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Friday, 8 June 2007

£40m anyone?

What would you do if you had £40m each year for mother Zambia? Well apparently that's how much Britain will give Zambia each year for the next 10 years. One can only hope that this is new money, better yet a "free" lunch.

Actually, I hope it is new but not given freely. Isn't this a great time for Britain to think outside the box and consider the possibility of converting this "new cash" into long term Kwacha bond claims of Zambians on the Zambia Government? I can hear you say, "what"? Well I think such a move would restore much needed accountability in our system as well as strengthening our debt management practices. For example you could allocate a share of the bonds to civil servants as part of civil service pay increase and so forth. Then we wouldn't have to worry about whether Mr Mutati means it when he says "the money would be used prudently and transparently for the benefit of the people of Zambia".

7 comments:

  1. i cant believe in as an economist you believe in free things.

    for what i know free things are expensive and carry alot of consequences.

    what zambia needs is not free stuff but proper management from people running the economy in business and politics.

    i find very few brains in zambia capable of turning this country arround.they will take you a smooth road only to find its a culdesac.

    we have so many employement opportunities to widen the tax base and probably break even,then we can start looking to spending or borrowing.

    is it clever thinking to spend money advertising tourism when the infrastructure is not there to allay fears.lets stop being small thinkers.

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  2. Arthur,

    Welcome!

    "i cant believe in as an economist you believe in free things”

    It was “tongue in cheek” my good friend :)

    The late Nobel Laureat Milton Friedman has indeed taught us “there’s no such thing as a free lunch”.

    But if indeed "free things " did truly exist I don’t agree with you that “free things are expensive and carry alot of consequences” . By definition surely they must be costless?

    I full agree with you that ”what zambia needs is not free stuff but proper management from people running the economy in business and politics". I call that working on our “institutional framework” . See some of the discussions on this here.

    "i find very few brains in zambia capable of turning this country arround.they will take you a smooth road only to find its a culdesac."

    Probably not the case., although we do suffer from the brain drain problem, we do have enough brains still in Zambia. Contrary to popular opinion, only 10% of Zambia's elite are abroad – it’s just our institutions as you say, are not leveraging these brains into place to allow them to play a full role in our national development.

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  3. I agree with both of you:

    Arthur, in that 1) usually when someone tells you it is free, it won't be because the scary armed people who weren't there before but have suddenly appeared behind you have stridently suggested that you pay.

    2) That Zambia really needs "proper management from people running the economy in business and politics", as at least a necessary factor to sustainable development, if not a prerequisite.

    3) That unless development is accompanied by an increase in the tax base, the Zambian public sector budget will continue to run in deficit. I will differ here only in the case of borrowing where there is a demonstrable increase in net income, which is in excess of loan repayment costs (not loan maintenance, but sufficient for timely loan elimination).

    I also agree with Cho that Arthur's point of view is very much about what this space can be. As Cho has pointed out, Zambia has no "think tanks" to inform politicians on strategy outside of the political parties. To whatever extent we can bring together expertise and explore solutions (assuming we can separate out a solveable problem first), we owe it to the country to try.

    I like Cho's idea of increases in Civil Service compensation being tied into the new sovereign bonds, but I would not like them tied to salaries as much as into pensions. That would allow them to act on civil servants in the same fashion that private sector stock options are designed to give employees long term incentive for the business to succeed.

    Unless the government decides to get creatively fungible and reallocate money to the civil service payroll in direct proportions, then as the Xinhua article suggests, the brits want their money to be spent only on specific Millenium Goal poverty reduction programs. As always the amount offered is paltry compared to the need, but it looks good in a banner headline.

    If only they had been a bit realistic and narrowed it down to "agricultural irrigation", or "rural transport infrastructure", or any one thing which could really be done for UK400m over ten years, then we could reasonably expect to hold the government to it. Instead this "free pie" is likely to be sliced up by committee until it is spread just thin enough to grease the wheels. Too bad the problem is traction.

    One thing about "free lunches" I learned by watching my sister. I remember that just because you don't forgive a man who brings you flowers, to say that he's sorry, it doesn't mean that you can't keep the flowers. If the british wish to offer apologetic gifts, by all means they should be accepted, as long as everyone is clear that it by no means zeroes their account. The challenge will be to keep the capital in the domestic savings and loan cycle long enough to benefit from what could turn out to be just another poorly disguised subsidy to british heavy industrials.

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  4. “That unless development is accompanied by an increase in the tax base, the Zambian public sector budget will continue to run in deficit. I will differ here only in the case of borrowing where there is a demonstrable increase in net income, which is in excess of loan repayment costs (not loan maintenance, but sufficient for timely loan elimination.” - Yakima

    I think we all agree that Zambia needs a broader tax base to enable it to meet its budget needs. We are currently relying on the donors and others to meet the difference. The issue is how best to increase that tax base – this was very much part of the discussion in last year’s general election.

    Some say we need lower taxes (e.g. the PF/UDA positions)
    Others say it’s just not going to work because of weak fiscal position (the Government) – the latter accuse the former of not doing the numbers properly, at which point the former accuse the later of not opening up the books properly to everyone. I note that this year's budget tried to offer incentives to move people from informal sector into more formal employment. Such transitions if successful helps to widen the tax base. Informality really is the problem in Zambia. We have not discussed this issue on the blog yet :)
    The IMF view is restructuring – yesterday’s statement hinted at that again – see the blog IMF-Zambia Watch. The IMF macro model for Zambia is presumably the source of these inferences. But of course if restructuring means lower income taxes but high VAT or even worse VAT on mosquito nets and newspapers, then we are back to square one. As the IMF found out in the run up to this year’s budget. So they are back again calling for “restructuring”.
    I read on MrK's blog that today another economist is calling for revision [As quoted in the Post].

    “I like Cho's idea of increases in Civil Service compensation being tied into the new sovereign bonds, but I would not like them tied to salaries as much as into pensions. That would allow them to act on civil servants in the same fashion that private sector stock options are designed to give employees long term incentive for the business to succeed” - Yakima

    Agreed.
    I have been searching hard for better examples, with limited success so your intervention is timely :)

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  5. Cho,
    Your "note that this year's budget tried to offer incentives to move people from informal sector into more formal employment", is important, I agree. A large barrier to formalization is the cost of compliance. Direct assistance in accounting and bookkeeping will be necessary to bring the majority of informal activities into the formal economy. Linkage of compliance to credit ratings would encourage expansion of the tax base in line with improvements in access to investment credit.

    In cases where the government is in deficit, I prefer targeted tax rebate programs over either sweeping tax cuts or status quo caution. For example, lower income taxpayers could be granted credits based on the number of dependant children and disabled persons in their household. The credits could then be applied against future tax debits, effectively easing the tax burden on family support systems for the working poor, and also providing a mechanism for targeted poverty reduction in cases where credits exceed debits.

    Similarly, tax rebates to SMEs which undertake development oriented programs using local investment credit vehicles would provide genuine financial incentive to formalize. This would also focus government efforts on the informal enterprises with the greatest growth potential and overall development contribution.

    The common argument that, "sweeping reductions of tax rates will increase future government receipts", only works when the benefits of tax reductions are invested and result in economic growth at a rate greater than what public sector programs would have produced with the revenue in the first place. On the other hand, status quo tax policy assumes that the current pattern of deficit spending and donor reliance is producing an optimal rate of sustainable growth. Selective tax rebates can reward behaviours likely to improve the macroeconomic situation and increase the tax base, without undue risk that higher short-term budget shortfalls will undermine recent progress in debt maintenance.

    Certain types of rebate could also come in the form of sovereign bonds instead of tax credits, reducing short-term revenue shock but increasing debt maintenance costs overall.

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  6. You forgot to mention that part of that £40m has already been used to pay for congestion charges on the hire cars the president's delegation used in central London!

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  7. Yakima,

    So very good points there, especially on tax rebate versus sweeping tax cuts.
    A more targeted approach is differently better as it allows better realignment of incentives.

    I also agree that “A large barrier to formalization is the cost of compliance. Direct assistance in accounting and bookkeeping will be necessary to bring the majority of informal activities into the formal economy. Linkage of compliance to credit ratings would encourage expansion of the tax base in line with improvements in access to investment credit”.

    I would add that the cost of compliance becomes even more of a telling factor when there’s ineffective monitoring and compliance across board. This is basically the case in Zambia. Firms basically prefer to remain in the informal sector knowing they won’t get caught! It is possible therefore that “effective monitoring” in itself can help dissuade firms from acting informally. Since you increase the probability of getting caught!

    A recent IMF Working Paper “Informality and Regulations: What Drives Firm Growth?” seems to support this view. The authors found that firms reduce their formal operations when faced with a high regulatory burden, but increase their formal operations with better enforcement quality.

    Gerry

    "You forgot to mention that part of that £40m has already been used to pay for congestion charges on the hire cars the president's delegation used in central London!

    Whatever happened to the luxurious ZAM1? lol!!

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