for the domestic and the foreign markets. This decision of producers is governed by a constant elasticity oftransformation (CET) function, which distinguishes between exported and domestic goods, and by doing so, captures any quality differences between the two products. Profit maximization drives producers to sell in those markets where they can achieve the highest returns. These returns are based on domestic and export prices (where the latter is determined by the world price times the exchange rate adjusted for any taxes or subsidies). Under the small-country assumption, Zambia is assumed to face a perfectly elastic world demand at a fixed world price. The final ratio of exports to domestic goods is determined by the endogenous interaction of relative prices for these two commodity types.
1.9 Domestically produced commodities that are not exported are supplied to the domestic market. Substitution possibilities exist between imported and domestic goods under a CES Armington specification (Armington, 1969). Such substitution can take place both in final and intermediates usage. Again under the small country assumption, Zambia is assumed to face infinitely elastic world supply at fixed world prices. The final ratio of imports to domestic goods is determined by the cost minimizing decision-making of domestic demanders based on the relative prices of imports and domestic goods (both of which include relevant taxes). -37-
1.10 Transaction costs are incurred when commodities are traded in markets. Demand for trade and transportation services is a fixed coefficient per unit sold. The coefficient is disaggregated by type of commodity and trade (export, import, or domestic sale). The final composite good, containing a combination of imported and domestic goods, is supplied to both final and intermediate demand. Intermediate demand, as described above, is determined by Leontief technology and by the composition of sectoral production. Final demand is dependent on institutional incomes and the composition of aggregate demand.
1.1 1 The model distinguishes between various institutions within the Zambian economy, including enterprises (mining and non-mining), the government, and 11 types ofhouseholds. The household categories are primarily distinguished according rural or urban areas. Rural households are further broken down into small-scale, medium-scale, large-scale, and non-farm households. Urban areas are disaggregated according to household head into low-skilled or high- skilled self-employed, and private or public employees.
1.12 The primary source of income for households and enterprises are factor returns generated during production. For each factor, the supply is fixed within a given time-period. Capital is immobile across sectors and fully employed, earning a flexible return that reflects its sector- specific scarcity value. The non-capital factors are mobile across sectors and fully-employed, with an economy-wide wage clearing each market. For the non-capital factors, each activity pays an activity-specific wage that is the product of this economy-wide wage and a fixed activity- specific wage distortion term. Final factor incomes also include remittances received from and paid to the rest of the world.
1.13 Households and enterprises earn factor incomes in proportion to the share that they control of each factor. Enterprises or firms are the sole recipient of non-agricultural capital income, which they transfer to households after having paid corporate taxes (based on fixed tax rates), saved (based on fixed savings rates), and remitted profits to the rest of the world. Households within each of the 11 representative groups are assumed to have identical preferences, and are therefore modeled as ‘representative’ consumers. In addition to factor returns, which represent the bulk of household incomes, households also receive transfers from the government, other domestic institutions, and the rest of the world. Household disposable income is net of personal income tax (based on fixed tax rates), savings (based on fixed savings rates), and remittances to the rest of the world. Consumer preferences are represented by a linear expenditure system (LES) of demand, which is derived from the maximization of a Stone-Geary utility function subject to a household budget constraint. Given prices and incomes, these demand functions define households’ real consumption of each commodity. The LES specification allows for the identification of supernumerary household income that ensures a minimum level of consumption.
1.14 The government earns most of its income from direct and indirect taxes, and then spends it on consumption and transfers to households. Both of these payments are fixed in real terms. The difference between revenues and expenditures is the budget deficit, which is primarily financed through borrowing (or dis-saving) from the domestic capital market.
1.15 Savings by households and enterprises are collected into a savings pool from which investment is financed. This supply of loanable funds is diminished by government borrowing (or dis-saving) and augmented by capital inflows from the rest of the world. There is no explicit modeling of the investment decision or the financial sector within a particular time-period, but aggregate savings-investment equality is required. One possible mechanism through which this balance is achieved is via adjustment in the interest rate (which may affect savings and/or -38- investment). The disaggregation of investment into demand for final commodities is done assuming a fixed bundle of investment commodities with changes in aggregate investment leading to proportional increases in the demand for individual commodities.
1.16 Production is linked to demand through the generation of factor incomes and the payment of these incomes to domestic institutions, including households. Balance between demand and supply for both commodities and factors are necessary in order for the model to reach equilibrium. This balance is imposed on the model through a series of system constraints.
1.17 The model includes three broad macroeconomic accounts: the government balance, the current account, and the savings and investment account. In order to bring about balance in the macro accounts, it is necessary to specify a set of mechanisms or macro ‘closure’ rules.
1.18 For the government, consumption is fixed in real terms. For most simulations, all tax rates are also fixed, with savings (showing the difference between current revenue and current spending) clearing the government account.37For the current account of the balance ofpayments (the rest of the world account), a flexible exchange adjusts to maintain a fixed level of foreign savings. In other words the external balance is held fixed in foreign currency. Nominal investment is a fixed share of nominal absorption - other things being equal, real investment will respond positively (negatively) to decreases (increases) in the prices of investment commodities relative to other commodities. Adjustments in household savings rates assure that savings and investment values are equal (Le., savings is driven by investment). Finally, the consumer price index was chosen as the numkraire.
Between-period, Dynamic Specijkation
1.19 The static model described above is extended to a recursive dynamic model. Selected parameters are updated based on the modeling of inter-temporal behavior and results from previous periods. Current economic conditions, such as the availability of capital, are thus endogenously dependent on past outcomes. The dynamic model is also exogenously updated to reflect demographic and technological changes that are based on projected trends.
1.20 The process of capital accumulation is modeled endogenously, with previous-period investment generating new capital stock for the subsequent period. Although the allocation of new capital across sectors is influenced by each sector’s initial share ofaggregate capital income, the final sectoral allocation of capital in the current period is dependent on the capital depreciation rate and on sectoral profit-rate differentials from the previous period. Sectors with above-average capital returns receive a larger share of investible funds than their share in capital income. The converse is true for sectors where capital returns are below average. (For more details, see Dervis et al. 1982, pp. 175-178).
1.21 Population, labor force and productivity growth are exogenously imposed on the model based on separately calculated growth projections. It is assumed that a growing population generates a higher level of consumption demand and therefore raises the supernumerary income level of household consumption.
37 In some of the simulations, government savings is fixed while all direct tax rates on households are scaled to generate the revenue required to generate this level of savings. -39-
1.22 Projected changes in the current account balance are exogenously accounted for. Mining production is assumed to be predominantly driven by a combination of changes in world demand and prices, and other factors external to the model. Accordingly, the value-added growth ofthese sectors and the world price of exports are updated exogenously between periods.
1.23 The Zambian dynamic model is solved as a series of within-period equilibria, each one representing a single year. By imposing the above policy-independent dynamic adjustments, the model produces a projected or counterfactual growth path. Policy changes can then be expressed in terms of changes in relevant exogenous parameters and the model is re-solved for a new series of equilibria. For policy shifts that involve additional government spending, we increase real government consumption, thereby the main burden of these policies, the diversion of resources from private consumption and investment in non-government production. Differences between the policy-influenced growth path and that of the counterfactual can then be interpreted as the economy-wide impact of the simulated policy.
Database
1.24 The model database, which captures the structural features of the Zambian economy, consists of a SAM; base-year and projected values for labor force, population, govemment policies, foreign savings, foreign borrowing, interest payments on foreign debt, and factor productivity; and a set of elasticities (for trade, production and consumption).
1.25 The SAM was constructed using input-output data, including an earlier SAM (Hausner, 1999), as well as the database assembled by the World Bank for its 2001 RMSM of Zambia and the 1998 Living Standards Measurement Survey (LSMS) (Evans et al., forthcoming).
1.26 Base-year data on the population of each household group and the labor force are from the 1998 LSMS. The population and labor force numbers were scaled to match 2001 totals extracted from other World Bank data (World Bank, 2003). The AIDS-adjusted growth rates from 200 1 to 20 15 for population and labor are from IMF (2003). The size of the capital stock was estimated on the basis of value-added and gross capital income data in the SAM, a depreciation rate of 4% (from the RMSM), and an assumed net profit rate of25 percent.
1.27 The RMSM provided the data related to the foreign debt for the entire planning horizon: the base-year capital stock and, for each year during the planning horizon, interest payments actually paid and due, net foreign borrowing, and foreign grants.
1.28 The model is used to simulate the impact of policies and economic shocks on growth and poverty. Its structure supports analysis of trade-offs and synergies between different policies, the consequences of alternative financing mechanisms, and the extent to which foreign debt forgiveness can facilitate the task of reducing poverty.
2. Detailed Description of the Simulation Scenarios
Copper Simulations
1.29 The projected developments in the copper sector are expected to influence both Zambian export prices and mining output. Three scenarios are identified: Low-case, Average-case, and High-case. The Average-case is considered to be the most likely and is therefore used in the Base Scenario. The derivation of the price and output changes is described in turn below. -40-
1.30 The following table explains how the world copper price was derived from the information in Chapter 4. Given the projected prices for each ofthe copper scenarios, the annual growth rate was derived based on the implied 2001 and RMSM 2005 prices.
Table A5.1. Derived Copper Price Changes (2001-2015) Calculating the world copper price in 200 1 Annual decline in world copper prices (%) Chapter 4 ofthis report -2% Projected copper price in 2005 ($Ab) 1.07 Chapter 4 Implied copper price in 2001 (Mb) 1.16
Projected copper price in 2005 ($Ab) High case scenario 1.18 Chapter 4 Average case scenario 1.07 Chapter 4 Low case scenario 0.95 Chapter 4
Implied annual copper price change (%) High case scenario 0.5% Average case scenario -2.0% Low case scenario -5.0%
1.31 The level of copper output equaled 300,000 tons. The following table outlines the output implications of the three copper scenarios. The key distinction between the three scenarios lies in whether the investment for new mines is made available such that these mines will start operations in 2010. No new investment is made in the Low-case scenario and the mines are forced to close in 2010, thus lowering the level of output to 150,000 tons. In the High-case scenario the new mines open and output rises to 550,000 tons. In the Average-case scenario the new mines do not open but there is almost sufficient investment in the interim period to maintain output.
Table A5.2. Estimated Copper Mining Output Levels (2001-2015) Copper Mining Output (tons) Year Low-case Average-case High-case 200 1 300,000 300,000 300,000 2006 200,000 200,000 2007 400,000 2009 300,000 300,000 2010 150,000 260,000 550,000 Source: Chapter 4.
1.32 Taking the beginning and end period results produces an average annual growth rate for mining output. This produces annual compound growth rates of minus five percent for the Low- case scenario, minus one percent for the Average-case scenario, and 4.3 percent for the High-case scenario.
HIPC Debt Relief Simulations
1.33 Information on Zambia’s total foreign debt is taken from the RMSM. Total debt in 2001 amounted to 2 1,046 billion Kwacha.
Table A5.3. Derived Cost of AIDS Treatment Program (2001-2015)
Total foreign debt in 2001 (million S) 5,833 RMSM, World Bank -41-
Exchange rate (Kw/$) 3,608 RMSM, World Bank Total foreign debt in 2001 (billion Kw) 21,046
Interest due in 200 1 (billion Kw) 58 1 RMSM, World Bank Interest paid in 200 1 (billion Kw) 222 RMSM, World Bank
Interest rate (due) (%) 2.8 Interest rate (paid) (%) 1.o
1.34 In the model, Zambia’s foreign debt rises every year according to the difference between the interest rate due and paid. The resulting trend in foreign debt accumulation matches that of the RMSM. HIPC debt relief leads to a once-off reduction in debt by 69 percent. This reduces the interest paid and reduces the government deficit. In the simulations of HIPC funded programs for AIDS treatment, education, and development of transport infrastructure, it is implicitly assumed that these programs are entirely financed from the outside without any impact on domestic government consumption.
HIVIAIDS Simulations
1.35 The main calculation necessary for the AIDS simulations is the estimation of the total cost of the government treatment programs. This information is drawn from a number of sources as shown in Table A5.4.
Table A5.4. Derived Cost of AIDS Treatment Program (2001-2015)
Total population 10,400,000 Household survey 1998 Adult share of population (%) 50.0% Household survey 1998 Adult population 5,200,000
Per capita cost ($) 360 IMF (2003) Exchange rate (Kw/$) 3,608 RMSM, World Bank Per capita cost (Kw) 1,298,844
Infection rate (%) 25.0% IMF (2003) Number of adult infections 1,300,000
Share of infections to be treated (%) 50.0%
Total cost of treatment (Bn Kw) 844
1.36 As described in the AIDS scenarios section, the cost of a comprehensive treatment program is prohibitively high. As such only half of the infected adult population can be treated if the public financing of the program is to remain feasible. Table A5 shows the current dis- aggregation of government consumption spending according to government function. This information is taken from Zambia RMSM.
Table A5.5. Government Spending by Function (2001) Government spending function Initial value Percentage share 2001 (Bn Kw) of total Agriculture 69 4.1 Industry 30 1.8 Transportation 56 3.3 -42-
Education 319 18.9 Health 240 14.2 Other 974 57.7 Total 1,689 100.0 Source: RMSM
1.37 Based on the above government expenditure information, the total cost of the treatment (844 billion Kwacha) is half of total government expenditure in 2001 (1,689 billion Kwacha). It also represents a 450 percent increase in 2001 health expenditure.
1.38 As discussed in Table 5.9, the impact of a full HIV/AIDS treatment program will increase annual population, labor force, and total factor productivity (TFP) growth rates. These increases are taken from the IMF (2003) assessment of the impact of HIV/AIDS on the Zambian economy. Given that the government treatment program described above only treats 50 percent of the infected adult population, the gains in population, labor force, and TFP growth rates are half of those depicted in Table 5.9. Similarly, the HIPC debt relief, which amounts to 236 billion Kwacha in 2001, represents only 14 percent of the cost of a comprehensive treatment program. As such only 14 percent of the gains will be realized when these funds are used exclusively to treat HIV/AIDS.
1.39 It should also be noted that there are other impacts that HIV/AIDS is likely to have other than those considered in the analysis. These include changes in households’ and government consumption spending patterns. Furthermore, the actual cost of a HIV/AIDS program extends beyond the cost of medication. It should ideally include the cost of care provision (e.g. nurses and other clinic staff) and the administration of the program. These costs have not been accounted for in the simulations.
Education Scenarios
1.40 The education scenarios are based on assumptions regarding the cost and impact of government education spending. Current government spending in 2001 amounted to 3 19 billion Kwacha. In the first Education scenario (Publicly funded) the government triples the amount it was spending on education in 200 1. In the HIPC funded scenario education spending increases by 74 percent, In both cases it is assumed that half of this additional spending is devoted to primary schooling while the other half is devoted to secondary schooling. It is also assumed that secondary school spending per pupil is five times higher than primary schooling.
1.41 On the impact of education spending, it is assumed that for every one percent increase in spending on primary education, the growth rate of primary educated labor increases by 0.65 percent (not 0.65 percentage points). For secondary education spending, the higher cost of educating secondary school pupils implies that for every one percent increase in secondary school spending there is a 0.5 percent increase in the growth rate of secondary educated labor. It is maintained that the total new supply of labor in a given year is fixed in absolute numbers. Therefore the increase in primary educated labor comes at the expense of uneducated labor supply, and increased secondary labor supply comes at the expense ofprimary educated labor. In other words, the supply of labor is rolled-up the education levels. The applied labor force growth rates for the two Education scenarios are shown in Table A5.7.
Table A5.7. Government Spending by Function (2001) Labor Category Labor force 2001 Base Scenario Publicly HIPC funded (1000 workers) Annual Growth funded scenario -43-
Rate scenario Uneducated 207 1.O 2.0 -1.3 1.o Primary 1500.5 2.0 4.8 3.1 Secondary 252.2 1.7 3.6 2.4 Post-secondary 144.5 1.7 1.7 1.7 Source: 1998 LCMS household survey for labor force; IMF (2003) for Base scenario growth rates; author’s calculations for other education scenarios.
1.42 Since households now have higher educated labor, the distribution of labor income by skill must change from that described in the Zambia’s SAM for 2001 The adjustments are based on the assumed distribution ofthe stock oflabor assets in the base, and the shifts in labor between labor education categories. It is assumed that the changes in labor force at each skill level relative to the base are split across the different household groups in proportion to their shares in the total labor force, thereby significantly raising the skill level of low-income households.
Transport Scenarios
1.43 Four Transport scenarios are explored in this document. The first involves a one-off repair and continued maintenance of the existing road network. The remaining three scenarios involve the construction of new roads. These new roads take the form of either feeder (rural) roads, or pavedgravel (urban/less remote rural) roads. The fourth scenario involves the use of HIPC debt relief funds to finance the construction of new feeder roads. The costing of the various scenarios is presented in Table A5.10.
1.44 According to the PRSP (2003), 29 percent ofthe existing paved and gravel road network is in need ofrepair. The cost ofrepairing a road per square meter is provided in the Chapter 4 of this report. This cost is multiplied by the length of roads requiring repairs (29 percent of paved and gravel roads) to arrive at a final cost of662 billion Kwacha.
1.45 The per-lulometer cost of maintaining existing paved or gravel roads was calculated by multiplying the area of one kilometer of road (5000m2) by the cost of maintaining a single square meter of road. This figure was then multiplied by the length of existing roads in Zambia (excluding feeder roads which are assumed to be maintained by rural communities). It was also assumed that roads do not require maintenance every year, but rather every five years. The total cost of maintaining the existing network is 212 billion Kwacha, which is 13 times greater than current govemment transport spending of 56 billion Kwacha (see Table A5.5).
Financing and comparative costs 1.46 Besides the problem of inter-agency coordination and the need to improve links between communities and government agencies, the financing of road improvement is a major issue. The GRZ has mobilized funds from various sources for provision of infrastructure but has not delivered much (Tuble4.l). Of the planned 2,600 km of feeder roads for improvement, only 25 percent were actually done between 1997-2001. 409 kilometers of gravel roads were done even though these were not planned under the ROADSIP I. The poor performance and inconsistencies illustrates lack of agreement onicommitment to priorities which seem to change during implementation and funds are inconsistently diverted from one road to another. This is combined with shifts in favor of big roads because contractors prefer those more lucrative contracts. The fuel levy has to date not been used entirely for purposes of road maintenance nor has it been disbursed on time. -44-
Table A5.8. Road Rehabilitation: Planned vs. Actual Achievement-ROADSIP I Road Type /Planned(1997 - 2001) bctuaI(1997 -June 2001)
Agency Accessibility Improvement Full Improvement ZAMSIF 2,800* 9,000-15,000 PUSH 5000 7500 WVI Not known ROADSIP 1142-3869# 19892
1.47 For the Repairs and Maintenance scenario, the cost of repairs and maintenance are combined. Since the repair cost is large compared to current government transport spending, the cost was spread out over three years (2002-2004). It was assumed that maintenance cost need not be paid on roads that have not yet been repaired. After 2004 only the cost of maintenance is imposed on the government. The impact of this spending is a reduction in the rate of deterioration of the existing road network. Accordingly the capital depreciation rate of the transport sector is reduced from four to two percent.
Table A5. 10. The Costing of Transport Scenarios
Estimated costs for paved roads (%per sq m) PRSP (2002) Maintenance 5.8 Repairs 12.4 Construction 24.1
Official exchange rate (KwlS) 3,608 RMSM, World Bank
Width ofroad (meters) 5.0 Authors’ assumption
Number of years between maintenance (years) 5.0 Authors’ assumption
Calculated cost per kilometer ($ per !an) Maintenance Paved 28,750 Gravel 12,751
38 Community contribution for MPU is 25 percent. For NGOs sometimes this cost is not known nor is it required. Costs also depends on the conditions in a particular area. Northern and Luapula Province has an average of USD1892 per kilometer while Western has USD3869. Source: Impact Assessment for the MPU -45 -
Paved 61,800 Gravel 27,410 Construction Paved 120,450 PRSP (2002) Gravel 53,423 ROADSIP I(District road) Feeder/Earth 19,892 ROADSIP I(Full improvement),
Length of existing road (kilometers) Paved 6,476 PRSP (2002) Gravel 8,478 Earth 21,967 Community/Feeder 30,000
Share of existing network needing repair ("A) Chapter 3 of this CEM - Main Report Paved 29.0 Feeder 0.0
Total cost (bn Kw) Repairs 662 Maintenance 212 Construction Cfeeder roads) 445 Construction (paved roads) 373
1.48 For the Construction scenarios it was assumed that the government increased the length of either feededearth or pavedgravel roads by 10 percent. The cost of the two scenarios were calculated based on the length of the existing road network and the cost per square meter provided in Chapter 4. The final costs were 445 and 373 billion Kwacha for the Feeder and Paved Construction scenarios, respectively.
1.49 The impact of newly constructed roads differed according to the type of roads that were built. In both cases, the transactions costs margin was reduced. For feeder roads it was assumed that these roads are exclusively in rural areas and therefore the transaction cost reduction would only affect agricultural commodities. Furthermore, only transactions costs on domestic sales are affected. The final effect was a 30 percent reduction in domestic transactions costs for all agricultural commodities.
1.50 It was assumed that paved roads are in export agricultural and urban areas, and that as such only export agricultural and non-agricultural commodities would be affected. Furthermore, both domestic and export transaction costs would be reduced. There was therefore a 20 percent decline in non-agricultural transaction costs and a 10 percent decline in export agricultural transactions costs. 1929999999491 m63~00000000~
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Table A6.2. Balance of Pavments. 1990-2002 (millions of USD)
Debt forgiveness (HIPC) 0 0 0 0 0 0 0 0 0 0 0266266 New accumulation 210 21 0 0 0 176 0 0 85 0 0 31 12 Reduction in anearsiprepayments (-) 468 192 216 160 76 1208 176 0 0 251 10 0 0 -61-
Table A6.3. External Debt, 1990-2002
1990 1991 1992 1993 199 199 1996 199 199 I
Source: MFNP, IMF; and Bank staff estimates. -62-
1999 0.4 0.2 17.3 4.5 4.1 0.8 2.4 12.0 21.3 37.0 0.3 1.1 20.3 2.0 3.6 3.0 8.0 42.6 6.5 12.5 2000 0.1 2.0 36.4 1.4 0.0 1.6 3.1 24.6 14.1 16.6 0.1 1.2 13.3 1.5 3.2 5.0 6.3 56.8 6.5 6.0 2001 0.0 5.0 21.2 1.8 8.2 2.2 1.9 7.1 16.9 35.5 0.1 4.5 12.1 1.8 2.1 1.8 1.3 64.2 6.5 5.7 2002 0.1 4.9 15.4 2.0 9.0 1.1 2.1 8.0 19.0 38.3 0.3 4.4 10.6 1.8 2.3 3.7 1.2 63.5 6.5 5.8 -63 -
Istatistical discrepancy I 20,5161 -3,5551 -18,9881 -17,2881 -15,5961 -14,6281 -14,3221 I I I I I I I Source: Export Board of Zambia, BoZ, IMF; and Bank staff estimates.
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Table A6.13. Principal Crops Volume of Production, Yield, and Area Harvested, 1990-02 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Maize Production (metric tons) 1,119,670 1,095,908 483,492 1,597,767 1,020,749 737,835 1,409,485 960,188 638,134 822,056 1,052,806 801,889 601,606 Yield(ki1ogramsperhectare) 1,467 1,710 729 2,520 1,503 1,422 2,088 1,476 1,251 1,377 1,710 1,350 1,050 Area harvested (hectares) 763,277 639,390 661,606 633,326 679,355 520,165 675,565 649,039 510,372 597,454 586,907 466,898 600,000 Irrigated wheat Production (metric tons) 53,601 58,732 54,490 69,286 78,944 38,019 57,595 70,810 63,925 69,226 75,000 75,000 75,000 Yield(ki1ogramsperhectare) 4,626 4,959 4,968 5,076 5,265 4,869 5,580 6,624 5,670 6,975 6,210 6,198 6,198 Area harvested(hectares) 11,595 11,849 10,964 13,656 11,566 7,806 10,327 10,693 11,278 9,921 12,077 12,100 12,100 Millet Production (metric tons) 31,531 25,573 48,029 37,394 62,644 54,501 54,858 61,129 62,236 69,617 42,863 46,875 37,615 Yield(ki1ogramsperhectare) 540 540 720 720 ’ 720 720 720 720 720 720 720 717 662 Area harvested (hectares) 58,869 45,270 66,598 52,654 82,302 73,809 76,930 85,731 90,047 95,530 n.a. 65,354 n.a. Sorghum Production (metric tons) 19,591 20,939 13,007 35,448 35,068 26,523 35,640 30,756 25,399 25,494 26,898 30,245 16,801 Yield(ki1ogramsperhectare) 405 657 324 765 639 657 747 684 711 693 720 720 n.a. Area harvested (hectares) 48,466 31,790 40,323 46,563 55,245 40,365 47,839 44,684 35,864 36,657 n.a. 39,281 n.a. Groundnuts (shelled) Production (metric tons) 25,086 28,188 20,504 34,301 34,732 36,119 34,755 45,859 56,934 50,885 50,965 51,972 51,777 Yield(ki1ogramsperhectare) 312 352 296 480 328 360 392 360 368 360 400 400 320 Area harvested (hectares) 80,443 80,470 68,724 71,415 105,737 100,431 89,488 126,573 154,682 140,430 n.a. 132,284 n.a. Mixed beans Production (metric tons) 14,312 14,123 20,401 23,534 23,180 23,751 23,838 13,728 13,905 16,492 17,392 21,349 18,466 Yield(ki1ogramsperhectare) 541 488 530 611 477 573 551 330 392 424 450 449 450 Area harvested (hectares) 26,436 28:940 38,508 38,489 48,616 41,462 43,240 41,541 35,444 38,883 n.a. 47,520 n.a. Cassava Production (metric tons) 640,000 682,000 682,000 744,000 744,000 744,000 744,000 702,000 816,963 970,823 815,248 950,000 950,000 Yield (kilograms per hectare) 6,204 6,200 6,200 6,200 6,200 6,200 6,200 6,198 6,200 5,711 4,941 5,758 5,758 Area harvested (hectares) 103,159 110,000 110,000 120,000 120,000 120,000 120,000 113,266 131,768 170,000 165,000 165,000 165,000 Sugar cane Production (metric tons) 1,127 1,150 1,300 1,220 1,311 1,310 1,400 1,500 1,550 1,650 1,600 18,000 n.a. Yield (MT per hectare) 94 96 96 106 109 109 108 107 103 103 107 106 n.a. Area harvested (hectares) 11,974 12,000 13,500 11,497 11,986 12,000 13,000 14,000 15,000 16,000 15,000 17,000 n.a. Seed cotton Production (metric tons) 36,536 48,721 25,899 47,850 33,092 16,578 40,824 79,900 104,500 140,072 62,000 49,498 62,000 Yield(ki1ogramsperhectare) 571 658 434 626 653 471 617 1,431 1,324 1,326 1,129 901 1,127 Area harvested (hectares) 64,036 74,020 59,614 76,492 50,661 35,200 66,217 44,741 44,560 105,623 54,937 54,943 55,000. Coffee Production (mehic tons) 1,313 1,329 1,792 1,531 1,582 1,232 1,580 2,167 2,628 2,940 3,000 4,100 4,100 Yield(ki1ogramsperhectare) 858 738 996 851 931 684 790 985 876 1,050 1,071 1,323 1,323 Area harvested (hectares) 1,530 1,800 1,800 1,800 1,700 1,800 2,000 2,200 3,000 2,800 2,800 3,100 3,100 Burley tobacco Production (metric tons) 1,550 n.a. 1,050 2,514 1,083 1,560 1,892 n.a. n.a. 6,431 n.a. n.a. n.a. Yield (kilograms per hectare) 1,045 n.a. 454 268 243 907 919 n.8. n.a. 1,055 n.a. n.a. n.a. Area harvested (hectares) 1,483 n.a. 2,313 9,388 4,450 1,720 2,059 n.a. n.a. 6,096 n.a. n.a. n.a. Virginia tobacco Production (metric tons) 3,488 865 1,258 4,138 5,015 2,240 1,950 n.a. n.a. 2,169 n.a. n.a. n.a. Yield(ki1ogramsperhectare) 972 686 425 1,163 2,639 1,656 1,223 n.a. n.a. 1,126 n.a. n.a. n.a. Area harvested (hectares) 3,588 1,262 2,961 3,558 1,900 1,353 1,594 ma. n.a. 1,926 n.a. n.a. n.a. Source: Data for most crops are from the Ministry ofAgriculture and Cooperatives, “Agricultural Statistics Bulletin, 1999/2000,” 2000. Data for 2000,2001, and 2002 are from the Ministry of Agriculture and Cooperatives. Data not available from govemment sources-cassava, sugar cane, and other figures in italics-are from the Food and Agricultural Organization. -70-
Table A6.14. Agricultural Value added and Agricultural Exports (millions of current US$) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Agricultural value added 599 534 677 998 451 564 ' 506 643 606 676 644 715 728 Amicultural exuorts 24 29 36 27 16 36 52 81 81 153 87 114 121 Source: Data on agriculture value added is from the World Bank African development indicators database. Agricultural export data for 1990-2001 are from the Food and Agricultural Organization. Export data for 2002 are from the Export Board of Zambia.
Table A6.15. International Prices of Major Agriculture Export Crops (US$) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Coffee (arabica) 1,965 1,875 1,403 1,542 3,274 3,294 2,651 4,079 2,919 2,241 1,875 1,365 1,406 1,488 Tobacco 3,392 3,500 3,440 2,695 2,975 2,643 3,055 3,532 3,336 3,101 2,988 2,989 2,735 3,000 Cotton (Liverpool index) 1,820 1,696 1,277 1,279 1,758 2,167 1,776 1,747 1,445 1,171 1,302 1,058 1,020 1,102 Source: International Monetary Fund, International Financial Statistics Yearbook, 2002. -71-
Moderate Poverty, total (% of population) .. 12.0.. 13.0.. .. 16.0.. 15.0...... Moderate Poverty, urban (x ofpopulation) .. 16.0.. 21.0.. .. 19.0.. 20.0...... Moderate Poverty, rural (% of population) .. 7.0.. 9.0.. .. 14.C.. 19.C...... -72-
BIBLIOGRAPHY -73-
BIBLIOGRAPHY
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