Report No. 28069-ZA Report No. 28069-ZA Zambia Country Economic Memorandum Public Disclosure Authorized Public Disclosure Authorized Policies for Growth and Diversification (In Two Volumes) Volume II: Annexes October 20, 2004 Poverty Reduction and Economic Management I Southern Africa Africa Region Zambia Economic Memor Country Public Disclosure Authorized Public Disclosure Authorized andum II Volume Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank Public Disclosure Authorized Public Disclosure Authorized 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 -3- 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