Final report Understanding growth-income inequality interactions in Zambia Haroon Bhorat Nomsa Kachingwe Morné Oosthuizen Derek Yu August 2017 When citing this paper, please use the title and the following reference number: S-41304-ZMB-1 Table of Contents 1. INTRODUCTION ................................................................................................................................ 1 2. INTERACTIONS BETWEEN ECONOMIC GROWTH AND INCOME INEQUALITY ..................................... 2 2.1. IMPACT OF ECONOMIC GROWTH ON INCOME INEQUALITY ......................................................................... 2 2.2. IMPACT OF INCOME INEQUALITY ON ECONOMIC GROWTH ......................................................................... 3 2.3. EVIDENCE FROM SUB-SAHARAN AFRICA ................................................................................................. 4 2.4. EVIDENCE FROM ZAMBIA ..................................................................................................................... 5 3. OVERVIEW OF THE ZAMBIAN ECONOMY, 1996-2015 ....................................................................... 7 3.1. MACROECONOMIC DEVELOPMENTS ...................................................................................................... 7 3.2. SECTORAL PATTERNS OF GROWTH AND EMPLOYMENT .............................................................................. 8 3.3. POLICY INTERVENTIONS FOR POVERTY AND INEQUALITY ........................................................................... 14 3.3.1. TRENDS IN POVERTY AND INEQUALITY .............................................................................................. 14 3.3.2. POLICY INTERVENTIONS ................................................................................................................. 15 4. DATA AND METHODOLOGY ............................................................................................................ 18 4.1. DATA ............................................................................................................................................. 18 4.2. METHODOLOGY ............................................................................................................................... 21 5. FINDINGS ........................................................................................................................................ 23 5.1. DEMOGRAPHIC PROFILE OF HOUSEHOLDS ............................................................................................. 23 5.2. INCOME PROFILE OF HOUSEHOLDS ...................................................................................................... 26 5.3. INEQUALITY ANALYSIS ....................................................................................................................... 31 5.4. DECOMPOSITION OF INEQUALITY BY INCOME SOURCE ............................................................................. 36 5.5. POVERTY ANALYSIS ........................................................................................................................... 38 5.6. DECOMPOSITION OF CHANGES IN POVERTY ........................................................................................... 41 5.7. ASSESSING POTENTIAL INEQUALITY IMPACTS OF POLICY INTERVENTIONS ..................................................... 43 5.7.1. IMPACT OF EXTENDING THE CHILD GRANT PROGRAMME (CGP)............................................................ 44 5.7.2. IMPACT OF GREATER LABOUR ABSORPTION OF THE HIGHLY EDUCATED LABOUR FORCE ............................... 47 6. CONCLUSION .................................................................................................................................. 49 7. REFERENCES ................................................................................................................................... 51 APPENDIX ............................................................................................................................................... 55 List of Figures Figure 1. Growth in real GDP and GDP per capita, 1996-2015 .................................................................................... 7 Figure 2. Average annual change in real GDP by industry, 1996-2014 ....................................................................... 9 Figure 3. Share of GDP by industry, 1996 and 2014 .................................................................................................. 10 Figure 4. Average annual growth in real Gross Value Added (1996-2014) and employment (1996-2015), by industry ................................................................................................................................................................ 13 Figure 5. Countries with the highest Gini coefficients since 2000 ............................................................................ 15 Figure 6. Box plot of total household income, 1996-2015 ........................................................................................ 20 Figure 7. Lorenz curves, 1996-2015 ............................................................................................................................ 33 Figure 8. Growth Incidence Curves, 1996-2015 ......................................................................................................... 35 Figure 9. Cumulative Density Functions ..................................................................................................................... 39 Figure 10. Growth Incidence Curves, using per adult equivalent income ................................................................ 56 Figure 11. Growth Incidence Curves by area type using per capita income, 1996 vs. 2015 ................................... 57 List of Tables Table 1. Key macroeconomic indicators, 1996-2015 ................................................................................................... 8 Table 2. Labour market aggregates, 1996-2015 ........................................................................................................ 11 Table 3. Employment growth in context, 1996-2015 ................................................................................................ 12 Table 4. Selected official poverty and inequality indicators, 1996-2015 .................................................................. 14 Table 5. Broad income categories in each Living Conditions Monitoring Survey (LCMS) ........................................ 19 Table 6. Outliers in the income data, 1996-2015 ....................................................................................................... 21 Table 7. Adult equivalent scale .................................................................................................................................... 22 Table 8. Poverty lines (per annum per adult equivalent, kwacha) ............................................................................ 22 Table 9. Demographic profile of Zambian households .............................................................................................. 24 Table 10. Proportion of households receiving non-zero income by income source, 1996-2015 ............................ 27 Table 11. Aggregate income across all households from each source and proportion of households receiving non-zero income from each source, 1996-2015 ............................................................................................... 28 Table 12. Income share of each source by household decile, 1996-2015 ................................................................ 30 Table 13. Gini coefficients, 1996-2015 ....................................................................................................................... 31 Table 14. Population share and share of total income by household decile, 1996-2015 ........................................ 34 Table 15. Gini decomposition by income source, per capita income, 1996-2015 ................................................... 37 Table 16. Foster-Greer-Thorbecke Poverty Indices ................................................................................................... 40 Table 17. Foster-Greer-Thorbecke poverty headcount ratios by province, area type and gender, using the 2010 poverty lines ........................................................................................................................................................ 41 Table 18. Decomposition of poverty headcount ratios into growth and redistribution components, using the 2010 poverty lines .............................................................................................................................................. 42 Table 19. Proportion of households with at least one eligible child ......................................................................... 45 Table 20. Gini coefficients assuming changes to the Child Grant Programme ......................................................... 46 Table 21. Poverty headcount ratios using the 2010 poverty lines, assuming changes to the Child Grant Programme .......................................................................................................................................................... 46 Table 22. Cost associated with changes to the Child Grant Programme, billions of kwacha (constant 2009 June prices) .................................................................................................................................................................